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Keeping Current - Property

Keeping Current–—Property Editor: Daniel B. Bogart, Chapman University School of Law, One University Drive, Orange, CA 92866, bogart@chapman.edu. Contributing editors: Prof. James C. Smith andProf. William G. Baker.

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

CASES

BANKRUPTCY: Sale cuts off lessee’s right to possession. After execution of a 10-year lease of an Indiana warehouse, the lessor filed for bankruptcy. Before a decision by the debtor-lessor to assume or reject the lease, the court approved a sale of the debtor’s assets to its mortgage lenders. The purchaser evicted the lessee, which then claimed a right to remain in possession under Bankruptcy Code § 365(h). In a case of first impression at the circuit level, the court held that the sale extinguished the lessee’s right to remain in possession. Section 363 allows a sale “free and clear of any interest” in the property only if one of five conditions is met. One condition allows a sale if “applicable nonbankruptcy law permits sale of such property free and clear of such interest.” According to the court, because the lease was unrecorded, the parties did not dispute that the debtor’s sale of the property free and clear of the lease was “authorized” and “permissible.” Why the lessee’s attorneys would make such a concession is unclear. If the rationale is that a sale to a bona fide purchaser would extinguish the unrecorded lease, from the facts it appears that the lessee was in possession both upon filing of the bankruptcy petition and closing of the sale. Indiana has a race-notice recording act, so a BFP cannot take free of an unrecorded lease when the lessee is in possession. Professor Pat Randolph strongly criticized this decision in DIRT, his Internet discussion group. See http://dirt.umkc.edu/DD2003/AprilDD2003/April/042903.htm. Precision Industries, Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003).

COTENANTS: Ousted cotenant may collect share of rental value. A brother and sister bought a house as tenants in common, where they both lived. One year later, after they began experiencing difficulties with one another, he told her that he was putting the house up for sale and she “better find a place to live.” She promptly moved out. After he commenced litigation, at her request, the court ordered partition by sale, with the house to be listed with a real estate broker. The court rejected his argument that the partition statutes required an auction sale. Moreover, the court granted her a judgment for one-half of the rental value of the house from the time she vacated until the time of sale. In a case of first impression for Idaho, the court ruled that the friction in their personal relationship amounted to an “ouster” and that an ousted cotenant has the right to a proportion of the property’s rental value. Cox v. Cox, 71 P.3d 1028 (Idaho 2003).

DEEDS: Gift to grantee’s heirs “by her husband” excludes adopted child. In a 1945 deed, husband and wife conveyed a life estate in land to their daughter and son-in-law, using the following language: “unto Carl Brown and Thelma Brown and unto Thelma Brown’s heirs by Carl Brown and unto their heirs and assigns forever.” At the time, Thelma and Carl had one 11 year old natural-born daughter. A decade later they adopted a son. After Thelma and Carl died, their son claimed a one-half interest in the property, but their daughter claimed it all. The court held for the daughter, reasoning that the words “heirs by Carl Brown” unambiguously limited the remainder to natural children. This conclusion is questionable. Clearly, the grantors intended to exclude any of Thelma’s future children, should she remarry after her husband’s death or divorce and then have more children. One cannot tell what they would have wished had they known Thelma and Carl would adopt and raise a boy. He was, in one sense, “Thelma’s heir by Carl” (raised by both of them). The presumption should be that the grantors would want natural and adopted grandchildren to share the gift. Brown v. Johnson, 97 S.W.3d 924 (Ark. Ct. App. 2003).

EASEMENTS: Implied easement requires reasonable necessity. In 1974, when a restaurant and an adjacent shopping mall were under common ownership, the owner sold the restaurant. At the time, the restaurant used part of the mall parking lot for customer parking and for truck deliveries. The restaurant purchaser continued this use for over 20 years, until the mall owner tried to stop these uses to build an auto parts store on that space. The purchaser brought an action to establish an easement on two grounds—prescription and implication. The mall owner prevailed on the claim of prescriptive easement because the restaurant customers and delivery trucks were using the parking lot with the permission of the mall owner, just as were other members of the general public. As to an easement implied from prior use, the state supreme court upheld a summary judgment for the mall owner for customer parking but reversed and remanded for delivery trucks. An easement is implied only if the use is reasonably necessary to the enjoyment of the dominant estate. Because the restaurant had its own parking lot, customer parking in the mall lot was convenient but not necessary. Evidence conflicted as to whether large delivery trucks would be able to use the restaurant driveway and parking lot. Thompson v. E.I.G. Palace Mall, LLC, 657 N.W.2d 300 (S.D. 2003).

HOMESTEAD: Statute supersedes common law test for urban and rural homesteads. A Texas urban homestead is limited to 10 acres of land, but a rural homestead can have up to 200 acres. Traditionally, Texas common law evaluated five factors to determine whether a particular homestead was urban or rural. A 1989 Texas statute provided that a homestead not served by fire and police protection was rural. Cases interpreted the statute as supplementing the common law test. In 1999, Texas replaced the statute with a more detailed scheme: a homestead is urban if the land (1) lies within a municipality, its extraterritorial jurisdiction, or a platted subdivision,(2) is served by police and fire protection, and (3) has at least three of five specified municipal services (electric, natural gas, sewer, storm sewer, and water). A bankruptcy court found that a husband and wife’s 84-acre tract qualified as a rural homestead. Their tract satisfied the first two statutory elements but had less than three of the additional services. In affirming, the court of appeals held that the new statute was the exclusive test for determining homestead status, completely replacing the common law factors. Repudiating an earlier bankruptcy court decision, the court also ruled that, because the debtors used the home on the tract as their residence, they did not have to show that they used any of the surrounding acreage for agricultural or other activities that supported the family. In re Bouchie, 324 F.3d 780 (5th Cir. 2003).

NUISANCE: Injunction that prohibits unreasonably loud music is impermissibly vague. Urban Outfitters, a store in Burlington, Vermont, played music it believed appealed to its customers. The store’s landlord and neighboring tenants complained. Based on a jury finding of nuisance, the district court enjoined Urban Outfitters “from operating the sound system in the Store in a manner that substantially and unreasonably interferes with other tenants’ use of their space.” The court of appeals vacated the injunction based on Fed. R. Civ. Proc. 65(d), which requires: “Every order granting an injunction . . . shall be specific in terms; [and] shall describe in reasonable detail, and not by reference to the complaint or other document, the act or acts sought to be restrained.” The court instructed the district court to redraft the injunction with more precise noise limits. Howard Opera House Assocs. v. Urban Outfitters, Inc., 322 F.3d 125 (2d Cir. 2003).

SALES CONTRACTS: Seller not obligated to assign fishing rights. When a contract to sell a lot for $795,000 was entered into, the seller and his neighbors were engaged in litigation to establish fishing rights over a nearby guest ranch. The contract provided: “This offer is based upon said property being sold without any fishing rights. However, should litigation, which is currently underway, result in fishing rights, Seller agrees to transfer all fishing rights to Buyer.” After closing, the buyer attempted to resell the lot and asked the seller for an assignment of fishing rights, although litigation over those rights was still pending. The seller refused to give an assignment unless he was paid additional money. The buyer sued for breach of contract. The court ruled that the fishing rights provision was unambiguous and that the seller was not required to execute an assignment before successful completion of that litigation. Moreover, the seller did not have to actively pursue the litigation on the buyer’s behalf or assist the buyer in joining the lawsuit. The outcome demonstrates poor contract drafting, especially from the buyer’s standpoint. Rehnberg v. Hirshberg, 64 P.3d 115 (Wyo. 2003).

SALES CONTRACTS: Buyer who affirms contract may recover deposit. When a buyer sues a seller for breach of contract, he generally may elect to affirm or rescind the contract. If he affirms the contract, he may obtain specific performance or expectation damages. In a Rhode Island case, the buyer sought to affirm and proved that the seller had made fraudulent misrepresentations. The trial justice, however, awarded only $1 as nominal damages because of the lack of evidence of actual damages. The justice also ruled that the seller could retain the buyer’s deposit because the buyer had not sought rescission, but, upon motion to amend, he ordered return of the deposit plus statutory interest. The state supreme court ruled that returning the deposit to the buyer was proper because the seller had sold the property to an unrelated third party, thereby making contract affirmation impossible, but denied interest on the ground that return is “reimbursement” and not “pecuniary damages.” The court’s rationale for return of the deposit is cloudy inasmuch as the buyer never sought specific performance. Bogosian v. Bederman, 823 A.2d 1117 (R.I. 2003).

TAX FORECLOSURE: Notice valid even though mailed to taxpayer’s old address. In 1983, a taxpayer purchased an unimproved lot, reporting her address to the local government. With her payment of 1992 taxes, she included a change of address. The government, however, failed to update its records and mailed all subsequent bills to the old address. Although the post office did not forward the taxpayer’s mail, the taxpayer paid her taxes for all the years from 1993 through 1998, except for 1996. In 1997, the government filed a foreclosure action for the unpaid 1996 taxes. It posted and published a notice of foreclosure and mailed a notice to the taxpayer’s old address, which the post office returned as undeliverable. In 1998, the taxpayer learned of the foreclosure when the purchaser at the foreclosure action brought an action to quiet title to the land. The taxpayer claimed the government violated due process by failing to ascertain her proper mailing address. Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950), requires that the government exercise “due diligence” to provide “notice reasonably calculated, under all the circumstances, to apprise” a property owner of legal proceedings. Holding for the government, the court stated, “Ownership carries responsibilities. . . .[The taxpayer’s] pattern of paying bills sent to an address that she claims was incorrect gave the Town and County reason to believe that it was still the correct address.” The court stated its holding complied with Mullane, but this is questionable. The government took no action whatsoever to locate the taxpayer after the post office returned the mailed notice, and the foreclosure purchaser readily located the taxpayer when she brought her quiet title action. Kennedy v. Mossafa, 789 N.E.2d 607 (N.Y. 2003).

ZONING: Landlord is liable for tenant’s use violation. A restaurant lease expressly required the tenant to comply with all zoning ordinances. With the landlord’s consent, the tenant added a second room that included a bar for serving alcoholic drinks. One year later the town determined that this room constituted a “barroom,” a use not permitted in the commercial zone where the restaurant was located. After unsuccessfully contesting the determination before the zoning board of appeals, the tenant continued to use the barroom. The town filed citations against both the tenant and the landlord. The court held that a landlord is liable for a tenant’s zoningviolation when (1) the ordinance authorizes a separate penalty against a landlord, (2) the landlord had notice of the violation, (3) the landlord was able to control the tenant’s use, and (4) the landlord had a reasonable opportunity to obtain the tenant’s compliance or eviction. The landlord was ordered to pay a $100 fine plus $2,500 in attorney fees for the town (tenant was ordered to pay $200 plus $5,000 in attorney fees). Town of Boothbay v. Jenness, 822 A.2d 1169 (Me. 2003).

LITERATURE

Covenants, Conditions, and Restrictions—The Restatement (Third) of Servitudes. In her article, Building Community in Common Interest Communities: The Promise of the Restatement (Third) of Servitudes, 38 Real Prop. Prob. & Tr. J. 17 (2003), Paula A. Franzese evaluates the Restatement (Third) of Servitudes in light of an earlier groundbreaking work by Robert Ellickson. Prof. Ellickson demonstrated in an empirical study that many important elements and constraints of neighborly behavior arise in the absence of CC&Rs and outside “the shadow of the law.” Franzese identifies the well-known defects in “common interest communities,” as these entities have developed in the United States. These problems include unreasonable and arbitrary enforcement of rules that “pit neighbor against neighbor, association against neighbor, or vice-versa.” She then explains that the Restatement (Third) of Servitudes departs from the norm, and “casts relevant and mutual obligations in terms of ‘reasonableness,’ ‘fairness’ and ‘access.’” According to Prof. Franzese, adoption of the Restatement would allow appropriate and cooperative neighborly behavior to flourish. It is a nice thought, although perhaps a bit optimistic.

Covenants, Conditions, and Restrictions—Gated Communities. David L. Callies, Paula A. Franzese, and Heidi Kai Guth examine the development of gated communities in Ramapo Looking Forward: Gated Communities, Covenants, and Concerns, 35 Urb. Law. 177 (2003). In years past, only the wealthiest homeowners lived in communities isolated from the general public by walls and gates. The authors report that “more than 8 million Americans now live in over 20,000 gated communities.” This trend is increasing. Homeowners in such developments are subject to “ubiquitous” covenants, conditions, and restrictions, but the exclusive nature of these common interest communities raises a host of difficult legal and social issues. Callies, Franzese, and Guth trace the history of gated communities in the United States. They then identify a number of legal issues. These include the degree to which the communities, which may take over public functions, become subject to constitutional limitations; whether and to what degree the public retains any access rights to previously common space; and mechanisms of corporate governance employed by these communities. As to this last issue, the authors correctly note that some gated communities have successfully “incorporate[d] themselves into independent, gated towns.” Callies, Franzese, and Guth also muse on the social and political implications of this trend in real property development.

Mold. The September/October “Keeping Current” column highlighted two articles that discussed toxic mold litigation. Walter G. Wright Jr. and Stephanie M. Irby have now penned a fine article on mold and its effect on the many aspects of the real estate transaction in The Transactional Challenges Posed by Mold: Risk Management and Allocation Issues, 56 Ark. L. Rev. 295 (2003). The article explains the nature of mold in real property and the conditions necessary for mold to grow and describes methods that are used to physically remediate the problem. Readers will be most interested, however, in the remainder of the article, which addresses the transactional implications of mold. What precisely are the liabilities of the various parties? What are the mold-specific legal issues that arise in each sale, leasing, and loan transaction? What should lawyers for each of the parties to these transactions do to protect their clients? The article is thorough and draws on case law to date.

RESPA. In their article, RESPA: The Changing Landscape, 58 Bus. Law. 1259 (2003), Joseph M. Kolar, Walter E. Zalenski, and Peter N. Cubita address several recent RESPA case opinions and HUD policy statements. The first part of the article discusses limitations on fee arrangements under Section 8 of the legislation (limitations on fees paid or received in connection with referral agreements, limitations on fee sharing). The second part of the article focuses on HUD’s proposed 2002 amendments to RESPA, which, as the authors note, are intended to simplify the consumer’s process for obtaining residential loans and to reduce settlement costs. As to the latter, the authors are optimistic that the amendments will have a beneficial effect. The proposed rules would, among other things, allow lenders to offer consumers a “guaranteed mortgage package.” Presumably, consumers would find it easier to shop GMPs from lender to lender. The authors suggest that the new rules will “remove restrictions in RESPA that have long prevented loan originators from using their leverage to lower costs.” That notwithstanding, Kolar, Zalenski, and Cubita acknowledge that the new rules face significant political hurdles. They also point out that, even if adopted, the rules must be massaged to work with other existing consumer legislation.

Takings. Thomas J. Koffer predicts that the property rights movement will regain its momentum in What to “Take” from Palazzolo and Tahoe-Sierra: A Temporary Loss for Property Rights, 21 Va. Envtl. L. J. 503 (2003). Koffer recounts the now familiar facts and holdings of Palazzolo v. Rhode Island, 533 U.S. 606 (2001), and Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 535 U.S. 302 (2002). In the former, “the Court held that notice of an existing regulation does not automatically bar an owner from bringing a regulatory takings action.” In the latter, “the Court held that a complete ban on development for thirty-two months was not a categorical taking.” Some commentators argue that Tahoe-Sierra represents a new environmental sensitivity on the Court. Koffer argues otherwise and suggests that the “unique” facts of Tahoe-Sierra contributed to the Court’s decision. Koffer focuses in particular on the “relevant parcel” issue arising in Tahoe-Sierra.

Tax—Forest Property. Attorneys whose clients own forest property will be interested in Francine J. Lipman’s article, No More Parking Lots: How the Tax Code Keeps Trees Out of a Tree Museum and Paradise Unpaved, 27 Harv. Envtl. L. Rev. 471 (2003). Professor Lipman initially provides two pertinent facts: “365 acres of farms and forests are bulldozed” for development purposes every hour in the United States, and a large “portion of the more than 700 million acres of . . . forest land [in the United States] is privately owned.” Policymakers face the problem of reconciling the “conservation interests of the public sector” and the “economic interests of the private sector.” According to Professor Lipman, these policymakers have turned to various tax codes and structures to help resolve the conflict. She argues that tax incentives are more efficient than creating or funding a regulatory regime. In her article, Professor Lipman describes the tax benefits that presently exist and how a landowner might use these incentives in the real world.

LEGISLATION

Alaska expands the rights of adverse possessors. Good faith adverse possessors who do not have “color and claim of title” may nevertheless acquire title to adjacent land after ten years of adverse possession. 2003 Alaska Sess. Laws 147.

Florida creates a procedure for retiring a motor vehicle certificate of title for mobile homes that are permanently affixed to real property. The owner of the mobile home must also be the owner of the fee, or hold a recorded leasehold interest of 30 years or more. A security interest in the mobile home is treated as a mortgage on both the mobile home and fee, or on the mobile home and the leasehold. Subsequent conveyance of the mobile home must be accomplished by a deed. 2003 Fla. Laws ch. 282.

Florida modifies its Clean Indoor Air Act to ban smoking in most public places. The purpose of the law is to protect workers, paid and volunteer, from second-hand smoke. 2003 Fla. Laws ch. 398.

Florida adopts the Uniformed Servicemembers Protection Act. Service members are defined to include members of the United States Armed Forces, National Guard, and United States Reserve Forces when serving on active duty or state active duty. The Act prohibits discrimination by landlords against service members and allows service members to terminate their residential leasehold agreements as necessary for their military obligations. 2003 Fla. Laws ch. 72.

Hawaii prohibits landlords from banning the display of political signs by residential tenants. Reasonable regulation to comply with applicable building laws is allowed. 2003 Haw. Sess. Laws 194.

Maine mandates the disclosure of arsenic in wells and treated wood. The law is limited to sellers of residential real property. 2003 Me. Laws 457.

Nevada enacts substantial revisions to its Common-Interest Ownership (Uniform Act). A Commission for Common-Interest Communities is created. The powers and duties of the ombudsman are expanded. Other provisions of the uniform act, including delegation of voting and record keeping, among other things, are modernized. 2003 Nev. Stat. 385.

Nevada allows landlords of manufactured home parks to expedite notice of termination for certain “nuisances.” Prohibited nuisances include prostitution, drug use or manufacture, vandalism, discharge of a weapon, driving under the influence of alcohol or a controlled substance, and child or elder abuse. Notice of termination is three days. 2003 Nev. Stat. 403.

Nevada authorizes deeds effective upon the death of the grantor. The deed does not operate to sever a joint tenancy or community property interest without the concurrence of the other owners. 2003 Nev. Stat. 409.

Nevada enacts the Home Loan Protection Act. The Act regulates and limits points, fees, and “high-cost” home loans, in an effort to eliminate or reduce abusive mortgage lending. 2003 Nev. Stat. 465.

Nevada guarantees the right of individuals to display the U.S. flag. The right to display the flag may not be prohibited by owners’ associations or by a covenant, condition, or restriction in a deed. Reasonable restrictions may be imposed as long as they allow a display. The new law also prohibits landlords from banning the display of the flag. 2003 Nev. Stat. 472.

North Carolina prohibits the use of a person’s credit history to terminate residential property insurance. Credit rating may be used as the sole basis for discounting rates. The use of credit history by the insurance industry has become a contentious issue because it affects more heavily upon the poor. Although a statistical relationship between a poor credit rating and insurance loss exists, no causality has been proven. 2003 N.C. Sess. Laws 216.

Oregon clarifies that title insurers and licensed real estate professionals are not engaged in the practice of law when performing routine functions. 2003 Or. Laws 260.

Oregon expands comprehensive disclosure for residential real estate transactions. Statutory disclosure forms provide some protection to both the buyer and the seller but do not take the place of an independent home inspection. 2003 Or. Laws 328.

Oregon allows a tenant who has been the victim of domestic violence, stalking, or sexual assault to terminate his or her lease upon 14 days’ notice. The landlord may not impose a penalty or fee, including rent after the termination date, upon the tenant for exercising his or her rights under the law. 2003 Or. Laws 378.

Oregon allows service members to terminate their residential leases upon thirty days’ notice. Service members are defined to include members of the “organized militia” (National Guard) when called to active duty for 90 days or more. 2003 Or. Laws 383.

Oregon updates its Planned Community and Condominium Acts. New requirements are imposed for open meetings, executive sessions, records, estoppel statements, and association finances. Assessment lien priority is now based upon assessment date. Lien notices are made optional. Association recording of restated documents is allowed. Process is established to convert a leasehold condominium to a fee title condominium. 2003 Or. Laws 569.