P R O B A T E   &   P R O P E R T Y
July/August 2004
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Articles from other issues of Probate and Property

Department

Keeping Current- Property

Keeping Current—Property Editor:

Daniel B. Bogart, Chapman University School of Law, One University Drive, Orange, CA 92866, bogart@chapman.edu. Contributing editors: Prof. James C. Smith and
Prof. William G. Baker.

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: No commission is earned when buyer’s only contact with broker is receipt of written materials through third party.

An exclusive listing agreement called for a 9% commission on the sale of a commercial property. The agreement included a “tail” clause, providing for a commission “if within, 360 days after the expiration of this agreement, the property is sold to any person to whom the property was shown” by the broker. When the listing expired, the owners asked the broker for a complete list of the parties with whom the broker had made contact during the listing period. The broker sent a partial list, stating it was impossible to list the enormous number of people he had contacted. The owners sold the property to an individual whose name was not on the partial list. The broker had never taken the buyer to inspect the property nor had he spoken with him. The broker, however, claimed a commission, because the buyer was an associate of a contact who had unsuccessfully negotiated to buy the property during the listing period, and the buyer had obtained the broker’s information packet about the property from the contact. The court held for the owners, pointing to a dictionary definition of “shown” as “to cause or allow to be seen; display.” Thus, the redistribution of documents relating to the property did not constitute a “showing” of the property under the listing agreement. Prudential Kahler Realtors v. Schmitendorf, 673 N.W.2d 663 (S.D. 2003).

CONSTRUCTION CONTRACTS: Failure to complete work is breach of warranty of good and workmanlike performance.

An owner of a gymnastics business entered into a construction contract for a new athletic complex. After working for approximately one year, the builder walked off the job, leaving the project partially completed. The owner’s claims against the builder included breach of warranty and violations of the Texas Deceptive Trade Practices Act. The court rejected the builder’s argument that the implied warranty of good and workmanlike performance is only breached by work that contains defects. Nonfeasance as well as malfeasance can breach the warranty. A contractor’s failure to complete work required under the contract also breaches the warranty. The builder’s oral promises that he could complete the project on time, for the agreed-on budget, were found to be false, misleading, or deceptive practices under the Act. Barnett v. Coppell North Texas Court, Ltd.,123 S.W.3d 804 (Tex. App. 2003).

LANDLORD–TENANT: Landlord properly demanded “key money” as condition to renewal of commercial lease.

Some landlords require that tenants pay “key money” up front to obtain a lease or a lease renewal. A California statute, effective in January 2002, makes it unlawful for a landlord “to require, demand, or cause to make payable any payment of money, including, but not limited to, ‘key money,’ . . . as a condition of initiating, continuing, or renewing a [commercial] lease . . . unless the amount of payment is stated in the written lease or rental agreement.” Cal. Civil Code § 1950.8. Tenants, operators of a Korean restaurant, wanted to sell their business. Because the term of their lease was to expire soon, they needed a new lease or renewal to negotiate a sale. The landlord refused to grant a new lease or renewal unless the tenant agreed to pay $1 million as key money. After the parties failed to reach an agreement, the tenant brought an action under the statute for treble damages against the landlord. The tenant’s theory was straightforward. The landlord’s oral demand of key money violated the plain language of the statute. The statute says key money is lawful only if stated in the lease. The court, however, relied on legislative history to hold for the landlord, because the new lease was never completed as opposed to being completed without stating the key money. The legislative intent was to force landlords to document in writing the charges they collected. The report of the Senate Judiciary Committee stated: “This bill is intended to address the problem of some landlords in the tight Los Angeles commercial or industrial lease market demanding, mostly under-the-table, a ‘keying fee’ as a condition of beginning or renewing a commercial lease. This bill would not prohibit the practice, but would only allow its collection if its charge is ‘ascertainable’ in the lease agreement.” Edamerica, Inc. v. Superior Court, 7 Cal. Rptr. 3d 921 (Cal. Ct. App. 2003).

MORTGAGES: Erroneous notice of loan payoff estops lender from enforcing mortgage debt.

Normally, a person who pays money by mistake has the right to retrieve that money from the payee. Conversely, a creditor who by mistake notifies a debtor that payment has been received has the right to rescind that incorrect notice. All rules have exceptions (that is one reason why law school lasts three years and why good lawyers are in high demand). By mistake, a bank applied mortgage payoff funds to the wrong account. The bank sent a letter to the mortgagor, advising that his mortgage had been paid in full. Of course, this surprised the mortgagor. He directed numerous inquiries to the bank, asking for an explanation. The bank repeatedly assured the mortgagor that the mortgage had been paid off and a satisfaction of mortgage would be forthcoming. The bank recorded a mortgage satisfaction. Five months later, the mortgagor obtained a new mortgage loan from another lender. The new lender contacted the bank to confirm satisfaction of the prior mortgage. One month later, the bank woke up, notifying the mortgagor that it had mistakenly credited his account with someone else’s payoff funds. After the mortgagor refused to make further payments to the bank, the bank began foreclosure proceedings. The court dismissed the foreclosure action, applying the doctrine of equitable estoppel. The mortgagor justifiably relied on the bank’s misrepresentations to his detriment. Were the bank to prevail, the mortgagor would have to pay two mortgage loans. First Union Nat’l Bank v. Tecklenburg, 769 N.Y.S.2d 573 (N.Y. App. Div. 2003).

NUISANCE: Right-to-farm law is no defense to expansion in orchard activities.

Right-to-farm laws protect farmers from certain nuisance litigation. These laws attempt to balance the rights of farmers and their neighbors, and their scope can vary considerably from state to state. The owners of an apple orchard sold a farmhouse on the property to buyers. A barn directly across a dirt road from the house served as the main collecting point for apples. After the sale, the orchard owners expanded their operation. In the vicinity of the barn, they began on-site waxing of apples and on-site storage in refrigerated trailer trucks. These new activities took place close to the farmhouse and generated substantial noise. The Vermont right-to-farm statute protects agricultural activities that are “established prior to surrounding non-agricultural activities.” 12 Vt. Stat. § 5753. Based on the statute, the trial court rejected the buyers’ nuisance claim, but the Supreme Court disagreed. The protected agricultural use does not include the expansion in orchard activities. Trickett v. Ochs, 838 A.2d 66 (Vt. 2003).

PROPERTY OWNERS ASSOCIATIONS: Association that is not expressly required to maintain roads cannot enforce assessments by means of nonjudicial foreclosure.

During the 1970s, developers of a 320-lot subdivision conveyed the roads and common areas to a property owners’ association, which they had incorporated for the purpose of maintaining the roads and common areas. In 1997 the association, for the first time, decided to levy an assessment. An owner of two undeveloped lots failed to pay the $35 per lot assessment. The association conducted a nonjudicial foreclosure, as authorized by the Virginia Property Owners’ Association Act. Va. Code §§ 55–508 to 55–516.2. The owner successfully challenged the foreclosure. The subdivision covenants and the deed conveying the roads and common areas authorized the association to perform maintenance and to make assessments, but the documents did not expressly require the association to do so. The court held that lack of an express requirement in a recorded instrument made the association ineligible to be a “property owners’ association” as defined by the Act. Therefore, the association lacked the power to foreclose without judicial process. The case sends a clear message to transactional lawyers: Make sure that the recorded documents fully comply with statutory formalities. Dogwood Valley Citizens Ass’n, Inc. v. Winkelman, 590 S.E.2d 358 (Va. 2004).

LITERATURE

Georgia Law .

Linda S. Finley, Scott H. Michalove, and James S. Trieschmann Jr. review important Georgia case law and legislative developments in the real property area in Real Property, 55 Mercer L. Rev. 397 (2003). Case opinions apparently run the gamut, including title, easements, basic real estate contracts, broker law, and zoning. It is heartening to know that caveat emptor is alive and well in Georgia, as witnessed by at least one case opinion described by the authors. In Ainsworth v. Perreault, 563 S.E.2d 135 (Ga. Ct. App. 2002), the Georgia Court of Appeals denied a buyer’s suit for fraud because of a defectively constructed swimming pool. The seller did not disclose the fact that the pool had ruptured before the sale. The buyer had the pool inspected and the contract contained a merger clause. The court held that the merger clause barred the action on fraud, notwithstanding the fact that the seller had attached a property disclosure statement to the contract. The court further held that a seller is not bound to disclose prior repairs if the property is free of current defects at time of the contract.

Mortgage Law; History and Rumors of Its Demise.

In Will Mortgage Law Survive? A Commentary and Critique on Mortgage Law’s Birth, Long Life, and Current Proposals for Its Demise, 54 Case W. Res. L. Rev. 69 (2003), Professor Morris G. Shanker criticizes the Restatement of Mortgages as well as recent federal legislation that, he asserts, will bring about the death of mortgage law as we know it. Professor Shanker first traces the history of mortgage law. The French term mort gage means, literally, “dead pledge.” Initially, lenders took physical possession of property at the time of the loan. This form of security arrangement ultimately fell to a system of live pledge, in which the borrower kept possession while repaying the lender the borrowed money. A primary feature of mortgage law is the borrower’s equity of redemption—the right to redeem the property on payment of the debt. Professor Shanker explains that this innovation was eventually limited by the lender’s right to foreclose the mortgage. Over the last several hundred years, lenders have mounted a variety of attacks on the equity of redemption, which have been routinely denied by courts. According to Professor Shanker, however, recent events have begun to turn the advantage back to lenders. The author contends that Section 211 of the Uniform Land Security Interest Act, adopted in 1983, and Section 3.1(c) of the Restatement authorize the lender “in the mortgage agreement to contract to get any or all of the debtor’s property.” This would eviscerate basic anti-clogging rules. Professor Shanker takes particular umbrage with the notion, adopted by a number of other leading property law scholars, that the primary protection afforded borrowers by mortgage law is a public auction of the property for the borrower’s benefit. The primary protection, he argues, is the right of the borrower to take true physical ownership and possession of the collateral on payment of the debt.

Premises Liability Post 9/11; Negligent Security Law.

This column has already mentioned articles focusing on the effect of 9/11 on American real property law, and it is likely that scholarship in this area will continue. Daniel P. Dain and Robert L. Brennan Jr. add to this material in Negligent Security Law in the Commonwealth of Massachusetts in the Post-September 11 Era, 38 New Eng. L. Rev. 73 (2003). The authors state that their “perspective on negligent security law stems from [their] experience as litigators who have tried negligent security cases, and from [their] work as counselors who have advised property owners or possessors before any act giving rise to potential liability occurs.” Although the article obviously focuses on Massachusetts law, many of the general insights about this “nebulous” and “counter intuitive” area of real property law will apply to transactions involving property in the other 49 states. As Dain and Brennan explain, negligent security law is a sub-species of premises liability law. Individuals injured by third-party criminal behavior, including terrorist acts, sue the owners of property where the injuries occur, asserting that the property owners did not adequately secure the premises. The authors lay out the elements of a negligent security claim, drawing on the Restatement (Second) of Torts and Massachusetts case law. Precisely because this category of case law is new, an article written by lawyers who have actually litigated these cases may be instructive to transactional lawyers.

Residential Construction Defects

. Professor Debra Pogrund Stark and Andrew Cook treat the unfortunate scenario in which a buyer of “newly built or recently converted condominium homes and detached single family homes” later discovers that the builder has failed to complete promised improvements or has done so in a shoddy manner, in their article, Pay It Forward: A Proactive Model to Resolving Construction Defects and Market Failure, 38 Val. U. L. Rev. 1 (2003). To make the problem concrete, Professor Stark and Mr. Cook present the following fact set: A developer renovates an urban apartment building and converts it to condominium ownership, and then sells the units to individual owners. The developer then abandons the property before finishing promised improvements to common areas, failing to adequately install electrical wiring to the units or, for good measure, failing to apply for the initial city permits to conduct the renovation. What recourse do the unit owners have? The authors suggest that the developer will most likely make itself “judgment proof,” and that even if there are assets available to satisfy a judgment, unit owners will face daunting litigation costs before recovery. The article nicely details the common law and statutory protections typically in place and (inadequately) protecting purchasers of property in the event of construction defects. The article then proposes model legislation drawing on the best features of recent and innovative state construction defect law. Among other things, the model legislation would require registration of homebuilders. Registration would include payment of a fee to cover arbitration of disputes under the statute and would preclude homebuilders who are not in compliance from continuing to build units. The proposal would also extend performance standard warranties to cover a two-year period and permit buyers to buy extended warranties at a pre-set rate.

Takings; Political Realities

. A significant proportion of scholarly writing in the area of real property continues to concern constitutional issues—primarily takings. Consumer advocate and presidential candidate Ralph Nader has now weighed in on the subject in an article co-authored with Alan Hirsch, entitled Making Eminent Domain Humane, 49 Vill. L. Rev. 207 (2004). The authors condemn (no pun intended) what they assert to be an overly broad judicial reading of “public use” in the Takings Clause. To make their point, they hypothesize what the authors admit is an extreme scenario: “the United States government condemns a row of houses in the District of Columbia and transfers them to the leaders of the majority political party for use as personal residences. The prior homeowners, ordinary citizens who wish to remain in their homes, are compensated at a price dictated by the government and forced to move out.” According to Nader and Hirsch, the present judicial treatment of “public use” would validate the taking. In response to this “legal doctrine run amok,” Nader and Hirsch propose that courts apply strict scrutiny to takings in which “1) the land is transferred to another private party rather than held by the public; 2) the individual interest of those whose land is taken is particularly strong and monetary compensation cannot significantly compensate for the loss; and 3) the party whose land is taken is relatively powerless politically.” The focus on the political power of an individual whose land is taken is not surprising given the consumer advocacy background of the authors and comports with their goals of “importing the approach used in fundamental rights law and antidiscrimination law to the law of eminent domain.”

LEGISLATION

Idaho authorizes real estate brokers to enter into dual agency relationships with an individual agent assigned to a client.

The act specifies mandatory disclosures that must be in writing. This law provides statutory authority for a practice that is becoming common in many jurisdictions. 2004 Idaho Sess. Laws 119.

Idaho adopts the “Uniform Commercial Code—Documents of Title.”

2004 Idaho Sess. Laws 42.

South Dakota enacts the “Brownfields revitalization and economic development program.”

This act is intended to implement the benefits of the federal “Small Business Liability Relief and Brownfields Revitalization Act.” 2004 S.D. H.B. 1175.

Utah enacts the “Community Association Act.”

This law provides a straightforward procedure for homeowners associations that are not condominiums to collect real property taxes, insurance premiums, and other obligations of an association member. 2004 Utah Laws 153.

Utah simplifies the procedure to release a notice of pendency.

Claimants sometimes file a notice of pendency as leverage without probability of success for the underlying claim. This act may reduce such filings. 2004 Utah Laws 366.

Virginia allows landlords to separately charge tenants for “damage insurance” and “renter’s insurance.”

The cost of the insurance, plus the amount of any security deposit, must not exceed the amount of two months’ periodic rent. 2004 Va. Acts ch. 123.

Virginia authorizes the use of “Reverter Deeds” in time-share developments.

Under a “Reverter Deed,” title to the time-share automatically reverts to the developer should a grantee fail to meet his or her payment or other obligations. Substantial disclosure requirements are imposed on the developer by the act. 2004 Va. Acts ch. 143.

West Virginia adopts the “Good Funds Settlement Act.

” The lender is required to disburse loan funds to the settlement agent at or before the closing and may not charge or collect interest before the closing. 2004 W. Va. Acts 39.

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