P R O B A T E   &   P R O P E R T Y
January/February 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

CONTRACT RESCISSION: Cancellation notice must include supporting documentation to show failure of condition. A contract permitted the buyer to cancel if the building had substantial structural defects that would cost more than $50,000 to repair. The buyer sent the seller a notice of cancellation, stating there were substantial structural defects and requesting a return of its $100,000 down payment. The buyer failed to include any estimate or other evidence bearing on repair costs. The seller rejected the purported cancellation and sent a time-of-the-essence notice, which specified a closing date. The buyer failed to appear, but subsequently sued for the down payment. The seller prevailed on a motion for summary judgment, the court reasoning that the buyer forfeited its rescission right by failing to provide documentation for the cost of repairs. Arguably, the outcome is improper, because the parties’ contract did not explicitly require the buyer to submit supporting documentation with the notice. The court added a term to the contract that the seller did not bargain for. Whether or not correctly decided, the case demonstrates that a party should take great care in deciding how to exercise a right to rescind, including consideration of what records are advisable to substantiate proper exercise. Premier Storage Solutions, LLC v. Almar Group, Inc., 756 N.Y.S.2d 617 (N.Y. App. Div. 2003).

COVENANTS: Amendment can impose assessments on residential lots. Restrictive covenants often include express provisions bearing on amendments and modifications to those covenants. In a Colorado residential subdivision, a provision allowed 75% of the owners to “change or modify” the existing covenants. The community did not have a mandatory homeowners association, and the requisite majority added covenants to form an association, supported by mandatory dues on all lot owners, with the obligation to pay dues secured by liens on the lots. The court of appeals found the amendment invalid, reasoning that the amendment clause did not allow for the addition of wholly new covenants, but only for the modification of existing covenants. The supreme court reversed, holding the homeowners could create a common interest community with mandatory dues, notwithstanding the argument of the minority homeowners that they never had agreed to such a regime. Recognizing a split in the case law from other states on the issue, the court sanctioned assessments to avoid placing the community “in the untenable position of being obligated to maintain facilities and infrastructure without any viable economic means by which to do so.” Evergreen Highlands Ass’n v. West, 73 P.3d 1 (Colo. 2003).

EASEMENTS: Owner of easement can expand width if allowed by express terms of easement instrument. Early twentieth century grants of easements for irrigation ditches (called “laterals”) did not specify the width of the easement. The easement instruments granted the right to maintain laterals “with the right and permission to enter upon said land for the . . . enlargement and repair of said . . . laterals . . . and to . . . maintain and repair the same.” For decades, the easement owners used manual labor and small machines to remove sedimentation from the laterals and perform other maintenance. In the 1980s, the owners started using large, efficient machines (“slopers”) to maintain the laterals. The slopers move along the land adjoining the laterals. To operate, they require an unobstructed width of 20 feet from the centerline of the lateral. Owners of the servient estate refused to remove cherry trees and sprinklers from this area. The easement owner prevailed in an action to establish the expanded width. In a case of first impression for Washington, the court authorized expansion of an easement over time if its express terms manifest the parties’ intent to accommodate future demands. The court distinguished precedents holding that the original construction of improvements fixes the width of an easement, because in those cases the easement instrument had no express language permitting expansion. Sunnyside Valley Irrigation Dist. v. Dickie, 73 P.3d 369 (Wash. 2003).

HOUSING CODES: Government must personally notify tenants of right to appeal condemnation order. The City of Orlando, Florida, declared an apartment building unfit for occupancy because of substantial housing code violations, which the owner failed to correct. On June 29, the city posted condemnation notices at the building, demanding that all tenants vacate by 5 p.m. the next day or face possible arrest or prosecution. Several tenants promptly commenced litigation against the city, its code enforcement board, and the city official who had signed the notices. Plaintiffs asserted three violations of procedural due process: failure to notify them of the initial code violations, failure to afford them a hearing prior to eviction, and failure to afford them a post-eviction hearing at which they could challenge the order and assert a right to regain occupancy. The district court rejected the first two claims on the merits, reasoning that the risk of injury to tenants and guests constituted “exigent circumstances,” justifying eviction without first providing notice and an opportunity to be heard. The district court, however, held the tenants were entitled to a post-eviction hearing and that the June 29 notices were constitutionally defective, because they did not inform the tenants of their right to challenge the city’s condemnation decision. The court rejected the official’s defense of qualified immunity. On appeal, the Eleventh Circuit agreed with the lower court’s due process analysis but held (with one judge dissenting) that the official deserved immunity, because he could have reasonably believed, based upon precedent, that the notices he gave were lawful. Grayden v. Rhodes, 345 F.3d 1225 (11th Cir. 2003).

LANDLORD-TENANT: Tenant’s failure to supply forwarding address extends time for landlord to refund security deposit. Residential tenants vacated their premises with the landlord’s knowledge and consent, but without giving the landlord a forwarding address. The Indiana security deposits statute requires a landlord to refund a tenant’s security deposit or provide an itemized list of damages within 45 days after lease termination. Forty-seven days after they vacated, the tenants requested, by mail, that the landlord return their $500 security deposit. The landlord responded by filing a complaint for $6,000 for damage to the premises. The complaint, however, did not include an itemization of damages or give any factual basis for the damage claim. The tenants counterclaimed for the return of their deposit plus attorney fees. The issue was whether the tenants’ failure to provide a forwarding address within 45 days discharged the landlord’s statutory obligations or instead extended the time for their performance. Reversing the court of appeals, the supreme court held that the landlord’s obligations were extended, not discharged. Thus, the tenants were entitled to a return of their deposit and attorney fees because the landlord’s complaint did not itemize damages. Lae v. Householder, 789 N.E.2d 481 (Ind. 2003).

LEGAL ETHICS: Buyer’s attorney must attend real estate closing. An attorney representing a buyer of land sent a paralegal to conduct the closing. Before the closing, the attorney reviewed the settlement statement and other closing documents. During the closing, the attorney was accessible to the paralegal by telephone in case any questions arose. No other attorney attended the closing. The attorney regularly conducted other closings in this fashion. A disciplinary proceeding resulted in a settlement, in which the attorney admitted misconduct and recognized “that either he or another licensed attorney should have been physically present to conduct the actual real estate transactions and closings.” In many other states, the attorney’s conduct would be proper because non-attorney professionals are allowed to conduct real estate closings. See, e.g., In re Opinion No. 26 of the Committee on the Unauthorized Practice of Law, 654 A.2d 1344 (N.J. 1995). The South Carolina Supreme Court issued a public reprimand, relying upon its 1987 precedent mandating that attorneys supervise all closings. In re Lester, 578 S.E.2d 7 (S.C. 2003).

MORTGAGE PRIORITY: Refinancing lender entitled to equitable subrogation. In 1990, a landowner executed a deed of trust to secure a loan for $159,000. In 1998, the owner refinanced the debt with a new $168,000 loan from a different lender, several years after judgment creditors had filed judgment liens against the owner. The owner defaulted, and the refinancing lender commenced foreclosure. Its title search had failed to disclose the liens; it thus had constructive, but not actual, notice of the intervening liens. The trial court held that the judgment creditors had the prior lien under the “first in time, first in right” principle, but the appellate court reversed. Under equitable subrogation, the refinancing lender had priority to the extent (and only to the extent) of the debt it refinanced. The court followed the majority U.S. rule, also endorsed by the Restatement (Third) of Property: Mortgages § 7.6 (1997). Eastern Savings Bank v. Pappas, 829 A.2d 953 (D.C. 2003).

PROPERTY OWNERS ASSOCIATIONS: Election materials are not defamatory. Rarely do real estate lawyers need to recall the finer points of the law of defamation; however, a heated battle for electoral control of a property owners association can fuel a defamation charge. Insurgent homeowners in a 6,000-unit gated resort community proposed a slate of candidates for election to the association’s board of directors, which the developer controlled. The insurgents prepared election fliers, alleging the developer built inadequate roads and water and sewer systems, failed to pay revenues to the association for use of roads and other amenities by the developer’s guests, and failed to provide audits of the association’s books. The developer and its president brought a defamation action against the insurgent’s ringleader, claiming the election materials contained false statements, harmed their reputation, and held them out to ridicule. The court granted summary judgment for defendant, finding that some of the statements were truthful, at least partially, and others were nondefamatory “opinionated criticism.” The court relied on defendant’s affidavit, which professed his belief that his statements were truthful, reflected his opinions, and were not intended to deceive or mislead readers. Double Diamond, Inc. v. Van Tyne, 109 S.W.3d 848 (Tex. App. 2003).

SLANDER OF TITLE: Filing of materialman’s lien is privileged. A property owner contracted for the installation of custom-made cabinets. Dissatisfied with the work, the owner refused to pay, which prompted the cabinetmaker to file a materialman’s lien. The owner brought action for negligent construction and for slander of title to land. The cabinetmaker counterclaimed for the contract price of $6,064. The jury found in favor of the owner for negligent construction, awarding $3,225 in damages, and in favor of the cabinetmaker on the counterclaim; the damages thus partially offset the price. As to slander of title, the cabinetmaker obtained a directed verdict. Slander of title requires a false and malicious impugning of the plaintiff’s title. The owner failed to introduce any evidence that the cabinetmaker acted with malice. The lien notice accurately stated the contract price, which the cabinetmaker believed was payable. Moreover, the court noted that a materialman has a “statutory privilege to file a lien to protect its right of recovery.” Premier Cabinets, Inc. v. Bulat, 583 S.E.2d 235 (Ga. Ct. App. 2003).

SUBDIVISION MAPS: Antiquated map does not create vested rights. In 1865, a landowner filed a subdivision map in the Sonoma County real property records, dividing a tract of over 1,000 acres into 90 lots. This filing preceded the state legislature’s 1893 enactment of its first subdivision map statute. The owner never sold or conveyed individual lots. Over the years, several conveyances employed metes and bounds descriptions of parts of the subdivision. In 1990, the owners of 158 acres, consisting of two original lots and fragments of 10 other lots, applied to the county for certificates of compliance with the Subdivision Map Act. Such certificates would have allowed the holders to sell, lease, and finance individual lots. The county denied the application. The court rejected the owners’ claim of entitlement, reasoning that an “antiquated map,” even if recorded, does not establish a lawful subdivision or separately cognizable lots. In essence, the court rejected the owner’s claim of vested rights, although the court’s opinion does not use this term. Gardner v. County of Sonoma, 62 P.3d 103 (Cal. 2003).

LITERATURE

Covenants Against Suit or Competition, or to Spite. Professor Susan F. French examines case law involving some of the more difficult real property covenants, as well as the possible impact of the Restatement (Third) of Property on the development of this law, in Can Covenants Not to Sue, Covenants Against Competition and Spite Covenants Run with Land? Comparing Results Under the Touch or Concern Doctrine and Restatement Third, Property (Servitudes), 38 Real Prop. Prob. & Tr. J. 267 (2003). Professor French is the right person to provide insight into these real property issues; she served as Reporter for the Restatement (Third) of Property, Servitudes (2000). The author begins by presenting the traditional common law requirements for a covenant to “run with the land” and compares this system with that created by the new Restatement. As she points out, the Restatement differs from the present regime in three primary respects: (1) “the party seeking to avoid enforcement bears the burden” of demonstrating to the court that the covenant should not run—thus there is a presumption that the burden runs; (2) the Restatement discards the touch and concern doctrine and instead inquires whether “allowing the covenant to run with the land would be illegal, unconstitutional, or violate public policy”; and (3) a court that ultimately determines that the covenant should not run must justify its decision by explaining the court’s public policy concerns. As to the third item, a court operating under the traditional common law would end its inquiry altogether if it determined that the covenant did not touch and concern land. Professor French takes each of the different covenant scenarios in turn (those against suit and competition, and covenants for spite). She locates case opinions premised upon traditional touch-and-concern doctrine and then determines what she believes would be the correct analysis and outcome under the Restatement. She suggests that the outcome obtained by the Restatement (Third) more likely effectuates the intent of the parties creating covenants and avoids overly formalistic judicial decision-making. The Restatement is not enacted as a statutory matter; it is adopted by judges, if it suits them, over time. Much work has been invested in the new Restatement. The doctrine described in Professor French’s article may signal the eventual demise of case law that is part of the ordinary parlance of real property lawyers.

Lease Law; Voluntary Surrender and Subleases. In his student note, Giving Up on Voluntary Surrender: The Rights of a Sublessee When the Tenant and Landlord Cancel the Main Lease, 24 Cardozo L. Rev. 2149 (2003), Stephen T. Kaiser examines the common law doctrine that a tenant’s breach of a lease will terminate a sublease of the premises. Kaiser focuses his attention on one common exception to this rule—that the sublease will survive if the primary tenant voluntarily surrenders the prime lease to the landlord. Kaiser argues that courts should abandon the voluntary surrender doctrine. Commercial subtenants have the benefit of sophisticated counsel and may address the risks of termination of the prime lease in sublease negotiations. Residential subtenants would benefit from “legislation granting them a right to apply to the court for a continuance of their subtenancies in the event” of the sublandlord’s breach of the prime lease. Kaiser suggests that landlords and their tenants sometimes engage in collusive practices to avoid having the tenant’s behavior labeled a voluntary surrender, thereby terminating the sublease. This collusion is difficult for the subtenant to prove. Kaiser’s article reviews the common law effectively, drawing on cases from a number of jurisdictions. Courts have difficulty tossing out many of the older property law rules, and Kaiser acknowledges that this particular rule is “venerable.”

Malpractice and Professional Responsibility; Real Estate Lawyers. Real property conferences tackle the issue of lawyer malpractice in the context of real estate transactions. Although this issue is important to real estate lawyers, lawyer malpractice specifically in the real estate field is not the regular subject of scholarly articles. It once again falls to a student to provide some content. In his brief note, Legal Malpractice and the Real Estate Lawyer, 27 J. Legal Prof. 247 (2003), Kenneth M. Turnipseed examines ethics and malpractice traps that lawyers regularly set for themselves in the real estate context, the connection between professional responsibility and actionable malpractice, the ability of nonclients to successfully sue real estate lawyers for deals gone awry or faulty work product, and, finally, the particular quandaries posed by multijurisdictional practice. This article will not reveal anything to the experienced real estate lawyer that he or she did not already know. But it might be useful for two sets of readers: lawyers new to real estate practice and, perhaps more importantly, lawyers who only occasionally dabble in this area. In a number of instances, Turnipseed identifies a problem, but without significant explanation or suggestions for appropriate lawyer behavior. (An example comes at the end of the Note, in which Turnipseed briefly explains that a lawyer closing a deal in a jurisdiction other than his own might be practicing law without a license.) And in some instances, the author’s understandable lack of experience might give the reader the wrong impression. For example, the Note suggests that real estate lawyers might solve conflict of interest problems (in the real property purchaser/seller scenario) by obtaining the informed consent of both parties—in other words, a waiver. In some states, such as Oregon, representing adverse parties such as a buyer and seller in their sale transaction is prohibited as a nonwaivable conflict. Even if waiver of such a conflict is permitted in a jurisdiction, sophisticated commercial real property lawyers would be party to such devices only with great trepidation. If a problem emerges after the transaction closes, such an arrangement greatly increases the vulnerability of the attorney to malpractice liability. The editors of “Keeping Current—Property” hope the author will consider updating his article in a few years after gaining experience in practice.

Opinions of Counsel; Guidelines. A joint committee of the American College of Real Estate Lawyers and the Real Property, Probate and Trust Law Section recently published guidelines for third-party opinion letters in the context of real property loan transactions. This material appears in Real Estate Opinion Letter Guidelines, 38 Real Prop. Prob. & Tr. J. 241 (2003). The Guidelines mirror closing opinion guidelines that were previously adopted by the ABA Section of Business Law, but with additions tailored to the real estate loan transaction.

Personal Property; Finders Keepers, Losers Weepers, in Japan. A prior edition of this column highlighted a topic that usually takes up a day in first-year property courses—the rule of capture. This doctrine fits foxes but, according to at least one court, not baseballs. In his recent article, Losers: Recovering Lost Property in Japan and the United States, 37 L. & Soc’y Rev. 369 (2003), Mark D. West examines another topic common to first-year property courses—the law of finders. The author wonders why, in Japan, lost property so often makes its way back to the person who lost it, but rarely does so in the United States. West reviews the common law of finders, beginning with the 1722 chimney sweep case, Armory v. Delamirie. That case laid down the central rule: the right of a finder of lost property to the item is good as against all the world, except the “rightful” owner. Although this rule seems simple, it raises a host of issues that sometimes erupt into litigation. The Japanese system apparently is simple, and most of the populace understands its operation. Finders are required to submit the lost property to the police within a set number of days. The finder receives a reward set by statute (a percentage of the value of the lost item) for turning the property in. Failure to submit the property, however, subjects the finder to a civil penalty. Lawyers doing business in Japan may therefore feel confident that a lost wallet will be returned. (Losses to a pickpocket, in Japan and anywhere else, are likely to remain a casualty of travel.)

Takings. Takings law continues to be the focus of serious property law scholarship. One of the best recent articles is authored by Eric R. Claeys and is titled Takings, Regulations, and Natural Property Rights, 88 Cornell L. Rev. 1549 (2003). Professor Claeys has spent his research time looking at nineteenth century state court takings cases. According to Claeys, state courts framed their takings theory on the natural law that dominated discourse at the founding of the country. The author explains that, for a nineteenth century state court judge, regulations were meant to “order and encourage the free and equal use of property.” In other words, acceptable regulation “facilitated” a property owner’s use of property. Laws that deviated from this norm were takings. Claeys is impressed with this body of law because, he asserts, state courts created a cohesive and predictable takings framework. This contrasts with the takings law that has emerged from the Supreme Court in the latter part of the twentieth century, which even the Court has admitted is a jumble. Claeys describes his vision of takings law for the twenty-first century, and it borrows much from what state courts created in the past. He rejects the idea that it is impossible to create a truly coherent takings doctrine; the Court, he suggests, need only be willing to make principled distinctions between regulations that control nuisances or provide a common benefit and those that deprive an owner of her “fair and equal share of use rights in her property.”

Title Assurance; Liability for Conduct of the Assured. Title insurance companies, title abstractors, lawyers who write title opinions, and sellers who deliver warranty deeds understand that they may be subject to suit for a later discovered defect in title to property. But what if the individual to whom quality of title is assured created the defect in the first place? Charles B. Sheppard addresses this question in Assurances of Title to Real Property Available in the United States: Is a Person Who Assures a Quality of Title to Real Property Liable for a Defect in the Title Caused by Conduct of the Assured?, 79 N.D. L. Rev. 311 (2003). Professor Sheppard breaks his article into two parts. The first reviews the various mechanisms that are available to owners of interests in real property to assure the state of their title. The author covers the gamut; he explains marketable title, deed warranties, title insurance, title opinions, and tort obligations of persons examining or opining as to the state of title to real property. The author covers the broad range of black letter law. In the second part of the article, Sheppard addresses the most interesting set of issues—the degree to which the behavior of the party receiving title assurances terminates that party’s ability to sue individuals making the assurances. According to Sheppard, there is little in the way of case law on the subject, and the author’s answer seems to be “one should hope not.” The fact patterns that might give rise to the issues Sheppard describes are sometimes unusual. For example, when addressing the ability of a buyer to rescind a contract because of the seller’s failure to deliver marketable title, Sheppard hypothesizes a reacquisition of property by the buyer. In other words, the author suggests a fact pattern in which the buyer was a predecessor in interest in the property to the seller and the buyer created the defect during his original ownership.

LEGISTLATION

California adds density bonuses for child care facilities located within the development of lower income housing. In addition to the prescribed density bonus, the local municipality may also be required to provide other incentives or concessions for the appropriate lower income housing with child care facilities. Other jurisdictions can be expected to enact similar legislative inducements. 2003 Cal. Legis. Serv. 430.

California allows tenants to claim attorney fees against the landlord of an untenantable building. Attorney fees may be recovered when the landlord collects or demands rent, issues a rent increase, or commences an unlawful detainer action. In addition, the tenant may recover damages up to $5,000. The grant of attorney fees to tenants increases the likelihood that tenants will avail themselves of this untenantable building remedy. 2003 Cal. Legis. Serv. 109.

California enacts the California Domestic Partner Rights and Responsibilities Act of 2003. This act, effective January 1, 2005, treats domestic partners registered in California, or under similar laws in other jurisdictions, as if they were spouses for the ownership and transfer of real property. Assuming that this law withstands the expected legislative and judicial challenges, it will test a fundamental assumption in our society that granting special privileges to married couples for property, while denying the same rights to others, is permissible. 2003 Cal. Legis. Serv. 421.

California enacts the California Financial Information Privacy Act. Effective July 1, 2004,California financial institutions, including mortgage lenders, must provide their customers with a specified form and allow the customers, without penalty, to direct the financial institution not to disclose nonpublic information, other than to certain affiliated financial institutions. Some exceptions, such as disclosure to law enforcement authorities, are contained in the act. 2003 Cal. Legis. Serv. 241.

California limits a borrower’s duty to pay interest on a mortgage loan to one day before the disbursement of the loan proceeds to the borrower. Payments on behalf of the borrower are similarly treated. 2003 Cal. Legis. Serv. 554.

California prohibits banning the display of political signs by a homeowner or resident of a mobile home park. Signs may be limited to six square feet. 2003 Cal. Legis. Serv. 249.

Delaware extends “brownfields” protection to prospective purchasers and contiguous owners. Protection is limited to innocent purchasers and owners. 74 Del. Laws 185 (2003).

Illinois allows title insurance companies to issue and record a mortgage certificate of release. In the seemingly never-ending battle to secure and record releases for mortgage loans, this act allows a title insurance company to issue and record the release based on proof of payment or a hold-harmless letter from another title insurance company. 2003 Ill. Laws 428.

New York allows title insurance companies to write policies up to 103% of the fair market value of the property. Policies are allowed when lenders make first mortgage loans in such amounts. Although title insurance is necessary for the secondary market, one may question the wisdom of a “secured” loan and title insurance that exceeds that fair market value of the property. 2003 N.Y. Laws 555.

North Carolina establishes minimum standards for modular homes. These standards include roof pitch, eave protection, exterior walls and materials, and foundations. 2003 N.C. Sess. Laws 400.

Oregon establishes the Residential Structures Board. This board advises the director of the Department of Consumer and Business Services on a new “low-rise residential dwelling program.” The director is required to adopt a comprehensive building code for low-rise dwellings. 2003 Or. S.B. 906.

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