California Real Estate Lawyers Blog

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:

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.

What 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.

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.

The 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.

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.

Eventually 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!