P R O B A T E   &   P R O P E R T Y
Nov/Dec 2004
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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: Broker may recover commission for a friendly condemnation. An owner of a parcel of environmentally sensitive land entered into an oral brokerage agreement, providing for a 2% commission. The parties contemplated that the state would purchase the land under its Conservation and Recreation Lands program. For several years the parties negotiated unsuccessfully, failing to agree on price. To break the impasse, the broker suggested a “friendly condemnation” as a technique for arriving at a higher price. Both sides agreed, and the state paid $84 million in condemnation. The owner refused to pay a commission. The trial court granted summary judgment for the owner, relying on a line of cases holding that condemnation never constitutes a sale for purposes of a brokerage commission. The supreme court reversed, holding that the broker earns a commission if the parties modify their brokerage agreement to authorize the broker to pursue condemnation as an alternative to a sale. St. Joe Corp. v. McIver, 875 So. 2d 375 (Fla. 2004).

COVENANTS: Change of conditions outside subdivision not sufficient to terminate restrictions. Covenants recorded in 1959 restricted a 40-acre subdivision north of Charlottesville to residential use only. Four lots at the edge of the subdivision adjoined U.S. Route 29, at the time a two-lane road with residences and small businesses on both sides. By the 1990s, that part of Route 29 had become an eight- to 10-lane commercial strip, lined with shopping centers, hotels, restaurants, automobile dealerships, and other businesses. The owners of the four lots, which were never improved, began to explore commercial development options. Subdivision homeowners obtained a declaratory judgment that the restrictive covenant remained enforceable. The court rejected the lot owners’ claim that the covenants were no longer enforceable because of the drastic change of conditions. The covenant still served its intended purpose because all the changes were exterior to the subdivision. Within the subdivision, the only changes were the aging of homes and the maturing of trees. River Heights Associates Limited Partnership v. Batten, 591 S.E.2d 683 (Va. 2004).

GOVERNMENT DEMOLITION OF STRUCTURES: Demolition order requires evidence of value of structure and cost of repair. A village filed a complaint for demolition against the owner of an unoccupied building under the Illinois Municipal Code. 65 Ill. Comp. Stat. 5/11–31–1. The trial court found the building unsafe and dangerous because of rodent infestation, weak ceiling rafters, and other factors. The court ordered demolition based on findings that the value of the building was $100,000 and the cost of repair would be $75,000, constituting a “substantial renovation” of the building. The owner alleged that the demolition statute violated due process, asserting she had the right to repair the building, regardless of cost, rather than to submit to demolition. Holding the statute constitutional, the supreme court applied the rational basis standard, upholding the legislative decision to require immediate demolition of structures that were beyond reasonable repair. The court, however, vacated the demolition order and remanded because of the lack of competent evidence of building value. The trial court’s sole evidence was the price paid in a sale of the property between relatives 20 years ago. Contemporary evidence of value is required to support a demolition order. Village of Lake Villa v. Stokovich, 810 N.E.2d 13 (Ill. 2004).

LANDLORD-TENANT: Landlord may recover expenses of selling leased premises after tenant’s abandonment. A tenant who leased an entire office building for five years abandoned the property after three years. The landlord listed the property for lease or sale. Having received no offers to rent the property, the landlord sold the property eight months after the tenant’s abandonment. The landlord sued the tenant to recover its selling expenses, which consisted of a broker’s commission, a prepayment penalty on the landlord’s mortgage loan, and miscellaneous closing costs. The court allowed recovery of these items as consequential damages, concluding that for a single-tenant property it is reasonably foreseeable that a tenant’s abandonment may cause the landlord to sell the property to avoid further losses. Usually a landlord must mitigate damages after a tenant’s abandonment by seeking to relet the property, but the court concluded that sale was a proper method of mitigation under the circumstances. A number of cases from other states hold that a tenant’s obligation for future rent ends when the landlord sells the property. The court distinguished these cases on the basis that a California statute, Cal. Civ. Code § 1951.2, allows a landlord to recover all contract damages caused by the tenant’s abandonment, unless the tenant proves that the landlord could have avoided some or all of the rental loss. In this case, the sales price had no effect on the calculation of damages, but a sales price implies a certain rental value. The court properly observed that the sales price could affect the damage award if a party introduces evidence of capitalization rates from comparable sales to establish the rental value of the property. Millikan v. American Spectrum Real Estate Servs. California, Inc., 12 Cal. Rptr. 3d 459 (Cal. Ct. App. 2004).

MINERALS: Sand and gravel are not “valuable minerals” under a federal land-grant statute. The Pittman Act, enacted in 1919, provided for grants to settlers who successfully drilled water wells to irrigate bone-dry Nevada. The Act reserved to the United States all the “coal and other valuable minerals.” A tract of land, patented in 1940, contained sand and gravel visible at the surface. In the 1990s, successors to the patentee began to sell sand and gravel, the market demand coming from the rapid growth of Las Vegas. The Bureau of Land Management notified the sellers that they were trespassing on the government’s mineral reservation. The lower federal courts held for the government, relying on Watt v. Western Nuclear, Inc., 462 U.S. 36 (1983). The Western Nuclear Court, with four Justices dissenting, interpreted the reservation of “coal and other minerals” in the Stock-Raising Homestead Act of 1916 to reserve gravel to the government. In the Nevada case, however, the Court held for the landowners, refusing to extend Western Nuclear. Chief Justice Rehnquist’s plurality opinion distinguished Western Nuclear on the ground the Pittman Act uses the term “valuable minerals” and that gravel and sand were not valuable in Nevada in 1919. Two Justices concurred in the judgment, arguing that Western Nuclear was incorrectly decided. Bedroc Limited, LLC v. United States, 124 S. Ct. 1587 (2004).

MORTGAGES: Federal regulation preempts state prohibition of prepayment penalties on alternative mortgage transactions. An alternative mortgage transaction (AMT) is any home mortgage loan with an interest rate or finance charge that may be adjusted or renegotiated. Beginning in the 1980s, home lenders began offering various types of AMTs as alternatives to the standard self-amortizing fixed-rate loan. Many states prohibited state-chartered financial institutions from offering AMTs, or they imposed substantial restrictions on such loans. In contrast, federal regulations allowed federally chartered lenders to offer AMTs. Congress enacted the Alternative Mortgage Transaction Parity Act of 1982 to allow state-chartered institutions to offer AMTs. The Act grants rulemaking authority to the Office of Thrift Supervision (OTS) to prevent discrimination against state-chartered institutions. In 1996, the OTS enacted a regulation authorizing state lenders to charge prepayment penalties in AMTs. This regulation conflicted with a New Jersey statute, which prohibited prepayment penalties. The regulation, if valid, preempted conflicting state laws. A borrower obtained a balloon loan in 1999 and sold his home in 2001. The loan documents provided for a 2% prepayment fee, which the borrower paid under protest. The appellate division held for the borrower on the ground that the OTS regulation was beyond the scope of the agency’s rulemaking authority. In a four-to-three decision, the supreme court reversed, reasoning that the OTS is entitled to substantial deference in deciding how to enforce the Parity Act. The OTS rescinded the regulation, effective July 2003. After reexamining the issue, it concluded that the preemption of state prepayment laws was not essential to achieve the goals of the Parity Act. Nonetheless, the regulation was valid and enforceable when it applied, between 1996 and 2003. Glukowsky v. Equity One, Inc., 848 A.2d 747 (N.J. 2004).

RECORDING ACTS: Title curative acts do not apply retroactively. Before 2002, an Ohio statute required the presence of two witnesses at the signing of any mortgage. Three mortgages, executed and recorded during 2002, lacked witnesses. After the mortgagors entered bankruptcy, the trustee sought to avoid the mortgages under the strong-arm power of Bankruptcy Code § 544(a). In defense, the lenders relied on two pieces of title curative legislation. One Ohio statute irrebuttably presumed a recorded mortgage to be properly executed, regardless of any actual or alleged defect in witnessing. The court held this statute violated the one-subject rule of the Ohio Constitution, because it was included in a bill that addressed other matters not related to real property. The second statute, passed in 2001 after commencement of the bankruptcy cases, repealed the witness requirement for mortgages as of February 1, 2002. The statute applied retroactively, stating that unwitnessed mortgages executed before the effective date were presumed valid unless the mortgagor’s signature was obtained by fraud. The court, however, refused to validate the mortgages. The statute cannot apply retroactively, because the trustee’s rights to avoid the mortgages vested at the commencement of the cases. Kovacs v. First Union Home Equity Bank (In re Huffman), 369 F.3d 972 (6th Cir. 2004).

SALES CONTRACTS: Buyers forfeit 25% deposit for breach. In 1999 two brothers, Turkish billionaires, contracted to buy four penthouse units in The Trump World Tower, a 90-story luxury condominium building in New York City. The total price was $32 million, and in three installments the buyers paid deposits totaling 25% ($8 million). They failed to appear at closing, scheduled for October 2001, asserting a right to rescind based on the risk of terrorism similar to the attacks that took place the preceding month on September 11. The trial court rejected this claim but did not allow forfeiture of the entire deposit in a summary judgment proceeding. The trial court granted partial summary judgment to the seller to the extent of 10% of the deposit, holding that the remainder of the deposit would be forfeited only if the seller proved that the total deposit constituted valid liquidated damages that were reasonably related to the seller’s actual or probable loss. The appellate court reversed, authorizing forfeiture of the entire deposit as a matter of law. The purchase agreements were the product of lengthy negotiation between parties of equal bargaining power, represented by counsel, and there was no evidence of overreaching. Moreover, evidence indicated that 20% to 25% down payments were customary in the market for new luxury condominiums in New York City because of the high risks encountered by developers. Uzan v. 845 UN Limited Partnership, 778 N.Y.S.2d 171 (N.Y. App. Div. 2004).

SUBDIVISION REGULATIONS: Conveyance between neighboring landowners does not increase the number of lots that are exempt from controls. Landowners who seek to subdivide their tracts generally must comply with subdivision control legislation enacted by state and local governments. The controls include meeting standards for plats, lot sizes, streets, and other infrastructure components. In many states, a subdivider must pay assessments or other exactions. The subdivision regulatory process often imposes substantial costs. For this reason, subdivision laws sometimes exempt small subdivisions. The Michigan Land Division Act provides an exemption for dividing a parcel of up to 10 acres into no more than four parcels. Mich. Comp. Laws § 560.108. Two neighbors owned parcels with respective areas of 7.63 and 2.35 acres, located in a zone with a minimum lot size of one acre. Under the statutory exemption, the owner of the larger parcel could subdivide into four lots and the owner of the smaller parcel could subdivide into two lots. The neighbors, however, attempted to improve on this total of six lots. The owner of the larger parcel conveyed 3.25 acres of his property to his neighbor, so that the parcels contained 4.38 and 5.60 acres. Each neighbor then subdivided his reconfigured parcels into four lots. The township refused to approve the subdivisions as entitled to the exemption. The court of appeals held for the landowners, but the supreme court reversed, siding with the township. It interpreted the Michigan Act not to allow adjoining landowners to increase the number of lots exempted from subdivision regulations by reconfiguration of their parcels. Sotelo v. Township of Grant, 680 N.W.2d 381 (Mich. 2004).

TAKINGS: Cemetery access statute not an unconstitutional taking. The owners of a private cemetery refused to allow a woman to cross their land to visit the graves of her great-grandfather and other relatives. She brought an action based on a 1993 Texas statute that grants the public “the right to reasonable ingress and egress . . . only [for] visitation during reasonable hours and only for purposes usually associated with cemetery visits.” Tex. Health & Safety Code § 711.041(a). Based on jury findings, the trial court granted her the right of access for four hours each month to preserve the graves and markers, pay respects to the persons buried in the cemetery, meditate and pray, reset headstones on graves, and mow grass and remove vegetation. But she was not allowed to place a border around the graves because this was not a purpose usually associated with cemetery visits. On appeal, the landowners claimed that this application of the statute resulted in an unconstitutional taking of their property. The court disagreed, reasoning that the statute codified a pre-existing common-law right of access for relatives of decedents that arose when the land was first dedicated for cemetery purposes. The court distinguished a 1999 case, which held the statute unconstitutional as applied to a landowner who owned land near a cemetery but who did not own the cemetery or land adjoining the cemetery. Davis v. May, 135 S.W.3d 747 (Tex. Ct. App. 2003).

LITERATURE

Homeowners’ Associations; Litigation Survey. In Litigation Involving the Developer, Homeowners’ Associations, and Lenders, 39 Real Prop. Prob. & Tr. J. 1 (2004), E. Richard Kennedy and Ellen Hirsch de Haan survey duties that each of the developer, association, and lender owe to one another in a residential homeowners’ association, and the liability and litigation that arises when one party fails to live up to its responsibilities. The authors select an interesting assortment of cases that test the limits of liability of each party.

Homestead Exemptions; Bankruptcy Law. Ryan P. Rivera provides a general history of state homestead exemptions and the treatment of these exemptions under federal bankruptcy law in State Homestead Exemptions and Their Effect on the Federal Bankruptcy Laws, 39 Real Prop. Prob. & Tr. J. 72 (2004). Debtor/creditor law intersects with property law in critical ways. Homes are often the single most valuable asset of a debtor and the primary target of creditors seeking repayment. In a number of states, unlimited homestead exemptions provide the “wealthy debtor” an extraordinary mechanism to shield assets from creditors. So long as the home in question meets other usually easy requirements (for example, that the land on which the structure sits not exceed an acre, if in the city limits), then the entire value of the property is safe from creditors, even if the home is worth millions of dollars. Other states are less generous. For example, the author notes that “Virginia’s homestead exemption is exceptionally limited, providing debtors with a meager exemption of five thousand dollars.” Mr. Rivera does a very nice job of describing the extraordinary degree to which homestead exemptions vary state by state—the nature of the exemption and the extent of value in a home protected from judgment. He then moves on to bankruptcy law treatment of these state law debtor protection devices. Mr. Rivera first provides a history of bankruptcy law as it relates to the homestead exemption and then describes present day Bankruptcy Code § 522, which provides a set of federal exemptions. As Mr. Rivera notes, the Bankruptcy Code allows states to “opt out” of the federal scheme. As a result, the state law exemption schemes largely survive a debtor’s bankruptcy petition filing. As others have done, Mr. Rivera criticizes this patchwork system of exemptions that aids wealthy debtors in specific states and creates incentives for very odd wealth management. He concludes with a recommendation: “a hard uniform cap on state homestead exemptions.”

Homestead Exemptions; Mobile Homes. In a recent, sharp-witted article, Professor Robert Laurence also examines homestead exemptions. Professor Laurence, however, focuses on the status of the poorer cousin who lives, not in a gated community in a million dollar home, but instead in a “mobile home, a houseboat, an over-the-road tractor-trailer, a recreational vehicle, or, if it comes to that, an old camper shell removed from the bed of a pick-up truck.” Professor Laurence treats this issue in Mobile Homesteads, and in Particular the Exempt Status of Mobile Homes Located on Rented Lots: The Laws of Arkansas, Mississippi, Nebraska, and Utah Compared and the Principle of the Liberal Construction of Exemption Statutes Analyzed, 57 Ark. L. Rev. 221 (2004). He argues that these exemptions should include mobile homes. The author explains that Nebraska and Utah courts have always held mobile homes within the protection of the exemption, and Mississippi courts have recently shifted position to allow the same result. Arkansas courts have apparently not dealt with the specific issue, although these courts hew to the general principle that exemption statutes are to be applied liberally. Professor Laurence examines the interaction of these state laws with Bankruptcy Code § 522(d), which provides a set of exemptions to debtors filing bankruptcy petitions (and permits state legislatures to “opt out” of the federal scheme) and carefully examines the language of the exemption statutes in these four states and the effect of the principle of liberal construction.

Property Development; Abandoned Graveyards. Each year suburban and commercial development encroaches further into the countryside of the United States. Areas once thought to be fully and permanently rural are now subject to radical change. This real property development brings with it a host of land use and property law questions. One sensitive but recurring issue concerns the existence of very old and abandoned graveyards that may be situated squarely in the way of demographic expansion. C. Allen Shaffer addresses this issue in his comment, The Standing of the Dead: Solving the Problem of Abandoned Graveyards, 32 Capital U. L. Rev. 479 (2004). In this short article, Mr. Shaffer focuses particularly on “pioneer” graveyards. These include Olive Branch Cemetery, a 60-grave cemetery containing markers dating back to the Revolutionary War and established by a gift in fee simple by a soldier who fought in that war. That graveyard now sits under a freeway overpass in rural Ohio. The church that had been originally instructed to maintain the cemetery in the gift deed no longer exists. But the graveyard remains, in a state of disrepair, in a valuable location next to an exit from the freeway. Mr. Shaffer describes a number of these historically interesting and vexing situations. These include burial of the poor in “Potter’s Fields,” churchyard burial grounds, and “modern burial care cemeteries,” the latter becoming common in the middle of the 1800s. The author then explores the right of communities to move and alter these ancient (by American standards) cemeteries. He notes that American courts rejected the European idea that burial grounds are impermanent. At the beginning of the American expansion, it seemed that land was abundant and there was no need to recycle burial land. Therefore, courts announced that the sensitivities of relatives and friends limited the ability of communities and property owners to disturb graveyards absent some extraordinary circumstance. Mr. Shaffer then discusses the uniquely American set of property rights (or quasi property rights) that emerged as a result of this American view. These include easements in gross for family members and dedications of the cemetery as a property right of the community in which it exists. Mr. Shaffer reviews the property law defenses of relatives of decedents, including trespass, injunction, and ejectment. Finally, he examines the possibility that old cemeteries have been abandoned, triggering “the transfer of the fee interest to a government body, along with trusteeship of the easements of the decedents.”

Takings; Exactions. A raft of law review articles on takings law have appeared in print following the September/October 2004 column. In his article, Takings Formalism and Regulatory Formulas: Exactions and the Consequences of Clarity, 92 Cal. L. Rev. 609 (2004), Professor Mark Fenster addresses a hot-button issue—the requirement that property owners provide concessions to local government “as conditions for the issuance of the entitlements that enable the intensified use of real property.” Professor Fenster explains that a “vocal minority” of the Supreme Court, led by Justice Scalia, have “announced suspicion [in recent cases] that state and lower federal courts are systematically ignoring or misapplying the Court’s formalistic approach” to takings. Professor Fenster explains that takings are analyzed in a bifurcated manner. Courts are to apply a default rule that relies on a “relatively low level of scrutiny” using an “ad hoc, open ended inquiry,” unless the facts of a case fall into a “limited number of exceptional categories” that require a heightened scrutiny. This heightened scrutiny “favors the protection of property rights through clear, narrow rules of decision.” In Nollan v. California Coastal Commission and Dolan v. City of Tigard, “the Court declared that exactions must demonstrate both an ‘essential nexus’ and ‘rough proportionality’ to the expected harms that the new use would cause. The local government’s failure to meet either requirement results in a taking, which entitles the property owner to just compensation.” According to Professor Fenster, Justice Scalia is frustrated both that lower courts fail to impose heightened scrutiny in exaction cases and that exactions continue to be used to “threaten to expropriate private property.” Although he finds some of the concern regarding improper use of exactions reasonable, Professor Fenster states that “Justice Scalia and his like minded colleagues have only themselves to blame for their frustrations.” He asserts that land use regulations rely to a great extent on bargaining, and that the exaction process developed “as a political and administrative means to resolve highly charged, individualized and localized disputes.” Basically, the author argues that local actors and courts find it difficult to settle development disputes without exactions.

Takings; Original Understanding. Professor Matthew P. Harrington adds his historical analysis to the understanding of takings law in Regulatory Takings and the Original Understanding of the Takings Clause, 45 Wm. & Mary L. Rev. 2053 (2004). Professor Harrington describes the current debate among constitutional law scholars whether the original meaning of the Takings Clause is broad enough to encompass regulatory takings. Professor Harrington first explains the primary worry of Revolutionary period property owners—that “a distant and insular government would expropriate the property of the citizenry without reasonable compensation.” According to Professor Harrington, it is this worry that motivated the drafters of the Constitution to limit the power of the government to take private property in the Fifth Amendment. If so, it is not surprising that the author concludes that the original understanding of the clause did not contemplate governmental behavior that, on its face, was not a direct appropriation of property.

LEGISLATION

Alaska requires landlords to install carbon monoxide detection devices. The devices must be installed in all qualifying dwelling units; older units are not exempted. 2004 Alaska Sess. Laws 60.

Arizona clarifies the duty of the board of directors of condominium or planned community associations to avoid or disclose conflicts of interest. A director must disclose the conflict in an open meeting of the board. After disclosure, the director is allowed to vote on the matter, including beneficial contracts. This law exemplifies the modern trend of resolving conflict situations through disclosure. 2004 Ariz. Sess. Laws 312.

Colorado restricts the power of governmental entities to acquire property by eminent domain. No private property may be acquired by eminent domain and transferred to a private party. Urban renewal plans are exempted from this limitation. 2004 Colo. Sess. Laws 367.

Florida revises its condominium act. Among the many changes, notices may be delivered electronically to members, SLAPP suits against members are limited, and expanded disclosure forms must be delivered to prospective owners.  2003 Fla. Laws ch. 353.

Florida requires manufactured homes to meet the safety standards promulgated under the federal Manufactured Housing Improvement Act. 2003 Fla. Laws ch. 283.

Hawaii updates and clarifies its condominium act. Hawaii was the first state to enact enabling legislation for condominiums. 2004 Haw. Sess. Laws 164.

Louisiana expands property disclosure documents. The seller must disclose whether or not the prospective purchaser is required to be a member of a homeowners’ association. 2004 La. Acts 452.

Missouri limits homeowner’s insurance requirements by lenders. As a condition of financing a residential mortgage, lenders may not require the borrower to obtain homeowner’s insurance in an amount exceeding the replacement value of the home and contents. 2004 Mo. Legis. Serv. SB 1086.

North Carolina clarifies its condominium act. Notices may be delivered electronically to members who have agreed in writing. 2004 N.C. Sess. Laws 109.

North Carolina authorizes landlords to install submeters for water and sewer. Submeters may result in water conservation. 2004 N.C. Sess. Laws 143.

Pennsylvania allows service members to terminate their residential leases on 30 days’ notice. Service members are defined to include members of the National Guard when called to active duty for three months or more. 2004 Pa. Laws 65.

South Carolina adopts the Vested Rights Act. Except for public safety reasons, the approval of a site development plan creates a two-year vested right that cannot be changed by the local government. 2004 S.C. Acts 287.

Vermont modifies joint tenancy. Joint tenants may own unequal interests in the joint tenancy. 2004 Vt. Acts & Resolves 150.

Virginia authorizes reference to title insurance deeds. The first page of a deed may contain the name of the title insurer and the policy number. This may increase claims against title insurers. 2004 Va. Acts ch. 336.

 

 

 

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