CASES

 

CONDOMINIUMS: Unit owners not liable for personal injuries caused by negligent failure to maintain common elements. A section of chain-link fence fell from the roof of a condominium building, severely injuring two pedestrians who were walking on a public sidewalk. They sued the condominium’s board of managers for the negligent failure to maintain common elements, including the rooftop security fence. Because they claimed damages in excess of the $2 million in insurance carried by the board, they also sued the 11 owners of the condominium units. The unit owners, as is typical for condominium regimes, owned undivided interests in all the common elements, including the roof and the fence. A New York statute places the responsibility to maintain the premises in safe condition on the “owner.” N.Y. Mult. Dwell. Law § 78. In a case of first impression, the court held that the unit owners did not have statutory liability for safe maintenance of the building, because the nature of a unit owner’s interest in common elements is “materially dissimilar to the freehold interest” normally held by owners of multiple dwellings. The court also decided that vicarious liability for unit owners was inappropriate, because the common elements were solely under the control of the board of managers. Pekelnaya v. Allyn, 808 N.Y.S.2d 590 (App. Div. 2005).

 

DEEDS: Grantor’s letter signed after execution of deed created a trust, which required grantee to share proceeds of sale with grantee’s siblings. Nancy lived with her mother in her mother’s house. In 1990 the mother signed a quitclaim deed conveying her house to herself and to Nancy in joint tenancy with the right of survivorship. They left the deed at the mother’s attorney’s office and returned four days later, when the mother signed a letter addressed to her other five children, who lived elsewhere. The letter explained that the purpose of the deed was to allow Nancy to take income tax deductions for the mortgage interest and real estate tax payments, which she was making. The letter also stated that “should Nancy at any time sell the property, it is my direction and wish that she divide the property proceeds equally with those of you who are surviving.” The deed was recorded the day after the letter was signed. In 1993 the mother died, and four years later Nancy sold the house to one of her brothers for $64,000. She refused to share the sale proceeds with her other siblings, who brought an action for damages. The court held that the letter created an express trust. Nancy argued that the letter could not alter her rights, because delivery of the deed preceded the writing of the letter. Although the court recognized a presumption that delivery takes place at the time of execution, it found clear and convincing evidence that the mother did not intend the deed to become effective before she signed the letter restricting Nancy’s rights to the sales proceeds. The court awarded damages based on the fair market value of the house at the time of the sale to the brother, which it determined to be $75,000. Orud v. Groth, 708 N.W.2d 72 (Iowa 2006).

 

EASEMENTS: Easement by estoppel does not require any written evidence or a vendor-vendee relationship between the parties. Neighboring owners had a shared right to use livestock pens, together with a road easement to gain access to the pens. The neighbor whose land was more distant from the pens asked for a road easement across the other neighbor’s land. They orally agreed on a location, that both neighbors would use the road, that they would share the costs of building and maintaining the road based on their pro rata use, and that the landowner would sign a written easement. The neighbor built the road, the parties shared the initial cost, but a dispute ensued before the execution of any document. Generally, an oral promise to grant an easement is unenforceable because of the statute of frauds, but an exception exists when a claimant establishes an easement by estoppel. The landowner claimed that under Texas law an easement by estoppel could arise only if (1) there was some writing, even though unsigned, that reflected the easement terms and (2) the parties had a vendor-vendee relationship. The court rejected both proposed limitations, concluding they were not compelled by Texas precedents. An easement by estoppel arose based on the neighbor’s substantial, detrimental reliance on the oral agreement. Courts rarely grant easements by estoppel. With the typical claim of easement by estoppel, there is no bilateral contract, and the claimant in effect is seeking an easement for which he has not paid or given other consideration. Here, the fact that the landowner benefited from the road construction, and bargained for that benefit, makes application of the doctrine of easement by estoppel especially appropriate. Murphy v. Long, 170 S.W.3d 621 (Tex. Ct. App. 2005), review denied (Oct. 14, 2005).

 

ESCROWS: Seller’s liability for failure to complete construction may exceed funds deposited in escrow. A homebuilder failed to complete a number of construction items before closing. The parties agreed to escrow $10,000, to be paid to the seller only if the seller completed these items and submitted a “clear inspection” into escrow by a specified date. The seller never completed the work, but the escrow agent erroneously paid the money to the seller. The buyer sued both the escrow agent and the seller. The buyer and escrow agent negotiated a settlement, and the action against the seller continued. The court of appeals denied relief, reasoning that the escrow agreement replaced the sale agreement under the doctrine of merger. The supreme court reversed, holding that the escrow agreement supplemented rather than replaced the construction provisions of the original agreement. Thus, the buyer had the right to recover damages for the seller’s failure to complete construction. From the court’s brief description of the escrow agreement, it is hard to tell whether the parties intended the escrowed funds as a limit to the seller’s duty to complete the house, or whether they intended that the retained funds merely secured the seller’s obligation to finish the work. In case of doubt or ambiguity, an escrow agreement for repairs or completion ought to be interpreted as security and not as a cap on the seller’s obligation. It is too hard for ordinary homebuyers to know whether they have picked a realistic sum of money for completion of work. This case highlights the need for transactional lawyers to draft escrow agreements with clarity, specifying the precise consequences of the seller’s failure to complete the described work. Wallace v. Bock, 620 S.E.2d 820 (Ga. 2005).

 

LANDLORD-TENANT: Tenant has right to condemnation award, because condemnation is not a “sale” under lease provision allowing termination if landlord sells the property. Normally when leased property is condemned, both the landlord and the tenant have compensable interests in the absence of a lease provision to the contrary. When the leasehold has economic value, the tenant’s award generally reduces the award paid to the landlord. A billboard lease provided: “Lessee agrees that it will remove its structure and terminate the lease no later than forty-five (45) days after written notice from the Lessor, if Lessor should sell the property and the new owner does not want to keep the lease in force.” A state transportation commission filed a condemnation action against the landowner and the billboard company to obtain land for the relocation of a state road. After the action was filed, the landowner attempted to invoke its termination right. The court held that the lease provision did not apply because the owner “did not wish to sell its property.” The court distinguished a prior case in which a billboard lease provided for termination if the property “shall be taken by right of eminent domain.” The decision is open to question. The court interpreted the clause as applying only to voluntary sales without offering a justification for that limitation. In other contexts, the term “sale” frequently includes involuntary sales, including judicial sales and sales under an exercise of the power of eminent domain. The intent of the clause appears to allow the landlord to profit from the sale of the property, free of the billboard lease, if the buyer does not want to continue the lease. At any rate, the decision sends a clear message to lessors’ attorneys. If the client wants to capture the entire condemnation award, be sure to insert a condemnation clause with appropriate language in the lease. Eller Media Co. v. Mississippi Transportation Commission, 900 So. 2d 1156 (Miss. 2005).

 

MORTGAGE FINANCING CONDITION: Contract requires purchaser to make only one loan application. A home purchase contract had a mortgage contingency calling for a $245,000 loan on specified terms. The buyers agreed to “make written application for the financing herein described” within five days of the making of the contract. The buyers timely applied to an institutional lender, who rejected the application, giving as a reason its conclusion that the original appraisal of the property overstated its value. The lender was willing to lend only $225,000. The buyers did not make another loan application and declined an offer made by the seller’s broker to arrange financing for the full amount on the terms specified in the contract. The court held that the buyers were entitled to a refund of their deposit. It interpreted the contract to require that the buyers make only one loan application. The court recognized that a buyer may have an implied obligation to make multiple applications, but any such obligation was displaced by the parties’ express contract. Myers v. Kayhoe, 892 A.2d 520 (Md. 2006).

 

PROPERTY RIGHTS LEGISLATION: Statute passed by initiative to require compensation for regulatory takings is constitutional. By initiative in 2004, Oregon voters passed Ballot Measure 37, which requires state and local governments to compensate private property owners for the reduction in the fair market value of their real property caused by land use regulations that restrict property use. As an alternative to compensation, governments are allowed to modify or remove a regulation “to allow the owner to use the property for a use permitted at the time the owner acquired the property.” Measure 37 limits compensation and relief to owners who acquired their property before the enactment of the land use regulation in question. A challenge resulted in a trial court judgment invalidating Measure 37 as violating a number of constitutional protections: under the federal constitution, procedural and substantive due process; under the state constitution, equal privileges and immunities, separation of power, prohibition on the suspension of laws, and prohibition on intrusion on the legislature’s plenary power to regulate land use. The supreme court reversed, rejecting all the attacks on the legislation. For substantive due process, the court applied the rational basis standard. For a legitimate state interest, the court identified the compensation of, and the provision of other relief for, landowners who are burdened by certain land use regulations. It noted that whether the measure “as a policy choice is wise or foolish, farsighted or blind, is beyond this court’s purview.” MacPherson v. Department of Administrative Services, 130 P.3d 308 (Or. 2006).

 

SALES CONTRACTS: Buyer may recover damages from broker for lost appreciation and loss of use of buyer’s existing home. In 1999, a buyer contracted to buy a house in Sonoma County, California, for $420,000 through a broker who acted as dual agent for the sellers and the buyer. The broker knew that the house was subject to federal tax liens in an amount exceeding the contract price but failed to inform the buyer of the liens. When the buyer learned of the liens, the broker repeatedly assured the buyer that the sellers would solve the problem, even though the sellers had told the broker that their attempts to negotiate a compromise with the IRS were going poorly. Based on the broker’s assurances, the buyer sold his existing home. The sellers did not solve the lien problem and the contract fell through. The buyer tried to find another suitable home in Sonoma County to purchase but was unsuccessful primarily because housing prices appreciated rapidly. The buyer sued the broker for damages based on fraud and negligence. Normally a buyer of real estate has two choices for the recovery of damages: she can recover for loss of the benefit of the bargain (the “expectation interest”) or for her out-of-pocket expenses (the “reliance interest”). In this case, the buyer recovered over $200,000 in damages consisting of two elements: the appreciation on his existing home from its sale to the time of trial in 2003 and the loss of use of that home for the same period. Strebel v. Brenlar Investments, Inc., 37 Cal. Rptr. 3d 699
(Ct. App. 2006).

 

TRESPASS: Frequent entries of golf balls onto residential properties results in continuing trespass. In the late 1990s, two families constructed homes adjacent to the ninth hole of a privately owned golf course. After moving into their homes, both families discovered that golfers struck an alarming number of golf balls onto their properties—hundreds each year. Occasionally golf balls hit the houses, damaging screens and windows. Because of fear of injuries, the families restricted their use of the parts of their yards closest to the golf course while the course was open. The golf course operator made some adjustments to the ninth hole, but this reduced the number of balls entering their properties only marginally. The homeowners brought an action for trespass and nuisance. The court denied liability for nuisance, but found a trespass because the balls constituted a direct invasion stemming from the operator’s intended and ordinary use of its property. The court stated that the presence of the golf course before the plaintiffs built their homes was immaterial. Although nuisance law has a “coming to the nuisance” defense, the law recognizes no “coming to the trespass” defense. The homeowners were entitled to injunctive relief to compel the golf course operator to modify the course so as to solve the problem of invading balls. Amaral v. Cuppels, 831 N.E.2d 915 (Mass. App. Ct. 2005).

 

ZONING: Regulation of aircraft landing areas is not preempted by Federal Aviation Act. A pilot obtained the approval of the Federal Aviation Administration to construct two helicopter landing pads on his residential property in the town of Clear Lake, Indiana. The pilot began to commute to work by helicopter. The town brought a public nuisance action against the pilot, which ended in a settlement. Subsequently, the town amended its zoning ordinance to require a special permit for aircraft landing areas. The ordinance also provided that any preexisting unapproved aircraft landing area must be discontinued within five years. The pilot challenged the ordinance on the basis of federal preemption. The Federal Aviation Act expressly prohibits state and local governments from enacting or enforcing “a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier.” The pilot claimed that the town’s restriction of his landing pads would affect his route, but the court refused to find preemption. It reasoned that the Act allows local governments to control siting decisions for airports, heliports, and landing areas. For details of the heliport, see www.clearlakeheliport.org. Hoagland v. Town of Clear Lake, 415 F.3d 693 (7th Cir. 2005), cert. denied, 126 S. Ct. 1476 (2006).

 

LITERATURE

 

 

Common Interest Communities; Symposium. The Urban Lawyer recently published a series of creative articles on the theory, advantages, disadvantages, and future of common interest communities (CICs). These articles were prepared in connection with the Common Interest Communities Symposium sponsored by the Property Law Section of the Association of American Law Schools. Readers whose practices include drafting CC&Rs, representing homeowners’ associations, or assisting developers of large residential communities will find these materials of particular interest. Prof. David L. Callies sets the stage and describes the importance of the topics in Common Interest Communities: An Introduction, 37 Urb. Law. 325 (2005). According to Callies, CICs are residential communities subject to CC&Rs in which “following the selling of the last lot (or construction of the last home if seller is building them) the developer transfers the enforcement [of the CC&Rs] to some sort of association.” Michael A. Heller examines the theoretical underpinnings and rationale for CICs in Common Interest Developments at the Crossroads of Legal Theory, 37 Urb. Law. 329 (2005). Paula A. Franzese describes the abuses of power that have accompanied the rise of CICs (including, among others, restrictions on the weight of homeowners’ pets) in Privatization and Its Discontents: Common Interest Communities and the Rise of Government for “the Nice,” 37 Urb. Law. 335 (2005). Susan F. French suggests possible reforms to CIC law in Making Common Interest Communities Work: The Next Step, 37 Urb. Law. 359 (2005).

 

Eminent Domain; Kelo Continued. To date, much of the scholarly commentary surrounding Kelo v. City of New London, 125 S. Ct. 2655 (2005), suggests this opinion represents an unpleasant watershed in takings law or, at the least, an extreme extension of the governmental power. In a brief and thoughtful essay, Kelo and the Local Political Process, 34 Hofstra L. Rev. 13 (2005), Prof. Clayton P. Gillette examines the political process of condemnation and suggests that Kelo is not a death knell to private property rights in the United States. Gillette does not focus on “the substantive rights allocated by the case.” Instead, he states that “the historical relationships between local governments and local economies, combined with an understanding of the constraints that local governments face under the decision, may suggest that the list of horribles that have been predicted since Kelo are less likely to materialize.” The author acknowledges that he has taken a “heretical position.” Gillette argues that the “Court’s language is heavy with negative predicates.” He focuses on the Court’s recognition that the city of New London had engaged in (quoting the decision) “a carefully considered economic plan” and had “carefully formulated an economic development plan that it believes will provide appreciable benefits to the community.” The author then suggests that the Court’s language may be analogized to the traditionally noncontroversial language in case opinions striking down spot zoning. The essay is broader than this and worth reading. In fact, any thoughtful piece taking the “heretical” position demands a review.

 

Mortgage Law; Mezzanine Loans. Real estate lawyers (and professors) have in the last ten years been forced to come to terms with an entirely new set of complex real estate financing techniques. In his article, “Once a Mortgage, Always a Mortgage”—The Use (and Misuse of) Mezzanine Loans and Preferred Equity Investments, 11 Stan. J.L. Bus. & Fin. 76 (2005), Prof. Andrew R. Berman focuses on two lending devices in particular: mezzanine loans and preferred equity investments. Each of these financing devices has emerged from the confluence of “Main Street and Wall Street” and the “ascendancy of mortgage securitizations.” According to the author, “a mezzanine financing refers to a loan secured principally by the borrower’s equity in other entities.” The mezzanine borrower is a “sort of holding company” that owns equity in subsidiaries, and “these other subsidiaries actually own the underlying real property.” By contrast, “preferred equity transactions aren’t even technically loans.” “The lender typically makes a direct investment” in an entity that “directly owns the income producing real property.” In both scenarios, there is a senior mortgage. In the case of preferred equity investments, the senior may forbid “direct investment in the mortgagor.” “In such cases, the financing source makes an investment in a newly formed entity, and that new entity . . . owns all of the equity interests of the underlying mortgage borrower.” Preferred equity investors receive special rights, including the right to a “preferred rate of return on its capital investment.” Berman’s article describes the mechanics and uses of these new financing techniques. The author explains that this Wall Street–based approach to real estate financing has begun “quickly (and quietly) replacing conventional junior mortgages as the principal means to provide property owners with additional financing.” Berman worries that lenders have employed these new lending mechanisms, at least in part, to defeat borrower protections and property law rights such as the equity of redemption. He also argues that the significant influence of national ratings agencies “have caused the decline of traditional junior mortgages and inadvertently created the dramatic expansion of mezzanine financing and preferred equity investments.” He concludes that, notwithstanding the name or form, the substance of these lending arrangements is that of a mortgage, and that borrowers should be given all of the protections usually afforded when in default or subject to foreclosure.

 

Residential Real Estate Agents; Fiduciary Duties. Professors Royce de R. Barondes and V. Carlos Slawson Jr. provide results of an empirical study of the behavior of residential real estate agents in Examining Compliance with Fiduciary Duties: A Study of Real Estate Agents, 84 Or. L. Rev. 681 (2005). In residential real estate sales, the brokerage commission is typically split between a listing agent, who executes a listing agreement with the seller, and the selling agent, who locates the purchaser. The traditional rule makes the selling agent a subagent of the listing agent and subjects both agents to fiduciary duties benefiting the seller. As the authors note, many home buyers misunderstand their legal relationship to the selling agent. The actions of the selling agent often involve taking the purchaser to see a multitude of homes. Ultimately, the selling agent presents the purchaser’s offer to the seller and the listing agent. This behavior leads the purchaser to believe that the selling agent represents the purchaser. In the past decade, many jurisdictions have adopted a series of legislative cures to a perceived serious problem: that selling agents in fact work to the benefit of the seller—essentially duping the purchasers. Slawson and Barondes test and debunk this idea by examining “whether sellers receive worse sales prices where the selling and listing functions are divided between two firms. Such a relationship would be consistent [given the basic fiduciary obligations of selling agents] with selling agents improperly seeking to promote buyers’ interests. . . .” The authors’ analysis draws on “a sample of 3,209 single family dwelling sales during 1995 in a particular portion of a single metropolitan statistical area. As was the case in a number of jurisdictions in the 1990s, the jurisdiction had a statute providing that absent a written agreement to the contrary, a selling agent was the subagent of the listing agent and thus an agent of the seller.” The results of the study suggest that selling agents tend to view themselves as agents of the purchasers, notwithstanding the common law.

 

Zoning; Regulation of Superstores. Prof. George Lefcoe treats the hot button topic of union-endorsed zoning efforts that are intended to restrict the expansion of Wal-Mart, in The Regulation of Superstores: The Legality of Zoning Ordinances Emerging from the Skirmishes Between Wal-Mart and the United Food and Commercial Workers Union, 58 Ark. L. Rev. 833 (2006). Lefcoe’s article begins with a short but informative history of the conflict between the retailer and the union. On the one hand, Wal-Mart has become the “clear frontrunner in merging discount retail with grocery sales” and, on the other, “Wal-Mart’s implacable stance [on unions] is well known.” Simply put, Wal-Mart is taking its low price (and low wage) retail formula into suburban areas, and thereby threatens traditional grocery chains that employ a unionized workforce. One of the union’s responses has been to propose and support zoning challenges to the expansion. These include banning “superstores that carry groceries,” “deny[ing] superstores any ‘as of right’ zoning . . . by requiring a conditional use permit,” and requiring superstores to prepare economic impact analyses within specified redevelopment areas. According to the author, Wal-Mart will argue that zoning may not be used to regulate economic competition, that the zoning challenges violate equal protection, and that the labor-based assaults should be preempted by the National Labor Relations Act. Lefcoe is a former member and chair of the Los Angeles County Regional Planning Commission, and his background is evident in his account of both the policy debate and political process that underlie this dispute over the zoning process.

 

LEGISLATION

 

Arizona clarifies beneficiary deeds. An owner may declare that, if the grantee beneficiary predeceases the grantor, then the deed becomes void or the conveyance becomes part of the estate of the grantee. 2006 Ariz. Sess. Laws 13.

 

Colorado allows title insurance companies to enter into an affiliated business arrangement for referrals of settlement business. 2006 Colo. Sess. Laws 202.

 

Colorado eliminates the tenancy by the entirety. A conveyance that purports to create a tenancy by the entirety becomes a joint tenancy. 2006 Colo. Sess. Laws 240.

 

Idaho lengthens the period for adverse possession from five years to 20 years. 2006 Idaho Sess. Laws 158.

 

Idaho provides financial assistance to eligible landowners who agree to voluntary remediation plans. 2006 Idaho Sess. Laws 308.

 

Idaho enacts the Uniform Environmental Covenants Act. Environmental covenants are established as an interest in real property. The covenants arise as a result of environmental remediation or mitigation that imposes activity and use limitations on the property. Such covenants must be recorded and are subject to other requirements. 2006 Idaho Sess. Laws 15.

 

Indiana adopts Commercial Real Estate Brokers’ Liens. The lien attaches on the date of recording and does not relate back to the date of the brokerage agreement. 2006 Ind. Acts 78.

 

Indiana requires eminent domain to be exercised only for a public purpose. The term “public purpose” does not include economic development, an increase in tax base, tax revenues, employment, or general economic development. 2006 Ind. Acts 163.

 

Kentucky requires eminent domain to be exercised only for a public purpose.

2006 Ky. Acts 73.

 

Utah enacts the Property Rights Ombudsman Act. The office of the ombudsman may intervene on behalf of the public in eminent domain cases. 2006 Utah Laws 258.

 

Utah allows a joint tenancy to be severed by a unilateral conveyance by a joint tenant to him or herself. 2006 Utah Laws 236.

 

Utah enacts the Uniform Environmental Covenants Act. 2006 Utah Laws 51.

 

Virginia allows property held in trust to be held as tenants by the entireties. 2006 Va. Acts 281.

 

 

P R O B A T E   &   P R O P E R T Y
July/August 2006
Vol. 20 No. 4
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