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California generally goes by the American Rule for attorney fees- the parties are generally responsible for their own fees. In situations involving written contracts, however, they parties may provide for payment of attorney fees in the event on a dispute. I have written before regarding attorney provisions in:

—actions on commercial lease deposits;

–the CAR (California Association of Realtors) form & a failure to mediate; and —Promissory Notes and the breach of the implied covenant of good faith and fair dealing.

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The Subdivision Map Act generally prohibits the sale of any parcel of real property for which a map is required, unless a map compliant with its provisions has been filed. Government Code section 66499.30. However, the Subdivision Map Act does not prohibit parties to offer or enter into contracts for the future sale of divided portions of land without first filing subdivision maps as long as such contracts are expressly conditioned on compliance with the SMA before the close of escrow. A recent decision regarding land in Danville involved an option to buy real estate for which a subdivision map had not been recorded, and the contract was not expressly conditioned on compliance with the Act. parties contemplating an option should consult with a real estate attorney to fully understand the ramifications of their agreement. Here, they amended the Option Agreement to make it expressly conditioned on compliance with the Subdivision Map Act, and the court said it was therefore Legal and enforceable.

option agreement enforceable.jpgAn an option is an offer by which a promisor binds himself in advance to make a contract if the optionee accepts upon the terms and within the time designated in the option. In Sidney Corrie, Jr., v Elizabeth Soloway, Corries bought in 1994 an option to buy 7 acres of Danville property, part of a 16 plus acre parcel. There was a nonrefundable option fee of $100,000, plus payments of $5,000 per month during the term of the option. The owner of the property wrote a letter to the planning director of Danville authorizing Corrie to apply for a tentative map and create a separate parcel consisting of the option property -so, the parties knew about the requirement for a map. In 2009 the parties entered an agreement that expressly stated that the exercise of the Option was conditioned on the approval and filing of a final subdivision map or parcel map. Things went well, things went bad, a lawsuit followed and the owner claimed that the Option Agreement was void and unenforceable at its inception because it was not conditional on compliance with the Subdivision Map Act. The trial court agreed. The Court of Appeals did not.

The Court first distinguished other decisions which held that later actions did not change the illegality of the contract. Here, the parties took action to correct the illegality of the initial option agreement. The court did not believe that allowing the parties to correct a technical violation by agreeing to an amendment to the option contract would allow the Subdivision Map Act to be circumvented. No public policy prohibits parties from abandoning a void, illegal contract for a new enforceable contract covering the same subject. There is no bright line rule that the parties’ subsequent conduct cannot save their transaction from being illegal.

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California real estate law applies the first in time, first in right rule to recorded mortgages and deeds of trust. The lien recorded first, (senior) has priority to any recorded later. The result is that if the senior lender forecloses, the security of the second (junior) is wiped out. That means that the junior merely has a promissory note to enforce against the debtor, and no lien to foreclose. The lien is relied on by the lender as security, meaning that the best chance to get paid back the debt is to foreclose. After the senior forecloses, the junior can only file a lawsuit against the borrower, who may not have assets beyond the real estate that was foreclosed upon. There is an exception to the rule – if the senior modifies their loan enough that it significantly changes the risk to the junior that the senior loan may not be repaid, the senior may lose priority, and they swap places – the junior, or second, lienholder, may move into first place. Parties modifying a senior loan may should consult with a California real estate lawyer to determine whether this is a problem in their situation. In a 1998 decision the third district court of appeals explains the ground rules, and the junior lienholder was disappointed because the senior loan was not modified severely enough.

junior lienholder real estate law.jpgIn Thomas P. Friery et al. v. Sutter Buttes Savings Bank (61 CalApp 4th 869), Friery owned commercial property in Yuba City subject to a loan held by Sutter Buttes Savings Bank the first, or senior loan). She sold the property to Herminito and Eloisa Briones, and took back a note secured by a deed of trust (the 2nd, or junior lien). The sale triggered the “due on sale” provision of the senior loan, which allowed Sutter Buttes Savings Bank to call the entire loan balance as due. The Bank and the Briones entered a workout agreement, which allowed the Briones to assume the loan, and modified terms of the original promissory note. The maturity date was advanced five months, and the Briones were required to pledge two additional properties as security. Friery did not know about the modification.

The Briones defaulted, the Bank began foreclosure, and Friery brought this lawsuit, claiming that the modification agreement so increased the likelihood of Brione’s default as to amount to a substantial impairment of their security interest. They argued that the Bank owed a duty to refrain from making such a modification.

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The California Association of Realtors has published a set of transaction forms (“CAR” forms) for nearly every potential real estate contract. These fill-in-the-blank forms are intended to allow agents to prepare standard contract documents without the risk of being accused of practicing law. They are routinely revised and often the changes are not obvious. Anyone with prior experience with the forms should be sure to check which edition they are currently using or interpreting, as the provisions may be different that what they are used to. If necessary, buyers and sellers of real estate should consult with a Sacramento real estate attorney be better understand what their contract language will mean in their deal. A common area of concern is the release of contingencies. If the sale is contingent on something, that something has to happen for the contract to be further enforceable. An example is a contingency to obtain a loan on certain terms. If the buyer cannot obtain it, then they can call the deal off. However, they can decide to accept a loan under different conditions, and waive the contingency.

Sacramento real estate lawyer.jpgThe C.A.R. forms used for residential purchase agreements since the October 2002 revision have eliminated the last vestige of “passive” removal of contingencies common in the older forms. The new forms all utilize “active” written removal of contingencies, such that satisfaction of the underlying condition is not enough; there must be a written removal before a contingency is, in fact, removed. If a party does not remove it in writing, it is incumbent on the other to serve a Notice to Perform. Until all contingencies are removed in writing, Sellers always have a right to cancel. Other than the risk of cancellation, there is no penalty to the holder of the contingency if the underlying event occurs but the contingency is not removed in writing. The older C.A.R. Purchase and Sale form copyrighted 1983-1985, is different.

Older C.A.R. Forms Allowed “Passive” Removal of Contingencies

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Commercial tenants entering lease in California are usually required to pay their proportionate share of “common area maintenance,”, or CAM charges. The CAM charges are always characterized as an estimate- at the end of the year the landlord determines the total costs incurred for the year, and then apportions them out to all the tenants. However, if it is a new development, sometimes not even built, the lessor must base the Common Area Maintenance charges on true estimates- what they predict will happen based on experience on other projects, or otherwise a best guess. At the end of the year, they figure out the real charges, and usually the tenant has to make up a big deficit. Sacramento and Placer real estate attorneys are frequently consulted regarding CAM charge disputes; often, there is a big jump in the charges, and the tenant can’t believe they are justified. In a recent decision, the parties entered a letter of intent regarding an unbuilt project. Even though the CAM charges which were described were clearly described as an estimate, the landlord was surprise when the court said the landlord may be liable for fraud and breach of the covenant of good faith and fair dealing.

Sacramento commercial lease CAM.jpgIn Thrifty Payless Inc. V. The Americana at Brand, LLC, Thrifty entered a letter of intent to enter a lease of property from Americana. The project had not been built yet, but Thrifty had experience with Americana on other leases, and the CAM charges were reasonably accurate. The Letter of Intent (“LOI”) Americana proposed stated three estimates- property taxes, insurance premium, and common are maintenance. The CAM estimate was $14.50. Thrifty crossed out $14.50 and wrote that a budget was to be presented to Thrifty. Americana responded with a budget, saying that Thrifty’s pro rata share would be 2.2% of the budget, or $14.50. The parties entered the lease agreement. Of course, American ended up charging Thrifty much more for the three line items, including CAM charges at 5.67% of the total instead.

In the lawsuit, Thrifty alleged that Americana knew the representations were not true at the time they were made, or were made with no reasonable basis to believe that they were true. Thrifty alleged that its reliance was reasonable because of their prior experience with Americana. Citing other decisions, Thrifty claimed that estimates that the party should have known were inaccurate were grounds for misrepresentation. Thrifty found out that Americana was telling other potential tenants that Thrifty was paying a higher percentage that 2.2%, and that Americana had cut a deal with a theater to charge it less that its pro rata square footage rate. Great evidence!

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A quiet title action is often filed to establish adverse possession in real property once a claimant has established the five elements, including payment of property taxes. In a recent decision, a pair of professional adverse possessors- they did this for a living- recorded a wild deed so that the true owners would not get the tax bills, which resulted in the owners not paying taxes. The fiendish pros paid the taxes, and filed a quiet title based on their adverse possession. They got a big surprise when they were trumped by the unclean hands defense – recording the deed was wrongful, and their unclean hands got them thrown out of court.

sacramento quiet title.jpgIn Aguayo v.Amaro, Herman and Isabel bought a home in 1946. They had three children. Herman died in 1969, and Isabel passed in 1969, without a will. Sofia & Jesus, unrelated to the deceased, were in the business of acquiring properties by adverse possession. They had filed 10 lawsuits to quiet title by adverse possession. In 1995 Sofia sent a letter to the deceased asking whether she could buy the property. Sofia claims that she heard from Isabel’s son, and he orally agreed to sell the property for $25,000. The son then died.

Jesus, the adverse possessor, placed a no trespassing sign on the property, changed the locks, and claims to have made repairs. Jesus claims he then made a loan of $2,000 to another brother of the deceased, and they entered a sale and rental agreement (apparently all in Jesus’ handwriting). In 2000, Jesus then recorded a wild deed, from Jesus Duran (unrelated) to Jesus and Sofia. Jesus Duran was a made-up name and had no interest in the property. As a result of the deed, the brother stopped getting the County property tax bills, and Sofia got them. That way the true owners did not pay attention to getting the tax paid, and Sofia paid the taxes. In 2006 they filed suit to quiet title by adverse possession.

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How to determine damages in a California real estate purchase and sale fraud dispute is often as significant and as hard fought as the question of liability. The reason is that there are two possible ways of measuring damages for fraud claims (other than contract damages), based on two different sections of the Civil Code. One section is the “benefit of the bargain” rule – it satisfies the expectations of the plaintiffs by measuring the difference between the price paid, and the value of the property as represented. Even if the property turns out to be worth what the buyer paid, he still may recover damages for the value he was led to believe he was getting. The other, more objective “out of pocket” rule, provides for the difference in the price paid, and the fair market value at the time of sale, and is the exclusive standard except in the case of fraud by a fiduciary.

sacramento real estate fraud.jpgThe out of pocket rule satisfies the goal of tort claims, which is to restore the plaintiff to the financial position he was in before the fraudulent transaction, and thus awards the difference in actual value between what the plaintiff gave and what he received.

The benefit of the bargain rule is a more effective deterrent. Even if the value of the property received equals the price paid, there can still be an award of what the plaintiff was led to believe the value of the property was.

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California residential borrowers, in trouble on their mortgage, know the lengthy frustrating process for seeking a loan modification. Some have told me that they believe it is a con game, where they get the borrower to make more payments under a trial program, with no intent to modify the loan -get some more cash, then foreclose. I recently wrote about the West v Wells Fargo decision where a California Court found that, due to promissory estoppel, Wells Fargo could not tell the homeowner that they would get a modification if they followed the rules, but then not offering the modification after the borrow did everything required. Recently, in Corvello v. Wells Fargo Bank the Court of Appeals for the Ninth Circuit, governing all federal courts in California, addressed the issue. Where the loan modification was conditional on Wells Fargo returning a signed copy of the agreement, and the borrower did everything required, the Ninth Circuit held that the lender was obligated to offer the modification – otherwise, injustice would result.

Yolo real estate attorney.jpgIn Corvello v. Wells Fargo Bank, the court framed the issue: whether the bank was contractually required to offer the plaintiff a permanent loan modification after they complied with the requirements of a trial period plan (“TPP”). The answer was yes. The court first reviewed the federal programs resulting from TARP to assist homeowners. It noted that Wells Fargo, and others, signed “Servicer Participation Agreements” with the U.S. Treasury. It entitled the lenders to incentive payments for loan modifications, and requires them to follow Treasury guidelines.

The Treasury Regulations require the following steps;

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In the typical California home loan foreclosure, The first loan forecloses, and the second loan against the property loses its security. The question then becomes whether or not the borrower will be personally liable for the debt on the second loan. If it was a purchase money loan, the borrower probably is not liable; if a refinance, then they probably are liable. With the wave of foreclosures that has hit California, there are a large number of unsecured 2nd loans out there. A Texas company, Heritage Pacific, has spent millions buying up large pools of 2nds at low cost, amassing an inventory of at least 40,000 second-mortgage notes. Heritage Pacific claims that it focuses on borrowers who committed fraud in applying for their loans. In a recent case out of Richmond, the borrower may well have committed fraud, but Heritage Pacific was surprised when the court said they could not sue for fraud, because they were not assigned the fraud claims along with the promissory notes.

sacramento 2nd deed of trust attorney.jpgIn Heritage Pacific Financial v. Monroy, the borrowers’s son was having trouble with his mortgage, so his mother bought his house in 2006 for $450,000. She financed the purchase with a 100% loan consisting of a first and a second. In the loan application Monroy claimed she made $9,200 a month as a house cleaner. She also signed a declaration that she did not have a family or business relationship with the seller of the property. That looks pretty bad. She defaulted, and the property was foreclosed in August 2008.

Heritage Pacific Financial filed suit, claiming Monroy committed fraud in connection with her loan application. The trial court found that, while Heritage had shown evidence that the promissory note and related contract rights had been assigned to it, it could not claim that the original lender’s fraud claims had been assigned. On appeal, Heritage claimed that the assignment of tort claims was implied by the following language in the agreement between Heritage and the original lender:

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I’ve written before about California adverse possession and prescriptive easements. These are two legal concepts in which a party who does not own a property to establish an interest in it, and possibly own clear title. The concept is that the true owner must monitor their property; in California they ave five years to correct any issues with use. The elements of adverse possession are:

(1) possession under claim of right (claiming a right to use the property, though not founded on a written instrument; the claim need not be based on a good faith belief in the title), or color of title (a written or deeded easement, though it may be incorrect or in the wrong location) ;

(2) The claimant must occupy or utilize the land in a way (actual, open, and notorious) that constituting reasonable notice to the true owner;

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