Articles Posted in real estate law

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Letters of Intent are often ambiguous documents in which parties set out certain key terms of a deal, usually with the intent there will be further negotiation and documentation. They may also be called a ‘term sheet’ or “memorandum of understanding,” and are used extensively in California real estate transactions and Leases as well as in business contracts. The parties usually do not intend this document to be enforceable in court – rather, it is intended to guide further discussions and execution of a formal agreement or approval of a third party. A party entering such a letter should consult with a Sacramento business attorney for guidance in drafting it. However, as open ended as the parties may make them, occasionally they are surprised when a court finds such a letter creates enforceable obligations between the parties. It all depends on the court’s view of the intentions and expectation of the parties. Among the issues considered are whether the parties agreed to the material terms, or left some for later agreement, making it an agreement to agree, and whether the parties intended not to be bound until preparation of a more formal agreement. The two decisions discussed below establish two important rules:

A. A Letter of Intent may be enforceable even if you plan to enter a formal contract. If the material terms of the deal are there, as well as intent, the Letter is enforceable; and,

B. A Letter of Intent may create a duty of the parties to negotiate in good faith, and failure to do so can result in damages.

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An easement is the right of an owner of property (the “dominant tenement”) to use the property of another (the subservient tenement”) for a specified type and extent of use. Most common are roadway easements, to allow the owner of the dominant tenement (the easement holder) access to their own property. If the easement is by grant, as in a deed, hopefully the language clearly spells out the use, otherwise it has to be determined based historical use of the easement. For a properly drafted easement, it would be best to consult with an experienced Sacramento real estate attorney. Additionally, the owner subject to the easement has an obligation not to interfere with its use. Usually, this occurs when a roadway falls into disrepair, some obstruction is placed in the way, or a gate is installed. In a recent decision in So. California, the easement was clearly spelled out, but interfering owner refused to allow the easement holder to improve the road so she could get a building permit, and this was found to be obstruction of the easement.

Sacramento easement lawyer.jpgIn Flora Dolnikov v. Dikran Ekizian, the easement was located in the Hollywood Hills above Laurel Canyon Road. (Google map) The plaintiff Flora had a easement for access to her property (“ingress and egress”) Both parcels were undeveloped; Plaintiff’s lot was uphill from the defendant’s. Flora obtained building permits for two houses on her property. The slope of the easement was too steep and the right of way had fallen into disrepair so that all that remained of the original pavement was substantially covered with dirt and rocks from uphill. The easement was unsuitable for access. The County approved Flora’s grading plan which would lower the soil level 6-8 feet, and build a retaining wall. The defendant complained about the construction, and the County required that the defendant sign off on a community driveway covenant. Defendant refused, first demanding $100,00, then $200,000. This lawsuit was filed.

The trial court found after bench trial they the grading and wall were necessary for the use of the easement for its expressly intended purpose by plaintiff, the owner of the dominant tenement, and that their presence was not in any sense inconsistent with the nature of the easement and were authorized by the easement. Thus, they were a “necessary incident” of the easement. Despite this court order, defendant refused to sign off on the county permit.

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The California Legislature enacted a comprehensive law covering the requirements for lawsuits regarding construction defects. Its application is limited to new residential units where the purchase agreement with the buyer was signed by the seller on or after January 1, 2003. The “Right to Repair Act” (Civil code section 895 +) provides standards for residential design and construction, the violation of which gives rise to liability on the part of a subcontractor, material supplier, individual product manufacturer, or design professional. Section 696 of the law establishes an extensive list of standards for specific elements of the design and construction of the home. The statutes do not apply to an action by a homeowner to enforce a contract or express contractual provision, or any action for fraud, personal injury, or violation of a statute. In an important recent decision where there was actual damage to the property, the court found that an owner’s claims for damages regarding a burst pipe were not governed by the Right to Repair Act limitation of “four years after close of escrow.” Civil Code section 896(e).

Woodland real estate attorney.jpgIn Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC, a sprinkler system burst, causing significant damage, including relocation expenses incurred while the homeowner was forced to be out of the home. This lawsuit was filed, but the trial court found that it was time-barred by the four-year statute of limitations.

The court of appeal first looked at the legislative history of the Right To Repair Act. It provides remedies where construction defects have negatively affected the economic value of a home, even though no actual property damage or personal injury has occurred yet. It was enacted as a result of a California Supreme Court decision holding that construction defects in residential properties, in the absence of actual property damage, were not actionable in tort. (Aas v. Superior Court (2000) 24 Cal.4th 627, 632.) A key provision in the Act is that liability would accrue under the standards regardless of whether the violation of the standard had resulted in actual damage or injury. As a result, the standards would essentially overrule the Aas decision and, for most defects, eliminate that decision’s holding that construction defects must cause actual damage or injury prior to being actionable. There was evidence that the Act was intended to address the inequity of the Aas decision and give homeowners the ability to have specified defects in the construction of their homes corrected before the defects cause harm or damage.

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Easements in California can be expressly reserved in a deed, or implied. When they are express, generally courts look to the terms of the easement language itself to determine the extent of the easement – the physical dimensions, and the type and amount of use permitted to the easement holder.

In a recent decision by the Third District Court of Appeal, the defendant claimed that it had both an express easement, and also a 99-year lease to use the same property covered by the easement. The defendant was surprised when the court limited its use of the easement to the historical use, and found that the lease had been abandoned. To avoid surprises, parties with easements should consult with an experienced Sacramento real estate attorney to draft their easement or advise as to the extent of use permitted. While a court may not extinguish or reduce diminish a clearly described easement, here, in surprising the defendant, the court relied on a fundamental principal of easement law:

— When the language of the easement does not specify or limit the extent of the use of the easement, the permissible use must be inferred from the intent of parties.

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Standard in most form real estate contracts are provisions for liquidated damages. Not so common is the non-refundable deposit. A “liquidated damages” provision stipulates an estimate of what the damages would be in the event of a breach of a contract. It is generally valid, unless it can be shown that it was unreasonable under the circumstances at the time the contract was entered. A non – refundable deposit is generally not valid in a falling market. But there is an alternative!

nonrefundable deposit.jpgIn Bradford Kuish v. William W. Smith, Jr. There was a purchase contact for plaintiff to buy defendant’s Laguna Beach house for $14 million dollars. The contract required a non-refundable deposit, initially of $800,000; after some amendments to the escrow instructions, the deposit was reduced to $620,000, which was paid by the buyer. The parties extended the escrow a couple of times. Finally the buyer asked that the escrow be cancelled; the seller agreed. They then turned to a backup up offer to sell the property for $15 million, one million more than the plaintiff would have paid. The seller refused to refund the buyer’s $620,000 deposit, claiming that it was “non-refundable.” The buyer sued to recover the deposit.

The court started with Civil Code 3307:

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In commercial leases the landlord and commercial tenant may agree to notice procedures that differ from those provided in the statutory provisions governing landlord – tenant relations. Residential leases are different, given the Legislature’s long standing concerning with protecting unwary residential tenants, and the swift process of unlawful detainer. The courts respect the terms of the commercial lease regarding notice. In one decision the Lease provided for notice to the tenant by mail or email “at” the specified address, and the tenant acknowledged receiving the email at a location other than the specified address. The court said it was not good enough, and even though it is naive to think of the location where an email is received, that’s what the Lease required. In recent decision out of San Luis Obispo, the court declined to follow the letter of the lease, because the tenant’s attorney instructed plaintiff’s attorney to contact the attorney only.

Sacramento landlord attorney 2.jpgIn Eucasia Worldwide School Inc. V. DW August Co. The Lease provision read: “The addresses noted adjacent to a Party’s signature on this Lease shall be that Party’s address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee’s taking possession of the Premises, the Premises shall constitute Lessee’s address for notice.”

The parties did not get along at all. Due to the strained relationship, the tenant’s attorney’s assistant, on attorney letterhead, directed landlord’s counsel to “have NO DIRECT CONTACT with” appellant without [the attorney’s] “express permission.”

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A lis pendens, or “notice of action,” is a document recorded to perfect a claim being alleged in a lawsuit regarding title to real property. Once recorded, the world has notice of the lawsuit, and no purchaser may buy the property free of the claim – if the plaintiff wins in the suit, the new owner of the property is subject to the decision of the court. It is not a lien on the property, but it effectively renders the title unmarketable. A question posed to Sacramento and El Dorado real estate attorneys is how the lis pendens plays out in a bankruptcy. In a bankruptcy the trustee may avoid certain transfers (get them reversed) if they were made within 90 days (and in some cases, one year) before the bankruptcy filing if they would benefit one or more creditors at the expense of other creditors. These transfers are called “preferences.” (11 USC § 547(b)). Is recording the lis pendens a preference?

The reasons behind this are to promote equal distribution of assets to creditors, and to prevent aggressive collection efforts that may be undone by the court. A Ninth Circuit Court of Appeals decision, which governs California Federal Courts (plus several other western states), has held that the recording of a lis pendens is a “transfer” for purposes of determining whether it is a preference. While this position is law in California, not all circuits agree.

el dorado real estate attorney.jpgIn re Lane, 980 F.2d 601, the Ninth Circuit decision, involved a creditor who had sued Lane, and apparently recorded a lis pendens on filing the suit, or sometime thereafter. The creditor obtained a judgment, and recorded abstracts of the judgment on June 24. Lane filed bankruptcy September 16. Thus, the abstracts were recorded in the 90 day preference period, but the lis pendens was recorded prior to the start of the 90 day period. In the bankruptcy there was a motion to determine whether the creditor was secured, as it had recorded the abstract within the preference period, and the debtor wanted it to be unsecured.

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Anti deficiency legislation has been a mainstay of California real estate law for many years. It is a set of rules that prohibits, in certain instances, a creditor with real property security from pursuing a debtor in default directly for the debt. Many other states do not have the anti-deficiency protections built into California law. Because of this, if there is an out of state foreclosure, the lender could then sue in the other state for the balance due on the note, and then enter the judgment in California. A California borrower facing default on an out of state secured loan should consult with an experienced Sacramento real estate attorney to explore their risk in this situation. A decision from the First District Court of Appeal raises a technique that may point out a creative solution to help California residents in this situation to avoid personal liability for an out of state real estate loan.

anti deficiency out of state.jpgIn Kimbel J. Stuart v. Steven G. Lilves, the defendant, a Marin County resident, bought a house in Fort Collins, Colorado, signing a purchase money note for $18,000. There was a foreclosure of a senior lien – what this lien was is not clear, but it happened. The plaintiff then sued the defendant, in California State Court, for the unpaid amount due on the purchase money promissory note.

The California judge ruled in favor of defendant, finding that this was an action to collect a deficiency judgment, which was barred by Code of Civil Procedure section 580b.

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The California Legislature enacted, and then revised, Code of Civil Procedure section 580e in response to the collapse of the housing market. As reported elsewhere, 580e now prohibits deficiencies whenever a short sale is approved by a lender on a residential property. Prior to that, it was common for lenders to claim the borrower owed the balance of the loan not paid off in the short sale. However, a decision this summer, applying the law as it existed prior to 580e, held that 580b prohibited collection of a deficiency after a short sale. The decision ignores some language in 580b, but now provides an argument for deficiency protection in short sales prior to the effective date of 580e.

****NOTE*** Since this was written, The justices of The California Supreme Court, at their weekly conference in San Francisco Wednesday Nov 22, voted 6-0 to grant review of this decision, thus it is not a final decision.

deficiency judgment attorney.jpgIn Carol Coker v. JP Morgan Chase Bank, N.A., Coker owed $452,000 purchase money debt for her property in San Diego. She stopped paying the loan, and a notice of default was recorded. She negotiated a short sale, which Chase Bank approved subject to several conditions. The important one here is that the amount of the sale proceeds paid to Chase Bank was for the release of Chase Bank’s security interest only, and Coker was still responsible for any deficiency balance remaining on the loan after application of the proceeds received by Chase Bank. This was typical of the requirements seen by Sacramento Real Estate attorneys a few years ago; sometimes, the lender would require the seller/borrower to sign a new promissory note. The sale closed, and Chase Bank sicced a collection agency on Coker, demanding $116,686. Coker filed this lawsuit for declaratory relief, seeking a ruling from the court that 580b and 580e prohibited Chase Bank from collecting a deficiency based on this loan. 580e did not apply retroactively, so the court dismissed that claim. On appeal, however, the court found that 580b did apply to prohibit the deficiency.

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Acceleration clauses are standard in loans secured by California real estate. The clause provides that on the happening of a listed event, the lender (or beneficiary) may call the entire loan balance due and payable immediately. The events stated are usually a) if the borrower (trustor) defaults on any provision of the loan, b) if the property is sold or otherwise transferred, and sometimes c) if the property is otherwise encumbered (most likely by taking out another loan). If the note or contract language provides for it, acceleration could also require payment of any prepayment penalty. If there is no contract provision allowing for acceleration, the lender is stuck – if the borrower defaults in one or two payments, the lender could only foreclose on those delinquent payments Lenders and borrowers concerned about acceleration, and how it is triggered, should consult with an experienced Sacramento real estate attorney.

Acceleration clause el dorado real estate attorney.jpgSome Contract defaults that may trigger acceleration

The typical default is where the borrower does not make an installment payment. Also common are failure to pay taxes, or property assessment, or HOA fees; failure to pay property insurance premiums, or allowing an insurance policy to lapse; or, failing to pay an obligation which is senior to the subject deed of trust.

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