P R O B A T E   &   P R O P E R T Y
September/October 2005
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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, 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

 

CONDOMINIUMS: Association must impose special assessment to pay judgment creditor. The 1994 Northridge earthquake damaged the common areas of a condominium project. The condominium association hired an insurance adjuster, agreeing to pay him 10% of the proceeds received from the association’s insurer. After the insurer paid $1.4 million, the association refused to pay the adjuster. The adjuster obtained a judgment, which he sought to collect from the assessments paid by the unit owners to the association. A California statute exempts regular assessments from execution “to the extent necessary for the association to perform essential services.” Cal. Civ. Code § 1366(c). The court agreed that all the association’s regular assessments were needed for essential services, but it directed the association to impose a special emergency assessment to pay the judgment. The members met, but did not vote for an assessment. The court appointed a receiver for the purpose of imposing the assessment. The appellate court affirmed, interpreting the state’s convoluted assessment statute as authorizing the remedy. The result contravenes the general principle that members and shareholders of a corporation are not personally liable for the entity’s debts, notwithstanding the court’s disavowal that the special assessment “will not transform the homeowners into judgment debtors or otherwise make them personally liable for the debts of the Association.” Suppose all or most of the condominium owners refuse to pay the special assessment. Almost certainly, then, the court will authorize the receiver to take enforcement measures, including use of the association’s lien powers. Perhaps the real reason for the result is an unspoken sense that the creditor was defrauded when the member assessments are the sole source of association revenue and the members refuse to assess themselves enough to cover the association’s debt. James F. O’Toole Co., Inc. v. Los Angeles Kingsbury Court Owners Ass’n, 23 Cal. Rptr. 3d 894 (Cal. Ct. App. 2005).

 

COVENANTS: Covenant in gross excluding church use is enforceable. Mobil Oil Corporation, in settling litigation before a state environmental commission, agreed to a pollution remediation plan for an oil pipeline terminal. Mobil also agreed to impose a restrictive covenant to bar uses that could create environmental risks before selling the property. In 1997, it sold the property subject to a covenant requiring use of the property “for commercial/light industrial purposes only” and specifically prohibiting use “for residential purposes, healthcare facilities, daycare facilities, schools, playgrounds.” Three years later the buyer resold the property to a church. The church renovated an old industrial warehouse, making it a church sanctuary where it held worship services. It also opened a kitchen, printing press, appliance repair shop, and retail store on the property. Mobil (now ExxonMobil) obtained an injunction prohibiting use of the property for “church
services and related fellowship and worship activities.” The appellate court affirmed, conclusorily rejecting the church’s argument that the covenant, properly interpreted, did not bar church uses. Although the court gave the “brownfield-redevelopment context” as a reason for broadly construing the covenant, it did not ask whether environmental risks for church patrons were as great as those presented for residential users, or akin to those presented for commercial and industrial users. The court rejected the church’s second principal argument—that enforcement of the covenant violated the church’s constitutional rights to religious freedom—because the covenant was facially neutral. This holding is consistent with a line of authority excluding churches from residential neighborhoods that have residential-use-only covenants. The church also argued that ExxonMobil lacked standing to enforce the covenant because it did not own land benefited by the covenant. Traditional law, followed up until now by Texas courts, requires that both ends of a covenant touch and concern parcels of land. Benefits in gross are prohibited. The new Restatement partially rejects this position. Restatement (Third) of Property (Servitudes) §§ 2.6, 8.1 (2000). The church may not have fully developed this argument. The court rejected it summarily, without discussing Texas precedents or the Restatement. Voice of the Cornerstone Church Corp. v. Pizza Property Partners, 160 S.W.3d 657 (Tex. Ct. App. 2005).

 

DEEDS: Specifying the grantee’s town, county, and state complies with a statutory address requirement. In a foreclosure proceeding, an Idaho court adjudicated the validity of a quitclaim deed made by a successor to the original mortgagor. The deed conveyed a 245-acre tract to Walter and Mary Barton, stating their address as “Carmen, Lemhi County, Idaho.” An Idaho statute mandates, “The name of the grantee and his complete mailing address must appear on [the] instrument.” Idaho Code § 55–601. The court upheld the deed on the ground that the given address was sufficient to allow the post office to deliver tax notices, sent by the assessor, to the addressee. The court noted that Carmen was sparsely populated. The party attacking the deed also noted that the grantees had divorced before delivery of the deed, and that the husband then had an out-of-state address. The court rejected this claim without analysis. Presumably, whenever a deed has multiple grantees, furnishing the “complete address” of one grantee complies with the statute. KEB Enterprises, L.P. v. Smedley, 101 P.3d 690 (Idaho 2004), review denied (Apr. 6, 2005).

 

EASEMENTS: Brief physical interruptions of use prevent prescriptive easements. In 1975, a homeowner began using a plantation road across a neighbor’s tract for access to his home. Seven years later, the neighbor sought to stop the use by setting posts and cables across the road. This triggered a neighborhood feud, which lasted for more than a decade. The owner drove around the obstacles and subsequently destroyed them. The neighbor installed new barriers and complained to the police. The neighbor also plowed the road every year and planted the road with rye for several years. The owner uprooted a couple of small trees and scraped the road with his tractor. The trial court granted the owner a prescriptive easement based on continued and uninterrupted use for twenty years. In a case of first impression for South Carolina, the court reversed, holding that a prescriptive use is interrupted by overt acts of the servient owner that cause a discontinuance of the use, no matter how brief. The court rejected a North Carolina case holding that ineffective interruptions do not prevent the creation of a prescriptive easement. The court grounded its holding on the old acquiescence element of prescriptive easement, which proceeded from the lost grant theory. It quoted a Holmes opinion from 1898, which reasoned that a landowner “is not required to battle successfully for his rights. It is enough if he asserts them [through] an overt act [that] interrupts the would-be dominant owner’s impression of acquiescence.” Pittman v. Lowther, 610 S.E.2d 479 (S.C. 2005).

 

ESCROWS: No attorney malpractice liability for failure of bank that holds deposit. An elderly widow contracted to sell two Manhattan cooperative apartments. Her attorney, acting as escrow agent, deposited down payments of $1.45 million and $1.28 million in the Connecticut Bank of Commerce, where his firm maintained an Interest on Lawyer Account (IOLA). Before closing, the bank closed, with the FDIC named as receiver. The buyers sued the seller and her attorney for their down payments. In a cross claim, the seller asserted malpractice against her attorney on the ground that he should have deposited the funds in a manner providing for greater protection than the FDIC insurance coverage for $100,000. Reversing the trial court, the appellate court dismissed the malpractice claim, because the attorney did not violate the escrow instructions and did not know that the bank was in danger of closing. The outcome is questionable. The attorney should have advised his client of the risk that small banks are more likely to fail than large banks and that he could take other steps to reduce the risk of loss. Moreover, the attorney’s deposit of the funds into a non-interest-bearing IOLA account presents a conflict of interest. Bazinet v. Kluge, 788 N.Y.S.2d 77 (N.Y. App. Div. 2005).

 

LANDLORD-TENANT: Grantee under deed from landlord has right to collect rent notwithstanding lack of express assignment of lease. Three months after entering into a five-year lease, the landlord conveyed the real property by quitclaim deed to a partnership. The tenant subsequently defaulted, and the partnership brought an action for unpaid rent. The tenant’s defense was that the grantee lacked the right to collect rent, because the lease was personal property (a chattel real) and was not properly assigned to the grantee. The court rejected the defense, relying in part on a statute providing, “A person to whom any real property is transferred . . . upon which rent has been reserved . . . is entitled to the same remedies for recovery of rent . . . as his grantor . . . might have had.” S.D. Codified Laws
§ 43–8–7. The common law rule is the same. All jurisdictions appear to reach the same result. When a deed is silent on the treatment of an existing lease, the grantee becomes the new landlord by privity of estate. The grantee is entitled to enforce all real covenants, including the rent covenant. MHW Ltd. Family Partnership v. Farrokhi, 693 N.W.2d 66 (S.D. 2005).

 

PUBLIC HOUSING: Landlord’s refusal to rent to tenant with
Section 8 voucher does not violate Equal Credit Opportunity Act (ECOA).
A federal housing program, known as Section 8, provides subsidies for low-income families to rent dwelling units from private landlords. Federal housing legislation does not require private landlords to participate in the Section 8 program. A Chicago apartment complex, which did not accept Section 8 vouchers, rejected a tenant who tendered a voucher. She sued under the federal ECOA, which prohibits discrimination against credit applicants based on public assistance as the source of the applicant’s income. In a case of first impression, the court held that the typical residential lease is not a credit transaction, because it involves a contemporaneous exchange of consideration—monthly rent is paid in advance for the right to occupy premises for the coming month. This decision adopts the position of the Federal Reserve Board, which repudiated an earlier Ninth Circuit case, holding that the ECOA applies to a consumer lease of an automobile. Laramore v. Ritchie Realty Management Co., 397 F.3d 544 (7th Cir. 2005).

 

REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA): Arbitration clause in promissory note covers RESPA claims. A promissory note secured by a mortgage on Florida real property called for binding arbitration of “[a]ll disputes, claims or controversies arising from or relating to this contract.” Husband executed the note, but husband and wife executed the mortgage. The lender’s bankruptcy resulted in a transfer of the loan to a new entity, Green Tree. Husband and wife brought a RESPA action for the failure to provide notice of a change in the loan servicer. The district court refused Green Tree’s motion to compel arbitration, but the circuit court reversed. The court rejected plaintiffs’ argument that their claim was independent of the note, reasoning that there could be no statutory servicer liability if there were no note. It also pointed to a “strong federal policy favoring arbitration” reflected by the Federal Arbitration Act. The court applied the doctrine of equitable estoppel to bind the wife to arbitration. Even though she did not sign the note, her RESPA claims rested on her status as a borrower, and thus she was claiming the benefits of the note. Blinco v. Green Tree Servicing LLC, 400 F.3d 1308 (11th Cir. 2005).

 

SALE CONTRACTS: Representation that lot is buildable survives “no representations” contract clause. During negotiations, the buyer of a vacant lot stated that he wanted to build a seasonal home. The town zoning board had previously denied the seller’s application to build a seasonal home on the lot. The seller nevertheless represented that the buyer “could build a house on the property.” Immediately after closing, the buyer learned the truth from a town official and stopped payment on his check given for the purchase price. When the seller sued for the price, the buyer counterclaimed for fraud, misrepresentation, abuse of process, and malicious prosecution. Trial resulted in a jury verdict for the buyer, with an award for the buyer’s attorney’s fees but with no damages on the counterclaims. On appeal, the seller claimed he should have received summary judgment based on a contract clause providing, “Seller makes no representations as to land use law or regulations.” The court rejected seller’s claim on two grounds. First, the court stated the disclaimer’s language was not specific enough to exclude reliance on a representation that the lot was buildable. Second, the court held that no contract language can ever insulate a party from liability for “positive fraud.” In some other states, the seller would have prevailed on the ground that it is impossible for a buyer justifiably to rely on the seller’s representation when the contract has an express disclaimer. The appellate court remanded for reconsideration of the attorney’s fees award. The trial court had awarded attorney’s fees based on a finding that the seller acted in bad faith, which was not sufficient by itself. Van Der Stok v. Van Voorhees, 866 A.2d 972 (N.H. 2005).

 

SPECIFIC PERFORMANCE: Buyer may enforce contract despite seller’s “time of the essence” notice. A contract of sale required the seller to terminate a tenancy before closing. Unforeseen difficulties ensued. Because the tenant refused to leave, the seller prosecuted litigation, which took over two years. Then the vacant building contained substantial debris. The buyer insisted that the seller remove it, relying on a contract provision requiring that the premises be “broom clean.” The seller refused, relying on another contract provision stating the property was being sold “as is.” The seller sent the buyer a “time of the essence” closing date, which the buyer ignored. After that date passed, the parties negotiated, agreeing to a new closing date with an escrow to handle debris removal. Before that new date arrived, the seller sold the property to a third party. The original buyer sought specific performance. The appellate court reversed a summary judgment for defendants. Although one party can make “time of the essence” by sending a reasonable notice of a closing date to the other party, the seller’s notice was ineffective, because the seller was unwilling to remove the debris. The contract’s “broom clean” clause took precedence over the “as is” clause. Moreover, the seller waived its right to insist on a timely closing by subsequently agreeing to a later closing date. The third-party buyer did not qualify as a bona fide purchaser. He had actual knowledge of the prior contract, having earlier inspected the property to bid on doing restoration work for the original buyer. Marioni v. 94 Broadway, Inc., 866 A.2d 208 (N.J. Super. Ct. App. Div. 2005).

 

 

LITERATURE

 

9/11 Ongoing Thoughts; Commercial Leasing . The destruction of the Twin Towers continues to occupy the minds of property law lawyers and professors. John B. Wood and Alan M. Di Sciullo recently updated their well-crafted and very useful two-volume treatise, Negotiating and Drafting Office Leases (Law Journal Press 2005). The revised treatise continues to treat each aspect of the commercial office lease, providing clear explanations, sample provisions, negotiating and fallback positions, and a general statement of reasonable positions that parties might pursue. The authors speak with evident and thorough knowledge of the substantive law. The authors have added new material to the treatise specifically evaluating the commercial office lease in light of 9/11. In particular, the treatise regards insurance needs of landlord and tenant and the effect of the Terrorism Risk Insurance Act (2002). The authors also pay close attention to the requirement of landlords to provide building safety in the aftermath of 9/11. Di Sciullo had his office on the 65th floor of Tower 2 and was on his way to the building when the planes struck. See Alan M. Di Sciullo, A Personal Perspective, Prob. & Prop. 16, Sept./Oct. 2002. His preface to the treatise makes it clear that the events of 9/11 raise more than merely legal and negotiating interests for this attorney, as they should for us all.

 

9/11; Commercial Development . The prior summary reveals that commercial office space can become more than a fungible commodity in the minds of the people who occupy the space. In the words of Alan M. Di Sciullo, “the World Trade Center was as much a home for many of us as our family residences.” In her recent article, Reconstructing the World Trade Center: An Argument for the Applicability of Personhood Theory to Commercial Property Ownership and Use, 109 Penn. St. L. Rev. 815 (2005), Professor Mary L. Clark explores this relationship, and its implications. Professor Clark first explains the “personhood theory of property” developed by Professor Margaret Jane Radin. Professor Radin argued that certain types of property deserved special protection under the law “in recognition of the roles these classes of things play in our self-constitution and expression.” The personhood theory of property suggests that, to some extent, we are what we own. Property that helps define an individual therefore should be entitled to greater legal protection. Professor Radin argued that personal property, such as wedding rings, and real property, such as private residences, fall into this category. As an example, Professor Radin suggested that family homes should be essentially “immune” from eminent domain actions. This theory, although intellectually interesting, has not had a significant effect on eminent domain, so far as Professor Clark can discern. Although Professor Radin apparently found few “personhood” attributes in commercial property, Professor Clark sees this as a significant omission. She points to the landowner’s decision, in the face of significant community concern, not to develop the “footprint” of the Twin Towers as proof that commercial property has significant aspects of personhood property.

 

Eminent Domain and Public Use; Taking Ongoing Businesses. Professor Shelley Ross Saxer raises concern that government may be overextending its takings power in Government Power Unleashed: Using Eminent Domain to Acquire a Public Utility or Other Ongoing Enterprise, 38 Ind. L. Rev. 55 (2005). Professor Saxer’s point of departure is “the City of Corona [California]’s exercise of eminent domain power to acquire Southern Edison in order to provide less expensive rates and more reliable electricity service to residents.” As Professor Saxer notes, municipalities are now reacting to the California energy shortages and “the Enron mess” by following the lead of Corona. Although the article focuses on the power of state and local government to employ takings powers to acquire utilities, “an overriding concern remains—what is the limitation on government power after a municipality or state condemns a private business it determines can be run more efficiently as a public function?” The author examines both the narrow and broader issues in light of the “Dormant Commerce Clause, the Commerce Clause, the Tenth Amendment, the Supremacy Clause, antitrust laws, and the Contract Clause.” Although the author accepts that there are compelling reasons for employing the Takings Clause to take utilities, Professor Saxer nevertheless worries that this “opens the door to a myriad of condemnation actions converting private free enterprise to municipal ownership.” Because the courts have been historically deferential to the condemnation decisions, Professor Saxer argues that this power must be legislatively or constitutionally limited. This article is timely, especially given the recent Michigan Supreme Court decision to overrule Poletown Neighborhood Council v. Detroit and the U.S. Supreme Court opinion in Kelo v. City of New London, 125 S. Ct. 2655 (2005)(see below).

 

Eminent Domain and Public Use; Poletown . Timothy Sandefur is a staff attorney for the Pacific Legal Foundation and the author of an amicus curiae brief in County of Wayne v. Hathcock, 684 N.W.2d 765 (Mich. 2004). In Hathcock, which was the subject of article summaries in the July/August installment of “Keeping Current—Property,” the Michigan Supreme Court discarded the very broad definition of “public use” adopted in its earlier case of Poletown Neighborhood Council v. City of Detroit, 304 N.W.2d 455 (Mich. 1981). Sandefur’s article is titled A Gleeful Obituary for Poletown Neighborhood Council v. Detroit, 28 Harv. J. L. & Pub. Pol’y 651 (2005). Sandefur argues that Poletown is just one example in a pattern of judicial abuse of the takings power provided by the Constitution. The Poletown application of public use permitted the City of Detroit to take property from one set of private parties (neighbors in a blue-collar area of the Motor City) to be redistributed to another private party (General Motors). According to the author, the power of government to redistribute private property on the premise that it will benefit the public creates a “public choice problem.” In other words, “it is in the interest of those parties to lobby the government to do so on their behalf.” The takings power therefore, arguably, becomes a captive to the financial resources and lobbying prowess of significant individuals or entities with a need to obtain particular real property. Sandefur would like the U.S. Supreme Court to follow the example of the Michigan Court and redraw the limits of public use. According to the author, this would necessitate overruling key aspects of Hawaii Housing Authority v. Midkiff, 467 U.S. 229 (1984). After publication of the article, however, the U.S. Supreme Court reaffirmed its support of a broad reading of “public use” in Kelo v. City of New London, 125 S. Ct. 2655 (2005). The editor (in this case, Professor Bogart) is pleased to note that Sandefur, his former student, has involved himself in property law on a constitutional level and has taken the time to defend his views in legal scholarship.

 

Materialman’s Liens; the Status of the Architect. Steven J. Kuhn looks at the occasionally precarious position of the unpaid architect when the developer abandons the property before construction. In his article, The Noble Architect, the Heartless Landowner and an Ambiguity in Oregon’s Construction Lien Statutes, 41 Willamette L. Rev. 95 (2005), Kuhn asks whether, under Oregon’s statute, the architect is entitled to a construction lien. The Oregon statute provides a lien to architects for work that relates back to the date construction commences on a project (or, presumably, when the property is abandoned in lieu of construction). The statute provides that the lien covers work “intended for use” in development of property. Architects have argued, and some Oregon courts have agreed, that this language should protect the architect if no construction work actually begins. Yet, Oregon courts have been inconsistent in their holdings. Kuhn capably explains the ambiguities inherent in the Oregon statute. Kuhn then looks to similar statutes of other states and examines the application of the rules by courts of these other jurisdictions. This article will be of interest to attorneys with construction lien questions involving architectural work, regardless of the jurisdiction of that lawyer’s practice.

 

 

LEGISLATION

 

Alaska criminalizes the false filing of a Notice of Pendency. A notice of pendency that is filed with “reckless disregard” constitutes the crime of filing a false instrument. 2005 Alaska Sess.Laws 27.

 

Arizona adopts the Timeshare Owners’ Association and Management Act. Regulation of timeshares is separated from planned communities and condominiums. The Act provides a detailed scheme for the development, sale, and operation of timeshares. 2005 Ariz. Sess. Laws 132.

 

Arizona enacts the Uniform Real Property Electronic Recording Act. Electronic signatures, filing, recording, and storage are authorized by the Act. 2005 Ariz. Sess. Laws 109.

 

Arizona requires updated maps be maintained by the state land department for public use in determining whether seller disclosure is required relative to property located within noise or clear zone of a military airport. 2005 Ariz. Sess. Laws 153.

 

Arkansas adopts the Real Estate Lien License Act. Real estate brokers are granted a lien in commercial real estate transactions to aid in the collection of fees. 2005 Ark. Acts 1944.

 

Arkansas authorizes beneficiary deeds that are effective on the death of the grantor. The deed is revocable until the death of the grantor. A beneficiary deed is a countable asset under Medicaid. 2005 Ark. Acts 1918.

 

Arkansas enhances the marketability of title of tax deeds. Fifteen years after the tax deed is recorded, the title becomes marketable on meeting the requirements of the Act. 2005 Ark.Acts 2270.

Arkansas regulates reverse mortgages. The Reverse Mortgage Protection Act substantially increases the disclosures required by the lender and the rights of the borrower. 2005 Ark. Acts 2166.

 

Delaware enacts the Uniform Real Property Electronic Recording Act. Electronic signatures, filing, recording, and storage are authorized by the Act. 75 Del. Laws 23 (2005).

 

Florida validates mortgage releases executed by a title insurer. In the battle to secure and record releases for mortgage loans, this Act allows a valid mortgage release to be recorded without the signature of the record mortgage holder as long as the record owner affirms that the debt has been paid. The Mortgage Certificate Release is signed by an agent of a title insurer. Although the Act contains stringent requirements to avoid fraud, it seems to open the door to that very problem. 2005 Fla. Laws ch. 122.

 

Florida adopts the Uniform Disclaimer of Interests Act. 2005 Fla. Laws ch. 108.

 

Idaho authorizes electronic indexes and storage of documents related to real property transactions. The recorder is no longer required to maintain physical records or indexes. 2005 Idaho Sess. Laws 243.

 

Iowa enacts the Iowa Cemetery Act that imposes substantial requirements for interment, along with regulation of fees and management. 2005 Iowa Legis. Serv. H.F. 836.

 

Iowa 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. 2005 Iowa Legis. Serv.
S.F. 375.

 

Kansas adopts the Commercial Real Estate Broker Lien Act. Real estate brokers are granted a lien in commercial real estate transactions to aid in the collection of fees. 2005 Kan. Sess. Laws 179.

 

Maryland enacts the Uniform Environmental Covenants Act. See Iowa, above. 2005 Md. Laws 229.

 

Maryland expands the protection of homeowners in mortgage foreclosure. 2005 Md. Laws 509.

 

Montana adopts the “Uniform Commercial Code—Documentsof Title.” This Act modifies and supercedes the federal Electronic Signatures in Global and National Commerce Act. 2005 Mt. Laws 575.

 

Nebraska adopts the “Uniform Commercial Code—Documents of Title.” See Montana, above. 2005 Neb. Laws 570.

 

New Mexico adopts the “Uniform Commercial Code—Documents of Title.” See Montana, above. 2005 N.M. Laws 144.

 

North Dakota limits deficiency judgments in the foreclosure of mortgages secured by agricultural land. 2005 N.D. Laws 302.

 

Oklahoma adopts the “Uniform Commercial Code—Documents of Title.” See Montana, above. 2005 Okla. Sess. Laws 139.

 

Tennessee enacts the Residential Closing Funds Distribution Act of 2005. Funds are required to be disbursed in accordance with the Act. 2005 Tenn. Pub. Acts 273.

 

Washington imposes Medicaid liens on life estates. The life estate is valued immediately before the death of the life tenant (decedent). 2005 Wash. Laws 292.

 

West Virginia enacts the Uniform Environmental Covenants Act. See Iowa, above. 2005 W. Va. Acts 406.

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