| P R O B A T E & P R O P E R T Y July/Auguest 2007 Vol. 21 No.4 Other articles from this issue |
| Articles from other issues of Probate and Property |
Keeping Current Property
Keeping Current—Property Editor: Prof. James C. Smith, University of Georgia, Athens, GA 30602, jim@uga.edu. Contributing editor: Prof. 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
ARBITRATION: Contract cannot impose all arbitration costs on homebuyer or call for homebuilders’ association to appoint sole arbitrator. Purchasers of new homes sued the builder/vendor for fraudulent misrepresentation and breach of the warranty of habitability. The builder invoked an arbitration clause set forth in the sales contracts, which granted the builder the unilateral right to require binding arbitration of any claims brought against it. The clause provided for appointment of the arbitrator by a third party, the president of the Homebuilders Association of Greater St. Louis. The clause also provided that the buyer would pay all arbitration costs and fees, including the builder’s attorney’s fees. The court held the agreement to arbitrate was enforceable, rejecting the buyers’ claim that the clause was flawed by the lack of mutuality of obligation (the buyers could not force arbitration). The court did, however, find both the appointment provision and the fee-shifting provision to be unconscionable. A person with a bias cannot be the sole selector of the arbitrator, and an agreement cannot shift all of the fees for arbitration to the consumer. The court allowed arbitration to go forward, with the trial court to appoint the arbitrator whose award would determine the payment of fees. State ex rel. Vincent v. Schneider, 194 S.W.3d 853 ( Mo. 2006).
FAIR HOUSING ACT: Landlord’s inquiry about prospective tenant’s marital status constitutes familial status discrimination. A woman telephoned in response to a newspaper advertisement for a rental apartment in Cook County, Illinois. As soon as the landlord elicited that the woman was the unmarried mother of two small children, the landlord stated that she “can’t rent to you because you have two children and no husband and this girl [that is, the landlord] has to pay her mortgage.” The call terminated, with the landlord never asking about the prospective tenant’s financial resources. Three weeks later, the woman noticed another ad for the same apartment and phoned again. This time she pretended to be married with one child, and the landlord agreed to show her the apartment. The woman then filed a complaint, alleging familial status discrimination under the Fair Housing Act (FHA). The FHA defines familial status as a household that includes minor children (under the age of 18). The Department of Housing and Urban Development appointed an administrative law judge, who found no violation, concluding that the landlord’s refusal to rent was motivated by a financial concern and perhaps also by a preference for married tenants. Reversing, the court recognized that the FHA does not prohibit discrimination based on marital status but held that the conversations implied that the landlord was willing to rent to a single woman without children. Thus, unrefuted testimony demonstrated unlawful discrimination based on familial status. White v. U.S. Dep’t of Housing and Urban Development, 475 F.3d 898 (7th Cir. 2007).
HOUSING CODES: Government’s long-standing failure to enforce housing code is a taking of tenants’ property. A state department responsible for housing code enforcement ordered the closure and vacation of an apartment building for fire and electrical hazards, for which the agency had issued a series of citations over an eight-year period. Displaced tenants brought an action against the department, alleging the denial of due process and a taking of their property rights. The trial court dismissed both claims, but the appellate court held that plaintiffs had stated a valid takings claim. The department’s failure to impose meaningful sanctions on the landlord during the years before the vacation order deprived the tenants of their leaseholds. The takings analysis is novel, and a dissenting judge criticized the majority for usurping the department’s role in deciding how best to enforce the housing code. Alger v. Department of Labor and Industry, 917 A.2d 508 ( Vt. 2006).
LANDLORD-TENANT: Security deposit creates security interest under Uniform Commercial Code. Under a five-year lease of office space, Tenant deposited $1.8 million “as security and collateral for Tenant’s performance” of its obligations. Landlord, a bank (“Bank”), agreed to hold the deposit “in an interest bearing certificate of deposit account or accounts” with interest payable to Tenant. Bank opened a certificate of deposit account in its institution in the name of Tenant, but did not issue an instrument. Bank sold the building and assigned the lease to the purchaser (“Landlord”). The title owner of the account was changed to a partnership that evidently was an affiliate of Landlord. After more than a year, Tenant abandoned the premises and immediately filed for bankruptcy (Chapter 7). Landlord filed a bankruptcy claim for lease rejection damages. The amount was contested, but the parties agreed to $622,738. Landlord described its claim as secured, and listed the CD as its collateral. The trustee argued that Landlord’s claim was unsecured, but the court held that the security deposit clause created a security interest under Article 9 of the Uniform Commercial Code. The court distinguished a number of cases involving consumer leases of automobiles, in which class action plaintiffs claimed the lessors were obligated to pay interest to the lessees on the deposits. The court classified the collateral as a certificate of deposit account, rather than an instrument, because the deposit was not represented by an instrument. Landlord’s security interest was perfected, because Bank, its predecessor, had control over the deposit account. Thus, Landlord was allowed to retain out of the deposit an amount equal to the lease rejection damages. This appears to be the first court holding that a security deposit under a real property lease creates an Article 9 security interest, but the holding is limited by the unique factual context. In re Verus Investment Management, LLC, 344 B.R. 536 (Bankr. N.D. Ohio 2006).
MORTGAGES: Identity theft victim may recover surplus proceeds from foreclosure on property bought by perpetrator. In an act of identity theft, an unknown criminal bought and mortgaged property in the name of another person. A foreclosure resulted, and surprisingly the sale generated surplus proceeds in excess of $51,000. Only the victim of identity theft made a claim to the proceeds, but the trial court ordered payment into the county’s general fund, because the victim never owned the property or had any connection to it. The appellate court reversed, finding the victim entitled to the funds on a theory of restitution. A person’s identifying information is “a valuable asset,” which the wrongdoer appropriated. A victim of theft has the right to recover not only stolen assets, but anything, such as the funds, acquired with the stolen assets. CTC Real Estate Services v. Lepe, 44 Cal. Rptr. 3d 823 (Ct. App. 2006).
RIGHT OF FIRST REFUSAL: Co-tenant’s breach of preferential purchase right agreement precludes breaching party from enforcing right to purchase on subsequent sale by other co-tenant. A husband’s murder of his wife resulted in the ownership of a parcel of land by a tenancy in common consisting of the couple’s son, the husband (father), and the estate of a partner of the husband. The son sued the estate for mismanagement, which led to a settlement that increased the son’s ownership by 7.5%. In the agreement each owner reserved “the first right to purchase from the remaining owners the share of that owner at the price offered by any subsequent purchaser.” Soon thereafter the son, without notifying the other owners, paid his attorney a contingent fee by conveying half of the additional interest (3.75%) to the attorney. Four years later, the estate sold its interest to the father for $10,000 per acre. The son sued to enforce his right to purchase, but lost on the basis that he previously breached the agreement. The court rejected his claim that the conveyance in satisfaction of the attorney’s fee was not a sale that triggered the preferential right. Mandell v. Mandell, 214 S.W.3d 682 (Tex. Ct. App. 2007).
SALE CONTRACTS: Sellers not obligated to disclose structural flaw in basement. Before contracting to buy a house from its original owners, the buyers noticed iron braces attached to the inside of a basement wall. Thirteen years earlier, the contractor who built the house had installed the braces to compensate for pressure exerted by “backfill” dirt, added outside the basement wall before the concrete blocks had “set.” Responding to the buyers’ inquiry, the sellers said the braces were “just added reinforcement,” installed when the house was built. After closing, the buyers encountered structural problems stemming from the wall in question. The court rejected the buyers’ claim of fraudulent misrepresentation, concluding that the sellers had answered truthfully. This decision reflects the continuing vitality of caveat emptor. Courts in some other states, however, would have protected these buyers, reasoning that once the seller offered an explanation for the presence of the braces, a fuller explanation of the reason was necessary. Nesbitt v. Frederick, 941 So. 2d 950 ( Ala. 2006).
SPECIFIC PERFORMANCE: Tenant’s option to buy at usurious rate is enforceable, with no interest payable. A two-year commercial lease of space in a multi-unit property granted the tenant the option to purchase the entire property for $412,000, with the landlord to finance the purchase over 20 years at an interest rate of 7% for five years and thereafter at 6% above the federal discount rate (FDR). One year later, the landlord rented two suites in the building to a related company at rents far below market rates for 10 years. The tenant gave a notice of intent to exercise the option. The landlord insisted that the tenant purchase subject to the leases. This prompted litigation. The court granted specific performance to the tenant, ordering cancellation of the leases under a provision of the option calling for conveyance “subject to recorded instruments and easements if any, which do not materially affect the value of the Property.” Both components of the financing violated a usury law limiting the rate to 5% above the FDR. Ark. Const. art. 19, § 13. At the time the lease was made, the FDR was 1.25%. The law makes usurious contracts “void as to the unpaid interest.” The court rejected the landlord’s arguments that the contract was illegal and should not be enforced, allowing the tenant to pay the price over 20 years without interest. Van Carr Enterprises, Inc. v. Hamco, Inc., No. 05-954, 2006 WL 649985 ( Ark. Mar. 16, 2006).
SUBDIVISION MAPS: Designation of park establishes an offer of dedication, which the municipality may accept 75 years later. A subdivision map, approved by a township in 1929, designated one lakefront lot as “Park.” An agreement with early purchasers obligated the developer to maintain the park and certain streets in the development until the township assumed this responsibility. Until 1988, the park lot was attached to a neighboring lot for real property tax purposes, at which time a sale of the neighboring lot prompted the tax assessor to designate and assess the park lot separately. The assessor was unable to identify an owner for the park lot, and a tax foreclosure resulted in a sale to a private buyer. Neighbors objected to the buyer’s plan to build a house on the park lot. At their urging, the township brought an action to declare that the park lot was dedicated for use as a park. Subsequently in 2004, the township passed an ordinance that formally accepted the dedication. The court held that the subdivision map reflected the developer’s offer of a public park easement, which the city could accept at any time. The tax foreclosure buyer took title subject to the city’s continuing right to accept the dedication. Township of Middletown v. Simon, 903 A.2d 418 (N.J. Super. Ct. App. Div. 2006).
TIMBER: Mortgage lien extends to timber cut from mortgaged land, despite characterization of timber as goods under Uniform Commercial Code. A landowner granted a deed of trust to secure a bank loan and subsequently entered into a timber sale contract. The timber buyer arranged for the cutting of timber, which resulted in the payment of $13,500 to the landowner. Shortly thereafter, the bank foreclosed, with the foreclosure sale yielding a deficiency. The bank brought an action for waste against the timber buyer. A mortgage on land generally covers growing timber. The trial court, however, held that the bank lost its interest in the cut timber, because it did not perfect a security interest under the UCC. The appellate court reversed, holding that the UCC treatment of timber to be cut as goods did not override the bank’s lien under the deed of trust. The court applied U.C.C. § 2-107(3), which states: “The provisions of this section [relating to timber to be cut] are subject to any third party rights provided by the law relating to realty records. . . .” Feliciana Bank & Trust v. Manuel & Sessions, L.L.C., 943 So. 2d 736 (Miss. Ct. App. 2006).
LITERATURE
Common Interest Communities; Effect of Restrictions Post-purchase. In a comment, In Search of the Middle-Ground: Protecting the Existing Rights of Prior Purchasers in Common Interest Communities, 111 Penn St. L. Rev. 759 (2007), Terrell R. Lee examines a tricky aspect of homeowner association (HOA) life. Many purchasers today buy residential property (whether a detached home, condominium unit, or townhouse) burdened by covenants, conditions, and restrictions (CC&Rs), and become members of and subject to an HOA. What happens if the HOA adopts restrictions after purchase of the condominium unit that are objectionable to its owner? For example, in one Florida case addressed by the comment (Woodside Village Condominium Association, Inc. v. Jahren, 806 So. 2d 452 ( Fla. 2002)), a condominium unit owner was in the long-time practice of leasing his unit. The CC&Rs in effect at the time the unit owner purchased permitted leasing. Owners of other units unhappy with having renters in the community successfully amended the covenants to prohibit leasing. The Florida Supreme Court overruled the lower court and enforced the new restriction. The author argues that this case is wrongly decided. Lee first examines the nature and governance of common interest communities and the standards for judicial review of HOA board decisions. He notes that often either the business judgment rule or a “reasonableness standard” is used by courts. The latter prohibits HOA boards from acting in an arbitrary and capricious manner. Many courts begin their examination with a statement that decisions of boards are entitled to a presumption of validity. The author argues that existing homeowners are under-protected by these varying standards of review and that a legislative solution is needed. Lee suggests that “legislatures should enact laws prohibiting HOAs from burdening individually owned property with entirely new covenants and restrictions.” Of course, such legislative solutions would be unnecessary if the lawyer dealing with CC&Rs were more sensitive to the need for certain fundamental CC&R amendments to require unanimous approval of the owners.
Easements; Access Rights to Graveyards and Private Property Rights. Every suburban and urban real property lawyer can attest to an inexorable trend: land available for development is becoming ever scarcer. Property reserved for unusual uses and that may once have been removed from everyday activities is now located squarely within a business district or next to a subdivision or adjacent to a mall. Occasionally, graveyards fall into this category. What happens if individuals who own surrounding property, or the property on which a graveyard sits, deny access to visitors to the graveyard? Prof. Alfred L. Brophy has written a wonderful article delving into this and other questions in Grave Matters: The Ancient Rights of the Graveyard, 2006 B.Y.U. L. Rev. 1469. Brophy notes that the underlying right of access to graves of ancestors is best described as an implied easement in gross. It arises naturally, because “when people have used property in a way for an extended period of time they come to believe that other uses cannot interfere with theirs—that they have a claim against the entire world.” The right to visit graves persists even where the underlying land comes into the ownership of a third person. Apparently, this right has been memorialized by statute “in about a fifth of states and by case law in many others.” This implied easement is a trump of sorts: “overlapping community interests” often take precedence over private rights of individual property owners. Brophy concludes by linking “this ancient right to the current discussion of memory of the era of slavery.” The author argues that the implied easement in gross might be used by descendants of slaves to gain access to former slave plantations and thereby allow a mechanism of remembering forbearers and shared history.
Eminent Domain; Public Use or Public Purpose . Real estate law generally and condemnation law in particular are rarely the focus of a national public debate and nationwide legislation to overturn judicial precedent. The reaction to the U.S. Supreme Court decision in the Kelo case has been a truly remarkable and dramatic public rejection. In 2006 Templeton Lecture: Eminent Domain Post-Kelo, 9 U. Pa. J. Const. L. 501 (2007), Prof. Douglas W. Kmiec moderates a debate between Susette Kelo’s attorney, Scott Bullock, of the Institute for Justice in Washington, D.C., and Prof. Thomas Merrill, who is one of the relatively few who dare to defend the Kelo decision. Merrill describes the Kelo decision as the inevitable culmination of a long line of cases gradually expanding the condemnation power to any plausible public purpose. He believes the courts cannot effectively scrutinize the purposes of particular condemnations. He views the Kelo decision not as an endorsement of condemnation for economic development but as a call for legislative bodies to determine the limits of the condemnation power. Bullock, however, has no faith in the long-term prospect for legislative protection against condemnation abuses, particularly at the city council level where the influence of employers seeking economic development opportunities so often trumps the desire of low-income residents to keep their humble homes. Notwithstanding the recent state and federal legislative efforts to prohibit condemnation for economic development, Bullock openly calls for, and hopes to one day see, a complete judicial reversal of the Kelo decision based on the reasoning of Justice O’Connor’s dissenting opinion.
Real Estate Auctions; a Call for Uniform Rules . Auction sales are exciting, and at some point almost everyone has had the experience of jumping in and later feeling buyer’s remorse. Often the occasion is a fundraiser for a school or another nonprofit organization. Real property also can be sold by auction, and during the 1980s and 1990s auctions of nondistressed real estate became common. During the strong residential market that followed the dot-com bubble, the auction sale of residences became even more frequent with frantic buyers vying against each other for the dubious honor of being the winning bidder. The curtain has now been drawn back to reveal the reasons that are often behind such buyer’s remorse by Steven Good, the chair and CEO of Sheldon Good & Company, and Prof. Celeste Hammond, the director of the Center for Real Estate Law at the John Marshall Law School. In their comprehensive article Real Estate Auctions—Legal Concerns for an Increasingly Preferred Method of Selling Real Property, 40 Real Prop. Prob. & Tr. J. 765 (Winter 2006), they review all the various means by which auctions have become notorious for getting the bidders to pay more than the fair market value for the property. The authors call for enactment of uniform national rules to protect participants from abuses and to provide real estate attorneys a dependable framework to use in structuring real estate auction transactions and in advising clients what to expect. These reforms would include treating auction abuses as deceptive and unfair trade practices subject to enhanced penalties.
LEGISLATION
Arkansas adopts the Uniform Real Property Electronic Recording Act. Electronic signatures, filing, recording, and storage are authorized by the Act. 2007 Ark. Acts 734.
Arkansas clarifies beneficiary deeds. The grantee may include unnamed heirs of the grantor. 2007 Ark. Acts 243.
Arkansas enacts the Arkansas Title Insurance Act. Regulation of title insurance companies is transferred to the State Insurance Department. 2007 Ark. Acts 684.
Arkansas limits the scope of its product liability law. Real estate and improvements on real estate, other than tangible objects or goods affixed to the real estate, are excluded from the definition of product. 2007 Ark. Acts 315.
Arkansas prohibits discrimination against residential tenants who have been subjected to domestic abuse. The tenant may change the locks on the residential unit.The landlord may not retaliate against a victim of domestic violence for exercising his or her rights. 2007 Ark. Acts 682.
Arkansas regulates compensation to surface owners and surface tenants for damages caused by a spill of crude oil or produced water. The responsible party is required to restore the damaged land in accordance with the rules of the Arkansas Department of Environmental Quality or the Oil and Gas Commission. 2007 Ark. Acts 507.
Idaho adopts the Uniform Real Property Electronic Recording Act. 2007 Idaho Sess. Laws 63.
Idaho provides that a broker compensation agreement does not by itself constitute an agreement for agency representation. Idaho requires “representation agreements” and “contracts for representation” to be in writing. 2007 Idaho Sess. Laws 150.
Minnesota enacts the Great Lakes–St. Lawrence River Basin Water Resources Compact. 2007 Minn. Laws 2.
New Mexico adopts the Surface Owners Protection Act. The law clarifies the duty of operators to the owners of the surface. 2007 N.M. Laws 5.
