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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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Recent news has shown that the State of California has not been a wise landlord, leaving millions in uncollected rent. This articles outlines some of the advantages of the commercial landlord over the residential landlord in California.

Historically parties negotiating a commercial tenancy are more likely to have equal bargaining power than residential parties, where landlords are in a stronger bargaining position. As a result, California courts often apply different standards to commercial vs. residential leases. While residential leases have an implied warranty of habitability as a dependent covenant in residential leases, commercial leases have no such warranty.

Residential tenants are prohibited from waiving statutory deposit refund rights in Civil Code section 1950.7. There is no comparable prohibition against a commercial tenant’s waiver of security deposit refund rights.

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Last week I discussed the use of the all-inclusive or wrap deed of trust. First, some definitions. The Seller owns property and pays the underlying note secured by the underlying deed of trust. The Buyer is the person who commits to pay the overriding note to the Seller secured by the All-Inclusive Deed of trust. The underlying note is the existing note that is wrapped by the Buyer’s new note and deed of trust. And the “AITD” is All-Inclusive security instrument.

Given that both parties play a significant role in the life of the transaction, there are many considerations to negotiate.

There may be restrictions on Right of the Seller to refinance the underlying note.

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The last period of high inflation in California mortgage loan rates this author saw the use of all-inclusive deeds of trust (a.k.a. wraparound deed of trust) to allow borrowers to acquire property when it was difficult to qualify for a high interest rate loan for the entire purchase price. Given the amount of money dumped into the economy by the federal reserve, inflation is likely to be returning, and buyers & sellers will again be using this type of creative financing.

An all-inclusive deed of trust (“AITD”) is used when the seller will be financing part of the selling price, and the buyer will also take subject to the existing deed of trust. The seller remains on the existing loan (and continues to make the payments) and finances the difference between the existing loan balance and the purchase price.

There are two situations in which all-inclusive deeds of trust are used:

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Receivers have recently been in the Sacramento news concerning the status of the Senator Hotel, a situation where the loan was in default and the lender had a receiver appointed.. With distressed properties at record levels, an increasing number of Lenders are turning to receivership to help salvage troubled properties.

The appointed receiver is an officer of the court and is accountable to the judge. A receiver’s primary duty is to secure the property, prevent waste, and collect rents. In general, the receiver is required to follow the court’s order, which may include specific authority to manage the property, collect rents, and provide monthly accountings. In some instances, the court may grant the receiver authority to enter into leases and position the property for sale. Once appointed, the receiver takes custody of the property, changing locks, securing operating accounts, and retrieving property-related documents from the borrower. The receiver itemizes personal property of the borrower, notify tenants the change in control, transfer of utility bills, place property insurance, hire a third-party management company, maintain or entering into new service contracts with vendors, and other issues concerning the property’s overall operation and security. The receiver must act quickly so that the borrower does not harm the property.

533138_law_and_order.jpgThis blog addresses only California state law, and not US Bankruptcy law, which has its own procedure. In California, appointment is made under Code of Civil Procedure section 564. The two most common lawsuits in which a receivers are appointed under section 564 are:

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Lenders on commercial properties usually require a Deed of Trust that gives them an assignment of rents and profits. The idea is that, if the borrower defaults, the lender is entitled to all rents and profits which have accrued and are collected after the default. Profit is short for” profit-à-prendre“, middle French for right of taking, meaning a right to go on property and take natural resources, such as timber, crops, or minerals.

This assumes that the borrower has leased the property and has something to collect. The frustration of small and moderate commercial lenders is with the knowledge that, while they are not getting paid, the defaulting borrower is collecting cash from its tenants. Enforcement of the assignment of rents clause can provide some satisfaction.

The enforcement of the rents and profits assignment is governed by California Civil Code section 2938. It requires that the assignment must be perfected by recording. And it provides lenders four ways to enforce assignments of rent, summarized as:

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California Civil Code section 1950.7 controls the commercial Lessor / Landlord’s use of the deposit. A commercial landlord got a surprise in decision involving a San Francisco commercial lease. The tenant had already leased the premises for five years when PERS (Public Employee’s Retirement System, California’s state employee retirement program) bought the building. PERS terminated, or reduced, many of the services the prior lessor had provided the lessee. The lessee was infuriated, and stopped paying rent. Two months later he made a partial payment of back rent, and vacated the building. PERS v. Winston

The trial court found that the elimination of some and reduction of other services followed by the tenant vacating the premises was a “constructive eviction” (where the conditions are so reduced that the tenant is forced to vacate the premises). The court concluded that the tenant owed rent for the time up until he vacated the property, reduced by an amount to account for the reduced services. The court made no finding as to the deposit. On appeal, the tenant said that the landlord was entitled to offset the deposit by the rent due, but was then required to refund the balance of the deposit. As a result, the landlord owed him money.

The Appellate Court agreed. It reasoned that under subdivision c) of 1950.7, where the only default is failure to pay rent, the lessor is required to return the balance of the deposit to the tenant “no later than two weeks after the landlord receives possession of the premises…” Thus, the landlord owed the tenant a refund before the lawsuit was filed. The landlord cannot offset the deposit for future rent damages, interest, or attorney fees it may recover in a lawsuit. Important in this case is the timing of the offset. It was critical in determining who was entitled to a money judgment.

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A recent decision granted a judgment to a neighbor for a fire in Santa Clara County. The plaintiff owned several original documents written by Albert Einstein; the plaintiff’s father & Einstein were friends. To go through the papers, the plaintiff had brought them to his get-away trailer parked on rural land near Henry Coe State Park. The defendants were co-owners of the 400 acre property where the fire started. On this property they had a 55 gallon drum they used as a burn barrel. The naughty party started a trash fire in the barrel, left it unattended, and started the 48,000 acre Lick fire.

There were numerous owners of the 400 acres; one defendant, who suffered a $750,000 judgment, owned only 2% and claims he did not know he owned an interest until he was served with the lawsuit. Apparently the jury was convinced that all the owners were aware of the burn barrel and the dangerous condition it created, and that owners other than the fire-starter should be liable.

1147252_fire_service_controlled_burn__1.jpgWhat are the legal principals involved in such a decision? As summarized in a 1955 decision, Reid & Sibell v. Gilmore & Edwards, the general rule is that ‘A possessor of land is required to make reasonable use of his premises which causes no unreasonable harm to those in the vicinity, either by reason of the character of the use itself or because of the manner in which it is conducted.’ A landowner has a right to be free of unreasonable risk in the enjoyment of his property. This places a duty on others to not cause such unreasonable risk. Here, a finding that the fire starter acted negligently established that the risk of interfering with the neighbor was unreasonable.

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A “Power Coupled With An Interest” is an ancient legal concept that is different from an ordinary power of attorney. A power of attorney gives the attorney-in-fact or agent (the holder of the power) the ability to act on behalf of the principal, who is the person who granted the power. However, in the case of a power coupled with an interest, the agency is created for the benefit of the agent in order to protect some title or right in the subject of the agency or secure some performance to the agent. This kind of power is not an agency as the term is commonly understood. Instead, the grantor or creator of the power relinquishes the ability to direct the attorney in fact, who is then permitted to act solely in his own interest. This type of power is to protect the agent’s interest. It does not create an agency, because it is not given for the benefit of the person who grants it. The holder does not owe any duty to the creator. Experienced real estate attorneys see this situation when a developer obtains an option to buy property, and also receives a power of attorney to pursue the development entitlement process.

The power and the interest must be united in the same person. If a power of attorney is granted to Fred, but an option to Susan, there is no power coupled with an interest. Recently some Sonoma County developers discovered that it is easy to terminate a power by uncoupling it. In Bonfigli v. Strachan, the developers’ limited partnership (“LP”) obtained an option to buy real property. The LP also received a special durable power of attorney coupled with an interest, granting the LP the right to rent, encumber, grant easements, and other things necessary to develop the property.

420973_planning_for_construction.jpgThe LP then assigned the option to their construction company LLC. The LLC did not exercise the option, but did file a lot line adjustment with the City. The adjustment was completed. The developer also used the property as collateral for a loan.

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A California mortgage lender does not owe fiduciary duty to a borrower; a mortgage broker does. The difference is substantial, and a loan officer in Ventura County learned the hard way. A fiduciary duty is a duty of both loyalty and good faith.

Borrower Tonya contacted loan officer Anthony in response to an advertisement. She had existing first & second loans, and wanted a home equity loan (HELOC). Anthony told her could shop the loan. However, he later said she did not qualify for a HELOC because her credit scores were too low. He said he had ‘shopped’ it with more then one lender, and that they looked at every lender that offered a HELOC that they were able to process. (Here’s a key to the story- this was to be a NO DOCS loan). He recommended refinancing into a new $700,000 first, with an interest margin of 3.85 over the indexed rate, which she did. It was agreed that there would not be a prepayment penalty, but one got slipped in on a rider, a surprise every experienced Sacramento Real Estate Attorney has seen in their practice before.

istockphoto_11975157-approved-loan-application-on-a-desktop.jpgEventually Tonya got wise and sued. Her expert testified that the interest she paid was astronomical, and she could have obtained a loan with a much lower rate, the present value of the difference being $72,187.17. Plus there would be no repayment penalty. Now she cannot refinance because she cannot provide documentation of income- she needs a no docs loan, but no one does that anymore!

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