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It has long been the rule in California, stated in Civil Code §1953, that a residential landlord cannot require a tenant to waive their right to have the landlord take care to prevent personal injury. A recent decision addressed whether this rule against waiver applies to health club or exercise facilities provided by the landlord. The court found the landlord could indeed require a waiver of injury in using the exercise equipment.

The no-waiver rule is derived from a series of Supreme Court decisions concerned about waiver, or ‘exculpatory’ clauses, that affects the public interest. In cases generally suitable for public regulation, where the party is performing a service of great importance to the public, which is often a matter of necessity for some members of the public. The party seeking the waiver has a decisive bargaining advantage against members of the public. This is the situation in rental housing, an area of extensive regulation by the legislature.

treadmill.jpgHere, in Lewis Operating Corp. V. Superior Court, the tenant was injured on a treadmill in the recreation facilities of the landlord. There was a waiver in the lease applying only to the recreation facilities. The court looked at the facilities as being “noncore functions” of the property. It noted that courts have consistently enforced exculpatory clauses , releases, and waivers in the recreational context. Skiing, parachute jumping, and attending football games are not essential services affecting the public for this purpose. California law is designed to protect a tenant’s basic, essential need for shelter. This does not include exercise equipment, which is outside the basic requirement. The court found that there was no public policy violated by the waiver applying to the health facilities, and the waiver was valid.

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A California court recently ruled that a Developer of a condominium project, who was sued for construction defects by the homeowner’s association, could not force the association into arbitration. Promenade at Playa Vista Homeowners Association v. Western Pacific Housing, Inc. Cal . Court of Appeal, Second District, No. B225086. This line of decisions may result in experienced Yolo and Sacramento Real Estate lawyers to advise developer clients to hold on to at least one unit in their projects.

In this case the CC&R’s (Covenants Conditions and Restrictions) contained a mandatory arbitration provision between the developers and the association or unit owners be submitted to binding arbitration. In any common interest development, the developer prepares the original CC&Rs, and usually requires arbitration. As is usually the case, here the developer’s goal was to sell the units. It had sold them all, and no longer owned an interest in the development. Eventually the Homeowners Association filed this lawsuit for construction defects related to the roofs, stucco, and many other problems.

The arbitration provision in the CC&Rs stated that it was governed by the Federal Arbitration Act, which covers contracts. The FAA was selected because it makes arbitration provisions irrevocable, and drastically limits the court’s ability to fix errors of the arbitrator.

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I noted in a prior real estate law blog what the steps the government must go through to take property through an eminent domain proceeding. A recent court decision reported by Rick Daysog in Sacramento County requiring the city of Rancho Cordova to pay the Lily Co. $7.9 million for its property illustrates the variation that can occur in determining fair market value.

First off, both the California and U.S. Constitutions require that parties that lose their property to an eminent domain proceeding receive just compensation. This compensation will place the owner in the same economic position that he would have occupied had the property not been taken. However, the property is not valued as to its worth to the owner or government, but what it is worth in the marketplace. Fair market value is the highest price a willing buyer would pay a willing seller, where neither party is under any particular necessity nor rush to do so, and who have full knowledge of all the possible uses of the property. Special value to the owner is not considered. Arguing fair market value with the agency often requires the owner get their own appraisal and consult with an experienced Sacramento real estate lawyer.

The fair market value cannot include any change due to the government project. For example, a new sports arena may increase the value of nearby land, but the government’s plan to build one is not taken into consideration in determining value.

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One aspect of California commercial property evictions you seldom see is the unlawful detainer judgment being overturned on appeal. It can happen. While it is established that the lessor is not liable for forcible entry and detainer or wrongful eviction in such a case, a court recently ruled on a claim for breach of contract.

In Munoz v. MacMillan the landlord obtained a judgment for possession of commercial property. The tenant appealed and won. Meanwhile the landlord had leased the property to someone else. The tenant then sued for breach of contract. The trial judge threw the suit out, finding that the landlord had “proceeded in accordance with orderly judicial processes.” The decision was based on the principal that legitimate, non-fraudulent use of the judicial process, protects the lessor from tort claims. A tort involves breach of a civil duty (as opposed to a contractual duty) which can be redressed by damages. Of course, if the landlord proceeds fraudulently in obtaining the judgment -for example, lying about receipt of rent, or communications between the parties, or notices given- they are not protected.

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The appeals court overturned the decision, finding that the breach of contract claim is viable. It noted that whenever an order is reversed, the court may direct that the parties be returned as far as possible to the positions they occupied before the enforcement of the order. This includes restitution of all property and rights, or money compensation for those that cannot be restored. This is the principal of restitution.

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Eminent Domain is the legal process in which the government takes property without the owner’s consent, but with payment of compensation. It is a common practice in California, as seen in Sacramento in both the Hazel Avenue improvement project and Madison Avenue improvement project.

Projects like these include “right of way acquisition” which means getting the property through voluntary sale or legal process. There are specific statutory steps the government agency must take in this process once it identifies the property it needs, as follows.

1.The Agency must first obtain an appraisal of fair market value.

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A recent decision out of Santa Clara County found that some investors in hard money loans were not holders in due course, and had to pay back all their interest, all because the broker was mistaken as to whether his corporation was licensed. Experienced California real estate lawyers always check the DRE license status; but this broker’s attorney did not.

A hard money lender makes loans that do not conform to bank standards (and thus pay higher interest) and are secured by real estate. If the broker has a real estate license, they are not subject to California usury laws.

In Creative Ventures v. Jim Ward , a licensed broker retired and closed his hard money corporation. He came out of retirement, formed a new business to lend money (“JWA”), applied for a brokers license, but apparently the license was never placed with the corporation. JWA held itself out to be licensed, and the Promissory Notes indicated that it was. JWA arranged to lend close to 3 million to a developer with several promissory notes. Meanwhile, the DRE did an audit, and notified JWA’s attorney, before the deals were final, that they did not believe JWA was licensed (Yikes!). The deals closed, and JWA solicited 54 individual investors.

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Often in California real estate nonjudicial foreclosures (trustee sales), it is not the first lender that is foreclosing, but the second deed of trust. Concerning priorities: the “first” is the first deed of trust to be recorded, and is usually the purchase money loan, or a refinance. The first is usually the biggest loan against the property. If there is sufficient equity in the property, there may be a 2nd, and a 3rd. For the rest of this post, I will call the first the “senior lien”, and the second the “junior lien.”

In residential properties, the junior is usually an equity line, for a much lower amount then the second. If the junior is the foreclosing lender, the trustee’s sale wipes out any liens recorded after the junior was recorded, but does not affect the senior lien. The buyer at the sale steps into the shoes of the junior lender- and is subject to the senior lien. That means the buyer must pay the senior, and is subject to the terms of the senior note and deed of trust.

property_for_sale_5.jpgSome considerations:

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Reported in the Sacramento Bee by Nathaniel Miller is the issuance of criminal complaints against five people related to Diversified Management Consultants, Inc. for running a Ponzi scheme (Ponzi is capitalized because it is named after the first such schemer). This author, as I am sure other regional attorneys and victims, have been expecting this result.

First off, a Ponzi scheme is when you promise Mr. A huge returns on an investment. You then find Miss B, promise a huge return, and when Ms. B makes an investment, you use her cash to pay the interest or profit to Mr. A. It requires continually recruiting new money to keep paying off new investors in the Ponzi scheme.

In this case I know of two techniques these defendants made to clients- paying high rates of interest for loans supposedly secured by real estate, and shares of stock in corporations with supposed interests in real estate. These claims where made in a time of high real estate appreciation and speculation.

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I had noted in a previous post that between late 2009 and 2013, more than $2 trillion in commercial mortgages, which typically have a five- to 10-year term, will need to be refinanced. Many California commercial mortgage loans have gone into default and the properties are being run by court appointed receivers such as has happened recently in Sacramento to the Le Rivage Hotel (As reported by Bob Shallit) & the Senator Hotel. These workouts differ from residential modifications, because the dollars involved allow the servicers to focus on the projects.

If the loan is involved in a commercial mortgage back security “CMBS”, the institutional lender may keep the portfolio and try to manage the workouts, or may sell a distressed portfolio at a steep discount and leave it to the buyer to workout. In either case a short sale is an option. If the portfolio is sold the buyer may elect to workout through the servicer, modifying the loan so it can become performing again.

_shopping_palace_by_night_1.jpg The buyer may direct the borrower to a third-party lender to refinance (at a discount to the remaining balance, though with a premium). If these steps fail, they may just foreclose or accept a deed in lieu of foreclosure. In the case of La Rivage, mentioned above, the lender filed a lawsuit for judicial foreclosure, had a receiver appointed, but is still trying to work out the loan.

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In California, the rules regarding adverse possession and prescriptive easement are well established.

A recent decision regarding commercial property in Irvine addressed the one rare situation in which payment of taxes IS required to establish a prescriptive easement; in this case however, payment of taxes was not needed to establish the easement.

The Plaintiff in Main Street Plaza v. Cartwright and Main LLC owned a retail center. One defendant owns the adjacent property. Behind the two parcels is an alley. The second defendant owns the property behind the other two, on the other side of the alley. The property lines were in the middle of the alley. To make it interesting, down the alley there was a no-longer used easement owned by a railroad for only “railroad purposes.”

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