Keeping Current Property

Volume 26 No. 3

Keeping Current—Property Editor: Prof. Shelby D. Green, Pace University School of Law, White Plains, NY 10603, sgreen@law.pace.edu. Contributors: Prof. William G. Baker, Prof. Matthew J. Festa, Prof. Bridget Fuselier, and Prof. Darryl C. Wilson.

Keeping Current—Property offers a look at selected recent cases, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.

CASES

BROKERS: Listing agreement that describes property by street address does not entitle agent to commission on personal property used in business. The Hinsdales owned a 56-acre parcel, which contained a two-family residence and berry fields, from which they sold berries commercially. They entered into a written listing agreement that described the property by its street address only and provided for a 6% sales commission. The agent found a buyer who contracted to pay $900,000, consisting of $725,000 for the real estate, $100,000 for the business known as “Berry Farm and Farm Stand,” and $75,000 for business machinery, equipment, tools, fixtures, inventory, and supplies. The agent sought to collect a commission on the entire price, but the Hinsdales claimed that the listing agreement covered the sale of the real property only. The trial court found that the term “sales price” used in the listing agreement was ambiguous but held for the agent because it had used its expertise to sell all of the property with the Hinsdales’ knowledge and assistance. Although the real estate commission rules required that a listing agreement contain a “clear description of the property” covered by it, the court dismissed the omission of the business-related personal property as a technical violation that otherwise did not undermine the purpose of the rules. The supreme court disagreed with this assessment, pointing out that the regulations served to ensure that consumers are fully informed and treated fairly and to avoid a situation in which the parties dispute what was covered and not. Based on the strong public policy underlying the writing requirement, the court refused to allow the agent to collect a commission on the sale of the business portion of the transaction. Lang McLaughry Spera Real Estate, LLC v. Hinsdale, 35 A.3d 100 (Vt. 2011).

EASEMENT: Right-of-way easement to ocean does not include recreational use of lawn. An 1885 subdivision map for a beachfront community on Long Island Sound depicted 35 waterfront lots and other lots (the rear lots) on the other side of a great lawn. Earlier litigation determined that the map created an easement by implication over the lawn for the benefit of the rear lots. The issue in this case was whether the scope of that easement included the right to recreate on the lawn or merely to pass and repass to the Sound. Based on an examination of maps, the original plan, photos, picture postcards, deeds conveying lots within the development, and even testimony from the town historian, the trial court determined that the rear lot owners had an easement only to pass and repass over the lawn to the shoreline. But, in a supplemental ruling, the trial court also allowed the rear lot owners “to use their easement . . . to pass and repass to the east . . . including any open space or alternate access to the shoreline.” The supreme court affirmed the trial court’s initial ruling but reversed its supplemental ruling. The scope of an easement created by implication is determined by reasonable inferences from the circumstances existing when the easement is created. As the trial court found, the most compelling evidence on the scope was the language in the deeds executed contemporaneously with the creation of the development. These deeds referred to a right of way “as shown upon said plan” or “to the sea.” A right of way usually encompasses only a right to pass. It was of no import that the rear lot owners had since used the lawn for recreation, because a party cannot expand the scope of an easement merely by exceeding it. The deeds made no references to any property to the east or to access to any part of the development. McBurney v. Paquin, 28 A.3d 272 (Conn. 2011).

EMINENT DOMAIN: Evidence of environmental contamination and remediation costs is admissible to reduce condemnation award. The state department of transportation acquired Ryan’s property under its power of eminent domain. Ryan obtained his own appraisal that reflected the value of the property as $3.497 million. The state’s appraisal reflected a property value of $1.348 million. The property was located in a largely abandoned industrial area, contaminated with numerous pollutants. Ryan’s appraiser testified that his appraisal assumed that the property was environmentally clean but conceded that a prudent buyer would offer a lower price because of the costs to remediate any environmental contamination. The state’s appraiser confirmed that his appraisal included a deduction for environmental contamination and the estimated costs of remediation. Ryan argued that allowing evidence of environmental contamination and remediation costs unfairly subjected him to a “double liability” or a “double take” in which the property owner must first pay for the contamination through a reduced condemnation award while still remaining potentially liable for cleaning up the contamination under environmental regulations. The trial court allowed the jury to consider both appraisals. The jury determined the fair market value to be $2,001,725. The supreme court affirmed, applying a well-recognized definition of fair market value: that which a willing seller would accept and a willing buyer would offer, neither being obliged to act, considering every element that affects value and would influence a prudent purchaser. The court viewed evidence of environmental contamination no differently than evidence of a leaky basement, a cracked foundation, or a dilapidated roof. If the damage and costs of repair would influence a purchaser in determining how much to pay for the land, then such evidence is relevant to fair market value and admissible in a condemnation proceeding. As to Ryan’s “double-take” argument, the court stated that liability for environmental contamination had no place in a condemnation proceeding. The object of the hearing is to ensure that the landowner receives an amount equal to the property’s fair market value on the date of the taking. How the property came to be contaminated on the date of the taking and who is responsible for remediation, are different questions. The concurring opinion noted that the valuation of condemned contaminated property is a developing area with only 12 states having addressed the issue thus far and a slim majority allowing consideration of contamination and remediation costs in determining fair market value. 260 North 12th Street, LLC v. Wisconsin Dep’t of Transp., 808 N.W.2d 372 (Wis. 2011).

LANDLORD-TENANT: Landlord’s interference with 12 square feet of leased premises containing over 15,000 square feet is not partial eviction entitling tenant to full rent abatement. A tenant leased two floors in a building to operate East 86th Street Cinemas, a large multiplex movie theater. The lease allowed the landlord to enter to make repairs and improvements and stated that the tenant would not be entitled to a reduction in rent for the diminution of rental value from such repairs or improvements. Four years into the lease, without the tenant’s consent the landlord entered the premises and installed cross-bracing between two existing steel support columns on both floors leased. These changes caused a change in the flow of patron foot traffic on the first floor and a slight diminution of the second floor waiting area—about 12 square feet out of a total of over 15,000 square feet in the leased premises. The tenant stopped paying rent and sued for $1 million in actual damages, $3 million in punitive damages, and an injunction to bar the landlord from doing any further work and to remove the cross-bracing. The trial court granted the injunctive relief, restraining any further work, and ordered the landlord to complete the repairs commenced as expeditiously as possible. The court, however, dismissed the tenant’s damage claims, instead granting the landlord’s claim for unpaid rent. The tenant relied on the long-standing rule that a landlord’s eviction of a tenant suspends the rent obligation because of a failure of consideration. In such case, a tenant is privileged to withhold the entire rent even when the eviction is only partial because a landlord is not permitted to apportion his wrong. The court of appeals affirmed, redefining “actual partial eviction” to require something more than a mere “trivial” or de minimis interference with the tenant’s use and enjoyment. The court was not sympathetic to the tenant, given the modern realities of commercial leasing when tenants are free to negotiate appropriate lease terms. Eastside Exhibition Corp. v. 210 East 86th Street Corp., 965 N.E.2d 246 (N.Y. 2012).

LANDLORD-TENANT: Tenant is entitled to damages under implied warranty of habitability for entire time that premises lacked running water and functioning toilet. From 1987 to 2009, the tenants rented a trailer in a mobile home park to use as their year-round residence. In December 2008, water pipes in the trailer froze and burst, causing the tenants to be without running water. They reported the broken pipes to the landlord, who asserted he had no obligation to make repairs, but he allowed the tenants a rent abatement if they made the repairs. They did not repair the pipes, and for some time they made do by buying bottled water and hauling water from a neighbor’s home. In March 2009, the toilet stopped working. The landlord told one of the tenants that he “was on [his] own with that.” In May 2009, the tenants sued the landlord for breach of the implied warranty of habitability. The trial court ruled for the tenants, finding that the lack of water and a functioning toilet “were of sufficient magnitude as to ‘materially impair the [tenants’] health or safety.’” The court awarded the tenants five months’ rent, even though at the time they were evicted in August 2009, they had been without running water for nine months and without a functioning toilet for five months. The tenants moved to amend the judgment to include damages for the four months they were without water. The trial court denied the motion. On appeal, the court found that the relevant period for determining damages was the entire nine-month period. The absence of running water by itself violated the warranty of habitability as a condition that endangered or materially impaired health or safety. Belanger v. Mulholland, 30 A.3d 836 (Me. 2011).

MORTGAGES: Judgment on promissory note does not extinguish junior deed of trust and does not preclude junior lender’s claim to surplus at foreclosure on senior loan. The Burnses encumbered their residence with a senior deed of trust held by a bank and a junior deed of trust held by a credit union. When the Burnses defaulted on the junior loan, the credit union obtained a default judgment on the promissory note, which went unsatisfied. Next, the bank foreclosed on the senior deed of trust, and the trustee’s sale generated a surplus. The credit union sought to recover its judgment out of the surplus. The trial court held for the Burnses, reasoning that the judgment on the note extinguished the credit union’s deed of trust by merger. The court of appeals reversed, relying on well-settled rules of mortgage law that it applied to deeds of trust. An entry of judgment on a promissory note does not extinguish a mortgage lien in the real property that secures the note; the note and mortgage represent separate obligations. It was entirely proper for the trustee to elect to sue on the note before first exhausting the security, because the law does not prohibit successive actions. The Burnses also argued that the credit union was not entitled to share in the surplus because the junior deed of trust was extinguished at the foreclosure on the senior deed of trust. While this correctly stated the effect on the deed of trust, the promissory note remains intact. Because both owners had granted the deed of trust to the credit union, a homestead exemption was not available. Boeing Employees’ Credit Union v. Burns, 272 P.3d 908 (Wash. Ct. App. 2012).

REAL COVENANTS: Landowner that deliberately violates restrictive covenants must remove offending structures without benefit of balancing of equities. Cullen owned and resided on a parcel on Beacon Hill Road with a grand vista and ocean views. He also owned an adjacent unimproved lot on Hammersmith Road lying between his home and the ocean. Before selling the Hammersmith lot, Cullen recorded a “Declaration of Easements, Restrictions, Conditions, Servitudes and Uses,” burdening the Hammersmith lot for the benefit of the Beacon Hill lot. The Declaration divided the Hammersmith lot into three areas: the Homesite Building Area, the View Easement Area, and the Open Space Maintenance Area. The Declaration prohibited any construction within either the Open Space Area or the View Easement Area, and in the Homesite Building Area limited the building footprint (including porches and decks) to 3,500 square feet with an additional 1,000 square feet for accessory structures, the total interior space to 7,000 square feet, and the maximum height to 30 feet above a defined reference grade. When the Tarinis bought the Hammersmith lot, they sought clarification from Cullen’s attorney as to the meaning of the covenants. Being satisfied with the attorney’s responses, the Tarinis went forward and engaged an architect to design and build a home. From that point on, the Tarinis played fast and loose with both the architect (by not providing him with a copy of the Declaration) and with Cullen (by not disclosing that the drawn plans violated the limits in the Declaration and by refusing to provide a copy of the plans that showed the dimensions and location of the proposed structure). After the Tarinis commenced construction, Cullen learned that the proposed building would have an elevation of over 34 feet, the footprint was more than 5,300 square feet, the total interior space would exceed 12,000 square feet, and the structure would protrude beyond the Homesite Area. Cullen sued for an injunction. The trial court ruled for Cullen, finding the restrictions unambiguous and the Tarinis deliberately violated them, resulting in irreparable harm. The court restrained the Tarinis from continuing and ordered the removal of the offending structures. The supreme court affirmed, rejecting the Tarinis’ claim that the trial court should have balanced the equities. Ordinarily, if enforcement of a restriction disproportionately harms the defendant with little benefit to the plaintiff, a court may balance the equities, but the benefit of that doctrine is generally reserved for an innocent party that proceeds without knowledge that she is encroaching on another’s property rights. The Tarinis were not innocent; they proceeded to spend approximately $1.25 million to construct a home that they knew violated at least three of the Declaration’s restrictions. Cullen v. Tarini, 15 A.3d 968 (R.I. 2011).

RIGHT OF FIRST REFUSAL: Right of first refusal is waived by repeated attempts to negotiate lower price. A testatrix left 10 acres of land to her grandson, Brian, and 80 acres to her two children, James and Shirley (Brian’s mother). The will subjected the 80 acres to a right of first refusal in Brian. When James and Shirley received an offer to buy their property, their lawyer notified Brian by letter. Rather than simply accept or reject the offer, Brian responded that the terms were unacceptable and demanded a whole slew of documents, not only the sales contract with the third party, but all the ancillary documents needed for closing (mortgage commitment, appraisal, survey, flood plain map, environmental impact study, as well as a HUD-1 Settlement Statement). The attorney sent him only the sales contract. Brian then insisted that the price be reduced because he would not pay any broker’s fees and refused to go forward, even though his mother offered to rebate the broker’s fees. He complained that the deadlines set were unreasonable and continued to insist on getting copies of the other closing documents. James refused to lower the price and sold his interest to the buyer under the contract. Shirley sold her interest to a corporation that listed Brian as its president. The buyer sued Shirley and Brian to enforce its right to buy the remaining one-half interest. The buyer prevailed because Brian had waived his right of first refusal. The court explained that the right of first refusal was triggered when Brian received notice of the third-party offer. The only way to exercise the right was by unequivocally accepting the third-party offer. An acceptance containing conditions amounts to a rejection. Brian’s repeated attempts to negotiate a lower price did just that and amounted to counteroffers, which functioned as rejections. Richmond v. EBI, Inc., 53 So. 3d 859 (Miss. Ct. App. 2011).

WATER: Although subject to the rule of capture, groundwater in place is owned separately, distinctly, and exclusively by surface owner. A landowner applied to an aquifer authority for an initial regular permit (IRP) to withdraw 700 acre-feet of water annually from an aquifer. The total annual withdrawal allowed by the authority was calculated based on the beneficial use of water without waste during an historical period. The aquifer authority denied the application. The owner appealed to an administrative law judge, who awarded the landowner an IRP for 14 acre-feet of water based on the owner’s testimony that he drew water from the lake for his irrigation needs and that water from the lake, including the well water that had flowed into it, was state surface water that could not support his application for groundwater. The case then went to the courts, where the landowner added a claim for a taking of property without compensation. The trial court ruled for the landowner on the IRP claim and for the state on the takings claim. On review, the supreme court made two rulings, the first relatively unremarkable, and the other arguably groundbreaking. It affirmed the aquifer authority’s power to regulate the withdrawal of groundwater and found substantial evidence to support the finding that groundwater from a well became state water when it flowed into a lake and as such could not be used to calculate historical use of groundwater for IRP purposes. The court went on to consider the nature of a landowner’s property interest in groundwater. Although an issue of first impression, the court was not operating in complete darkness. The court discerned a strong analogy in the body of law governing oil and gas interests, which were well articulated in Texas jurisprudence. A landowner’s right to the oil and gas beneath his land is an exclusive and private property right, and, although subject to the rule of capture, the landowner owns these resources in place. The court saw no reason for a different rule for groundwater; both types of interests concern a thing that may be found in subterranean reservoirs in which it is fugacious, and both involve a shared resource that must be conserved under the state constitution. Although the landowner thus had a compensable property interest in groundwater, whether the limits on withdrawal imposed by the aquifer authority constituted a taking under the Texas Constitution could not be resolved without further findings by the trial court. Edwards Aquifer Auth. v. Day, No. 08-0964, 2012 WL 592729 (Tex. Feb. 24, 2012).

LITERATURE

Property Theory. Many property lawyers began their careers as first-year law students learning about the “bundle of sticks” concept of property. The “sticks” symbolize the various rights that can be held by different people at different times, including the rights to possess, use, exclude, and alienate. This theory, which shaped property law throughout the 20th century, has in recent decades encountered critiques. Recently, in Symposium, Property: A Bundle of Rights, published in the Econ Journal Watch, several highly regarded property law scholars engaged in such a critique. The entire volume is available online at http://econjwatch.org/issues/ volume-8-issue-3-september-2011. The introductory essay by the organizers, Prof. Daniel B. Klein and John Robinson, Property: A Bundle of Rights? Prologue to the Property Symposium, 8 Econ J. Watch 193 (2011), posits the question of whether the bundle metaphor, which became popular in the 20th century along with the rise of democratic theory, is meaningful and still obtains today.

Six of the essays in this symposium criticize the bundle-of-rights metaphor. Prof. Eric Claeys writes in Bundle-of-Sticks Notions in Legal and Economic Scholarship, 8 Econ J. Watch 205 (2011), that the concept can be helpful, but that a better understanding of property is as a “right securing an interest in determining exclusively the use of an asset external to the owner’s person.” Id. at 208. Prof. Larissa Katz, in The Regulative Functions of Property Rights, 8 Econ J. Watch 236 (2011), notes the instrumentalist nature of much contemporary property theory—that is, the recognition that the point of property theory is to manage scarce collective resources. Katz posits a third way (as an alternative to either the absolute freedom or the bundle of rights model) of thinking about property: one that seeks to answer the “Basic Question” of the relationship between neighbors over the use of a thing. Id. at 237. Prof. Thomas W. Merrill writes in The Property Prism, 8 Econ J. Watch 247 (2011), that the bundle metaphor has failed in offering guidance for answering practical property questions—what kinds of deprivations must be tolerated, what are the patterns and dimensions mediating relationships, and the like. Id. at 248, 249. He suggests that property is better conceived as a “prism” to view how property rules affect various audiences. Id. at 251. In Property Is Not Just a Bundle of Rights, 8 Econ J. Watch 279, 281 (2011), Prof. Henry E. Smith concurs with this critique and offers a more “architectural” approach to property as a system calculated to reveal that those interests that property protects are related but distinct. Prof. Adam Mossoff joins the bundle critique but also contends that the focus on exclusion is likewise incomplete as it does not fully account for the heterogeneity of interests in property, in The False Promise of the Right to Exclude, 8 Econ J. Watch 255, 257 (2011). One of the early leading critics of the bundle theory, Prof. J.E. Penner, suggests the superiority of the “layman’s theory” that property is not an incongruous bundle but rather a more concrete “right to a thing,” in Potentiality, Actuality, and “Stick”-Theory, 8 Econ J. Watch 274, 275 (2011).

A few of the essays, however, respond with defenses of the bundle-of-rights theory of property. In A Bundle Theorist Holds On to His Collection of Sticks, 8 Econ J. Watch 265 (2011), Prof. Stephen R. Munzer argues that the exclusion model suggested by Merrill and Smith is unduly narrow and does not fully account for the complexity of property. The very disjointed and disparate nature of property rights and rules makes the bundle a better descriptive metaphor. Id. at 272. Prof. Richard A. Epstein also contributes a defense from a classical liberal perspective, arguing that the bundle theory offers the best understanding of property as an institution that promotes limited government, in Bundle-of-Rights Theory as a Bulwark Against Statist Conceptions of Private Property, 8 Econ J. Watch 223 (2011).

Finally, Prof. Robert C. Ellickson stakes out middle ground in Two Cheers for the Bundle-of-Sticks Metaphor, Three Cheers for Merrill and Smith, 8 Econ J. Watch 215 (2011). Ellickson credits the critics of the bundle metaphor for recognizing its incompleteness as well as its historical-political role in reifying private property rights. He acknowledges, however, the great explanatory power that the bundle metaphor has in helping lawyers, law students, and laypersons to understand the complexity of property law. Ellickson’s thesis best encapsulates the usefulness of this Symposium for both scholars and practitioners: that while property law is highly theoretical, with proper understanding of its limitations, we can continue to use the bundle-of-sticks metaphor to explain property rules and controversies to clients, judges, and law students.

Zoning. Land use development and control have various components in practice. In many fields of law practice, the litigation arena tends to be fairly structured, with rules, standards, and precedents firmly in place. Land use disputes, however, tend to be much less predictable. In particular, the ad hoc nature of many zoning decisions leaves much uncertainty for future development. Prof. Stewart E. Sterk and Kimberly J. Brunelle address this important problem in their recent article, Zoning Finality: Reconceptualizing Res Judicata Doctrine in Land Use Cases, 63 Fla. L. Rev. 1139 (2011). The authors note, insightfully, that for many Americans, their only interaction with government may come from zoning or development issues. This fact, coupled with the social and economic investments that property owners make in their communities, makes it all the more crucial to have a legal regime that overcomes the uncertainty of traditional land use disputes. The article suggests that a greater attention to the civil procedure concept of res judicata—particularly the issue preclusion doctrine—can help provide better results, more reliability, and a degree of finality. The article illustrates the suggestion through a series of scenarios demonstrating when issue preclusion might or might not be applied. This is a new innovation as applied to zoning, but one that is consistent with the normative goals of land use regulation.

Housing. The movement of disabled persons from state institutions to private residential housing during recent years has presented vexing questions of public policy. In particular, the movement toward increased residential housing has met with resistance through quotas. Prof. Daniel R. Mandelker addresses this problem in Housing Quotas for People with Disabilities: Legislating Exclusion, 43 Urb. Law. 915 (2012). Mandelker describes the functional quotas in three forms: minimum distance between homes, limitations on the total number of residential homes in a community, or limitations on the number of units in each home. First, he debunks the evidentiary support offered for the quotas. Applying the framework of the federal Fair Housing Act and examining the proffered justifications in a number of court challenges, Mandelker argues that these quotas are illegal. Furthermore, the opposition that is reflected by the quotas works to defeat our constitutional and political commitments to free choice and equality in the allocation of housing opportunities.

LEGISLATION

California requires common interest developments to allow installation of electric vehicle charging stations. The legislation makes void and unenforceable any covenant or restriction that prohibits the installation or operation of an electric vehicle charging station. Owners of designated parking spaces can install an electric vehicle charging station in the parking space unless such installation is impossible or unreasonably expensive. When the installation is impossible or unreasonably expensive, the association, in accordance with the statute, can develop alternative methods for installations of electric vehicle charging stations in the common areas. 2012 Cal. Stat. 6.

New Jersey adopts the Foreclosure Rescue Fraud Prevention Act. Like many other jurisdictions, New Jersey enacts legislation to prevent fraud and overreaching against mortgagors that are in default on a debt secured by a security interest in residential real property. The act imposes stringent requirements on those who attempt to profit from the growing number of mortgage defaults. “Foreclosure consultant” is broadly defined to include anyone that solicits or contacts a homeowner and offers to provide services for a pending foreclosure. Such consultants do not include banks, savings banks, savings and loan associations, credit unions, and those licensed as real estate brokers or salespersons. Regulated foreclosure consultants are required to post a surety bond with the Director of the Division of Consumer Affairs, provide the owner a written contract in plain language, and meet the other requirements of the detailed statute. The act also regulates distressed-property purchasers, imposing stringent disclosure requirements and providing the mortgagor with a right to rescind. 2011 N.J. Laws 146.

New Jersey authorizes recording of electronic title documents. The recording act is amended to include “electronic” documents within the definition of document. Recording means that the document or its image has been placed in the permanent records of the recording office and has been indexed. 2011 N.J. Laws 217.

Ohio adopts the Uniform Power of Attorney Act (2006). By default, powers of attorney under the act are durable. The principal must sign the power, which becomes presumptively valid if the signature is acknowledged. Witnesses are not required. Provisions are made for electronic signatures. In the power, the principal can nominate a guardian of the principal’s person and estate and also can nominate a guardian of the person and the estate of the principal’s minor children. The Uniform Power of Attorney Act has been adopted by at least 12 states. Ohio Rev. Code Ann. §§ 1337.21 to 1337.64.

Pennsylvania adopts the Appraisal Management Company Registration Act. Under this act, an appraisal management company, defined as a person who administers appraisers to fulfill requests for appraisal services, must register with the state board of certified real estate appraisers, file a bond, and otherwise comply with the rules of the board. The act imposes stringent requirements on appraisal management companies to reduce fraud and ensure competence in the appraisal process. 2012 Pa. Laws 4.

South Carolina prohibits transfer fee covenants. A transfer fee covenant is a fee or charge payable on the transfer or payable for the right to make a transfer of real property. Transfer fee covenants are void. Existing transfer fee covenants are subject to numerous requirements or risk being treated as void. The law excludes most one-time fees and fees paid to homeowners, condominium, and cooperative associations. 2012 S.C. Acts 106.

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