Anti-SLAPP

Without litigation, no anti-SLAPP protection for landlord to bar tenant claims

Reported by Alex Gomory & Giang Hoang-Burdette

A residential tenant opposed his landlord’s plans to redevelop the property the tenant was renting. The landlord served the tenant a 30-day notice increasing the tenant’s rent. The tenant refused to pay the higher rent, and the landlord served the tenant with a three-day notice to pay rent or quit. To resolve the dispute before filing an unlawful detainer (UD), the landlord and the tenant entered into a lease agreement reducing the rent on the condition the tenant vacate the property by the expiration of the lease. The tenant did not vacate by the expiration of the lease, and the landlord demanded payment of the discount given the tenant, which the tenant rejected. The landlord retained the security deposit to offset the rent demanded. The tenant demanded his security deposit be returned and sought a declaration that he did not owe the amount of the discount for failing to vacate. The landlord claimed the tenant was barred by anti-SLAPP statutes from litigating to recover his security deposit and avoid liability for the discount since the lease agreement giving rise to the tenant’s claims was a settlement of the three-day notice to pay rent or quit, a prerequisite to a UD action. The tenant claimed anti-SLAPP statutes did not apply to his demands on the landlord since the lease agreement was not entered into to settle a dispute in litigation. A California court of appeals held the tenant’s right to recover his security deposit and obtain a declaration of his rent obligations was not barred by anti-SLAPP statutes since the lease agreement giving rise to these disputes was not entered into to settle a dispute in litigation. [Delois v. Barrett Block Partners (2009) 177 CA4th 940]

Editor’s note — Had the landlord filed a UD action on expiration of the three-day notice before settling the dispute, the litigation requirements of the anti-SLAPP statutes would have been satisfied.

Arbitration

 

Arbitrator has immunity for failure to disclose conflict of interest

 

Reported by Krista Craig & Kelli Galippo

A developer entered into arbitration with a contractor in an attempt to recover money losses.  Following the conclusion of arbitration and an adverse award favoring the contractor, the developer learned the contractor’s lawyer was a long-time personal friend of the arbitrator, constituting a conflict of interest. The developer sought a reversal of the arbitration award and demanded compensation from the arbitrator for the amount of money losses he sought from the contractor through arbitration, claiming the arbitrator’s decision was biased since he failed to disclose the conflict of interest with the contractor’s lawyer before the proceedings began. The arbitrator claimed the developer was barred from recovering money losses, and the developer’s sole remedy was the reversal of the arbitration award since decisions made by an arbitrator as part of the judicial function are protected against civil lawsuits.  A California appeals court held the arbitrator was not liable for any money losses for his non-disclosure and the arbitration award was invalid since arbitrators are protected by arbitral immunity against civil lawsuits for decisions made as part of the judicial function. [La Serena Properties, Inc. v. Weisbach (2010) 186 CA4th 893]

Editor’s Note –The disclosure requirement prior to entering into arbitration is similar to a judge’s requirement to complete the notice and disclosure of a conflict of interest, and both are protected as normal judicial functions.

Arbitration clause in CC&Rs does not to waive the right to litigate

Reported by Heather McCartney & Kelli Galippo

A developer of a common interest development (CID) recorded covenants, conditions and restrictions (CC&Rs) on the title to all units in the condominium project. The CC&Rs contained a provision mandating binding arbitration of any dispute the homeowners’ association (HOA) or the homeowners had with the developer. The HOA discovered construction defects in the property, and made a demand on the developer to repair the defects, which he rejected. The HOA filed a judicial action to litigate the dispute, not a petition to arbitrate, against the developer to recover for the cost of repairing the defects. The developer sought to compel arbitration and avoid litigation of the dispute, claiming the arbitration provision contained in the CC&Rs barred the HOA from litigating the dispute, since the homeowners agreed to all provisions in the CC&Rs, including the binding arbitration provision, when they purchased their units. A California court of appeals held the HOA was entitled to litigate, rather than arbitrate, their dispute with the developer, since the CC&Rs were not a mutual agreement between the developer and the CID owners or the HOA— a requirement to waive the right to discovery, the right to appeal and the right to obtain a fair and final judgment. [Villa Vicenza Homeowners Association v. Nobel Court Development, LLC (2010) 185 CA4th 23]

Editor’s Note — Villa Vicenza Homeowners Association v. Nobel Court Development was granted a hearing by the California Supreme Court. [See first tuesday’s Supreme Court Watch to keep up-to-date on the progress of this case.]

Arbitration provision in the CC&Rs is unenforceable by the developer

Reported by Kelli Galippo & Alex Gomory

The developer of a condominium project recorded covenants, conditions and restrictions (CC&Rs) with an arbitration clause requiring any dispute about construction defects between the developer and the homeowners’ association (HOA) to be resolved through arbitration. After unsuccessful mediation of a construction dispute with the developer, the HOA sought to resolve the dispute by filing an action to litigate, not arbitrate. The developer sought to compel arbitration, claiming the HOA was bound by the arbitration provision in the CC&Rs since the HOA was a beneficiary bound by the CC&Rs since CC&Rs run with the property. The HOA claimed the developer could not compel arbitration since the CC&Rs were not an agreement entered into between the HOA and the developer. A California court of appeals held the developer had no basis to compel arbitration under the provision in the CC&Rs since the HOA, while bound by the CC&Rs, never agreed to arbitration separately from the provision in the CC&Rs. [Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC (2010) 187 CA4th 24]

Editor’s note — This is a case about the distinction between privity of contract (mutual arbitration agreement) and privity of estate (a non-contractual title arrangement) — a conceptual problem born out of the enforceability of CC&Rs as though a homeowner agreed to them, but only due to the “running with the land” title that CC&Rs carry, and not as a signed contract.

 

Bankruptcy

As bankruptcy strips a second trust deed, homeowner is forced to sell home

Reported by Kelli Galippo & Heather McCartney

A homeowner whose residence was encumbered by a second trust deed filed a Chapter 13 bankruptcy petition seeking protection from creditors. The value of his home was determined to be less than the balance owed on the first trust deed on the residence. The homeowner sought to keep his home, subject to the first trust deed only, by eliminating the second trust deed from title, since no equity existed in the property to secure the second trust deed. The bankruptcy court stripped the second trust deed lien from title, thus converting the loan to an unsecured debt under the proposed bankruptcy plan, since the unpaid balance of the first lien exceeded the value of the residence it encumbered. The bankruptcy trustee then sought to dismiss the Chapter 13 bankruptcy case before the plan was approved, claiming the homeowner’s total unsecured debt exceeded the limit for filing Chapter 13 bankruptcy, since the stripped second trust deed loan was now an unsecured debt. The homeowner claimed the Chapter 13 petition was proper and should not be dismissed since the second trust deed would remain of record and the debt would continue to be secured until the bankruptcy plan was fully performed, and only then would the second be stripped from title. The United States Bankruptcy Appellate Panel held the homeowner was ineligible for Chapter 13 bankruptcy on declaring the second trust deed loan an unsecured debt for purposes of the plan since the second lien, while remaining of record on title to his home, was now an unsecured debt — making his total unsecured debt exceed the statutory maximum for Chapter 13 eligibility. [In re Smith 9th Cir. BAP (2010) _BR_]

Editor’s Note— Without access to protection under Chapter 13, the homeowner’s alternative is Chapter 7, which then calls for his home to be sold and the proceeds paid to the first trust deed lender. Bankruptcy law places an unsecured debt ceiling of $336,900 on a homeowner to maintain a Chapter 13 bankruptcy petition. The unsecured debt limit coupled with the mortgage crisis obstructs homeowners from stripping off unmanageable debt from their title, leaving the homeowner qualified for only a Chapter 7 liquidation (sale) of the home, the antithesis of his intent to keep his home under the court’s order to strip away excess debt.

 

Covenants, Conditions and Restrictions

HOA regulation enforceable without proof of adoption

Reported by Heather McCartney & Alex Gomory

A homeowners’ association (HOA) had a height restriction for houses within the common interest development (CID). There was no record of the restriction being adopted in the HOA’s covenants, conditions and restrictions (CC&Rs), but the HOA had enforced it for ten years. When the homeowner submitted his construction plans, the HOA notified the homeowner about the height restriction. However, when the house was built, it exceeded the height restriction. The HOA claimed the homeowner knowingly ignored the height restriction, since the HOA informed him of the restriction. The homeowner claimed the height restriction was invalid since there was no evidence the height restriction was properly adopted into the CC&Rs by the HOA. A California court of appeals held the HOA’s height restriction was valid and the homeowner was required to bring his house into compliance since the HOA was not required to provide evidence a regulation was properly adopted to enforce it.

Another issue in this case:

 

Intentionally violating a regulation makes a homeowner unable to claim hardship rule

A homeowners’ association (HOA) had height restriction guideline for houses within the common-interest-development (CID). The plans were approved, and the HOA warned the homeowner about the height restrictions and noted the restriction on every page of the homeowner’s plans. When the house was finished, it exceeded the height restriction, interfering with neighboring ownership by encroaching on the neighbors’ views and diminishing their property values. The HOA made a demand on the homeowner to bring the house into compliance with the height restriction. The homeowner claimed he shouldn’t have to lower the house to the height restriction since his hardship in tearing down the house was greatly disproportionate to the hardship caused to his neighbors. A California court of appeals held the homeowner had to bring his house into compliance with the height restriction regardless of the cost since he intentionally violated the regulation and could not now use the home’s completion as a reason to continue to violate the regulation. [Clear Lake Riviera Community Association v. Cramer (2010) 184 CA4th 459]

 

District Assessments

Improvement district vote for assessment does not require secret ballot

Reported by Kelli Galippo & Krista Craig

Property owners within an improvement district voted and signed their ballots to approve an assessment for improvements within a neighborhood. After the assessment was approved by the voters, a property owner challenged the validity of the vote, claiming the voting was invalid since the vote was not by secret ballot as each property owner signed their ballot. The improvement district claimed procedures followed identifying each property owner’s vote was proper since a secret ballot was not required for district voting. The California Supreme Court held the voting by the property owners to fund improvements within a district was valid since a secret ballot is not required for an improvement district vote. [Greene v. Flood Mitigation League of Ross Valley (2010) 211 C3d 1062]

Editor’s note—In 1997, Government Code §53750 was passed as part of Proposition 218 to address the procedure for imposing an assessment in more detail. The court concluded that ballot secrecy was not stipulated as part of assessment voting protocol because it was not clearly defined in §53750.

Special assessment must be allocated to all properties within a district

Reported by Jeffery Marino & Heather McCartney

A local agency planned to make improvements to an existing public park. A special assessment district was formed to fund the cost of the improvements. The local agency determined only single family residential (SFR) properties within the special assessment district would receive a direct benefit from the improvements; thus, only SFR properties were subject to an assessment for the cost of the park improvements. All other properties (non-SFRs) within the district were classified as part of the general public and not subject to the assessment. A homeowner sought to have the special assessment declared invalid, claiming the cost of the improvements must be allocated to all property owners within the district based on the benefit received by each property due to the improvements. The local agency claimed the allocation of costs only to the SFR properties was proper since the non-SFR properties were accounted for as part of the benefit to the general public. A California court of appeals held limiting the special assessment to only SFR properties was invalid since the local agency failed to allocate the costs of the improvements to the non-SFR properties within the district which benefited from the improvements.  [Beutz v. County of Riverside (2010) 184 CA4th 1516]

Eminent Domain

 

Cap on relocation expenses for eminent domain

Reported by Kelli Galippo & Krista Craig

A government agency acquired property by eminent domain from the owner who operated his business from the property. The agency paid the business owner the maximum statutory limit for his relocation expenses, which did not cover all of his relocation expenses. The business owner made a demand on the agency for the remainder of his expenditures incurred due to relocation, claiming he was owed the entire amount of his relocation expenditures since, if the expenditures were not relocation expenses, they were spent to mitigate his loss of goodwill due to the relocation. The agency claimed they did not owe the business owner any more than the legal maximum of compensation for his relocation since the business owner had not established the remaining expenditures were for mitigation of any loss of goodwill. A California court of appeals held the agency owed the business owner nothing beyond the statutory maximum amount for relocation costs since the business owner had not established any loss of goodwill in the value of his business due to the relocation.

 

Also at issue in this case…

Penalties for failure to vacate triggered by holdover

A government agency acquired property by eminent domain from the owner who operated his business from the property. The agency and the business owner entered into a written agreement setting a deadline for vacating the property and the payment of a daily penalty for each day the business owner retained possession after the deadline. The business owner failed to vacate the property by the date agreed, and the agency made a demand for the penalty. The agreement to vacate was then amended to grant an extension of the deadline, and the penalty assessed by the agency was orally waived conditioned on the business owner vacating by the extended deadline. The business owner failed to vacate by the extension deadline triggering reinstatement of the demand for payment of the penalty already assessed.  Further, the agency demanded an additional daily penalty under the penalty provision in the written agreement for the failure to vacate by the extended deadline, claiming the agency was entitled to both sets of penalties since the waiver of the first penalty they assessed was contingent upon him vacating by expiration of the extended deadline and the second demand was based on the penalty provision in their written agreement.  The business owner claimed he did not owe the penalties since the agency had orally agreed to cancel their demand for penalties. A California court of appeals held the business owner owed the agency both penalties since the waiver of the initial demand was contingent upon him vacating on time, and his failure to do so triggered the demand for the penalties. [Los Angeles Unified School District v. Casasola (2010) 187 CA4th 189]

Guarantors

Lender may pursue guarantors individually

Reported by Krista Craig & Jeffery Marino

A lender made a construction loan to a developer secured by a trust deed on the property to be developed. The developer and an investor entered into an agreement guaranteeing the payment of the construction loan. The guarantee agreement was secured by a trust deed on other property owned by the guarantors. The guarantee agreement provided for joint and several liability by the guarantors for the construction loan, waiving their right to require the lender to first foreclose on the property to be developed. The developer later defaulted on the construction loan and the lender sought a court ordered attachment of the other real estate owned by the guarantors. The guarantors claimed the lender was barred from obtaining an attachment on their real estate since the lender did not first foreclose on the real estate that secured the loan and the guarantee agreement. The lender claimed it was entitled to an attachment of other real estate since a provision in the guarantee agreement waived the guarantors’ right to require the lender to first foreclose before the lender pursues collection under the guarantee agreement. A California court of appeals held the lender was entitled under the guarantee agreement to a court-ordered attachment of other properties owned by the guarantors since they waived their right to require the lender to first foreclose on the real estate that was security for the loan and the guarantee agreement. [Bank of America v. Stonehaven Manor (2010) 186 CA4th 719]

Editor’s note: For an example of a trust-deed contract, see first tuesday Form 439, Guarantee Agreement for Promissory Note.

Landlording

A property owner cannot be forced to remain in the residential rental market

 

Reported by Kelli Galippo & Alex Gomory

A property owner who previously entered into an agreement to settle a transient occupancy tax dispute on property containing both transient and rental units notified the city of his intent to withdraw the rental units on the property from the housing market. The city refused to accept the property owner’s filing, claiming the settlement agreement he previously entered into contained a waiver of the property owner’s Ellis Act rights, thus restricting the property owner from withdrawing the rental units from the market. The property owner claimed the waiver was unenforceable since Ellis Act rights cannot be waived. A California appeals court held the property owner was allowed to withdraw his units from the rental housing market since his rights under the Ellis Act to remove property from the residential rental market cannot be waived as a matter of public policy. [Embassy LLC v. City of Santa Monica (2010) 185 CA2nd 771]

Editor’s note —The land was zoned for residential rental and transient occupancy. The owner intended to convert his rental units on the property into transient occupancy hotel units, thus quitting the residential rental market.

Landlord cancels agreement to lease based on construction contingency

Reported by Kelli Galippo & Alex Gomory

A non-residential landlord and tenant entered into a lease agreement contingent on the landlord’s completed construction of proposed improvements by a set date. The landlord was unable to obtain a construction permit by the agreed-to date for completion of construction after pursuing all his administrative remedies. The landlord cancelled the agreement to lease under the contingency provision in the lease agreement. The tenant made a demand on the landlord for his money losses caused by the landlord’s failure to construct the improvements, claiming the landlord’s cancellation of the lease agreement was ineffective since the landlord did not spend adequate time and money to get a permit to construct the improvements. The landlord rejected the tenant’s demand, claiming he had the right to cancel the lease agreement since he made a reasonable effort to construct the improvements by the date set forth in the contingency provision. A California appeals court held the landlord had the right to terminate the lease agreement and the tenant recovers nothing since the landlord made a reasonable effort to obtain a permit to construct the improvements at the time set for cancellation under the agreement’s contingency provision. [Thrifty Payless, Inc. v. Mariners Mile Gateway, LLC (2010) 185 CA4th 1050]

Editor’s note — For a copy of lease agreement, see first tuesday’s Form 552.

UD action fails when notice to quit is sent to wrong email address

Reported by Heather McCartney & Kelli Galippo

 

A non-residential landlord served a notice to pay or quit on a tenant by email, since the tenant was delinquent in the payment of rent. A provision in the lease agreement authorized service by email, but did not state a specific email address where notices were to be sent.  The notice was served by email to an employee’s email account that was not located at the tenant’s physical corporate offices. The employee acknowledged receipt of the email, and the rent payment was sent. The landlord received the rent after the notice to pay had expired, and returned the check un-cashed. The landlord filed an unlawful detainer (UD) action seeking to evict the tenant. The tenant sought to retain possession of the property, claiming the landlord did not correctly serve the notice and thus the UD action must be dismissed, since he sent the notice to an email address other than one located at the tenant’s corporate address as stated in the lease. The landlord claimed the tenant was unlawfully detaining the property since the tenant acknowledged receipt of the notice and the landlord did not receive the rent prior to the expiration of the notice. A California court of appeals held the service of the notice to quit on an employee’s email address was improper since service to an email address other than one located at the physical address as agreed in the lease agreement was not effective to terminate the tenant’s right to possession and establish an unlawful detainer. [Culver Center Partners East #1, L.P. v Baja Fresh Westlake Village, Inc. (2010) 185 CA2nd 744]

Editor’s note — A lease agreement may authorize use of email to serve a notice to pay rent or quit. However, the lease agreement needs to specify a designated email address to which the notice must be served — not just a brick and mortar address.

Liability

Property owner who knows his improvements are unsafe is liable for injuries due to collapse

 

Reported by Jeffery Marino & Alex Gomory

A local agency served notice on a property owner to retrofit his building to meet earthquake safety standards by a specific deadline. Before the owner retrofitted the building to meet the agency’s deadline, an earthquake caused the building to collapse, injuring an individual inside. The injured individual made a demand on the property owner for his losses caused by the collapse, claiming the property owner was liable since he knew about the danger and permitted the individual to enter the structure. The property owner claimed he was not liable for the individual’s losses since the deadline set by the local agency to retrofit the building had not yet passed. A California court of appeals held the individual was entitled to recover his losses caused by the collapse of the property owner’s building from the property owner since the property owner knew the improvements did not meet earthquake safety standards and allowed others to access the building, the agency deadline for retrofitting having no bearing on liability. [Myrick v Mastagni (2010) 185 CA4th 1082]

Property owner liable for failure to immediately notify government of contractor’s hazardous material spill

Reported by Kelli Galippo & Heather McCartney

A property owner hired a contractor to demolish a building on his property. The contractor spilled hazardous material on the property, and immediately advised the owner. The spill was allowed to remain, and seeped into the groundwater. The government fined the property owner for violating the water code by failing to notify the government at the time of the spill and for causing hazardous material to seep into the groundwater.  The property owner  sought to have the fine annulled, claiming he was not the proper person to be fined since only the contractor actively participated in the discharge of the hazardous materials. The state claimed the property owner owed the fine since the property owner employed the contractor who discharged the toxic chemicals. A California court of appeals held the government appropriately fined the property owner for failing to report the hazardous material spill to the government as soon as he became aware of it, since the spill reached the groundwater and the property owner employed the person who discharged the hazardous material. [TWC Storage, LLC v. government Water Resources Control Board (2010) 185 CA4th 291]

Statute of limitation for notarizing a forgery runs from date of acknowledgement

 

Reported by Heather McCartney & Alex Gomory

A property owner’s signature was forged on a deed which transferred title to his property to another individual. A notary acknowledged the forged signature indicating it was the property owner’s signature, and the deed was recorded. The individual, now holding the title under the forged deed, further encumbered the property with a second trust deed lien. Three years after the notary’s acknowledgment, the property owner discovered the existence of the forged deed, and had his title cleared of the cloud in a quiet title action. The property owner suffered money losses due to the second trust deed lien on the property. More than three years after he discovered the forged deed, the owner made a demand on the notary for his losses. The notary rejected the demand, claiming the owner was barred from recovering his losses since more than six years had passed from the date of the notary’s acknowledgment of the forged signature. The property owner claimed he was entitled to recover his losses from the notary since it had been less than six years from the date he discovered the notary’s acknowledgement of the forgery. A California court of appeals held the notary was not liable for the losses caused by his acknowledgement of the forgery since the six year statute-of-limitations barring any recovery for the actions of a notary commences on the date of the notary’s acknowledgement, and not the date the property owner discovered the forgery. [Purdum v. Holmes (2010) 187 CA4th 916]

 

Property Reassessment

Death of property owner constituted change in ownership

Reported by Kelli Galippo & Krista Craig

An owner of income-producing property transferred title to his property, vesting it in a living trust he established. On the death of the owner, the trust agreement provided the trustee was to retain title for the benefit of the deceased’s children until the last of the deceased children dies, at which time the trustee is to transfer title to the owner’s grandchildren. Upon the owner’s death, the county assessor reassessed the property at its current market value, viewing the owner’s death as a change in ownership. The deceased’s children challenged the reassessment of the property, claiming a change in ownership does not occur on the owner’s death since title remained with the trustee without the transfer of any right to possess the property until the trust transfers title to the deceased’s grandchildren. The assessor claimed a change in ownership occurred and the reassessment was proper since the owner’s entire interest in the property was transferred upon his death to his children (life estate) and grandchildren (a remainder interest). A California appeals court held the reassessment of the property on death of the owner while title remained in the living trust was proper since the death of the property owner transferred all his ownership in the property, no matter how he may have vested his property’s title, which constituted a change in ownership triggering reassessment. [Phelps v. Orange County Assessment Appeals Board (2010) 187 CA4th 653]

Editor’s note — For more information regarding life estates, see the July 2010 first tuesday Recent Case Decisions.

 

Recording

Recorder does not need to verify notarized signature before recording documents

Reported by Kelli Galippo & Heather McCartney

An individual forged the signature of a property owner on a power-of-attorney form, granting the individual the power of attorney to act as the owner’s attorney-in-fact.  The individual had a notary acknowledge the signature as that of the property owner, and filed the power-of-attorney form with the county recorder who recorded and indexed it. The individual, now acting as the owner’s attorney-in-fact, signed and recorded a deed, transferring title of the owner’s property to himself. The individual, appearing on record as the vested owner, evicted the tenants who occupied the property. The property owner discovered the conveyance and cleared title of the cloud created by the recorded deed. The owner then made a demand on the county recorder for his lost rental income, claiming the recorder was responsible since the recorder failed to verify whether the signature on the power of attorney document was valid before recording it. The county recorder claimed he had no duty to investigate the validity of the signature on the documents, since he must record all notarized power of attorney documents. A California court of appeals held the recorder did not have a duty to look beyond the notarized document to verify whether the signature was that of the property owner, since the recorder cannot refuse to record a document based on its validity. [Jackson v. County of Amador (2010) 186 CA3rd 514]

Real Estate Law

An individual cannot be removed from a shopping mall for expressing his beliefs to others

Reported by Jeffery Marino & Krista Craig

An individual entered the common area of a shopping mall and proceeded to share his religious beliefs with mall patrons. The mall owner instructed the individual to either stop speaking to the patrons or leave the property since the owner of the shopping mall barred its patrons from discussing issues unrelated to mall activities without written permission. The individual refused to comply with either request and the owner had the individual removed from the property. The individual claimed he was wrongfully removed from the property since his conversation was protected by his right to free speech. The mall owner claimed he could remove the individual from the property since the individual had violated mall rules governing public use. A California court of appeals held the individual was permitted to share his beliefs with other patrons since the mall rules improperly discriminated against types of speech other than those relating to mall activities. [Snatchko V. Westfield LLC et al. (2010) _CA3rd_]

Editor’s note — For more information on the public use of private property, see the August 2010 first tuesday recent case decision, Demonstration considered trespassing on private property.

Real Estate Settlement Procedures Act

RESPA prohibits title company kick-back for referral by escrow company

Reported by Heather McCartney & Kelli Galippo

An independent escrow company entered into a business referral agreement with a title company calling for the escrow company to refer all title business exclusively to the title company in exchange for a fee. A homebuyer escrowed the purchase of a property through the escrow company, and discovered the escrow officer had steered the title insurance to the title company under the exclusive referral agreement. The homebuyer made a demand on the title company for triple the premium paid for the policy title insurance — the damages permitted under the Real Estate Settlement Procedures Act (RESPA) for violations involving an escrow company.  The homebuyer claimed he was improperly referred to the title company by the escrow company since RESPA prohibits payments for a business referral to title companies from a provider of other services (escrow) rendered in the transaction. The title company claimed the homebuyer was not owed anything since he would be charged the same amount for the same services by any title company. A California court of appeals held the homebuyer was entitled to recover triple the premium paid for the title insurance policy since the receipt of a fee on a referral by a provider of other services in a RESPA transaction is prohibited. [Edwards v. First American Title Insurance Company (2010) _CA _]

Editor’s Note—The kick-back from the title company was two million dollars up front. This case has a whiff of anti-trust law violation which the court failed to discuss. The exclusive referral agreement was created to interfere with customers of the escrow company seeking competitive total policies, and the agreement can easily be interpreted as intentional unfair business practices. However, the court did not address the issue, and it makes us at first tuesday wonder if the Department of Corporations and Department of Insurance will concern themselves as regulators of these operators. We have yet to receive a response from either department as to what their involvement may be.

Taxation

Tenant’s cost of TIs tax deductible as rent per lease agreement

Reported by Krista Craig & Jeffery Marino

The tenant and landlord of a non-residential income property entered into a lease agreement calling for the tenant to make improvements (TIs) on the property. The lease agreement rent provisions credited the tenant with rent equal to the cost of the TIs the tenant completed. The tenant made TIs to the property, received the credit on the rent for his costs of the TIs and deducted the cost of the TIs as a rental expense on his federal income tax return. The Internal Revenue Service (IRS) claimed the cost of the TIs could not be deducted as rental expenses since they are capital improvements which must be depreciated to be recovered. The tenant claimed the cost of the TIs were deductible as rental expenses since the rent credit for the tenant’s expenditures on TIs was agreed to by the landlord and the tenant in the lease agreement. A United States tax court held the cost of a tenant’s TIs are deductible as rental expenses since the intention of the landlord and tenant stated in the lease agreement provided for an offset against rent owed equal to the costs incurred by the tenant in the construction of TIs.

Also at issue in this case:

No limit on duration or amount of rent credits for TIs

The tenant and landlord of an income property entered into a lease agreement, providing for the tenant to make tenant improvements (TIs) on the property. The lease agreement provisions also provided for the tenant to be given credit against rent owed for the costs he incurred making the TIs, placing a limit on the amount of rent credits the tenant may claim in any one year, but allowing for any TI costs above the limit to be carried over and claimed as credits against rent in following years. The tenant built TIs on the property, received the rent credit from the owner and deducted the cost of the TIs, up to the rent credit limit, as rental expenses on his federal income tax return. The Internal Revenue Service (IRS) claimed the cost of the TIs could not be carried over from year to year and deducted as rental expenses since the lease agreement capped the amount and duration of rent credits. The tenant claimed the amount and duration of rent credits was unlimited and allowable as an expense deduction since the lease agreement allowed the tenant to carry over excessive TI costs into following years. A United States tax court held the tenant properly reported the TI costs carried forward as rent expenses in the years following the expenditures on TIs since the lease agreement controls the amount and duration of rent credits received by the tenant for the cost of TIs made, and no such limits existed in the lease agreement. [Hopkins Partners v. IRS (2009) _TC]

Editor’s note—The issue in this case was the effectiveness of the lease agreement to control the amount of theTI costs intended to be treated as rent paid by the tenant and thus deductible as rent expenses by the tenant. This is a “heads-up” case for those leasing agents representing a user to shift the cost of the TIs paid by the tenant into the “agreed rent.” As a result, the tenant can immediately recover his TI costs as an offset against that “agreed rent” since he is actually expensing his TIs when expensing his total rent, not waiting years to fully amortize the TIs as a capital investment in improvements.

 

Title

Title officer’s representation of trust deed priority does not shift risk to title company

 

Reported by Alex Gomory & Jeffery Marino

A buyer of a property in foreclosure asked a title officer representing a title company about the priority of the trust deed being foreclosed. The title officer advised the buyer the trust deed being foreclosed was the first trust deed. In reliance upon the title officer’s representation of the trust deed’s priority, the buyer acquired the property at the trust deed foreclosure sale. The buyer then discovered the trust deed he purchased was a second trust deed subject to a first trust deed lien. The buyer made a demand on the title company for the cost of paying off the first trust deed based on the title officer’s misrepresentation of the trust deed’s priority. The title company rejected the buyer’s demand. The buyer claimed the title company was liable for his losses since he relied on the title officer’s representation of the trust deed priority. The title company claimed it was not liable for the title officer’s misrepresentation of trust deed priorities on title since the title officer’s representation was not an abstract of title. A California court of appeals held the title company was not liable for the buyer’s losses that arose from his reliance on the title officer’s representation of the trust deed priorities since the title officer’s representation was not an abstract of title and was thus not a guarantee on the trust deed’s priority by the title company. [Soifer v Chicago Title Company (2010) 187 CA4th 365]

Editor’s Note — Other than obtaining an abstract of title, which would have offered the buyer protection in this case, this buyer should have acquired a binder, also known as a commitment to issue. A binder entitles the buyer to title insurance coverage until the buyer resells the property and requests the title insurance policy be issued to a new buyer.

Title transfer to a non-existent intervivos trust effective on execution of trust agreement

Reported by Alex Gomory & Heather McCartney

A property owner recorded a deed which transferred his property’s title to an intervivos trust vesting. Later, the property owner created the trust by executing the trust agreement document. The property owner died and the property was further transferred to the beneficiary as dictated by the trust agreement. A family member of the deceased demanded the intervivos trust be declared void, claiming the transfer of the title to the intervivos trust vesting was invalid since the trust did not exist at the time the title was vested in the name of the trust. The beneficiary of the trust claimed the transfer of title to the intervivos trust was valid since the property owner signed and delivered the deed transferring title with the intention of later forming the intervivos trust, which he did. A California court of appeals held the conveyance of title to an intervivos trust preceding creation of the intervivos trust was valid since the title was considered delivered only when the trust was established. [Luna v. Brownell (2010) 185 CA4th 668]