Keeping Current - Property

Keeping Current—Property offers a look at selected recent cases and literature. The editors of Probate & Property welcome suggestions and contributions from readers.

BOUNDARY BY ACQUIESCENCE: Successive owners allowed to tack periods of possession. Boundary by acquiescence, like adverse possession, can protect long-standing possession that is inconsistent with record boundary lines, thus altering the legal boundary. Boundary by acquiescence, unlike adverse possession, proceeds upon a theory of consent. If neighbors occupy up to a visible boundary line, such as a fence, for the requisite period of time in the belief that the occupied line is the true boundary, then the occupied line becomes a boundary by acquiescence. The Pennsylvania Supreme Court, resolving a case conflict, unanimously held that privity of possession suffices for tacking to meet the required 21-year period. The holding conforms Pennsylvania law to the majority rule, but creates tension with the Pennsylvania law of adverse possession. Unlike other states, Pennsylvania courts have long rejected tacking in the absence of privity of estate (a deed between the successive possessors that describes the land being claimed). Although the court carefully limited its holding to the context of boundary by acquiescence, the editor believes that tacking based on possession alone ought to suffice for adverse possession, because the doctrines of acquiescence and adverse possession are so similar. Perhaps this decision portends a re-examination of tacking for adverse possession. Zeglin v. Gahagen,812 A.2d 558 (Pa. 2002).

CONDEMNATION: Housing authority condemned automobile dealerships on basis of “blight.” A city housing and redevelopment authority brought eminent domain proceedings against two automobile dealerships, claiming the properties were “blighted” because of their proximity to residential properties. The owners argued that the allegation of “blight” lacked a factual basis and that the city’s purpose—to attract a new corporate headquarters for the large retailer, Best Buy Company—violated the Public Use Clause. The court of appeals held for the city, and the Supreme Court affirmed by an equally divided vote. Housing and Redevelopment Auth. ex rel. City of Richfield v. Walser Auto Sales, Inc., 630 N.W.2d 662 (Minn. Ct. App. 2001), aff’d, 641 N.W.2d 885 (Minn. 2002), cert. denied, 123 S. Ct. 437 (2002).

CONDOMINIUM ASSOCIATION: Association may evict owner of homestead who fails to pay assessments. The Illinois Condominium Property Act specifically allows a condominium association to bring a forcible entry and detainer action against a unit owner for nonpayment of assessments. The association obtains possession, and may rent the unit to a third party, until the delinquent assessments are paid. The Illinois homestead statute generally prevents a creditor from asserting a claim, such as a judgment lien, against the debtor’s residence. The homestead statute has several express exceptions, but no exception for a condominium association’s action for possession. A unit owner, in default for failing to pay $2,326 in maintenance assessments, raised the affirmative defense of homestead to the association’s action for possession. The appellate court upheld the defense, but the state supreme court reversed, reasoning that the legislature intended to allow an association to take possession of a defaulting owner’s unit even if it qualifies as a homestead. Knolls Condo. Ass’n v. Harms, 781 N.E.2d 261 (Ill. 2002).

FAIR HOUSING ACT: FHA does not impose vicarious liability on corporate owners or officers. An interracial couple alleged a real estate salesman prevented them from buying a house for racially discriminatory reasons. Plaintiffs sued the salesman, the corporation that employed him, and an individual who was president and sole shareholder of the corporation. The Supreme Court, reversing the Ninth Circuit, unanimously held that the owner was not properly a defendant in this case. Justice Breyer, author of the Court’s opinion, explained that the Fair Housing Act was silent on the issue of vicarious liability, and therefore traditional agency rules should apply. This meant that the corporation was vicariously liable for the salesman’s acts committed in the scope of employment, but corporate shareholders and officers were liable only if they participated in the wrongdoing. Meyer v. Holley, 123 S. Ct. 824 (2003).

HUD: HUD policy statement on yield spread premiums under RESPA entitled to deference. When a borrower gets a loan through a mortgage broker, the borrower often pays an interest rate in excess of the lender’s “par” or market rate. The lender pays the value of the excess—the yield spread premium—to the broker. Such payments arguably constitute illegal referral fees under the Real Estate Settlement Procedures Act (RESPA). In 1999, the Department of Housing and Urban Development (HUD) issued a policy statement, supportive of the lending industry, allowing the practice if (1) the total compensation of the broker was for services performed and (2) that the compensation was reasonably related to the services provided. In enacting the policy, HUD did not follow formal rulemaking procedures, including notice to the public and the invitation of comments. A mortgage borrower brought a class action challenging yield spread premiums. The Ninth Circuit Court of Appeals refused to certify the class action, reasoning the HUD policy statement was entitled to deference under Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984). The court focused on Congress’s explicit grant to HUD of authority to interpret RESPA and HUD’s expertise in the home lending industry. In disagreement are recent Eighth and Eleventh Circuit cases, refusing to defer to the HUD statement. Schuetz v. Banc One Mortgage Corp., 292 F.3d 1004 (9th Cir. 2002), cert. denied, 71 U.S.L.W. 3503 (2003).

LEASE LAW: Tenant’s “dual option” to purchase property fails. Some leases give the tenant a “dual option,” conferring both the right to purchase the property at a fixed price and a right of refusal if the landlord receives an offer from a third party. Cases have split as to whether the tenant’s fixed-price option terminates or persists when the landlordpresents the tenant with a third-party offer. The outcome properly turns on the particular language used in the lease instrument. In a Virginia case, a landlord presented a tenant with a third-party offer to purchase for $175,000. The tenant declined to match this offer, instead insisting that he would exercise his option to purchase for the fixed price of $150,000. The court rejected the tenant’s argument that the parties intended that the tenant could pick between whichever option he considered more favorable to him. By refusing to match the third-party offer, the tenant forfeited his fixed-price option. Subsequently, the landlord’s contract with the third party failed to close because of a dispute, but the court ruled that this event did not resurrect the tenant’s fixed-price option. Shepherd v. Davis, 574 S.E.2d 514 (Va. 2003).

NUISANCE: Injunction puts extensive limits on use of fraternity property. A fraternity’s large parties, attended by hundreds of people and lasting until close to dawn, constituted a nuisance. Noise, litter, and the shooting of firearms disturbed the neighboring plaintiffs. The fraternity bought its tract of rural land before the plaintiffs bought their tract, and thus the fraternity raised a “coming to the nuisance” defense. Although the appellate court indicated that priority of occupation was a factor for the trial court to consider, it did not require a finding of no nuisance. The court’s injunction included four elements: (1) the fraternity had to fence its property, with a closed gate during late-night hours; (2) no gatherings could have over 200 individuals; (3) no shooting of firearms; and (4) the fraternity had to provide the name and address of a person to whom plaintiff could report further disturbances. Edmunds v. Sigma Chapter of Alpha Kappa Lambda Fraternity, 87 S.W.3d 21 (Mo. Ct. App. 2002).

PREMISES LIABILITY: Landowner not liable for injury to contractor’s employee. Dow Chemical hired an independent contractor, and an employee of the contractor was injured when an overhead pipe fell, striking him. The contractor, having installed the pipe, created the defect. The employee claimed Dow owed him a duty of care because of Dow’s actual control of the work site and a requirement of the construction contract that the contractor comply with Dow’s safety manual. The court disagreed, finding Dow did not control the means or methods of the contractor’s work. Dow Chemical Co. v. Bright, 89 S.W.3d 602 (Tex. 2002).

TAKINGS: Eminent domain does not result when government accepts prior owner’s offer to dedicate easement. In 1977, the owner of beachfront property made a 25-year firm offer to dedicate a pedestrian and bicycle easement to the county in exchange for permits to subdivide and build on the property. In 1988, after a sale of the property to plaintiffs, the county accepted the offer. Plaintiffs brought their action under the Takings Clause, alleging that the government did not meet the nexus and proportionality standards for developer exactions. The Ninth Circuit Court of Appeals held for the government, because plaintiffs purchased with notice of the offer to dedicate, presumably paying a discounted price. In response to the owners’ claim that the county had obtained the offer by an improper exaction, the court observed that if they were correct, a compensable taking occurred during the 1970s and thus was barred by the statute of limitations. Daniel v. County of Santa Barbara, 288 F.3d 375 (9th Cir. 2002), cert. denied, 123 S. Ct. 466 (2002).

ZONING: Denial of home for alcoholics raises issues of disability discrimination. A local community action organization sought a special permit to develop a halfway home for recovering alcoholics in an industrial zone. The city denied the permit, and the organization brought action under the Americans with Disabilities Act, the Fair Housing Act, and the Rehabilitation Act. The Second Circuit Court of Appeals rejected the city’s claim that the residents were not “disabled” because they had been treated and were alcohol-free for at least 30 days. Denying summary judgment for the city, the court ruled there was an issue of fact as to whether the city’s expressed reasons for denying the permit—to preserve the land for industrial development and to protect the halfway house residents from nuisance effects of a nearby railroad—were bona fide or pretextual. Regional Economic Community Action Program, Inc. v. City of Middletown, 294 F.3d 35 (2d Cir. 2002), cert. denied, 123 S. Ct. 74 (2002).

Commercial Leasing. The Fall 2002 edition of Real Property, Probate and Trust Journal is now available and, as usual, contains important reading for real estate and property lawyers. In Allocation of Insurable Risks in Commercial Leases, 37 Real Prop. Prob. & Tr. J. 479 (2002), Sidney G. Saltz criticizes case law and statutory provisions that prohibit landlords from extracting exculpatory language from tenants in commercial leases. Instead, Saltz argues that parties should apply language derived from waiver of subrogation provisions (which allocate risk of loss to physical property) to other risks typically insured by landlords and tenants. Saltz brushes aside the tenant’s worry that allowing a waiver of the fault principle will permit the landlord to physically injure the tenant and that any such provision will result solely from a disparity in bargaining positions between the parties. According to Saltz, if a typical commercial landlord and tenant are required to maintain proper insurance, fault is largely irrelevant. Saltz also addresses the problem that arises when property of someone other than the tenant is damaged in the leased premises. Saltz’s article provides a variety of useful formlanguage.

Commercial Leasing. Gary Goldman argues that landlord tenant law, as it applies to commercial property, is anachronistic and should be entirely rejected, in Uniform Commercial Landlord and Tenant Act—A Proposal to Reform “Law Out of Context,” 19 T.M. Cooley L. Rev. 175 (2002). Goldman would replace the existing common law, which rests on the “twin legal underpinnings of caveat emptor and independent covenants,” with a model act similar to the 1972 Uniform Residential Landlord and Tenant Act. Scholars have already noted the disconnect between the common law regime, which dates back centuries, and the needs and expectations of sophisticated commercial landlords and tenants. Goldman, however, would simply replace the present common law rather than tinker with it. He points out that the present law is based on (1) the now outdated factual assumptions that the tenant is not interested in the structures on leased land and is in a better position to repair and maintain leased property, (2) consumer protection concerns similar to those posed in residential lease scenarios, and (3) a truer understanding of the relative (and often unequal) bargaining positions of commercial landlords and tenants. Goldman then proposes fourteen key provisions that he believes should be part of any model commercial landlord and tenant act. Some of the more controversial provisions would include a prohibition on tenant waivers and landlord exculpatory provisions, the outright termination of the concept of independent covenants, prohibition of provisions limiting the liability of landlord to tenant following sale of the building for acts occurring before the sale, and significant modification to the typical common area maintenance charge provisions, which the author hopes will limit the deceptive use of such provisions as hidden profit centers. There is much to commend in Goldman’s proposed approach to commercial leases. As the reader will surmise, however, these changes are likely to find a receptive audience in only half of the landlord-tenant equation and may provoke some interesting debate.

Conservation Easements. Yet two more articles concerning conservation easements grace this column. Each raises troubling questions about the headlong rush by some attorneys and conservationists to use this relatively new device. Leigh Raymond and Sally K. Fairfax author the first piece, which they title The “Shift to Privatization” in Land Conservation: A Cautionary Essay, 42 Nat. Resources J. 599 (2002). Raymond and Fairfax challenge the notion that the increasing use of conservation easements and other market-based environmental protection devices signals a shift away from the “progressive era” reliance on coercive regulations. Instead, they argue that “we are actually experiencing a continued blurring” of what constitutes private and public protection of the environment. This blurring reveals numerous problems. For example, they note little exists in the way of public oversight of the negotiation and use of private land subject to conservation easements. Furthermore, although more and more land is burdened by these new encumbrances, little of this land is open to the public in the manner of parkland and national preserves. Finally, they wonder just how beneficial this trend toward the use of conservation easements will be to the financially disenfranchised and the urban poor.

Conservation Easements . The increasing use of conservation easements may raise other unexpected problems. Ellen Aubrey Fred addresses one such issue in Note, Outdoor Accessibility Requirements of the Americans with Disabilities Act: Must Holders of Conservation Easements Provide ADA Access?, 54 Hastings L.J. 243 (2002). The note first evaluates the basics of conservation easements: the purported usefulness of such devices and the requirements for qualifying these easements as tax-deductible contributions to land trusts. The note then repeats the basic framework of the Americans with Disabilities Act and the policy behind the ADA. The author explains the significant effect on a landowner of a determination that property is a place of “public accommodation” or a “commercial facility.” The primary portion of the article is concerned with whether land trusts are subject to the ADA. If so, managers of land trusts would need to carefully examine any contribution of a conservation easement and determine whether the costs of ADA accommodations outweigh the easement’s benefits. Fred explains that land trusts are subject to the ADA when “they own, lease (or lease to), or operate places of public accommodation.” She argues that land trusts should not seek to evade the effect of the ADA, but, rather, they should factor ADA considerations into the negotiation and maintenance of conservation easements. Fred’s advocacy notwithstanding, her article suggests exceptions to the ADA that may, in certain circumstances, exempt land trusts from compliance with this regulatory scheme.

Law Journals. Readers of this column may have little time to simply peruse law journal shelves to locate interesting and new publications. But there is a relatively new law journal published by the University of Tennessee College of Law named Transactions—The Tennessee Journal of Business Law that is worth a look. This journal appears semi-annually and is associated with the College of Law’s Clayton Center for Entrepreneurial Law. As its name implies, Transactions is targeted to transactional lawyers. Although the articles may not be specifically directed at real estate practice, many of the pieces will be of interest to property attorneys. The first edition of volume four recently appeared in print and contains at least one article of special interest to real estate lawyers. Although still a law student at the time of publication, Robert D. Pinson has penned a helpful article for those lawyers aiding clients in the conversion of partnerships to LLCs. Pinson’s article is titled Controversies and Conundra: Converting a Partnership into an LLC, 4 Transactions 47 (2002). Transactions is a young journal, and one hopes that, over time, it will attract articles of significance by well-known attorneys and scholars and will provide a forum for articles aimed at improving transactional practice.

Letters of Intent. Real estate lawyers use letters of intent as intermediate mechanisms to provide substance to transactions that have not yet closed and when the parties have not even agreed on major terms. The problem is simply this: a party that wishes to back away from a transaction will always claim that the letter of intent is unenforceable and that no real meeting of the minds had been reached, while the party wishing to conclude the transaction will argue that the letter of intent itself is binding. Inevitably, the latter party will ask a court to “fill in the details” of the binding agreement. Thomas C. Homburger and James R. Schueller examine these uncertainties in Letters of Intent—A Trap for the Unwary, 37 Real Prop. Prob. & Tr. J. 509 (2002). The article explains the utility of these devices in modern and complex business transactions and notes their particular usefulness to leasing transactions. Focusing primarily on Illinois law, the authors examine how a letter of intent may be characterized as a binding contract, an agreement requiring parties to negotiate in good faith, or a simple nonbinding term sheet. Perhaps the best feature of the article is the authors’ focus on mistakes that lawyers make when creating or negotiating theseinstruments.

Keeping Current–—Property Editor: Daniel B. Bogart, Chapman University School of Law, One University Drive, Orange, CA 92866, Contributing editor: James C. Smith.