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Under California law, “benefit of the bargain” damages for breach of a real estate contract is the difference between the actual value of what the plaintiff got and what he expected to receive. If Joe breaches his contract to buy a house from Sam for $100,000, and Sam later sells it for $80,000, Sam is entitled to damages of $20,000.

In a recent California decision parties contracted to buy & sell a commercial property, with environmental and financial contingencies in the contract. There was a problem with subsurface contamination, and it was unclear what the cleanup cost would be.

The buyer unexplainably released all financing contingencies, though they apparently did not have a firm commitment from the bank. The lender said they would not fund the loan due to the environmental contamination. The seller ended up selling to a third party for less, and in the process lost out on a 1031 exchange.

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As noted in prior blog post the Fed confirms the end of program to buy mortgage securities which has been financing US debt. There is some evidence that the asset-backed securities market is already responding, and China has become a net seller of US Treasuries. The Fed claims they are in no hurry to raise rates but they will have to raise cash to finance government spending. It is only a matter of time -short, or shorter- before rates climb.

Law Office of James J. Falcone

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In my previous post, I discussed a case where the parties had a “non- refundable” deposit in their real estate purchase contract, but the court refunded it anyway.

Liquidated damages are damages whose amount the parties agree during the formation of a contract for the injured party to collect as compensation upon a breach.

In addition to the forfeiture concern, the court also noted that to find that the seller was entitled to keep the deposit without regard to actual damages would essentially create a “liquidated damages provision. Among other problems with this view, the court noted that California Civil Code section 1677 requires a liquidated damages clause to be”separately signed or initialed by each party to the contract.” That was not the case here. But what does it take to enforce a clause liquidating damages in a real estate purchase contract?

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A California Buyer entered a contract to buy Seller’s California beachfront property for $14 million. The agreement required a total of $620,000 in non-refundable deposits. The agreement did NOT contain a liquidated damages provision.

Buyers backed out of the deal, and Seller sold to someone else for $15 million- one million more that the original contract was for. Seller sued to get back their $620,000 deposit. The trial judge let the Seller keep the deposit.

The appeals court said no- allowing the Seller to keep the deposit would be an “invalid forfeiture.” Here, where the Seller eventually sold for more then the original contract amount ($1 million more), the Seller suffered no harm from the Buyer’s default. To allow Seller to keep the deposit would be a penalty in excess of any damages he caused.

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A California Broker entered a contract with a Buyer to locate commercial property for development; the broker would be representing the Buyer exclusively. They located a project, and the Buyer entered a contract to buy the property from the seller. The contract also required the seller to build over 175 condo units and obtain a certificate of occupancy before escrow would close.

There were delays, the certificates were never issued, the condo market collapsed, and escrow never closed. The broker sued the Buyer for its commission, which was $1.74 million.

The Buyer’s claimed it did not have to pay the commission, because escrow never closed. The Brokerage agreement stated that “the commission was to be paid the Broker through escrow at closing.”

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As reported in the Financial Times, the Federal Reserve plans to end its special program of buying mortgage securities in March. This program was implemented to keep mortgage costs – that is, the home buyer’s interest rate- artificially low to create a boost to real estate sales. The expectation is that the end of the program will result in an increase in rates, but how large a jump is a matter of debate.

As John Maudlin spells out, the purchase of these securities resulted in lower interest rates, but it also seems to have indirectly financed the US government deficit. The funds and banks that sold the mortgage securities turned around and bought US government debt or put the cash right back at the Fed. With a booming deficit, someone has to buy US debt, but who will, unless rates increase significantly, with a similar drop in the value of the dollar? If you need a real estate loan, now is the time. After the first quarter of 2010, rates are going up, and qualifying for that loan may be out of reach.

Law Office of James J. Falcone

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A recent California court decision addressed this issue, with surprising results. The B’s renovated their earthquake-damaged residence and, in the process, encroached on the neighbor’s land. The neighbors sold, and the new neighbors sued the B’s for the encroachment. The B’s insurance company refused to defend the lawsuit, claiming that they rebuilt the house intentionally, so it was not an accident that would be covered under the property. The B’s sued their insurance company for breach of the insurance contract.

The lower court denied summary judgment, saying that the act of intentionally building the home could be an accident if they were in the mistaken belief that they owned the property.

The Court of Appeals disagreed. They found that the insurance covered only an “occurrence”, defined in the policy as “an accident… which results…in property damage.” It found that when the insured intended all the acts that resulted in the victim’s injury, the event may not be deemed an accident merely because the insured did not intend to cause injury.

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While tax consequences may be the last thing on the mind of homeowners facing a real estate foreclosure, they play a role in the bigger picture and should be part of the decision process.  What follows is a simple discussion of three aspects of personal income tax factors that should be considered.

1. Cancellation of Debt Income: when a debt is wiped out and you are no longer liable for it, it can be considered income, which is reported by the lender on form 1099-C.  It is taxable unless either:

A.  You are subject to the Mortgage Debt Forgiveness Act, which applies if the debt was forgiven in years 2007 through 2012.  This requires that the debt was incurred to buy or substantially improve the taxpayer’s principal residence.  This includes a refinance loan, to the extent that the principal balance of the old mortgage would have qualified;

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I have noted in two prior blogs that Arbitrators have nearly unlimited discretion to make mistakes and not follow the law, and their mistakes are protected by the courts.  In a recent California case, buyers bought a house and learned that the pool and fence encroached on neighboring property.  Claiming that the seller knew of the encroachment but failed to disclose, buyers pursued arbitration.

After the sale but before the arbitration the title insurance company paid the neighbor in exchange for a lot line adjustment, giving the buyer clear title.  The buyers convinced the arbitrator to exclude evidence of the lot line adjustment, claiming that their damages were fixed on close of escrow.

The arbitrator excluded the evidence, and found that the buyers were damaged in the amount of $552,750, even though the problem was fixed before the arbitration.

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What happens to unpaid property tax when a mortgage lender forecloses?

The payment of ad valorem real property taxes is secured by a lien on the assessed property.  The tax lien is senior to other state tax liens and federal tax liens that take their priority from the date of recording, and it is senior to all other liens on the property regardless of the time of their creation- this includes the mortgage deed of trust.

Thus, because the property tax lien is superior to the mortgage lien, on the foreclosure of a deed of trust, the buyer takes title subject to all property tax liens assessed against the property, whether the assessment was levied before or after the deed of trust was recorded. The buyer at the trustee’s sale must pay the delinquent taxes together with all penalties in order to clear title. Whether or not the penalties have the same priority as the tax lien is not relevant. The only way of redeeming and preventing a foreclosure sale of the tax lien is by payment of the penalties

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