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When co-owners of property cannot agree on what to do with it, a solution is a legal action for partition. In a partition the judge will order the property ‘partitioned’; that is, either divided in-kind between them or sold and the money divided between the owners. Under California law Partition in-kind is favored “since this does not disturb the existing form of inheritance or compel a person to sell his property against his will. Forced sales are strongly disfavored.” However, in modern times, Sacramento real estate attorneys see the bulk of these disputes concerning developed properties with an individual home or commercial building. You can’t split a house down the middle, so the property is ordered sold and the judge splits the cash accordingly. But larger properties are different, and the preference is division in kind. One co-owner who really only wanted a sale so that he could buy out the other owner was disappointed when the court caught on and cut-up the property for division in kind.

Sacramento partition attorney.jpgIn Butte Creek Island Ranch v. William Crim, The parties each owned one half of a waterfowl hunting ranch in Butte County. The property consisted of two separate parcels Parcel A was primarily used for a sleep house, dining building, garage and barn. Parcel B, which is much larger, is where the hunting occurs. Butte Creek (a partnership) wanted to buy Crim. When Crim said no, this Partition action was filed.

The parties stipulated to the appointment of a receiver (CCP section 873.040). The referee concluded that the proper course was division in kind- to divide Parcel A & B into 2 parcels each and then each party would get part of A and part of B. He thought that division by sale would leave the parties less than whole in two respects:

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Real estate title in more rural or agricultural areas of California are often reliant on ancient surveys, sometimes handwritten, relying on monuments that are gone or have changed, and less accurate survey instruments. When disputes arise, the parties must rely on their surveyors to convince a judge that they are correct. Real estate attorneys can find themselves in a battle of surveyors, disputing whether the other side’s approach is reliable or not. This problem arose in a recent decision near Healdsburg regarding a property line between a vineyard property and the new owners of an adjacent winery. The surveyor’s approach, as well as testimony of some old-timers who lived on the properties, made life difficult for the new winery owners.

Sacramento title attorney lg.jpgIn Belle Terre Ranch, Inc. v. Wilson, new owners bought the Soda Rock Winery in 2000. The Soda Rock winery building backed up to the vineyard of Belle Terre Ranch, with a pathway in between. A line of ancient oaks ran behind the building, within 2-4 feet of the building wall. The new Soda Rock owners began reconstructing the winery, and the owners used the pathway for deliveries to the back of the building, as well as for heavy equipment access. Ron, the 70 year old President of Belle Terre, had lived on the property all his life. He testified that he did not complaint about use of the pathway during the initial reconstruction because he wanted to be neighborly.

Soda Rock applied to the county for permits to complete the renovation, and Belle Terre complained to the county about a need for the survey, and that there had been some trespassing. The owners spoke with each other, agreeing that a survey should be done. Ron apparently agreed to accommodate access to the rear of the winery for reconstruction, so as to be a good neighbor.

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When California lenders and buyers seek title insurance, they want to be sure that the title to the property that they are receiving, or the security for their loan, is what they expect it to be. In the case of the lender, they want to be sure that they are in first place, so that if they need to foreclose, the property will be unburdened by any senior lien or liability, and they can get their money out of it. A preliminary title report, the precursor to the policy, is an offer to sell an insurance policy, but not like any other kind of offer to make a contract. If I offer to sell you my “used Buick, which has 20,000 miles on it, for $12,000,” and you accept, when you discover that it really has 97,000 miles on it, you have a claim against me for breach of contract and fraud. But Sacramento & Yolo commercial real estate attorneys are often faced with explaining to clients that the preliminary report cannot be relied on in the same way. That was the answer some mortgage investors got from the court, when the preliminary report stated that the title company would get a full release of a notice of abatement action before issuing a policy.

Sacramento title insurance policy attorney.jpgIn Stockton Mortgage Inc. v Tope, the plaintiff Lender loan $315,000 to Tope to buy and rehab a Stockton property. The lender obtained title insurance from Alliance Title Company, underwritten by First American. The preliminary report had the standard language stating”

“[T]his Company … is prepared to issue, or cause to be issued, as of the date hereof, a Policy or Policies of Title Insurance … insuring against loss which may be sustained by reason of any defect, lien or encumbrance not shown or referred to as an Exception herein or not excluded from coverage pursuant to the printed Schedules, Conditions and Stipulations of said Policy forms.”

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Last week I discussed a cotenancy provision in a California commercial lease, where the court found that the rent abatement aspect – if the specified cotenant was not operating, the tenant’s rent is reduced or eliminated – was found to be an unenforceable penalty. That court also looked at whether the provision was unconscionable, and thus unenforceable. Unconscionability (codified at Civil 1670.5) has no specific legal definition, but generally means extreme unfairness. Business and real estate attorneys often see a situation where one party gets a really bad deal, but that alone does not make it unenforceable. California courts have developed an analysis requiring two elements, “Procedural,” and “Substantive.” In the decision being addressed here, the court found that Procedural element was not fulfilled so the cotenancy provision was not unconscionable.

Sacramento commercial lease unconscionable attorney.jpgIn Grand Prospect Partners, LP, v Ross Dress for Less Inc., Ross entered a lease in a commercial center in Porterville, CA. The lease required that Mervyn’s be open when the Ross store opened, and Mervyn’s was to remain in operation for the term of the Ross lease. If Mervyn’s was not operating, Ross could cease paying rent, and also terminate the lease. Mervyn’s filed for bankruptcy before opening in this center, so the cotenancy requirement was unfulfilled, and Ross declined paying rent. In the ensuing lawsuit, the Landlord claimed that the cotenancy provision was unconscionable, and thus should not be enforced.

Procedural Unconscionability.

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Cotenancy provisions are often required by larger retail tenants in shopping centers of all sizes. They require other specified stores in the center to be open and operating, on the assumption that these other stores will draw the desired mix of potential customers. They come in two flavors; opening requirements, meaning that the requirement is fulfilled before the tenant is required to open; and Operating requirements, meaning that the tenant’s obligations continunue only so long as the named tenants remain in business. Parties to a commercial lease may need to consult with a Sacramento real estate attorney to clearly define the cotenancy requirements in their lease, so that they do not face any surprises, as one tenant faced in a recent decision when their cotenancy provision was found to be an unenforceable penalty because the tenant had never really considered what its harm would be if the named store did not open.

Sacramento commercial lease attorney.jpgIn Grand Prospect Partners, LP, v Ross Dress for Less Inc., Ross was negotiating with a shopping center owner Porterville, in Tulare County. Ross wanted a cotenancy provision that required a Mervyn’s to opening and running before Ross was required to open. If Mervyn’s did not open, or ceased operating, Ross would not owe rent, and did not have to open a store. (The terms of the lease are more fully set out below). Two months after the parties signed the lease; Mervyn’s filed bankruptcy, and never opened its store in the Portville center. Eventually Ross notified the landlord that it was going to terminate the lease under the cotenancy provision. This lawsuit ensued, with Grand Prospect, the landlord, claiming that the lease was unconscionable, and the cotenancy rent abatement provision was an unenforceable penalty.

Under California law, an unenforceable penalty lacks a proportional relationship between the forfeiture compelled and the damages or harm that might actually flow from the failure to perform a covenant or satisfy a condition. The test requires a comparison of

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California real estate sellers and buyers are rightly concerned about reassessment of the property on sale. A parcel held for many years is assessed, and taxed, based on the purchase price long ago. Prop 13 provides that, real property generally is taxed based on its value at the time of acquisition, not its current value. A sale today would trigger reassessment and an increase in property tax. A problem can arise with ownership of entities such as LLCs or corporations Generally, the transfer of an ownership interest in an entity such as an LLC or corporation is not a change in ownership of the real property held by that entity. However, if one person or entity acquires more than 50%, it is deemed a change of ownership; if you are facing this problem, you may want to consult a Sacramento real estate attorney. In a recent decision the County assessor claimed that more than 50% changed hands; however, the court, demonstrating the math to determine ownership, showed that the assessor was dead wrong, and at risk of paying over $200,000 in attorney fees.

Sacramento property assessment lawyer.jpgIn Ocean Avenue LLC v. County of Los Angeles (227 Cal App 4th 344), Ocean LLC owned the Fairmont Miramar Hotel in Santa Monica. Ocean entered a contract to sell it, but that contract was terminated. On the same day of the termination they contracted to sell ownership of the LLC to a group of three entities; a Trust, MSD Portfolio, and Hotel Investor LLC. Staff for the County assessor reviewed the ownership interests and determined that no one had more than 50% ownership. Ignoring staff, the Assessor re-assessed the hotel. The owners paid the tax, then filed suit.

California Code provides that there can be reassessment when there is a change of ownership in real property, “[w]hen any corporation, partnership, limited liability company, Massachusetts business trust or similar trust, other legal entity or any person… obtains through multi-tiering, reorganization, or any transfer direct or indirect ownership of more than 50 percent of the total interest in [the limited liability company’s] capital and more than 50 percent of the total interest in [its] profits[.]” (Cal. Code. Regs., tit. 18, § 462.180, subd. (d)(1)(B).) The Assessor claimed that Michael Dell (that may be his name on the computer you are using) controlled more than 50% of the capital invested by the new owners.

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Title Insurance – Only Insures Against Claims Alleging a Defect, Lien or Encumbrance Against Title – The Preliminary Report Is Not A Contract Guarantying The State of Title

Buyers of real estate in California routinely buy a policy of title insurance. This insurance is triggered when there is a claim or lien against the property which the title company did not initially identify and point out to the buyer in the Preliminary Report. The Preliminary Report is a report prepared by a title company before issuing a title insurance policy, indicating the conditions under which the insurance company will issue title insurance. Buyers often have misunderstandings about the preliminary report and how it should be looked at, and may wish to consult a Sacramento real estate attorney for assistance. Often people incorrectly view the Prelim as a contract guaranteeing that the title is in such a condition. But that is not the case, as was recently made clear in a Federal Court decision following California law in which alota money was at stake.

Sacramento Title insurance attorney.jpgIn Feduniak v. Old Republic National Title Company (2014 WL 6603253), the plaintiffs bought a $13 million dollar home on 17 mile drive in Pebble Beach. They bought title insurance from Old Republic title Company. The title company missed something – namely, an easement in favor of the California Costal Commission. The easement required that at least 86% of the property be maintained as native dune habitat. At the time the property was purchased, it contained a golf course, violating the native dune requirement. Old Republic Title Company missed the easement; it was not listed as an exception to the title policy. The owner filed a claim with Old Republic. The title company wanted to hire an appraiser to determine the diminishment in value of the property due to the easement, but the owners had them negotiate with the Coastal Commission instead, to remove the easement. The negotiations were unsuccessful, other than to tip off the Coastal Commission that the easement was being violated. The Commission went after the owners, and Old Republic defended them. The Commission issued a cease & desist order, requiring them to submit a fix-it plan. They went back & forth on plans, and the commission filed suit for violation of the Cease & Desist order. They eventually agreed on a rehab plan, but the Commission did not dismiss the suit- it went to trial for over $25 million in penalties, exemplary damages, attorney fees and costs. The owners then sued the title company.

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A deed in lieu of foreclosure is occasionally used as an alternative to a foreclosure sale. The borrower merely deeds the property back to the lender “in lieu of foreclosure.” The lender does not have to go through the time and expense of a foreclosure, and the borrower/owner gets the process over with more quickly. However, there is some risk for the lender in this situation. Title conveyed by a trustee’s deed after a foreclosure sale relates back in time to the date on which the deed of trust was executed. The trustee’s deed therefore passes the title held by the trustor (the borrower; remember the ‘trustor’ is ‘poor’) as of that earlier time, rather than the title that the trustor held on the date of the foreclosure sale. Liens that attached after the deed of trust was recorded are ‘sold out’ or eliminated. However, a deed in lieu of foreclosure (as opposed to a foreclosure deed) passes title to the transferee subject to all existing liens. Whether concerned about deeds in lieu or lien priority in general, it is best to consult with a Sacramento real estate lawyer. Hopefully, you can avoid the problem recently faced by a lender when the trial judge didn’t follow the law regarding merger. They had to get the court of appeals to set things right.

Sacramento merger attorney.jpgIn Decon Group, Inc. v. Prudential Mortgage Capital Company LLC, the owner of a commercial property had a mortgage with Prudential. They hired Decon to renovate the property, but did not pay the bills, so Decon recorded a mechanic’s lien for $437,000, and filed suit to foreclose the lien. The owner was in default on the loan, so the lender took back a deed in lieu of foreclosure from the owner. The lender then conducted a trustee’s sale, and took title to the property. In the action to foreclose the mechanic’s lien, the judge ruled that, on taking back the deed of lieu, the two interests, as beneficiary under the deed of trust and as grantee under the deed in lieu merged, destroying the senior lien. Thus, the junior mechanic’s lien was not eliminated by the foreclosure. The court ordered that the property be sold at auction. The lender appealed.

The court of appeal reversed the lower court, finding that no merger had occurred. It first noted that, under ordinary circumstances, where the holder of a mortgage acquires the estate of the mortgagor (debtor), the mortgage interest is merged in the fee and the mortgage is extinguished…. But this rule is never applied where there is an intervening lien on the property, and where there is no evidence of an express intention to extinguish the first mortgage and hold subject only to the second.

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The proper use of an easement is often the subject of disputes in California. An easement is a restricted right to a definable use or activity on someone’s property, and it must be less than the full right of ownership. Real estate attorneys are often consulted when someone interferes with use of an easement; if legal action is pursued, the judge must interpret the language of the grant of easement to determine what the original parties intended. In a recent decision, a developer had an easement over other property for ingress and egress. Being a bonehead, he did much more that use it to access the property, and then lost the development to Bank in foreclosure. The Bank, which then inherited the dispute, had to make a ridiculous argument to the court to avoid a judgment that misuse of the easement subjected it to damages.

sacramento easement scope attorney.jpgIn Schmidt v. Bank of America, N.A., Parks owned two adjacent properties in La Mesa, California. She conveyed the western parcel to Schmidt, reserving to herself an easement for ingress and egress for public road purposes along the eastern 40 feet. She later sold the adjoining property (the dominant tenement), along with the easement over the eastern property. Time goes by, and eventually the owner of the eastern parcel began construction of a condominium project. In doing so, he built features on, under, and around the easement area. It was graded for use as a private roadway, a locked gate was added. He installed sewer pipes, and storm drains under the easement area. The developer went belly up, and defendant Bank of America foreclosed. The Bank ended up owned the condominium property, including the features on and under the easement. The eastern owner, Schmidt, sued for trespass, nuisance, and other relief.

In the lawsuit the Bank argued that the scope of the easement covered the structures and improvements affecting the easement. The Schmidts countered that the grant was for only a right of ingress and egress that allowed the Bank to use only the surface of the easement. The phrase “for public road purposes” did not create a public right of way.

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Altered or forged deeds are subject to some specific rules in California. In some cases, where it is altered by a party to the deed, they may be declared void, and of no effect. If it is altered by a third party, it is not entirely void – it is still valid as between the original parties. In a recent decision, The person who should have been an owner of property did not consult a Sacramento real estate attorney, and misunderstood what a deed actually said. When it was improperly altered before recording, the result did not change the effect of the conveyance – she had no interest in the property.

Sacramento altered deed attorney.jpgIn Lin v. Coronado, Lin pooled her $150,000 with $100k provided by River LLC and Elevation LLC to buy a residential property at a trustee’s sale. The property was bought by the LLCs for $250,000. The original deed from the trustee was to “Cal-Western Reconveyance Corporation (herein called trustee) does hereby grant and convey, but without covenant or warranty, express or implied to RIVER FOREST FINANCIAL LLC 75%, ELEVATION INVESTMENTS 25% HELEN LIN.” However, the deed that was recorded states “Cal-Western Reconveyance Corporation (herein called trustee) does hereby grant and convey, but without covenant or warranty, express or implied to RIVER FOREST FINANCIAL LLC 75%, ELEVATION INVESTMENTS 25%.” Lin was not named in the recorded deed. River LLC and Elevation sold the property to Coronado, the defendant in this appeal.

Lin filed suit against River & Elevation for fraud, and also against Coronado, the buyer, to quiet title. Regarding the quiet title, she claimed that the deed was altered after it was executed, it was void, and thus did not convey title. The buyer claimed that Lin never had an interest in the title in the first place, so they were a bona fide purchaser for value, and the claim failed. The Court agreed with the buyer.

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