Prescriptive easements and landlord -lessors. When the easement can be established against the owner of rented property in California.

April 15, 2014

A landlord or lessor does not have any possessory interest in the property during the term of the lease. That is the nature of a lease - the owner transfers the right to possession to the lessee. But what if, during the lease term, a third party trespasses on the property, in a way that may create a prescriptive easement?
Under California real estate law a prescriptive easement requires the trespasser showing that they have used the property "for the statutory period of five years, which use has been (1) open and notorious; (2) continuous and uninterrupted; (3) hostile to the true owner; and (4) under claim of right." In this situation, the issue is the five year period. Real estate attorneys advise owners that the way a property owner cuts off a possible prescriptive easement is by filing a suit for trespass or ejectment. But an action for trespass is designed to protect possessory --not necessarily ownership--interests in land from unlawful interference. As the landlord does not have a right to possession during the lease term, he may not bring an action for trespass.

El Dorado trespass lawyer.jpgThis was the problem presented in a recent decision, where the court found that numerous lease terms ended of the course of the prescriptive period; in one instance the property did not have a tenant for over a year. If the owner never had a possessory right during the prescription period, he had a defense to the prescriptive easement claim. However, in this case, the lessor / owner did not have a tenant the entire period, so the court concluded it should have taken action to prevent the trespassing use. Parties in such situtations may want to consult an experienced Sacramento and El Dorado real estate attorney.

In King v. Wu, King's predecessor in interest poured a concrete driveway which encroached on the neighbor's property for a strip eight inches wide. 49 years later, the neighboring owner, Wu, built a guardrail along the trespassing strip. This lawsuit followed. The plaintiff proved the elements for prescriptive easement. The defendant did not prove otherwise, but instead they argued that they had an affirmative defense because they and their predecessors had not been in continuous possession of the Wu property for five years.

sacramento prescriptive easement attorney.jpgThe court did not buy the defense argument. Remember, there were numerous periods when the property was not occupied by a tenant. There were two lengthy periods when they were in actual possession. Plus, at the end of each lease term, and a change in tenants, they had constructive possession at the expiration of each of the various leases.

The court distinguished this situation with that in Dieterich v. JS & J Services ((1992) 3 Cal.App.4th 1601). There, the defendant owner had granted a 49 year lease on the property, and the trespass occurred doing the lease. It was his right to possession in the future that was the concern. The court noted that the right of possession is that stick in the bundle of rights which gives owner the power to prevent others from entering his property. The injury to be prevented is entry onto defendant's property for the period of the prescription, causing plaintiff's use to ripen into a right. To protect that interest, defendant must bring an action in trespass or ejectment. But landlords are legally unable to bring an action for trespass as trespass "is designed to protect possessory --not necessarily ownership--interests in land from unlawful interference." This is in contrast with other sticks in the bundle, such as the right to ownership. The court discussed decisions where the owner who was not in possession brought actions for waste- damage to the property itself, such as using it to dump unwanted materials. Parties who have a right to possession in the future are able to protect such interest.


How Old Can A Mortgage or Deed of Trust be and still be Enforced in California? The MRTA Provides An Answer.

The Marketable Record Title Act (MRTA, Civil Code section 882.02+) was enacted so that 'ancient mortgages' would not last forever. Prior to the act, lost or forgotten mortgages and deeds of trust would continue to be a cloud on title. The MRTA became law in 1982 to put an outside limit on the number of years that the power of sale in a deed of trust may be executed. The MRTA provides that if the "evidence of indebtedness" recorded with the county recorder contains a reference to the maturity date of the secured debt, the right to foreclose by private trustee's sale will expire 10 years after maturity. If no date of maturity is provided, the limit is 60 years after recordation of the deed of trust. The trustee's deed must be recorded before the time is up. The limit to conduct a judicial foreclosure, however, is much different. Civil Code section 2911 provides that a lien is extinguished by the lapse of time within which, under the provisions of the Code of Civil Procedure, an action can be brought upon the principal obligation. Generally, this means four years after maturity or breach of a written note.

marketable title attorney.jpgThe beneficiary can extend the time by recording a "notice of intent to preserve interests" prior to the expiration of the prescribed time period. If this notice is timely recorded, the period is extended until 10 years after the notice is recorded. Civil Code section 880.310(a), 880.020(a)(3). If one has a concern about the limitations of their deed of trust, they should consult a Sacramento and Yolo county real estate attorney.

Prior to a 2006 amendment, the statute required the maturity date be "ascertainable from the record...". This resulted in an issue which had been raised several times, and courts have had varying opinions about, namely, what happens if a Notice of Default is recorded? One decision found that this triggered the 10 year statute. Another court has said it did not. A third decision, from the Third District Court of Appeal (which includes the greater Sacramento area), found that it did not trigger the 10 year statute. The statute was amended in 2006 to resolve this issue, essentially providing that a Notice of Default does NOT trigger the limit. The discussion which follows concerns the 3rd District decision, and why interpreting the older language to allow the NOD to trigger the limit would be preposterous.

In Nancy Schmidli v. Rodney Pearce, a deed of trust was recorded against property in Woodbridge in 1986. The deed of trust did not specify the maturity date, nor include a copy of the note. A notice of default was recorded 1994, but no other action to foreclose was taken. In 2006, more than 12 years after the Notice of Default was recorded, the owner of the property filed a quiet title action to get rid of the deed of rust, saying that the notice of default trigger the ten year statute.

Sacramento real estate lawyer - title.jpgThe court concluded that, if the notice of default triggered the 10 year rule, it would render the 60 year rule superfluous and creates a "catch-22" for any lender who recorded the deed of trust with the intent of availing itself of the 60-year statute of limitation. A beneficiary who is otherwise entitled to 60 years, but does not begin nonjudicial foreclosure within the first 10 years, will be entitled to the remaining years only until the beneficiary files the required notice of default. Instantly the beneficiary will retroactively be entitled to only 10 years, all of which has by definition elapsed. So he loses all enforcement rights.


Catastrophic Damage to California Real Estate During a Purchase Transaction - How the Risk Is Allocated After Fire, Flood, Landslide,or other Disaster.

March 27, 2014

When California real estate is bought or sold, there is always a period of time between signing the purchase and sale contract, and when the title is transferred. With commercial properties the period could last for months, as the buyer completes their due diligence. But what happens if the building burns down in the interim? Does the buyer still pay full price? Is the contract cancelled? When it comes to allocation of this risk, The more detailed the sale contract, the better. Residential purchase agreements rarely provide for this issue, and rely on the California Civil Code. Commercial Sale agreements often contain provisions that covers the topic, and some in great detail. parties concerned about this issue should consult with a Sacramento and El Dorado real estate attorney to ensure that they are protected, as there are can be some surprises for both buyers and sellers.

Sacramento real estate catastrophe.jpgThe Civil Code

California Civil Code §1662 (the Uniform Vendor and Purchaser Risk Act, or "UVPA") provides that in sale contracts;
a) if neither title nor possession has been transferred, and a material part of the property is destroyed, the seller cannot enforce the contract, and the buyer gets a refund.
b) if either possession or title is transferred, the risk is on the buyer, and the contract is enforced to require full payment. The problem here is, what is material? That may become an area of dispute that prohibits easy resolution.

Contract Provisions

Many commercial purchase and sale contracts go the extra distance to define what "material" means. They do it in two ways:

1) Cost of Repair - this specifies that, if cost to repair exceeds a specified amount, than a material part of the property has been destroyed. If there are any aspects of the property that the buyer intends not to use or to demolish, such as an unattached garage or outbuilding, these should be excluded in calculating the cost to repair.
2) Diminution in Value -this is less desirable, as it would require appraisal, an expensive and time consuming affair.

Enforcement at a Reduced Price?

Civil Code §1662 subdivision (a), described above, does not state that the seller may terminate the contract; only that they cannot enforce it. It allows the Buyer to enforce it ("specific enforcement"). A 1983 court decision found that a buyer could not require enforcement of the contract with a reduction in the purchase price. In Dixon v. Salvation Army, Dixon was buying property with two buildings. Before possession or title passed to the Dixon, one of the buildings burned down. Dixon sued, seeking to enforce the contract at a reduced price to reflect that he was getting only one building.

Yolo purchase agreement.jpgThe court noted that subdivision (a) of 1662 applied, and the seller had the risk of loss. The seller could not enforce the contract., and the buyer could rescind. However, the statute did not say whether the buyer could enforce the contract at a reduced purchase price.

The court found that the equitable approach would be "to place the parties in their original position, free to make a new bargain. A rule that denies a vendor the ability to specifically enforce the sales agreement where the material part of the consideration is lost or destroyed calls out for the converse also to be applied. It would be grossly unfair to require either party to accept consideration less than the whole of what was bargained for under these circumstances."

Thus, the court ruled against the buyer, and did not order the sale at a reduced price. I think the court took the wrong approach to achieve the right result. The UVPA, by allowing the buyer to enforce, but being silent on a reduction, as a matter of statutory interpretation means that the buyer can enforce only the existing terms, without any change to the contract.


When a Bankruptcy trustee abandons California real estate - Who it Belongs to, And When the Automatic Stay is lifted

March 20, 2014

When a debtor files bankruptcy, an "automatic stay" arises by operation of law which prohibits all actions by creditors to collect, such as foreclosure, repossession, or lawsuit against property of the bankruptcy estate, the debtor, and the debtor's property (11 U.S.C. (the Bankruptcy Code) §362). Real Estate attorneys frequently see a filing intended to thwart actions against the property, such as foreclosure. Operating like a "blanket injunction," the stay continues until a court order lifting the stay has been entered or the stay has expired. Actions taken in violation of the stay are void.

Property ceases to be property of the estate if it is sold or abandoned. The trustee may abandon property if it is burdensome or of inconsequential value. (§554) Unless the judge orders otherwise, the property is abandoned back to the debtor. Often, the debtor is behind on their mortgage and the lender, wanting to foreclose, consults a real estate attorney. A recent decision in the 9th Circuit BAP points out just what that means- as property of the debtor, it is still protected by an automatic stay, and a foreclosure is void. The lender should have made sure that the abandonment order included lifting the stay so it could proceed with the sale, or otherwise sought relief from stay..

relief from stay sacramento.jpgIn re Gasprom, Inc. involved abandonment of a gas station in Oxnard, the principal asset of the debtor. The gas station was subject to a deed of trust securing a debt of over $1 million dollars. The trustee brought a motion to abandon the property. Gasprom objected (to prevent its creditors from exercising their state law rights and remedies, bu the court approved the abandonment. The Abandonment order was silent as to the automatic stay, and the secured creditor held a trustee's sale later that day. Sixteen days later the case was closed. The trustee's sale was in violation of the automatic stay -if they waited another 16 days, they would have been in the clear.

The Court found that, when the abandonment order was entered, the property was abandoned back to the debtor. However, the debtor was still protected by the automatic stay.

Some of the confusion may arise in how the automatic stay statute was constructed by the Legislature. Section 362(a) language quoted below protects different things, as pointed out in italics:

DEBTOR & ESTATE (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
ESTATE (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
ESTATE (4) any act to create, perfect, or enforce any lien against property of the estate;
DEBTOR (5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
DEBTOR (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.

Sacramento real estate abandonment attorney.jpgThe Court reasoned that by operation of law, Abandonment Order only terminated one aspect of the stay, the aspect protecting the Gas Station as "property of the estate." Upon abandonment, the Gas Station no longer was property of the estate; title to the Gas Station reverted to Gasprom. But the abandonment did not by operation of law terminate the aspect of the stay arising from§ 362(a)(5), which protects "property of the debtor." Absent a ruling by the court granting relief from stay under § 362(d) so as to permit foreclosure to occur, § 362(a)(5) continued to protect the Gas Station from foreclosure, at least until the bankruptcy court closed Gasprom's bankruptcy case.
Parties in these situations should consult with a Sacramento real estate attorney experienced in bankruptcy proceedings, to ensure they follow the correct course of action.


The Disappearing Sublease - What can happen if the Sublessor files Bankruptcy, and ways to protect the subtenant or assignee.

March 11, 2014

California commercial tenants sometimes need to sublease their premises, or assign the lease. Without fail, they remain liable to the property owner for the lease, in the event that the subtenant does not perform. Breach of the lease does not automatically terminate it - the owner must exercise its right to terminate the lease. But what happens if the sublessor files for bankruptcy protection? In bankruptcy the bankrupt sublessor has 60 days to "assume" the lease. (Bankruptcy Code section 365(d)(4). In the 9th circuit Federal Court (covering California), if the lease is not assumed, the bankrupt owner's right to possession under the lease ends. (In re Lovett 757 F.2d 1035) The master lease no longer exists, extinguishing all subordinate rights, such as a Sublease. Suddenly, the sub-tenant no longer has a lease, and is out in the cold. The California Court of appeal decision discussed below adopts this rule. Parties considering a sublease may want to consult with a Sacramento real estate attorney. A solution to the disappearing sublease may be, at the time of entering the sublease, for the subtenant to enter a non-disturbance agreement or option to enter a new lease with the property owner.

sacramento sublease attorney.jpgIn 366-386 Street LP v. Superior Court (Monro), Paem was the assignee of the lease for Rosebud's English Pub on Geary in San Francisco. In the assignment transaction, Paem gave to the assignor a note and deed of trust, secured by the business. Paem filed Chapter 11. The bankruptcy court rejected the lease, and thus the debtor (and trustee) no longer had any right, title, or interest in the lease. This extinguished the assignor's security interest in the lease.

The Assignor then filed a state court action, seeking relief from forfeiture of its security interest under Code of Civil Procedure section 1179. This section provides that The court may relieve a tenant against a forfeiture of a lease whether or not the tenancy has terminated, and restore him or her to his or her former estate or tenancy, in case of hardship, as provided in Section 1174.

sacramento landlord attorney 3.jpgThe court of appeal first noted that the rejection of the lease by the bankruptcy court extinguished the lease, and the debtor no longer had any interest in it- likewise, all subordinate interests were extinguished. The court then noted that, here, the secured party was not a tenant seeking to be restored to the leasehold, nor was this the required unlawful detainer proceeding, so section 1179 did not apply.

A subtenant in a similar situation may not actually have notice of the bankrupt cy filing, and be up to date with rent and all other requirements, but suddenly be out on the street. To have a chance of surviving, the subtenant should have a separate agreement with the property owner, either a non-disturbance agreement or an option to enter a new lease. Either of these would be a contract directly with the owner, not affected by intermediate bankrupt party. Thus, the bankruptcy would not impact the subtenant's right to possession. A non-disturbance agreement would provide that the owner would not terminate the subtenant's right to possession, on notice and curing of all defaults. It would also provide that the subtenant would be entitled to all the bankrupt parties rights under the lease.

Liquidated Damages, Penalty, or a provision for Alternative Performance?

Liquidated damages provisions in California real estate contracts provide that the parties, at the time they enter into the contract, determine what the damages will be if there is a specified breach of the contract. It must represent a reasonable attempt to anticipate the losses to be suffered. It will not be enforced if it is primarily a penalty for punishing the party at fault. It must bear some relationship to what they parties may foresee as the actual damages that will occur. However, the parties could also have negotiated for alternative performance, where one side has a choice; Do things A & B, and you get paid something. Do just A, and you get paid something less.

A recent decision out of San Joaquin County shows how important it is to be clear in the contract, and one may need to consult a Sacramento real estate and business attorney for clarification. If the provision is not to be determined a penalty, you must actually have a reasonable basis for calculating the amount at the time of entering the contract, and also the contract must have language describing the parties agreement that the actual dollar amount has some relationship to the likely damages. If the number appears reasonable, it may qualify as both liquidated damages OR alternative performance. If it is not reasonable, the only hope is that if it is found to be alternative performance.

sacramento liqudated damages attorney.jpgIn Brian McGuire v. More-Gas Investments, LLC, McGuire had a contract to buy property to build a house. The property sold for over $1 million dollars, and was amongst vineyards in Acampo. The buyer wanted to make sure his view would be protected.

The Contract Provision
In the purchase contract the seller warranted that adjacent lots would not be permitted to construct any structure within nine hundred feet of the access road, in order to protect the buyer's view, by amending the CC&Rs. If the Seller was unable to amend the CC & Rs within two months from close of escrow, Seller was to refund to Buyers $80,000 from the purchase price under the Agreement. The CC&Rs were not amended, the Buyer refused to refund the money, and this lawsuit resulted.

At his deposition, the Buyer testified that he did not remember how that $80,000 figure was determined. He admitted plaintiffs did not do any market research to determine what the diminution in the value of the property would be in the absence of the building , and had not discussed damages.

The trial judge granted summary judgment, finding that the provision was an unenforceable penalty.
Yolo real estate sales contract attorney.jpg
Liquidated Damages

Civil Code section 1671 provides that a liquidated damages clause is "valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made." (If the case involves a buyer failing to complete the purchase and facing forfeiture of the deposit, Civil Code sections 1675 - 1697 would apply)

An amount disproportionate to the anticipated damages is termed a "penalty." A contractual provision imposing a "penalty" is ineffective, and the wronged party can collect only the actual damages sustained. In this case the defendant shot himself in the foot in testifying that they did not really consider a way to arrive at the $80,000 figure, it was just a number. Thus, the court did not think it qualified as liquidated damages, and must be a penalty. The trial court did not consider whether it was for alternative performance.

Alternative Performance

A contract provision that first appears to be a liquidated damages clause or a penalty may, in fact be instead a provision that allows an alternative performance that does not impose damages and is not subject to section 1671 limitations. However, the court has to determine whether or not the alternative performance is merely a ruse to disguise a penalty. The judge looks at the substance, not the form, of the transaction. If it is in fact a contract contemplating but a single, definite performance with an additional charge contingent on the breach of that performance, the provision must be viewed under the rules for liquidated damages.

The Court in this case looked at cases covering alternative performance, in which a party was given the rational choice of which performance to tender: either the company could make the specified improvements to the property and an installment payment or the company could decline to make those improvements and forego the payment. In this case. More-Gas could either amend the CC & Rs and keep the $80,000 or decline to secure that amendment and refund the $80,000 to plaintiffs. Viewed in this manner, the purchase agreement for the Orchard property can be understood to contain an enforceable provision for alternative performance rather than an unenforceable penalty provision. Thus, it overruled the trial judge's finding that it was a penalty, and sent it back to determine if it was in fact a penalty or rather alternative performance.


California 'One Action Rule' may not apply if the property is out-of-state

February 25, 2014

Code of Civil Procedure §726 is referred to as the "one action rule," and the "security first rule." It provides that, where there is a debt secured by real estate, there may only be one form of action to collect the debt, and that remedy is foreclosure. If it is through a lawsuit for judicial foreclosure, with some exceptions the lender may also obtain a deficiency judgment in that same action. If the lender conducts a non-judicial trustee's sale, it is barred from collecting for the deficiency. On its face the rule is simple, but what if either the borrower, or the real property, is not located in California where section 726 applies? In that case, lenders and borrowers should consult with a Sacramento and El Dorado real state attorney, as there are numerous statutes and court decisions that cover the issues in this area. One such issue is where the lender gets a deficiency judgment after foreclosure of out of state property. Another issue, discussed here, is where the foreclosure is out of state, but the lender wants to sue for the balance in California. In this case, 726 does not apply.

Yolo real estate attorney one action rule.jpgIn Felton v. West ((1894)102 Cal 266), both parties lived I n California. Felton loaned West over $90,000, and West signed a promissory note, which was secured by property West owned in Oregon. West didn't pay the loan, and there was a foreclosure sale of the Oregon property. The sale price did not cover the debt, so the lender sued the borrower, in California, for the balance, about $44,000.

Defendant argued that section 726 barred the action. As there was a prior action in Oregon to recover for the same debt, section 726 prohibited the California action- after all, there can be only "one form of action...," and that already occurred in Oregon.

The court did not agree. It looked at the origin of section 726. Previously, the law permitted an action on the Promissory Note, and also a separate suit in equity to foreclose the mortgage which secured the note.

"The mischief in such a practice lay in the multiplicity of suits, and the harassing of the debtor by two actions, when the creditor could readily enforce all his rights in one. A remedy for this evil was provided by section 726 of the code, whereby the creditor was allowed to foreclose his mortgage and have a personal judgment for any deficiency in the same action."

As a result, section 726 has been interpreted to "suppress the mischief and advance the remedy" by requiring the lender to exhaust his security first (through foreclosure) before bringing a personal suit against the borrower.

sacramento real property attorney.jpgIn this case the lender was a resident of California, but to follow the borrower's interpretation, he had no access to California courts. He could not bring an action here to foreclose the mortgage, for the security is situated in another state. He could not bring a personal action at law upon the note only, for our courts would not allow him to waive his security.

However, the court interpreted section 726 to only refer to action for recovery of debt secured by property located in California. Section 726 refers to foreclosure, which by necessity could only apply to property in the state of California. Therefore, under these facts, multiple actions-one to foreclose, and one to collect the balance, is ok.


The Sham Guaranty - where the guarantor shares a substantial identity with the borrower, the guaranty may be found invalid in California real estate loans.

February 18, 2014

A Loan Guaranty is a promise by the guarantor to pay the debt of another. In commercial real estate loans they are commonly used to provide additional security to the lender. Such loans are often given to new entities without a financial history, and the lender wants a person (with assets) on the hook for the debt if the entity fails. Last week I discussed a decision where the guarantor excluded a house from liability on the guaranty, but when he sold the home, the cash proceeds could be grabbed by the creditor. This article concerns the scenario in which the guarantor can escape liability, if the it turns out that they signed what courts consider a "sham guaranty." This could arise due to deliberate action by the lender, insufficient investigation by the lender, or inartfully worded guaranty language. Parties concerned about what exactly their guaranty covers should consult with a Sacramento real estate attorney.

sacramento loan guaranty attorney 1.jpgCivil Code section 2787 provides that a "guarantor is one who promises to answer for the debt, default, or miscarriage of another..." What has become known as a sham guaranty is one where the guarantor is found to be the same as the borrower. The clearest case is where an individual signs a promissory note promising to pay the debt. The lender requires the same individual to sign a guaranty for the same debt, waiving many defenses. For example, there are statutory anti-deficiency protections for real estate borrowers, prohibiting the lender from collecting from the borrower. These protections are not extended to guarantors, and loan guaranties usually have waivers of all these defenses. In the sham guaranty the lender may think that by having the same borrower guaranty the loan allows for a deficiency judgment against the borrower as guarantor. Or, it may be used in hopes that the borrower/guarantor does not understand, and truly expects to be personally liable for the debt.

The sham guaranty defense extends to partnerships. In a general partnership, where each partner is already liable for debts of the partnership, their guaranty of partnership debt would be a sham. For Limited Partnerships, the same could apply to the general partner. River Bank America v. Diller is instructive, in a case where the principals of the corporate general partner signed the guaranty. The Bank wanted the borrower to form a limited partnership to be the borrower. A new entity was formed to be the general partner. The lender always considered the individuals as the primarily obligors, and had them guaranty the loan. The lender did not investigate the financial health of the new entity created to be general partner. The court found that, had the individuals themselves been the general partners, and had they attempted to guarantee the debt, there is no question such guaranty would have been a sham. Instead, the general partner of the primary obligor is a corporation which the individuals fully owned and controlled. However, the court found that this was a distinction without a difference. (The court was influenced also by evidence of the lender's intent to subvert the antideficiency protection.

El Doado real estate attorney.jpgThe sham guaranty defense extends to debts of a corporation, where officers and shareholders guaranty the loan. If the corporate entity is found to be a "mere shell," and thus the guaranty was not a debt of another. (Valinda Builders v. Bissner (1964) 230 CalApp 2d 106; this court was also influenced by evidence of the lender's intent to subvert the antideficiency protection.) It may also be argued that where the corporate veil may be pierced and the officer is the alter ego of the corporate borrower, the sham guaranty defense applies. The key is showing a unity of interest between the borrower and the guarantor.

Likewise, the sham guaranty defense applies to certain Trustors and Trustees. There is no legal separation between the Trustee guarantors and the revocable living trust that is the primary obligor on the loan because the trust law made trustees personally liable for the contracts they executed on the trust's behalf. (Torrey Pines v. Hoffman, , 231 Cal.App.3d 308 at p. 321)


A Home was excluded from a loan guaranty, but the proceeds from sale of the home were not protected. What a surprised guarantor left out.

February 13, 2014

Loan guaranties are contracts in which the guarantor promises to pay the debt if the principal debtor fails to pay. This is not what happens when someone thinks they guaranteed a home mortgage loan for their son or their significant other- they are usually equally liable on the loan. A guaranty more routinely shows up when an entity, such as an LLC or corporation, borrows money or signs a lease. The lender or landlord wants the individuals involved to guaranty the debt. If the guarantor has substantial assets, the lender may allow them to carve out some assets from being available for collection, such as their residence. Loan guarantors should consult with a Sacramento real estate and business attorney to closely review the terms of their guaranty so that they understand what their liability is. In a recent case (which was the first published opinion on the issue in the U.S.), the guarantor excluded a house from liability. He sold the house, and was surprised when the court ruled that, while the house was not attachable to pay the debt, the proceeds of the house (cash from the sale) were not excluded, and could be grabbed by the Lender. That the house was on Lake Como tells you that this was alota cash.

sacramento loan guaranty attorney.jpgIn Series AGI West Linn of Appian Group Investors DE LLC, Series loaned $3.1 million to a limited partnership which was developing a market in Oregon. Robert Eves, the developer, guaranteed the loan. The lender had Eves sign a Loan Guaranty, which provided:
" The following assets are excluded from the Robert J. Eves personal Guaranty: ... The personal residence of Robert J. Eves at Via Regina, 27 Moltrasio, Como, Italy and its contents."
The project went belly-up, the senior lender foreclosed, and Eves refused to honor his guaranty. The lender filed suit against the borrower and guarantor for $6.3 million, then applied for a prejudgment order of attachment. Eves opposed to the extent it would attach to proceeds of the Como house.

Attachment Law
The creditor seeking an attachment must show that it is "more likely than not that the plaintiff will obtain a judgment against the defendant" (Code Civ. Proc., §§ 481.190 An attachment is properly issued in an action involving a contractual claim of money of a fixed or ascertainable amount of more than $500 (Code Civ. Proc., § 483.010, subd. (a))
Guaranty Law
A guaranty is a form of surety, whereby the guarantor "promises to answer for the debt ... of another." (Civ.Code, § 2787.) A guaranty is a contract, is subject to the usual rules of contract interpretation. Parties are free to enter any contract they like, and courts assume that each party to a contract is alert to, and able to protect, his or her own best interests.

yolo real estate attorney 1.jpgThe court found that the other loan documents were relevant, as they are all referenced in the guaranty, and found that the concept of 'proceeds' was addressed in other ways. The "Deed of Trust, Security Agreement with Assignment of Rents and Fixture Filing" that Eves, as the developer, signed for the limited partnership on the same day as the guaranty, has numerous references to "proceeds." It transferred to the lender transferred to Series AGI "All income, rents, .... proceeds and other benefits from..." the project, together with "All proceeds and claims arising on account of any damage to, or Condemnation ... Also transferred were "All proceeds of any of the foregoing, including,...., proceeds of any ...claim... or proceeds thereof." (Italics added.) Another provision discussed "Insurance Proceeds," "Net Insurance Proceeds," "Condemnation Proceeds " and "Proceeds of Sale. " The result of all this was that the parties were not ignorant of the concept of "proceeds."

The court found for the Lender, as it was more likely than not that they would obtain a judgment against the guarantor. The guarantor was a sophisticated party and experienced investor. He was assisted by counsel. The proceeds problem is one he should be expected to anticipate. He carved out the house from liability, but NOT the proceeds. He was left to lie in the bed that he made.


Does a mortgage broker meet its duty to prevent fraudulent loans by arranging for title insurance? The Court found evidence of obtaining insurance relevant to the broker's duty, not barred by the collateral source rule.

February 11, 2014

Mortgage loan brokers have a duty to mitigate the risk of possible loan fraud in California. The extent that title insurance would do this is a topic for another day, but brokers routinely arrange for title insurance for their lenders. Another protection against fraud is to have signatures notarized; at least the person signing has proven their identity. In a perfect storm for one mortgage Broker, it was the notary committing the fraud, and the trial court judge would not let them submit evidence that they got title insurance to help protect the lender against such acts. The judge claimed that the collateral source rule required the evidence be kept out. With this evidence barred, the Lender hammered the jury with claims that the Broker was negligent and breached its fiduciary duty, and the jury agreed. The appellate court did not.

El dorado real estate lawyer.jpg In Bryan Chanda V. Federal Home Loans Corporation, Chanda was a money lender and Federal was a private mortgage broker. Barker was the office manager for the owner of a commercial building in El Centro. Barker was also a Notary Public. Barker contacted Federal requesting an equity loan of $165,000 on behalf of the owners of the building. Federal's loan officer wanted to arrange to meet with the owners so that they could sign the note and deed of trust, but Barker said one of the owners was not available. But, she would be happy to take the documents and get their notarized signatures. Barker then forged the signatures, and notarized them. Sacramento real estate trial attorneys rarely see fraudulent notarizations, but when they do, the notary is usually long gone.

Six months later, Barker asked for a larger replacement loan of $480,000. She again forged and notarized the signatures. The property owners learned about the fraud (no indication whether or not Barker had skipped town yet), and sued everyone. A forged deed of trust is not effective (though they can win out over unclean hands). The lender cross-complained against everyone, including Federal for negligence and breach of fiduciary duty. All parties and claims settled, except the lender's claims against the Broker.

At trial the Broker wanted to admit evidence that it had obtained a title insurance policy, relevant to defendant against the breach of fiduciary duty claim. The judge first prohibited the evidence under the collateral source rule, then said it could be mentioned that ti was acquired as per the escrow instructions, but finally refused to allow the evidence because it had the potential to prejudice the jury, knowing that there might be insurance coverage..

In determining tort damages, the collateral source rule provides "that if an injured party receives some compensation for his injuries from a source wholly independent of the tortfeasor, such payment should not be deducted from the damages which the plaintiff would otherwise collect from the tortfeasor. [i]f an injured plaintiff gets some compensation for the injury from a collateral source such as insurance, that payment is, under the collateral source doctrine, not deducted from the damages that the plaintiff can collect from the tortfeasor

-The Test: As a rule of evidence, it precludes the introduction of evidence of the plaintiff being compensated by a collateral source unless there is a 'persuasive showing' that such evidence is of 'substantial probative value' for purposes other than reducing damages. The trial court must then determine, pursuant to Evidence Code section 352, whether the probative value of the other evidence outweighs the prejudicial effect of the mention of insurance.

sacramento forgery attorney.jpgHere, the Broker wanted to show that industry standards required it to obtain title insurance covering fraud and forgery for the loan transaction. The Broker's expert stated that a broker has a duty to mitigate the risks of possible loan fraud. However, he was prevented by the judge from testifying about the role of title insurance against fraud and forgery applicable to such mitigation. The court of appeals found that keeping out this evidence was prejudicial to the Broker. The Lender tried the case on the theory that the Broker did nothing to mitigate against the risk of fraud or forgery. At the beginning of trial, counsel told the jury that the evidence would show that the Broker had no policies, procedures or practice manuals to cover "how their clients or investors might be protected."

The court found that the value of the evidence outweighed its prejudicial effect because it could have prevented the prejudice by instructing the jury:
(1) to only consider the evidence for purposes of deciding whether the Broker was negligent or had breached its fiduciary duties, and
(2) to not consider any potential recovery under the title insurance policy in assessing damages as this is a matter for the court to address after the jury renders its verdict.

It was interesting that, at the time of trial, the claim against the title insurance policy had not been resolved. So the only prejudice would have been that the Lender MIGHT have insurance coverage to compensate him for the loss.


The Relative Hardship Doctrine in California real estate - When it provides exclusive use, while a Prescriptive Easement does not. Part 2- How Relative Hardship Differs from Prescriptive Easement

February 6, 2014

My last post discussed the relative hardship doctrine in California real estate law. This doctrine provides that, once the court determines that a trespass has occurred, the court conducts an equitable balancing to determine whether to grant an injunction prohibiting the trespass, or whether to award damages instead. If the court determines that it will award damages and not disturb the trespass, it essentially gives the trespasser an easement, which may allow exclusive use. This result differs from the law on prescriptive easements, which prohibits granting exclusive prescriptive rights. This blog discusses how it differs For a better understanding, a party with questions should consult with a Sacramento and El Dorado real estate attorney.

ElDorado real estate attorney.jpgIn the decision of Hirshfield v Schwartz, One neighbor in Bel-Air mistakenly encroached on the other neighbor's property in installing a strong block wall in front, and in the rear, extensive underground water and electrical lines, and several motors (for the pool and waterfall) underground in a concrete and iron enclosure. The judge balanced the hardship to the trespasser to move these items, vs. the harm to the victim, and decided that they did not need to be moved. The trespasser was to compensate the victim instead. In doing so, the judge granted the trespassers an interest in the neighbor's property, which it called an 'easement.' The victim appealed, claiming that this is contrary to the decisions in several prescriptive easement cases, which hold that such an exclusive easement is an unlawful remedy in boundary disputes.

The appellate court disagreed with the prescriptive easement characterization, and thus those decisions were irrelevant. Here's why.

When a trial court refuses to enjoin encroachments which trespass on another's land, "the net effect is a judicially created easement by a sort of non-statutory eminent domain." The courts may exercise their equity powers to affirmatively fashion an interest in the owner's land which will protect the encroacher's use. This equitable power had been established in a number of reported decisions. While the court had mentioned the term "prescriptive easement," it had stated:
"[S]itting as a court in equity, I found that a straightforward judgment in favor of the [Schwartzes] would not be equitable, so I've taken the additional step of making it clear that this is a present easement which will end when certain events occur, and I've provided that the [Schwartzes] will pay a significant amount of money to the [Hirshfields]."

Sacramento prescriptive easement lawyer.jpgThus, the court expressly stated that it was relying on its equitable powers, and in doing so ordered the trespasser to pay damages for there protected interest. While a court can order payment under its equity powers, it could not do so in the case of a prescriptive easement. In the prescriptive easement cases it was noted that an exclusive prescriptive easement essentially amounted to ownership of the disputed land, and the court could not order ownership without all the requirements for adverse possession. In those decisions there was no discussion of the court's equity power to create a protective interest for the trespasser. These cases were solely concerned with the integrity of the adverse possession laws. In prescriptive easement, the trespasser's intent to dispossess the owner need not be innocent (and sometimes, innocence works against adverse possession). In the relative hardship test, the trespassing party is required to be innocent. As stated in another decision, It is not an ownership right, but a right to a specific use of another's property. We are required to observe the traditional distinction between easements and possessory interests in order to foster certainty in land titles. Moreover, the requirement for paying taxes in order to obtain title by adverse possession is statutory. (Code Civ. Proc., § 325.) The law does not allow parties who have possessed land to ignore the statutory requirement for paying taxes by claiming a prescriptive easement. (Kapner v Meadowlark 116 Cal.App.4th 1182)


The Relative Hardship Doctrine in California real estate - When it provides exclusive use, while a Prescriptive Easement does not. Part 1- Balancing the Hardships

February 4, 2014

When a court is considering whether to grant an injunction to stop an innocent (the trespasser does not know they are trespassing) trespass to real estate, the judge applies the balancing the hardships test - how is the owner whose property is being encroached upon, versus the hardship to the trespasser to remove the encroachment. This is an equitable decision, as opposed to the case of prescriptive easement, in which the judge applies a strict set of statutory rules. Cases have established that there should not be an "exclusive" prescriptive easement. However, in a relative hardship analysis, the court may establish what is actually an exclusive use easement.. Sacramento and El Dorado real estate attorneys may consider the difference in the two remedies in fashioning their claims for relief.

sacramento real estate trespass lawyer.jpgIn Hirshfield v. Schwartz, the Hirshfields were elderly sisters who lived in their Bel-Air house since 1940. The Schwartzes moved in 1979. Both assumed that the chain link fence between their properties marked their property line. The defendants made several improvements: they extended the fence, built waterfalls a koi pond and stone deck, added a putting green and sand trap. After a car entered their front yard, to keep the kids safe they built an exceptionally strong block wall with the largest rebar available. Meanwhile the plaintiff sisters maintained a variety of exotic plants and trees, making it a botanical showplace..

It always starts with a survey, which the plaintiffs did. The survey disclosed that the defendants trespassed on their property in two locations. In the front, the block wall encroached. In the rear, part of the sand trap, extensive underground water and electrical lines, and several motors underground in a concrete and iron enclosure were encroaching. The plaintiffs, claiming that they needed the front portion to build a circular driveway, and the rear portion to install a greenhouse, filed suit to quiet title and trespass.

The decision rested on the paucity of plaintiffs' evidence. They admitted that the entire wall did not need to be removed, but removing a three foot section would improve visibility from the proposed driveway. Before learning of the trespass, they had planned to build a greenhouse (presumably in another location).

The defendants evidence showed that they believed the chain link fence marked the boundary. They produced no evidence of the cost to move the various motors and utility lines, but the judge inferred that it would be significant. With consent of the parties, the judge had examined the property. The judge's observations were not reported, but the judge could have taken notice on his own that the cost would be substantial. The Court did two things; 1) it denied an injunction to force defendants to remove the encroaching items. 2) It granted the defendants an exclusive easement in the plaintiffs' property.

The Relative Hardship Doctrine

sacramento real estate prescriptive easement attorney.jpgIn denying the injunction, the court relied on the relative hardship doctrine of Christensen v. Tucker (114 CalApp 2nd 554). Under this doctrine, once the court determines that a trespass has occurred, the court conducts an equitable balancing to determine whether to grant an injunction prohibiting the trespass, or whether to award damages instead. Overarching the analysis is the principle that since the defendant is the trespasser, he or she is the wrongdoer; therefore, "doubtful cases should be decided in favor of the plaintiff." To deny the injunction, the defendant must show three factors:
First, the defendant must be innocent. That is, his or her encroachment must not be willful or negligent. The court should consider the parties' conduct to determine who is responsible for the dispute.
Second, unless the rights of the public would be harmed, the court should grant the injunction if the plaintiff "will suffer irreparable injury ... regardless of the injury to defendant."
Third, the hardship to the defendant from granting the injunction "must be greatly disproportionate to the hardship caused plaintiff by the continuance of the encroachment and this fact must clearly appear in the evidence and must be proved by the defendant.

Here, the court identified the relative equities, and then balanced the relative hardships. The judge found the testimony for the plaintiffs "lacked weight." While the defendants did not present evidence of the cost of moving encroachments, the judge inspected the property. There was evidence of how extensive the encroachments were - the strong wall with the largest rebar, the several motors underground in a vault, extensive underground water and electric lines. It is assumed that, combined with what the judge saw, the evidence was sufficient to support the conclusion that the cost would be substantial. The injunction was denied.

I think this decision rode on the insufficient evidence presented by the plaintiffs; it may have poor preparation, or just the nature of the plaintiff witnesses. The decision of the court of appeal, read in whole, gives a feeling that they brought there B game.

Next post- How granting an exclusive easement to trespasser is different that a prohibited exclusive prescriptive easement.


Adding additional judgment debtors to California Money Judgments.

January 28, 2014

Often a party to a lawsuit will have great success at trial, resulting in a money judgment. Then the judgment holder tries to collect the judgment, and finds that the debtor is judgment - proof, has no assets, or files bankruptcy to avoid liability for that judgment. Sacramento business attorneys are frequently presented with the problem of an uncollectible judgment. One solution - A judgment may be amended to add additional judgment debtors on the ground that a person or entity is the alter ego of the original judgment debtor; it is an equitable procedure based on the theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant. That happened to a plaintiff in a recent decision, and the court found that the creditor met the test to nail the parties responsible for the damages, who were not originally named defendants.

sacramento business lawyer -judgment debtor.jpgIn Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership, Relentless sued Airborne concerning purchase of a French military jet that was not certified for flight. Relentless won a money judgment for damages of one dollar ($1.00), plus was awarded attorney fees of over $174,000 and costs of over $6,000. Airborne limited partnership was a deadbeat, with no assets, so Relentless could not collect its judgment. Relentless the sought to add the husband and wife team behind Airborne, plus their two corporations, as judgment debtors.

The court first reviewed the law concerning adding additional judgment debtors. The theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant. The three-part test requires the judgment holder show:

(1) the parties to be added as judgment debtors had control of the underlying litigation and were virtually represented in that proceeding;

(2) there is such a unity of interest and ownership that the separate personalities of the entity and the owners no longer exist; and

(3) an inequitable result will follow if the acts are treated as those of the entity alone.
(Greenspan, 191 Cal App 4th 486, 509)

Here, the evidence was pretty bad for Airborne, and the individuals, Linda and Wayne Fulton. They are the sole limited partners and the directors of the two corporations that were its general partner. Just before the end of the trial (must have looked grim!) The changed general partners, and the new one had no asserts. All the entities operate from an office in their home, using equipment that they own. They have written minutes of only one partnership meeting per year. They took draws when they had bills to pay, but did not have meetings concerning draws. Prior to the trial they withdrew $115,000 from Airborne, the last of its cash. At trial, their demeanor was that the business ventures were their personal efforts, benefits, responsibilities, and liabilities.

sacramento business lawyer collecting judgment.jpgThe trial court found that the Fultons and their business entities were not separate, but that there was a unity of interest. However, the trial judge did not find that there was evidence of an inequitable result, because there was insufficient evidence to show that the Fultons acted with wrongful intent. The appellate court said this was wrong- intent was not required, but rather proof of an inequitable result. Given that the trial court found the unity of interest, and that the Fultons controlled the partnership, it is highly unlikely that the partnership will ever have assets to satisfy the judgment. Relentless cannot collect its judgment because Airborne is insolvent. Under the circumstances here, this is an inequitable result as a matter of law.

The defendant also argued that it was too late - Robert Fulton was originally named in the suit as the alter ego of Airborne, but was dismissed by the plaintiff before trial. But the court noted that it would not be appropriate, in every case, to require a plaintiff suing a corporation to allege alter ego liability. The plaintiff would then have to engage in pretrial discovery to establish such liability, resulting in a fishing expedition into alter ego evidence before the plaintiff had a favorable judgment.


Option Agreements with other lease or purchase conract attached - when the binding contract is formed.

January 21, 2014

Option agreements for sale or lease of property often have a form of lease or purchase agreement attached, to be entered on exercising the option. The expectation is that, if the option is exercised, the attached contract will be signed by the parties and govern the transaction. Occasionally the option will contain all the terms, and not attach a form contract, and may or may not refer to entering an agreement. Sacramento and ElDorado real estate attorneys advise clients to prepare the Agreement and attach it to the option, otherwise there could be a dispute when the option was exercised. In pone such case, after the option to lease property was exercised, the property owner backed out. His legal argument was that the option was only a contract to enter a contract, and did not affect title to his property. The court said no, in this case, the option was sufficient as a lease.

In John Gavina v. Lon Smith, Plaintiff Gavina granted Defendant an option for an oil and gas lease on Gavina's property. The option stated all the details of the lease, (set out below), but also had an attached lease form that, on exercise of the option, was to be signed by the parties. Smith exercised the option and deposited the money in escrow. Gavina refused to accept the money from the escrow, did not sign the formal lease form, offered to give Smith the option fee back. Essentially, they told Smith to get lost. The lawsuit resulted.

sacramento lease attorney.jpgThe judge was not impressed by Gavina's conduct. Because of the nature of the suit (quiet title), it first addressed the question of whether the option itself created a contract, or was merely an executable contract to make a lease. It found the intent of the parties, as expressed in the option agreement, to set forth in both the option and the attached form of lease all the terms and conditions on which Gavina's offer to lease was made. By exercising the option, Smith accepted the offer and agreed to the lease on the those terms. The requirement of a written lease was satisfied. (Statute of Frauds) Nothing more was required to make a binding lease.

"Where the parties, however, have agreed in writing upon the essential terms of the lease, there is a binding lease, even though a formal instrument is to be prepared and signed later. The formal instrument may be more convenient for purposes of recordation and better designed to prevent misunderstanding than the other writings but it is not essential to the existence of the lease." Just because they expected to enter a written lease does not let them off the hook for a contract they already signed.

The decision had a caveat, though, to reign in its impact. "Since the execution of the formal contract would add nothing to what the parties had already agreed upon," there is no reason to say that the agreement they had made was not enforceable. The question raised is that, if the lease contract that was attached added any terms or conditions, would that make a difference? In this case, probably not. I think the court would have found an intent that the terms of the attached lease were incorporated into the option agreement. Thus, they were already agreed to.

But what if the lease agreement had not been attached, and the option indicated that it was subject to entering a formal lease agreement? This is the same language used at superior court settlement conferences in California, they are often "subject to entering a formal settlement agreement," or "formal documentation of releases," or something similar. The parties get the case 'settled,' so it is taken off the trial calendar, everybody sighs relief, and then the negotiating over the formal settlement agreement gets complicated, maybe even falling apart, and the parties go back to set a trial date.

Here are the Option terms:

-Rent was $1.00 per acre per year payable in advance.
-If drilling operations were not commenced within one year from the date of the lease, the lessee could extend the period of the lease for four years by paying $1.00 per acre for each year.
-Plaintiffs' royalty was to be one-eighth of all production.
-Surface rights were to be retained by plaintiffs for agricultural purposes.
The lessee was to pay for any injury to livestock, trees, crops and improvements
-On the exercise by defendant of the option and the payment in advance to plaintiffs of a rental of $1.00 per acre for one year, plaintiffs agreed to execute and deliver a completed oil and gas lease on the attached form.
-The money for the rental could be deposited in escrow with instructions that it be paid to the lessors upon receipt of the executed oil and gas lease.


Letters of Intent May Be Enforced in California - Steps to be Sure they Are Not Binding

January 16, 2014

Letters of Intent are often ambiguous documents in which parties set out certain key terms of a deal, usually with the intent there will be further negotiation and documentation. They may also be called a 'term sheet' or "memorandum of understanding," and are used extensively in California real estate transactions and Leases as well as in business contracts. The parties usually do not intend this document to be enforceable in court - rather, it is intended to guide further discussions and execution of a formal agreement or approval of a third party. A party entering such a letter should consult with a Sacramento business attorney for guidance in drafting it. However, as open ended as the parties may make them, occasionally they are surprised when a court finds such a letter creates enforceable obligations between the parties. It all depends on the court's view of the intentions and expectation of the parties. Among the issues considered are whether the parties agreed to the material terms, or left some for later agreement, making it an agreement to agree, and whether the parties intended not to be bound until preparation of a more formal agreement. The two decisions discussed below establish two important rules:

A. A Letter of Intent may be enforceable even if you plan to enter a formal contract. If the material terms of the deal are there, as well as intent, the Letter is enforceable; and,

B. A Letter of Intent may create a duty of the parties to negotiate in good faith, and failure to do so can result in damages.

Sacramento business attorney 5.jpgIn First National Mortgage Company V. Federal Realty Investment Trust, two sophisticated parties had been engaged in negotiations over several years regarding development of Santana Row in San Jose. They exchanged several proposals, including a "counter proposal" and a "revised proposal." Eventually they signed a document titled "Final Proposal," a one page document. Earlier proposals stated that they were non-binding; the final did not include this language. The Final stated that Federal Realty was to "prepare a legal agreement for First National's review to finalize the agreement." The effective date of the agreement was to be the "date of vacating premises." Finally, the last clause of the Final Proposal provides: "The above terms are hereby accepted by the parties subject only to approval of the terms and conditions of a formal agreement."

The court noted that an agreement is not unenforceable merely because it is subject to the approval of a formal contract. The Final Proposal clearly states that its terms "are hereby accepted by the parties subject only to approval of the terms and conditions of a formal agreement." Here, the circumstances demonstrate that the parties went from a "Counter Proposal," to a "Revised Proposal," to a "Final Proposal." In light of this, it cannot be said, as a matter of law, that the Final Proposal was not meant to be binding.

sacramento letter of intent attorney.jpgIn Copeland v. Baskin Robbins U.S.A., the parties were negotiating the sale of an ice cream plant. As part of the deal, Copeland, the buyer, wanted a co-packing agreement, in which the seller would agree to buy ice cream from Copeland. The parties signed a letter stating the terms of the deal, subject to a separate co-packing agreement and negotiated pricing. The parties negotiated another two months, then Baskin Robbins broke off, stating that the co-packing agreement was no longer "in alignment' with their strategy.

The Court found that Baskin Robbins failed to negotiate in good faith.
"A contract to negotiate the terms of an agreement is not, in form or substance, an "agreement to agree." If, despite their good faith efforts, the parties fail to reach ultimate agreement on the terms in issue the contract to negotiate is deemed performed and the parties are discharged from their obligations. Failure to agree is not, itself, a breach of the contract to negotiate. A party will be liable only if a failure to reach ultimate agreement resulted from a breach of that party's obligation to negotiate or to negotiate in good faith."

Thus , a letter of intent should include waivers of the implied covenant of good faith and fair dealing and reliance damages (as well as any other damages), as well as an affirmative statement that the non-binding letter of intent will not create an obligation to negotiate or be deemed a contract to negotiate.

Instead, to minimize the risk of a court deeming their letter of intent enforceable, negotiating parties should make sure to explicitly state in the letter of intent that it states that

1. It is non-binding on the parties, and that

2. no party shall be bound in any way until a final contract has been agreed to, executed and delivered by each party.

3. Moreover, all parties involved in the deal should avoid taking any actions that could imply that they intend to be bound by the letter of intent or believe that a binding contract exists, such as making public announcements that a deal has been reached.

4. language clearly denying the existence of a duty to negotiate in good faith and expressly stating that either party may terminate negotiations for any reason, or no reason, at any time prior to consummation of the contemplated final agreement.