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Does selling real estate broker incur disclosure liability to buyer who relied on reference to 24 year old earthquake-zone study's statement that property was "buildable"?

property-for-sale-1-1150485-m.jpgUnder the circumstances of Saffie v. Schmeling (filed 3/7/14) E055716, the answer is no. In 2006, seller's broker posted in the multiple listing service (MLS) the listing of a commercial parcel that stated the property was within an earthquake study zone, but a fault hazard zone investigation by a licensed geologist had determined the parcel buildable. With the help of his own broker, buyer negotiated an agreeable purchase contract. During escrow, seller's broker provided a copy of the 1982 Fault Hazard Investigation report, bearing the 1982 approval of Riverside County, wherein the property was located; he advised buyer's broker to "check out" the report. Neither buyer nor his broker read the report nor investigated the issue; buyer's broker led buyer to believe the property was "ready to build," and buyer so relied in completing the transaction. After closure of the deal, buyer learned that the state of the art concerning investigation of fault hazards had changed since the 1994 Northridge earthquake, and the County of Riverside no longer accepted investigation reports that predated that earthquake. Buyer's intended use of the property was rendered impractical by the costs it would now take to make the property buildable for his purposes.

Buyer sued seller, seller's broker and his own broker. At bench trial, the court found buyer's broker liable in the sum of $232,147 for breach of fiduciary duty and negligence. Seller and seller's broker were found not liable. Buyer appealed the finding of non-liability as to seller's broker. The Court of Appeal, Fourth Appellate District, Division Two, affirmed the judgment.

Without disputing the truthfulness of seller's statements, buyer contended the statements gave the false impression that the Fault Hazard Investigation report remained valid as a basis for developing the property in 2006. The appellate court began its analysis by commenting that, while a real estate broker owes his own client fiduciary duties, the only duties owed to third parties are statutory, specifically those found in Civil Code Section 1088. There, it is stated that one is responsible for the truth of all representations made in an MLS so far as one has knowledge or should have knowledge; a broker may be found negligent to anyone injured by the falseness or inaccuracy of such statements.

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Can commercial tenant sue landlord based on inaccurate pre-lease estimates of shopping center pro-rata costs portion of its rent?

landlord.jpgIn Thrifty-Payless, Inc. v. The Americana at Brand, LLC (certified for publication 8/14/13) 2013 DJDAR 10838, plaintiff, doing business as Rite-Aid, leased commercial space at defendant's shopping center in Glendale. Prior to execution of the lease, the parties negotiated through a letter of intent (LOI). In their final LOI, defendants stated that, as a part of the rent, plaintiff would be responsible for its pro-rata share of common area expenses including property tax, insurance and common area maintenance, giving per square foot estimates of what that would be. Plaintiff questioned the amount and it amended the LOI by crossing out the estimate figure and interlineating that the budget would be provided to tenant prior to lease execution. Defendant did produce budget figures and rendered a per square foot amount; it labeled the figures as "purely estimated values." The final lease of the parties provided that plaintiff would pay its pro rata share of such expenses; no details were stated.

After its first full year of occupancy, plaintiff received the bill for its share of these common area expenses. Instead of plaintiff's share being 2.2% of the total as indicated in defendant's estimates, plaintiff ended up being charged about 5.7%, resulting in about $342,700 more than estimated.

Plaintiff then sued defendant on claims of fraud and negligent misrepresentation. It claimed these expenses were material, and that it had relied upon the estimates to evaluate the suitability of the project; that defendant had reason to believe the estimates were false, and plaintiff relied upon defendant's superior knowledge. It alternatively claimed innocent misrepresentation and mutual mistake. Defendant demurred to the complaint alleging plaintiff did its own investigation and was relying on representations not contained in the integrated final lease agreement of the parties; that its estimates were non-actionable opinions and predictions. The trial court sustained the demurrer without leave to amend, finding the figures in question were only estimates.

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In the Path of the High Speed Rail: An Overview of the Eminent Domain Process

February 15, 2013

eminent-domain-lawyer1.jpgOn January 14, 2013, California's Public Works Board authorized the California High Speed Rail Authority ("CHSRA") to begin negotiating with property owners in Madera and Merced counties for the purchase of their property needed for the first construction segment of high speed rail ("HSR") route. This action initiates a process, known as eminent domain, which is one of the most controversial powers afforded to the State by Article I, section 19 of the California Constitution. These constitutionally based powers allow public agencies, like CHSRA, to take private property for a public use. Many farms, ranches, businesses and individuals in the Central Valley will be affected by this process over the coming months. The purpose of this article is to provide a broad overview of the eminent domain process and to generally describe the rights which property owners have to ensure that they are justly compensated for their land, buildings, improvements and businesses which are located within the planned rights of way needed for the HSR project.

The CHSRA is allowed to use eminent domain powers to acquire the right of way for the HSR project because the trains will serve a public use. The definition of "public use" is extremely broad and applies to anything that confers a public benefit. Because this definition has been applied by the courts to projects of far less public significance, legal challenges by property owners located within the planned HSR right of way, on the basis of a lack of public benefit, are not going to succeed. For this reason it is likely more beneficial for owners to turn their attention and resources away from challenging the CHSRA's right to take their property, and focus instead on how much the CHSRA should pay to justly and fully compensate the owners for their property.

The California Legislature has codified the procedures to be followed for the eminent domain process beginning at Code of Civil Procedure. The procedures are strictly applied by the courts. While the statutory process includes all of the steps to follow leading to a court trial, if necessary, public agencies typically attempt to negotiate privately with the property owner and avoid court action. This is because going to court is expensive for the public agency and for the property owner. The negotiating process can often be lengthy. Like other public agencies, the CHSRA is required to first obtain a formal appraisal of the property to determine the "fair market value" of what is being taken. The initial offer from the CHSRA may not be less than the value stated in the formal appraisal. The property owner is entitled to a copy of the appraisal summary indicating the value determined by the CHSRA appraiser. In addition, the property owner is allowed to obtain his own appraisal, paid for by the CHSRA, at a cost not to exceed $5,000. Our advice to property owners is to always obtain the second appraisal.

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Arbitration covenant that runs with the land binds homeowners and their association even though neither was a direct party to the covenant

November 13, 2012

Supreme Court.jpgOne of the earlier blog articles that I wrote on this site commented on the trend of California appellate cases questioning the fairness of arbitration clauses that often left the non-drafting party without any bargaining power. While many of these situations arise in the context of disadvantaged consumers and employees directly contracting with the drafting party, the circumstance stated in my February 7, 2011 blog concerned homeowners and homeowners associations. As was stated in the opinion which was the subject of that blog, Villa Vicenza Homeowners Association v. Nobel Court Development LLC 185 Cal.App.4th 23 (2011), in spite of the provisions of California Civil Code section 1354 generally providing that recorded covenants in deeds are enforceable as equitable servitudes binding future property owners, that court resorted to the exception: "unless unreasonable." I questioned whether there was a substantial enough basis establishing unreasonableness in that homeowners had record notice of these covenants; they could simply choose not to buy these homes realizing that claims against the developer would require arbitration, waiving the right to a public trial.

The Villa Vicenza published opinion and others like it had a short "shelf-life." They were granted review by the California Supreme Court. And just this past month that case name appeared again in the published body of law, this time in a minute order of the Supreme Court stating the grant of review was vacated and the matter was remanded to the Court of Appeal to decide the matter in light of the Supreme Court's recent opinion in Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US) LLC (2012) 55 Cal.4th 223.

In Pinnacle, a homeowners association sued a condominium developer for construction defect, seeking damage to its property and damage to the separate interests of the condominium owners who compose its membership. The developer filed a motion to compel arbitration, based on a clause in the recorded declaration of covenants, conditions, and restrictions providing that the association and the individual owners agree to resolve any construction dispute with the developer through binding arbitration in accordance with the Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.).

The Supreme Court granted review to determine whether the arbitration clause is binding on the association, and if so, whether it must be invalidated as unconscionable. The high court determined that, even though the association did not exist as an entity independent of the developer when the declaration was drafted and recorded, it is settled under the statutory and decisional law pertaining to common interest developments that the covenants and terms in the recorded declaration reflect written promises and agreements that are subject to enforcement against the association. The court concluded that the arbitration clause binds the association and is not unconscionable


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Triable issues of lender fraud requires reversal of summary adjudication of claims for damages caused by foreclosure

September 27, 2012

Foreclosure.jpgThe general history of the instant foreclosure is all too familiar. Home loan borrower starts with a low adjustable rate loan based on now-bygone high home values. The interest adjusts in a few years to more than twice the original rate, more than doubling the homeowners' payment on a home that now is substantially "underwater" due to decreased home values. Eventually, the lender itself goes under and is replaced by a successor.

In Ragland v. U.S. Bank National Association, Inc. (filed September 11, 2012) 2012 DJDAR 12769, we have the added facts that the borrower, Pam Ragland, had remained current on her mortgage obligation up to April 2008, when she spoke about loan modification to a lender representative who told her she would have to get "behind" on her loan in order to modify the loan. Additionally, Ragland had executed her note after complaining that her signature had been forged on other loan documents (confirmed by a handwriting expert). She thought this part of her loan history justified her request to have the lender waive the normal modification fee. The rep said he would get back to her. As she was not certain she wanted to miss her loan payment and apply for a modification without further assurances and she did not hear back at the time for her to make her April 2008 payment without incurring a late charge, she called the rep again. He referred her to his supervisor who stated that if any documents in her loan packet had been forged, she may not be responsible for anything in her loan. She was advised not to pay anything while the legal department investigated.

By late April 2008, Ragland received a delinquency notice from the lender. She immediately called and was advised by two separate reps not to worry because collection activity was frozen. Still nervous about all of this, she attempted to transmit a loan payment, which was refused by the lender. On May 5, 2008 she received a notice of foreclosure. Yet another call to the lender was responded to: legal department will get back to you. Predictably, she did not hear back and instead was greeted by another letter in early July 2008 that advised foreclosure was under way. She again got the "runaround," being told her situation was not properly flagged with legal and the foreclosure would be on hold. She again tried to make mortgage payments, three in this instance, which were again rejected. The foreclosure went forward and she filed her lawsuit.

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Doctrine of boundary by agreement: good fences don't make good neighbors absent an agreement.

September 17, 2012

fences.jpgWith apologies to Robert Frost and his poem "Mending Wall," there might be a circumstance when a good fence does make a good neighbor: that is where the fence marks an agreed-upon boundary between two neighbors. In Martin v. Van Bergen (filed September 6, 2012) 2012 DJDAR 12577, the Van Bergens contended the fence that had been built between the Van Bergens' property and that of the Martins defined the boundary between the two properties because their predecessors who owned the two properties when the fence was built created a "boundary by agreement." The Court of Appeal, Second Appellate District, Division Six, recognized this doctrine, but found one all too obvious element missing in the Van Bergen's proof: an agreement. It affirmed the quiet title judgment in accordance with the Martins' survey of the true boundary.

The Martins own a 240-acre parcel in Paso Robles that include their residence and a vineyard. The Van Bergens own a contiguous property consisting of their residence and an almond orchard. A fence runs over Martin's parcel for a portion of the 1300 feet parallel to the boundary. The area between the boundary and the fence has almond trees farmed by the Van Bergens, encroaching on the Martin parcel. The almond orchard was planted in 1947; the Van Bergens' predecessor-in-interest was assisted by Martin's predecessor, who possessed some survey equipment, in the planting. No one recalls any survey equipment actually being used; the "deer" fence constructed at that time marked the extent of almond trees simply replacing and matching the location of an old fence used to contain cattle.

In 2005, upon acquiring their property, the Martins had professional surveyors perform a survey for them. The survey established the boundary as showing the Van Bergen orchard and fence encroached on the Martins' property. The boundary indicated that 8 to 10% of the Van Bergens' almond crop was being grown on the Martins, property. The Van Bergens sold only about 25% of their crop commercially. The Van Bergens also had a professional survey performed which showed the boundary line to be different than both the fence line and the Martins' survey.

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Real Estate Recovery Program provides recovery for broker's fiduciary breach if factual findings supporting judgment state conduct constituting deliberate fraud

real estate broker.jpgCalifornia Business & Profession Code section 10471 is a "remedial statute intended to protect the public from loss resulting from unsatisfied damage awards against licensed real estate personnel." (Doyle v. Department of Real Estate (1994) 30 Cal.App.4th 893.) It is punitive in the sense that an agent's license is immediately suspended if the state pays from the fund and that license will not be reinstated until the payment is paid back in full. It is limited in that it only applies to an unsatisfied judgment for intentional fraud.

In Worthington v. Davi (G045537, filed August 7, 2012), plaintiffs arbitrated three transactions claiming breach of fiduciary duty and one transaction claiming fraud committed by their real estate broker and others, and received a total award of $280,000. The award was confirmed in a judgment which went unpaid. Plaintiffs applied to the state's Real Estate Commissioner for recovery from the 10471 recovery fund. The Commissioner allowed recovery of $50,000, allowing recovery only on the "fraud" transaction, and disallowing the other three.

Plaintiffs applied to the trial court for an order directing payment of the judgment from the recovery fund as to the remaining three transactions. The trial court ordered payment on two of these three. On these three transactions, the arbitrator did not expressly state the award was for "fraud." The trial court found that in two of these transactions, there was a breach of fiduciary duty resulting from fraudulent transactions. However the remaining fiduciary transaction involved no sufficient stated showing of fraud. Both sides appealed.

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Full price offer does not invoke offering real estate broker's contractual right to commission

Real Estate.jpgThere are times when real estate brokers will claim entitlement to a commission, even though the sale of the real property in question has not been completed. One such case is presented in RealPro, Inc. v. Smith Residual Company LLC (filed February 28, 201) 2012 DJDAR 2655.

Defendant listed its vacant land for sale with its listing broker on the following terms: $17 million cash or such other price and terms acceptable to defendant and additional standard terms; a cooperative broker may enforce the listing agreement as a third party beneficiary (4% total commission). Within the listing period, plaintiff broker submitted to the listing broker a written offer to purchase the property for the full price of $17 million, all cash. About one month later, defendant responded with a counteroffer of an increased listing price of $19.5 million. The counteroffer was not accepted. Plaintiff eventually demanded its 2 percent brokerage fee and sued defendant for refusing to pay.

In Riverside Superior Court proceedings, defendant demurred on numerous grounds including condition precedent: that the listing price was alternatively such other price and terms acceptable to owner and escrow must close prior to payment of any commission. The trial court sustained the demurrer without leave to amend. The Court of Appeal, 4th Appellate District, Division Two, affirmed, concluding that the allegations of plaintiff's action established as a matter of law that there was no enforceable written contract entitling plaintiff to a commission.

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Home Construction Defect Case Prelitigation Procedure Under California Civil Code Section 914 Backfires on Homebuilder Drafting Its Own Contract Provision

In 2002, hoping to reduce construction litigation and the impact on housing costs, the California Legislature enacted Civil Code sections 895-945.5 that included a nonadversarial prelitigation procedure requiring home purchasers, who believe their home may be defective, to give the builder notice of the claimed defects and an opportunity to investigate and repair the defects prior to the homeowner being allowed to bring a lawsuit. Section 914, subdivision (a), allows the builder to provide in the home purchase contract an alternative procedure to that provided by statute so long as the alternative procedure is "fair and enforceable."

In Anders v. Superior Court (filed February 7, 2011) 2011 DJDAR 2137, the homeowner petitioners, owners of 54 homes built by real party Meritage Homes, filed their lawsuit for alleged defects without exhausting the prelitigation procedure. Meritage moved in the trial court to require the procedure it had prescribed in its home sale contracts. The Stanislaus County trial court found the particular procedure set out in the contracts unconscionable and unenforceable; however the court found it appropriate to require the homeowners to comply with the statutory prelitigation procedures. The homeowners petitioned the California Court of Appeal, Fifth Appellate District, to be relieved of this prelitigation requirement claiming the unenforceability of the builder's contractual procedure exempted them from having to comply with the statutory procedure. The appellate court agreed with the homeowners, with the exception of two homeowners whose contractual provision contained an election to use the statutory procedure.

The Court of Appeal points to the plain language of the statute that stated the builder's election was binding regardless of the success or unenforceability of the builders own contractual provision; that the builder waives the statutory provision by so electing. The trial court tried to take a practical approach, in the appellate court's view, by thinking the statutory procedure "would not harm them (the homeowners) and might be beneficial." But the problem with that thought, as is correctly noted by the appellate court, is the statute absolutely precludes such recourse.

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Interpreting California Civil Code Sections 1354 & 1468: Recorded Real Estate Covenants, Conditions and Restrictions (CC&R) Trump Contract

February 14, 2011

In the last posting concerning the Villa Vicenza case, I discussed how the appellate court there refused to enforce a CC&R, asserted under Civil Code section 1354. In this posting, I discuss Monterey/Santa Cruz County Building and Construction Trades Council v. Cypress Marina Heights LP (filed January 10, 2011) 2011 DJDAR 1324, in which the 6th District enforces a CC&R provision, recorded by a prior landowner/developer, against a developer who later acquires the property (not the immediate successor) and who, among other defenses, claims its contract to develop the property does not require compliance with the "prevailing wage" term of the CC&R's.

The Fort Ord military base was closed and being redeveloped into a residential community. The City of Marina's Redevelopment Agency worked with the Fort Ord Reuse Authority (FORA) to acquire the property for nominal consideration. FORA adopted a master resolution (that was incorporated into an implementation agreement with City) that had a chapter entitled "Public Works Contracts" that included a provision that required any developer entering into an agreement with FORA to develop the property to pay prevailing wages to construction workers. When FORA gratuitously transferred ownership to City, this prevailing-wage requirement was among the restrictions recorded as "running with the land." City later conveyed the property to Cypress Marina Heights (CMH) for market-value consideration for CMH to develop; this purchase agreement did not require payment of the prevailing wage. Plaintiffs, representatives of local construction workers, sued CMH for declaratory and injunctive relief requiring CMH to pay prevailing wage on this project. Trial court granted plaintiffs summary adjudication and the appellate court affirmed.

Among its contentions on appeal, CMH argued that the FORA/City deeds did not actually bind successors-in-interest (as the covenant appears to be directed only at those directly contracting with FORA) and that City did not put the prevailing wage requirement into its contract with CMH. The appellate court disagreed, finding that the recorded deed language was not susceptible to CMH's interpretation, that the covenant stated it "ran with the land in perpetuity" and that the city's covenant in the deeds expressly stated that it covenanted "for its successors," as well as itself; the covenants thus facially complied with Civil Code section 1468 (the "double covenants" section of the code that parallels with section 1354).

As a former California Court of Appeal Justice, I don't quarrel with this reasoning that the recorded covenant was binding as complying with the statute. What is interesting is the contrasting policy and interpretive views taken here in comparison with Villa Vicenza. There it appeared the court side-stepped Civil Code section 1354, or at least determined that to enforce the covenant under that statute was "unreasonable," in finding the legislature could not have possibly meant to allow developers to have the continuing and irrevocable right to enforce an arbitration covenant against homeowners with whom they did not directly contract. It sounds like a developer gets the short end of the stick whether it is the party asserting or denying that the covenant should be enforced because, as a matter of policy, a developer should know better.