California Commercial Lease - How to Determine if Option to Renew is Not Enforceable

California commercial leases often include options for renewal of the lease beyond the initial term. Option terms can provide the duration of the renewal, and describe the future rent, or provide a mechanism for calculating the rent to be paid. But, frequently commercial lease attorneys encounter leases that are not so specific. They can describe the procedure for exercising the option, and the future term or terms, but only provide that the rent was to be as agreed upon. Lessors and landlords do this to provide some assurance to the potential tenant that they may be able to stay in the location for another tenant without committing themselves to rent terms, or even that this tenant. The tenant who has not consulted a real estate attorney enters the lease with the false comfort that they have the right to stay if they want. Such was the case in a Supreme Court decision where the tenant, who had made significant improvements to the property, learned that they did not have a right to stay.

ElDorado real estate and leasing attorney.jpgIn Ablett v. Clausen the Lease provided these option terms:
the lessees 'shall have the first right and a prior option to secure a lease upon said premises before the same are offered to any other person, firm or corporation for lease or rental and that said option shall contemplate a lease for a period of five (5) years upon terms to be then agreed upon.'
The landlord and tenant had some disputes about grading in the parking area of the property where the tenant had the 'Rite Spot' restaurant;, and the landlord's refusal to allow the tenant to remodel the restaurant. So, the landlord told the tenant that they would NOT renew the lease on expiration - the option was terminated. The tenant filed suit to have the court declare they were entitled to another five year rental, under the same terms and conditions.

The trial court ruled in favor of the tenants, so the landlord appealed. The tenant argued that the provision, 'first right and prior option', does not in any way qualify the right of renewal. The court first noted that terms as 'first privilege', and 'first right', and concluded that such provisions do not give the lessee an absolute right to a renewal, but one conditioned upon the lessor's leasing the property, in which case the lessee may have first refusal.

Sacramento real estate option attorney.jpgThe landlord argued that the option provision does not give even a conditional right to a renewal, but is too uncertain to be enforced; it is just an agreement to contract in the future, which is not enforceable. Here, the court noted that the rule is that where "either party by the terms of the promise may refuse to agree to anything to which the other party will agree, it is impossible for the law to affix any obligation to such a promise." There are some court decisions which find that when the only term of a lease which still requires the parties' agreement is the rent, there can be an exception allowing the court to determine a reasonable rent. But here, the Supreme Court found this permissible only where there are some ascertainable standards in the option for the court to decide the terms of the lease. That is not the case here. The original Lease was nine pages long, yet the only term provided by the option provision is how long the renewed lease would last. There is neither discussion of rent, nor a standard by which it may be calculated. Thus, the terms were not specific enough to be enforced.

This opinion takes a long time to get to what was really the obvious conclusion - where the option requires the parties to agree in the future, it is false comfort for the tenant to think they have a right to renew the lease.


The Option to Buy California Real Estate, and Escape Clauses - How Part Performance Made the Promise Binding

Sometimes possible real estate buyers do want to close the deal unless they can obtain certain benefits, such as a zoning change, or lot split. To lock up the property and make their investment worthwhile, they enter an option contract. An option is a unilateral contract under which a property owner, for consideration, agrees to sell its property to another (optionee) if, within a specified time period, the optionee elects to exercise the right to purchase. The owner has made an irrevocable offer to sell at the specified terms in return for the consideration. To be enforceable, the option contract must have consideration paid by the optionee, and sufficiently describe the purchase terms - parties considering such a deal may want to consult with a Sacramento real estate attorney to ensure its enforceability.

The optionee is not required to buy, but if they follow the terms for exercising the option, it becomes a simple purchase contract. Otherwise, it expires. In one court decision, the question arose of whether there was adequate consideration, or just an illusory promise that was not legally binding. the buyer had an escape clause that did not require him to do anything. The plaintiff who then decided not to sell was disappointed to learn that the buyer's part performance made the promise binding.

Sacramento option contract attorney.jpgIn Steiner v. Thaxton, Steiner entered a contract to buy 10 acres of bare land. However, the agreement provided that Steiner could cancel the deal at any time at his sole discretion. It states:

"It is expressly understood that [Steiner] may, at [his] absolute and sole discretion during this period, elect not to continue in this transaction and this purchase contract will become null and void."

He proceeded to seek county approval for a parcel split, and to obtain development permits, spending thousands of dollars. The seller then said he did not want to sell, and the buyer sued for specific performance of the contract.

The court first concluded that the contract was in fact an option. When the owner binds himself to sell on specified terms, and leaves it discretionary with the other party to the contract whether he will or will not buy, it constitutes simply an optional contract. Thus, the question arose as to whether there was consideration for the option.

Was There Consideration?

Civil Code section 1605 defines consideration as "Any benefit conferred, or agreed to be conferred, upon the promisor, by any other an inducement to the promisor"

In our case the promisor is the owner of the land.

Thus, there is a 2-part test in order to find consideration:

1- The promisee must confer (or agree to confer) a benefit or must suffer (or agree to suffer) prejudice.

2- the benefit or prejudice must actually be bargained for as the exchange for the promise.

option contract attorney.jpgHere, part 1 was accomplished - the buyer/optionee's promise to seek a parcel split may have been illusory at the time the agreement was entered into, but he subsequently undertook substantial steps toward obtaining the parcel split and incurred significant expenses. The effort provided a benefit to the seller/optionor, and was a prejudice suffered by the buyer.

Secondly, part 2 was accomplished -the promise to obtain a parcel split was bargained for and induced the seller to enter the contract. There was evidence that the seller told the buyer that it was important to him that any potential buyer seeks to obtain a parcel split.

Thus, the court concluded that the buyer's part performance cured the illusory nature of the contract; thus there was sufficient consideration for the option, and that it was enforceable.

The steps that probably took place were a) the buyer tied up the property at a specific price, b) he signed a deal with another person to buy from him all or part of the finished product, with lot split and permits completed, and then c) he began the process of obtaining the development rights. There was a third party who interned in the lawsuit, because the buyer had assigned some of his rights.

Detailed terms of the purchase contract are set out in the footnotes of the opinion. But this begs the question - why did the parties not just enter an option contract? A nominal cash consideration could have been paid; after all, the seller has now tied up his property to some extent.


Conditions in California Real Estate Contracts - It makes a Difference if they are Dependent or Independent

A condition in a contract is a fact, the happening or nonhappening of which creates or extinguishes a duty on the part of the promisor. If the promisor makes an absolute or unconditional promise, he must perform when the time arrives. But if the promisor makes a conditional promise, he must perform only if the condition precedent occurs. The promise may be dependent upon the performance of another condition, in which case they would be dependant and concurrent conditions. In this case neither party is in default until one party performs or tenders performance. In the typical real estate contract seen by Sacramento real estate attorneys, delivery of the deed and payment of the purchase price are dependent and concurrent conditions. There must be performance or tender thereof by one party to put the other in default. In a recent decision, the court agreed with the swindled would-be buyer, who argued that return of their $3 million dollar deposit was an independent condition

Sacramento real estate contract attorney.jpgIn Rutherford Holdings, LLC v. Plaza Del Rey, Rutherford contracted to buy a mobile home park from Plaza, and provided a deposit of $3 million dollars. The agreement provided that the deposit was nonrefundable unless Plaza materially breached the purchase agreement or failed or refused to close.

Prior to the closing date, Plaza told the buyer that Plaza could reduce its property tax bill for the year if it was not in this contract for sale. The contract would increase the value that the tax was based on. If they did not close by the closing date, the tax would be based on a lesser value. Plaza promised the buyer that they would sell the property after the closing date, and after Plaza filed it tax returns. The buyer agreed! The closing date came and went and neither party performed; Plaza never tendered the deed to Rutherford, and Rutherford never tendered the full purchase price to Plaza. Plaza paid less in taxes, then said they would not sell the property to Rutherford, plus they were keeping the deposit, ha ha! This suit followed.

The court first noted that in a contract for the sale of real estate the delivery of the deed and the payment of the purchase price are dependent and concurrent conditions. Where the parties' contractual obligations constitute concurrent conditions, neither party is in default until one party performs or tenders performance. However, here, the buyer argued that the seller's obligation to return the deposit was independent of the Buyer's promise to pay the full purchase price. If the two covenants are independent, breach of one does not excuse performance of the other. The buyer's failure to place the money in escrow did not excuse Plaza's failure to return the deposit.

El Dorado real estate contract attorney.jpgIn this case the Court was looking at whether the Complaint sufficiently described a legitimate claim. Where an ambiguous contract is the basis of an action, the parties are expected to provide their own interpretation of its meaning. If their interpretation is not clearly incorrect, the court accepts as correct plaintiff's allegations as to the meaning of the agreement.

Here, the purchase agreement can be reasonably interpreted to mean what the Buyer has claimed. "While [that] interpretation ... ultimately may prove invalid," at the pleading stage, it is sufficient that the agreement is reasonably susceptible of this meaning." Thus, the Buyer had properly made the claim that return of the deposit was an independent condition, and should have been returned. It's too bad this buyer had to go through the appeal process at this stage of the lawsuit. The seller seems to be a real con artist, convincing the buyer to let the contract lapse with a promise to sell on the same terms, then keeping the $3 million dollar deposit.


The Sham Guaranty in California - How to Avoid By Making Sure There is Separation Beween the Borrowower & Guarantor

I have written in the past about Sham Guaranties - this is a guaranty of a loan where the guarantor has such a close identity with the borrower that they are in effect providing a guaranty of their own loan. Such a sham guaranty is not enforceable. A typical scenario would be with a limited partnership. The general partner is fully liable for the debts of the limited partnership. If all the principals of the general partner sign the guaranty, the question arises of whether anything has been added by the guaranty. This is a sham especially when the lender takes a role in encouraging the formation of the entity, and only investigates the financial wherewithal of the individual guarantors. Business and real estate attorneys for lenders usually pay special attention to make sure they really will have an effective guaranty. In a recent decision. the guarantors were unhappy to learn that they were liable on the guaranty - there was too much separation between themselves and the borrowers, which they did on purpose so that they would not occur direct liability on the loan.

Sacramento real estate loan sham guaranty attorney.jpg In California Bank & Trust v. Lawlor, the bank loaned millions to Heritage Partners, secured by numerous real estate projects. Smith and Lawlor owned and controlled Covenant Management, which owned and controlled Heritage Capital, which was the general partner of the Heritage partnerships. They really tried to isolate themselves from the borrower to avoid personal liability. The lender required Smith and Lawlor to sign continuing guaranties. The borrower went into default, the lender foreclosed, and had a deficiency of $15 million dollars. California Bank and Trust brought this action to collect on the loan guaranties. Smith and Lawlor argued that the guaranties were sham guaranties and therefore they were actually the primary obligors on the loans, not true guarantors. As primary obligors, Smith and Lawlor claimed that they were entitled to the protection of California's antideficiency statutes. This should prohibit the lender from obtaining a judgment against them for the difference between the value of the security and the outstanding loan balances.

The antideficiency statutes strictly limit the right to recover deficiency judgments for the amount the debt exceeds the value of the security. The antideficiency laws promote several public policy objectives:
(1) to prevent a multiplicity of actions,
(2) to prevent an overvaluation of the security,
(3) to prevent the aggravation of an economic recession which would result if creditors lost their property and were also burdened with personal liability, and
(4) to prevent the creditor from making an unreasonably low bid at the foreclosure sale, acquire the asset below its value, and also recover a personal judgment against the debtor.

These protections are NOT provided to a true guarantor, however. The courts must decide whether the purported debtor is anything other than an instrumentality used by the individuals who guaranteed the debtor's obligation, and whether such instrumentality actually removed the individuals from their status and obligations as debtors.
The court surveyed numerous sham guaranty decisions, and noted that it would look to the purpose and effect of the parties' agreement to determine whether the guaranties constitute an attempt to circumvent the antideficiency law and recover deficiency judgments when those judgments otherwise would be prohibited. The test is to determine 1) whether the legal relationship between the guarantor and the purported primary obligor truly separated the guarantor from the principal underlying obligation, and 2) whether the lender required or structured the transaction in a manner designed to cast a primary obligor in the appearance of a guarantor.

Regarding the legal relationship, The Defendants are not the primary obligors on the loans because they did not enter into the business loan agreements or execute the promissory notes with the lender. Also, Cartwright Properties's and Heritage's (two of the borrowers) legal status as a limited liability company and a limited partnership provide legal separation between those entities as the primary obligors and Defendants as the guarantors. For the Heritage loans, there was an additional layer of separation existed between Smith and Lawlor and the primary obligors because there was both a limited partnership and a limited liability company between them and the primary obligors. Though the defendants owned and controlled these entities, there was no evidence that these were mere shells, which would allow the plaintiff to pierce the corporate veil ('ultra vires').

Sacramento loan guaranty attorney.jpgRegarding the lender's involvement, There was no evidence that the lender requested, required, or otherwise had any involvement in selecting the entities, or the form of the entities, that were the borrowers and primary obligors. Defendants offered no evidence showing Smith and Lawlor were the primary obligors on the loans or that the lender attempted to separate Defendants' interests in the loans by making Cartwright Properties and Heritage the borrowers while relegating Defendants to the position of guarantors.
These defendants did a great job structuring entities to shield themselves from personal liability. A property constructed LLC, corporation, or limited partnership can do that. The downside however, is that this level of protection eliminates the sham guaranty defense.


In California if you Obstruct a Prescriptive Easement, the Court can Require You to Remove the Obstruction, Even if it is a Commercial Building.

A prescriptive easement is a right established in someone else's property by using that property in a consistent way over a period of at lease five years. The easement holder starts out as a trespasser, If the true owner does not take action to stop the trespass, or establish that the use is permitted, they lose. A real estate Professor has pointed out that 'historically, prescription has had the theoretical basis of a lost grant of property. Its continued use has been justified because of its functional utility in helping to cause prompt termination of controversies before the possible loss of evidence and in stabilizing long continued property uses.' (Powell, The Law of Real Property). Sacramento real estate attorneys often see the lawsuit to establish a prescriptive easement instigated when the owner of the property blocks the prescriptive use, by building a fence, installing a locked gate, or the like. If the easement is established, the court can require the property owner to move the obstruction. But to what extent? The California Supreme Court made it clear - when the obstructor builds knowing of the claim of an easement, with litigation ongoing, the court need not show mercy - in one case, they required removal of a commercial warehouse.

sacramento prescriptive easement rights attorney.jpgIn Ernest E. Warsaw v. Chicago Metallic Ceilings, Inc., the plaintiff built a large commercial building with the loading docks on the north side of the building. There was room for a forty foot driveway along that Northern boundary of the parcel, but forty feet was never enough room for big trucks to turn and back in to the loading docks. They always encroached on the adjoining property. The defendant's adjacent parcel to the North had been vacant land all this time. The parties had in the past discussed creating a granted easement, but nothing came of it. After more than seven years had passed, the defendant decided to build on the southern portion of its property. They graded a pad that blocked the plaintiff's use of the area, and the plaintiff filed this lawsuit.

The Court decided three issues:
1. Was a prescriptive easement created?
2. Could the defendant be required to remove the building?
3. Was the defendant entitled to be paid any money?

A Prescriptive Easement was Created

The party claiming a prescriptive easement must show use of the property which has been open, notorious, continuous and adverse for an uninterrupted period of five years. Here, the truckers using the neighboring property followed a definite course and pattern, and while no two truck drivers followed the exact course ... the deviation taken by various drivers over the seven-year period was only slight.

The Defendant Could Be Required To Move The Obstruction, Even if it is a Building

Yolo easement lawyer.jpgA court of equity may issue a mandatory injunction for protection and preservation of an easement including, where appropriate, an order for removal of an obstruction already erected; even if the cost of removal is great under certain circumstances, especially if the encroaching structure was willfully erected with knowledge of the claimed easement. Where, by innocent mistake or oversight, buildings erected slightly encroach, the damage to the owner of the buildings by their removal would be greatly disproportionate to the injury, so the court might not order their removal However, where the defendant acted with a full knowledge of the complainant's rights and with an understanding of the consequences which might ensue, courts will not deny relief on the ground that the loss caused by it will be disproportionate to the good accomplished. Here, construction of the building was not started until the lawsuit had begun. It was completed before the trial. The defendants rolled the dice, assuming that they would win but they lost.

The Defendant is Not Entitled to Compensation

The defendant argued that, in equity, the court should grant compensation for the fair market value of the easement, or alternatively share the cost of removing or restructuring the building. The court said no. Civil Code section 1007, enacted in 1872, provides that 'Occupancy for the period prescribed by the Code of Civil Procedure as sufficient to bar any action for the recovery of the property confers a title thereto, denominated a title by prescription, which is sufficient against all ....' Here, on finding the creation of the easement, the plaintiff has title. There are no grounds for requiring compensation. The court looked at the history of prescriptive rights, and its functional utility in helping to cause prompt termination of controversies before the possible loss of evidence and in stabilizing long continued property uses. With this as its aim, there are no grounds for compensation the defendant for damages.

It is a little surprising that the court made the defendant tear out its commercial building, but I think the court was influenced by the chutzpah of the defendant, who constructed the building while the lawsuit was ongoing. Screw you, the defendant was saying, but he was forced to eat his words.


Deeding California Property to Someone To Avoid Creditors Not a Fraudulent Conveyance When There is No Equity; How the Homestead Exemption Helps Beat Intentional Fraud

When someone who owes a debt transfers property out of their name in order to prevent the creditor from collecting against that property, the transfer may be set aside under the Uniform Fraudulent Transfer Act (UFTA, California Civil Code section 3439.04 et seq.). AN important element of a fraudulent conveyance is that an injury must occur. Mere intent to delay or defraud is not enough. Thus, in the case of real property, a real estate attorney must determine whether, on seizing the real estate and selling it, would the creditor actually get anything after the liens are paid. In a recent decision, a creditor was surprised when the automatic homestead exemption (not a declared homestead) was applied to determine that there was no equity in the property.

sacramento fradulent conveyance attorney.jpgIn Fidelity National Title Insurance Company v. Schroeder, Fidelity screwed up when it allowed a property to be refinanced without paying an existing judgment lien. Fidelity, as title insurer, thus had to pay off the creditor, and then stepped into their shoes, hoping to get a judgment and record their own lien against the property. However, the property was owned by two people, and the one whom the judgment was against conveyed his interest to the other, to avoid attachment of Fidelity's lien. This lawsuit ensued, and the trial court dismissed the action by Fidelity, finding that, if the property were sold, after paying the existing liens, the remaining equity was protected by the debtor's undeclared homestead exemption. Fidelity appealed, arguing that, in the case of an automatic homestead exemption, the judgment lien still attaches to the property.

The appellate court first addressed the difference between the two types of homestead exemption:

Declared Homestead
Declared Homestead law protects declared homesteads from judgment liens (see §§ 704.950 & 697.340), with the exception that a judgment lien may attach to a declared homestead in the amount of any surplus over the total of prior liens and encumbrances plus the amount of the homestead exemption.

Automatic Homestead
the automatic homestead exemption does not prevent the attachment of judgment liens against a dwelling (Reddy, 8 Cal.App.4th 118 at pp. 121-122), but affords protection when a judgment creditor seeks a court ordered sale of the dwelling after a notice of levy. Under section 704.800, unless a bid exceeds the amount of the homestead exemption plus all liens and encumbrances on the property, "the homestead shall not be sold and shall be released and is not thereafter subject to a court order for sale upon subsequent application by the same judgment creditor for a period of one year."

sacramento homestead exemption attorney.jpgThe court pointed out that the injury requirement is part of the UFTA, which not only requires that excluding senior liens from the definition of "asset" (for the purpose of determining if a fraudulent transfer of an asset occurred), but also property "to the extent it is generally exempt under nonbankruptcy law." (Civ. Code, §3439.01, subd. (a)(1), (2), The automatic homestead protection is such an exemption. The automatic homestead exemption and the declared homestead exemption are contained in the chapter of the enforcement of judgment law that specifically addresses exemptions.

Fidelity argued that this was contrary to the prior Reddy decision, but the court disagreed. Reddy pointed out that, in the case of an automatic homestead exemption, a creditors judgment lien attaches against the debtor's residence. However, Reddy did not deal with the issue of injury, or the definition of asset, which excludes exempt property. Here, the title company did not present evidence that the property had sufficient value to cover the seniors liens and homestead exemption, and still raise enough cash for this creditor.


A Private Easement for "Public Road Purposes;" its Still A Private Easement Enforceable Only By the Private Parties

A public right of way, while it may be described as an easement, is much different from a private easement. The Supreme Court explained that 'public ways, as applied to ways by land, are usually termed "highways" or "public roads," and are such ways as every citizen has a right to use. A private way relates to those easements in which a particular person, or particular description or class of persons, have an interest or right as distinguished from the general public. A private easement ordinarily vests those use rights in the owner of a particular parcel of neighboring property, while the use rights of a public right-of-way are vested equally in each and every member of the public. Sacramento real estate attorneys often face issues concerning private easements - extent of use of the easement, interference with the easement, etc. but seldom need to address public right of way issues. In a recent decision, the court explained that using the language "for public road purposes" in the grant of easement between private parties does not create an easement for public use, but rather to allow access to a public road.

sacramento easement dispute attorney.jpgIn Schmidt v. Bank of America, N.A. the easement holder sold a portion of their property in La Mesa to Betty, reserving an easement, the language being:

"RESERVING to the grantor, her successors, assigns and/or heirs, the right of ingress and egress for public road purposes over, along and across the Easterly 40 feet thereof."

Betty sold the property, and eventually a large condominium [project was developed, with construction of numerous features on, around, and under the easement area, including a locked gate on the easement holder's property! This lawsuit followed.

The trespassing condo project owner argued that the phrase "for public road purposes" created a public right-of-way over the reserved easement. As a public right-of-way, it may be used for any infrastructure that accompanies normal development, including the various structures and improvements (Bello v. ABA121 Cal App 4th 301). The easement holder argued that the grant created only a "right of ingress and egress" that entitles their dominant parcel to use only the surface of the easement, and that the easement benefits only the dominant parcel and not the public at large.

sacramento easement rights attorney.jpgThe court first noted that an easement is a restricted right to specific, limited, definable use or activity upon another's property, which right must be less than the right of ownership. Here, the grant is restricted to the right to ingress and egress. The phrase "right of ingress and egress" has been used to describe one of the easements that a landowner has over a public street that his land abuts. "Every lot fronting upon a street has, as appurtenances thereto, certain private easements in the street, in front of and adjacent to the lot. The court concluded that the parties intended that the easement holder would have a right of ingress and egress across the condo property in order to reach a public road. A public right of way entitles all the public to use the easement. Here, the reserved easement exists only between two private parties.
The condo project owner also argued that the phrase "and incidental purposes" means that the reserved easement should be interpreted broadly and encompass any use incidental to a public road. The court disagreed. "Incidental purposes" are necessarily dependent and subordinate to the main purpose of the easement, which was access to a public road.

Either the developer didn't care about the neighbors, or its planners did not know about the easement. Most landowners do not look the other way when their easement rights are interfered with. Not only did this developer impact the easement, but they put a locked gate on the neighbors property, poking at the hornets nest. No surprise, but this developer defaulted on its loan, and Bank of America got into this lawsuit because it foreclosed on the developer.


When Can You Use Equitable Subordination of California Real Estate Loans To Get The Priority You Bargained For?

"Equitable subordination" is used to correct equitable wrongs in the priority of liens on real property. If fairness requires, a first lien or deed of trust can be subordinated, or reduced in priority below, a second lien, swapping their positions. (Civ. Code, §§ 2876, 2903, 2904. A lengthy description by the Supreme Court is copied below). When, through fraud or mistake, a party finds that his lien does not have the priority he bargained for, they should consult with a Sacramento real estate attorney to discuss equitable subordination. Such a lawsuit may result in the judge reclassifying the respective liens to make them fair. In a recent decision the court granted equitable subordination on behalf of two deeds of trust where there was both broker fraud (in forging signatures) and escrow negligence in failing to carry out instructions and reconvey a deed of trust.

Sacramento equitable subordination of loan.jpgIn Elbert Branscomb v. JPMorgan Chase Bank N.A., Navjot owned property on Canal Street in San Rafael. He had three loans; 1st, from Washington Mutual Bank; 2nd with MMB; and 3rd, a $500,000 loan from plaintiff Branscomb. All were secured by deeds of trust. However, Banscomb's 3rd DOT only indicated that I the loan was for $100,000, due to the broker's negligence. Navjot refinanced with WaMu, and Modified the MMU loan. Conditions of both were that the lenders were to keep their respective first & second positions. When the escrow officer asked Branscomb's broker for a payoff of the third, he replied that it was zero, and signed a request for reconveyance. (Yikes, it was $500,000! This broker was bad news. He was also found to have forged his client's signature on a number of documents. He had done this before, but Branscomb continued to work with him. They deserved each other.) Compounding the broker's error, the escrow officer was negligent in not reconveying the Third deed of trust. When the first & second refinances recorded, Branscomb moved to 1st, and the other two dropped to 2nd & 3rd. This lawsuit for equitable subordination resulted.

Knowledge of the Plaintiff's Lien Did Not Prevent Subordination

The court noted that, generally, courts will give a lender the security he bargained for when there is a mistake or fraud and an intervening right cuts off the lender. Here, both JPMorgan & MMB advanced funds on the condition that they remain in 1st & 2nd position. Third place plaintiff knew his loan was intended to be 3rd. Thought The first lenders knew of the third loan, they did not know that the 3rd would remain on the property and move to first - they conditioned their actions on maintaining the same priority.

The Negligence of Escrow Did Not Prevent Subordination

Also, the trial court had claimed that the holders of the first & second, unlike plaintiff, had a claim for damages against the escrow officer. But the appellate court did not agree that it affected the equities of the parties. This was because:
(1) there was no guarantee such a lawsuit would succeed,
(2) if the lender received the equitable subrogation to which it was entitled, there would be no loss for the title insurance company to indemnify, and
(3) if sued by the lender, the title insurance company might be entitled to assert lender's right to equitable subrogation.

Sacramento real estate loan attorney 1.jpgThus, the court of appeal found that the first and second lenders were entitled to equitable subordination. Unknown from the decision is whether the escrow and title company, having caused the problem through its negligence, hired the attorneys for the two lenders to bring the lawsuit for equitable subordination - they certainly had a hand in causing the problem.

The Supreme Court explanation of equitable subordination mentioned above:
"One who advances money to pay off an encumbrance on realty at the instance of either the owner of the property or the holder of the incumbrance, either on the express understanding, or under circumstances from which an understanding will be implied, that the advance made is to be secured by a first lien on the property, is not a mere volunteer; and in the event the new security is for any reason not a first lien on the property, the holder of such security, if not chargeable with culpable and inexcusable neglect, will be subrogated to the rights of the prior encumbrancer under the security held by him, unless the superior or equal equities of others would be prejudiced thereby, and to this end equity will set aside a cancellation of such security, and revive the same for his benefit." (Simon Newman Co. v. Fink (1928) 206 Cal. 143, 146.)


General reference of California disputes - How you can avoid a courthouse trial without having to deal with unpredictable arbitration

Parties can provide in their contracts that any dispute be resolved by "general reference." A general reference directs a referee to try all issues in the action. The hearing is conducted under the rules of evidence applicable to judicial proceedings. In a general reference, the referee prepares a statement of decision that stands as the decision of the court and is reviewable as if the court had rendered it. This results in a trial by a referee and not by a court or jury. "Judicial reference," on the other hand, differs in that in that it involves sending a pending trial court action to a referee for hearing, determination and a report back to the court. The BIG DIFFERENCE between reference and arbitration is that a judgment obtained by reference can be appealed, but an arbitrator's may not be appealed, regardless of how flawed it is. Sacramento real estate and business attorneys know that all the CAR forms have arbitration provisions, which are usually initialed by the parties without truly understanding them. I have railed before about how arbitrators are not held accountable for erroneous rulings.

The general referee's statement of decision "stands as the decision of the court," and once the statement of decision is final and filed by the referee, judgment must be entered thereon "in the same manner as if the action had been tried by the court." After judgment is entered, the losing party may make post-trial motions for a new trial, and/or to vacate the judgment. The judgment entered on the general referee's statement of decision may be appealed like any other judgment.

SACRAMENTO CONTRACT DISPUTE ATTORNEY.jpgIn a recent decision the court enforced a general reference provision that did not include an explicit waiver of a jury trial. In O'Donoghue v. Superior Court (Performing Arts LLC), a developer obtained a $20 million dollar construction loan for condos at 973 Market Street in San Francisco. Several individuals signed personal guarantees for the loan; the guaranty instrument had a general reference provision. Default occurred, a lawsuit filed, and the court enforced the reference, appointing a referee. The reference provision did not include a jury waiver; the guarantors appealed.

The court first noted that statute permitting agreement for a reference unambiguously results in a waiver of 'jury trial' without the need to use those words. Such a reference (like arbitration) entails dispensing with trial in the judicial forum, including jury trial. Also, in parallel, the California Supreme Court concluded that an agreement to arbitrate need not contain an express waiver of a jury trial.

sacramento loan guaranty attorney 2.jpgThe court reasoned that the provision must clearly and ambiguously show that a party has agreed to resolve disputes in a forum other than the judicial one, which is the only forum in which disputes are resolved by juries. The reference provision in this case satisfied that test. It contains the heading "Judicial Reference" and advises that all disputes "shall be heard by a single referee by consensual general reference pursuant to the provision of the California Code of Civil Procedure, Sections 638 et. seq." and that the referee "shall then try all issues, whether of fact or law, and report a statement of decision which either party may file with the clerk or judge and have judgment entered thereon." Further, it provides that "[t]he parties agree that the referee shall have the power to decide all issues of fact and law and report a statement of decision hereon, and to issue all legal and equitable relief appropriate under the circumstances before him or her."

This is a good result. Hopefully more California real estate and business attorneys will recommend reference to their clients instead of arbitration


Fraud in the inducement evidence not barred in real estate contracts between sophisticated parties

I recently described a decision that overruled the rule that a borrower may not make a claim for fraud based on the other party misrepresenting what the contract will say (The Pendergrass Rule). In the past borrowers who claimed that their mortgage broker or lender made promises about their loan that were not true. Where these promises are in direct conflict with the terms of the written agreement, the parole evidence rule as described in Pendergrass prohibited allowing evidence of these statements in court. The California Supreme Court decision in Riverisland concluded that evidence of the false promises may be admitted as evidence of fraud. Another decision went a little farther in clarifying the new rule, finding that even sophisticated parties who engaged in extensive negotiations were not subject to the Pendergrass rule, and evidence of fraudulent statements could be admitted.

sacramento real estate contract fraud attorney.jpgIn Julius Castle Restaurant Inc. V. Payne, the parties entered a lease agreement, as well as purchase of the fixtures, of a restaurant in San Francisco. The lease agreement stated:

"Tenant acknowledges that as of the date of this Lease, Tenant has inspected the Premises and all improvements on the Premises and that the Premises and improvements are in good order, repair, and condition... This instrument constitutes the sole agreement between Landlord and Tenant respecting the Premises, the leasing of the Premises to Tenant, and the specified lease term, and correctly sets forth the obligations of Landlord and Tenant. Any agreement or representations respecting the Premises or their leasing by Landlord to Tenant not expressly set forth in this instrument are void."

The tenants went into default shortly thereafter, a lawsuit and counter-complaint followed. The tenants claim for fraudulent and negligent misrepresentation were based on the assertion that the lessor had told them the property was in good condition, and assured them an inspection was not necessary, and guaranteed that he would fix anything that was not working or in proper running order.

Sacramento and yolo real estate attorney.jpgThe landlord argued that one of the justifications for the Riverisland decision was to avoid shielding fraudulent practices, a valid concern, but "Riverisland is strong medicine and must be applied only when the circumstances call for it: with contracts of adhesion where there is a disparity in bargaining power." The appellate court disagreed. The Supreme Court had not limited the decision in Riverisland to contracts of adhesion. Allowing parol evidence to be admissible as to fraud claims does not create an injustice. The party claiming fraud still must prove that they relied on the misrepresentation, and that their reliance was reasonable. In the case of sophisticated parties, this is much more difficult. Sophisticated businessmen are assumed to enter "arms-length" transactions, where both parties in the deal are acting in their own self interest and are not subject to any pressure or duress from the other party.

Sacramento and Yolo real estate attorneys now face a broader array of evidence that may be admitted in a misrepresentation caseThe landlord in this case tried to restrict the breadth of the Riverisland ruling to no avail. Apparently, the decision came as result of pretrial in limine motions, meaning that they were close to trial. There is not indication whether the evidence was tested in a motion for summary judgment, in which a judge may have made a decision as to whether the evidence was admissible to support a finding that the reliance was reasonable as a matter of law. Now, the question will go to a jury.


The Performance Deed of Trust, Used in California to Secure Obligations other than Payment of Money. When It Can Be Reconveyed.

April 29, 2014

A Deed of Trust in California can be used to secure contract obligations other payment of money. Usually, the primary obligation secured is the repayment of the loan. There are ancillary duties usually set out in the deed of trust, such as keeping the property in good repair, maintaining insurance, etc. However, in some cases the other obligations may be a primary secured obligation. Enforcement, by judicial foreclosure or nonjudicial trustee's sale, essentially provides a dollars remedy through a foreclosure sale. Thus, the obligation being secured must be capable of liquidation (i.e. determining a specific monetary value) before enforcement. The contract may include a liquidated damages provision, which specifies how to calculate that monetary value. Whether a liquidated damages clause is enforceable is not always clear, and interested parties may want to consult with a Sacramento real estate and business attorney for clarification. Otherwise, without liquidated damages, determining the amount of damages would likely require a judicial foreclosure, in which monetary damages will be determined.

yolo and sacramento real estate attorney.jpgA dilemma arises when the property owner pays off the loan, but has not yet completed full performance of other obligations secured by the deed of trust. Usually, on paying off the loan, the borrower wants the lender to record a reconveyance of the deed of trust, effectively removing the 'lien' from the record. However, courts have found that reconveyance was not required. Such was the case in Dieckmeyer v. Redevelopment Agency of the City of Huntington Beach, where the plaintiff bought a condo through an affordable housing program. The program included restrictions on household incomes, and on future buyers. The deed of trust securing the purchase loan stated that it secured repayment of the note, future advances or obligations of the borrower, and...

"[p]erformance of each and every obligation, covenant, promise or agreement of Trustor contained herein in the Loan Agreement between Beneficiary and Trustor ... and in that certain Affordable Housing Agreement [the CC & R's] currently recorded on the property...."

The owner wanted to prepay her loan, and have the City reconvey the deed of trust. The City refused, and the lawsuit followed.

The Court first noted that a mortgage or deed of trust is security "for the performance of an act." (Civ. Code, § 2920, subd. (a).) While the obligation most often secured is payment of a note, it may also be performance of a contract. Partial performance of the obligation secured does not extinguish the lien. (Civ. Code, § 2912.) Here, if the note is paid in full, it would be part performance of the secured obligation. But the payment does not extinguish the security. The Deed of Trust remains as security for the owners other obligations under the loan agreement and CC&R's. Thus, the deed of trust remained as security for performance after the loan was paid off.

sacramento deed of trust attorney.jpgThe court unfortunately elected not to address language in the Trust Deed that stated the borrower was entitled to a reconveyance when "all sums secured hereby have been paid, " as the plaintiff did not argue that "all sums" excluded non-monetary obligations. This language provides a borrower with the argument that "all sums" means money, and does not include obeying the CC&Rs and the loan agreement.

A performance deed of trust may be difficult to foreclose non-judicially - that is, by trustee's sale through the power of sale. A hesitant title company would refuse to perform the sale, especially if the borrower disputes the performance breach. The lender/holder of the deed of trust (the beneficiary) could substitute themselves in as trustee, and conduct the sale. However, If the beneficiary buys the property at the sale (in the event that there are no sufficient bidders), the borrower - mortgagor would have the right to redeem the property, getting it back by full performance of his obligation. (Copsey v. Sacramento Bank (1901) 133 Cal. 659).


Joint Tenancy in California Real Estate - Termination of Family Joint Tenancy Can Trigger Reassessment. Pitfalls of Using Them As A Will Substitute

April 22, 2014

According to the California Legislature, the vast majority of joint tenancies in California are used as a will substitute among family members. In a joint tenancy, the survivor among the title holders "inherits" the property. This is different from holding the property as tenants in common, in which case each party owns a percentage interest in the property; if one passes, their percentage would go to the deceased person's heirs. Real estate lawyers are reluctant to suggest joint tenancy because of the risks involved (though escrow officers suggest it). A joint tenancy requires a great amount of trust in the co-parties, because any joint tenant may sever the joint tenancy at any time by recording a deed. Thus, John Doe, joint tenant, could deed his interest to himself as John Doe, tenant in common, at any time, and the other owners of the property would never know. The result would be that the parties are no longer joint tenants, but are now tenants in common. Sacramento real estate attorneys commonly see this happen with estranged couples who bought property as tenants in common. One unexpected result of this problem surprised two Marin County brothers in a recent court case, when one brother deeded his interest to himself as tenant in common. This triggered reassessment, and they got hit with a huge tax bill.

Sacramento joint tenant attorney.jpgIn Benson v. Marin County Assessment Appeals Board, Mom was joint tenant with good son. After mom died, good son owned the property outright. He put his ungrateful brother on title as joint tenants. Ten years later Ungrateful severed the joint tenancy by recording a grant deed in which he granted to himself his interest as a tenant in common. The County Assessor felt this triggered the reassessment provisions, the assessed value of the house went up, and the property tax increased an additional $2,683 per year. Ungrateful brought this lawsuit claiming that severing the joint tenancy did not constitute a change in ownership for reassessment purposes, but was merely a change in the way title was held..

El Dorado deed attorney.jpgUnder Proposition 13 real property tax is based on "full cash value," meaning "the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred. Generally, any sale or transfer of property results in a change of ownership. However, the legislation and regulations carve out some exceptions to the definition of change in ownership, especially for joint tenancies. Joint tenancies and tenancies-in-common and create undivided interests in land, with each co-tenant owning a percentage (fractional) interest. Transfer of any fractional interest is a change of ownership, but results in reappraisal ONLY of the percentage interest transferred. This created a concern because, as the fractional interests change ownership, the various County Assessors would be required to keep track of they various interests and their varied assessments. To minimize this accounting nightmare, the Legislature determined that separate accounting would not be required for family joint tenancies, which are the bulk of joint tenancies in California. It is treated as an equivalent to making a will. As there is no change in ownership in making a will, so there should be no such change in creating a family joint tenancy. Change in ownership would occur when the joint tenancy terminated, frequently on the death of the last surviving parent.

The court, looking at this history, concluded that the law required reassessment to occur when a joint tenancy ended, no matter how that happened. Property will be reassessed. This decision brings to light two issues that most folks in a joint tenancy do not consider. First, is that any joint tenant can sever the tenancy at any time. And secondly, that such severance may have unforseen tax consequences.


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.