P R O B A T E & P R O P E R T Y
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P R O B A T E & P R O P E R T Y
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Keeping Current - Property
Keeping Current—Property Editor: Prof.Daniel B. Bogart, Chapman University School of Law, One University Drive, Orange, CA 92866, firstname.lastname@example.org.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.
BROKERS: Broker earns commission under quantum meruit when owners lease property rather than sell. Owners of a commercial property signed an exclusive listing agreement when a broker approached them, telling them that he had a prospective buyer. The agreement listed the property for $750,000, provided for a 5% commission, and did not address a lease of the property. The parties failed to agree upon a sales price but reached agreement on a 20-year lease. The lease provided for rents of $70,000 per year for the first five years, escalating for the remainder of the term. The lease provided “that there is no commission, charge or other compensation due to any broker, except for [the broker].” The broker offered to accept a commission of $35,000 paid as a lump sum (5% of $700,000, the owners’ final counteroffer made during sale negotiations). The owners offered to pay $35,000 in annual payments over five years, but this was unacceptable to the broker. The broker sued for a commission in quantum meruit. The trial court held for the owners, based on a Delaware real estate commission regulation requiring that all listing agreements be in writing. The supreme court reversed, reasoning that a recovery under quantum meruit was appropriate because there was a written listing agreement at the outset, the broker procured the lessee and participated in lease negotiations, and the owner acknowledged his right to a commission in the lease. Chabbott Petrosky Commercial Realtors v. Peterson, 859 A.2d 77 (Del. 2004).
EASEMENTS: Implied easement for air and light requires proof of necessity. In a neighborhood in which there are no setback lines established by zoning or covenants, it is risky for an owner to install windows on a wall that abuts a boundary line. The neighbor may construct new improvements that block air and light to the windows. This happened in Georgetown. Aggrieved owners of a townhouse sued, claiming they owned an easement for air and light, created either by prescription or by implication. An easement for air and light is classified as a negative easement, because it involves no entry upon the servient estate. It can be created by express grant. The court quickly rejected the plaintiffs’ prescriptive easement claim, applying the long-standing rule that a negative easement can never arise through prescription. The implied easement claim had more plausibility. The two properties were under common ownership when the windows were installed in 1976. In 2000, the townhouse owners sold the neighboring property, where a subsequent owner made the addition that occluded the windows. The court applied the general rule for implied easements. The claimant must prove a use that is open, apparent, and continuous and reasonably necessary for the enjoyment of the benefited estate. The plaintiffs lost because they had not proven necessity. The record contained no evidence of the economic impact, or other harm, stemming from the window blockage. The court’s analysis implies that implied easements for air and light are allowed, with the proper proof. There is a split of authority on the question. Many American courts have categorically refused to allow implied easements for air and light. Hefazi v. Stiglitz, 862 A.2d 901 (D.C. Cir. 2004).
FORECLOSURE: Sale of two parcels for grossly inadequate price is set aside. A buyer paid $225,000 for two adjoining parcels, issuing two promissory notes secured by a single deed of trust on both parcels. Three years later, she paid off one note in full, but five years after that she defaulted on the remaining note. At a foreclosure sale, the trustee sold both parcels to a partnership, organized by and including the lender, for $26,782 (one dollar more than the remaining debt). The court set aside the sale, coupling gross inadequacy of price with the trustee’s decision to sell both parcels when a sale of either parcel by itself was sufficient to pay the remaining debt. The court found the fair market value of both parcels at the time of the sale was the same as the purchase price ($225,000). It relied on the Restatement guideline defining “gross inadequacy” as less than 20%. Restatement (Third) of Property: Mortgages § 8.3 cmt. b (1997). Baskurt v. Beal, 101 P.3d 1041 (Alaska 2004).
FUTURE INTERESTS: Reverter for “immoral purposes” does not include cohabitation by unmarried couples. A 1935 deed created a fee simple determinable, prohibiting any use “for immoral purposes, or for the manufacture and/or sale of any intoxicating liquors.” Subdivision of the 71-acre tract resulted in a mobile home park and 30 single-family homes, with undeveloped land in between. The owner of the possibility of reverter sued all of the owners, claiming that some mobile home residents had engaged in immoral purposes—specifically, three criminal convictions for trafficking in cocaine and heroin and an unspecified number of cohabitating unmarried couples. The court held that the owners of the single-family homes were immune from loss of their properties under the doctrine of partial reversion. Because there was no claim that immoral activities took place on their properties, the court construed the deed as not calling for a forfeiture based on events on neighboring parcels. This holding is significant because very few U.S. cases have addressed partial reversion. As to the mobile home park, the court held that the landlord’s interest was not subject to reversion in the absence of proof that she had knowledge of or consented to the drug trafficking. Regarding cohabitation, the court strictly construed the limitation and applied it only to prostitution and other sex crimes. The court noted that the phrase “immoral purposes” tracked language from the federal Mann Act, which the Supreme Court interpreted as criminalizing the interstate transportation of women and girls for the purpose of illegal sexual activities. Maloof v. Prieskorn, 101 P.3d 327 (N.M. Ct. App. 2004).
LATERAL SUPPORT: Landowners have no duty to support improvements on neighboring land. RaceTrac built a gas station and sold excess adjoining land to a buyer. RaceTrac’s parking lot was supported by a sloped embankment, created with fill dirt and lying completely on the conveyed tract. Six years later, the buyer, wanting to develop its property, brought a declaratory action to determine its lateral support obligations. The court followed the traditional common-law rule limiting the lateral support duty to land in its natural condition. Thus, the owner could remove the embankment, subject to a duty of reasonable care to avoid unnecessary and foreseeable damage to RaceTrac’s property. This allocated to RaceTrac the duty to provide alternative support for the parking lot by building a retaining wall or a similar structure. RaceTrac apparently did not argue that it had an easement by implication. In some states, RaceTrac would have an implied support easement, on the theory that the sloped embankment was an open and necessary prior existing use. XI Properties, Inc. v. RaceTrac Petroleum, Inc., 151 S.W.3d 443 (Tenn. 2004).
NUISANCE: Nuisance is permanent if occurrences are sufficiently regular to estimate future effect with reasonable certainty. Residents living near the Houston Ship Channel brought a nuisance action based on air contaminants and odors emanating from industrial plants. Nuisance law recognizes a distinction between interferences that are “permanent” or “temporary,” with three consequences. First, a plaintiff can recover damages for future injury (loss of market value) only for a permanent nuisance. Second, a plaintiff may bring a series of suits for a temporary nuisance, but res judicata compels a single action for a permanent nuisance. Third, the statute of limitations restarts with each injury for a temporary nuisance, but not for a permanent nuisance. The defendants invoked the statute of limitations, claiming the facts alleged by plaintiffs represented a claim of permanent nuisance. Prior Texas cases failed to provide a clear rule for determining which nuisances are permanent and temporary, reaching irreconcilable results. To clarify the law, the court announced a new rule that examines only one factor—whether future injury caused by the defendants’ activities can be estimated with reasonable certainty. This directly relates to a question about market value. When future injury is capable of measurement, the plaintiffs have suffered a reduction in the fair market value of their properties, and the nuisance is deemed permanent. A nuisance may be permanent even if the injury-inflicting occurrences happen only monthly or even annually and depend upon factors such as wind direction or rainfall. Length between occurrences does not make a nuisance “temporary” if the future impact can be reasonably evaluated. The court repudiated other tests often used by courts, including whether the nuisance is abatable (if abatable, it is temporary). Applying the new market value test, the court held that the plaintiffs asserted a permanent nuisance as a matter of law. Thus, their action was time barred. Although they claimed that the air quality was intolerable only under certain combinations of wind and humidity, they claimed this happened several times in most weeks or months. This was predictable enough to assess the future impact from the plants’ activities. Schneider National Carriers, Inc. v. Bates, 147 S.W.3d 264 (Tex. 2004).
RENT CONTROL: Ordinance prohibition of landlords’ requests that tenants vacate premises violates First Amendment. San Francisco’s rent control ordinance, like that of many cities, allows a landlord to terminate a lease for the landlord to occupy the premises as her principal residence. Some landlords apparently ended tenancies by falsely telling their tenants that they intended to occupy personally. In 2002, San Francisco responded to the perceived problem. It amended the ordinance to make it unlawful for a landlord “to request that a tenant move from a rental unit or to threaten to recover possession [unless the] landlord in good faith intends to recover said unit under one of the grounds enumerated” in the ordinance. The prohibition also extended to any person who willfully assists the landlord in requesting possession. The court held the provision facially invalid, rejecting the city’s defense that it was a permissible regulation of commercial speech. Assuming that it regulated only commercial speech, its scope included speech that was neither false nor misleading. A landlord who asked a tenant to leave, but did not have the present intent to begin eviction proceedings immediately, would violate the ordinance. Moreover, there was no evidence that the ordinance advanced a substantial government interest or that it was no more extensive than necessary. Baba v. Board of Supervisors of City and County of San Francisco, 21 Cal. Rptr. 3d 428 (Cal. Ct. App. 2004).
SALES CONTRACTS: Impossibility of performance does not relieve buyer of promise to build road. A buyer of an 87-acre tract promised to construct a road to provide access to a neighboring tract retained by the seller. The contract did not specify the precise location for the road. Ambiguous language referred to each party’s architect and called for a location that would minimize cost, “subject to and in the good faith opinion of [seller’s] architect.” The buyer failed to install a road, prompting the seller to bring an action for damages and specific perfor-mance. The buyer’s principal defenses were failure of a condition precedent and impossibility of performance. The court rejected both defenses. The buyer claimed that the seller’s architect had to establish the road location before he was obligated to build, but the court interpreted the contract to call for the buyer’s architect to locate the road, subject to the approval of the seller’s architect. As to impossibility, buyer alleged that he could not obtain government permits to build the road unless the seller submitted development plans for his retained parcel. The court said this was not “an unanticipated event that could not have been foreseen or guarded against in the contract.” Thus, the buyer assumed the risk of difficulties in obtaining permits. This case highlights the importance, in drafting contracts, of including express allocations of duties to obtain necessary permits. Query whether the seller should have an implied obligation to facilitate the necessary permit, and whether refusing to cooperate should raise an unclean hands defense to an equitable remedy like specific perfor-mance. Rooney v. Slomowitz, 784 N.Y.S.2d 189 (N.Y. App. Div. 2004).
WATER: Interstate compact allows damages for state’s excess withdrawals of water. In 1949, Kansas and Colorado entered into the Arkansas River Compact to define their rights to apportion the river’s waters. In 1985, Kansas commenced litigation, claiming that Colorado appropriated too much water by drilling new irrigation wells. The Supreme Court appointed a special master and, in three prior opinions, determined that Colorado violated the Compact and assessed damages. In round four, the Court (per Breyer, J.) rejected objections made by Kansas to parts of the special master’s fourth report. The Court rejected Kansas’s request to appoint a river master to decide various technical disputes related to enforcement of the Court’s decree. The Court concluded that arbitration and other ADR forms were better suited for resolving the disputes, which although technical were likely to involve policy-oriented questions of judgment. The special master recommended the use of a computer model with a 10-year measurement period to determine whether Colorado’s future water withdrawals comply with the Compact. Kansas objected, claiming that annual measurement was compelled by a Compact provision, which says that there “shall be no allowance for accumulation of credits or debits for or against either State.” The Court rejected Kansas’s argument, reasoning that the 10-year period was more accurate and may be consistent with the original intent of the framers of the Compact. The special master recommended that the Colorado Water Court determine the credits awarded to Colorado for water it replaced. Kansas objected on the understandable basis that “Colorado cannot be its own judge in a dispute with a sister State.” Surprisingly, the Supreme Court rejected Kansas’s objection on the ground that further resort to the Supreme Court, which retains original jurisdiction, could solve any problems. The Court also decided that the special master properly assessed prejudgment interest on only part of the damages award. Kansas v. Colorado, 125 S. Ct. 526 (2004).
ZONING: Tree house stays in the front yard. In 1996, a city zoning official told the mother that her family could build a tree house in their front yard, with no building permit required. This was no ordinary tree house that they had in mind. Construction took several years, with a project budget surpassing $5,000 (lucky children!). In 1999 and 2000, the owners had building inspections to review other recent improvements. Those inspections did not result in any objection to the tree house. In 2002, responding to a citizen complaint, a new zoning official (the one the mother dealt with before had died) demanded removal of the tree house. He cited a zoning code provision prohibiting any “accessory building or use” from the front yard. The court, with two justices dissenting, overturned the Board of Aldermen’s decision that the tree house violated the ordinance on two grounds. First, the ordinance was unconstitutionally vague because it failed to define “accessory building or use.” The court was skeptical of the city’s claim that a code definition of “accessory structure or use” properly applied, and it also criticized other ordinance drafting flaws. Second, the court held that the original oral approval, coupled with the passage of time, barred enforcement under the doctrine of equitable estoppel. From the outset, this case attracted substantial media attention—see the family’s web page at www.saveourtreehouse.com. Mayor & Bd. of Aldermen, City of Clinton v. Welch, 888 So. 2d 416 (Miss. 2004).
Mortgage Law; Uniform Nonjudicial Foreclosure Act . Professors Grant S. Nelson and Dale A. Whitman are the authors of well-regarded treatises and textbooks in the area of real estate and property law. In their new article, Reforming Foreclosure: The Uniform Nonjudicial Foreclosure Act, 53 Duke L.J. 1399 (2004), these authors laud the efforts of the National Conference of Commissioners on Uniform State Laws to develop a model law that would bring uniformity to state mortgage laws, provide for “prompt and efficient nonjudicial liquidation of real estate collateral,” and afford “substantial safeguards for defaulting borrowers.” The result of the Conference’s efforts is the 2002 Uniform Nonjudicial Foreclosure Act (UNFA). The authors first examine widely divergent state laws concerning the nonjudicial foreclosure of mortgages. The need for uniform mortgage laws, including foreclosure rules, has increased in concert with the dramatic rise in the secondary market for mortgages and the recent development of a market for securitized mortgages. Nelson and Whitman review prior efforts to achieve uniformity in state mortgage law, which have included earlier uniform laws, the Restatement (Third) of Property: Mortgages, attempts to achieve uniformity by contract via the widespread use of Fannie Mae and Freddie Mac mortgage documents, and congressional preemption. The latter effort largely comprises the Truth-in-Lending and Real Estate and Settlement Procedures Acts. Despite all of this work, however, the authors suggest that “local divergence is still the norm” and “all states are saddled with a method of property disposition that is largely ineffective and wasteful—the auction.” The authors are particularly troubled by the use of an auction to derive foreclosure values and describe the many well-known failings in this system. To solve these and other problems in the process, the authors promote the use of UNFA. Indeed, because they think it unlikely that UNFA will be comprehensively adopted by the various state legislatures, Nelson and Whitman argue that UNFA should be enacted by Congress. The UNFA would revise the auction system with relative minor alterations, including a requirement that the foreclosing lender provide the title information it generates to prospective bidders. In addition, UNFA develops “two distinct nonauction methods of disposing of real estate in foreclosure,” each of which, according to the authors, is an improvement over the present auction-based regime. In the first, “foreclosure by negotiated sale,” the lender “can use any means of attracting a buyer and entering into a contract of sale.” This means, among other things, that the lender may employ the services of a real estate broker. In the second system, “foreclosure by appraisal,” the lender is permitted “to obtain and give to the debtor an appraisal of the property, accompanied by an offer of a proposed net amount that the lender agrees to allow in return for taking title to the property.” Either because state legislatures will adopt this model law or because Congress may be tempted to nationalize it, real estate lawyers would be well advised to read this comprehensive article.
Public Trust Doctrine; History . According to Professor (and Dean of Marquette University Law School) Joseph D. Kearney and Professor Thomas W. Merrill, in their article The Origins of the American Public Trust Doctrine: What Really Happened in Illinois Central, 71 U. Chi. L. Rev. 799 (2004), the public trust doctrine suggests that “elected officials cannot be trusted to dispose of certain kinds of [natural] resources.” These resources, such as lakebeds and navigable waters, should instead be subject to “a judicially enforced inalienability rule.” The public trust doctrine has been the subject of significant scholarly interest. The doctrine originates with the 1892 Supreme Court case of Illinois Central Railroad Company v. Illinois. In that case, the Court “wrangled over” whether the state of Illinois, the railroad company, the city of Chicago, or the federal government was entitled to exert ownership and control of a portion of the bed of Lake Michigan located near Chicago. The Court determined that each of the parties had some interest and, as “an exercise in dispute resolution, provided something for everyone.” Most importantly, the Court addressed whether the 1869 Lake Front Act, which allegedly conveyed vested rights in the property, was valid. The Court concluded that the state had no such power, because of the public interest in navigation in the lake, and that this property “was held in trust for the people.” Kearney and Merrill provide a wonderful historical treatment of this important case. They repeat the accepted explanation of the case—that the railroad corrupted the legislature to obtain passage of the Act. According to the authors, this narrative, without much more, is often used as the explanatory foundation for the public trust doctrine. The authors challenge the basic story of the case and examine the historical record, available from a variety of sources, to present a somewhat more sympathetic explanation of the parties and the passage of the Act. The authors do not employ this historical analysis to argue that the public trust doctrine should be discarded. Rather, they argue that “the doctrine should be assessed using arguments more probing than a retelling of the standard narrative of Illinois Central.”
Residential Real Estate; Private Mortgage Insurance . Professor Quintin Johnstone critically evaluates the present system of private mortgage insurance (PMI) in the residential real estate market and “possible developments in the foreseeable future that could trigger law reforms concerning PMI companies,” in Private Mortgage Insurance, 39 Wake Forest L. Rev. 783 (2004). Johnstone is Justus S. Hotchkiss Professor of Law Emeritus at the Yale Law School and has a long track record in carefully observing the development of real estate law. Johnstone explains the operation of PMI and its value as a “significant contributing factor” in the increasing pervasiveness of “occupant home ownership” in the United States. He also provides a history of PMI—the complete financial failure of PMI companies during the Great Depression and a similar, if less disastrous, financial loss to PMI companies in the 1980s. The author describes the basic PMI policies, PMI premiums, the duration of coverage of this type of insurance, and origination procedures. Johnstone then notes that only seven PMI companies compete in this industry. He also notes that PMI companies largely compete against the Federal Housing Administration and the Veterans Administration, both of which insure residential loans. Ultimately, Johnstone anticipates a number of economic and political factors that might lead to significant changes in the regulation of PMI. These include a “sharp decline in much or all of the country in the market for residential properties” that “could threaten the solvency of PMI companies,” “increasingly intense competition among PMI companies” that might result in consolidation into a fewer number of institutions writing PMI policies, and changes in laws prohibiting Fannie Mae and Freddie Mac from entering into this segment of the mortgage market.
Title Insurance; Water Rights . Some real property lawyers contend not just with rights in traditional real property, but in water as well. Although not an issue that confronts the urban real estate lawyer on a regular basis, the nature of water rights may be a concern in transactions involving real property. In most places, there is general agreement on how to convey rights in water. The problem arises when parties wish to establish evidence of rights. Colorado now imposes a “water administration fee” on the owners of significant and absolute water rights. The state must fix a means of determining who owns a water right that should result in payment of the fee. According to Amy W. Beatie and Arthur R. Kleven in their article, The Devil in the Details: Water Rights and Title Insurance, 7 U. Denv. Water L. Rev. 381 (2004), the title insurance industry has stepped into the breach and suggested that title insurance might afford certainty in ownership. According to the authors, the industry makes this claim notwithstanding the fact that, ordinarily, title policies “add a specific exclusion or exception for water rights to land title insurance . . . even if a description of the water rights is carried over to Schedule A of the policy with the legal description of the lands.” According to the authors, the “hesitance” to guarantee water title is shared by water attorneys, who shy away from providing formal title opinions to water rights. Beatie and Kleven note several obstacles to the use of title insurance to establish evidence of water rights. These include the title industry’s reliance on title plants, which may not have the ability to “track water conveyances.” Furthermore, title insurance is often used to “insure over clouds on title.” This use of title insurance will not complement the needs of adjudication of water rights, which “often involve numerous parties, and accurate quantification is the only means of protecting their interests.” After listing several other problems with a title insurance approach, the authors conclude that “recent trends and occurrences have created an atmosphere more conducive to water rights title insurance.”
Massachusetts authorizes landlords to install submeters for water and sewer in residences. Before submetering, the landlord must install water conservation devices for faucets, showers, and toilets. Submeters may result in water conservation. 2004 Mass. Acts 417.
New Jersey allows mortgage guaranty insurance companies to issue insurance for indebtedness not exceeding 103% of the fair market value of the property. Policies are allowed when lenders make first mortgage loans in such amounts. Although mortgage guaranty insurance is necessary for the secondary market, one may question the wisdom of a “secured” loan and mortgage guaranty insurance that exceeds the fair market value of the property. 2004 N.J. Laws 164.
Ohio enacts the Uniform Environmental Covenants Act that establishes environmental covenants as an interest in real property. Environmental covenants arise under an environmental remediation or mitigation project that imposes activity and use limitations on the property. Such covenants must be recorded and are subject to other requirements. 2004 Ohio Legis. Serv. 134 (Banks-Baldwin).
Ohio 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 Ohio Legis. Serv. 158 (Banks-Baldwin).Ohio reduces the liability of property owners for unsafe conditions. Owners do not assure that premises open to the public for growing or harvesting agricultural produce are safe from naturally occurring hazards. Similar rules apply to recreational trails open to the public. 2004 Ohio Legis Serv. 144 (Banks-Baldwin).