Reported by Ai M. Kelley:

Tenant’s right of first refusal not triggered by fee conveyance between co-owners
A limited partnership (LP), as the owner of property, entered into a lease agreement with a tenant giving the tenant a right of first refusal if a sale of the property was contemplated by the LP to “any person”. Later, one co-owner of the LP wanted out of the LP. A distribution agreement was proposed where one co-owner would buy out the other co-owner’s interest in the LP and in the property. The tenant found out about the proposed distribution agreement and attempted to exercise his right of first refusal. The LP denied the distribution agreement would trigger the tenant’s right of first refusal. The tenant sought specific performance, claiming his right of first refusal would be triggered by the buy out of one co-owner’s interest by the other under the “any person” wording in the right of first refusal provisions. The LP claimed the tenant’s first refusal right would not be triggered by the co-owner’s buyout of the other since “any person” referred to any third party, not the LP or any co-owners of the LP. A California appeals court held the tenant’s right of first refusal would not be triggered by the co-owner’s buyout of the other’s interest in the LP or the property since the co-owner was not a third party to the lease agreement, but, as a co-owner in the LP, was the landlord. [Bill Signs Trucking, LLC v. Signs Family Limited Partnership (December 18, 2007) __ CA4th __]

Editor’s note— The LP was originally owned by one person. On the original owner’s death, the LP was willed to two people. As the new co-owners of the property and co-partners in the LP, they became the “collective landlord” under the lease agreement with the tenant. A landlord cannot be a third party to a lease. As no “stranger” to the lease was to gain control over the leased property, no sale for the purposes of triggering a first refusal right could have occurred. As it stands, the tenant still holds his right of first refusal to buy the property should a third-party offer be presented.

Unconscionable arbitration agreement is unenforceable
A residential homebuyer entered into a purchase agreement with a builder which contained an arbitration provision for any disputes over the buyer’s funds deposited in escrow. On close of escrow, the homebuyer signed a Builder Application for Home Enrollment so their home would be included in a home warranty program. The Application acknowledged receipt by the homebuyer of a warranty booklet, which they did not receive, and their consent to the arbitration provision contained in the booklet. After the close of escrow, the homebuyer received the warranty booklet with the arbitration provision which stated the homebuyer had waived all rights against the builder on signing the Application. Construction defects existed on the property which the builder refused to correct. The homebuyer sought to recover his losses from the builder for the construction defects. The builder sought to compel arbitration, claiming the homebuyer agreed to arbitration when he signed the home warranty Application. The homebuyer claimed the builder could not compel arbitration since the arbitration provision regarding construction defects was not in the purchase agreement or Application, but in the booklet which they did not receive until after closing. A California appeals court held the arbitration agreement was unenforceable and the builder could not compel arbitration since the terms of the provision were not in the purchase agreement or Application, and was non-negotiable, misleading, and one-sided. [Baker v. Osborne Development Corporation (January 31, 2008) __CA4th __]

Editor’s note — Since the late 1970s, public policy has pushed for enforcement of arbitration agreements to remove litigation from the courts. However, this policy does not come into play until an enforceable arbitration agreement exists between the buyer and seller. Unless an arbitration provision authorizes the arbitrator to decide whether an arbitration provision is enforceable, it is up to a court to decide its unconscionability, and hence, its unenforceability. Unconscionability has both procedural and substantive elements. Both elements must be present to invalidate an arbitration provision.

In Baker, the arbitration provision was procedurally unconscionable since the arbitration provision was not in the purchase agreement or the Application for the home warranty program, the provision was not presented as negotiable, and the Application to the home warranty insurer was misleading if it was meant to be an arbitration agreement binding both the homebuyer and builder. The arbitration provision was also substantively unconscionable since the provision was for the sole benefit of the builder since it also waived any claims the homebuyer might have against the builder to arbitrate.

Builder’s arbitration agreement with homebuyer is void
A buyer purchased a home from a builder. On closing, the buyer signed numerous documents, including a Builder Application for enrollment in a home warranty program. The Application acknowledged receipt of a warranty booklet, which he did not receive, and his consent to the arbitration provisions contained in the booklet. The arbitration provisions in the booklet stated any disputes concerning the enforceability of the arbitration agreement are to be decided by the arbitrator. After closing, the homebuyer found construction defects which the builder refused to correct. The homebuyer filed a lawsuit against the builder to recover the costs to correct the construction defects. The builder sought to compel arbitration under the arbitration agreement contained in the home warranty booklet. The homebuyer claimed he did not agree to the arbitration provisions and, without an agreement to arbitrate, the builder could not compel arbitration. The builder claimed he could compel arbitration since the arbitration clause authorized the arbitrator to determine the existence of the arbitration agreement. A California appeals court held the builder could not compel arbitration since the homebuyer claimed he did not knowingly agree to the arbitration provisions, and whether the homebuyer entered into an agreement to submit a dispute to arbitration was up to the court to decide, not the arbitrator.

Also at issue in this case:

Arbitration provisions in contract of adhesion are void
A buyer agreed to purchase a home from a builder. On closing, the buyer was given numerous documents to sign, including a Builder Application for enrollment in a home warranty program, all presented on a “take-it-or-leave-it” basis with no negotiation. The Application acknowledged receipt of a warranty booklet, which he did not receive, and his consent to the arbitration provisions contained in the booklet. The arbitration provisions in the booklet waived all of the homebuyer’s rights against the builder, applied to disputes arising not only from the warranty, but also from any dispute regarding the home or the sale of the home. After closing, the homebuyer found construction defects on the property which the builder refused to correct. The homebuyer filed a lawsuit against the builder to recover costs to correct the construction defects. The builder sought to compel arbitration under the arbitration agreement contained in the home warranty booklet. The homebuyer claimed the arbitration provisions were unconscionable, and thus unenforceable, since they were presented as non-negotiable, for the sole benefit of the builder, and the scope of the provisions were beyond the homebuyer’s reasonable expectations. The builder claimed the arbitration provisions were not unconscionable since they were to be expected in a residential sales transaction. A California appeals court held the arbitration provisions were unconscionable and could not be enforced by the builder since they were presented as non-negotiable, one-sided, and the scope of the provisions covering disputes arising not only from the warranty, but from any claim the homebuyer might have against the builder violated the homebuyer’s reasonable expectations, an unconscionable “contract of adhesion”. [Bruni v. Didion (March 12, 2008) __ CA4th __]

Editor’s note — In this case, as in the Baker case, the home warranty program was provided by the Home Buyers Warranty Corporation (HBW). The court in Baker also ruled that the arbitration provision was void as unconscionable. Also, in a Nevada Supreme Court case, they held that an essentially identical “2-10 Home Buyers Warranty” program and Application administered by a different company was also an unconscionable “contract of adhesion”.

Reported by Connor P. Wallmark:

Appropriative water rights are appurtenant to entire property
The prior common owner of two parcels held appropriative water rights for a fixed amount of water, rights appurtenant to the entire acreage in the two parcels. Historically, a high portion of the water was used on the upper parcel with a small portion used on the lower. The lower parcel comprised 52% of the total acreage in the two parcels. The prior owner encumbered the lower parcel with a trust deed without reserving his water rights. The lower parcel was later foreclosed and sold to a new owner. The new owner of the lower parcel claimed the water rights held by the prior owner were appurtenant to the entire acreage in both parcels, and on foreclosure of the lower parcel, 52% of the water rights were acquired by the new owner of the lower parcel as appurtenant rights. The prior owner still owning the upper parcel claimed the new owner of the lower parcel should receive a small portion of water rights based on the preforeclosure water usage. A California appeals court held the new owner, on acquiring the property by foreclosure under a trust deed which did not reserve the water rights to the prior owner, was entitled to 52% percent of the water rights since appropriative water rights are appurtenant to the entire property and appurtenant water rights are equally proportioned on the basis of acreage without concern for where or how the water is used on the property. [John W. Nicoll v. Oscar Rudnick (February 27, 2008) __ CA4th__]

Monthly interest on payoff based on one-twelfth of a year’s interest
A borrower entered into a loan transaction with a lender. The borrower later prepaid the principal of the note. In determining the amount of interest needed to satisfy the obligation, the lender calculated interest for February, a short month, as one-twelfth of a year, roughly 30.4 days. The borrower claimed the lender’s calculation of interest breached the terms of the note since it calculated interest on the basis of a 30.4-day month not the literal days in the month, and thus the lender was guilty of unfair business practices. The lender claimed its 30.4-day month calculation was proper since it was consistent with federal regulations, standard practice within the mortgage industry, and the terms of the note. A California appeals court held the lender could use the 30.4-day month interest calculation for determining the loan payoff, even though February is shorter than 30.4 days, since that method of calculation was consistent with the industry standard, federal regulations and a reasonable interpretation of the terms of the note. [Julie Puentes et al v. Wells Fargo Home Mortgage, Inc. (February 28, 2008) __ CA4th__]

Reported by Giang Hoang:

Prior government ownership of a landlocked parcel bars easement of necessity
Land owned by the federal government was broken into two separate parcels, one of them landlocked by the other. The parcel that was not landlocked was conveyed to a private owner. No easement was reserved burdening the conveyed property for the benefit of the landlocked property. The federal government did not during its ownership exercise its power of eminent domain to establish an access route for the landlocked property it retained. Later, the landlocked property was transferred to another private owner. The owner of the landlocked property sought to establish an easement of necessity across the adjacent property since the landlocked property had no access to a public road and the federal government was the common owner of both properties when the landlocked condition was created. The owner of the adjacent property claimed the easement never existed despite common ownership since the federal government never exercised the power of eminent domain to create an easement over the adjacent property following its transfer. A California appeals court held no easement of necessity existed on the adjacent property for the benefit of the landlocked property since the federal government never exercised its right of eminent domain to establish an easement prior to the landlocked property’s transfer to a private party. [Murphy v. Burch (November 19, 2007) ­­__CA4th___]

Editor’s note — The Supreme Court has accepted a petition for a hearing on this case.