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The California civil code provides that, in a breach of a real estate purchase and sale contract, the breaching party may be liable for consequential damages. An appellate court determined that this may include lost profits in certain cases. Where lost profits are recoverable as consequential damages, “Not only must such damages be pled with particularity [citation], but they must also be proven to be certain both as to their occurrence and their extent, albeit not with ‘mathematical precision.’” Thus, the offended party in consultation with their real estate attorney must develop their argument to establish their lost profits to ensure that they can be awarded. In discussing how a particular plaintiff failed to provide sufficient evidence for lost profits, the court indicated what it would take.

lost profits attorneyIn Greenwich SF. LLC v. Wong, Mr. Chan bought property with Mr. Wong with the intent to remodel or develop it, and they held title as joint tenants. They had worked together on flipping properties, as Chan was a contractor. Mr. Wong died, so title automatically passed to Plaintiff. But Wong’s wife tied up the property in Probate (! Mr. Chan should have consulted with a real estate attorney, this mess should never have occurred!) and refused to convey the property to Chan. She led Mr. Chan to believe that she would once it cleared probate. Chan eventually formed the plaintiff LLC for the redevelopment. The plaintiff had plans drawn up. The defendant widow entered a contract to sell the property to plaintiff. Ultimately, Wong’s widow refused to convey the property as she could sell it for more to a third party, and plaintiff filed this suit for breach of contract. Part of the damages claim was for lost profits.

Until this time California law was unsettled as to whether lost profits could be claimed in a breach of a real estate purchase contract. Civil Code Section 3306 allows consequential damages in the breach of a real estate contract, but no decisions have decided the lost profits may be included as consequential damages. Here, this court determined that lost profits ARE available, as long as such damages are pled with particularity, and they must also be proven to be certain both as to their occurrence and their extent.

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For a California real property owner, liability to third parties for their injuries on the property requires that the injured person prove the owner had a duty of care to the injured party, there was a breach of the duty of care that was the proximate cause of the injuries, and the injured party suffered damages. Often most difficult test is the duty of care. The landowner must exercise ordinary care or skill in the management of their property. The idea is that the owner has control over the property and the ability to prevent the harm. When the owner is aware of (or should reasonably be aware of) a dangerous condition on the property, there are obligated to either fix it or warn people of the risk. I have written previously of the failure to warn of a dangerous attic stair, and how the real estate agent failed to warn a person who was injured. The California Supreme Court has established a list of factors in determining whether there is a duty of care:

(1) the foreseeability of harm;

(2) the degree of certainty that the plaintiff suffered injury;

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For a parcel to be “landlocked,” the owner must have no legal right of access to the property. They would have to cross someone else’s land, but the problem is that they do not have a legitimate easement which gives them that right. In cases where traditional easements do not apply, California Courts may exercise their equity powers to establish an “equitable easement”. Landowners with access problems should contact a real estate attorney to see if an equitable easement will apply in their situation. For the Court to create an equitable easement, it must apply the relative hardship test, and find three factors:

Three Factor Test for Equitable Easement-

• First, the defendant must be innocent. That is, his or her encroachment must not be willful or negligent. The court should consider the parties’ conduct to determine who is responsible for the dispute.

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When someone who owes a debt transfers property out of their name in order to prevent the creditor from collecting against that property, the transfer may be set aside under the Uniform Fraudulent Transfer Act. A classic move seen by business and real estate attorneys is the transfer of real estate to someone who disappears and cannot be served with a summons and complaint. This does not necessarily end the story, as the fraud is so obvious that the courts will not aid them in their fraud. In a recent decision involving an obviously fraudulent conveyance, the new owner of the property had been in prison and was subsequently deported to Mexico. That was not enough to keep the creditor from undoing the transaction.

Sacramento fraudulent transfer attorneyIn Diana Buchanan v. Ramon Soto, Maria Soto bought a business from Buchanan for over $300 thousand but did not pay for it. The plaintiff was in the process of obtaining a judgment against Maria, when Maria transferred her real estate in Vista, CA to her husband Ramon as his separate property. Plaintiff sued Maria & Ramon to undo the fraudulent conveyance. Of course, Ramon could not be found, because he was deported due to criminal activity, and was somewhere in Mexico. The plaintiff asked Maria where, but Maria did not know where other than rural Mexicali.

The court allowed plaintiff to serve Ramon by publication. A trial was held, and the plaintiff won. Ramon tried to set aside the judgment due to lack of service, but failed. They appealed, claiming that the California court lacked personal jurisdiction because Ramon had not been properly served.

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California real estate financing typically includes a note and deed of trust. In event of default the trustee named in the deed of trust is a third party who would conduct the non-judicial foreclosure process, and hold a trustee sale. This is not a true ‘trustee’ with fiduciary duties but an agent for the parties with statutory duties. When disputes arise regarding foreclosure, Sacramento real estate attorneys often see that the trustee is often named in the lawsuit by the borrower with the other defendants. Given that the trustee relies on instructions of the beneficiary and does not act on its own, the complaint does not allege any specific wrongful act committed by the trustee. As a result, Civil Code section 2924l provides that the trustee may file a “Declaration of Nonmonetary Interest” in the case. The declaration must state that the trustee’s “reasonable belief that it is named as a defendant … solely in its capacity as trustee and not due to its acts or omissions.” Unless another party objects, the trustee then avoids participation in the lawsuit and liability for damages and attorney fees.

woodland deed of trust attorneyIn Bae v. T.D. Service Company, Bae defaulted on a $5 million dollar property in Glen Ivy. The property was sold at a trustee sale, and the plaintiff sued everyone, including the Trustee. The trustee filed a Declaration of Nonmonetary Interest, and not an answer to the complaint. The Plaintiff’s attorney entered the trustee’s default and obtained a default judgment, all without providing notice to the trustee’s attorney. That’s right, the clerk entered the default, the judge granted the judgment, all without notifying the trustee’s attorney. Unbelievable, but it happened, and the trustee moved to set aside the default and won. More bizarre- the plaintiff appealed.

The court first looked at requirements for setting aside a default. Civil Procedure section 473.5 permits the court to set aside a default or default judgment if the defendant, through no inexcusable fault of his own, [received] no actual notice” of the action, provided that relief is requested not more two years after the entry of the default judgment. But here, the Trustee filed its motion more than two years later.

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Easements in California usually grant a restricted right to a specified use of another’s real property. The use may not go beyond that which is described, and the owner of the underlying property (the “servient tenement”) is allowed to use the property in any way which does not unreasonably interfere with the easement holder’s use. Sacramento real estate attorneys are often asked to interpret the language granting an easement to determine if their client, or the other party, can make a certain use of the property, and such disputes result in lawsuits. Surprisingly, an easement may actually be “exclusive” – that is, the servient property owner can make no use of the easement area at all, without regard to whether or not it interferes with the easement use. But the terms of the easement must be clear, because if it is not, the courts will decide that it is not exclusive. Sufficient clarity was found in a case in Orange County, where the dueling owners had spent millions on their properties.

sacramento exclusive easement attorneyIn Gray v. McCormick, Gray paid $2.9 Million for a multi-acre unimproved property in Coto de Caza, in Orange County. CC&Rs for the property provide that access is by easement (entire description of the easement provided at the end of this article). The Tract Map indicates a proposed easement 16 feet wide by 90 feet long. Without the easement, the plaintiff’s property would be landlocked. The defendants (owners of the servient tenement), had been using the easement area for their horse riding, and for hauling trash and manure. The plaintiff planned to improve the easement with a driveway, perimeter walls, and landscaping. Plaintiff wants the defendant to stop using the easement, but defendants refused, claiming that it did not interfere with plaintiff’s use. This lawsuit followed.

The plaintiff claimed that the easement was exclusive, such that it excluded all other owners of property in the subdivision. This was based on the language of the easement description in the CC&Rs that it was an exclusive easement in favor of the plaintiff’s property. The court first noted that an ‘exclusive easement’ is unusual interest in land, and no intent to convey an exclusive easement will be imputed unless there is a clear indication of this intent.

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Real Estate investors in California often work through a licensed Broker, who puts together investor’s cash with potential borrowers. Investors prefer these arrangements (hard-money loans) because they can obtain a higher interest rate for their money, fully secured by a deed of trust recorded against real property. These loans are made through a licensed Broker because broker arranged loans are not subject to usury laws. (More details at the end of this article.) Real Estate Attorneys may be tasked with the job of determining if the usury law applies, and if so, whether this particular loan is usurious. If the loan is usurious, the concern for the investor is to be treated as a holder in due course, free from the defense of usury. It was a bad day for some investors in the Bay Area when the court decided that they were not holders in due course, because the unlicensed Broker kept possession of the notes in order to service them.

In Creative Ventures, LLC v. Jim Ward & Associates, Jim Ward was a licensed real estate broker, and his license was placed with a corporation. He retired and the license expired. He came out of retirement, created a new corporation, JWA, and applied to the DRE to renew his license for the old corporation. Apparently he did not realize that he needed a new license for the new corporation.

A real estate developer borrowed $3 million from JWA. It was through four Promissory Notes, two at 8% interest and two at 10% interest. All the notes included a 6% Broker commission. (For usury purposes, the interest rate is added to the commission, so here they were 14% and 16%, over the 10% usury limit.) This would be ok if JWA was licensed, but it was not. A lawsuit followed.

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Most California real estate appraisals are done to obtain a loan secured by the property, often involving the initial purchase. The lender requires the appraisal, often requiring the borrower to pay for it. However, parties other than the lender obtain copies of the appraisal. The question then arises, who may rely on the appraisal? If a Buyer wants an appraisal to make a purchase decision, they could include an appraisal contingency in the purchase contract; if they do not like what the appraisal reveals, they can bow out of the contract. This type of appraisal would certainly be prepared for the buyer to be able to rely on. However, less sophisticated buyers may believe that, because they paid for their lender’s appraisal, it is theirs, and they may rely on it. Parties interested in an appraisal may want to consult with an experienced real estate attorney to determine the best way to protect themselves. In a decision concerning a commercial real estate purchase, a buyer apparently did not have much guidance in entering the purchase contract, and was disappointed when he discovered that he could not rely on the lender’s appraisal.

California real estate appraisal attorneyIn Willemsen v. Mitrosilis (230 Cal. App. 4th 622), Willemsen entered a contract to buy 4.8 acres of vacant land in San Bernardino County in order to use the property as a recycling facility. His lender hired an appraiser to appraise the property to see if its value would support the purchase price and hence, the loan amount. The sale closed, and the Buyer discovered that the city intended to run roads across the property, and earthquake faultiness run through the parcel. He sued everyone, including the appraiser.

The appraisal stated that the intended use of the appraisal was to assist the lender in analyzing a new loan for the subject property. “The report may not be used for any purpose by any person other [than] the party to whom it is addressed…”

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Expert opinions are occasionally relied on in California real estate disputes. Experts may be hired initially to determine if there are grounds for a lawsuit. In ongoing litigation, an expert may be hired to offer an opinion to establish damages, or to serve as a witness at trial as to the other party’s breach of a duty, or to counter an expert identified by the opposing party. Experts are usually hired by Sacramento real estate attorneys, rather than their clients, so that the expert’s report is protected by the attorney privilege.

Some examples of expert opinion in real estate cases –

Valuation of property – it must be based on matter perceived by the expert or made known to the witness before the hearing, that is of the type reasonably may be relied upon by an expert in determining the value of property. (Evidence Code section 814)

Construction defect – review and evaluation of the specifications and plans, materials that were used, and degree of care and skill used by the contractor are usually required and undertaken by experts.

Broker and Agent Negligence – expert testimony is admissible regarding the breach of the duty of care, including testimony as to custom and practice. However, such testimony is not admitted to establish whether there is a duty in the first place.

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In California, every contract includes an implied obligation not to do anything that prevents the other party from benefiting from the contract, and to cooperate if necessary for the other party.  This is called the implied covenant of good faith and fair dealing.  It does not create a new obligation but applies to those obligations which have been agreed on.  The Restatement of Contracts comments provide that the bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty.  Sacramento Real Estate attorneys see the argument come up often in real estate contracts which end up falling out of escrow, and occasionally commercial leases in which the parties fail to cooperate.  Courts generally allow parties to use unfettered discretion, without restriction of the covenant, if the contract provides for unfettered discretion, and there is adequate consideration (162 Cal App. 4th 1107, 1121).  In a decision involving an office lease at 595 Market Street in San Francisco the tenant wanted to sublease the premises, and thought that the landlord breached the implied covenant by terminating the lease.  But the lease provided that the landlord could do so, so the tenant had covenanted away its argument.

covenant of good faith attorneyIn Carma Developers (Cal) Inc. v. Marathon Development, Carma entered a lease of the 30th floor of the building for ten years.  Carma’s business changed, its headquarters moved to Houston, and Carma submitted a proposal to the lessor to sublease a portion of the premises.  The Lease had a provision (set out below) that in such a case the lessor had the right to terminate the lease.  The Court first noted that it has been suggested the covenant requires the party holding such power to exercise it “for any purpose within the reasonable contemplation of the parties at the time of formation-to capture opportunities that were preserved upon entering the contract, interpreted objectively.”  It repeated to principles that have emerged:

1, breach of a specific provision of the contract is not a necessary prerequisite, and

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