Articles Posted in real estate law

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A landlord or lessor does not have any possessory interest in the property during the term of the lease. That is the nature of a lease – the owner transfers the right to possession to the lessee. But what if, during the lease term, a third party trespasses on the property, in a way that may create a prescriptive easement?

Under California real estate law a prescriptive easement requires the trespasser showing that they have used the property “for the statutory period of five years, which use has been (1) open and notorious; (2) continuous and uninterrupted; (3) hostile to the true owner; and (4) under claim of right.” In this situation, the issue is the five year period. Real estate attorneys advise owners that the way a property owner cuts off a possible prescriptive easement is by filing a suit for trespass or ejectment. But an action for trespass is designed to protect possessory –not necessarily ownership–interests in land from unlawful interference. As the landlord does not have a right to possession during the lease term, he may not bring an action for trespass.

El Dorado trespass lawyer.jpgThis was the problem presented in a recent decision, where the court found that numerous lease terms ended of the course of the prescriptive period; in one instance the property did not have a tenant for over a year. If the owner never had a possessory right during the prescription period, he had a defense to the prescriptive easement claim. However, in this case, the lessor / owner did not have a tenant the entire period, so the court concluded it should have taken action to prevent the trespassing use. Parties in such situtations may want to consult an experienced Sacramento and El Dorado real estate attorney.

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The Marketable Record Title Act (MRTA, Civil Code section 882.02+) was enacted so that ‘ancient mortgages’ would not last forever. Prior to the act, lost or forgotten mortgages and deeds of trust would continue to be a cloud on title. The MRTA became law in 1982 to put an outside limit on the number of years that the power of sale in a deed of trust may be executed. The MRTA provides that if the “evidence of indebtedness” recorded with the county recorder contains a reference to the maturity date of the secured debt, the right to foreclose by private trustee’s sale will expire 10 years after maturity. If no date of maturity is provided, the limit is 60 years after recordation of the deed of trust. The trustee’s deed must be recorded before the time is up. The limit to conduct a judicial foreclosure, however, is much different. Civil Code section 2911 provides that a lien is extinguished by the lapse of time within which, under the provisions of the Code of Civil Procedure, an action can be brought upon the principal obligation. Generally, this means four years after maturity or breach of a written note.

marketable title attorney.jpgThe beneficiary can extend the time by recording a “notice of intent to preserve interests” prior to the expiration of the prescribed time period. If this notice is timely recorded, the period is extended until 10 years after the notice is recorded. Civil Code section 880.310(a), 880.020(a)(3). If one has a concern about the limitations of their deed of trust, they should consult a Sacramento and Yolo county real estate attorney.

Prior to a 2006 amendment, the statute required the maturity date be “ascertainable from the record…”. This resulted in an issue which had been raised several times, and courts have had varying opinions about, namely, what happens if a Notice of Default is recorded? One decision found that this triggered the 10 year statute. Another court has said it did not. A third decision, from the Third District Court of Appeal (which includes the greater Sacramento area), found that it did not trigger the 10 year statute. The statute was amended in 2006 to resolve this issue, essentially providing that a Notice of Default does NOT trigger the limit. The discussion which follows concerns the 3rd District decision, and why interpreting the older language to allow the NOD to trigger the limit would be preposterous.

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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;

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California commercial tenants sometimes need to sublease their premises, or assign the lease. Without fail, they remain liable to the property owner for the lease, in the event that the subtenant does not perform. Breach of the lease does not automatically terminate it – the owner must exercise its right to terminate the lease. But what happens if the sublessor files for bankruptcy protection? In bankruptcy the bankrupt sublessor has 60 days to “assume” the lease. (Bankruptcy Code section 365(d)(4). In the 9th circuit Federal Court (covering California), if the lease is not assumed, the bankrupt owner’s right to possession under the lease ends. (In re Lovett 757 F.2d 1035) The master lease no longer exists, extinguishing all subordinate rights, such as a Sublease. Suddenly, the sub-tenant no longer has a lease, and is out in the cold. The California Court of appeal decision discussed below adopts this rule. Parties considering a sublease may want to consult with a Sacramento real estate attorney. A solution to the disappearing sublease may be, at the time of entering the sublease, for the subtenant to enter a non-disturbance agreement or option to enter a new lease with the property owner.

sacramento sublease attorney.jpgIn 366-386 Street LP v. Superior Court (Monro), Paem was the assignee of the lease for Rosebud’s English Pub on Geary in San Francisco. In the assignment transaction, Paem gave to the assignor a note and deed of trust, secured by the business. Paem filed Chapter 11. The bankruptcy court rejected the lease, and thus the debtor (and trustee) no longer had any right, title, or interest in the lease. This extinguished the assignor’s security interest in the lease.

The Assignor then filed a state court action, seeking relief from forfeiture of its security interest under Code of Civil Procedure section 1179. This section provides that The court may relieve a tenant against a forfeiture of a lease whether or not the tenancy has terminated, and restore him or her to his or her former estate or tenancy, in case of hardship, as provided in Section 1174.

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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.

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Code of Civil Procedure §726 is referred to as the “one action rule,” and the “security first rule.” It provides that, where there is a debt secured by real estate, there may only be one form of action to collect the debt, and that remedy is foreclosure. If it is through a lawsuit for judicial foreclosure, with some exceptions the lender may also obtain a deficiency judgment in that same action. If the lender conducts a non-judicial trustee’s sale, it is barred from collecting for the deficiency. On its face the rule is simple, but what if either the borrower, or the real property, is not located in California where section 726 applies? In that case, lenders and borrowers should consult with a Sacramento and El Dorado real state attorney, as there are numerous statutes and court decisions that cover the issues in this area. One such issue is where the lender gets a deficiency judgment after foreclosure of out of state property. Another issue, discussed here, is where the foreclosure is out of state, but the lender wants to sue for the balance in California. In this case, 726 does not apply.

Yolo real estate attorney one action rule.jpgIn Felton v. West ((1894)102 Cal 266), both parties lived I n California. Felton loaned West over $90,000, and West signed a promissory note, which was secured by property West owned in Oregon. West didn’t pay the loan, and there was a foreclosure sale of the Oregon property. The sale price did not cover the debt, so the lender sued the borrower, in California, for the balance, about $44,000.

Defendant argued that section 726 barred the action. As there was a prior action in Oregon to recover for the same debt, section 726 prohibited the California action- after all, there can be only “one form of action…,” and that already occurred in Oregon.

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A Loan Guaranty is a promise by the guarantor to pay the debt of another. In commercial real estate loans they are commonly used to provide additional security to the lender. Such loans are often given to new entities without a financial history, and the lender wants a person (with assets) on the hook for the debt if the entity fails. Last week I discussed a decision where the guarantor excluded a house from liability on the guaranty, but when he sold the home, the cash proceeds could be grabbed by the creditor. This article concerns the scenario in which the guarantor can escape liability, if the it turns out that they signed what courts consider a “sham guaranty.” This could arise due to deliberate action by the lender, insufficient investigation by the lender, or inartfully worded guaranty language. Parties concerned about what exactly their guaranty covers should consult with a Sacramento real estate attorney.

sacramento loan guaranty attorney 1.jpgCivil Code section 2787 provides that a “guarantor is one who promises to answer for the debt, default, or miscarriage of another…” What has become known as a sham guaranty is one where the guarantor is found to be the same as the borrower. The clearest case is where an individual signs a promissory note promising to pay the debt. The lender requires the same individual to sign a guaranty for the same debt, waiving many defenses. For example, there are statutory anti-deficiency protections for real estate borrowers, prohibiting the lender from collecting from the borrower. These protections are not extended to guarantors, and loan guaranties usually have waivers of all these defenses. In the sham guaranty the lender may think that by having the same borrower guaranty the loan allows for a deficiency judgment against the borrower as guarantor. Or, it may be used in hopes that the borrower/guarantor does not understand, and truly expects to be personally liable for the debt.

The sham guaranty defense extends to partnerships. In a general partnership, where each partner is already liable for debts of the partnership, their guaranty of partnership debt would be a sham. For Limited Partnerships, the same could apply to the general partner. River Bank America v. Diller is instructive, in a case where the principals of the corporate general partner signed the guaranty. The Bank wanted the borrower to form a limited partnership to be the borrower. A new entity was formed to be the general partner. The lender always considered the individuals as the primarily obligors, and had them guaranty the loan. The lender did not investigate the financial health of the new entity created to be general partner. The court found that, had the individuals themselves been the general partners, and had they attempted to guarantee the debt, there is no question such guaranty would have been a sham. Instead, the general partner of the primary obligor is a corporation which the individuals fully owned and controlled. However, the court found that this was a distinction without a difference. (The court was influenced also by evidence of the lender’s intent to subvert the antideficiency protection.

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Loan guaranties are contracts in which the guarantor promises to pay the debt if the principal debtor fails to pay. This is not what happens when someone thinks they guaranteed a home mortgage loan for their son or their significant other- they are usually equally liable on the loan. A guaranty more routinely shows up when an entity, such as an LLC or corporation, borrows money or signs a lease. The lender or landlord wants the individuals involved to guaranty the debt. If the guarantor has substantial assets, the lender may allow them to carve out some assets from being available for collection, such as their residence. Loan guarantors should consult with a Sacramento real estate and business attorney to closely review the terms of their guaranty so that they understand what their liability is. In a recent case (which was the first published opinion on the issue in the U.S.), the guarantor excluded a house from liability. He sold the house, and was surprised when the court ruled that, while the house was not attachable to pay the debt, the proceeds of the house (cash from the sale) were not excluded, and could be grabbed by the Lender. That the house was on Lake Como tells you that this was alota cash.

sacramento loan guaranty attorney.jpgIn Series AGI West Linn of Appian Group Investors DE LLC, Series loaned $3.1 million to a limited partnership which was developing a market in Oregon. Robert Eves, the developer, guaranteed the loan. The lender had Eves sign a Loan Guaranty, which provided:

” The following assets are excluded from the Robert J. Eves personal Guaranty: … The personal residence of Robert J. Eves at Via Regina, 27 Moltrasio, Como, Italy and its contents.”

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Mortgage loan brokers have a duty to mitigate the risk of possible loan fraud in California. The extent that title insurance would do this is a topic for another day, but brokers routinely arrange for title insurance for their lenders. Another protection against fraud is to have signatures notarized; at least the person signing has proven their identity. In a perfect storm for one mortgage Broker, it was the notary committing the fraud, and the trial court judge would not let them submit evidence that they got title insurance to help protect the lender against such acts. The judge claimed that the collateral source rule required the evidence be kept out. With this evidence barred, the Lender hammered the jury with claims that the Broker was negligent and breached its fiduciary duty, and the jury agreed. The appellate court did not.

El dorado real estate lawyer.jpg In Bryan Chanda V. Federal Home Loans Corporation, Chanda was a money lender and Federal was a private mortgage broker. Barker was the office manager for the owner of a commercial building in El Centro. Barker was also a Notary Public. Barker contacted Federal requesting an equity loan of $165,000 on behalf of the owners of the building. Federal’s loan officer wanted to arrange to meet with the owners so that they could sign the note and deed of trust, but Barker said one of the owners was not available. But, she would be happy to take the documents and get their notarized signatures. Barker then forged the signatures, and notarized them. Sacramento real estate trial attorneys rarely see fraudulent notarizations, but when they do, the notary is usually long gone.

Six months later, Barker asked for a larger replacement loan of $480,000. She again forged and notarized the signatures. The property owners learned about the fraud (no indication whether or not Barker had skipped town yet), and sued everyone. A forged deed of trust is not effective (though they can win out over unclean hands). The lender cross-complained against everyone, including Federal for negligence and breach of fiduciary duty. All parties and claims settled, except the lender’s claims against the Broker.

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My last post discussed the relative hardship doctrine in California real estate law. This doctrine provides that, once the court determines that a trespass has occurred, the court conducts an equitable balancing to determine whether to grant an injunction prohibiting the trespass, or whether to award damages instead. If the court determines that it will award damages and not disturb the trespass, it essentially gives the trespasser an easement, which may allow exclusive use. This result differs from the law on prescriptive easements, which prohibits granting exclusive prescriptive rights. This blog discusses how it differs For a better understanding, a party with questions should consult with a Sacramento and El Dorado real estate attorney.

ElDorado real estate attorney.jpgIn the decision of Hirshfield v Schwartz, One neighbor in Bel-Air mistakenly encroached on the other neighbor’s property in installing a strong block wall in front, and in the rear, extensive underground water and electrical lines, and several motors (for the pool and waterfall) underground in a concrete and iron enclosure. The judge balanced the hardship to the trespasser to move these items, vs. the harm to the victim, and decided that they did not need to be moved. The trespasser was to compensate the victim instead. In doing so, the judge granted the trespassers an interest in the neighbor’s property, which it called an ‘easement.’ The victim appealed, claiming that this is contrary to the decisions in several prescriptive easement cases, which hold that such an exclusive easement is an unlawful remedy in boundary disputes.

The appellate court disagreed with the prescriptive easement characterization, and thus those decisions were irrelevant. Here’s why.

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