Articles Posted in Contract

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In California, every contract includes an implied obligation not to do anything that prevents the other party from benefiting from the contract, and to cooperate if necessary for the other party.  This is called the implied covenant of good faith and fair dealing.  It does not create a new obligation but applies to those obligations which have been agreed on.  The Restatement of Contracts comments provide that the bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty.  Sacramento Real Estate attorneys see the argument come up often in real estate contracts which end up falling out of escrow, and occasionally commercial leases in which the parties fail to cooperate.  Courts generally allow parties to use unfettered discretion, without restriction of the covenant, if the contract provides for unfettered discretion, and there is adequate consideration (162 Cal App. 4th 1107, 1121).  In a decision involving an office lease at 595 Market Street in San Francisco the tenant wanted to sublease the premises, and thought that the landlord breached the implied covenant by terminating the lease.  But the lease provided that the landlord could do so, so the tenant had covenanted away its argument.

covenant of good faith attorneyIn Carma Developers (Cal) Inc. v. Marathon Development, Carma entered a lease of the 30th floor of the building for ten years.  Carma’s business changed, its headquarters moved to Houston, and Carma submitted a proposal to the lessor to sublease a portion of the premises.  The Lease had a provision (set out below) that in such a case the lessor had the right to terminate the lease.  The Court first noted that it has been suggested the covenant requires the party holding such power to exercise it “for any purpose within the reasonable contemplation of the parties at the time of formation-to capture opportunities that were preserved upon entering the contract, interpreted objectively.”  It repeated to principles that have emerged:

1, breach of a specific provision of the contract is not a necessary prerequisite, and

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When there has been a breach of contract or fraud related to a real estate contract, the injured party can either seek damages, or disaffirm the contract, treat it as rescinded (called rescission), and seek damages for the rescission. In the case of rescission, Civil Code Section 1689 permits rescission when the consent to the contract was given by mistake or obtained through fraud or undue influence exercised by the party as to whom he rescinds. The party that was harmed must offer to restore to the other party everything of value they had received under the contract. Sacramento real estate attorneys often see clients in difficult positions regarding returning everything of value – if it was a purchase contract, you have to give the property back though you have already made changes to it and it may now have encumbrances. If it was a loan contract, it is not always easy to give the money back, since it has already been spent. Nonetheless, rescission is a good remedy for undoing the damage done. Such was the case in an unusual situation in San Carlos when buyers bought a house for $2.35 million and spent $300,000 in renovations, but were able to rescind the purchase contract.

sacramento rescission attorney.jpgIn Wong v. Stoler (an UNPUBLISHED opinion), the Wongs bought a hillside home from the Stolers. After they moved in and renovations were underway, they were surprised to discover that they were not hooked up to the City’s public sewer system, but instead to a private system.

The sellers provided the Wongs with a transfer disclosure statement completed in 2002 by the prior owners, an updated 2008 transfer disclosure statement, and a supplemental sellers’ checklist, which represented to the Buyers that the property was connected to the City sewer. They did not tell the Buyers any details about recorded CC&Rs that discussed the private sewer system nor did they disclose the existence of a Homeowners Association.

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Real estate contracts contain covenants and warranties that the parties sometimes want to enforce after the sale has been concluded. Whether or not they are still enforceable is determined by whether the covenants were “merged in the deed.” The idea is that, once the Seller grants and Buyer accepts the deed, the deed is conclusive and all bets are off. The general rule is that any covenants in a contract between the parties are merged into the deed. If a covenant is not performed, then the rights of the parties depend on the terms of the deed. If the deed does not discuss the covenants, then whether these covenants survive and remain enforceable after closing depends on the intent of the parties. The starting point for figuring out the party’s intent is the language of the deed. When a provision in a deed is certain and unambiguous it prevails over an inconsistent provision in a contract of purchase pursuant to which the deed was given. Sacramento real estate attorneys commonly see situations where the intent is clear – the contract states whether the conditions survive, or do not. More troubling is the case where the contract is not so clear.

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In Rams Gate Winery, LLC v. Joseph G. Roche
, Rams Gate bought a Sonoma County winery property from Roche. As part of the agreement, the Roches agreed to provide

“[w]ithin ten days of the Effective Date” “written disclosure” of any “information known to Seller” regarding violations of “building, zoning, fire, health, environmental statutes, ordinances or regulations; [and] any known geological hazards; … soil reports, … geotechnical reports, … and all other facts, events, conditions or agreements which have a material effect on the value of the ownership or use of the Property….”

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Co-owners of property often enter agreements that include a right of first refusal. If one of the parties wants to sell their interest, and receives a bona fide offer, they must offer to sell to the co-owner on the same terms. Partition is a legal action which forces the sale of a property when co-owners cannot agree to another way to end the relationship. The right to partition can be waived by contract, either expressly or by implication. Parties entering a co-ownership agreement should consult with a Sacramento real estate attorney in drafting the agreement to ensure it will accomplish their goals, including waiver of the right to partition if that is what they want. In a decision regarding a Lake Tahoe vacation home valued at over $2.8 million, a truculent co-owner tried to argue that the right of first refusal waived the right to partition, but the court said no. If you want to waive all possibility of partition, you should clearly state that in your agreement.

sacramento right of first refusal attorney.jpgIn LEG Investments v. Boxler, the parties were 50% co-owners of a house on the water in Carnelian Bay. LEG was a general partnership, and Eppie Johnson (founder of Eppies restaurants and Eppies Great Race, the world’s oldest triathlon) was the general partner. The co-owners had a Tenant-in-Common Agreement, which included a right of first refusal.

The Right of First Refusal Language

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Individuals create LLCs, same with corporations, for ownership and investment purposes primarily to enjoy limited liability. If you invest $10 in an LLC and someone gets a huge judgment against the LLC, the most you could lose is your investment -the $10. The judgment creditor would not be able to come after you personally to collect the balance of their judgment. However, not all LLCs or corporations have assets from which a judgment may be collected. Sacramento area business and real estate attorneys are occasionally asked by clients withe judgments what can be done to go after the members, managers, directors or shareholders. As one group of LLC members recently discovered, if the LLC’s distributions to them leaves the LLC penniless and essentially dissolved, the creditor may collect from the members.

Yolo LLC attorney.jpgIn CB RICHARD ELLIS, INC. v. TERRA NOSTRA CONSULTANTS, the real estate broker was seeking their commission on sale of 38 acres in Murrieta for $11.8 million. While the broker had the property listed, the buyer made an offer. Before closing, either the listing ended or the LLC which owned the property fired the broker, it was not clear. The sale closed. A few days after the cash went from escrow to the seller LLC’s bank account, it all left the account and was distributed to the members. The broker arbitrated its dispute with the LLC (because there was an arbitration provision in the listing agreement) and obtained a judgment against the LLC. But, of course, the LLC had no money.

The broker than filed suit against the members. Its argument was in the Corporations code, which provides for liability in the event the entity has been dissolved. Applicable was the old Section 17350 (which was replaced by the equivalent section 17707.07) provides:

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Judicial reference, unlike arbitration, works within the court system. A lawsuit is filed, and the judge appoints a referee to assist in the case, or decide it on their own. Parties can agree, in their contracts, that disputes are to be determined by a general judicial reference. This means the entire dispute is to be resolved by a referee. An advantage of judicial reference over other forms of dispute resolution (read ‘binding arbitration’) is that a referee’s decision is treated like a judge’s decision for purposes of appeal. On the other hand, an arbitrator’s decision cannot be appealed for errors of fact or law, as I have railed about several times in this blog. But as some parties found out in a 2011 decision, a judicial reference provision is not a guaranty that the dispute will be decided by a referee, and parties interested in reference should consult with a Sacramento business and real estate attorney as to what is possible. In this case the California Supreme Court concluded that a judge could decline to appoint a referee if there is a possibility of conflicting rulings on a common issue of law or fact.

Sacramento judicial reference attorney.jpgIn Tarrant Bell Property, LLC v. The Superior Court, 120 residents of a mobile home park in Alameda County sued the park owners complaining that they had not maintained the common areas of the park and subjected residents to substandard living conditions. Of those residents, 100 residents’ leases had a provision that provided that disputes were to be resolved, first, by arbitration, or should the arbitration provision be found to be unenforceable, by general judicial reference. Key here is that the remaining 20 residents, 17% of the total, had leases that did not require arbitration and reference.

The plaintiffs asked the judge to order arbitration or reference, the park owners opposed either. The trail court judge refused to order arbitration or reference. The opinion does not describe why the court denied arbitration, but focuses instead on denial of reference.

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Let’s get this out of the way – the only essential terms for a real estate sale contract are the identities of the buyer and seller, the property in question, and the purchase price. Essentially, that is the law in California. Of course, the courts have found ways around the rule, but the trend of the law favors carrying out the parties’ intent once the court has determined that the parties had intended to make a contract. The courts will hear evidence of the parties’ intent to explain essential terms. (Okun v. Morton, 203 Cal. App. 3d 805) Sacramento real estate attorneys are occasionally asked about contracts in which all the standard details are left out, and asked how to enforce, or deny, the contract. When there is no time for payment specified, I always advise the “a reasonable time” is inferred, whatever that means in the circumstances. Such a situation was addressed by the Supreme Court when a tenant wanted to enforce a purchase option that was included in the lease.

sacramento real estate purchase attorney.jpgIn Patel v. Liebermensch, the tenants leased a condo in San Diego. The lease included the following purchase and sale option:

“Through the end of the year 2003, the selling price is $290,000. The selling price increases by 3% through the end of the year 2004 and cancels with expiration of your occupancy. Should this option to buy be exercised, $1,200.00 shall be refunded to you.”

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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.’

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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:

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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.