California Real Estate Law Blog

Berkeley Balcony Tragedy

noreply@blogger.com (Joel D. Ruben) — Tue, 30 Jun 2015 21:49:00 +0000

Every day since the apartment building balcony in Berkeley collapsed on June 16th, the L.A. Times has run an article about the tragedy without

providing a definitive explanation for the failure. What caused the supporting joists to rot, resulting in the deaths of six students and critical injuries to the seven others? We have learned that the City inspectors did not red flag any problems with the balcony during the construction of the apartment building. This is not a surprise because city inspectors apparently focus on whether a particular phase of construction has been completed, not whether the construction conforms with the plans and industry standards. In fact, under California law, a contractor does not have a defense in a construction defect case based on the approval of construction by a city inspector. A general contractor or developer would be mistaken if he or she assumed that work was done properly if it passed building inspections by the local department of building and safety. In El Escorial Owners’ Association v. DLC Plastering, Inc. (2007) 154 Cal. App. 4th 1337, 1358, the California Court of Appeal found the defendants (including the general contractor, Alderman Construction, Inc.)were liable for negligence. The Court stated: “Alderman notes that the building inspector approved the work. But that does not change the result. [Firemen’s Ins. Co. of Newark, N.J. v. Indermill (1960) 182 Cal. App.2d 339, 342-343 (building inspector’s approval did not insulate contractor from liability for defective work).]” So what went wrong with the balcony? While the experts try to figure this out, some general observations based on a construction defect case I handled come to mind. A cantilevered balcony is designed to include a waterproofing system. This system has several interrelated components. In the case of the balcony in Berkeley, the construction defects may have included: installation deficiencies of the edge flashing along the perimeter of all decks; failure to properly install deck to wall flashings (i.e., where the balcony is attached to the exterior wall; and/or, the failure to waterproof around handrail post penetrations of the deck membrane. The covering installed on top of the deck may mask these defects. Unless the water came down to the deck through the exterior walls of the apartment buidling, the problems with the deck was due to improper installation of the waterproofing system. It would be very difficult for the owner to perform maintenance on an improperly installed waterproofing membrane and flashing under the deck covering if the defects were not visible. In many instances these problems could be avoided if a contractor would hire a waterproofing specialist to instruct the subcontractor and his employees how to make the building envelope (windows, decks, exterior walls covered by stucco, roof parapets, roof, etc.) "watertight." An article in today's L.A. Times revealed that that decks were inspected within the last year or so in connection with the sale of the property and passed the inspection. However, if the inspection was non-invasive -- if the inspector did not remove part of the deck to expose the rotten joists -- he would have no way of knowing the failure was imminent. As the Court of Appeal held in El Escorial Owners’ Association v. DLC Plastering, Inc., 154 Cal. App.4th at p. 1356, “A case from another jurisdiction reminds us that ‘[s]tructural quality ... is nearly impossible to determine by inspection after the house is built, since many of the most important elements ... are hidden from view.”

High Energy -- New CAL Commercial Real Estate Disclosure Law

noreply@blogger.com (Joel D. Ruben) — Fri, 17 Jan 2014 22:45:00 +0000

After several delays, CAL Assembly Bill 1103 Commercial Energy Disclosure went into effect on January 1, 2014. It requires the owners of all commercial buildings over 10,000 square feet which are being leased, sold, or refinanced to comply with the law. The final phase will go into effect on July 1, 2014, requiring the owners of all commercial buildings over 5,000 square feet to comply. The statute can be found at California Resources Code section 25402.10. What is the purpose of AB1103? The California legislature has set aggressive energy efficiency goals. The AB1103 Commercial Energy Disclosure program was created with the goal of making energy efficiency part of the discussion during a real estate transaction: the ultimate goal is to reduce energy waste in commercial buildings throughout California. The idea is also to benchmark buildings with similar features, allowing potential purchasers to easily shop around for more energy efficient buildings. Not only do energy efficient buildings help to reduce greenhouse gases, but they also usually translate into lower than average utility bills.

What does AB1103 require? Property owners who are going to sell, lease, or refinance an entire commercial building must upload one year’s worth of energy use data and space use attributes into the U.S. Environmental Protection Agency ENERGY STAR Portfolio Manager. This tool will process the building’s energy information and allow the property owner to generate a Data Verification Checklist disclosure form. The disclosure must be provided to the purchaser or lessee no later than 24 hours prior to the execution of the sales contract or lease agreement. In the case of a refinance, it must be provided to the lending institution no later than submittal of the loan application.

AB1103 also requires utility companies to provide the most recent 12 months of energy use data to property owners. The utility company will have the discretion to determine how to provide the energy use data information to the building owner. Currently, only the three major California utility companies (SoCal Gas, SCE and SDGE) are set up to provide the information directly through Portfolio Manager. It is anticipated that others will provide the information via a spreadsheet or similar means and the owner will then need to manually enter the information into Portfolio Manager in order to generate the disclosure form. The utility companies will also have the discretion to deal with confidentiality issues related to providing energy use data to owners when the bills are under the tenants’ names. Although AB1103 does not require any action to alter or update building systems on a property, AB1103 may encourage building owners to install energy efficient building systems to make their properties more marketable.

Who is exempt from AB1103? The most significant exemptions from AB1103 are factory, industrial, and residential properties. If the property in question is a mixed use property containing any of these exempt uses, then the entire building is exempt. Commercial buildings under 5,000 square feet are also exempt. It is also important to note that commercial buildings entering a contract before July 1, 2014 that are less than 10,000 square feet are also exempt. After July 1, 2014, all commercial buildings 5,000 square feet and larger will have to comply.

Who is enforcing AB1103? The property owner is required to release the disclosure report to the lessee, new property owner, lender, and the California Energy Commission (CEC). Enforcement for the law will be complaint driven and the hope from the CEC is that enforcement will be primarily market-driven.

California "Contractor Licensing Laws: the Sword and the Shield"

noreply@blogger.com (Joel D. Ruben) — Mon, 02 May 2011 21:16:00 +0000

In my last post I discussed that even though a home improvement contract is required to be in writing, a contractor could recover compensation even if it was not. In such a case, the court will consider the equities -- whether the homeowner will be unjustly enriched if the contractor is not paid -- if the contractor provided labor and materials without obtaining a written contract.

The story is very different if the contractor never had a contractor's license before the labor and materials were provided. A landscaping contractor faced such a dilemma last year in Alatriste v. Cesar's Exterior Designs, Inc. (2010) 183 Cal.App.4th 656. There the contractor began the job without a landscaping contractor's license, but obtained a license from the State Contractors Licensing Board during the course of the project. The homeowner paid $57,500 to the landscaping contractor before it left the job because of non-payment. The homeowner then sued to get his money back from the landscaping contractor on the basis that it was not licensed when it began the project. The Court of Appeal held that the California Contractor's License Law is both a sword and a shield in the hands of a homeowner who has hired an unlicensed contractor.

A person who utilizes the services of an unlicensed contractor is shielded from lawsuits by that contractor to collect payment for unlicensed work by Business & Professions Code section 7031(a). The California Legislature complemented the shield in section 7031(a) by adding a sword that allows recovery of all compensation paid to a contractor for performing unlicensed work. Section 7031(b) provides in pertinent part: a person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.

The landscaping contractor in Alatriste v. Cesar's Exterior Designs, Inc. made several arguments that the Court of Appeal rejected: the homeowner knew it was unlicensed when it began the job; the homeowner would be unjustly enriched; and some of the labor and materials were provided after the landscaper was licensed. This was a case where the five letter synonym for justice applied: "tough."

The Court of Appeal followed a line of California cases which have held that section 7031 embodies an “all-or nothing” philosophy aimed at deterring persons from offering or providing unlicensed contractor services for pay. Section 7031 does not permit an unlicensed entity to recover partial compensation by narrowly segmenting the licensed and unlicensed portions of their performance. Where applicable, section 7031 bars a person from recovering or retaining compensation for any work performed in connection with an agreement for services requiring a contractor's license unless proper license was in place at all times during such contractual performance. In Alatriste v. Cesar's Exterior Designs, Inc. , the landscaping contractor even had to refund the money paid for materials retained by the homeowner!

The story might have had a happier ending for the landscaping contractor if it previously had a license which expired and which was being reinstated. But that will have to be the subject of another post.

The Tale of a Home Improvement Contract -- What If It is Not in Writing?

noreply@blogger.com (Joel D. Ruben) — Mon, 25 Apr 2011 21:05:00 +0000

Business and Professions Code section 7159 requires that a home improvement contract be in writing. However, in a series of cases dating back to 1980, the Court of Appeal has judicially created an exception to this statute based on the sophistication of the homeowners and whether they would be unjustly enriched if the contractor is not paid. The most recent example of this is Hinerfeld-Ward, Inc. v. Lipian (2010) 188 Cal.App.4th 86. There the Court of Appeal affirmed a judgment by trial court which enforced an oral agreement between the general contractor and the homeowners. The homeowners failed to show they were the type of persons who came within the protection of section 7159 for three reasons: the project was a complex, high-end remodel on which the design continued to evolve over the years of planning and construction; the owners' architect and designer had extensive involvement in the project as their representative; and the owners would be unjustly enriched if contractor was denied recovery. The contractor recovered approximately $202,000 that the homeowners had failed to pay.

To make matters worse for the homeowners, the homeowners had to pay the contractor's attorney's fees ($200,000) and 2% per month of the progress payments withheld (more than $54,000) because the homeowners violated Civil Code section 3260.1, a statute which governs withholding of progress payments on a construction contract. The violation resulted from the homeowners withholding an amount exceeding 150% of the disputed amount from progress payments to the contractor.

California Real Estate Licensing Cases -- 2010

noreply@blogger.com (Joel D. Ruben) — Wed, 05 Jan 2011 23:55:00 +0000

In California, a person acting as a real estate broker without a license cannot recover for services for which a license is required. For example, if a CPA acts as a property manager without a real estate license and collects rents, he may be required to disgorge his management fees even if his services were impeccable. Likewise, a company that arranges financing for real estate is normally required to have a real estate broker's license. But in two cases reported in 2010, the California Court of Appeal held that a person could recover for property management and services to arrange a credit facility for a "bridge" lender to the extent a license is not required to perform the services for which they sought compensation.

In MKB Management, Inc. v. Melikian (2010) 184 CA 4th 796, the plaintiff entered into a property management agreement with the owner of several apartment buildings. The Court of Appeal held that the trial court erred in finding that a property management agreement that called on plaintiff to perform multiple services, some of which required a broker’s license and some of which did not, could not be severed as a matter of law. Even if entire contract was illegal and unenforceable, plaintiff could still recover the reasonable value of services rendered provided that those particular services were not legally prohibited. Similarly, plaintiff’s lack of a contractor’s license would preclude recovery of compensation for acts that require license but not for those actions for which such a license was not required.

In Greenlake Capital, LLC v. Bingo Investments, LLC (2010) 185 CA 4th 731, the Court of Appeal relied on MKB Management, Inc. v. Melikian in holding that a finance company's lack of a real estate broker's license did not bar the company from recovering compensation for indentifying and procuring a credit facility for a lender under a contract to assist in obtaining financing. The contract did not have as a central purpose the provision of illegal services and the parties do not intend at the outset that the financing would take a form that would necessarily violate the license requirement.

So what is the moral to the story of these cases? Get a real estate broker's license (or another appropriate license) if you will be performing services for which a license may be required. But if you don't have a license, read the two cases cited above and argue that some or all of the services for which compensation is sought do not require a license.

Home Buyer's Deposit in a Rising Market

noreply@blogger.com (Joel D. Ruben) — Fri, 19 Feb 2010 23:09:00 +0000

As the residential real estate market begins to show signs of life, it is worthwhile discussing a recent case about who is entitled to a breaching buyer's deposit in a rising market. Kuish v. Smith (2010) G040743.

In December 2005, the plaintiff/buyer offered to purchase the seller's beach front home in Laguna Beach for the modest sum of $14,000,000. After all contingencies were removed, the buyer unilaterally canceled the lengthy escrow in September 2006 without cause. Two months later, the seller sold the house to another buyer for $15,000,000.

The plaintiff demanded the return of his $620,000 deposit since the seller came out ahead by selling the property for $1 million more. But the seller declined the buyer's request to return the deposit and a lawsuit ensued. The Court of Appeal held that the trial court erred in refusing to return the deposit. The Court held that in a rising market, where the seller could not prove actual damages, the seller's retention of buyer's deposit constituted an invalid forfeiture under Freedman v. The Rector (1951) 37 Cal.2d 16 (Freedman). The Court reached that result despite the agreement by the parties that the deposits were "non-refundable."

The purchase agreement in Kuish v. Smith did not contain a liquidated damages provision. Most purchase agreements in California do contain a liquidated damages provision because of the widespread use of the forms promulgated by the California Association of Realtors, a trade association of real estate agents. The liquidated damages provision in the C.A.R. purchase agreement must be initialed by the parties to become effective. If it is, the buyer may lose his or her deposit up to 3% of the purchase price by breaching the agreement after the waiver or removal of all buyer's contingencies. Civil Code section 1675 governs liquidated damages in the purchase of a dwelling of not more than four units. Under that code section, if the deposit is less than 3% of the purchase price, the breaching buyer has the burden of establishing the amount of the deposit is unreasonable as liquidated damages.

This gets us back to Freedman where the CA Supreme Court held that there are circumstances where a liquidated damages provision will not be enforced: "Since [the seller] resold the property for $2,000 more than [the buyer] had agreed to pay for it, it is clear that [the seller] suffered no damage as a result of [the buyer]'s breach. If [the seller] is allowed to retain the amount of the down payment in excess of its expenses in connection with the contract it will be enriched and plaintiff will suffer a penalty in excess of any damages he caused." (Id. at pp. 19-20). In other words, a rising market may prevent a seller from recovering liquidated damages.

The Buyer's Broker Has Commission Claim Upon Signing of Purchase Agreement

noreply@blogger.com (Joel D. Ruben) — Tue, 24 Nov 2009 00:06:00 +0000

In August 2005, when the residential real estate market in downtown Los Angeles was still hot, Standard Pacific Corporation signed a purchase agreement to buy a condominium project near Union Station from Lincoln Property Co. During escrow, the market deteriorated to the point that Standard Pacific was willing to forfeit a $4 million deposit to cancel the deal. In August 2006, Standard Pacific and Lincoln signed a agreement to settle their differences. Lincoln later changed the name of the project and leased the condos instead of selling them.

Standard Pacific's broker, RC Royal Development and Realty Corporation (RC), was left out of the settlement and sued for a broker's commission under its written brokerage contract with the buyer. The trial court ruled in favor of Standard Pacific on a summary adjudication on the grounds that the close of escrow was a condition precedent to the obligation to pay a commission.

RC appealed and the Court of Appeal recently reversed the trial court in RC Royal Development and Realty Corporation v. Standard Pacific Corporation (2009) 177 Cal.App.4th 1410. It argued that its right to a commission ripened under the brokerage contract when Standard Pacific signed the purchase agreement with Lincoln. The brokerage contract provided that the broker would be entitled to a commission if buyer "purchased" the property and specifically defined "purchase" as "any and all acquisitions of any direct or indirect beneficial interest." The most interesting part of the published opinion is the Court of Appeal's discussion that the buyer acquired a "direct or indirect beneficial interest" in the property upon the signing of an executory contract -- in effect, there was a "purchase" of the property when the parties signed the buy-sell contract even though the escrow never closed. In the words of the Court of Appeal: ". . . [E]quitable title is a 'beneficial interest,' as it is one stick in the bundle of full legal rights to real property. Once Standard Pacific entered into a buy-sell contract containing all of the essential terms of purchase, it obtained equitable title."

If Standard Pacific had conditioned its obligation to pay a commission upon the close of escrow, the result probably would have been different. In that case it would not have been subject to the general rule of law that, "unless the contract provides otherwise, the broker earns his commission upon the principal's entry into a binding contract for a purchase subject to the brokerage contract regardless of whether the sale is consummated." (See, R.J. Kuhl Corp. v. Sullivan (1993) 13 Cal.App.4th 1589,1599-1600.

Sham Agreements -- They Will Not Take You Where You Need to Go

noreply@blogger.com (Joel D. Ruben) — Wed, 19 Aug 2009 02:42:00 +0000

During the 1960's, Sam the Sham and the Pharaohs was a rock band which reached great heights considering that their big hit was "Wooly Bully." In a way, Sam was modest to call himself the Sham because no one could deliver "Wooly Bully" or "Little Red Riding Hood" like he and the Pharoahs.

Fast forward 40 years. The California Court of Appeal has rejected sham agreement prepared "solely for property tax purposes" -- to avoid the reassessment of a 50% interest in a shopping mall transferred several years earlier by the owner, Equitable Life, to a holding company and then to a LLC. The case is of interest to lawyers and accountants who advise clients how to use entities such as limited liability companies to structure the transfer of real estate without triggering a reassessment of the property under Proposition 13.

The Court reasoned that since the agreement that had no economic substance other than to avoid property tax liability, it was a sham document that could not be given effect. For a change in ownership to occur, there must be a transfer of legal title and of that transferor’s beneficial or equitable interests in that property. For purposes of property tax reassessment, a 100 percent change in ownership occurred when record title in property was transferred by Equitable Life to the holding company as its initial capital contribution. Even though Equitable Life was entitled to receive distributions if the holding company made a profit and had a right to participate in certain management decisions, those benefits and rights derived from Equitable Life’s membership interest in the holding company, not from ownership of the transferred property. Thus, the transferor did not retain a beneficial interest in the property itself. See, Fashion Valley Mall, LLC v. County of San Diego - filed August 17, 2009, Fourth District, Div.One, 2009 SOS 4956. To read the case, click here.

Landlord Beware -- Trespass and Forcible Entry and Detainer

noreply@blogger.com (Joel D. Ruben) — Tue, 21 Jul 2009 21:28:00 +0000

The crash last week of the Oscar Meyer Weinermobile into a home in Wisconsin is as good a reason as any to write a post about recent California case concerning trespass and forcible entry. The case is a reminder that a landlord cannot use self-help to evict an occupant of an apartment.

Lori Spinks was an employee of Mobile Medical Staffing, LLC ("Mobile"). Mobile rented an apartment in Sunnyvale for Spinks to occupy while on assignment. Spinks had surgery for an injury to her hand suffered on the job, and Mobile terminated the apartment lease and told the landlord to change the locks on the doors. The case got to the Court of Appeal after the landlord successfully moved for summary judgment on the grounds it did not owe any duty to Spinks because its lease was with Mobile.

The Court of Appeal reversed; its opinion reads like a primer on the rights of third party beneficiaries of contracts, the difference between a lease and a license, and causes of action for breach of the covenant of quiet enjoyment, trespass, forcible entry, invasion of privacy, etc. The Court found that there were a number of triable issues of facts on these claims.
While not breaking new ground, the opinion in Spinks v. Equity Residential Briarwood Apartments (2009) 171 Cal. App. 4th 1004 serves as a timely reminder in these difficult times that a party in peaceful possession of real property is protected by the forcible entry and detainer statutes even if he or she is technically a trespasser.

Cal Foreclosure Consultants Must Now Register & Post $100K Bond

noreply@blogger.com (Joel D. Ruben) — Sun, 12 Jul 2009 02:19:00 +0000

As the mortgage crises began, I received a number of unsolicited inquiries from people who were interested in starting a business to help borrowers in distress by purchasing and leasing back their residence or negotiating a loan modification. I explained to these callers that they would be acting as "foreclosure consultants" and would be subject to statutes in the Civil Code that regulate foreclosure consultants. Invariably, the callers were not aware of these statutes and were not interested in paying a lawyer to advise them how to follow the law. Apparently budding foreclosure consultants fancy the idea of a new business with no start up costs.

As the mortgage crises became worse, there stories in the news about unscrupulous people who would take a fee up-front to negotiate a loan modification (this is illegal unless an exemption applies) and then do nothing for the fee. The California Legislature was apparently moved by these stories to amend Civil Code sections 2945, et seq. effective July 1, 2009 so that "foreclosure consultants" are now require to register with the State and post a $100,000 bond. To learn more about the changes to the laws governing "foreclosure consultants," and the consequences if the laws are violated, click here or here.

LAW ON THE WEB -- A California Law Library Compliments of King Hall School of Law, UC Davis

noreply@blogger.com (Joel D. Ruben) — Sun, 03 May 2009 15:46:00 +0000

I graduated from the UC Davis School of Law in 1977. We had one of the first computer terminals in the country that accessed a new service for legal research called Lexis. But for the most part, we did legal research the old fashioned way using law books in our extensive Law Library.

Recently I visited the website for UC Davis School of Law and found a free California law library available on line entitled, "Law on the Web." For lawyers and non-lawyers alike, it is worth a visit by clicking here.

ESCROW EXTENSIONS -- BE REASONABLE!

noreply@blogger.com (Joel D. Ruben) — Thu, 23 Apr 2009 14:59:00 +0000

It has been the law in California for some time that a Landlord must be reasonable in consenting to the assignment of a commercial lease. The California Court of Appeal has recently held that a seller of real property must act in an objectively reasonable manner when asked to extend the close of escrow.

In Peak-Las Positas Partners v. Bollag, the seller told the buyer he did not care how long it took the buyer to entitle a residential development project. But when the close of escrow approached, the seller refused to extend escrow. Imagine the buyers' surprise -- the buyer had already paid 98 percent of purchase price, had invested $5 million in project development costs and had diligently pursued the conditions for closing the sale.

The Court of Appeal held that the seller acted in an objectively unreasonable manner so the buyer would not forfeit the $465,000 it paid for the property and the $5 million in project costs.

A review of the facts demonstrates that the seller invented reasons late in the escrow to refuse the extension. First, the seller claimed he had landslide liability concerns. But the seller had observed soil failures on his property before purchase agreement was signed, and admitted he made no inquiries about insurance costs or availability. Second, the seller claimed the buyer failed to keep him informed about the entitlement processing. To the contrary, the buyer informed the seller about the progress of the land use application and the seller never complained that he lacked information. Even if the buyer had breached its obligation under the purchase agreement to keep the seller informed, the Court of Appeal said it would not constitute reasonable or good faith grounds for the seller to refuse the requested extension.

For guidance about what is objectively reasonable in a commercial real estate transaction, click here to read the opinion in Peak-Las Positas Partners v. Bollag.

LOAN MODIFICATION UPDATE -- Help for Owners Who Are Upside Down?

noreply@blogger.com (Joel D. Ruben) — Mon, 23 Mar 2009 01:01:00 +0000

This Blog began on in late 2006 with the mortgage debacle on the horizon. A number of posts have been devoted to mortgage fraud, foreclosure consultants, home equity purchasers, loan modifications and the like. Recently, the Federal Government has launched new initiatives to promote loan modifications.

Today the Los Angeles Times ran an article on page 1 of the Business Section with a good but very general overview about mortgage modifications. The author advises borrowers to look for free help from federal programs or non-profit legal services. The article is entitled, "IS IT HOPE OR HYPE FOR HOMEOWNERS?"

The advice to look for free loan aid is worth considering. Many "opportunists" have entered the loan modification business as a way to make a quick buck from distressed homeowners. As we have discussed in other posts, it is very difficult to provide mortgage modification assistance for a fee in California under to State laws regulating "foreclosure consultants." In a future post, we will discuss how the laws governing foreclosure consultants will change effective July 1, 2009.

2009 Trends in Environmental Law and Due Diligence

noreply@blogger.com (Joel D. Ruben) — Thu, 08 Jan 2009 23:44:00 +0000

Environmental regulation has come a long way in the last 100 years. But environmental due diligence has been effected by the recent downturn in the commercial real estate market. In addition, there are some new laws that commercial real estate owners, lenders and brokers should be aware of. Joe Derhake is a environmental engineer and a principal at Partner Engineering and Science, Inc. based in El Segundo, California. Mr. Derhake is a friend of this Blog and its author. He was recently interviewed by Jessica Lillian of MortgageOrb.com, a blog for commercial real estate professionals. She asked Mr. Derhake about the effect of the lending slowdown on environmental due diligence on commercial properties, and about the trends in environmental law for commercial property in 2009. The interview is reprinted below.

Q: Have the more stringent lending and underwriting standards these days translated into more attention paid to the environmental component of the due diligence process?

Joe Derhake: The short answer is yes, we are definitely seeing a trend in that direction. Lending decisions are influenced by deal people and credit people, and as of late, the credit side is the more powerful group. For the environmental consultant, that means more thorough due diligence. Lenders are now more likely to order Phase I Environmental Site Assessments instead of limited products.

When contamination is found, however, the enthusiasm among lenders for quantifying the environmental problem and trying to underwrite around the problem is low. Lenders would prefer to pass on the deal.

Q: Vapor intrusion has received a lot of attention lately - though many in the lending community seemed somewhat unaware of it until recently. What emerging environmental issues are you seeing now?

Derhake: While the ASTM 2008 vapor intrusion standard created a lot of discussion in the environmental professional community, clients have been hesitant to use the new standard, instead relying heavily on the Phase I Environmental Site Assessment to address these environmental concerns.

An up-and-coming environmental issue is energy consumption, and California is leading the charge with Assembly Bill 1103, which mandates that all California nonresidential buildings participate in the Federal Energy Star program beginning in January 2009.

Benchmark data showing the building's relative energy consumption performance will be collected throughout 2009. After Jan. 1, 2010, building owners will be required to disclose these data to buyers, lessees and lenders. Energy Star will rate buildings against other buildings within the same class - adjusted for climate, but not age. Buildings within the top quartile are eligible to be recognized as an EPA Energy Star Building and can use the Energy Star label to communicate their energy efficiency to tenants, lenders and other stakeholders.

Not only will highly ranked buildings be more likely to capture a green premium when the property sells or rents, but analysis of these data will yield opportunities of energy savings and, ultimately, improvement of net operating income.

Will green buildings ever receive any sort of preferential treatment from lenders? Bank of America, Wells Fargo Bank and Citibank are among the national lenders that have committed themselves to billions of dollars of green lending.

To date, much of the green lending has focused on building green and LEED construction. However, Energy Star-rated buildings are gaining more and more attention, and with the data required by AB 1103 becoming available in the next year, lenders will have more objective standards to judge their collateral.

Lenders could easily aggregate their portfolio's Energy Star Rating and set goals to improve their portfolio over time. It is possible that other states will follow suit and implement similar building energy disclosure requirements in the future.

Q: What steps can cash-strapped financial institutions take to manage the costs involved with environmental assessments?

Derhake: Environmental policy can be thrifty and smart. To be thrifty, lenders should consider limited environmental products, such as environmental transaction screens and historical environmental reports. Historical environmental reports are inexpensive (typically under $500) and focus solely on the history of the property.

This is a perfect product for an asset that clearly has no issues, due to a benign use such as residential or office, and most reasonable concern is centered on what was there before the current development. If environmental concern is identified during the historic research, further due diligence can be conducted.

Q: What are the most common forms of contamination you are finding these days? Are there any recent technological advancements in remediation strategies?

Derhake: The types of contamination that we find are across the board. However, the type of contamination that is receiving greater scrutiny by regulators is volatile organic compounds, which include chemicals such as benzene (an additive in gasoline and an industrial solvent) and tetrachloroetheylene (PCE, a drycleaning solvent). These volatile chemicals are toxic and represent a vapor intrusion risk.

The concern that these chemicals will migrate up into buildings and create a cancer risk for occupants is driving cleanups. Many state regulators require soil vapor testing for all sites. To achieve closure, a property owner has to show that the levels of soil vapor are below action levels. Generally speaking, soil vapor-based action levels are more stringent than soil matrix-based action levels.

Volatile organic compounds have historically been remediated via soil vapor extraction and dual phase extraction. Each of these technologies involves more or less sucking the contamination out of the ground. We install vapor extraction wells, connect the wells to large blowers and pull. The toxic vapor stream extracted must then be treated.

In-Situ Chemical Oxidation (ISCO) is proving to be a significant alternative technology. ISCO involves injecting a reactive chemical into the ground, and the reactive chemical oxidizes the contaminant upon contact. This technology works very quickly, and for some contamination plumes, it is very cost-effective.

Q: What is the latest on the regulatory front for environmental compliance/liability issues? What might be on the horizon for 2009?

Derhake: California, Oregon and other states have published soil vapor action levels. When professionals are cleaning a site, the question becomes, "How clean is clean?" Environmental professionals compare our testing data to the action levels.

Historically, we collected soil samples and compared these data to soil matrix action levels. Lately, closure sampling must also consider soil vapor analysis, and we must compare these to far more stringent soil vapor action levels.

This shift is profound, as sometimes it means that the remedial system must run another year or more.

The Federal EPA has not yet pushed for any such soil vapor standards. With a new administration coming in 2009, we may see the Federal EPA addressing this issue. Commercial real estate owners do not benefit from stricter standards, as it likely will increase cleanup costs. However, greater uniformity from state to state makes environmental risk management easier.

To learn more about Joe Derhake's firm, Partner Engineering & Science, Inc., click here.

Real Estate Contracts -- What is Expressed is Understood; What is Not Can Be Implied By the CA Supreme Court

noreply@blogger.com (Joel D. Ruben) — Fri, 02 Jan 2009 18:47:00 +0000

The legendary folksinger, Pete Seeger, once offered these words of wisdom about written contracts: "Education is when you read the fine print. Experience is what you get if you don't."

In recent years, many individuals and companies decided to obtain experience instead of education by signing loan documents or issuing mortgage backed securities without reading the fine print.

But what if a written contract is silent on an important deal point? You cannot read what isn't there, whether it is in bold or fine print. In late December 2008, the California Supreme Court told us "it ain't necessarily so" in Patel v. Liebermensch (filed 12/22/08) S156797.

In that case, the parties (apparently acting without lawyers) entered into a written lease of a condo with an option for the tenant to buy. The written option contained the essential terms of the purchase except for the time of payment. It was also silent about using an escrow for the purchase. A dispute arose between the parties after the tenant exercised the option to buy, and they could not agree to the terms of a purchase agreement. The tenant, Patel, brought a specific performance action to enforce the option agreement. Patel won at trial and lost before the Court of Appeal which ruled the option agreement was too uncertain to specifically enforce. (See, August 23, 2007 post about the Court of Appeal opinion in this case.)

The Supreme Court had little trouble filling in the blanks. First the Court reasoned, " . . . while the parties are obviously free to include escrow specifications in the contract of sale, they are not necessary terms." Once you assume the parties implicitly decided to have an escrow, the rest is easy. "In the absence of a specified time of payment, a reasonable period is allowable under Civil Code section 1657." In other words, the Court concluded that it is reasonable to assume the purchase price would be paid when the implied escrow closed.

This opinion offers both education and experience for parties to a real estate contract in California. If you are willing to invest the time and money to take your case to trial, then to the Court of Appeal and finally to the Supreme Court, you can get a definitive opinion about what the parties did (and did not) agree to. This took about 3 years in the Patel case. During that time, the real estate market declined substantially and it became much more difficult to obtain financing.

If you want to save time and money, it is better to hire a lawyer at the outset so that your agreement covers the essential points of agreement and the incidental points as well. In the case of an option to buy real estate, you can agree to the form and content of the purchase agreement itself to avoid problems down the road.

After the Fall -- What Now?

noreply@blogger.com (Joel D. Ruben) — Fri, 26 Dec 2008 22:23:00 +0000

On December 26, 2006, I wrote a post entitled "'Creative' Financing -- The Slippery Slope in 2007."

On December 28, 2007, I wrote a post entitled "Non-Traditional Mortgage Products -- The Slippery Slope Became an Avalanche."

Now it is time for my third year end post. I read an insightful column in today's the Wall Street Journal about the global economic reversal. It is entitled, "The Economic News Isn't All Bleak" by Zachary Karabell. In the last paragraph of his column, Mr. Karabell observes:

"The rush to declare the future bleak has obscured the fact
that no one knows the outcome of an unprecedented event.
No one. The worst course in the face of uncertainty is blind
faith in conventional wisdom and past patterns. The best is
to stay humble in the face of the unknown, creative and
unideological about solutions, and open to the possibility
that as quickly as things turned sour they can reverse."

To the loyal readers of CalRealEstateLawBlog.com, watch out for wolves in sheeps' clothing and have a productive and healthy 2009!

New Foreclosure Hurdles in California Helping Distressed Homeowners

noreply@blogger.com (Joel D. Ruben) — Tue, 18 Nov 2008 22:42:00 +0000

Section 2923.5 of the California Civil Code went into effect on September 6, 2008. This statute, which applies only to owner-occupied, residential real property, was enacted to help distressed California homeowners. Section 2923.5 requires a lender seeking to foreclose to contact the borrower "in order to assess the borrower's financial situation and explore options for the borrower to avoid foreclosure." The statute applies to all loans made from January 1, 2003 through December 31, 2007.

Section 2923.5 is complicated and sets up a number of requirements that must be satisfied by the foreclosing party or its authorized agent. The contact requirements of section 2923.5 are very specific. The foreclosing party must contact the borrower, in person or by telephone, to assess the borrower's financial situation and explore options to avoid foreclosure. If contact is not made by phone or in person with the borrower, the foreclosing party must send a certified letter to the borrower with a return receipt requested. If the foreclosing party is unable to contact the borrower, it must fulfill certain due-diligence requirements outlined in section 2923.5. In addition, the statute imposes a 30‑day waiting period after the foreclosing party fulfills the contact or due-diligence requirements.

After the foreclosing party has met the requirements of section 2923.5, in order to ensure compliance, the foreclosing party must submit a declaration along with the recording of any notice of default or its notice of sale, if the foreclosure proceedings were initiated prior to September 6, 2008.

The foreclosing party does not have to meet the statutory requirements in certain limited situations: (1) if the borrower surrendered the property; (2) the borrower contracted with an organization, person or entity whose primary business is to advise people who have decided to leave their home and seek to extend the foreclosure process and avoid their contractual obligations; or (3) the borrower filed for bankruptcy and the proceeding has "not been finalized."

A foreclosing party must be well versed in the detailed requirements of section 2923.5 and follow them to the letter to avoid further delays in the foreclosure process. A distressed homeowner should also study the new statute to gain the benefits of its protection. In addition, a distressed homeowner should consult with a CPA about the tax consequences of a foreclosure or loan modification.

More changes in California's foreclosure laws are in the offing. Governor Schwarzenegger has proposed a 90 day foreclosure moratorium to pressure banks to modify loans. The California Legislature has not yet acted on the Governor's new proposals.

The '08 Wildfires -- A Helping Handbook

noreply@blogger.com (Joel D. Ruben) — Sun, 16 Nov 2008 16:48:00 +0000

Sadly, this is a repeat of a post from November 2007:

The recent wildfires have wreaked havoc on the lives of many families in Southern California. As a public service to those families, the Los Angeles County Bar Association and Morrison & Forester have published a "Helping Handbook" available on line. This handbook contains a compendium of California and Federal real estate and insurance law that will assist wildfire victims in the recovery process.

To read the Helping Handbook, click here.

LOAN MODIFICATION SERVICES & ADVANCE FEES -- Foreclosure Consultants Revisited

noreply@blogger.com (Joel D. Ruben) — Sat, 18 Oct 2008 16:20:00 +0000

Millions of homeowners nationwide want to modify the terms of their loans but do not know how to go about it. This has created growing business opportunity for people who want to provide loan modification services for a fee. Many of these people are new to this business and may not be aware of the law in this area. In California, for example, there are rigorous legal requirements for real estate licensees who want to earn fees by helping homeowners modify their loans.

In an earlier post, I discussed the California statutes (California Civil Code sections 2945, et seq.) that regulate foreclosure consultants; these statutes apply when a real estate license attempts to negotiate a loan modification for a homeowner after he or she has received a Notice of Default recorded under Civil Code section 2945. A foreclosure consultant is prohibited from accepting payment in advance, even if the foreclosure consultant is a licensed California real estate broker. (In contrast, licensed California lawyers are exempt from these statutes.)

But what if a real estate licensee agrees to negotiate a loan modification for a homeowner who has not yet received a Notice of Default and the licensee wants to be paid in advance? The California Department of Real Estate has created a procedure for a real estate licensee to accept advance fees for loan modification services when a notice of default has not yet been recorded. First, the licensee must apply to the DRE for its approval of an advance fee agreement. Once this approval is obtained, the broker must enter into the agreement with a borrower/homeowner who retains the broker and pays a fee in advance for loan modification services. It appears that very few California real estate licensees have obtained approval of an advance fee agreement yet.

In summary, a homeowner who has not received a Notice of Default commencing a foreclosure should only pay fees in advance to a broker who presents an agreement that has been approved by the DRE (the homeowner should call the DRE to confirm the agreement has been approved).

If the homeowner has received a Notice of Default, he or she should not pay any fees in advance. The homeowner should confirm that the foreclosure consultant has the bond required under Civil Code section 2945.11. If these requirements are not met, the homeowner has extensive civil remedies under Civil Code section 2945.6, and the foreclosure consultant may be subject to criminal penalties under Civil Code section 2945.7.

HOME SWEET HOME --The Price of a Great Love Affair

noreply@blogger.com (Joel D. Ruben) — Sun, 05 Oct 2008 16:54:00 +0000

On June 13, 2005, TIME magazine reminded us that Americans were at the height of a great love affair with residential real estate. On October 3, 2008, we learned that every American taxpayer, now and in the future, would share in the cost of mortgage defaults and the rescue plan through the Troubled Assets Relief Program (TARP). The recent federal "rescue" legislation and the government's takeover of Fannie Mae and Freddie Mac make the United States the largest mortgage company in the world.

Two maxims of California jurisprudence provide food for thought in assessing the fallout from the messy aftermath of the latest residential real estate binge: "He [or she] who takes the benefit must bear the burden"; and, "He [or she] who consents to an act is not wronged by it." California Civil Code sections 3521 & 3515.

With that said, let us acknowledge the participants who benefited from and consented to the questionable transactions in the United States that have resulted in extraordinary actions by governments around the developed world:

Buyers who used "creative financing" while they were in denial about the consequences of a variable interest rate loan readjusting and the inevitable decline in housing prices;

Mortgage brokers and real estate brokers who did not adequately warn buyers about the credit risk of buying a home without a down payment or a fixed rate loan;

Appraisers who, in some cases, participated in the validation of inflated prices or worse; i.e., mortgage fraud;

Mortgage companies and banks who defied reality by making loans without following reasonable underwriting standards;

Investment bankers who "securitized" pools of loans ("mortgage backed securities") that were not properly underwritten or backed by capital in the event of widespread defaults;

Rating companies that bestowed their pedigrees on the mortgaged backed securities at they same time they were compensated by the investment bankers;

Hedge funds, insurance companies and investment bankers who wrote contracts ("credit default swaps") to pick up the losses on the mortgage backed securities without the financial ability to do so in the event of widespread defaults;

And the United States government which failed to warn, regulate and control the participants before it became the world's biggest mortgage company.

PROTECTION FOR BUYERS' BROKERS AS THE BUBBLE BURSTS

noreply@blogger.com (Joel D. Ruben) — Fri, 26 Sep 2008 17:05:00 +0000

Four years ago, during the week of 2004 Democratic Convention, I vacationed with my family in San Diego, California. One day I read a local newspaper and learned that the number of licensed real estate salespersons in San Diego County had skyrocketed to an all time high. The article was like the ringing of a bell, warning that the real estate market had reach a top.

A recently published California case arises from speculation during 2002 in the downtown San Diego condominium market and the slowing of that market. More importantly, it affirms that a buyer's broker will be protected under under an exclusive buyer-broker commission agreement when the buyer defaults. In Schaffter v. Creative Capital Leasing Group, LLC (2008) D047364, the Fourth Appellate District held that a buyer's broker is owed a commission if the buyer defaults after the broker locates residential property and the buyer signs a purchase agreement.

If Schaffter, the buyer tied up two new condominiums in lengthy escrows with the hope that they would significantly appreciate in value before the closing. (One of the buildings is pictured above.) When the condos did not appreciate enough to satisfy the buyer, it refused to close the escrows. The Court of Appeal found that the principal of the buyer, ". . . never intended to finalize the purchases if the market did not perform as he expected, or to pay commissions on units that did not close escrow."

The buyer's primary defense -- that it was not in default under the commission agreement because the developers decided not to sue for breach of contract -- was disingenuous. The buyer's principal apparently was successful in threatening and bullying the developers into accepting the buyer's cancellations. The Court of Appeal rejected this "defense" and affirmed the ruling of the trial court that: "'there are consequences when people cancel contracts' without valid reason. Here the consequence is CCLG's payment of commissions."

Buyer's brokers will be heartened by the holding in the Schaffter case and the Court's recognition that a commission agreement should be honored when a purchase is cancelled without justification.

ARBITRATION -- Revisited and Reviewed

noreply@blogger.com (Joel D. Ruben) — Sat, 30 Aug 2008 03:51:00 +0000

This Blog recently criticized non- judicial arbitration because, among other problems, the arbitrator can render a binding award without following the applicable law. The California Supreme Court has ruled that the parties may agree by contract to avoid this pitfall.

In the recent case of Cable Connection Inc. v. DIRECTV, 2008 DJAR 13491, the Supreme Court held that parties to an arbitration agreement can agree in advance to judicial review of legal mistakes by the arbitrator. This is significant because many people sign arbitration provisions in this State unaware that arbitrators are not required to follow the law. For example, an arbitration provision is standard in the commonly used California Association of Realtor's form Purchase Agreement for residential real estate. If both parties initial the arbitration provision, they have agreed to binding arbitration without judicial review for legal mistakes.

Justice Carol Corrigan writing for the majority in Cable Connection Inc. v. DIRECTV explained that judicial review of an arbitrator's decision will still ease the pressure on California's trial courts. "The judicial system reaps little benefit from forcing parties to choose between the risk of an erroneous arbitration award and the burden of litigating their dispute entirely in court. Enforcing contract provisions for review of awards on the merits relieves pressure on congested trial court dockets."

What can you do to preserve the right to judicial review of an arbitrator's award. First, you must have appropriate language in the agreement to arbitrate. The provision in Cable Connection Inc. v. DIRECTV read: "The arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for such error."

Second, there must be a record made in the arbitration that is reviewable by a court. Often times awards in arbitrations merely something like, "Claimant is awarded $________ against respondent, plus costs." At the very least, a party should request a "reasoned decision" by the arbitrator in a form similar to a Statement of Decision that is issued by the Judge in a Superior Court trial. Because without a "reasoned decision" there may be nothing to review.

Loan Modifications -- The Federal Housing Bill

noreply@blogger.com (Joel D. Ruben) — Sun, 27 Jul 2008 03:37:00 +0000

Congress has passed Federal housing legislation to address the housing downturn, the subprime crises, and the problems confronting Fannie Mae and Freddie Mac. Once signed by the President,this legislation will impact the ability of homeowners to modify or renegotiate their mortgages. Any reader who was interested in the last post about negotiating a loan modification should read the overview of the new legislation in the July 25, 2008 New York Times entitled, "A Housing Bill That Has Something For Everyone." To read the article, click here.

9 Hurdles for a Borrower to Negotiate a Loan Modification

noreply@blogger.com (Joel D. Ruben) — Mon, 16 Jun 2008 22:49:00 +0000

With the increase in pending foreclosures and mortgage defaults, many borrowers are feeling squeezed and are looking for relief from their lenders. The following checklist may be be helpful in approaching a lender about a loan modification:

1. A loan modification is may be available to a borrower who was unable to make regular payments for several months due to exigent circumstances such as an illness, the loss of a job, or a divorce, but who has now solved that problem. The lender will want to see a "hardship letter" and detailed financial information that demonstrates the borrower can resume regular payments on modified terms. The modified terms may include a lower, fixed interest rate with the delinquent amounts added on to the principal of the loan. In a few cases, the borrower may persuade the lender to "write down" (decrease) the principal balance.

2. If a borrower is delinquent, the lender will probably require a "good faith" payment of a substantial part of the delinquency when the loan modification is consummated. A borrower who has put their mortgage payments in the bank while trying to work out a loan modification has a much better chance of success than a borrower with no money to put on the table.

3. The borrower will have to get past the financial institution's collection department and to a person is a position of authority in the loss mitigation department to negotiate a loan modification. This is one area where a lawyer can be helpful.

4. When a borrower is trying to convince the lender that he or she can now make payments on new terms, the lender will want to see historical financial information. If the borrower provides information that contradicts their original loan application, the borrower may be unwittingly creating a record that will give rise to an action for mortgage fraud. (See my January 14, 2007 post.)

5. If a non-lawyer offers to perform the services described above and asks for the payment of their fees in advance completing the services, ask them if they are licensed by the State of California and, if so, how they are licensed. Can the consultant demonstrate to you that they are exempt from the laws regulating "Foreclosure Consultants"? If not, can they demonstrate to you that they are providing the disclosures and documents required of Foreclosure Consultants. (See my January 30, 2007 post.)

6. If the borrower has more than one loan secured by their property, it will probably be necessary for all lenders to agree to the terms of the loan modification before it is finalized. If the modification of the first trust deed loan puts the holder of the second trust deed at greater risk of a default under the first deed of trust, the holder of the first will lose its priority without the consent of the holder of the second to the modification agreement.

7. It will take months, not days, to negotiate a loan modification with a lender, so start as soon as possible after you go into default. Once the borrower is served with a Notice of Default to commence a non-judicial foreclosure, he or she should begin the process of contacting the lender about a loan modification -- do not wait until you receive a Notice of Trustee's Sale.

8. Keep all your loan records well organized, including all communications with the lender about the loan.

9. Consult your CPA or tax adviser to determine if the modified loan will result in any adverse income tax consequences.

CONTRACTOR'S STATE LICENSE LAW -- When Is Ignorance Bliss?

noreply@blogger.com (Joel D. Ruben) — Fri, 23 May 2008 01:21:00 +0000

A few months ago, I was retained to draft a construction contract by a client who is building a house in my area. During this assignment, I checked the website of the California Contractor's State License Board to see if the general contractor selected by my client was licensed. The contractor did not have a license in the name of his corporation and did not have worker's compensation insurance. My client selected another contractor who had a license and insurance.

A recent Court of Appeal case, Great West Contractors, Inc. v. WSS Industrial Construction, Inc. (2008 Cal. App. LEXIS 627) provides a good overview of the circumstances under which a licensed contractor can be denied any payment for its work. In that case a steel subcontractor sued the general contractor for labor and materials it provided for a school. The steel subcontractor ("WSS") was not licensed when it bid the job, did preliminary work under the subcontract (preparing plans and ordering materials), and began to invoice the general contractor. WSS became licensed before the subcontract was signed by both parties and before it did the lion's share of its work under the subcontract.

The Court of Appeal reversed a ruling by the trial court in favor of WSS, holding: "With one exception, the [Contractor's State License Law] forbids a contractor from recovery -- in law or equity -- on an otherwise valid claim for performance of any service for which a license is required if the contractor was unlicensed at any time during performance of the work." (Emphasis added.) This "bright line" test requires contractors to be licensed at the commencement of its services. If the contractor is aware of the problem and fixes it during the project, it is a case of "too little, too late."

But as the Court of Appeal said in that case, there is a statutory exception which is subject to interpretation by California courts. Under Business & Professions Code section 7031(e), a contractor can recover money in a civil action if it proves there has been "substantial compliance" with the licensure requirements: (1) the contractor had been duly licensed in this state prior to the contract or act; (2) it acted reasonably and in good faith to maintain proper licensure, (3) and did not know or reasonably should not have known that it was not licensed. This means that a contractor with an expired license can recover for work done without a license if a court finds that its ignorance of the law and the facts was excusable -- even if the excuse is a weak one. See, e.g., ICF Kaiser Engineers, Inc. v. Superior Court (1999) 75 Cal. App. 4th 226 (the appellate court excused Kaiser from compliance with the licensing law because it was a large company and could not be expected to keep abreast of developments that resulted in the suspension of its license). This is a case where ignorance was bliss.

But the owner who contracts with an unlicensed contractor is unlikely to achieve a state of bliss if a worker is injured on the job. Assuming the unlicensed contractor does not have worker's compensation insurance (a likely state of affairs), the injured worker may be deemed an employee of the owner. Labor Code section 2750.5. A possible consequence is that the unlicensed contractor who is injured on the job will make a worker's compensation or personal injury claim against the owner. This is a case where ignorance will not be bliss -- an owner should determine if a contractor is licensed and has worker's comp insurance before he or she signs a construction contract.

To read a recent Los Angeles Times article about the problems that can be created by hiring an unlicensed contractor, click here.