Articles Posted in real estate law

I noted in a prior real estate law blog what the steps the government must go through to take property through an eminent domain proceeding. A recent court decision reported by Rick Daysog in Sacramento County requiring the city of Rancho Cordova to pay the Lily Co. $7.9 million for its property illustrates the variation that can occur in determining fair market value.

First off, both the California and U.S. Constitutions require that parties that lose their property to an eminent domain proceeding receive just compensation. This compensation will place the owner in the same economic position that he would have occupied had the property not been taken. However, the property is not valued as to its worth to the owner or government, but what it is worth in the marketplace. Fair market value is the highest price a willing buyer would pay a willing seller, where neither party is under any particular necessity nor rush to do so, and who have full knowledge of all the possible uses of the property. Special value to the owner is not considered. Arguing fair market value with the agency often requires the owner get their own appraisal and consult with an experienced Sacramento real estate lawyer.

The fair market value cannot include any change due to the government project. For example, a new sports arena may increase the value of nearby land, but the government’s plan to build one is not taken into consideration in determining value.

Eminent Domain is the legal process in which the government takes property without the owner’s consent, but with payment of compensation. It is a common practice in California, as seen in Sacramento in both the Hazel Avenue improvement project and Madison Avenue improvement project.

Projects like these include “right of way acquisition” which means getting the property through voluntary sale or legal process. There are specific statutory steps the government agency must take in this process once it identifies the property it needs, as follows.

1.The Agency must first obtain an appraisal of fair market value.

In California, the rules regarding adverse possession and prescriptive easement are well established.

A recent decision regarding commercial property in Irvine addressed the one rare situation in which payment of taxes IS required to establish a prescriptive easement; in this case however, payment of taxes was not needed to establish the easement.

The Plaintiff in Main Street Plaza v. Cartwright and Main LLC owned a retail center. One defendant owns the adjacent property. Behind the two parcels is an alley. The second defendant owns the property behind the other two, on the other side of the alley. The property lines were in the middle of the alley. To make it interesting, down the alley there was a no-longer used easement owned by a railroad for only “railroad purposes.”

Lenders on commercial properties usually require a Deed of Trust that gives them an assignment of rents and profits. The idea is that, if the borrower defaults, the lender is entitled to all rents and profits which have accrued and are collected after the default. Profit is short for” profit-à-prendre“, middle French for right of taking, meaning a right to go on property and take natural resources, such as timber, crops, or minerals.

This assumes that the borrower has leased the property and has something to collect. The frustration of small and moderate commercial lenders is with the knowledge that, while they are not getting paid, the defaulting borrower is collecting cash from its tenants. Enforcement of the assignment of rents clause can provide some satisfaction.

The enforcement of the rents and profits assignment is governed by California Civil Code section 2938. It requires that the assignment must be perfected by recording. And it provides lenders four ways to enforce assignments of rent, summarized as:

A recent decision granted a judgment to a neighbor for a fire in Santa Clara County. The plaintiff owned several original documents written by Albert Einstein; the plaintiff’s father & Einstein were friends. To go through the papers, the plaintiff had brought them to his get-away trailer parked on rural land near Henry Coe State Park. The defendants were co-owners of the 400 acre property where the fire started. On this property they had a 55 gallon drum they used as a burn barrel. The naughty party started a trash fire in the barrel, left it unattended, and started the 48,000 acre Lick fire.

There were numerous owners of the 400 acres; one defendant, who suffered a $750,000 judgment, owned only 2% and claims he did not know he owned an interest until he was served with the lawsuit. Apparently the jury was convinced that all the owners were aware of the burn barrel and the dangerous condition it created, and that owners other than the fire-starter should be liable.

What are the legal principals involved in such a decision? As summarized in a 1955 decision, Reid & Sibell v. Gilmore & Edwards, the general rule is that ‘A possessor of land is required to make reasonable use of his premises which causes no unreasonable harm to those in the vicinity, either by reason of the character of the use itself or because of the manner in which it is conducted.’ A landowner has a right to be free of unreasonable risk in the enjoyment of his property. This places a duty on others to not cause such unreasonable risk. Here, a finding that the fire starter acted negligently established that the risk of interfering with the neighbor was unreasonable.

A “Power Coupled With An Interest” is an ancient legal concept that is different from an ordinary power of attorney. A power of attorney gives the attorney-in-fact or agent (the holder of the power) the ability to act on behalf of the principal, who is the person who granted the power. However, in the case of a power coupled with an interest, the agency is created for the benefit of the agent in order to protect some title or right in the subject of the agency or secure some performance to the agent. This kind of power is not an agency as the term is commonly understood. Instead, the grantor or creator of the power relinquishes the ability to direct the attorney in fact, who is then permitted to act solely in his own interest. This type of power is to protect the agent’s interest. It does not create an agency, because it is not given for the benefit of the person who grants it. The holder does not owe any duty to the creator. Experienced real estate attorneys see this situation when a developer obtains an option to buy property, and also receives a power of attorney to pursue the development entitlement process.

The power and the interest must be united in the same person. If a power of attorney is granted to Fred, but an option to Susan, there is no power coupled with an interest. Recently some Sonoma County developers discovered that it is easy to terminate a power by uncoupling it. In Bonfigli v. Strachan, the developers’ limited partnership (“LP”) obtained an option to buy real property. The LP also received a special durable power of attorney coupled with an interest, granting the LP the right to rent, encumber, grant easements, and other things necessary to develop the property.

The LP then assigned the option to their construction company LLC. The LLC did not exercise the option, but did file a lot line adjustment with the City. The adjustment was completed. The developer also used the property as collateral for a loan.

A California mortgage lender does not owe fiduciary duty to a borrower; a mortgage broker does. The difference is substantial, and a loan officer in Ventura County learned the hard way. A fiduciary duty is a duty of both loyalty and good faith.

Borrower Tonya contacted loan officer Anthony in response to an advertisement. She had existing first & second loans, and wanted a home equity loan (HELOC). Anthony told her could shop the loan. However, he later said she did not qualify for a HELOC because her credit scores were too low. He said he had ‘shopped’ it with more then one lender, and that they looked at every lender that offered a HELOC that they were able to process. (Here’s a key to the story- this was to be a NO DOCS loan). He recommended refinancing into a new $700,000 first, with an interest margin of 3.85 over the indexed rate, which she did. It was agreed that there would not be a prepayment penalty, but one got slipped in on a rider, a surprise every experienced Sacramento Real Estate Attorney has seen in their practice before.

Eventually Tonya got wise and sued. Her expert testified that the interest she paid was astronomical, and she could have obtained a loan with a much lower rate, the present value of the difference being $72,187.17. Plus there would be no repayment penalty. Now she cannot refinance because she cannot provide documentation of income- she needs a no docs loan, but no one does that anymore!