Howard Rich (“Buyer”) purchased a single-family residence at a sheriff’s sale in July 2011. The prior owner, Yung-Shen Steven Lee (“Debtor”), had a judgment against him. The judgment holder, Spyglass Hill Community Association (“HOA”), sought and completed the execution sale in order to collect on its judgment. In February 2012, Debtor filed a motion to set aside the original judgment obtained by the HOA on the grounds that the HOA never properly served the lawsuit on him. The Court granted Debtor’s motion and set aside the judgment. After the default was set aside, Debtor then filed a motion to cancel the sheriff’s deed and Buyer’s purchase of the property. The court granted Debtor’s motion as the original judgment was void and had been set aside. Buyer then filed an appeal.

THE DECISION:
In Lee v. Rich, the California Court of Appeals, Fourth Circuit, reversed the trial court’s decision and held a sheriff’s sale cannot be set aside for any reason if the purchaser is a bona fide third party. The Appellate Court found that the statute explicitly stated that the sheriff’s sale could not be set aside unless the purchaser was the judgment creditor. Here, since Buyer was a third party, Debtor could not set aside the sale. The Appellate Court noted that the statute allowed for the Debtor to redeem the property, but once the redemption period ended, there was no way for sale to be set aside even if the underlying judgment was void. However, while Debtor could not set aside the sale, he was entitled to seek damages from the Creditor. In addition, the Appellate Court went on to note that the debtors, in some instances, have a right to equitable redemption. However, in order for that to apply, the purchaser must be guilty of unfairness and the property had to be sold at a grossly inadequate price. Here, since Buyer did not do anything wrong, equitable redemption did not apply.

WHY THIS DECISION IS IMPORTANT:
This case is relatively strange. The Appellate Court does not dispute that the underlying judgment that led to the sale was void as a matter of law. However, although the judgment was void, the Appellate Court found that it was not void as to Buyer because Buyer did not participate in the lawsuit. It is unclear how a sale based on a judgment that was void because the court did not have jurisdiction over Debtor could still be effective be sufficient to allow the sale of Debtor’s home. It seems that the sale would be in violation of Debtor’s due process rights. Given these facts, it seems unlikely that a court would ever set aside a sheriff’s sale with a third party buyer.

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San Jose Tenant Protection Ordinance


Ashlee Adkins

by Ashlee Adkins on June 12, 2017

in Landlord/Tenant Disputes

The rental market in San Jose, currently the most expensive in America according to the 13th annual Demographia International Housing Affordability Survey of 2017, has experienced a recent spike in activity leading up to the enactment of a City ordinance regarding rental restrictions. On May 9, 2017, the San Jose City Council passed and adopted Ordinance No. 29911, more commonly known as the Tenant Protection Ordinance (“TPO”). The TPO eliminates no-cause evictions for certain units and requires landlords to use just cause for their notices to vacate. The TPO provides for twelve just causes in total, concerning both landlord and tenant behavior. Outlined below are actions amounting to just cause, broken up into tenant and landlord behavior.

  • Tenant Actions Amounting to Just Cause
    • Nonpayment of Rent
    • Damage to the Rental Unit
    • Refusal to Agree to Similar or New Rental Agreement
    • Violation of Lease
      • Does not include subleasing to family members including: dependent child or foster child, spouse/domestic partner, parent, or sibling of Tenant, unless occupancy exceeds max number of tenants permissible for unit
    • Disorderly Behavior Disturbing the Peace
    • Refuse Access to Unit, Requested in Accordance in Law
  • Landlord Actions Amounting to Just Cause
    • Substantial Rehabilitation of the Unit
    • Removal of Apartments from the Rental Market Under the Ellis Act
    • Owner Move-In
    • City Code Enforcement Actions Requiring a Move-Out
    • Converting an Unpermitted Rental Unit for Permitted Use

Unbeknownst to many, the TPO does not cover all tenants in San Jose. However, the recent trend and homeless rate in San Jose certainly leads one to believe that it is only a matter of time before all rental units are covered by the TPO.  Currently, protection is only afforded to rent stabilized units, other multifamily dwellings with at least three units, units built without a permit, rental apartments with a condo map, and guesthouses. Duplexes, single family homes, condos, and second units are not covered, unless they are an unpermitted unit. To ascertain if your unit is rent stabilized; click here to see a map of rent-controlled properties in San Jose. Once the map is open, select “Multiple Housing Roster” from the drop down menu on the left and search for your address.

Prior to the enactment of the TPO, San Jose had more than 2,400 no-cause evictions dating back to 2010. This number only includes evictions that were self-reported to the City by landlords, amounting to nearly a 270% increase from previous years. If you are a resident of Santa Clara County, it is likely you have been affected by these evictions in one form or another. In a 2015 economic study by the Economic Roundtable, evictions were determined to be the leading cause of homelessness in Santa Clara County; costing the community nearly $520 million per year. Additionally, higher eviction rates have resulted in workers moving further and further away from work, causing more congestion on our already impacted roadways. It is reasonable to presume that the recent spike in evictions has been prompted by the rent control trend and introduction of the TPO by the City. Landlords all over San Jose emptied out their rental units, without cause, in an effort to snag a higher rent rate before the TPO came into effect.

It is important to know, both as a landlord and tenant, your rights concerning eviction. Keeping a watchful eye on incoming legislature and enacted laws in your area is essential to being able to adapt to the current trends and rental market. Missteps in the increasingly complicated eviction process are becoming more costly, and we recommend seeking legal advice before taking action.

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Commercial subleases can be good bargain options for tenants, but there are certain risks involved.  This article is intended to assist tenants in identifying these risks and understanding what can be done to mitigate them.

There are many issues for tenants to consider when subleasing, and this article is the first in a series of articles that will highlight these matters.

Protection from Sublessor’s Default

One of the more important issues for a sublessee to do to protect themselves is to try and ensure they are protected in the event the sublessor/master tenant defaults.  What does this mean?  The sublessee generally has an agreement with the master tenant, not directly with the landlord.  So, unless protections are added, if the master tenant defaults and its lease is terminated, that also means the sublessee loses its rights!  If the sublessee has expended significant resources to move into the new space and the master tenant defaults a few months later, this could be a significant loss.

So, what can the sublessee do?  In a perfect world hey can try and obtain a recognition agreement from the landlord whereby the landlord agrees to recognize the sublease as a direct lease between the landlord and the sublessee in the event that the tenant defaults under the terms of the master lease.  This allows the sublessee to remain in the property as if nothing has changed (other than the master tenant being gone!).  That said, landlords can be reluctant to provide such agreements, but there are other actions the sublessee take.

First, the sublessee should investigate the financial health of the master tenant.  Does the master tenant always pay rent in time?  Do they have liquid assets to pay future rent, or a strong revenue stream?  Have they been in default on any lease terms in the past?  This are crucial considerations for the sublessee to consider and investigate.

Moreover, the commercial tenant sublessee should require the landlord, or at least the master tenant, to provide any default notices to the sublessee.  This will allow the sublessee to possible cure, or assist in curing, any defaults to preserve their lease (sometimes called an attornment agreement).

Understand the Master Lease

This may go without saying, but it is critical for the sublessee to understand and approve the terms of the master lease.  This can be lost in the shuffle when entering into a sublease, as the sublease itself may be 20-plus pages long, and some much time is spent negotiating the sublease, the sublessee forgets to make sure the master lease is acceptable.

It is highly unlikely that the landlord will agree to amend the master lease, but is nonetheless critical for the sublessee to make sure that the master lease does not have egregious terms or otherwise make subleasing impractical (ie limitations on use of the property that make doing business impossible).

Along these same lines, it is also critical to know if the landlord will allow the sublease or not.  One can spend weeks or longer negotiating the terms of the sublease, paying attorney fees etc. to later find out the master landlord will not allow the sublease.  Thus, in a perfect world, the sublessee will get early confirmation of this, and preferably include it in the sublease (as opposed to executing the sublease subject to landlord approval).

Obtain Warranties from the Sublessor

As it is important to understand what is in the master lease, it is also critical to understand whether that is the current status as well.  Thus, in come representations and warranties.

It is critical for the sublessee to obtain certain representations from the sublessor about the status of the lease and property.  Common representations and/or warranties from the sublessor include

  1. the master lease is the entire agreement between the parties, and there are no other agreements between the landlord and the sublessee;
  2. there are no existing defaults or set of circumstances which would lead to a default under the master lease by either the landlord or sublessor;
  3. the premises and the improvements therein are in compliance with all applicable laws; and
  4. the premises, improvements and building systems are in good working order and condition.

These are just some of the critical issues that commercial tenants need to ensure are included in their sublease.  Future articles will address other issues, including use of the space, utilities, shared functions, and other matters.

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Prompted by the 2016 landmark ruling in the California Supreme Court Case Horiike v. Coldwell Banker, California Assembly members have introduced Assembly Bill 1059 (“AB 1059”) and Assembly Bill 1626 (“AB 1626”). AB 1626 and 1059 oppose each other and are scheduled for review on April 25th and May 2nd respectively. These bills would change broker regulations surrounding dual agency in commercial transactions, including purchases and leasing. Current law in California permits the existence of dual agency in real estate transactions (Civil Code §2079.16), however the legality and requirements in the commercial industry may change if either of these bills pass.

AB 1059 would prohibit a brokerage firm, broker or any of the broker’s or brokerage’s licensees from acting as a dual agent in a commercial property transaction. AB 1059 furthers the trend of legislators moving towards a complete ban on dual agency. Colorado, Kansas, Florida and Wyoming specifically prohibit dual agency, while dozens of others are moving towards a total ban. Awareness of the conflicts of interest involved and duties owed to a client illustrated in Horiike may have led to the proposal of AB 1059 by legislators.

AB 1626 would add to the disclosure requirements in commercial transactions, rather than prohibit it all together. This would maintain the status quo, but also provide parties with more information regarding the existence of a dual agency, and the fiduciary duties owed by the agents to both sides. Senate Bill 1171 (“SB 1171”), a previous bill passed in early 2015, requires that agents disclose to clients the existence of dual agency in commercial property transactions, not what specific duties are owed to them. Legislators argue that AB 1626 would be less abrasive than AB 1059, and would implement what the court in Horiike intended concerning dual agency in real estate transactions.

In Horiike, the court ruled that both real estate agents in a transaction owe a fiduciary duty to both parties when the agents work under the same broker’s license. Furthermore, the court reiterated that dual agents have a duty to disclose all facts materially affecting the value or desirability of a property to both parties to the transaction. The seller’s agent in Horiike owed the same duty to the buyer as he owed to his own client, based on the fact that both agents were from the same Coldwell brokerage firm. As you can imagine, this potentially creates a conflict of interest and limits the tactics and strategy an agent can use in executing a sale.

Horiike has had a ripple effect on the real estate market, affecting consumers and real estate brokerages alike. Some have argued that the ruling highlighted the risks involved with dual agency and has made consumers more wary of engaging in such activity.  In an amicus brief filed by the California Association of Realtors (“CAR”) concerning Horiike, CAR argued that the ruling limit’s consumer’s choices in purchasing and leasing property, reasoning that because a buyer/lessee working with a broker doesn’t know what property they will ultimately pick, there’s no way to anticipate whether the seller/landlord will be represented by the same firm. This could be a substantial issue in very small towns where there is potentially only one brokerage. This split in opinion is evidenced by the proposal of AB 1059 and 1626, with the passing of either one implementing major changes in the commercial real estate market.

If passed, AB 1059 takes Horiike a step further, completely eliminating dual agency in commercial transactions. Legislators are constantly trying to stay on the forefront of legal changes, and the passing of AB 1059 may be a change that is inevitable given the current trend around the country. In almost every other fiduciary profession, this type of dual agency relationship is illegal, except in certain emergency situations. AB 1059 would move commercial real estate in line with these other fiduciary professions, getting rid of dual agency all together. This includes dual agency relationships in both commercial property purchases and leasing. Many people in the industry believe that commercial tenants’ interests have historically been misrepresented due to the use of dual agency, and the elimination of such would provide thousands of businesses with more effective representation. See: http://www.costar.com/News/Article/CA-Legislator-Introduces-Bill-Banning-Dual-Agency-Representation-in-CRE-Transactions/189991

While it is required that parties to commercial property transactions are made aware of dual representation, it is unclear if they actually understand the risks involved and the likelihood of a conflict of interest. The passing of AB 1626 would help fix that and more clearly define dual agency and the fiduciary disclosure requirements for commercial agents. AB 1626 would also allow consumers the freedom of selecting whichever brokerage they prefer, even if the opposing party’s agent is from the same brokerage.

Although it is unclear how each bill will do upon review, one thing is certain; the commercial real estate industry is evolving and changing. The passing of either bill affects thousands of property and business owners around the state, with the potential of changing how business is done in the industry. Stay tuned to see just how much of an effect Horiike has had on legislators concerning commercial transactions.

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Recently, the Sixth District Court of Appeals overturned a state trial court order that originally invalidated a listing broker’s claim against multiple sellers of a vacant parcel of land in Marin County.

FACTS:  Licensed broker Bernice Jacobs presented a listing agreement to five owners, only one of which executed the agreement.  The sellers owned a parcel of land in Marin County that Bernice listed at $2.2 million.  The agreement entitled her to a commission of $200,000 if she procured a buyer for the property.

Though only John Locatelli, one of the owners, executed the agreement, Plaintiff claimed that seller Locatelli told her when he was signing the agreement that he was authorized to act on behalf of the other owners. His signature line is also ambiguous, “John B. Locatelli, Trustee of the John B. Locatelli Trust, et al.”  (The last bit, “et al.” suggests that he could be signing on behalf of multiple parties.)

 

Further, Jacobs claimed the other owners were aware of her retention as a broker and that two individual owners acknowledged her employment, were impressed by her performance and inquired about working with her on other projects.

The agent did market the property and within the specified time frame she did procure a buyer for the property.  However, Locatelli asserted that he had been speaking to the prospective buyer, TPL, for three years and he wanted to exempt that buyer from the commission agreements with Jacobs. Jacobs alleged that TPL’s representative claimed not to know Locatelli and had never spoken with him prior to Jacobs’ marketing efforts. Ultimately the owners and the identified buyer TPL did enter into an agreement for that buyer to purchase the property

Jacob file suit against the owners for breach of contract, breach of the implied covenant of good faith and fair dealing, anticipatory breach, and specific performance. The owners demurred. At the trial court level, the owners argued that Jacob’s complaint was barred by the statute of frauds which requires a writing when transacting for real estate.

As to the argument that Locatelli could sign on behalf of the other owners, the other owners alleged that such an agreement must also be in writing pursuant to the equal dignities rule.

Jacobs alleged the owners were joint venturers, and that Locatelli had signed the agreement on behalf of the joint venture. The trial court sustained the owners’ demurrer without leave to amend but did not give a reason. Only Locatelli remained in the action as a defendant.  This appeal followed.

THE HOLDING: The appellate court found that plaintiff has sufficiently alleged in the complaint that Locatelli had a written authority to sign on behalf of the other owners. That is a sufficient allegation at the demurrer stage. Furthermore, the court adhered to the finding of Sterling v. Taylor (2007) 40 Cal. 4th 757 and noted that when there is an ambiguity in the written agreement, extrinsic evidence is admissible to resolve uncertainty. The appellate court found that the trial court should have allowed the case to proceed and allowed the plaintiff to introduce extrinsic evidence and the manner in which Locatelli signed the agreement. Accordingly, the lower court’s order sustaining the demurrer did not conform to the Supreme Court holding in Sterling regarding the admission of parol evidence.

 

WHY THIS CASE IS IMPORTANT: Neither party acted as they should have.  The listing agent is a licensed professional and held to a high standard.  That means the licensee is supposed to have a fully ratified agreement.  However, there appeared to be some unclean hands on the part of the seller, the appellate court seemed inclined to give the listing agent a chance to prove her case and provide evidence of the meaning of “et. al” in the signature line.  Lesson to practitioners, signatory lines should be for single party, with no additional verbiage.

 

[Jacobs v. Locatelli, et al. (Feb. 8, 2017) (Santa Clara County Superior Court)]

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One of the most overlooked clauses in commercial leases is the option to renew. Essentially, an option to renew is merely an offer by which the lessor binds himself in advance to make a contact if the lessee accepts on the terms and within the time designated (Cicinelli v. IwasakiI (1959) 170 Cal. App. 2d 58). Landlords have a tendency to use form or template language in their leases without paying too much attention to renewal clauses. Relying on boiler plate language and not negotiating lease terms can lead to a costly dispute at the expiration of the initial lease term. Tenants and landlords should fully apprise themselves of the terms and conditions of their renewal clause, if any, prior to executing the lease.

Many commercial leases with renewal clauses contain explicit terms for the tenant to comply with if they intend to exercise their option.  Notably, options to renew typically require the tenant to give the landlord notice in writing of their intent to renew, usually 6-12 months prior to termination of the lease. In Jeffrey Kavin, Inc. v. Frye, a 2012 California Court of Appeals case, the lease required tenants to deliver written notice to the landlord within six months before the end of the initial term; otherwise the option would automatically expire. The tenants in this case provided written notice of their intent to renew two weeks after termination of the initial term, and remained in the premises for a few months after the initial lease term ended.

Upon their move-out, landlord sued the tenants for breach of contract, claiming that they had validly exercised their option to renew. The court ruled otherwise, stating that since the tenants did not strictly comply with the terms of the option, the option to renew automatically expired. The court further stated that the landlord was not permitted to waive the renewal notice requirements, citing that a party cannot waive a contract provision when the provision benefits both parties (Jeffrey Kavin, Inc. v. Frye (2012) 204 CA4th 35).  Given that the renewal clause gives exclusive power to the commercial tenants to accept or reject, the landlord cannot waive the provisions surrounding that option.

In a surprisingly large amount of commercial leases, the lease provides the tenant with the option to renew, but fails to make any mention of what notice the tenant must give the landlord of their intent to renew. California courts have held that when the option to renew requires no particular form of notice, the tenant’s acts or course of conduct dictate whether or not the option has been validly exercised. In a California Court of Appeals case involving a commercial lease for a food market, the option to renew did not contain any notice requirements, but contained an increased rent amount for the renewal period. When the option to renew is not clear on its face, the court will consider evidence outside of the lease to determine whether the option was exercised. In the instant case, after the conclusion of the initial lease term, the tenant remained in possession of the premises and paid the increased rent amount, which the court ruled as being sufficient conduct constituting an exercise of the option (Cicinelli v. Iwasaki (1959) 170 Cal. App. 2d 58).

A lease containing a renewal option that is silent as to notice requirements can be detrimental to landlords. Without specific notice requirements, the landlord is left in the dark and unable to prepare for the tenant’s acceptance or rejection of the additional lease term(s). Absent the tenant voluntarily telling the landlord, the landlord will not know if the tenant plans to vacate or remain in possession of the premises until after expiration of the initial lease term. Landlords should implement a specific timeframe for the tenant to notify the landlord in writing of their intent to renew. This will provide sufficient notice to landlords to find a replacement tenant should their current tenant not wish to exercise their option to renew.

Alternatively, options to renew can be extremely beneficial to tenants, giving them security and peace of mind that they will not have to relocate their business every three to five years. The option to renew gives tenants exclusive power over the decision to continue the lease for additional term(s).  With that power, comes significant risk, especially when the option to renew lacks specific notice requirements. If the initial lease term ends and the lease lacks any notice requirements, the tenant’s continued possession of the premises and tender of rent payment could subject them to rent for the renewal period (Adv. Corp. v. Wikman (1986) 178 Cal. App. 3d 61). Given that most renewal periods range from three to five years, tenants should be mindful of termination dates to avoid any unwanted lease renewals.

There are several other potential issues that can arise from renewal options, and we will discuss those in our upcoming commercial leasing articles. As noted, options to renew in commercial leases are oftentimes bitter-sweet. Landlords and tenants should adequately address and negotiate renewal clauses at the inception of the lease agreement, clearing up any misunderstandings or missing terms. Additionally, seeking the advice of an experienced real estate attorney can make renewal options more predictable and useful.

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Buying Into an HOA, Part 3


Simon Offord

by Simon Offord on January 26, 2017

in HOA Litigation

Buying a new home can be an overwhelming process. The amount of paperwork is staggering. When buying property that is part of a homeowners’ association (HOA), the paper work is increased due to a statutorily-mandated set of additional disclosures regarding the HOA (Civil Code Sections 1365 – 1368 and 1375).  In this third installment in this blog series (part 1 and part 2), I will discuss some of the more important issues to look out for in the HOA disclosures.

One of the vital elements of the HOA disclosures is the Covenants, Conditions, and Restrictions, commonly known as CC&Rs. The CC&Rs contain the rules that govern the HOA, and some of the things you might find the in CC&Rs could impact your decision to buy the property.  Previous blogs discussed potential restrictions relating to improvements to your home or restrictions on use.  However there are several other potential pitfalls to look out for when reviewing CC&Rs and HOA disclosures.

Past Board/HOA Meeting Minutes

A well-run HOA should have regular meetings.  How regular is somewhat dependent on the size of the HOA, however in no case should the HOA not at least meet once annually.

Moreover, the HOA should maintain minutes of these meetings.  The minutes should include a description of what was discussed.  The minutes are an excellent resource to learn about what is going on in the HOA.  The minutes may mention common area projects that homeowners are considering, complaints owners may have about the HOA, potential upcoming special assessments, potential changes to the CC&Rs (some of which changes may have a significant impact on your intended use of the property, ie prohibiting short term rentals or restricting pets) etc.  It is possible the seller is not involved and does not attend these meetings, so the meeting minutes can be a useful resource.

Larger HOAs may also produce monthly or quarterly newsletters.  The newsletters are another resource for buyers to learn about issues that may have not been disclosed about the HOA.

The HOA’s Finances

HOA’s should maintain financial documents that include an operating budget, a summary of association reserves, a summary of any outstanding loans, and information on all association insurance policies, among other things.  Again, size of the HOA is a significant issue in determining whether the HOA is properly funded, but potential purchasers should make sure the HOA has funds in reserve to cover unexpected damage or issues, along with sufficient monthly income to cover all expenses in addition to building up the reserves.

Consider Your Own Research

If after a review of all the items discussed in this article and the prior two you still are not comfortable, keep researching!  Try and speak with the Board or Property Manager to get their honest opinion.  Walk the property and look at the condition of the railings, roof, siding and any other building components.  Have a property inspector inspect the common areas for potentially expensive upcoming issues.  Search the internet.  Talk to owners.  Make sure there are no past or active lawsuits involving the HOA or members.

Ultimately, the more information one gathers, the better.  Owning in an HOA has benefits including cost-sharing of maintenance, but there are also disadvantages.  Identifying these disadvantages prior to purchasing is critical, and we hope this series has been helpful.

Of course, the issues discussed above are among the concerns that clients have raised with us.  However, it is critical that a buyer carefully review the CC&Rs and disclosures for themselves.  What may seem insignificant to one buyer may be a deal-breaker for another.  Therefore, the above items are not intended to be an all-inclusive list, but instead a guide as to some of the more common issues that have caused concerns.

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Broker Beware! How to NOT Lose a $925,000 Commission!

by Simon Offord December 22, 2016 Broker/Realtor
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A recent case confirmed our oft-repeated advice to get it in writing.  In Westside Estate Agency, Inc. v. James Randall, a broker learned this rule the hard way. California’s statute of frauds declares invalid any “agreement authorizing or employing an agent, broker, or any other person to purchase or sell real estate” unless that agreement […]

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5 Tips for Landlords This Winter

by Ashlee Adkins December 21, 2016 Landlord/Tenant Disputes
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A landlord’s duty to maintain a habitable unit can morph as the winter months approach here in California. What makes a unit habitable in the summer months can change with the seasons and the drop in temperature. In our recent California Landlord Basics webinar on December 16 (view replay here), we discussed the statutory requirements […]

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Appellate Court Upholds Fact-Based Determination of Nuisance

by Simon Offord November 29, 2016 Neighbor Issues
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In the recent case of Mendez v. Rancho Valencia Resort Partners, LLC, the appellate court analyzed whether certain noise constituted a nuisance. The Mendezes (“Neighbor”) filed suit, claiming Rancho Valencia’s (“the Resort”) outdoor festivities constituted a private nuisance.  The Trial Court ruled in favor of the Resort, determining the noise levels were not “substantial and […]

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