This article explores the use of a declaratory relief action to resolve a real estate dispute before performing the contract or employing other remedies which would be expensive to reverse.

Disputes resolved before closing

A buyer is interested in purchasing an unimproved parcel of real estate on which to build a residence as allowed by zoning.

Before the buyer and seller enter into a purchase agreement, a neighbor informs the seller’s listing agent a written agreement between the prior owners of the neighbor’s property and the seller’s property prohibits the construction of any improvements on the seller’s property.

However, the agreement is not recorded and the seller was previously unaware of the existence of the use restriction. The agent believes the agreement is not binding since it was not recorded and the seller acquired the property without knowledge of the use restriction.

Before closing, the buyer is advised of the agreement and requests the neighbor’s permission to build improvements on the property.

The neighbor refuses to grant the buyer permission, claiming the agreement is a covenant running with the land which is binding on all subsequent owners, including the buyer. No one wants escrow to close due to the uncertainty that the property can be used as expected.

To resolve the dispute over the use restriction agreement, the buyer and seller join together and file an action against the neighbor for declaratory relief.

The buyer and seller do not seek to recover any money losses or property from the neighbor. They only seek a declaration of their rights and obligations under the use restriction agreement entered into between the prior owners of the contiguous properties. Also, the buyer and seller agree with the agent to an extension of their escrow period with closing contingent on a favorable result in the declaratory relief action they filed.

The neighbor claims the buyer is barred from pursuing declaratory relief since he is merely a prospective buyer with no ownership interest in the property.

However, an actual controversy exists since the use restriction could force the buyer into further litigation after acquiring the property. If the buyer were to purchase the real estate and begin constructing improvements as allowed by zoning, but in violation of the unrecorded agreement, he would expose himself to an expensive and time-consuming lawsuit with the neighbor and possibly need to remove the improvements.

Thus, the buyer is entitled to a declaration of his rights to resolve the uncertainty before buying the property and constructing improvements since the buyer holds an equitable ownership interest in the property under his purchase agreement with the seller.

Likewise, the seller is entitled to a declaratory judgment since he will also be directly affected by the outcome — the closing of the sale is contingent on the buyer’s ability to make improvements. [Reiner v. Danial (1989) 211 CA3d 682]

With a declaratory judgment, the agent is able to keep alive an otherwise dead transaction.

Preventative justice for a certain future

When one person sues another, he is typically seeking to recover something tangible — money, property or a right such as an easement.

However, controversies over the nature of rights or the interpretation of agreements frequently arise long before they produce any claims for the recovery of money or property. A prudent individual often wants to know what his rights and duties are before he undertakes irreversible actions which may result in costly litigation.

The declaratory relief statutes allow a person to obtain a declaration of his rights and obligations before an actual claim arises for the recovery of money or property, or a breach of an obligation. [Calif. Code of Civil Procedure §1060]

To expedite the resolution of controversies which could result in a future loss and litigation, actions for declaratory relief are given priority over the court scheduling of other kinds of actions. [CCP §1062.3]

When a claim for declaratory relief arises due to a performance which is already in process, such as construction or foreclosure, the contested activity is typically postponed, or stayed by the court, until the declaratory relief action is resolved.

The differing parties in a declaratory relief action often enter into a Reservation of Rights Agreement allowing them to preserve their respective claims so they can later pursue them after a court declares their rights. The purpose of the stay with reservation of rights is to maintain the status quo, such as the acceptance of loan payments on a loan in dispute, until the uncertainty is resolved by a declaratory judgment. [Wellenkamp v. Bank of America (1978) 21 C3d 943]

Thus, declaratory relief functions as a kind of preventive justice, settling controversies before they result in litigation to recover money, convey property, rescind a transaction, reconvey property lost to foreclosure or reoccupy a premise after an eviction.

No breach required for clarification

Declaratory relief is based on an individual’s right to know where he stands in relation to the adverse claims made by another person which might affect his position. If an individual is contemplating activity which he or others feel may be prohibited by law or contract, he is entitled to know whether the activity is permitted before undertaking it.

For instance, consider an owner who believes his property is no longer subject to deed restrictions against construction which were recorded many years earlier.

To know for certain whether the deed restrictions apply to him, the owner can either:

  • undertake construction activities in violation of the restrictions (but not zoning ordinances) and run the risk of a potentially expensive lawsuit; or
  • obtain a declaration from the court stating whether the restrictions are still binding before he proceeds with construction.

The owner is not required to breach his obligations before he can seek a judicial determination of his rights. Thus, the owner is entitled to a declaratory judgment clarifying his rights which will either allow him to proceed safely with his desired construction activities, or notify him the restrictions are still in effect. [Ross v. Harootunian (1967) 257 CA2d 292]

Predetermining legal results

Proceeding with activities under dubious authority without first obtaining a declaratory judgment can produce disastrous financial results.

For example, a buyer of real estate seeks to rescind his recently closed acquisition of property after grading it.

Without first seeking a court declaration of his rights, the buyer deeds the property back to the seller, called rescission. He then makes a demand on the seller to recover the purchase price and the costs of carrying the property during his ownership, called restoration.

The seller accepts the deed to the property but refuses to return any money to the buyer, claiming he physically damaged the property when he graded it in preparation for construction.

Ultimately, the buyer is unable to recover any money through restoration since he inflicted damage on the property by grading it. Thus, the buyer now has neither the property nor the money. [Grill v. Hunt (1992) 6 CA4th 73]

A declaratory judgment would have clarified whether the buyer was entitled to recover the purchase price by rescinding the transaction, and if so, the basis for valuation of the property on its return. Thus, the buyer would be able to decide whether to proceed with the rescission, which would have “restored” the property to the seller and the money to the buyer, or keep the property.

Anticipating a breach before closing?

Declaratory relief can also take the place of a buyer’s or seller’s claim that the conduct of the other party is an anticipatory breach of their purchase agreement, lease agreement or note and trust deed.

An anticipatory breach occurs when a buyer or seller in some way acts to repudiate the purchase agreement before the time for closing arrives — manifesting through words or conduct his intent not to further perform on his agreements. [Calif. Commercial Code §2610]

However, proving an anticipatory breach can be difficult since it is a claim for nonperformance before the time of performance by closing escrow has even arrived.

Thus, rather than attempting to prove a buyer or seller does not intend to perform on his agreement or close a transaction, a better remedy might be a declaratory relief action to determine if the other party’s activities constitute a breach of the agreement. With a declaration of his rights in hand, the injured party can then pursue a specific performance action or recover his money losses for a breach should escrow not close.

Rights of government agencies interpreted

Declaratory relief can be sought to interpret nearly any kind of right or obligation.

For instance, a property owner may seek a declaratory judgment testing the validity of a city zoning ordinance. [Viso v. State (1979) 92 CA3d 15]

Additionally, an owner may seek declaratory relief before entering into a transaction which may result in a tax liability to determine what his liability would be if he undertook the activity. Since tax liability does not accrue before the transaction is completed, a declaratory judgment does not illegally prevent the collection of a tax. [Honeywell, Inc. v. State Board of Equalization (1975) 48 CA3d 907]

However, owners involved in tax disputes with state government agencies have no recourse to declaratory relief once the taxes are levied. Courts may not prevent the collection of taxes which are now due to state agencies. The owner’s remedy is to pay the taxes and pursue an action for a refund of excess taxes paid. [Calif. Revenue and Taxation Code §§6931, 6932]

Interference with future events

Consider a tenant operating a barber shop who subleases a portion of the premises to a subtenant who sets up a smoke shop. The sublease grants the subtenant an option to renew the sublease contingent on the tenant renewing his lease.

The tenant arranges for his son to lease the property from the landlord at the end of the current lease term rather than renew or extend it himself. The tenant then informs the subtenant he will not be renewing the lease, and thus the sublease will be terminated at the end of the current term.

The subtenant claims the leasing of the property by the tenant’s son is merely a ploy to terminate the sublease.

No cause of action yet exists for money losses or breach of the option to renew since the sublease is still in effect and no one is seeking to evict the subtenant.

However, due to the words and conduct of the tenant, a controversy exists as to whether the subtenant is entitled to renew his sublease. The subtenant seeks a declaration of his right to renew his sublease.

A declaratory judgment is handed down by the court stating the leasing of the property by a member of the tenant’s family constitutes a renewal of the lease. With his rights established by a court order, the subtenant will be able to exercise his option to renew the sublease when the time to exercise the option arrives. [Jones v. Feichtmeir (1949) 95 CA2d 341]

Useful purpose of ending litigation

The requirements for obtaining a declaratory judgment are:

  • an actual controversy exists as to a person’s rights or duties; and
  • the controversy will likely result in future litigation if not resolved.

Thus, a declaratory judgment is only granted if the judgment will serve a useful purpose. The court may deny declaratory relief if no declaration is necessary or proper. [CCP §1061]

For example, a buyer and seller sign a purchase agreement. Later, a third party records an option to purchase the property.

The seller informs the buyer he will be unable to deliver title to the property due to the option. The buyer’s deposit is refunded and the property is sold to the optionee.

The buyer now claims the seller breached the purchase agreement and seeks a declaration of his rights. However, the buyer does not seek any other form of relief, such as the recovery of money losses or specific performance of the purchase agreement.

Thus, the buyer’s claim for declaratory relief amounts to asking the court to declare the seller breached the purchase agreement when he conveyed the property to the optionee.

This is a useless declaration since it has no effect on the future rights or claims between the parties. The relationship between the buyer and seller was already terminated and the seller no longer owns the property.

Thus, any claims of the buyer against the seller can only be for money losses incurred by the termination of the agreement, for which a declaration is unnecessary. [Travers v. Louden (1967) 254 CA2d 926]

Editor’s note: An important distinction must be made between a court’s refusal to award declaratory relief and a declaratory judgment which is negative or adverse to the individual seeking it.

When an actual controversy exists, a person is entitled to declaratory relief even if the judgment is against him since he is entitled to have his uncertainty resolved.