P R O B A T E   &   P R O P E R T Y
March/April 2002
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KEEPING CURRENT - PROPERTY

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

Cases

CONSTITUTIONAL LAW: Free speech. Violation of the store owner’s rule limiting referenda-petitioning to a specified eight foot square area justified the owner in having a violator arrested for trespassing and removed from the premises of a big box retail store. Lushbaugh v. Home Depot U.S.A., Inc., 113 Cal. Rptr. 2d 700 (Cal. Ct. App. 2001).

CONSTRUCTION: Emotional distress damages. Ohio joined the minority of states holding that emotional distress damages are available for breach of a contract for construction of a new home. Kishmarton v. William Bailey Const., Inc., 754 N.E.2d 785 (Ohio 2001).

CONVEYANCES: Title warranty. The grantee’s successful defense of an adverse possession claim meant the grantor’s title warranty was not breached and the grantee cannot recover from the grantor the defense costs. Outcalt v. Wardlaw, 750 N.E.2d 859 (Ind. Ct. App. 2001).

EASEMENTS: Ambiguity. The plaintiff purchased a subdivision lot that abutted strip mine lakes located partly outside the subdivision. The subdivision was part of a larger property, which was sold to several different developers. At the time of purchase, the plaintiff had access to a significant portion of the lakes. Another subdivision developer later built a levee for the convenience of its residents on its property, restricting the plaintiff’s access to a significant portion of the lakes. The court held that the document regarding access rights to the lakes did not restrict the other developer. The document conveyed no easement rights to the plaintiff, because the information was insufficient (such as the absence of the burdened property description) to create a valid easement. In addition, there was no general scheme or plan in place before the parcels were sold to the individual developers that would have imposed a duty upon them. Mackiewicz v. Metzger, 750 N.E.2d 812 (Ind. Ct. App. 2001).

EASEMENTS: Scope. Over a period of years a father conveyed three parcels to his son. Two of the conveyances were expressly together with a beneficial road easement. The third conveyance was together with an access easement via a more inconvenient road. The son built a house on the three parcels and used the more convenient road. The son eventually sold his property, which was divided into two residential lots, one of which consisted primarily of the parcel conveyed without an easement for the better road. The father’s successor in interest objected to the use of the better road for both of the lots. The court held that the three conveyances were intended to create one lot benefited by the better road and the division of the lot did not unreasonably increase the burden on the easement. Martin Drive Corp. v. Thorsen, 786 A.2d 484 (Conn. App. Ct. 2001).

HAZARDOUS SUBSTANCES: Subsurface migration. The migration of unknown subsurface environmental contaminants does not constitute the "discharge" of hazardous substances creating strict liability for the landowner under the state environmental law. White Oak Funding, Inc. v. Winning, 775 A.2d 222 (N.J. Super. Ct. App. Div. 2001).

INSURANCE: Environmental coverage. Because the insurance policy stated that the insurer had a duty to indemnify the insured for "all sums that the insured becomes legally obligated to pay as damages" for harm provided within coverage, the court held the insurance company was liable only for cleanup costs arising from court orders. Therefore, the insurer was not required to reimburse its insured for cleanup costs incurred pursuant to a state administrative order. Certain Underwriters at Lloyd’s of London v. Superior Court, 16 P.3d 94 (Cal. 2001).

A property owner who was "invited" by the state environmental agency to remediate its site under the state voluntary cleanup program was entitled to coverage even though it did not notify its insurer before entering into the program. The state’s invitation to participate in the voluntary cleanup program constituted a "suit" triggering the insurer’s duty to defend. The insurer was not prejudiced by the policyholder’s agreement to participate because the insurer could bring a lawsuit against a responsible party if it later determined that its policyholder was not responsible for the contamination. W. Nat’l Mut. Ins. Co. v. Westling Mfg., No. C8–01–360, 2001 WL 1085005 (Minn. Ct. App. 2001)(unpublished).

LANDLORD AND TENANT: Extensions and renewals. A tenant’s agreement to extend its operating covenant for an identified time period implicitly and unambiguously constituted the tenant’s agreement to extend the lease term to be coterminous with the extended operating covenant. Rouse-Randhurst Shopping Center, Inc. v. J.C. Penney Co., 171 F. Supp. 2d 824 (N.D. Ill. 2001).

There should be no equitable exception to a requirement for timely exercise of a lease extension or renewal option if the tenant’s negligence resulted in the late notice. Otherwise the equitable exception would swallow the rule of strict compliance and excuse almost every late extension or renewal notice. Utah Coal and Lumber Restaurant, Inc. v. Outdoor Endeavors Unlimited, No. 20000699, 2001 Utah 100, 2001 WL 1477916 (Utah 2001).

LANDLORD AND TENANT: Letters of intent. OfficeMax and Sapp entered into a letter of intent (LOI) for a lease. The LOI stated that Sapp would not entertain other offers for the space, but Sapp later signed a lease agreement with Staples. The LOI was held unenforceable, because (1) major terms of the lease were omitted from the LOI, (2) OfficeMax had no mutual obligation to not look at other sites, and (3) the LOI contained no legal description of the property. OfficeMax, Inc., v. Sapp, 132 F. Supp. 2d 1079 (M.D. Ga. 2001).

LANDLORD AND TENANT: Operating covenants. A shoe store in a regional supercenter closed with approximately three years remaining on its lease. The tenant testified it would lose over $100,000 per year as well as the cost of re-outfitting the store. The landlord argued closure adversely affected its ability to keep the rest of the center occupied. The operating covenant contained a fairly high degree of specificity as to the operating requirements, reducing the need for the court to determine the scope of the operating requirement. The court held the liquidated damage clause did not preclude other relief and ordered the tenant to operate the store. Summit Town Centre, Inc. v. The Shoe Show of Rocky Mount, Inc., 786 A.2d 240 (Pa. Super. Ct. 2001).

LANDLORD AND TENANT: Prevailing party. The landlord’s bad faith efforts to avoid a tenant’s valid lease renewal right prevented an award of attorney fees to the landlord as the prevailing party on a rent claim for the tenant’s temporary holdover after voluntarily relinquishing the renewal right. Jacreg Realty Corp. v. Matthew Barnes, 727 N.Y.S.2d 103 (N.Y. App. Div. 2001).

A landlord initiated a holdover proceeding in which the tenant failed to appear, instead vacating the premises. The court awarded the landlord its attorney fees as the prevailing party, because the surrender was an outcome favorable to the landlord. Soho Village Realty, Inc. v Gaffney, 727 N.Y.S.2d 261 (N.Y. App. Div. 2001).

LANDLORD AND TENANT: Tax consequences. The parties to a sale and leaseback transaction inconsistently claimed tax deductions as the owner of the leased property, resulting in an IRS audit. The tax court held the lessee was the property owner for tax purposes because the sale and leaseback was in substance a financing transaction. The lease option functioned like a fully amortizing loan. Guaderrama v. Comm’r, 2001–2 U.S. Tax Cas. (CCH) ¶ 50,714; 88 A.F.T.R. 2d (RIA) 6620 (10th Cir. 2001)(unpublished).

LENDER LIABILITY: Fees. Document preparation charges were held to be illegal because charging for loan document preparation would constitute the unlicensed practice of law even though the state law authorized "such fees as the parties agree." Dressel v. Ameribank, 635 N.W.2d 328 (Mich. Ct. App. 2001).

MORTGAGES: Assignments of rents. Hotel room revenues are cash collateral and property of the debtor’s bankruptcy estate, even though the mortgage described the assignment of the hotel revenue as "absolute" and "unconditional." The mortgage was internally inconsistent in also granting a security interest in the revenue. Furthermore, the assignment of rent was not contained in an independent document and did not contain clarifying language to the effect that it was not an assignment for additional security only. In the circumstances, the revenue assignee must take affirmative action in the event of default to terminate the debtor’s right to collect the rents. In re 5877 Poplar, L.P., 268 B.R. 140 (Bankr. W.D. Tenn. 2001).

MORTGAGES: Federal preemption. The Alternative Mortgage Instrument Parity Act is not a complete preemption of state regulation; rather, state consumer protection laws will apply except in those areas in which directly inconsistent federal regulations apply. Black v. Financial Freedom Senior Funding Corp., 112 Cal. Rptr. 2d 445 (Cal. Ct. App. 2001).

MORTGAGES: Passive waste. The borrower’s failure to renew parking rights on adjacent property does not, as a matter of law, amount to waste as against a mortgagee’s interest. Boucher Investments, L.P., v. Annappolis-West L.P., 784 A.2d 39 (Md. Ct. Spec. App. 2001).

MORTGAGES: Validity. A mortgage loan arranged by an unlicensed mortgage broker was held void and the lender was barred even from any equitable relief. Beneficial Hawaii, Inc. v. Kida, 30 P.3d 895 (Haw. 2001).

PROPERTY INSURANCE: Scope of coverage. In determining property insurance coverage, the term "decay" does not include only weakness caused by organic processes but can include simple failure of structural elements, such as the roof, because of stress and temperature changes over a 50-year period. Stamm Theatres, Inc. v. Hartford Casualty Insurance Co., 113 Cal. Rptr. 2d 300 (Cal. Ct. App. 2001).

SERVITUDES: Development agreements. A development agreement between a city and a developer to settle a zoning dispute, which capped sewage connection fees, benefited subsequent owners of the developer’s property without an assignment because the agreement met the requirements of a servitude running with the land. County Comm’rs v. St. Charles Assocs., 784 A.2d 545 (Md. 2001).

SERVITUDES: Remedies. A homeowner’s freestanding garage was ordered removed as a violation of subdivision servitudes. The existence of small sheds on other lots was held immaterial as a "slight" violation, whereas the garage was a "major" violation. The existence of the sheds did not constitute grounds for either a defense of changed conditions or unclean hands. Pietrowski v. Dufrane, 634 N.W.2d 109 (Wis. Ct. App. 2001).

SUBDIVISIONS: Definition of lot. In an eminent domain proceeding, the state argued that a parcel adjacent to a river had no development rights because it did not constitute a lot. The definition of "lot" in the city zoning ordinance was "a parcel of land in identical ownership

throughout, bounded by other lots or by streets, which is designated by its owner to be used, developed or built upon as a unit." The court held the ambiguous definition must be interpreted to recognize parcels bounded by natural features as separate lots. The purpose of the ordinance was to determine permitted development based upon the size of lots and not to deny development rights to parcels not constituting a lot. North Shore Realty Trust v. Commonwealth, 747 N.E.2d 107 (Mass. 2001).

TELECOMMUNICATIONS: Federal preemption. Based primarily on the neighbors’ opposition, a city decided to deny a variance for a 150-foot communications tower. The Telecommunications Act of 1996 (TCA) requires such a denial be supported by substantial evidence contained in a written record. The opponents’ evidence consisted of lay testimony concerning the aesthetics and the effect of the tower on property values and the value of the natural environment. The evidence was held insufficient under the TCA. MIOP, Inc. v. City of Grand Rapids, 175 F. Supp. 2d 952 (W.D. Mich. 2001).

TITLE INSURANCE: Marketability of title. The physical encroachment of a city street onto the insured’s property established a triable issue of fact as to whether plaintiff’s title was rendered unmarketable. Mellinger v. TICOR Title Ins. Co., 113 Cal. Rptr. 2d 357 (Cal. Ct. App. 2001).

Literature

Indiana Law. Lloyd T. Wilson Jr. reviews important developments in Indiana property law in New Bricks for the Wall: Developments in Property Law in Indiana, 34 Ind. L. Rev. 955 (2001). Wilson notes that important changes in Indiana property law in the past year were primarily attributable to appellate opinions and not legislation. Wilson describes significant Indiana case law concerning mechanics’ liens, real estate licensees and right-to-sell listing agreements, liabilities of landlords and tenants to one another, premises liability, lender liability to third parties and to the borrower, and, finally, the statute of frauds in real estate conveyances.

Synthetic Leasing. John C. Murray describes synthetic lease transactions as a form of "off balance sheet" financing of corporate real estate acquisitions in Synthetic Leases: "Bankruptcy Proofing" the Lessee’s Option to Purchase, 106 Comm. L. J. 221 (2001). The lessor provides the loan and is identified as owner for balance sheet purposes, and the lessee is the "corporate user." The synthetic lease further provides the lessee an option to purchase the property. Murray’s article reviews the effect of the lessor’s bankruptcy on the synthetic lease transaction—the possibility that the trustee may "reject" the lease and thus terminate the advantageous tax and economic benefits of the facility. The article critically examines the enforceability of mechanisms that the lessee may include to protect its option to purchase the property. Murray concludes that these devices may be too costly and further may be unenforceable under the Bankruptcy Code.

Zoning. Case Western Reserve Law Review devoted an entire issue to the seventy-fifth anniversary of the Supreme Court’s Village of Euclid v. Ambler Realty Co. decision in Symposium on the Seventy Fifth Anniversary of Village of Euclid v. Ambler Realty Co. , 51 Case W. Res. L. Rev. 593 (2001).

—In Euclid ’s Historical Imagery, 51 Case W. Res. L. Rev. 597 (2001), Richard H. Chused challenges the "rosy" image of twentieth century land-use reformers as individuals driven by a desire for rational urban planning and development of scarce resources. Instead, Chused reviews the use of nuisance terminology both by reformers and in judicial decisions of the time and discovers an undercurrent of racism.

—Dean Gerald Korngold reviews the history of covenants, conditions, and restrictions as private land-use controls in The Emergence of Private Land Use Controls in Large-Scale Subdivisions: The Comparison Story to Village of Euclid v. Ambler Realty Co., 51 Case W. Res. L. Rev. 617 (2001). Korngold focuses on the covenants and restrictions created in connection with the large-scale and well-to-do subdivision known as "Shaker Village." (This subdivision has since become known as Shaker Heights, outside Cleveland, Ohio.) The Shaker Village restrictions "contained building and use restrictions, lot requirements, architectural and aesthetic controls, and anti nuisance provisions." These private restrictions made their appearance at the same time as the Supreme Court decision validating a zoning ordinance adopted by the Village of Euclid, a community near Shaker Heights. Korngold finds the building, use, and aesthetic controls adopted for Shaker Village defensible and concludes by briefly comparing the strengths and weaknesses of zoning and private land-use controls.

—In Village of Euclid v. Ambler Realty Co. , Seventy-Five Years Later: This Is Not Your Father’s Zoning Ordinance, 51 Case W. Res. L. Rev. 645 (2001), Melvyn R. Durchslag argues that zoning law has changed so radically in form and purpose from the model approved in Euclid that it would likely be "unrecognizable" to the Justices of the 1925 Supreme Court.

—David L. Callies and Julie A. Tappendorf review the problems inherent in development and annexation agreements in Unconstitutional Land Development Conditions and the Development Agreement Solution: Bargaining for Public Facilities After Nollan and Dolan , 51 Case W. Res. L. Rev. 663 (2001). The authors note the benefits of these agreements to both developers and local governmental entities and suggest that these agreements should ordinarily be valid and enforceable. Callies and Tappendorf’s article focuses in particular on the authority of local governments to enter into these agreements.

—Finally, William T. Bogart attempts to see into the future of cities and metropolitan development in "Trading Places": The Role of Zoning in Promoting and Discouraging Intrametropolitan Trade, 51 Case W. Res. L. Rev. 697 (2001). Bogart notes that a significant part of the goods and ser-vices produced in cities are not exported, but, rather, are consumed within those metropolitan areas. Bogart asserts that zoning law may serve to both discourage and encourage this "intrametropolitan" trade. Bogart then critically questions whether the trend toward increasingly diffuse metropolitan development would have been altered if the Supreme Court had invalidated zoning in Euclid.

Legislation

Rhode Island permits transfer of trust property. An instrument intended to convey title to a named trust is deemed effective despite failure to name the trustee as grantee in the instrument. R.I. Gen. Laws § 34–4–28.

South Carolina enacts environmental immunity. A qualified evidentiary privilege is created for the results of environmental self-audits. Immunity from some types of liability is provided for persons who voluntarily and in good faith disclose violations uncovered through such self-audits. It does not apply for criminal proceedings. S.C. Code Ann. § 48–57–10.

South Carolina revises joint tenancy. For joint tenancies of real estate, revisions are made to the language needed to create such an estate and the means of severance. A conveyance using the words "as joint tenants with rights of survivorship, and not as tenants in common" conclusively creates a joint tenancy. A conveyance by all the joint tenants to themselves "as tenants in common" does sever the joint tenancy and leaves them as tenants in common. For married couples, severance and conversion to tenancy in common is deemed to occur upon the filing of a divorce decree, unless otherwise specifically ordered. A jointly held fee interest cannot be encumbered or conveyed to a stranger without all tenants joining in the encumbrance or conveyance, but the statute "shall not be construed to create the estate of tenancy by the entireties." S.C. Code Ann. § 27–7–40.

Tennessee expands state disclosure. In acquiring property for road purposes, by voluntary sale, the state must show the seller the entire contents of any appraisal procured by the state, or any other documents used to determine the offering price. Tenn. Code Ann. § 54–5–110.

Utah adds recording requirements. Documents evidencing the termination of joint tenancy, tenancy by the entirety, life estate, or determinable or conditional interest in real estate may not be recorded unless they include an affidavit with the legal description of the realty, a description of the interest to be terminated, indexing identification of the instrument by which the interest was created, and a copy of any relevant death certificate. Utah Code Ann. § 57–1–5.1.

Vermont recognizes civil union. "Civil union" status is created as a substitute for civil marriage for same-sex couples, enabling them to have "all the same benefits, protections and responsibilities under law as are granted to spouses in a marriage," including laws "relating to title, tenure, descent and distribution, intestate succession, waiver of will, survivorship, or other incidents of the acquisition, ownership, or transfer, inter vivos or at death, of real or personal property, including eligibility to hold real and personal property as tenants by the entirety," and laws relating to prohibitions against discrimination based upon marital status, homestead rights, loans and tax exemptions for veterans, recognition of "family farmers," and hunting and fishing rights of family landowners. Vt. Code Ann. tit. 15, § 1201 et seq. The Act also declares that "marriage is the legally recognized union of one man and one woman."

Virginia adopts Uniform Statutory Rule Against Perpetuities. Va. Code Ann. § 55–12.1. By separate Act, the Rule "shall not apply to any trust or any interest created in personal property held in such trust, or to any power of appointment over personal property held in such trust, or to any power of appointment over personal property granted under such trust, when the trust instrument, by its terms, provides that the rule against perpetuities shall not apply." Va. Code Ann. § 55–13.3.

Virginia revises the Residential Landlord Tenant Act. Landlords must treat information about their tenants and prospective tenants as confidential, to be released to third parties only pursuant to subpoena or for emergencies. Injunction and damage remedies are established against tenants who refuse to allow lawful access, or against landlords who make an unlawful entry or a lawful entry in an unreasonable manner.

Security deposits cannot exceed two months’ rent, must accrue interest, and must be returned along with an itemized statement of deductions within 30 days of termination. When deductible items arise during the course of the tenancy, the landlord must notify the tenant of such deductions within 30 days. A landlord’s successor-in-interest is obligated to return security deposits at the time of termination regardless of whether the predecessor actually transferred the deposits to the successor and regardless the method of succession to the landlord’s interest.

Litigation procedures are established for abatement of rents and payment of rents into court-supervised escrow when a landlord fails to maintain habitable premises. Va. Code Ann. §§ 55–248.9:1, 55–248.15:1, 55–248.27 .

 

Keeping Current–Property Editor: Eugene L. Grant, 1211 S.W. 5th Ave., Ste. 1600, Portland, OR 97204-3795, egrant@schwabe.com. Contributing editors: Daniel B. Bogart and Robert Flores.

 

 

 

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