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Rescission of a Real Estate Contract - It is hard to Undo the Harm, But the Court Must No Matter How Difficult

October 21, 2015

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related to a real estate contract, the injured party can either seek damages, or disaffirm the contract, treat it as rescinded (called rescission), and seek damages for the rescission.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sacramento rescission attorney.jpgIn Wong v. Stoler (an UNPUBLISHED opinion), the Wongs bought a hillside home from the Stolers.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.

About four months after taking possession, the Wongs first learned about the private system through an email from a neighbor. They tried to work out a more formal association with the neighbors, and also offered to dedicate the system to the City, but nothing worked out, so they sought to rescind the contract. This lawsuit was the result.

sacramento contract rescission attorney.jpgIn rescission of a real estate purchase, the seller must refund all payments received in connection with the sale. If the buyer has taken possession of the property, the buyer must restore possession to the seller. As consequential damages, rescinding buyers or sellers may recover such items as real estate commissions paid in connection with the sale], escrow expenses, interest on specific sums of money paid to the other party, and attorney fees in appropriate. The trial court decided this was too much. The Sellers had bought a new home and spent $100,000 in improvements, and the Buyers had spent three times that on their home.

The trial court found that the sellers acted fraudulently, but denied rescission, claiming that unwinding the transaction would be impractical and too burdensome on the sellers. Instead, it required the sellers to pay for any repairs or maintenance for the next 10 years. The buyers appealed.

The court of appeal overruled the trial court. Under Civil Code section 1692, once a court has determined that the contract was rescinded, "[t]he aggrieved party shall be awarded complete relief, including restitution of benefits, if any, conferred by him as a result of the transaction and any consequential damages to which he is entitled." The fundamental principle 'is that "in such actions the court should do complete equity between the parties" and to that end "may grant any monetary relief necessary" to do so.


California real estate contract covenants can be merged in the Deed - What it takes

April 23, 2015

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.

Sacramento deed attorney.jpg
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...."
Escrow closed, and eventually the Buyer learned that there was a fault running through the property that limited its development. The Buyer claimed that, prior to entering the agreement, the Sellers had both a site plan and a geological report prepared, which both identified a fault or fault trace on the land, and which required the Sellers to relocate their winery's building pad from its original planned location in order to provide a 50-foot setback. These were not disclosed to the Buyer.

The Buyer sued, and the trial court ruled for the Seller, finding that the disclosure requirement was "merged in the deed" when the parties closed escrow. Buyer appealed. The trial court ruling was on summary judgment, meaning the court said that there was no issue of fact which a judge or jury could go either way.

In this case the deed apparently had the typical language like "For a valuable consideration, receipt of which is hereby acknowledged, Seller Grants to Buyer the following described real property in the County..." The court found it a "rather pedestrian instrument addressing only "the mechanics of transferring title" and containing a legal description of the property conveyed." It concluded that, from the face of the deed itself, it appears that not all of the terms of the contract were "merged" into the deed.

merged in the deed.jpgThe Sellers argued that the sole purpose for the disclosure covenant was to aid the buyer in doing its due diligence investigation to determine whether or not to go through with the deal. Once the buyer decided to close the transaction, it gave up any claim for breach of the disclosure obligation.

But the Buyers countered with a declaration stating that their understanding was that the covenants would survive closing. There was no agreement that the covenants and warranties would merge in the deed and be extinguished at the close of escrow. Rather, it was the buyers' intention that these provisions in the purchase and sale agreement would continue to be enforceable after close of escrow.

The court of appeal agreed with the Buyers. The declaration provided by the Buyers should be considered in figuring out the parties' mutual intent on the survival issues. Thought the purchase and sale agreement had several paragraphs that specifically provided for their own survival after close of escrow that alone does not compel the conclusion that no other provisions could survive without similar language.

I agree that there may be triable issues of fact. The fact that some of the covenants had language stating that they survive closing is a strong argument for the Sellers. But, stepping back and viewing from the distance, it appears that the Seller deliberately withheld these reports from the Buyer. The Seller had to relocate the site it planned to build on. This bad conduct may influence the factfinder enough to overcome the Sellers arguments at trial.


Shared Tahoe Vacation Home Gone Bad -When A Right of First Refusal Between Co-Owners Does Not Waive the Right to Partition

March 23, 2015

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

"If and when either Owner decides to sell their [i]nterest in the Property and that Owner receives a bona fide offer for its purchase from any other person or entity, the other Owner shall have the first right of refusal to purchase the selling Owner's Interest in the Property for the price and on the terms provided for in such bona fide offer."
If the right was refused, "the selling Owner may enter into an agreement to sell the Interest to the offeror at the price and under terms no less favorable than those set forth in the notice of offer given to the other Owner."

There were disputes between the parties immediately. Johnson complained that the Boxlers failed to clean the property and refused to pay for reasonable and necessary maintenance, landscaping, cleaning, and repairs. LEG offered to sell its interest to the Boxlers, but was declined. In 2005 LEG received an offer from a third party to buy its interest for $1.4 million. LEG, following the terms of the Tenant-in-Common Agreement, offered to sell its interest to Boxler under the same terms. Boxler refused. The sale to the third party did not close, presumably because his investigation of the Boxlers dissuaded him. LEG filed this action for Partition to sell the property, and have the court split the proceeds. Boxlers opposed, claiming the right of first refusal waived the right to partition. The trial judge agreed, but the Court of Appeals overturned the decision.

sacramento partition attorneys.jpgThe court of appeal first reviewed the law in this area. The original purpose of allowing partition was to permit cotenants to avoid the inconvenience and dissension arising from sharing joint possession of land. An additional reason to favor partition is the policy of facilitating transmission of title, thereby avoiding unreasonable restraints on the use and enjoyment of property. A co-owner of property has an absolute right to partition unless barred by a valid waiver. An agreement giving rights of first refusal to the other tenants may imply an agreement not to bring a partition action in lieu of a sale to the cotenants.

The court then noted that prior decisions have found that the right to partition had been modified by a right of first refusal "to the extent that before partition can be had the selling owner must first offer his interest to the co-owner. Upon the non-selling owner's refusal or failure to exercise the right to purchase within a reasonable time, the seller has discharged his obligation to his co-owner and he may proceed with partition..."

The apparent purpose of a similar right of first refusal was "to retain for [the original parties] control of the admission of new co-owners." Here, the Boxlers argued for a second purpose - it gave the non-seller cotenant the right to purchase the selling cotenant's interest at the price of a fractional interest. However, the court found that interpreting this tenant-in-common agreement to allow partition after the non-selling cotenant has declined to exercise the right of first refusal, and the sale falls through, would not be contrary to either of these purposes. Since the third-party offer was for a fractional interest, it would have included a discount. If the no-selling owner declined to buy it at that price, they could not complaint if the frustrated owner brought an action for partition.


Collecting A Judgment against a Bankrupt LLC - When You Can Hold The Members Liable.

October 16, 2014

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:

(a) (1) Causes of action against a dissolved limited liability company, whether arising before or after the dissolution of the limited liability company, may be enforced against any of the following:

(A) Against the dissolved limited liability company, to the extent of its undistributed assets, including, without limitation, any insurance assets held by the limited liability company that may be available to satisfy claims.

(B) If any of the assets of the dissolved limited liability company have been distributed to members, against members of the dissolved limited liability company to the extent of the limited liability company assets distributed to them upon dissolution of the limited liability company.

sacramento broker commission attorney.jpgIt was subsection (B) that the broker was looking at -over $11 million was distributed to the members. But, argued the members, this code section only applies when the corporation had been dissolved. Another section of the corporations code (old 17355, now replaced by 17707.1 ), states that an LLC shall be dissolved when it provides so in the operating agreement, when the members vote to dissolve, or a court issues a decree of judicial dissolution. None of these formal steps had occurred!

The Court of appeal said get lost. The purpose of section 17350 was designed to prevent unjust enrichment of LLC members, when the members have received assets which the LLC needs to pay creditors. Here, there was a de facto dissolution, and the broker could make the claim against the creditors. Otherwise, an LLC could be free to distribute all its assets, and then the next day vote to dissolve, with the members escaping free and clear.


Judicial Reference Better than Arbitration In California - But the reason the court can refuse to order reference

September 30, 2014

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.

The concern was that, with two groups of plaintiffs one having the lease provision and the other not, there was a possibility of inconsistent judgments:

Woodland  judicial reference attorney.jpg"Ordering two groups of real parties in interest to try their cases in separate but parallel proceedings would not reduce the burdens on this court or the parties, result in any cost savings, streamline the proceedings, or achieve efficiencies of any kind. The parties would be required to conduct the same discovery, litigate, and ultimately try the same issues in separate but parallel forums. A general reference would thus result in a duplication of effort, increased costs, and potentially, delays in resolution. Moreover, it would not reduce any burden on this Court, which would almost certainly have to hear, and decide, all of the same issues."

The Court of Appeal did not overturn the decision, and neither did the Supreme Court. The Supreme Court started with the judicial reference statutes, Code of Civil Procedure Sections 638 +. Section 638 provides that the court may appoint a referee if the parties agreement states that the dispute shall be heard by a referee. "May" is permissive, meaning that the court has discretion, even if the parties agreement states "shall," which does not allow for discretion.

Thus, the court will not follow the intent of the parties, (at least 83% of them), in refusing to enforce a provision for judicial reference that they had in their leases. The facts here, where there were 120 different lease contracts, are not common for most contracting parties. But a common scenario where the problem would arise is a real estate purchase contract. Often, when there are real estate sales disputes, the brokers are included as defendants. But, the brokers are not parties to the purchase contract. Thus, a judicial reference provision would apply only to the dispute between the buyer and seller, but not between the plaintiff and broker.


How you can determine if your real estate contract is specific enough to be enforced - what essential terms are required.

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."
The option contract did not specify the time or manner of payment, which the landlord claimed rendered the agreement unenforceable. The court of appeal decided that, while it might be reasonable in some circumstances to imply standard terms on these points into the contract, here it was not, because the seller contemplated conducting a 1031 exchange (which would have specific timing requirements) which involved serious tax consequences.

The Supreme Court disagreed, finding the option real estate purchase contract enforceable. The seller's undisclosed intentions are not considered part of the contract.

It first noted that the equitable remedy of specific performance cannot be granted if the terms of a contract are not certain enough for the court to know what to enforce. (Civ.Code, § 3390, subd. 5)

In the absence of express conditions, custom determines incidental matters relating to the opening of an escrow, furnishing deeds, title insurance policies, prorating of taxes, and the like. "The material factors to be ascertained from the written contract are the seller, the buyer, the price to be paid, the time and manner of payment, and the property to be transferred, describing it so it may be identified." However, the manner and time of payment may be determined by "reference to custom and reason when the contract is silent on the question, unless the contract includes seller financing provisions that are not sufficiently clear enough to protect the seller."

el dorado real estate option attorney.jpgThe court concluded that, since time and manner of payment are terms that may be supplied by implication, they are not material elements that must appear in writing in every real estate sale agreement. What is for sure is 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; the happen at the same time, and not without each other.

Civil Code section 1657 applies here to interpret of the contract: "If no time is specified for the performance of an act required to be performed, a reasonable time is allowed. If the act is in its nature capable of being done instantly--as, for example, if it consists in the payment of money only--it must be performed immediately upon the thing to be done being exactly ascertained. The purchase price is deemed payable upon delivery of the deed.

Thus, the case was sent back to the trial court to determine what a "reasonable time" for payment was. To determine this, the parties will have to have evidence from real estate professionals, testifying as experts, as to what a reasonable amount of time is standard in San Diego residential sales for escrow to close.


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.


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


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.


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

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

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

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

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

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

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

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

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

Alternative Performance

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

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


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

January 21, 2014

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

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

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

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

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

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

Here are the Option terms:

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


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

January 16, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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