Articles Posted in Contract

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A popular topic in Sacramento now is this possibility that the Kings may be bought by a Seattle ownership group, and moved to Seattle. The method this would be accomplished is by the Maloof family selling their majority interest in the Kings partnership to the new group- the minority partners would be stuck with a new majority partner. However, there are multiple investors in Northern California who are expressing an interest in presenting an offer that could result in the Kings remaining in Sacramento. Experienced Sacramento business attorneys know that the Kings limited partnership agreement may give them the opportunity to match the Seattle group’s offer, and possibly for less cash.

Sacramento business attorney 2.jpgPartnership agreements generally have a right of first refusal, which provides that if a partner wishes to sell their interest, and receive a bona- fide offer from a third party, the other partners have the opportunity to match the offer, in which case they would win out over the stranger. When the selling partner accepts an offer, the remaining partners have essentially an option; they can force the sale to them by matching the offer. The idea is partners want to have a say in who their partners will be, and would prefer not to have a stranger step in. They are required to match the offer, however, to be fair to the selling partner. We do not know what this partnership agreement states, but news reports have indicated it has a right of first refusal.

Generally speaking, the offer must be matched perfectly- the existing partners may not vary the terms at all. However, strict adherence to this rule gives the selling partners and third party accomplice the ability to structure an offer in a way that the others could never match. It could provide a security a parcel owned by the third party (the existing partners cannot provide as security a parcel they do not own), or they could name as consideration a valuable race horse which the existing parties could not own. In this case, strict enforcement of the perfect match rule would make the right of first refusal illusory. In such a case, the seller is bound by the standard of a reasonable person and must accept the third partner’s offer if it is the economic equivalent of the offer by the third party. In a recent decision on this subject, the Court concluded that the un-matching offer paid the seller the same net price, and that was good enough. And there’s the rub.

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The California parole evidence rule generally prohibits evidence of oral statements that contradict the terms of a written contract. In the past several years Sacramento and El Dorado real estate attorneys often heard borrowers claim that their mortgage broker made promises about their loan regarding the interest rate, whether it was adjustable, when the rate would go up, and a myriad of other terms, that turned out to be true. These promises are in direct conflict with the terms of the written agreement, so the parole evidence rule keeps these statements out, and can result in a lawsuit being thrown out of court. However, a new California Supreme Court decision changes everything- now, the false promises may be admitted as evidence.

real estate loan fraud.jpgIn Riverisland Cold Storage vs. Fresno-Madera Production, the borrowers owed the lender over $765 thousand, and were in default. They entered a work-out with the lender. The borrowers claim that two weeks before signing the workout they met with an officer for the lender. He told them that they would extend the loan for two years in exchange for additional collateral of two ranches. However, the agreement they signed (which the borrowers did not review closely) extended the loan for only three months, and, as additional collateral, added eight separate parcels.

The borrowers again defaulted and the lender took action before the three years the borrowers were counting on. The borrowers brought the loan current, and filed this lawsuit, claiming fraud and negligent misrepresentation. The lender raised the parole evidence rule, arguing that the borrower could not prove their claims because the rule barred any evidence of oral representations contradicting the actual terms of the written agreement.

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In California contracts sometimes a party is obligated to use “best efforts” to accomplish a goal of the contract. For example, a contract to buy real estate may be subject to a condition to obtain financing. In such a case, the implied covenant of good faith requires the buyer to exert their best efforts to satisfy the condition. Or, the actual requirement may be in the contract, such as for a holder of water rights to use “best efforts” to maintain the level of water in a reservoir. California courts have never defined best efforts, but look to the specific facts of each case to determine if best efforts were actually made. A party with such an issue is well advised to consult with a Sacramento or Placer real estate and business attorney to determine how far their efforts must extend. A property owner’s associations in Modoc County recently was disappointed that a best efforts provision did not make the other party a fiduciary.

sacramento real estate attorney best efforts.jpgIn California Pines Property Owners Association v. Pedotti, the association owned the land in where the reservoir was, and it had lake-side houses. Pedotti owned a 1700 acre cattle ranch. Both parties had rights to water that enters the reservoir. Pedotti used the water to irrigate his ranch, and the association wanted to keep enough water in the reservoir to maintain its aesthetic value. Pedotti’s water rights required him to use “best efforts” to maintain a full reservoir. The association did not appreciate the low water levels in 2006 through 2008, and sued. It claimed that best efforts means the efforts required of a fiduciary. The court disagreed.

Pedotti had the local Cooperative Extension farm advisor testify as an expert that his flood irrigation technique was typical for ranches in Modoc county, and to change to an enclosed pipe system would cost over a half million dollars. In 2006 through 2008 Pedotti took less water than he was entitled to, and supplemented it from another source.

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California construction and contractor law is pretty clear – you have to have a contractor’s license to get paid. If you don’t have a license and the owner does not pay, the courts will not help. The intent of the Contractor’s State License Law is to prohibit unlicensed contractors from being paid, thus discouraging those who have failed to comply with the law from providing unlicensed services for pay, protecting the public from incompetence and dishonesty. In the case of an entity, such as a corporation, it is the entity itself which is licensed. In a recent decision in San Francisco, the court went out of its way rescued one contractor that couldn’t decide if it was a limited partnership or a general partnership. Obviously this contractor had not consulted an experienced Sacramento and Bay Area business attorney.

unlicensed contractor.JPGIn Montgomery Sansome LP v Rezai, the building owner Rezai hired “Montgomery Sansome Ltd. Lp.” (That’s what the contract said.) After doing some work on their apartment building, Rezai fired the contractor. The contractor, calling itself “Montgomery Sansome Lp” (no “Ltd”) sued for $203,000. The owner said they were neither a party to the contract, nor a licensed contractor. Here is the crazy history of this contractor, in chronological order:

1. Montgomery Sansome LP filed a certificate of limited partnership.

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California real estate purchase contracts often include mediation provisions. Such a provision provides that, in the event of a dispute, the parties either may, or must, attempt a mediated solution before extended litigation. If the provision requires that they must, there is a penalty for refusing to mediate. In a new decision from Calaveras County a party who thought they were able decline mediation under the provision turned out to be wrong.

mediation provision.jpgIn Cullen v. Corwin, the parties agreement , a standard form purchase agreement, provides for the prevailing party in any dispute to recover legal fees. However, this right is subject to a condition precedent that reads,

“If, for any dispute . . . to which this paragraph applies, any party commences an action without first attempting to resolve the matter through mediation, or refuses to mediate after [the making of] a request . . ., then that party shall not be entitled to recover attorney[] fees . . . .”

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Recently a federal court in Northern California found that a document which one party claimed was a non-binding proposal was really a binding ground lease agreement with purchase options, which resulted in a 16 million dollar damage award. The proposal concerned development of the Santana Row project in San Jose. Generally, creating of a valid contract requires mutual assent. An “agreement to agree, ” without more, does not create a contract. In this case the court found more.

Santana Row.jpgIn First National v. Federal Realty, First National controlled the property but did not want to sell it yet. Federal unsuccessfully offered to buy, and the parties entered negotiations for a ground lease that lasted several years. They exchanged several proposals, including a “counter proposal” and a “revised proposal.” Finally the both signed a document titled “Final Proposal,” a one page document. Earlier proposals stated that they were non-binding; the final did not include this language. It stated that it was “accepted by the parties subject only to approval of the terms and conditions of a formal agreement,” and Federal was to prepare a formal legal agreement. And it provided that First National could require Federal to buy the property any time over a period of ten years; and that Federal could force First National to sell at the end of ten years (the “Put and Call”). Federal never prepared a formal agreement, and decided it did not want the lease.

The court First looked at the specific language of the Final Proposal. It did not include the standard non-binding clause, and said that its terms were “hereby accepted by the parties subject to” only a formal agreement. The court then looked at the surrounding circumstances. There was the passage from counter to revised to final proposal.

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Sometimes a debt may be disputed between the parties. In the early days of my practice I heard stories of people sending a check to their creditor for less then it was due, marked “payment in full” with the hope that the creditor would not notice, cash it and be tricked into accepting less than was due. The rules then were thought to be clear, but they turn out not to be so obvious, so anyone with the situation who is not sure of the consequences should consult with an experienced Sacramento, El Dorado, or Yolo Business Lawyer.

“Accord and Satisfaction” is a legal term for an agreement to accept something different from what a contract provides for in order to satisfy the requirements of the contract. Something different can be less money than due, or it can be different in kind, such a bushel of apples instead of a peck of peppers. The creditors acceptance of something different than required extinguishes the contract (or ‘satisfies’ it). Civil Code section1521, 1523.

check_book_and_statement.jpgRegarding checks, in 1987 the California legislature enacted Civil Code section 1526. It provides that for a a check mark “payment in full,” acceptance does not create an accord and satisfaction if the creditor protests by deleting the notation, or accepts the check inadvertently or without knowledge of the notation. There are exceptions to this rule where the check is tendered in conjunction with a release of a claim, or under a composition or extension agreement with creditors.

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Tender of performance is a critical concept that only arises in the event of a dispute. The general rule is that to claim the other party is in breach of contract, you have to first tender performance.

1. Tender must be made at the proper time and place. If the agreement does not provide a specific time, then at a reasonable time.

2. Tender must be by the proper method. If the agreement requires a deposit in escrow, it must be deposited; if performance is required by certified mail, it must be so.

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A California condo owner sued his association for repair costs In plaintiff’s suit against the homeowner association for repair costs to his condo aused by a leaky sewer pipe beneath the concrete slab underlying plaintiff’s condominium. The association argued that the sewer pipes were exclusive use common areas, so the owner was responsible for repairs.

The Davis-Stirling Act (sec. 1351) defines “exclusive use common area” as a portion of the common areas for the exclusive use of one or more, but fewer than all, of the owners of the separate interests and which is or will be appurtenant to the separate interest or interests. This includes fixtures designed to serve a single separate interest, but located outside the boundaries of the separate interest.

The court held that interconnected sewer pipes couldn’t really be said to be the “fixtures” of any particular unit. A sewer system is a series of interconnected pipes which ultimately feed into one common line. Differentiating parts of that interconnected system is unreasonable. The portion of piping coming from one unit is no more affixed to that unit than it is to the sewer system and other pipes or piping within that system. The court affirmed the award of about $17,000 is affirmed as, under a natural reading of the CC&R’s, the sewer pipe was a genuine common area to be maintained and repaired by the association.

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Buyers bought a home in Southern California using the standard CAR purchase agreement, in which they initialed the requirement to arbitrate any disputes. Before they moved into the home, they learned it had extensive structural damage which was not disclosed. The buyers sued their broker, claiming that they knew about the damage. The brokers moved the lawsuit to arbitration, as the purchase Contract allowed them to do- big mistake for the broker.

The Arbitrator awarded the Buyer damages based on the benefit of the bargain” measure, which is applicable to damages not arising from a contract. The Brokers sought to set aside the award, claiming he should have used the “out of pocket” measure of damages (Civil Code 3343).

The Broker argued that the Arbitration provision requires the arbitrator to render an award in accordance with California substantive law; thus, this departs from the general rule of non-reviewability of arbitration awards. However, the court disagreed. Citing DirectTV, a provision requiring arbitrators to apply the law leaves open the possibility that they may apply it incorrectly.

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