The recent case of Taylor v. Nu Digital Marketing, Inc. discusses the issue of when it is appropriate for a seller to regain possession of a property from a buyer by filing an unlawful detainer action.

In Taylor, the Plaintiffs (sellers) and Defendant (buyer) entered into an agreement entitled “Contract of Sale Residential Property” in August of 2012. The agreement provided that the buyer will maintain possession of the property and make probationary installment payments for 60 months. These probationary installment payments did not go towards the purchase price. The buyer was also required to contribute to the purchase price during the 60 months by grants of equity in their corporation, property taxes, homeowner association fees, and payments in excess of the probationary installment amount.  At the conclusion of the 60 months, the remaining balance on the $1.25 million purchase price was to be paid in full in order for the buyer to own the property.

In June of 2013, the buyer defaulted on the probationary installment payments, and sellers filed an unlawful detainer action to regain possession of the property. Sellers claimed that their agreement with the buyer created a tenancy in which they could regain possession by unlawful detainer. Defendant argued that sellers’ complaint failed to state a cause of action because they were a purchaser, not a tenant. The trial court sided with the sellers.

The trial court held that despite the agreement being entitled ‘contract of sale’, the contract between the plaintiffs and defendant was primarily a lease agreement, with the contract for sale being secondary and taking effect at the conclusion of the 60-month term. Additionally, the court reasoned that both the ‘probationary installment’ payments and the sellers’ ability to use a Five-Day Notice to Quit as a remedy upon buyer’s default were characteristics of a landlord-tenant relationship.  (CCP§ 1161).

The Court of Appeal affirmed the lower court’s decision. The appellate court emphasized that the relationship created by the agreement must be characterized by reference to the rights and obligations of the parties and not by labels (Green v. Municipal Court (1975) 51 Cal.App.3d 450). The Defendant in Taylor only had a right of possession of the property for the first 60 months, and did not have the opportunity to own the property until the 60-month term elapsed and the purchase price was paid in full. Additionally, the agreement between the parties conspicuously stated that the Plaintiffs may use a 5-day notice. The appellate court went on to reason that when possession is achieved through a landlord-tenant relationship, unlawful detainer may be utilized to regain possession.  As mentioned by the lower court, the terms of the agreement were those readily found in tenancy agreements.

Buyer’s possession of the property was conditioned upon the satisfaction of the probationary installment payments. The court noted that the probationary installment payment provision set forth a 60-month lease, with the payments therefore being rent. To support that contention, the trial court reviewed email correspondence between the parties evidencing that both sides understood the payments to be considered “rent”. Through both the means in which the buyer in this case obtained possession, and the landlord-tenant characteristics of their agreement, an unlawful detainer action was an appropriate remedy.

This case is particularly relevant today with the prices of homes as high as they are. These contract for sale/lease hybrid contracts can be an affordable alternative to prospective purchasers.  With the benefit of affordability, also comes the risk. Prior to entering into a real estate purchase agreement similar to the one in Taylor, a prospective purchaser should consult with a real estate attorney to better understand the potential benefits and pitfalls.

 

Taylor v. Nu Digital Marketing, Inc., (2016) 245 Cal. App. 4th 283, Court of Appeals of California, Third District

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Pokémon Go is the latest craze that is literally everywhere we look. It is all over the news, and all over the streets with players of all ages trying to “catch ’em all.”  We have all heard about the stories of people falling, getting into car accidents, and even quitting their jobs to play full time, but does this game have any impact on real estate? Maybe, if you live in a house like this family’s: https://www.buzzfeed.com/stephaniemcneal/pokemon-go-house

In the article linked above, the family’s home had been labeled as a Pokémon “gym” (apparently churches and other public places are oftentimes identified as Pokémon gyms. This home was unique in that it was a former church, so the game considered it a gym).  Pokémon gyms appear to be quite a big attraction, as players can “train” their Pokémon for battle at such locations.

As a result, this home had substantial additional foot traffic as players showed up at all hours to train their Pokémon. There have been other stories in the news about homes close to parks or bodies of water having increased foot traffic. So, the question becomes, is this something you need to disclose?!

Under California law, a seller must disclose all material facts which affect the value, desirability and intended use of the property.

Is an increase in foot traffic something that materially affects the value of your home? To some owners, the answer is yes. The idea of having people congregating in your front yard or in front of your house at all hours is certainly less than ideal. Players could keep homeowners up at night or present a safety concern.   Imagine if you lived near a high school, but it was not so obvious to a purchaser that on Friday nights when the football games are played, this was the area everyone parked.  Would you disclose that?  A prudent seller would.

Now, the caveat to all this is if the condition is readily observable, a buyer should not be able to sue for closing a blind eye.  However, if I were buying a house, checking to see if it was a popular Pokémon Go site would be pretty low on my priority list, as I would not even know how to begin.

Obviously, we are not predicting a wave of Pokémon related disclosure issues being the new real estate legal trend. But this humorous situation is a great opportunity to remind our readers about how broad disclosure requirements may be. There is a reason the CAR and PRDS disclosure forms are upwards of 10 pages long (the statutorily required Transfer Disclosure Statement is three pages, and the “supplemental” disclosures which are commonly used are several more pages, depending on which set of forms you are using).  The issues contained therein are all things that should be disclosed to avoid the risk of a lawsuit.  Neighborhood conditions is certainly one such item.

If you ever need assistance in determining what should be disclosed, do not hesitate to reach out to us.  In the meantime, have fun playing Pokémon GO, but please do not play while driving, walking in the middle or the street, or riding your bike…

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Since 2001, California has had PACE programs available throughout the state.  One of the most well known is the “HERO” program, the Home Energy Retrofit Opportunity program which was first established in the Riverside County area. In late 2013, San Jose’s city council voted to participate in the HERO program, joining Berkeley, San Francisco, Menlo Park and other Bay Area municipalities in implementing the program.[1]

Homeowners who were eligible for this program essentially borrowed money to install solar panels or other conservation improvements to their property.  Once approved, the amount spent on the solar panels were then assessed against the property as a lien, plus interest.  The homeowner then spends between 5 to 20 years paying off this special assessment (the PACE lien) on their property tax bill.

Fast forward, and now a new problem has arisen.  Homeowners often may not understand that how the mechanics of the PACE lien works.  The PACE loan is repaid through their property tax bill and owners may have entirely forgotten the financing as a result.  Now when it comes time to list the property for sale, the PACE liens have been causing a problem for buyers and sellers trying to close escrow.

What’s the problem?  Well, for one thing, the PACE lien is a priority lien.  That means that for the buyers, their loan is supposed to pay off all liens against the property and be in first position.  Often when applying for the loan to purchase the property, only the purchase price is taken into account—not the hidden tax lien.

That means that sellers and their listing agents must be mindful to disclose the PACE lien.  The California Association of Realtors issued an FAQ for their members and reminded licensees who use the CAR forms that:

“The C.A.R. residential purchase agreement (RPA-CA) requires a seller in paragraph 8.B.(4) to disclose to the buyer whether any items in paragraph 8.B. of the contract are subject to a lien or encumbrance.  8.B. includes all fixtures and various other features of the property including solar power systems, plumbing and heating fixtures, and any other item included in the sale.[2]

 

In summary, the CAR publication goes on to note that sellers have a mandatory duty to disclosure any material facts of the property, of which a PACE lien most certainly would qualify.  Additionally, the publication goes on to note that the seller must provide a preliminary report from the title company to the buyer, and liens are of public record.

As most real estate and escrow professionals are aware, the preliminary report can be difficult to navigate.  Tax liens should appear there but the seller is not as likely to review the preliminary report as the buyer is.  However, the buyer is less likely to understand the ramifications of the special tax assessment.  TIP–> That means the first line of defense comes from the listing agent interviewing the seller.

In the meantime, this issue remains thorny.  Fannie Mae/Freddie Mac released a statement on these liens.[3]  A buyer in Moreno Valley who got stuck with nearly $30k in liens sued the seller for failure to disclose.[4]   Licensees are held to a higher standard and if a buyer ends up with a five figure lien or the seller fails to close escrow, the consumer is most certainly going to look at the licensee as a central person with responsibility for the problem.  Listing agents can address the early in the interview process with the seller and seek assistance from escrow and title professionals if the preliminary report needs further scrutiny.  Additionally, the selling agent should be mindful to look for this disclosure as well.

 


[1]   Gelhaus, Anne “Residents can pace energy use with new program” June 4, 2014  http://www.mercurynews.com/san-jose-neighborhoods/ci_25900245/residents-can-pace-energy-use-new-program

[2]   CAR Publication “PACE Programs and Solar Leases”

[3]  Federal Housing Finance Agency, “Statement of the Federal Housing Finance Agency on Certain Super-Priority Liens” December 22, 2014  http://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-of-the-Federal-Housing-Finance-Agency-on-Certain-Super-Priority-Liens.aspx

[4] Gruszeki, Debra “Moreno Valley homebuyer files lawsuit over HERO-financed transaction; Realtors say lawsuit illustrates hurdles Realtors, buyers and sellers face at point-of-sale for energy-upgrade assessments” March 5, 2015 The Press Enterprise http://www.pe.com/articles/hero-761687-realtors-property.html

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In June 2005, Monica Sciarratta (“Borrower”) obtained a loan in the amount of $620,000 from Washington Mutual Bank.  In April 2009, Chase Bank (“Chase”), the servicer of the loan, recorded an assignment of the loan and transferred it to Deutsche Bank National Trust Company (“Deutsche”).  In that same month, Borrower began defaulting on the loan.  Chase began foreclosure proceedings.  In November 2009, Chase recorded another assignment of the loan and transferred the loan to Bank of America (“BoA”), notwithstanding the fact that it had already been assigned to Deutsche.  On the same day, the trustee recorded a Trustee’s Deed Upon Sale on behalf of BoA naming BoA as the foreclosing beneficiary.  The Trustee’s Deed noted that BoA was winner at the foreclosure pursuant to a credit bid.  In December 2009, Chase records another assignment of the loan purporting to correct the assignment made in April.  Prior to the foreclosure sale, the Borrower filed a lawsuit in federal court.  Eventually, in May 2012, that case was dismissed.  In February 2013, the Borrower once again filed a lawsuit in state court.  There, the Borrower alleged that BoA was not the lender of record for the loan as Chase had transferred the loan to Deutsche.  Further, as Chase had transferred all of its interest to Deutsche, the second transfer was void as a matter of law as Chase had nothing to transfer.  In response, BoA filed a demurrer to the complaint alleging that the case was barred by the previous federal case and because the Borrower did not allege any harm.

Initially, the trial court denied the demurrer and allowed the case to proceed.  However, after the demurrer, BoA filed a motion for judgment on the pleadings on the same arguments raised in the demurrer.  Somewhat confusingly, the Court granted that motion finding that the Borrower did not allege harm.  The Court then gave the Borrower leave to amend the complaint.  The Borrower then filed another complaint which BoA once again demurred to again.  The Court granted the demurrer without leave to amend.  The Borrower then appealed the decision.

 THE DECISION:

The California Court of Appeals for the Fourth District reversed the lower courts’ rulings and held a borrower is automatically prejudiced by a foreclosure by a third party and does not need to specify any other damages.  Here, the Court noted that the California Supreme Court’s decision in Yvanova v. New Century Mortgage Corp. has largely held that a foreclosure by a third party is actionable.  While it may be true that the Borrower would be unable to pay the loan, that was not relevant to the analysis of whether the borrower had been damaged.  Further, it would be against good policy to prohibit a borrower from challenging any third party from foreclosing as the borrower only owes a debt to the specific lender and only that lender has the right to foreclose.  Finally, the Court noted that Chase could not assign the Loan to BoA as it had already assigned all of its rights to Deutsche.  Accordingly, the public record showed that BoA was not the holder of the loan and did not have the right to foreclose.

WHY THIS DECISION IS IMPORTANT:

This case follows the reasoning in the Yvanova decision.  It is likely that more cases will continue to be decided in favor of borrowers allowing them to challenge more foreclosure sales.  The court explicitly stated that there was a strong policy reason to allow a borrower to challenge a void foreclosure sale as California has a nonjudicial foreclosure procedure that does not involve the court system.  The court rejected the lender’s arguments as the natural extension of it would be to allow any third party to foreclose as long as a debt was owed and largely escape any consequences.

COMMENT:

Given the Yvanova decision, this case, and likely many similar ones in the pipeline, we expect that lenders will be more and more careful in making assignments of the loan.  It is unclear why Chase recorded the second and third assignments instead of requesting that Deutsche record the assignment and avoiding the void transfer.  However, given the likelihood of borrowers prevailing on these claims, lenders will likely work to clean up the recording issues and work with each other to prevent further cases such as these from happening.

Sciarratta v. U.S. Bank, 247 Cal.App.4th 552 (2016)

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Juan Juarez (“Tenant”) lived in a rent-controlled apartment complex owned by Boston LLC (“Landlord”) for more than 15 years.  Although his lease required him to obtain renter’s insurance, Tenant did not obtain the insurance.  After 15 years of not having insurance, on a Friday before a holiday weekend, Landlord served a three-day notice to perform or quit to obtain insurance.  Tenant then obtained insurance, but after the three-day period expired.  As Tenant did not obtain insurance until after the expiration of the three-day notice, Landlord filed an unlawful detainer suit to evict Tenant.

At the trial court level, the Court ruled in favor of Landlord.  Tenant then appealed the decision to the appellate division of the superior court.  There, the appellate division affirmed the trial court’s ruling finding that Tenant had breached the lease and therefore could be evicted on that ground.  In addition, the Court held that since the lease contained a forfeiture clause in the lease stating that any breach was sufficient grounds for termination of the lease, it did not matter if the breach was of a material term.  Tenant appealed again to the appellate court.

 THE DECISION:

The California Court of Appeals for the Second District reversed the lower courts’ rulings and held that a lease can only be terminated for a material breach of the lease.  The Court noted that previous cases have held that there must be a breach of a material term before a lease can be terminated.  It cited previous cases where a minor default was determined to be insufficient to terminate a lease.  The Court noted that while this case was different because of the forfeiture clause, the Court refused to enforce the forfeiture clause in this instance because it was against public policy and needed to be strictly construed.  The Court noted that free market principles have limited applicability in residential lease agreements because landlords have disproportionately more power than tenants in those agreements.  As such, courts generally favor tenants as they have less bargaining powers and hold landlords to a higher standard.

WHY THIS DECISION IS IMPORTANT:

In order to overcome previous decisions that required a breach of a lease, many landlords included a forfeiture provision in the lease.  However, this decision confirms that such a provision does not change the underlying law and is insufficient to allow a termination of a lease for a minor breach.  While this case dealt with a lease of a rent controlled apartment, there is no reason to believe that it would not apply to all residential units.

COMMENT:

This was perhaps the best case possible for a tenant to bring to challenge the forfeiture provision.  Here, the tenant had not complied with the insurance term of the lease for 15 years.  Further, the insurance provision only benefited the tenant and the landlord was unable to articulate a reason why not having insurance harmed the landlord.  Finally, while giving a 3-day notice on a Friday before a national holiday was technically legal, the court noted that the landlord was gaming the system and was possibly retaliating as there was no reasonable way for the tenant to obtain insurance in time.

Boston LLC v. Juarez, 245 Cal.App4th 75 (2016)

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AirBNB (and similar rental sites) have been omnipresent in the news for the last few years.  Controversy has arisen in many cities as regulations and restrictions have been implemented.  The recent case of Chen v. Kraft is an example how these restrictions can impact landlords and tenants.

In Chen v. Kraft, Chen (“Landlord”) filed an unlawful detainer complaint against Kraft (“Tenant”), asserting that Tenant failed to comply with multiple 10-day notices to cease using the attic of the premises and stop subletting the unit to subtenants or short term renters.  The property was zoned R-1 and was subject to the Los Angeles Rent Stabilization Ordinance.  Los Angeles prohibits short-term rentals in homes that fall within the R-1 zone.

Tenant’s affirmative defenses included the following: the “attic” plaintiff referred to was actually a “loft” which was part of the rental agreement with plaintiff’s predecessor in interest; the Los Angeles Municipal Code permitted the “sharing of the premises”; plaintiff’s predecessor in interest expressly permitted her to use the premises as an Airbnb location; and plaintiff breached the warranty of habitability.

Landlord filed a motion for summary judgment, arguing that Tenant was operating an illegal bed and breakfast or transient occupancy.  Tenant argued that there were triable issues of fact, including as to the nature of the occupancy of the Airbnb guests, the approval of such use, the circumstances under which the premises may be restricted from use, and waiver by Landlord’s predecessor.

The Trial Court granted Landlord’s motion, holding there was no triable issue of any material fact, and that Tenant’s use of the premises as a vacation rental violated the zoning ordinance.  Tenant appealed.

THE DECISION

The Appellate Court affirmed the Trial Court decision.  The Appellate Court determined that Landlord established all of the elements of unlawful detainer based on the theory of illegal purpose.  Essentially, a landlord is entitled to evict a tenant if they are using the premises for an unlawful purpose.  Since the Municipal Code was clear that short term rentals were not allowed in premises zoned R-1, the Tenant’s Airbnb listings and rentals were unlawful, and Tenant failed to comply with the notices to quit.  Tenant’s argument that the prior landlord allowed the rentals was not dispositive, as such approval was an illegal contract and therefore void and unenforceable.

WHY THIS DECISION IS IMPORTANT

This decision confirms that municipal ordinances control over contracts between parties.  Even though the prior landlord expressly approved the short term rentals, the new landlord was able to evict the tenant after she failed to comply with the 10-day notice provided.

COMMENT

This case is another strike on Airbnb.  Between court decisions and cities continually passing ordinances that limit, tax, restrict or all-together ban short term rentals, Airbnb and similar providers are facing an uphill battle.

Moreover, the tenant here could have remained in the property had she stopped listing the premises on Airbnb after receiving the notice to quit, however her decision to continue the short term rentals was her downfall.

To learn more about the legal issues surrounding short-term rentals, including how to determine if you can list your property on Airbnb and how to find local & city restrictions on short-term rentals, check out our recent webinar: Real Estate Law in the Sharing Economy.

Chen v. Kraft (2016) 243 Cal. App. 4th Supp. 13

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In 2004, Ms. Brown borrowed $450k and secured that loan with a deed of trust against her property in Oakland, California.  The beneficiary under that deed of trust was Washington Mutual Bank, F. A.

WAMU failed in 2008 and the FDIC sold WAMU’s assets to JP Morgan Chase Bank, N.A.  This sale included Ms. Brown’s loan and was memorialized in a September 2008 Purchase and Assumption Agreement (P&A Agreement).

In March of 2011, the foreclosing Trustee, California Reconveyance Company (“CRC”) recorded a Notice of Default for Chase stating Brown was in arrears for slightly over $60k.  One month later, Chase Bank assigned the deed of trust to Deutsche Bank.  CRC remained the trustee.  Two months later, CRC recorded a notice of sale.

In January of 2012, Brown filed the first of three lawsuits challenging the foreclosure.  She voluntarily dismissed the first two.  Each time, CRC republished its notice of sale.  Finally, in July 2013, CRC executed a third notice of sale and two days later Brown filed her third lawsuit challenging this foreclosure sale.  In her complaint, she alleged that the deed of trust assignment to Deutsche Bank was invalid and the foreclosure proceedings were initiated without authority.

Additionally, after the defendants successfully demurred to the complaint, she amended it to allege various other allegations, including violation of the California Homeowner Bill of Rights (HBOR), which had gone into effect Jan. 2013.

The defendants again demurred.  The trial court sustained the demurrer without leave to amend and dismissed the case.  The trial court found that Ms. Brown’s causes of action for cancellation of the instruments, foreclosure by entity lacking a beneficial interest (allegedly Deutsche Bank) and that the declaratory relief sought failed for three reasons: 1) the causes of action were barred as a matter of law because there is no recognized cause of action that allows a borrower to test the legal authority of the entity commencing foreclosure in a preemptive action, 2) Brown lacked standing and 3) Brown’s allegation that Deutsche Bank lacked authority to enforce the deed of trust was contradicted by matters subject to judicial notice (the P&A Agreement).

THE DECISION:  AFFIRMED. The appellate court decision began by reciting the overview of California’s non-judicial foreclosure process and then briefly looked at the issues of standing and whether a borrower can bring a preemptive action to challenge an entity’s (usually a lender or trustee) authority to foreclose.  The Brown court noted that the Supreme Court in Yvanova expressly declined to address the validity of preemptive actions.  Then, the Brown court went on to state that under Yvanova’s determination that a borrower has standing in the post-foreclosure timeframe that it is likely that a borrower in a pre-foreclosure challenge would have sufficient injury to confer standing.  However, the Brown decision made it clear that even in noting those two issues of standing and preemptive actions, it was affirming the lower court’s decision on separate grounds.

Specifically, the Brown court found that nowhere in the briefing did Brown “present any reasoned argument…” that the P&A Agreement should be interpreted any differently than how it is written, wherein in plainly transfers WAMU’s assets to Chase.  Clearly, this case turned on the record before the court and Brown’s facts lacked any viability as compared with those facts found in Yvanova.  In Yvanova, the entity purportedly transferring its assets had long ago gone through a bankruptcy and been dissolved, leading to a inference of forgery.  Brown’s mere allegation was not sufficient to counter the plain reading of the P&A Agreement itself.

Why this case is important:  The Yvanova decision had been long awaited, but in the end was a very narrow holding.  Subsequent decisions suggest that Yvanova offered little guidance to issue of borrower preemptive actions.

COMMENT:   This opinion placed great weight on the P&A Agreement, which was part of the record as a matter of judicial notice.  Prudent practitioners know that most judges would be reluctant to take notice of the actual contents of the agreement and instead limit the judicial notice to the existence of the record itself.  Here, the opinion clearly analyzed the context of the P&A Agreement and transfer wording.  This is essentially a fact finding and usually beyond the scope of judicial notice.  At one point in the opinion, the appellate court noted that Brown had failed to challenge trial court’s determination that the P&A was proper subject for judicial notice, and went on to include a footnote.

Brown v. Deutsche Bank National Trust Company, as Trustee, etc. ., et al Opinion filed May 9, 2016 (First District A144339)

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Committee Offers Hope for Relief from Airplane Noise to Bay Area Residents

by Ashlee Adkins May 23, 2016 Disclosure
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Beginning in early 2015, the Federal Aviation Administration (“FAA”) introduced a new program, NextGen, which rerouted flight paths in the South Bay and Peninsula in an effort to improve airport infrastructure, air traffic management, and provide nearly $133 billion in benefits to airports, airlines, and passengers.  NextGen was implemented with the intention to drastically advance […]

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Important Water Considerations for After El Niño

by Ashlee Adkins April 29, 2016 Construction Disputes
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As predicted, El Niño arrived in California and brought some much needed precipitation with it.  This past winter brought the most rain California has had in quite awhile, with many major reservoirs in better shape than they have been in years.  Despite the warm welcoming El Niño received, there is a downside to the wet […]

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Court Denies a Landlord’s Ability to Change House Rules in San Francisco

by Henry Chuang April 29, 2016 Landlord/Tenant Disputes
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Margaret Foster (“Foster”) lived in the same apartment in San Francisco for more than 40 years.  In 2011, her building was bought by W.J. Britton & Co., Inc. (“Britton”).  As part of new management, Britton sent each tenant a new set of house rules.  In those rules, the tenants were required to share the back […]

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