Articles Posted in Contract

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In a sales transaction, there is often included a guaranty, where one party guarantees to pay the debt of another. More accurately, a guarantor is “one who promises to answer for the debt, default, or miscarriage of another, or hypothecates property as security therefor.” (Civil.C. 2787). Thus if you buy a business or real estate, and the seller is concerned that you might not be able to pay for it, the seller may want someone with a stronger balance sheet to guaranty the debt. When a dispute arises, Sacramento business and real estate attorneys question what exactly was guaranteed, and if the guarantor was exonerated. Exoneration can occur if the creditor or seller does something that changes the terms of the deal without the guarantor’s approval. Both issues arose in a recent decision concerning the sale of a motorcycle dealership.

Sacramento-real-esate-loan-guaranty-attorneyIn G&W Warren’s Inc. v. Judson V. Dabney II, the Warrens sold their dealership to Dabney. The paperwork starts with a master “Asset Purchase Agreement.” This incorporated by reference …

– (1) a promissory note in the amount of $1,016,000 signed by Dabney as Maker;

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The Statute of Frauds requires certain agreements to be in writing. The reason is that these agreements are too important to allow oral agreements, as they are susceptible to fraud. It is codified in Civil Code section 1624, and also applies to agreements for real estate commissions, about which the Supreme Court has said that a “broker’s real estate commissions agreement is invalid unless the agreement `or some note or memorandum thereof, is in writing and subscribed by the party to be charged or by the party’s agent.'” But what happens when not everyone who should sign does? Parties may need to consult with a Sacramento real estate attorney, because a dispute may result that the contract is not valid. I have never seen a matter where a real estate broker did not require ALL the parties on title to sign a listing agreement, but that was the case in a February decision regarding a listing agreement signed in 2013 – they waited four years to get a result, which is why, in my experience, everybody must sign. In this case, in a decision that combined the statute of frauds, the equal dignities rule, and the parole evidence rule, the broker lucked out…

Sacramento-Statute-of-frauds-attorneyIn Bernice Jacobs v. John Locatelli as Trustee, Jacobs was the broker looking to sell vacant land in Marin for over $2 million dollars. The broker Jacobs signed, as did Locatelli. However, there were blank signature lines for five other people, five other owners.

Right above Locatelli’s signature line is the notation “Owner: John B. Locatelli, Trustee of the John B. Locatelli Trust,” with his title listed as “Trustee.” As mentioned above, while there were signature lines for the remaining owners, they were left blank. However, at the very top of the agreement, “Owner” is defined (with emphasis added) as “John B. Locatelli, Trustee of the John B. Locatelli Trust, et al.” “Et al.” clearly means, in this context, “and others.”

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There is a difference between an “Agreement to Agree” and an Agreement to Negotiate the Terms of an Agreement. An agreement to agree is not an enforceable contract, and thus there is no duty to negotiate. In the case of the agreement to negotiate, failure to reach the ultimate agreement alone is not a breach of the agreement to negotiate. Only if the failure is due to one party’s failure to negotiate in good faith is there a breach. That is because California law imposes an implied covenant of good faith and fair dealing in contracts. Parties entering preliminary agreements in expectation of further negotiations and a formal contract should be very careful how they describe that initial agreement. For example, a Letter of Intent regarding purchase of real property may be interpreted as containing a duty to negotiate in good faith, unless the Letter expressly disclaims such as agreement. The Agreement should also include waivers of the implied covenant of good faith and fair dealing and damages, and state that it does not create an obligation to negotiate. A party considering a Letter of Intent in a large real estate transaction may want to consult with an experienced real estate attorney to be sure the Letter describes what their actual intent is.

sacramento-letter-of-intent-attorneyIn one case a letter to the plaintiff from the defendant began: “ It is a pleasure to draft the outline of our future agreement ….” After outlining the terms of the agreement, the letter concluded: “If this is a general understanding of the agreement, I ask that you sign a copy of this letter, so that I might forward it to Corporate Counsel for the drafting of a contract. When we have a draft, we will discuss it and hopefully shall have a completed contract and operating unit in the very near future.” (Beck v. Am Health) The court concluded that it was an agreement to agree, because the language of the letter showed an intention that no binding contract would exist until there was a formal contract.

When parties begin the negotiation process with no obligation to do so, they do not have a duty to negotiate in good faith. It is only if the parties are contractually compelled to negotiate doe the covenant to negotiate in good faith become implied.

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Real Estate Purchase Contracts encountered in California are often detailed and explicit as to the terms of the deal – parties, price, escrow, when closing is to occur, time for inspections, etc. While some terms are subject to varied interpretation, rarely do Sacramento real estate attorneys encounter contracts with glaring omissions. But when they do, the question arises, is the contract enforceable? In a 2008 Supreme Court decision, the court clarified that the only elements necessary for enforceability are the seller, the buyer, the price to be paid, the time and manner of payment, and the property to be transferred. Everything else can be provided by the court based on what is usual and customary.

sacramento real estate contract attorneyIn Sunil Patel v. Morris Liebermensch, Patel was a tenant in a building owned by Liebermensch. Patel held a lease option – he had the right to buy the property under specified terms. The option purchase terms were as follows:

“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 real estate purchase and sale contracts often incur in conjunction with a written lease, such as in the case of a lease- option or both a lease and a contract entered together that reference each other. The lease-option includes a purchase contract that with instructions in the option as to how to exercise the option and make the purchase contract binding. The combo lease-contract will (at least should) be clear as to what payments are exclusively applied to the rental, and what rights the owner has to evict the tenant-purchaser. Sacramento area real estate attorneys frequently prepare these types of agreements usually in cases where the buyer-tenant cannot immediately obtain financing to buy the property outright. In a recent case with perhaps a too-complicated purchase contract, the defaulting buyer was disappointed to find out that it was really a tenant. Maybe it was complicated in order to disguise the fact from the buyer, but the court provided a guide to create such a deal while ensuring the seller can evict the buyer.

Sacramento commercial lease attorneyIn Jon Taylor v. Nu Digital Marketing Inc., Taylor was the owner and seller, Bu was the buyer. They entered a document entitled “Contract of Sale Residential Property.” It required the buyer to consummate the sale within 60 months by payment of $1.25 million. It also required (full details set out at the end of this article) that the buyer make “Probationary Installment” payments of $2,300 per month for 60 months, which covered the seller’s adjustable rate mortgage, and would increase if the mortgage adjusted. None of the probationary installment was applied to the purchase price. It also required a down payment (“additional Probationary Installment” of $500 per month. Lastly, it gave buyer immediate possession of the property and provided that if the buyer defaulted on probationary payments, the seller could serve a five-day notice.

Auburn commercial lease attorneyThe buyer defaulted, and the seller brought an unlawful detainer. The buyer claimed that it could not be evicted, because this was a contract, not a lease. The court of appeal disagreed.

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In California, equitable indemnity applies when there are two wrongdoers (‘tortfeasors’) who are both jointly and severally liable for harm to someone. They are entitled to have their liability split between them based on their comparable fault. Joint and several liability can apply to acts that are concurrent or successive or are joint or several, as long as they create a detriment caused by several actors. Equitable indemnity often arises when a person who has been harmed sues one, or both, of the tortfeasors. The tortfeasors then file a cross-complaint for equitable indemnity. Or, if only one tortfeasor is named in the lawsuit, that person brings in the second. In a prior post I discussed a case in which a real estate Buyer learned of an undisclosed easement, and sued both the seller & buyer brokers. The brokers cross-complained against each other for equitable indemnity. Ordinarily their joint liability would be apportioned at trial, but if one party settled out with the plaintiff there would be no apportionment without the cross-complaint. In a more recent decision, a defendant cross-complained for equitable indemnity in a breach of contract case. They were disappointed that the court would not stretch the doctrine that far.

Sacramento equitable indemnity attorney State Ready Mix, Inc. v. Moffatt & Nickol involved construction of marine pier. Bellingham hired Major as general contractor, and Moffatt to prepare plans. Major hired State Ready Mix to plan the concrete. Major asked Moffett to review the State concrete plan, which was not part of Moffett’s job, but Moffett agreed and did so. On the day of the concrete pour, State had equipment failure and had to add a chemical into the mix manually in a non-precise way (can you picture the laborer dumping stuff into the truck, say about 2 and a half bags of this and a third of a sack of that?). The concrete was bad, and had to be torn out and the job started over. State was sued for the cost of the concrete, and State cross-complained against Moffett for equitable indemnity.

The problem for State was that it could not allege that Moffett committed a tort. No facts were alleged that Moffett owed State a duty of care. Nor can State say that Moffett negligently performed its contract with Bellingham – review of the concrete mix was not within the scope of that 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