California Real Estate Lawyers Blog

I recently wrote about the California Public Benefit Corporations law recently enacted in California. Enacted at the same time was legislation for creating a different type of corporation. Called a flexible purpose, it allows as its name described- joint purposes of profit and public benefit.

The standard corporation obligates directors to promote the long-term value growth and maximize profits for shareholders; nothing else. the business judgment rule rises as a presumption that the directors exercised good faith in pursuing the corporation's interest; however, as experienced Sacramento and El Dorado Business Attorneys advise their clients, the rule does not arise is there is no reasonable connection between the directors' actions and achieving and maintaining profitability.

New Corporations code section 2602 requires the flexible purpose corporation articles to state two things:

First,
"The purpose of this flexible purpose corporation is to engage
in any lawful act or activity for which a flexible purpose
corporation may be organized..., for the benefit of
the long-term and the short-term interests of the flexible purpose
corporation and its shareholders and in furtherance of the following
enumerated purposes ____.

This allows a purpose more aligned with a traditional corporation. A reasonable profit or long term value purpose can be included.

Secondly, the Articles will further that:

"a purpose of the flexible purpose corporation is to engage in one or more of the following purposes, in addition to the purpose stated [above]

(A) One or more charitable or public purpose activities that a nonprofit public benefit corporation is authorized to carry out.
(B) The purpose of promoting positive short-term or long-term effects of, or minimizing adverse short-term or long-term effects of, the flexible purpose corporation's activities upon any of the following:

(I) The flexible purpose corporation's employees, suppliers,
customers, and creditors.
(ii) The community and society.
(iii) The environment."

This second part is more aligned with the public benefit -style corporation.

What is the difference between flexible purpose and public benefit corporations? I believe that the flexible purposes allows a corporation to make a profit (while doing some good) whereas the benefit corporation format does not. I an not sure that a benefit corporation is that far removed from a qualifying non-profit, and if so, why not qualify as a non-profit? It is subject to annual third party certification (which must be paid for), but is recognized in several other states. The flexible benefit corporation does allow more flexibility, but California is the only state in the country which recognizes it. The final answer will bee seen over time as shareholders object to directors' actions which they think is not in compliance, and the courts respond.

California recently enacted Assembly Bill 361, which allows formation of "Benefit Corporations." Maryland was the first state to enact such a law, California is the sixth. The law allows formation of corporations that have goals other then maximizing profits. In the traditional form, corporation directors have a fiduciary duty to shareholders to maximize profits and promote the long-term value growth for shareholders. As experienced Sacramento Business Lawyers advise their clients, the business judgment rule rises as a presumption that the directors exercised good faith in pursuing the corporation's interest; however it does not arise is there is no reasonable connection between the goal and their actions. In the benefit corporation however, the directors have a legal duty to take into account the public interest.

A benefit corporation must l have the purpose of "creating general public benefit" stated in its Articles. General public benefit means a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation. -There's the rub- the third party standard. There are a number of organizations who have established standards, and you can be qualified by them for an annual fee. The benefit corporation may also identify in its Articles one or more specific benefits that shall be the purpose or purposes of the benefit corporation.

Specific benefits can be:

(1) Providing low-income or underserved individuals or communities
with beneficial products or services.
(2) Promoting economic opportunity for individuals or communities
beyond the creation of jobs in the ordinary course of business.
(3) Preserving the environment.
(4) Improving human health.
(5) Promoting the arts, sciences, or advancement of knowledge.
(6) Increasing the flow of capital to entities with a public
benefit purpose.
(7) The accomplishment of any other particular benefit for society
or the environment.

The designated general and specific public benefit are deemed to be in the best interests of the benefit corporation.

Unlike a nonprofit corporation, a benefit corporation has no limits on the ways it can raise money. The invested money can create returns that further finance the public benefit mission. Several well known California corporation, including Patagonia and Give Something Back (as reported in the Sacramento Business Journal), have already made the switch to become benefit corporations.

However, another form of corporation was authorized this year- the 'Flexible Purpose Corporation." What this entails, and how they compare, will be the subject of my next post.

There are a number of steps troubled California home mortgage borrowers can take. The can negotiate with the lender or servicer of their loan. As I discussed last June in the California Real Estate Lawyers Blog, they can apply to the Keep Your Home California program HERE. One new step they can take is to file a complaint with the new federal Consumer Finance Protection Bureau. While a troubled borrower should always consult with an experienced Yolo and El Dorado County Real Estate Attorney, these other steps cost nothing and should be done simultaneously.

The CFPB was formed by the legislators who wanted to appear to be doing something in response to the 2008 financial crisis. Congress blocked appointment of a director for months, preventing the agency from taking much action. However, the agency staffed up and they have been busy. Last July they stated taking credit card complaints. The President recently made a sneak 'interim' appointment of a Director, and now they are taking mortgage complaints.

Complaints can be made by phone, mail, fax, or ONLINE. They can cover loan documents, servicing, and foreclosures. CFPB will review the complaint for completeness and forward the complaint to the relevant financial institution for review and resolution. The institution has 15 days to provide a response to the CFPB. Institutions are expected to resolve and close all but the most complicated complaints within 60 days. Throughout the process, the homeowner can check the status of their complaints on the CFPB's website. If they are not happy with the result, they can dispute the resolution.

The CFPB will prioritize for investigation those complaints that are not resolved in a timely manner by the financial institution and those in which the consumer disputes the resolution provided by the financial institution. If the CFPB detects potential legal violations, it will to ensure that appropriate investigations are initiated.

Once the word gets out, there will quickly be hundreds of thousands of complaints filed. I will be amazed if the larger institutions, with a high volume of loans (especially subprime loans), are able to staff up sufficiently to respond in 15 days. Likewise, how can the CFPB investigate the volume they can expect to receive? I suspect they will quickly have a backlog. Nonetheless, I recommend that any borrower who has concerns files a complaint with the CFPB.

Senate Bill 332, added to the Civil Code as Section 1947.5, allows landlords of residential property, to ban smoking tobacco products as of January 1, 2012. This applies to dwelling units, defined in section 1940 as a structure or the part of a structure that is used as a home, residence, or sleeping place by one person who maintains a household or by two or more persons who maintain a common household. Landlords have authority to put restrictions in new leases. Those wanting to modify existing agreements, the should contact an experienced Sacramento and Placer County Real Estate attorney.

Any lease or rental agreement entered January 1 or later, where the tenant is just moving in, is required to specify the areas on the property where smoking is prohibited . The new law does not provide for automatically changing existing rental agreements; all existing laws would apply. If a lease was entered before January 1 and the landlord desires to ban smoking, it would be a change in the terms of the lease. In a month to month tenancy, 30 days written notice is required, as specified in Civil Code section 827.

If it is a longer term tenancy, the parties would need to enter a new agreement on expiration of the existing agreement, or have a written modification of the agreement. For a modification to be enforceable the landlord must provide some consideration- some benefit to the tenant, such as some free rent, an amenity, or anything else. It does not need to be large value benefit, but if no new consideration is provided, the tenant can revoke the agreement.

Although many California landlords have restricted smoking in the past, there has been no clear legal authority for doing so, and the courts have not ruled on the subject. Now landlords have clear legislative authority to ban smoking if they choose to. Such a restriction can decrease the risk of accidental fires and may even reduce fire insurance premiums. Landlords also may see a significant reduction in maintenance and turnover costs. Cleaning and refurbishing a smoker's unit can require additional time and effort to repaint and to replace carpets and drapes.

The recent trend has been for pundits and politicians to cast the banks and investment houses as victims of the credit crisis and economic collapse, some in fact to say Fannie Mae and Freddie Mac are the source of the problem. This argument, described by Barry Ritholz as The Big Lie, is contrary to the facts. As California real estate has taken a big hit in the collapse, and Sacramento, Yolo, and Placer County real estate lawyers have since been trying to unravel the impacts on individual buyers throughout California, it is important not to be fooled.

The argument goes that Congress pressured policymakers & Fannie Mae and Freddie Mac (and other banks, through political pressure) to make loans to people who were on the edge of qualifying; as lending standards were forced downwards, the risk of default went up. This included the Community Reinvestment Act, which requires regulated banks and thrifts to provide credit nondiscriminatorily to low- and moderate-income borrowers. More and more people who were not qualified got loans, and, as a result, they starting a cascade of defaults which crashed the economy. However, this does nothing to explain the course of events:

a. Similar bubbles were created outside of residential housing, such as commercial real estate and consumer credit;

b. Similar crises occurred in other countries which did not have liberal housing policies;

c. The U.S. government's share of housing (through Fannie Mae & Freddie Mac) was declining during the bubble of the 2000s.

d. The boom & bust in the US should have occurred primarily in the inner cities, where the accused policies were focused; instead the bust was in the suburbs.

In fact, the charges brought by the Securities and Exchange Commission against six former Fannie and Freddie executives tell a different story; it charges that the executives were motivated to begin buying subprime mortgages -- belatedly, contrary to the Big Lie -- because they were trying to reclaim lost market share, and thus maximize their bonuses.

Meanwhile, Washington lawmakers, while claiming to be phasing out the government's role in housing, expanded it in last week's payroll tax cut extension, by requiring Fannie & Freddie to divert funds to pay general government expenses over the next ten years. This will require the companies to increase fees on new mortgages by an average of 10 basis points, or .1 percentage point, effective April 1, to comply with the law.

So what did cause the collapse? There are plenty of authors (linked above) who can explain in detail. But to summarize, Congress radically deregulated the financial sector, doing away with many of the protections that had been in place for years. Nonbank (which means "unregulated") mortgage underwriting exploded from 2001 to 2007, along with the private label securitization market. Private lenders not subject to congressional regulations (who did not need to make 'confirming' loans) collapsed lending standards, to make more profitable subprime loans. Private lenders made the bulk of the subprime loans, which were then securitized and sent out into the world with a cloak of respectability. Lets not let the Big Lie get too far.

Adverse Possession, like prescriptive easements, require a party to "possess" or use the property in a way that gives notice to the world of their intent. But co-owners -regardless of their percentage of ownership, or if they are tenants in common or joint tenants- all have an equal right to possession of the property. A recent Third District decision points out how difficult it is to adversely poses a co-owner, and why owners in this situation should consult with an experienced Sacramento, Yolo, or San Joaquin, Real Estate Lawyers.

In Hacienda Ranch Homes v. Sup. Court, the person claiming adverse possession ("the Possessor," for short) had bought an undivided 25% interest in undeveloped property in San Joaquin County. Six years later they filed this action to establish their title to 100 percent based on adverse possession against the other owners. They based their claim on their conduct- they removed weeds and grasses by discing the property two to three times a year, posted a "for Sale" sign near (but not on) the property; and paid all the property taxes.

The court of appeal listed the requirements for showing adverse possession but then noted that, where adverse possession is asserted against a cotenant, additional principles apply. As each cotenant has a right to possess, and the possession of one is deemed the possession of all,, each may assume that a possessor IS possessing for all. Thus the Possessor must show an ouster of the cotenant- strong evidence that shows they brought home to the cotenant that he intends to oust the cotenant. The evidence must be of acts of ownership of the "most open, notorious and unequivocal character." Whether ouster has been established is a question of law, not of fact, for the judge and not for a jury to decide.

The court found that the Possessor did not do enough. They never excluded the cotenants from the property, or put up a fence or barrier. Occasional discing could be seen as routine maintenance for the benefit of all cosecants. Lastly, the "for sale" sign did not clearly notify the tenants of an unequivocal and hostile claim. What is enough? I was involved in a case where my clients were run off with a gun by their cotenant, who them blocked access. In these cases, courts really need aggressive behavior to ensure the cotenants know what is going on. Quietly waiting for the statute of limitations to run before making the claim for adverse possession, such as was done in Hacienda, is not reward by the courts.

California real estate brokers occasionally face lawsuits from disgruntled clients for negligence is performing their duties. A recent California decision points out that, where breach of fiduciary duty is alleged, the client has four years to sue, not two as in the case of negligence. This is a reminder that concerned broker should consult with experienced Sacramento and Yolo real estate lawyers regarding their rights and potential liabilities.

In Thomson v Canyon Thomson, facing foreclosure, listed her property with Broker Canyon. An investor approached the owner and offered to salvage her property from foreclosure by buying it from her, paying off the liens, and then selling it back to her within six months in exchange for her paying to the investor the amount of the liens, plus $10,000 profit for him. She agreed, and they entered a contract for sale. Supposedly Thomson asked the Broker numerous times to document the requirement that the buyer deed the property back to her; the Broker assured her that he would take care of this. Of course, he never did. The investor took title to the property, and eventually sold to a third party for $140,000m more than he had paid for it.

Thomson sued the investor, but the case was tossed because of the Parole Evidence Rule -she was attempting to introduce evidence of an oral agreement that was contrary to the written terms of the purchase contract. She next sued the Broker for breach of fiduciary duty and negligence.

The court found that a claim for breach of fiduciary duty was different then a claim for professional negligence. Negligence claims are covered by the two year statute of limitations (CCP 339(1)). However, there is no specific section for breach of fiduciary duty, so the claim falls under the catch-all four year limit (CCP 343). A Broker's duties include the duty to obey the instructions of the client, and to provide diligent and faithful service. Thomson's claim was for the Broker's failure to prepare the documents as instructed, not for assuring her that he would do so. Thus, the claim, within four years, was timely.

The court also found the parole evidence rule did not apply. In her claim against the Broker, the seller was not trying to introduce evidence regarding the terms of the purchase agreement. She was presenting evidence regarding the Brokers duties while representing her in the transaction. If her argument was about the contractual agreement between she and her Broker, such as the amount of commission, subject of a written contract, the parole evidence rule may have applied; but not in these circumstances.

A right of first refusal is a preemptive right which gives the right-holder a contract right to buy the asset or real property if the owner decides to sell. It is different than an option because, under an option, the optionee/buyer can require the optionor/seller to sell the property. But the right of first refusal only gives the buyer a chance if the owner decides to sell. Occasionally the distinction is not no clear, and parties need to consult with experienced Sacramento, Yolo, and San Joaquin real estate attorneys.

The right of first refusal is commonly granted to a tenant in a commercial lease. The Right is part of the consideration for the tenant's covenants under the lease. The Right is triggered when the events stated in the contract occur. Usually, the contract requires that the seller receive a bona fide offer from a third party. It also usually requires the holder of the Right to buy on the exact same terms and conditions offered by a third party. In the usual transaction, this can be done and must be enforced. However, the third party offer may include terms that the holder of the right could never satisfy; in this case the courts take a closer look at the offers.

In C. Robert Nattress & Associates v. Cidco the third party offer provided the seller with $270,000 cash from escrow. The tenant's right of first refusal was to be "on the same terms and conditions so offered." The tenant's offer was a combination of cash plus credit against the seller's note. While not on identical terms, the tenant's offer provided that the seller "...was to receive the same amount from [buyers] as would have been received if the property were sold to plaintiffs.

The court noted that If the literal matching of terms were required, a triggering offeror could be offering some unique consideration such as existing trust deed notes, a bag of diamonds or a herd of Arabian horses, effectively defeating the lessee's right of first refusal. How would the holder of the right of first refusal in such a case make an offer to exercise the right of first refusal on the same terms and conditions as in the triggering offer? The court concluded that, given the net cash to seller was the same, the right of first refusal was effectively exercised by the tenant "on the same terms and conditions" set forth in the agreement.

The key here is that, in granting the Right, the owner wanted to obtain the best net result. If the third party offer is impossible to duplicate, the Right holder should have the opportunity to structure the offer in a way that gives the owner the same net result, at least in terms of dollar value. To find otherwise would require a mechanical reading of the Right, and not satisfy the parties' original intent.

Tender of performance is a critical concept that only arises in the event of a dispute. The general rule is that to claim the other party is in breach of contract, you have to first tender performance.

1. Tender must be made at the proper time and place. If the agreement does not provide a specific time, then at a reasonable time.

2. Tender must be by the proper method. If the agreement requires a deposit in escrow, it must be deposited; if performance is required by certified mail, it must be so.

3. Tender must be made in good faith and with the ability to perform. A statement that you are ready to perform is not enough when a deposit in escrow is required.

4. Tender must be unconditional, identical to what is specified in the contract. Anything else is ineffective.

5. Tender must be for full performance, thus triggering the obligation of the other party to fully perform.

Experienced Sacramento and Yolo Real Estate Attorneys often advise clients as to whether or not a tender is correctly made. What can happen when a party does not pay attention to the tender rules was made clear in the recent decision in In Re Conservatorship of Estate of Buchenau.

The Tormels bought a house at a public auction conducted by the Public Guardian in its capacity as conservator of an estate. There was a two-month escrow period. The escrow instructions provided that the Tormels were to deposit the balance of $228,600 in escrow no later than two working days prior to close of escrow. The Public Guardian was also supposed to deliver all necessary documents to transfer title to the escrow holder. The contract did NOT specify that "time was of the essence." Neither party made their deposits by the scheduled closing date.

The Public Guardian eventually deposit the deed in escrow 19 days later. However, Tormel refused to deposit their cash and consummate the deal, demanding that escrow be cancelled and their deposit returned. The court of appeals noted that neither party "tendered performance" by the closing date. But Tormel did not present any evidence that a delay of 19 days following a two month escrow was an unreasonable time for performance under the circumstances. The Court noted that, even if time for performance has expired has expired, a party cannot claim default by the other party as justification to terminate the escrow without performing or tendering performance to the other party. As such, their refusal to complete the sale (after the Guardian deposited the deed) was rightly considered a breach of contract by Tormel.

Surprising is that the contract did not provide that "time is of the essence." These are magic words that creates hard deadlines, without which, the parties are required to act reasonably. The Buyers here should have presented evidence of why waiting 19 days was unreasonable- did the lock on there loan expire? Did the house burn down? We will never know, because the buyers did not make the argument to the court.

Occasionally an owner conveys property without reserving an express or written easement to continue using the property for purposes related to an adjoining parcel. Most often the easement is for access to the adjoining property. In such cases, the courts determine if there should be an "implied easement."

An implied easement requires the following conditions:
1. The owner conveys all or a portion of their property;
2. The owner's prior existing use of the conveyed property was of a nature that the parties must have intended or believed that the use would continue; meaning that the existing use must either have been known to both parties or have been so obviously and apparently permanent that the parties should have known of the use;
3. The easement is reasonably necessary to the use of and benefit of the dominant tenement -the property that benefits from the implied easement.

Experienced Sacramento and Yolo real estate attorneys will apply their client's facts to these tests to argue for and against establishment of easements. Such a case was described in a recent decision, Thorstrom v Thorstrom, in which a woman owned two adjacent parcels in Fort Bragg. The original family house was on the larger parcel, but she eventually built a house that she moved to on the smaller parcel. The well on the small parcel was bad, so she had a new one dug on the large parcel and drew water from it for the smaller parcel. The pump and electronics were on the smaller parcel. The larger parcel also obtained its water from the well, after it was pumped to the small property, it returned to the larger one.

The woman died and left each parcel to a different son- Wayne got the larger parcel where the well was, Alan got the smaller one where the pump was. Alan shut off the water going back to Wayne, and built a 2,500 gallon water storage tank to hold water from the well on Wayne's property. The lawsuit followed. The trial court found an implied easement for Alan, owner of the smaller parcel, to have exclusive use of the well on Wayne's property.

The court of appeals applied the three prong test to the findings of the trial court:
1. The mother, through her trust, on her death conveyed the properties;
2. The only well on the smaller parcel was old and only marginally functional; the pump & plumbing for the new well were located on the smaller parcel, showing that the smaller parcel was conveyed with the intent that they not rely exclusively on the old well, but have access to water from the new well on Wayne's parcel;
3. Since the old well is no longer operational, the new well is vital for the supply of water to the smaller parcel.

The court of appeal found that an implied easement was correct, but not for exclusive use. The scope of the easement is measured by the extent the property was obviously and permanently used at the time the transfer was completed. Here, that prior use was not exclusive; the parcels shared the water before, now the brothers must continue to share the water.

I have written before about the courts' refusal to grant exclusive prescriptive easements, as they would subsume reasonable use and end up a grant of real property. This court's overturning of the trial court's exclusive implied easement, along the same lines, ensures that litigants do not end up with the equivalent of a grant of real property, but are limited to the uses that had been established prior to the grant.

California courts have generally provided for equitable easements, in cases in which three factors are present:

1. The party needing the easement is innocent , that is not willful or negligent.
2. where adverse possession and prescriptive easement rules do not apply; Adverse possession require unless the rights of the public would be harmed, the court will allow it if the party needing the easement would otherwise be irreparably harmed, regardless of the injury to the other party; and
3. The hardship to the party needed the easement must be greatly disproportionate to the hardship faced by the other party and this fact must clearly appear in the evidence.

The equitable easement is different than adverse possession or prescriptive easements, which each require the party obtaining the right to have used the property in the same way for 5 years. In what may be a surprise to experienced Yolo, Sacramento, and Placer real estate lawyers, the decision in Tashakori v. Lakis granted and equitable easement for future use where the access road had never been used by the people acquiring the easement.

Tashakori had bought 2 adjacent properties, one of which had a house, the other, Lot 18, bare land. They sold the house property, and then learned that they did not have a recorded deed of easement to Lot 18. There was a shared driveway they could use, but the owner of the underlying property (the servient estate ) protested.

The court found that the owners of Lot 18 were innocent, in that they had diligently investigated access before buying the property, relying on misinformation from the broker, prior owner, and preliminary title report. It found the owner of the driveway would suffer little or no harm- they nhad never used the driveway, it is completely separated from the rest of their property by a fence and is not acessible without jumping the fence. The have never paid for maintenance of the driveway.

In contrast, the owners of Lot 18 would be irreparably harmed if denied an equitable easement. Lot 18 would be landlocked and unusable. The owners could not legally access it, or even walk on it. The injury to them outweighed that of the other owners.

This must seem unfair to the owner of the servient estate. Presumably the owner or his predecessor was compensated at some time for granting the easement for use of the shared driveway to owners of lots other then Lot 18. Now Lot 18 gets a free ride without compensating them. On the other hand, the court had to find a solution to the landlocked parcel. Ultimately the fault was with the original owner who created the parcels for failing to ensure access to them all. The court took the easiest route here. Given that this equitable easement did not require a long existing use, like prescriptive easements do, there may be more claims of equitable easement.

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

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

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

How can the landlord protect themselves? Experienced Yolo and Sacramento County real estate attorneys will advise landlords to spell out in their lease waivers that the "noncore functions" of the property, such as swimming pool, exercise equipment, etc., are nonessential amenities. However, basic common areas, such as parking areas, lawns, and corridors, remain essential and are unlikely to be subject to a waiver of liability.

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

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

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

The argument was made by the Association that the developer could no longer enforce the CC&R's as the developer was no longer an owner. The court agreed, finding that the Declaration of CC&Rs is not a contract, but an equitable servitude which under Civil Code section 1354, binds owners, and may only be enforced by the owners or by the association. The court found that the right of enforcement "is inextricable from the ownership of real property." After the developers sold their last unit, they retained no authority or control over the project.

This could result in cautious developers retaining an minor interest, maybe one condo, in a project for at least as long as the statute of limitations on construction defects. I had recently blogged about a similar result denying CC&R enforcement from another court which used a different approach to find that the developer could not enforce the CC&Rs. The issue is currently before the California Supreme Court.

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

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

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

Fair market value is the value of the property considering its highest and best use. The highest and best use is subject to three tests:
(1) the use must be physically and geographically possible on the site;
(2) the use must be legally permissible, or it must be reasonably probable that the use will become permissible within a reasonable time; and
(3) the use must be economically feasible.

Some examples: As to physical possibility, if the land is a swamp, and it must be filled in, the cost of fill and stabilization must be considered. As to legal permissibility, it must be allowable under the subject zoning, or there is a reasonable possibility that the zoning could be changed in the near future. As to feasibility, the economics of the project is considered. To fill in a swamp and change the zoning to allow a residential use just may not pencil out to be worthwhile.

In the Rancho Cordova case, the city did not take into account that a community college district had entered a contract to buy the land for $8.6 million in 2007. The district later backed out of the deal. The property is also near a light rail station, which should increase its value. However, the city's redevelopment agency valued the property at only $2.2 million. The property owners would not accept the low value, and the jury agreed, awarding $7.9 million.

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

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

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

A 1917 California Supreme Court decision (Black v. Knight) points out that a lessor may not oust the lessee under an unlawful detainer judgment without making themselves liable for damages in the event the judgment is reversed. The landlord is not required to oust th4e tenant immediately, but can wait until the time for appeal has passed. An experienced Sacramento leasing attorney would advise the landlord to consider the risks of losing on appeal, the value of the lost leasehold, and the ability of the evicted tenant to fund an appeal in calculating the risk in not waiting.