Reported by Ai M. Kelley:
Lease subordination clause reference to future mortgages includes trust deeds
A tenant entered into a nonresidential lease which included a lease subordination clause stating all future mortgages placed on the property would be senior to the lease. The property was later refinanced and the loan was secured by a trust deed on the property in favor of the lender. The lender eventually acquired the property through a foreclosure trustee’s sale. The tenant vacated on being served with an unlawful detainer action based on service of a 3-day notice to quit due to foreclosure. The tenant sought to recover money for wrongful eviction. The lender claimed the tenant’s action for wrongful eviction was barred since the lease was junior to the lender’s loan due to the subordination clause and, being junior, was extinguished by the trustee’s sale. The tenant claimed his recovery was proper since the subordination clause only applied to mortgages, not trust deeds. A California appeals court held the lease was extinguished by the trustee’s sale and the tenant had no claim against the lender since trust deeds are functionally and legally the same as the mortgages referred to in the lease under its subordination clause. [Aviel v. Ng (February 28, 2008) __ CA4th __]
Grove owner not liable for injuries caused by a trespasser
A rural landowner maintained an oiled private road within his grove of citrus trees. The private road intersected and crossed a public road to additional groves. No stop sign existed on the private road at the intersection, but a cable blocked passage on the private road except for those days the owner’s workers needed access to his property. Further, no trees obstructed the view of the public road from the owner’s private road. A farm laborer working on an adjacent grove owner’s property needed to get to the public road. Although he had never been on the private road before, he used it to access the public road. The cables had been lowered that morning for the owner’s maintenance of his grove. Without permission, the farm laborer drove his truck down the private road at a high rate of speed, and on entering the intersection, slammed into a van traveling on the public road injuring the van’s driver. The injured driver sought to recover money for his losses from the grove owner, claiming the grove owner owed him a duty of care to place a stop sign at the intersection of the private road with the public road. The grove owner claimed he did not owe the driver a duty of care to place a stop sign at the intersection since the farm laborer who injured the driver did not have permission to use the road, the road is not used by the public as it is normally blocked by a cable, and the intersection with the public road is visible from a safe distance when traveling in the grove at a reasonable speed, not speeding as was the farm laborer. A California appeals court held the grove owner did not have a duty to place a stop sign on the private road at its intersection with the public road since the intersection was not blind when driving at a safe speed, the burden to inspect all private roads on a rural property with access to public roads for placement and maintenance of stop signs is too great, and the farm laborer was a third party who did not have permission to be on the private road and was driving negligently. [Garcia v. Paramount Citrus Association, Inc.(March 26, 2008) __ CA4th __]
Vacation home never held out for rent or sale not like-kind property
A taxpayer purchased a vacation home as an investment with the hope it would appreciate in value and be sold at a profit. The taxpayer then sold the vacation home and purchased another vacation home as an investment with the proceeds of the sale. The properties were never held out for rent or for resale, and no interest, maintenance, or other expenses were listed as deductions on their income tax return. The taxpayer reported the profit on the sale of the first vacation home as tax exempt under §1031 due to the sale and acquisition of like-kind properties. The IRS claimed the sale and purchase did not qualify as a §1031 transaction since neither the vacation home sold or the one acquired were held for investment as they were never held out for rent or for resale, or treated as investment property on the taxpayer’s tax returns. The taxpayer claimed the sale and acquisition did qualify as a §1031 transaction since his intent was to hold the properties for investment purposes, waiting for their value to appreciate before selling. A United States tax court held the sale and acquisition did not qualify as a §1031 transaction since the properties were not held primarily for investment, having never been held out for rent or for resale, expenses taken, or depreciation or investment interest deductions claimed, and the mere intent to hold the properties until they appreciate and can be sold at a profit does not establish an investment intent when used solely as a vacation home. [Moore v. Commissioner (May 30, 2007) TC Memo 2007-134]
Reported by Connor P. Wallmark:
No reimbursement of cleanup costs to owner who spreads contamination
A property owner purchased multiple parcels of land. One parcel was the site of a military airplane crash. During grading for construction, the owner discovered munitions in the soil of the crash site. The contaminated soil was transferred to multiple fill sites and mixed with the soil of previously uncontaminated parcels. The owner hired a company to screen and remove the munitions from all the soil that had been in contact with the contaminated soil. The owner sought to obtain reimbursement for all cleanup costs from the federal government, claiming he was an innocent landowner under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) since the government was the sole cause of the contamination. The federal government claimed the owner was not an innocent landowner as required by CERCLA, and thus not entitled to reimbursement, since the owner contributed to the release by mixing the contaminated soil in previously uncontaminated areas. The United States District Court held the owner was not entitled to reimbursement for the cleanup costs since by contributing to the contamination the owner was not an innocent landowner as required by CERCLA but a potentially responsible party, and thus the government was not the sole cause of the contamination. [Lewis Operating Corp., v. United States of America and the Department of the Army (2007) 533 F.Supp 2nd 1041]
Reported by Giang Hoang:
No temporary severance damages for hypothetical use of property
A city exercised its power of eminent domain to create a five-year temporary construction easement (TCE) across an owner’s property. The city offered an amount of money as compensation for the taking which did not include compensation for temporary severance damages. At the time of the taking, the owner did not have plans to develop or sell the property. The owner contested the amount of the compensation, claiming the city’s offer was inadequate since it did not amply compensate the owner with temporary severance damages for the loss of profit in the best use of the property—development and sale. The city claimed the compensation was adequate since the owner did not have plans to develop or sell the property at the time of the taking, and temporary severance damages must be based on actual use of property, not a hypothetical best use. A California appeals court held the city’s offer of compensation for the taking was adequate since temporary severance damages must be based on actual use of property, not a hypothetical best use. [City of Fremont v. Fisher (February 28, 2008) __CA4th___]
Population density for CEQA must be based on project acreage only
A developer applied to a city for approval of a building project. The proposed project site consisted of two parcels owned by the city. The building project called for a residential development on one of the parcels, and a public park on the other. The proposed residential development would call for a population density three times the allowable density under the city’s general plan. The city prepared an initial study to determine if the project would cause any environmental impacts, as required under the California Environmental Quality Act (CEQA). After making small changes to the project description and without addressing the increased population density, the city adopted a mitigated negative declaration and approved the project. A citizens’ group sought to have the approval set aside, claiming the city had violated the CEQA since it failed to prepare an environmental impact report (EIR) to address the increased population density of the residential development. The city claimed the population density was in line with the existing general plan and did not trigger an EIR since the project site acreage included both the residential development and the public park land. A California appeals court set the project approval aside, holding the city was required to prepare an EIR to address the increased population density since the residential development and the public park were separate developments and the public park acreage could not be used in the calculation of the residential development’s population density.
Also at issue in this case:
CEQA review must take into account public aesthetics
A developer applied to a city for approval of a building project. The proposed residential development called for a densely populated three-story residential building in an area with a low population density of single family residences. The city prepared an initial study to determine if the project would cause any environmental impacts, as required under the California Environmental Quality Act (CEQA). After adjusting the building to a two- and three-story combination, the city adopted a mitigated negative declaration and approved the project. A citizens’ group sought to have the approval set aside, claiming the city had violated the CEQA since it failed to prepare an environmental impact report (EIR) to address the change in the public aesthetics of having a high-population residential project in an area of primarily single family residences. The city claimed an EIR was unnecessary since the aesthetics of the proposed building development were not enough to trigger an EIR. A California appeals court set the project approval aside, holding the city was required to prepare an EIR to address the obstructed aesthetics of the neighborhood since public aesthetics is an issue properly addressed by the CEQA.
Also at issue in this case:
City’s general plan limitation does not preclude CEQA review
A developer applied to a city for approval of a building project. The proposed residential development called for dozens of noise-producing air conditioners to be installed on the outside of the proposed building. The city’s general plan limited the external noise level of a residential building to a certain number of decibels. The city prepared an initial study to determine if the project would cause any environmental impacts, as required under the California Environmental Quality Act (CEQA). After decreasing the number of air conditioners by a third and relocating them to a less-populated side of the building, the city adopted a mitigated negative declaration and approved the project. A citizens’ group sought to have the approval set aside, claiming the city had violated the CEQA since it failed to prepare an environmental impact report (EIR) to address the increased noise due to the dozens of air conditioners required for the building. The city claimed an EIR was unnecessary since the project was subject to the city’s external noise level limitation, and thus the noise did not need to be addressed in an EIR. A California appeals court set the project approval aside, holding the city was required to prepare an EIR to address the noise of the air conditioners since limitations in a city’s general plan do not preclude the necessity of a review of the environmental impacts of air conditioner noise under the CEQA.[Citizens for Responsible and Open Governmentv. City of Grand Terrace (February 21, 2008) __CA4th___]
Date of valuation must be based on sufficient deposit of compensation
A government agency exercised its power of eminent domain over a property, took the property and concurrently deposited funds with the court for the owner to receive as compensation. The owner withdrew the funds, but contested the amount of the deposit. After receiving an updated appraisal which indicated a much greater property value, the agency made a further deposit of compensation for the taking. The trial court changed the date of valuation of the property from the date of the deposit to the date of the valuation trial and again increased the amount of compensation required for the taking. The government agency sought to have the order for increased compensation set aside, claiming the court had erred in changing the date of the valuation to the time of trial since a deposit was made for the owner to withdraw at the time of the taking. The owner claimed the proper date for valuation of the compensation was the trial since the amount originally deposited was far below the actual compensation due and thus it was insufficient to meet the requirements of a deposit of just compensation. A California appeals court held the date of valuation was properly set as the date of the valuation trial since, for a compensation deposit to be valid for the purposes of setting a date of valuation, the deposit must be sufficient to meet the amount of just compensation due the owner. [San Diego Metropolitan Transit Development Board v. RV Communities (December 21, 2007) __CA4th___]
City may not prohibit a UD action to enforce rent control
To prevent landlord abuse of its rent control policies, a city passed an ordinance prohibiting landlords from filing an unlawful detainer (UD) action to remove a tenant from a rental unit without giving reasonable cause. Filing a UD action in violation of the ordinance subjected a landlord to fines and civil and criminal liability. A landlord of property within the rent-controlled city filed an unlawful detainer (UD) action to evict a tenant and recover possession of a unit. The city sought to enforce the ordinance and impose liability on the landlord, claiming the landlord violated the ordinance since he filed a UD action to remove a tenant. The landlord sought to have the prohibiting ordinance set aside, claiming the ordinance was preempted by federal law since federal law protects the right of the landlord to file an action, regardless of the reason for doing so. The California Supreme court set aside the prohibiting ordinance, holding the ordinance was preempted by federal law since a local government may not pass any ordinance which prohibits a landlord’s litigation privilege.
Also at issue in this case:
Landlord’s notice to quit as a requisite to a UD action is privileged
To prevent landlord abuse of its rent control policies, a city passed an ordinance prohibiting landlords from serving a notice to quit or eviction notice without giving reasonable cause. Filing a UD action in violation of the ordinance subjected a landlord to fines and civil and criminal liability. A landlord of property subject to the city’s rent control ordinances served a tenant with a notice to quit. The city sought to enforce the ordinance and impose liability on the landlord, claiming the landlord violated the ordinance by serving the tenant with a notice to quit. The landlord sought to have the prohibiting ordinance set aside, claiming the ordinance was preempted by federal law since the ordinance violated the landlord’s litigation privilege. The California Supreme court held a landlord’s federal litigation privilege preempts any ordinance prohibiting the service of a notice to quit only if the notice to quit indicates imminent litigation is to follow – the UD action – since the litigation privilege only protects communications related to litigation and not the malicious notices of vengeful landlords not intending to file a UD action. [Action Apartment Association, Inc. v. City of Santa Monica (2007) 41 C4th 1232]
Owner’s signature obtained by deceit is a forgery
An owner of a residence in financial distress contacted an individual to help him keep the residence out of foreclosure. The individual prepared documents for the owner to sign, representing the documents as bankruptcy paperwork. In fact, the documents contained a trust deed placing a lien on the residence in favor of the individual. The owner signed all the documents, including the trust deed. Later, the owner discovered the trust deed encumbrance on his residence, and sought to have the trust deed removed from title, claiming his signature on the trust deed was a forgery since the individual represented the trust deed as a bankruptcy document. The individual claimed the owner’s signature on the trust deed was not a forgery since it was the owner’s signature. A California appeals court held the individual was guilty of forgery and set aside the trust deed since a signature, though genuine, obtained through deceit is still considered to be a forgery. [The People v. Martinez (April 1, 2008) __CA4th___]
Tenant with long-term lease is owner for property tax purposes
A tenant under a long-term lease who was responsible for paying real and personal property taxes on the leased property made timely tax payments to the county. A decade after the taxes were paid, the county assessor performed an audit of the property’s value and issued escape assessments requiring further tax payments. The tenant requested a review of the assessments and applied for a reduction and refund of the taxes paid as a result of the escape assessment. The county claimed the tenant had no standing to apply for a review of all real and personal assessments or a refund since the tenant was not the owner of the real estate. The tenant claimed he had ownership of the real estate for tax purposes since the tenant was responsible for making the property tax payments and had a long-term (over 35-year) lease on the property. A California appeals court held the tenant subject to an escape assessment had the right to request a review of both real and personal property assessments and a refund of taxes paid since a long-term lease holder with responsibility for paying property taxes is considered to hold the property tax rights of an owner. [County of Los Angeles v. Raytheon Company (January 18, 2008) __CA4th___]
Title company may not challenge the IRS excessive valuation of insured property
The federal taxes due on the estate of a deceased were placed on an installment plan which was secured by a lien on all property held by the estate. A beneficiary of the estate received property from the estate and sold it. The title company issuing a policy of title insurance to the buyer on the sale did not discover the tax lien on the property. The estate taxes owed by the estate were later increased by the Internal Revenue Service (IRS) due to their re-evaluation of the estate. The beneficiary who sold the property he had received then filed bankruptcy, leaving an outstanding balance of unpaid estate taxes. The IRS sought to enforce the tax lien on the property acquired by the buyer to satisfy the estate taxes. The buyer made a claim on the title insurer who paid the tax lien under the policy it issued. The title insurer sought a refund from the IRS for the difference between the original taxes due and the increased amount after the re-evaluation since the value placed on the property on re-evaluation was too high. The IRS claimed the title insurer was not the taxpayer and could not challenge the re-evaluation. A United States appeals court held the title insurer who paid the estate taxes to eliminate the lien was not entitled to a refund of the increase in taxes due to the re-evaluation since the title insurer was a third party, not the estate or the beneficiary who sold the property, and is not allowed to challenge the re-evaluation. [First American Title Insurance Company v. United States of America (March 27, 2008) __BR___]
HOA claim under CC&Rs time-barred four years after making claim
A developer converted an apartment building into a condominium complex. The covenants, conditions and restrictions (CC&Rs) governing the complex required the developer to transfer parking spaces to buyers of condominiums within the complex. Any parking spaces not transferred to buyers within three years after the first condominium was purchased were to be transferred to the homeowners’ association (HOA) for the complex. Several decades passed after the first condominium unit was sold, during which period the developer retained title to parking spaces not transferred to buyers. Instead of transferring ownership to the HOA, the developer later transferred title for the parking spaces to the developer’s corporate president. Later, the HOA made a demand for conveyance of the parking spaces to the HOA, claiming the developer violated the CC&Rs since it failed to transfer title to the HOA after the three year period. The developer claimed a four-year statute of limitations for enforcing provisions in the CC&R had expired, barring the HOA claim to ownership since it had been decades since the first condominium was sold. A California appeals court held the HOA could enforce the CC&Rs and quiet title to the parking spaces since the statute of limitations to enforce a provision in a CC&R begins to run at the time the HOA made their claim for conveyance, not from the date of the violation. [Crestmas Owners Association v. Stapakis (December 13, 2007) __CA4th___]
Specific performance, not money, on seller’s breach of purchase agreement
A seller entered into a purchase agreement to sell coastal property to a buyer to be held by the buyer for investment. The seller, without excuse or justification, cancelled the purchase agreement and escrow prior to the time for closing. The buyer sought specific performance of the purchase agreement. The seller claimed the buyer was not entitled to specific performance since paying the buyer money for his loss of profit on the investment was adequate compensation for the cancelled purchase agreement when the buyer’s only interest in the property was for profit. The buyer claimed a recovery of money from the seller is inadequate since money alone could not compensate the buyer for the loss of a unique investment property. A California appeals court held the buyer was entitled to specific performance on the purchase agreement and transfer of the property, not money for a lost opportunity to profit on a resale, since regardless of the buyer’s investment-for-profit purpose of the purchase, every parcel of real estate is considered unique unless the seller can demonstrate the ready availability of equivalent property for acquisition by the buyer. [Real Estate Analytics, LLC v. Vallas (February 26, 2008) __CA4th___]
Lender’s mark-up of service provider’s fees does not violate RESPA
A borrower entered into a loan agreement with a mortgage bank. In conjunction with the borrower’s loan, the mortgage bank purchased and paid for tax services and flood certifications from a service provider. To recover the costs, the lender charged the borrower for the tax services and flood certifications. The fee charged the borrower by the lender was in excess of the amount paid by the lender to the service provider. The borrower claimed the marked-up fee was unlawful as a prohibited referral fee under the Real Estate Settlement Procedures Act (RESPA) since RESPA prohibits fees for anything other than services actually performed by a provider. The mortgage bank claimed the marked-up fee was not prohibited under RESPA since the bank kept the difference in fees, paying the providers no more than the amount due for the tax services and flood certifications. A federal district court held the marked-up fee did not violate RESPA since the provider did not receive any portion of the mark-up in fees and RESPA does not act as a price-control on mortgage-related services. [Morales v. Countrywide Home Loans, Inc. (January 10, 2008) __F3d___]
Editor’s note—While marking up fees does not violate RESPA, it may render a mortgage bank liable for other reasons. This case was remanded to the California court system for judgment under the California Unfair Competition Law.
Partners needed written authorization to execute a purchase agreement
Business partners co-owned a commercial property from which they operated their import/export business. One of the co-owners represented to a real estate broker that he was authorized by his partners to enter into a listing agreement and sell the property. The co-owner, on receiving a purchase offer, signed a counter offer which was submitted to the buyer and accepted, forming a purchase agreement. The co-owner then cancelled the sale. The buyer sued all the co-owners for specific performance of the purchase agreement, claiming the co-owners were bound by the purchase agreement since the co-owner, as a partner of the other co-owner was authorized to enter into the purchase agreement in the usual course of their business without the need for written authorization. The co-owners claimed the purchase agreement could not be enforced since there was no written authorization allowing one co-owner to act on behalf of other co-owners as their agent and enter into a purchase agreement. A California appeals court held the purchase agreement was unenforceable against any of the co-owners since written authorization for one co-owner to enter into a purchase agreement on behalf of a partnership holding title as tenants-in-common is necessary to make a purchase agreement enforceable, unless the sole business of the partnership is to hold and sell real estate, which, in this case, it was not. [Elias Real Estate, LLC v. Tseng (October 25, 2007) __CA4th___]
Editor’s note — This case illustrates the importance of clarifying the authority of a client to enter into listing and purchase agreements.A wise agent will obtain signatures from all co-owners of a property when entering into a listing or purchase agreement, or verify that the co-owner entering into the agreement has a written, signed power of attorney to act on the other’s behalf.
Enforcement of unrecorded CC&Rs falls under five-year statute of limitations
A home owner lived within a housing development subject to covenants, conditions and restrictions (CC&Rs). Authorized by the CC&Rs, the homeowners’ association (HOA) created additional unrecorded CC&Rs limiting the height of fences built from the property line. The HOA created rules and restrictions were unrecorded, unlike the CC&Rs. The statute of limitations for enforcing restrictions on the use of real estate in the event of a violation is five years. The owner built a fence with a greater height than allowed by the unrecorded HOA created restrictions. During the fifth year after the fence was built, the HOA sought to have the fence removed, claiming the owner had violated the CC&Rs since the fence was above the allowable height. The owner claimed the HOA was barred from having the fence removed or relocated since the fence height limitation was contained in restrictions which were not recorded and thus it did not fall under the five-year statute, but expired under a four-year statute of limitations. A California appeals court held the fence violated the unrecorded HOA created CC&Rs and was subject to removal or relocation since a restriction created by the HOA need not be recorded in order to be considered a restriction for the purposes of the five-year statute of limitations. [Pacific Hills Homeowners Association v. Prun (March 20, 2008) __CA4d___]
Editor’s note — The law does not reward those who rest on their laurels:in this case, the HOA’s delay in pursuing enforcement of the unrecorded deed restriction resulted in the HOA having to bear two-thirds the cost of relocating the fence, in addition to being responsible for its own attorney’s fees.