Joseph Erlach rented a bedroom and bathroom in a house located in Monterey.  He entered into an agreement with the original owner, Mary Schwann, to rent the property for seven months with the lease ending in October.  In the middle of October, the parties agreed to extend the lease until the end of November.  However, at the end of October, Schwann turned off the utilities at the property because some of the other tenants were not paying rent.

Several weeks after turning off the utilities, the property was red-tagged because of the lack of utilities and Erlach was prohibited from occupying the property.  Four days after the property was red-tagged, the property was foreclosed by Defendant Sierra Asset Servicing, LLC.

After the foreclosure sale, Erlach talked to Sierra and they agreed to extend his lease until the end of December.  In November, Sierra began removing flooring, carpeting, and fixtures from the property over Erlach’s objection.  In early December, Sierra notified Erlach that the property was ready for him to live in, even though there were still substantial habitability problems and the red-tag had never been removed.  Because of these issues, Erlach sued Sierra.

In Erlach’s suit, he claimed that Sierra had constructively evicted him and had violated several habitability statutes.  In response to the suit, Sierra filed a demurrer alleging that there was no valid lease as the lease was with Schwann.  Further, if there had been a lease with Sierra, the lease would have been void because the property had been red-tagged and Sierra had begun renovations.  By making the renovations, Sierra had “destroyed” the property and therefore terminated the lease.  The court agreed with Sierra and granted the demurrer without leave to amend.

THE DECISION:

The Sixth Appellate District overturned the trial court’s judgment and overruled the demurrer.  In Erlach v. Sierra Asset Servicing, LLC, the appellate court held that a red-tag does not automatically terminate a lease.  The court noted that the relevant Health and Safety Codes all refer to the rights and responsibilities of tenants in the present tense and do not refer to them as “former” tenants.  Given that, the court found that the legislature must have intended for the lease to continue beyond the issuance of a red-tag.  Erlach had a valid lease.

Further, since he had a valid lease, under California law it continued beyond the foreclosure sale.  Since Erlach alleged that the property was uninhabitable, he had made sufficient allegations to support claims for violations of the warranty of habitability and related claims.

WHY THIS DECISION IS IMPORTANT:

This case clarifies that a tenant with a valid lease remains a tenant even after a property has been red-tagged.  Also, it would be nonsensical to allow landlords to just let houses get red tagged to get rid of unwanted tenants.  While the statute was clear that a tenant has certain rights against a landlord after a property is red-tagged, this decision helps clarify that a tenant may make claims relating to the breach of contract and other tort causes of action.

COMMENT:

This appellate decision seemed like the obvious conclusion after reading the rent ordinances.  The trial court’s decision led to a rather strange result – that a tenant who rented a red-tagged property had fewer protections than if a property never was red-tagged.  Further, the appellate court went out of its way to highlight that just because a contract may have been for an illegal purpose, it does not mean that it is necessarily unenforceable.

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The recent case of Peake v. Underwood will hopefully deter frivolous claims against real estate agents.

Peake purchased a home from Underwood.  Long after the sale closed, Peake filed suit against Underwood and his agent, claiming Underwood and his agent failed to disclose defective subflooring.   During the course of the litigation, Peaked admitted that, during escrow, Underwood’s agent provided Peake with photographs and reports disclosing the defective subflooring.  In light of these disclosures the agent contended he had satisfied his duty to the buyer.

After several months of litigation the agent filed a CCP 128.7 Sanctions Motion, seeking sanctions and dismissal of the claims against the agent.  The Motion contended that the Plaintiff’s claim was frivolous.  The agent argued that since Peake was on ACTUAL notice of the subflooring issues, the agent had satisfied his duty to the buyer (this was especially true as the agent did not represent the buyer).  The trial court agreed with the agent and dismissed the case.  The Court also ordered Peake pay sanctions in the amount of $60,000.00.  The appellate court affirmed.

The appellate court emphasised that it was not suggesting that sanctions should be routinely issued, but that in this instance they were appropriate.  The court reasoned that the ADMITTED facts in evidence unequivocally established that Peake was aware of the subflooring issues before closing escrow.  As a result Peake, or his counsel, could not have had an honest or reasonable belief in the validity of the claim.

This is a welcome relief for real estate agents and their defense attorneys.  Courts tend to be reluctant to dismiss claims outright, no matter how baseless they may seem.  However, this court was not afraid to make the tough decision to dismiss the case and sanction Plaintiff for continuing to advance an obviously baseless claim.  In this instance, the Court found that Peake had notice of the issues complained of but apparently had buyer’s remorse.  In my opinion, the court rightfully dismissed the baseless claim.

Hopefully future courts will follow in this court’s footsteps when approached with similar requests.  The CCP 128.7 motion is an underutilized litigation tool.  However, this case and our own experience have shown that it can be very effective.  Our office understands the benefit of this lesser-known motion and has had success in the past getting cases dismissed this way.

The Law Offices of Peter N. Brewer has extensive experience dealing with failure to disclose cases and are here to help.  If you have any questions about this issue, or any real estate legal issue, please contact us at (650) 327-2900, or on the web at www.BrewerFirm.com.

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Real Estate Case Update Blog Series


Karolina Hondai

by Karolina Hondai on August 4, 2014

in Legal Update, Real Estate Law

The attorneys at the Law Offices of Peter N. Brewer put together a “Real Estate Case Update Blog Series.” We hope that the information you find here will be relevant for you as it covers a wide spectrum of common real estate related issues. Our knowledgeable and seasoned attorneys also have extensive experience in litigation, representing their clients in various real estate matters in California. If you or a friend is seeking real estate legal counsel, don’t hesitate to contact our office at (650) 327- 2900 x 10 or on the web at www.BrewerFirm.com

 

By: Simon Offord, Esq. (Click image for bio)

Court Clarifies Transfer Disclosure Law for Mixed-Use Property

The recent appellate decision of Richman v. Hartley is critical for California real estate agents and sellers to know as it clarifies the mandatory disclosure requirements for property sales.

Richman v. Hartley dealt with the sale of a mixed-use property in Ventura, California.  The property was…

 

By: Julia M. Wei, Esq. (Click image for bio)

$900K Judgment Against Supervising Broker Dischargeable in Bankruptcy Despite Agent’s Fraud

In a lengthy and well-reasoned opinion, the 9th Cir. Bankruptcy Appellate Panel concluded that where the broker was unaware of the agent’s fraud, the state court judgment against the broker was dischargeable and the broker was entitled to a “fresh start” after his bankruptcy.

WHY THIS IS IMPORTANT: This is a significant victory for real estate and mortgage brokers because…

 

By: Henry Chuang, Esq. (Click image for bio)

Court Gives a Double Win to Borrowers

Vidal Preciado was the owner of a residential property in Alviso, California where he lived with two roommates.  In July 2011, the Bank of New York Mellon (“BNYM”), holder of a loan secured against Preciado’s property, foreclosed on the loan.  At the foreclosure sale BNYM acquired the property and then began…

Court Helps Lender After Mistakes Are Made

Over three years, Navjot LLC obtained three loans secured by the same piece of property.  The first was in 2005 from Washington Mutual.  The second was in 2006 from a group of investors led by MMB First Mortgage Fund, LP.  The third was in 2007 from Elbert Branscomb.  The loans were for $5.1 million, $1.1 million, and for $500,000.  In late 2007, after Navjot received the Branscomb loan, Navjot refinanced the first two loans from WaMu and MMB and secured the new loans with new deeds of trust.  However, …

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The answer is … maybe.  At one point the industry had some certainty on this issue when, in 2006, the Department of Labor (DOL) issued an opinion letter on September 8, of that year stating that loan officers qualify as exempt from overtime pay under the administrative exemption.  At that point the answer was clear to employers that loan officers were NOT entitled to overtime pay.

However, some years later, on March 24, 2010, the DOL issued an administrator’s interpretation withdrawing its 2006 opinion and instead opining that loan officers do NOT qualify for the administrative exemption and can be entitled to overtime pay.

This was such a critical issue for the industry that in 2011, the Mortgage Bankers Association (MBA) sued the DOL challenging the validity of the 2010 reversal. MBA prevailed and on July 2, 2013, the Washington DC Circuit Court of Appeals issued a decision in Mortgage Bankers Association v. Harris, invalidating the DOL’s 2010 interpretation.  However, the decision focused on a technicality of notice rather than the merits.  So the question still remained, was the 2006 opinion letter valid?

In June of 2014, the United States Supreme Court granted review so the briefs will be going forward in the next few months.  Until a decision from the Supreme Court, even the 2006 DOL opinion seems to be in limbo.

Generally California courts apply our own state law overtime exemption requirements as provided for in industry wage orders.  As with any type of compliance work, the safest course of action when trying to comply is to adhere to the most stringent or conservative  requirement, whether state or federal.  California’s wage laws are generally more strict than other jurisdictions. Regardless of how it turns out, it will continue to be a very fact-specific analysis, such as the independent contractor analysis.

If you or a friend is seeking real estate legal counsel regarding a California based property, don’t hesitate to contact our law firm at (650) 327-2900 x 10 or to learn more about our firm and read attorney bios, visit us on the web at www.BrewerFirm.com.

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Ceceilia Drumea (“Drumea”) was the resident property manager at an apartment building in Los Angeles for 18 years.  Prior to serving as the property manager, she was a tenant at the property for one year.  During that time, she was paying $850 per month in rent.  However, as the property manager, she paid no rent as she provided management services.  In 2011, the owners who had employed Drumea sold the unit to 1300 N. Curson Investors, LLC (“Investors”).  The day before the sale was completed, Drumea’s service as the property manager was terminated.  Upon taking possession of the property, the Investors notified that Drumea’s rent was being increased to $1,522.03 which was calculated as a 3% increase per year since Drumea last paid rent.  Drumea refused to pay the increased rent but instead offered to pay $850.  The Investors rejected the payment and moved to evict her.

Before the case was filed, the parties first sought clarification about the permissible rent increases from the Los Angeles Housing Department (“Department”).  There, the Department stated that permissible rent was 3 percent above the $850 level.  At the trial court level, the Investors moved for summary judgment stating that the proper amount of rent was $1,552.03.  The court denied the motion and the parties agreed to enter a judgment in favor of Drumea at the $850 price so that the case could be appealed.

THE DECISION:

The Second Appellate District overturned the trial court’s judgment and held in favor of the Investors.  In 1300 N. Curson Investors, LLC, v. Cecilia Drumea, the appellate court held that because Drumea paid no rent, her landlord was not required to notify her yearly of the rent increases in order to preserve those increases when she eventually started paying rent.  Unlike other property managers who pay some rent and are required to receive yearly notices of rent increases, property managers who pay no rent do not need the notices since there is no actual increase to their yearly payment.  Further, in reading the Los Angeles Rent Control Statutes, other areas specifically note that the increases can only be for the previous year.  The part of the statute relating to resident landlords has no such limitation.

WHY THIS DECISION IS IMPORTANT:

This case is one of the rare cases where there is an appellate decision in favor of the landlord on a rent control ordinance.  Unsurprisingly, given the nature of rent control ordinances, much of the law and the decisions lay in favor of protecting tenants.  Here, the court decided the other way and issued a well reasoned decision that was based on what seemed to be a relatively clear reading of the statute.  However, even given the numerous grounds for the decision stated by the appellate court, both the trial court and the Housing Department reached different conclusions that were both far more favorable to the tenant/property manager.  Given this decision and others like it, it is possible that more landlords will appeal unfavorable trial court decisions of rent control ordinances.

COMMENT:

This case was procedurally interesting because it seemed that the parties worked together to get this matter to the appellate court.  After the original summary judgment motion was denied, the parties reached a stipulation that the rent would be at the $850 amount until the appellate decision became final.  Also, the Investors agreed not to seek any damages if rent was paid on time, even though they could have been entitled to almost twice as much rent per month.  Finally, the parties and the appellate court noted that this decision would not lead to the eviction of Drumea as long as she paid the new rent once this decision was final.  While not necessarily the basis of the decision, it was clear that the Investors were strategic in reducing any equities argument by agreeing to not evict the tenant and agreeing to the lower rent amount pending the appeal.

As always, give us a call at (650) 327-2900 if you think you have a real estate matter and need legal representation or visit us on the web at www.BrewerFirm.com.

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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 second installment in this blog series, 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.  A previous blog discussed potential restrictions relating to improvements to your home.  However there are several other potential pitfalls to look out for when reviewing CC&Rs.

Restrictions on Use of the Property

Many CC&Rs include specific restrictions on the use of the property.  These restrictions frequently seek to limit use of the units for residential purposes only.  This oftentimes means that an owner cannot use his home as an office.

Additionally, many CC&Rs have specific rules regulating renting or leasing of the unit.  It is common to require all leases to be for a minimum term of one year, require the owner to ensure the tenant understands and follows the rules for the HOA, and to provide the HOA with a copy of the lease.  Some CC&Rs go as far as to prohibit leasing all together, or prohibit leasing for more than a few weeks in a year.

Some CC&Rs even require that units be used solely as a dwelling for a “single family.”  The case of Colony Hill v. Ghamaty deemed this to be an acceptable provision and determined that an owner who was renting his unit out to unrelated, short term tenants was in violation of the CC&Rs.  Please note, that with the emergence of “Airbnb,” many HOAs are looking into instituting restrictions to prevent owners from renting units on a nightly or short-term basis.

CC&Rs often regulate whether satellite dishes are permitted, and if so their size and location.  We’ve seen CC&Rs that prohibit parking in driveways, or that require garage doors to be closed at all times except when entering or exiting the garage.  CC&Rs often limit or prohibit storage of non-vehicle-related personal property in the garage.  The range of issues that are covered is endless.

Restrictions on Use of Common Areas

Another common restriction deals with use of common areas.  What comes as a surprise to many is that areas such as patios, porches or balconies can be considered common areas.  The CC&Rs may limit how owners can use those common areas, including by preventing them from having BBQs or other amenities and requiring the common areas be kept free of debris or other materials.

Further, most HOAs consider the space between units to be common area.  Therefore, the CC&Rs may limit the owners from installing in-wall or in-ceiling speakers or improving or changing the plumbing or wiring within the walls.

Restrictions Regarding Pets

As a pet lover, one important restriction I always look for are those dealing with pets.  Many CC&Rs limit the number, size, breed, and types of animals an owner is allowed to have.

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 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.

The Law Offices of Peter N. Brewer review and advise on CC&Rs and HOA issues regularly, and are here to help.  If you have any questions about this issue, or any real estate legal issues, please contact us at (650) 327-2900, or on the web at www.BrewerFirm.com.

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What if you find the perfect house but the owner-seller is in bankruptcy?

Sometimes it can be challenging to navigate the bankruptcy system and understand who the decision-maker is in the transaction. If you want to make an offer on the home, here are a few things to consider:

1. What type of bankruptcy did the debtor/homeowner file?

In a Chapter 7 bankruptcy the property is the asset of the Chapter 7 estate and falls under the control of the Chapter 7 Trustee—who is NOT the owner of record, but is instead the person legally empowered to sell the property. The Chapter 7 Trustee is not likely to engage in an off-market transaction. Instead, to carry out his or her duties to all the creditors, and maximize the value of the asset, the trustee will likely list it with a broker and possibly have the property appraised as well.

This means that the property will follow a fairly traditional marketing model by the broker. But of course, the sale will be subject to Court approval (see more on that below).

However, in a Chapter 7, the debtor is usually entitled to the homestead exemption and if there is not enough equity above the liens plus the homestead exemption amount, the Trustee has no incentive to sell the property.

In a Chapter 13 or 11, the issue becomes more confusing. A Chapter 13 or 11 is a reorganization, and the purpose is for the debtor to restructure their debt by proposing a plan of how he, she, or it will pay all their creditors over a prolonged period of time (e.g. 3 or 5 years). The plan can include the sale of an asset and again, any sale would require court approval. In a Chapter 13, the property is an asset of the estate under the Chapter 13 Trustee’s dominion, but could re-vest in the debtor upon plan confirmation. That is a long way of saying that depending on how far along the bankruptcy is, the debtor may not have control over the property to list it or sell it until later, or at least until they have the consent of the Chapter 13 Trustee.

2. How long will the transaction take to close?

Once you have a signed contract in hand, the Court will have to approve the sale. This is usually a regularly noticed motion and can take up to a month to get on the calendar, depending on the type of motion brought and the court’s calendar. However, the sale is not a done deal because it is usually subject to overbid. That means that an auction takes place the day the sale order is supposed to be approved. Usually this is in the courtroom, but on occasion it can be informal and take place at the Trustee’s office.

Additionally, the transactions usually go through escrow and on occasion the title company/escrow officer will reject the Court Order and require an amended order with additional language that makes it possible to close escrow. That can add a couple of weeks to the transaction too.

TAKEAWAY 

A house that is an asset of the bankruptcy estate will likely be priced close to fair market value. However, the competition falls away only when one considers the pool of people willing to wait 60-120 days to close a sale and live with the uncertainty of having to pay even more in an open bidding session after the initial offer is accepted. In a rising market or for certain income producing properties, this can still be a deal with upside to the buyer who is willing to navigate these pitfalls.

If you or a friend is seeking real estate legal counsel regarding a California based property, don’t hesitate to contact our law firm at (650) 327-2900 x 10 or to learn more about our firm and read attorney bios, visit us on the web at www.BrewerFirm.com.

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Courts Give Landlord Relief From Rent Control Ordinances

by Henry Chuang June 23, 2014 Landlord/Tenant Disputes

Lakeesha Lyles (“Lyles”) was a tenant living in a rent controlled apartment in Los Angeles since 2003.  Her landlord, Denise Sengadeo-Patel (“Patel”), failed to send her a copy of a rental unit registration statement or the annual rental unit renewal statement as required by the rent control ordinances.  Due to Patel’s failure Lyles (after paying [...]

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Court Again Punishes Dual Agents

by Simon Offord June 18, 2014 Broker/Realtor

We have previously stressed to real estate professionals, in our blog articles and in many of our speaking engagements, that dual agency is a very risky proposition for real estate brokers. The courts have consistently gone out of their way to find liability against dual agents. The recent case of Horiike v. Coldwell Banker Residential [...]

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Neighbor Issues Blog Series

by Camille Rogers June 9, 2014 Neighbor Issues

The attorneys at the Law Offices of Peter N. Brewer have handled many disputes that arose between neighbors with respect to trees. In an effort to educate our network of California property owners, as well as our followers, we hope you will find this series of blogs written by our knowledgeable and seasoned attorneys helpful. If [...]

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