P R O B A T E   &   P R O P E R T Y
March/April 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 andProf. 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: Uniform price for support services set by master MLS violates antitrust laws. The 12 real estate brokers’ associations operating in San Diego County formed a corporation, which set up a single countywide multiple listing service (MLS). Previously each association provided support services to its members at costs that varied between $10 and $50 per month. Under the new arrangement, the local associations continued to provide support services, but each MLS subscriber paid the corporation a fixed price for support services and use of the MLS database. The corporation remitted the support fees to the associations, setting the uniform support fee high enough to enable full funding of the high-cost associations. Two brokers successfully challenged the fee as illegal price fixing under the Sherman Act. The court rejected the defenses that the defendants were a “single entity” and thus immune from antitrust liability and that a rule of reason rather than a per se rule should apply to their pricing agreement. San Diego Ass’n of Realtors v. Freeman, 322 F.3d 1133 (9th Cir.), cert. denied, 124 S. Ct. 355 (2003).

COTENANTS: Conveyance to unmarried couple creates joint tenancy. A 1974 deed, captioned as an “Estate by the Entireties with Survivorship Deed,” conveyed property “to James Shelton and Mary Elizabeth Shelton, husband and wife.” At the time, Mary lived with James but was married to another man. They divorced in 1979. Mary died intestate in 1981, and James died intestate in 2001. Does James’s estate own all of the property, or do the beneficiaries of Mary’s estate take an undivided half? In a case of first impression for Ohio, the trial court held the deed created a tenancy in common, thus splitting the property between Mary’s and James’s estates. The court of appeals reversed, holding by a 2–1 vote that the deed created a joint tenancy, because the deed contained express survivorship language. Nationally there is a split of authority as to whether a failed entireties conveyance creates a tenancy in common or a joint tenancy. The Ohio holding is sound, because it comes closest to effectuating the parties’ apparent intent to create survivorship rights. In re Estate of Shelton, 796 N.E.2d 955 (Ohio Ct. App. 2003).

EASEMENTS: No extinguishment by adverse possession when servient owner locks gate and gives key to easement owner. A mining company acquired a prescriptive easement over a Montana road leading to its mine. In 1990, the servient owner fenced his property, installing a locked gate and “no trespassing” signs. When the company asked about the obstruction, the servient owner provided a key, telling the company it could use the road “with permission.” After more than five years (the prescriptive period in Montana), a dispute arose when the company’s use became more intensive. The servient owner argued that the easement was lost under adverse possession rules. The court, with one justice dissenting, rejected this argument, reasoning that the servient owner’s conduct was equivocal, failing to give clear notice that he disputed the company’s easement. Normally when easements are terminated by adverse possession, the servient owner obstructs the easement for the statutory period, with complete non-use of the easement during that period. Under the facts of this case, the court correctly imposed a stringent burden of proof on the servient owner. The court did not discuss abandonment, but that concept may provide a better way to analyze the problem. Arguably, the company should lose its easement only if it voluntarily relinquished ownership of its easement in exchange for a license to use the road. Brimstone Mining, Inc. v. Glaus, 77 P.3d 175 (Mont. 2003).

FIRST REFUSALS: Buyer lacks standing to sue holder of right of first refusal. A buyer contracted to buy a Ford dealership’s assets, including real estate, for $545,000. Under the franchise agreement, Ford held a right of first refusal, which it chose to exercise. The Pennsylvania Board of Vehicles Act authorizes such first refusal rights, subject to the condition that the selling dealer receive “the same or greater consideration” as offered by the buyer. Under the act, Ford paid the disappointed buyer compensation for its negotiation costs. Nevertheless, the buyer sued Ford for breach of statute and for tortious interference with contract, claiming that Ford paid the seller less than $545,000. Ford successfully challenged the buyer’s standing. The buyer did not have a “substantial, immediate and direct interest” because payment of a lower price harmed only the seller, not the buyer. The decision may correctly interpret the Pennsylvania act, but it contravenes the general thinking about the nature of first refusals. A contract to purchase property, subject to the condition that a third party not exercise a first refusal right, is typically perceived to be a vested property right. The contract is generally enforceable against third parties, including the holder of the first refusal, who with knowledge of the contract acquires ownership of the property. Query: would the buyer have won had it sued the seller? Rosado v. Ford Motor Co., 337 F.3d 291 (3d Cir. 2003).

LANDLORD-TENANT: Tenant who vacates is liable for additional rent. In 1997 Woolworth closed all of its U.S. general merchandise stores. At a District of Columbia store, Woolworth removed its property and gave the landlord the key and permission to retake possession. Over two years remained on the lease term. The lease obligated Woolworth to pay additional rent should it “at any time vacate the premises” to make up for the landlord’s loss of percentage rent. Woolworth proposed using part of the premises for a FootLocker store and requested modifications to the lease, including an extension of the term. Negotiations ultimately failed. The issue was whether Woolworth owed additional rent from the time it closed the store, as the landlord contended, or from the time in 1998 when it decided not to reopen that store as a FootLocker outlet. Reversing the trial court, the appellate court held that the physical acts of closing the store and moving out constituted “vacating.” The court observed that Woolworth’s intention would be relevant if the issue were whether it “abandoned” the premises; “vacated,” however, is a different standard. The case illustrates the need for careful drafting of leases. Neither term (“vacates” or “abandons”) sufficiently handles the type of situation that confronted the parties—a cessation of business that might be either temporary or permanent. Saul Subsidiary II Limited Partnership v. Venator Group Specialty, Inc., 830 A.2d 854 (D.C. Ct. App. 2003).

LEGAL ETHICS: Only attorneys may prepare conveyances. Upholding a state bar advisory opinion, the Georgia Supreme Court held that only licensed attorneys may prepare deeds and other conveyances (including deeds to secure debt) and facilitate their execution. Such conduct by nonlawyers constitutes the unauthorized practice of law. This rule mandates an attorney’s presence at virtually all closings of sales and loans, including refinancings. Although the court recognized that many states allow nonlawyers to close real estate transactions, it asserted that the public interest requires attorney involvement. “If the attorney fails in his or her responsibility in the closing, the attorney may be held accountable through a malpractice or bar disciplinary action. In contrast, the public has little or no recourse if a non-lawyer fails to close the transaction properly.” The court rejected arguments made by amici, the U.S. Department of Justice and the FTC, that mandating lawyers limits consumer choice and raises cost . In re UPL Advisory Opinion 2003–2, No. S03U1451, 2003 Ga. LEXIS 946 (Ga. Nov. 10, 2003).

MECHANICS’ LIENS: Waiver does not violate public policy. In a construction contract to build an apartment building for a price of over $9 million, the contractor waived its rights to mechanics’ and materialmen’s liens. The contractor, unpaid, brought suit against the owner and filed a lien. In a case of first impression for Nevada, the court dismissed the lien, ruling that the waiver did not violate public policy. The court also rejected the contractor’s argument that the owner’s default in payment amounted to a failure of consideration, vitiating the waiver. Dayside Inc. v. First Judicial District Court, 75 P.3d 384 (Nev. 2003). Some states regulate lien waivers by statute. After the transaction involved in the case, the legislature enacted a statute allowing waivers, subject to certain formalities and conditions. Mechanics’ Liens Act, 2003 Nev. Stat. 427.

PROPERTY OWNERS ASSOCIATIONS: Statutory authority to levy fines is only prospective. Homeowners in a planned community, formed in 1987, began construction of a retaining wall in violation of architectural standards. The association sought to impose monetary fines, despite the lack of express authority in the declaration of covenants, articles of incorporation, or bylaws. The association relied upon the North Carolina Planned Community Act, enacted in 1998, which automatically grants associations certain powers, including the power to levy fines, unless expressly prohibited by the constituent documents. Reversing the lower courts, the state supreme court held that associations formed before the act lack the implied powers. An older association can exercise the new statutory powers only by expressly amending its documents. Wise v. Harrington Grove Community Ass’n, Inc., 584 S.E.2d 731 (N.C. 2003).

RECORDING ACTS: Defectively acknowledged deed imparts constructive notice. A Maryland notary acknowledged a deed of trust in West Virginia, falsifying the acknowledgment to make it appear that the grantors signed the instrument in Maryland. After the grantors filed bankruptcy, the trustee sought to set aside the deed on the basis that it did not impart constructive notice under state law. Answering a question certified from the bankruptcy court, the state court overruled prior authority. It held that the deed imparted constructive notice if no “improper benefit was obtained by the notary or any party” and no “harm flowed from the transaction.” One justice cogently dissented, arguing that “ignoring the wrongful conduct in this case undermines our traditional system of recording ownership of real property.” How the bankruptcy court should interpret the improper benefit/harm standard is unclear. Did the notary, guilty of a criminal misdemeanor, receive an “improper benefit” if he was paid for his notary services? In re Williams, 584 S.E.2d 922 (W. Va. 2003).

SIGN REGULATIONS: Texas Highway Beautification Act does not infringe landowner’s First Amendment rights. The federal Highway Beautification Act of 1965 requires states to control signs within 660 feet of interstate and primary highways. Barber, an attorney, installed a billboard stating, “Just say NO to searches,” and displaying a telephone number. Callers to that number heard a prerecorded message about a citizen’s right to refuse to have their vehicles searched by police officers. Under the Texas act implementing the federal legislation, the Texas Department of Transportation demanded that Barber remove his billboard. Exemptions in the Texas act allowed signs advertising on-site businesses, signs relating to public elections, and certain other signs. Barber, not qualifying for a statutory exemption, claimed the act violated his constitutional right to free speech. The state supreme court, with three justices dissenting, upheld the act, reasoning that the prohibition on signs was content neutral and was a reasonable time, place, and manner restriction. Texas Dep’t of Transportation v. Barber, 111 S.W.3d 86 (Tex. 2003).

Literature

Arbitration Agreements . Professor Celeste M. Hammond visits a topic of increasing importance to real estate lawyers: whether parties to binding arbitration agreements can be said to have validly consented to such agreements. In The (Pre) (As)sumed “Consent” of Commercial Binding Arbitration Contracts: An Empirical Study of Attitudes and Expectations of Transactional Lawyers, 36 John Marshall L. Rev. 589 (2003), Professor Hammond explains the operation of arbitration provisions and agreements in commercial transactions, the very limited bases for appealing the decision of the arbitrator, and the strong likelihood that courts will uphold the arbitration. Professor Hammond then describes her survey of commercial transactional lawyers in the Chicago Bar Association. The results of her survey indicate that there is a problem between what the law provides and what transactional lawyers believe the law to provide. Professor Hammond is particularly concerned that real estate lawyers—following advice disseminated at CLE events and the like—too often try to draft around specific elements of arbitration provisions while leaving the basic provision intact. The purpose of this strategy, apparently, is to promote the “speed, privacy, and reduced expense” associated with arbitration, while “retaining the predictability and application of the rule of law of litigation.” She states, however, that “it is unclear whether courts will enforce such individually tailored arbitration agreements” and that most commercial transaction lawyers will not have the knowledge or expertise to “draft appropriate modifications,” even if a court were willing to uphold them. Because binding arbitration provisions are such a common feature of commercial transactions, this article should be required reading for real estate lawyers.

Commercial Leasing; Landlord’s Post 9/11 Duties. The horrific events of 9/11 have reshaped many facets of American life. Real estate lawyers confront just one aspect of this extraordinary change when negotiating commercial lease agreements. The twin towers were office buildings subject to an enormous array of lease agreements; real estate lawyers negotiating similar space agreements are now forced to ask a terrible “what if” each time they represent a landlord or tenant. Thomas C. Homburger and Timothy J. Grant carefully and respectfully address some of these issues in their article, A Changing World: A Commercial Landlord’s Duty to Prevent Terrorist Attacks in Post–September 11th America, 36 John Marshall L. Rev. 669 (2003). According to the authors, tenants will demand that courts recognize a landlord’s legal obligation to make premises safe from terror attacks. To the degree that such a duty arises, Homburger and Grant suggest that courts will draw on existing law requiring landlords to keep property safe from third-party criminal activity. The authors examine this latter area of law and discover that jurisdictions vary widely in the degree to which landlords can be held accountable for the criminal behavior of third parties. They note that the modern trend is to impose a duty on landlords to prevent criminal activity in common areas of a building. Homburger and Grant suggest that several factors might lead to a landlord’s liability for terrorist acts. These factors include the “forseeability of a terrorist attack on a particular building,” whether the landlord voluntarily assumed liability, and whether the state legislature directly imposed a duty by statute.

Commercial Securitized Loans; Allocation of Extraordinary Risk. Commercial leasing is just one aspect of real estate practice touched significantly by the events of 9/11. Professor Georgette Chapman Poindexter addresses another in her short article, Impossible, Impracticable, or Just Expensive? Allocation of Expense of Ancillary Risk in the CMBS Market, 36 John Marshall L. Rev. 653 (2003). Professor Poindexter asks which party—the borrower or lender—should be required to “bear the burden of changed circumstances of [the borrower’s] default profile” that result from “ancillary risk.” Ancillary risks are those risks that are “industry wide, as opposed to property specific.” The risk of terrorism is one unfortunate example. Loan agreements require borrowers to maintain specified levels of insurance. Post 9/11, and as insurance policies come up for renewal, borrowers have chafed at significantly increased costs, and some, such as the Mall of America, have provided policies that “explicitly excluded coverage for loss or damage due to terrorism.” Loan servicers reject the borrowers’ new insurance packages, and the parties are forced into litigation over the issue. (The Mall of America owner successfully obtained a restraining order against the loan servicer to prohibit the latter from force-placing a policy covering acts of terrorism at the borrower’s expense.) The author limits her examination to nonmonetary defaults arising from unanticipated ancillary risk; the mall’s failure to provide insurance meeting the lender’s demands was, presumably, a default under the loan agreement. Should the borrower or lender bear the burden of these and similar costs? Is performance of this loan covenant by borrower impossible or commercially impracticable (thereby excusing performance), or merely expensive? Professor Poindexter looks to the forseeability of the ancillary risk at the time the parties contracted for an answer. In the case of post-9/11 insurance expenses, the author concludes that the increase in insurance cost was unforeseeable, “especially . . . in light of the fact that terrorism insurance did not exist as a U.S. insurance product prior to 9/11.” For securitized loans, Professor Poindexter argues that investors, rather than owners, should bear the burden of these new ancillary risks. She notes that owners in the CMBS arena are able to diversify their risks to a much greater extent than the property owners.

Virginia Law; Recent Judicial Developments. Brian R. Marron and Christopher M. Gill survey significant Virginia judicial decisions and legislative activity in the area of real estate law and land use in Real Estate Law, 38 U. Rich. L. Rev. 223 (2003). The Supreme Court of Virginia addressed contract interpretation issues, “land trusts, condemnation, marketability of title, easements and restrictions on the use of land.”

Legislation

California extends and modifies agricultural land conservation contracts. Material breaches of conservation contracts must be removed or the property owner is subject to substantial monetary penalties, including a lien against the land. The law that allows adjustments with respect to existing conservation contracts is extended to 2009. 2003 Cal. Legis. Serv. 694.

New York enacts the “Brownfield Cleanup Program.” This comprehensive and complex new program is designed to encourage development of “brownfield sites” while restoring ground water to its classified use. The goals of this program are worthwhile; implementation, however, will be expensive. 2003 N.Y. Laws 1.

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