| P R O B A T E & P R O P E R T Y May/June 2007 Vol. 21 No.3 Other articles from this issue |
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Keeping Current Property
Keeping Current—Property Editor: Prof. James C. Smith, University of Georgia, Athens, GA 30602, jim@uga.edu. Contributing editors: Prof. William G. Baker and Prof. Daniel B. Bogart.
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
BOUNDARY ENCROACHMENTS: Adding fill dirt to neighbor’s parcel gives rise to action for ejectment. In 1998, site work for the development of a parcel included the addition of fill dirt, with a five-foot rise in elevation. The contractor trespassed across the boundary, adding dirt and a slope to a neighbor’s parcel. In 2004 the neighbor brought an action seeking injunctive relief and damages for trespass, subsequently amending its complaint to add a claim for ejectment. The court dismissed the trespass claim based on expiration of the statute of limitations but upheld the ejectment claim. Ejectment is proper when a “permanent structure” unlawfully encroaches across a boundary. The earthen slope qualified as a “structure” because it served the purpose of providing lateral support to the improved parcel. MVP Inv. Co. v. North Fulton Express Oil, LLC, 639 S.E.2d 533 (Ga. Ct. App. 2006).
LANDLORD-TENANT: Exercise of right of first refusal contained in senior lease cuts off option granted in junior lease. A 1970 lease for a gasoline pumping station granted the tenant a right of first refusal to purchase the property, triggered if the lessor received an offer to purchase. Sales took place in 1979 and 1987, for which the tenant did not exercise its refusal right. In 1996, the owner of the property leased part of the property to a tenant for a convenience store. The convenience store lease granted that tenant an option to purchase all of the property. In 2003, the owner and the convenience store tenant entered into a contract of sale. The owner notified the gasoline station tenant, who chose to exercise its right of first refusal. The owner and the gasoline station tenant closed their contract, and two days later the convenience store tenant notified the buyer that it was attempting to exercise its purchase option. The buyer refused to go forward, but the trial court granted specific performance to the convenience store tenant, reasoning that the right of first refusal did not survive the earlier sales. The appellate court reversed based on the language of the right of first refusal that specified that a sale to the outside offeror “shall be subject to the terms of this lease or any renewal thereof.” Thus, both the right of refusal and the option were valid and outstanding immediately before the 2003 sale. The court rejected an argument made by the convenience store tenant that the gasoline station tenant bought subject to the option. The right of first refusal was senior in time, and the convenience store tenant had constructive notice of that right because the 1970 lease was recorded. As a result, the buyer was not required to honor the junior tenant’s option. Startex First Equipment, Ltd. v. Aelina Enterprises, Inc., 208 S.W.3d 596 (Tex. Ct. App. 2006), review denied (Sept. 22, 2006), rehearing of petition for review denied (Dec. 1, 2006).
MORTGAGES: Dragnet clause does not secure debt owed by the mortgagor to assignee of mortgagee. A landowner granted several mortgages to a lender to secure a series of loans. Later, in 2000, the owner granted a second mortgage on the same properties. In 2002, a creditor of the mortgagor obtained a judgment lien for a debt of $205,700. The judgment creditor then bargained with the first mortgagee, purchasing those loans, and sought judicial foreclosure. The second mortgagee had already filed a foreclosure action. The two foreclosure actions were consolidated. The judgment creditor sought priority for the judgment debt based on the dragnet clause in the first mortgages. In a matter of first impression for Indiana, the court rejected this claim, ruling that the original parties to the first mortgages did not intend to secure a subsequent debt owed by the mortgagor to a third party. Money Store Investment Corp. v. Summers, 849 N.E.2d 544 ( Ind. 2006).
RULE AGAINST PERPETUITIES: Savings clause with no specified measuring lives is valid. A contract signed in 1995 included the condition that the buyer apply for and obtain all governmental permits necessary to develop the land as a single-family residential subdivision. Closing was to take place 45 days after the issuance of all approvals. In 2002, the buyer, not having obtained all approvals, sent a notice waiving all contingencies and setting a closing date. The sellers refused to close and asserted, as one of their defenses, the rule against perpetuities. The court detected a violation of the rule, because it was possible that it would take more than 21 years plus a life in being for the buyer to obtain the approvals. The court held for the buyer, however, based on an oddly worded perpetuities savings clause, which provided:
In order to preclude any application of the Rule Against Perpetuities which would otherwise invalidate and nullify this contract, the parties agree that this contract shall expire, unless otherwise previously terminated, on the last day of the time period legally permitted by the Rule Against Perpetuities in the State of Maryland, in which case all deposits shall be promptly returned to the Buyer.
Most perpetuities savings clauses specify measuring lives (such as all the living descendants of a famous person, like Joseph Kennedy), but this one does not. The court applied the clause, stating that by implication the sellers (who unlike the buyer were natural persons) were measuring lives. Other courts might have been less generous, but the buyer should have prevailed anyway. With no implied measuring lives, the clause should be interpreted to terminate the contract after 21 years, and less than eight years had passed when the buyer called for a closing. Cattail Associates, Inc. v. Sass, 907 A.2d 828 (Md. Ct. Spec. App. 2006).
SALES CONTRACTS: Buyers’ request for more time to obtain financing is anticipatory repudiation. A sales contract for a Brooklyn housing cooperative apartment had a financing condition that required the issuance of a loan commitment within 20 business days. The contract allowed the buyers to cancel by sending a notice with documentation related to their loan application within seven business days after expiration of the 20-day period. Very near the end of the 20-day period, the buyers faxed a letter to the seller, at 9:25 a.m., requesting a one-month extension for the financing condition, stating that, if the seller refused to grant the extension, the “contract shall be null and void and neither party shall have any further liability to the other.” At 4:05 p.m. on the same day, the seller replied by fax, electing to rescind and to refund the contract deposit. Earlier that day, the buyers received a loan commitment, and at 5:28 p.m. they faxed a second letter to the seller, stating that they had a commitment and that the seller should “disregard the fax that was sent earlier today.” But the seller refused to go forward, and the buyers obtained an order for specific performance. The appellate court reversed, stating that the notice was defective, because it did not contain the required documentation, and therefore it amounted to an anticipatory repudiation of the contract. This reasoning is questionable. The buyers had until the end of the seven-day period to supply that documentation, and their second fax plainly stated that they were not repudiating their contract obligations. The case is rightly decided, but for an entirely different reason—application of a basic rule of offer and acceptance. The buyers’ first fax was an offer to modify or to rescind the contract, and the seller accepted the offer to rescind before the buyers revoked that offer. Smith v. Tenshore Realty, Ltd., 820 N.Y.S.2d 292 (App. Div. 2006).
SUBDIVISION MAPS: Contract to sell unsubdivided land is illegal unless both parties’ obligations are conditioned on subdivision approval. An owner of land in a shopping center development contracted to sell two parcels to a buyer, with the seller having the right to terminate unless it obtained governmental approval of subdivision before closing. A few weeks later, the seller obtained subdivision approval and recorded a parcel map. Later, however, the buyer attempted to terminate and recover its deposit. The California Subdivision Map Act (SMA), Cal. Gov. Code § 66499.30, prohibits the sale of land for which a subdivision map or parcel map is required, unless that map is recorded in compliance with the SMA and local law. An exception applies if a contract of sale “is expressly conditioned on the approval and filing of a final subdivision map or parcel map, as required under this division.” Id. § 66499.30(e). Because the contract expressly gave only the seller the right to terminate, the court held that the contract was illegal and void from the time of execution. The buyer recovered its deposit, plus attorney’s fees under an attorney’s fee clause in the contract. Black Hills Investments, Inc., v. Albertson’s Inc., 53 Cal. Rptr. 3d 263 (Ct. App. 2007).
TAKINGS: Government employees may not retaliate against landowner for resisting an inverse taking. A buyer of a Wyoming ranch lacked notice of an unrecorded road easement granted by the seller to the Bureau of Land Management (BLM). The buyer qualified as a bona fide purchaser, and he refused to grant a new easement to the BLM. He brought an action against certain BLM employees, alleging that they violated his rights under the Fifth Amendment Takings Clause by attempting to extort a new easement. Specifically, the owner claimed that the employees trespassed on his property; refused to maintain the road providing access to his property; cancelled his right-of-way across federal lands, his special recreation use permit, and grazing privileges; brought unfounded criminal charges against him; and interfered with his guest cattle drives. The court rejected the employees’ defense of qualified immunity, finding that the complaint asserted a violation of a “clearly established” constitutional right to exclude the government from one’s property, because the government had not properly invoked its right of eminent domain. The court recognized a constitutional right to be free from retaliation for the exercise of Fifth Amendment rights, analogizing to long-standing precedent that prohibits retaliation for the exercise of the right of freedom of expression under the First Amendment. Robbins v. Wilkie, 433 F.3d 755 (10th Cir. 2006).
TITLE INSURANCE: Creation of special assessment district is not a covered title defect. A mortgage lender obtained a Loan Policy of Title Insurance after the city where the land was located adopted a resolution that created a special improvement district (SID). Before issuance of the policy, the city recorded a “Notice of Intention” in the county land records, describing its action. Several months after issuance of the policy, the city passed an “Assessment Ordinance,” which levied an assessment on land within the SID. The ordinance provided for payment in small annual amounts over many years, unless the property was sold, in which event the assessment would be accelerated and due in full on the sale. Two years later the owner defaulted, prompting the lender to acquire title by nonjudicial foreclosure. The lender contracted to sell the property, but the sale fell through when the buyer discovered and objected to the assessment. The lender filed a claim under the Loan Policy, which the insurer refused to pay. The court held that the recorded notice of the creation of the SID was not a title defect, because the assessment and lien arose after issuance of the policy. The decision demonstrates that a standard title insurance policy does not obligate the insurer to disclose to a lender or buyer all items of record that may be of interest. In addition to purchasing an insurance policy, the lender or buyer must ask for a title report that includes everything of record that may be important, or request a special endorsement to the policy that covers matters, such as special assessment districts. Vestin Mortgage, Inc. v. First American Title Insurance Co., 139 P.3d 1055 (Utah 2006).
USURY: Statute of limitations for illegal loan origination fee expires two years from loan closing. An institutional lender made a residential second mortgage loan for $16,500, payable in monthly installments for 15 years. The lender charged a loan origination fee of $1,485 (9% of the loan amount), deducting this amount from the funds it disbursed. A state usury statute limited such a fee to 2%. N.C. Gen. Stat. § 24-14(f). The statute of limitations for usury claims was two years, however, and the borrowers sued almost five years after the closing of the loan. The court held the action was time barred, because the usurious fee was charged and paid in full at closing. A dissenting judge concluded that the borrowers “paid usurious interest with each monthly mortgage payment,” because the “usurious loan origination fee was financed and added to their mortgage loan.” The majority opinion disagreed, concluding that it made a difference that the “origination fee was not added to the loan amount, but was deducted from the proceeds that plaintiffs received.” The dissenter has the better argument. There is no economic substance to the mechanics of how a borrower pays such fees. The numbers for any loan can be manipulated to get the parties in exactly the same position, whether a fee is deducted from loan proceeds or added to the loan amount. Shepard v. Ocwen Federal Bank, FSB, 638 S.E.2d 197 (N.C. 2006).
ZONING: Racially motivated development plan denial not proven. A white developer began plans for a warehouse project in the City of Springfield, Illinois. Several black city officials encouraged him to select a site in a predominantly black neighborhood. The developer submitted plans, which complied with existing zoning and all technical requirements for this type of project. At a public hearing, residents from a nearby neighborhood objected, alleging the developer was a racist and using racial slurs. Later the city council denied the warehouse plan, citing public safety concerns. The alderman who was the chief supporter of the plan stated that the city had never before denied approval for a development plan that met all of the technical requirements. The district court issued a writ of mandamus, ordering the city to approve the plan, because such an approval was a ministerial act, as opposed to a discretionary one. The developer also sought damages based on a violation of equal protection under the “class of one” doctrine. To succeed, the plaintiff needed to introduce evidence that he was treated differently from similarly situated individuals. The court granted summary judgment for the city. The plaintiff introduced no evidence of other specific developers whose plans were approved; he relied solely on the alderman’s general statement that the city had not previously rejected plans that met technical requirements. Maulding Development, LLC v. City of Springfield, 453 F.3d 967 (7th Cir. 2006), cert. denied, 127 S. Ct. 944 (2007).
LITERATURE
Landlord/Tenant Law; Premises Liability . Deborah J. La Fetra brings the reader up to date on litigation concerning landlord liability for the crimes occurring on leased premises. In her article, A Moving Target: Property Owners’ Duty to Prevent Criminal Acts on the Premises, 28 Whittier L. Rev. 409 (2006), she focuses initially on decisions of the California Supreme Court, which she describes as moving in “pendulum swings . . . from a strongly pro-plaintiff to a
moderately pro-defendant back to a moderately pro-plaintiff definition” of the landlord’s duty. La Fetra does not limit her review to California, however. She examines three scenarios: “the tragically bizarre criminal act that causes injury,” “tenant-on-tenant crime,” and gang violence. As the title makes clear, landlords’ duties have been in a state of flux. Courts base duties on several possible tests, including the “totality of the circumstances” and “prior similar acts” on the property. She argues that “viewing the incidents in hindsight, courts tend to expand the landowners’ duty, to the detriment of certainty and fairness in the law.”
Property Law and Creditors’ Rights; History. Prof. Claire Priest has written a wonderful explanation of the early American history of creditors’ rights and property law in Creating an American Property Law: Alienability and Its Limits in American History, 120 Harv. L. Rev. 385 (2006). Priest suggests that it is not possible to understand property law as it exists today in the United States unless one first understands its development before and after the Revolution. The original English system in effect in the colonies insulated debtors’ real property from the claims of creditors in several important respects. Unsecured creditors had no recourse against land titles, and even when a creditor had land as security, the “Chancery Court gave landed inheritance preferential treatment over debt satisfaction in its proceedings.” Parliament removed the normal protections afforded English landowners for property in the colonies in 1732, when it enacted the Act for the More Easy Recovery of Debts in His Majesty’s Plantations and Colonies in America. Real property was thereafter treated identically to chattels and personal property. As a result, real property could be seized to pay off any kind of debt, including unsecured debt. (The Act was also applied to slaves.) The Act “obliterated” the distinctions between a landed elite and other property owners in the colonies by placing both types of property on the same footing for debt collection. After the Revolution, most of the colonies reenacted the legislation. This legislation facilitated lending transactions in the United States, by providing both secured and unsecured lenders greater access to collateral.
Purchase and Sale Contracts; Duty to Disclose. Prof. Florrie Young Roberts addresses one of the latest attacks on the doctrine of caveat emptor in her article, Off-Site Conditions and Disclosure Duties: Drawing the Line at the Property Line, 2006 B.Y.U. L. Rev. 957. Roberts explains that “most states now impose a duty to disclose certain defects to buyers.” The typical defect involves latent problems such as mold, asbestos, water leakage, and damage. Lately, however, buyers have begun to sue their sellers for failure to disclose problems that affect the property but are not physically located on the property sold. These “off-site defects” include “noisy neighbors, a nearby highway, an adjacent wastewater treatment plant, construction of an apartment complex in the area, a neighbor’s plans to build a tennis court, and a toxic waste contamination problem on a neighboring property.” Roberts pays particular attention to two types of off-site problems that create unusually high emotions among the parties: “stigma defects and the presence of a sex offender in the neighborhood.” Roberts argues that the existing property law limitation on the duty to disclose—that the duty pertains only to defects in the subject property—is the appropriate rule. Unlike on-site problems, a seller does not have significantly superior knowledge of the existence and extent of off-site defects. Buyers can see nearby apartment complexes under construction, notice the existence of tennis courts on the property of a neighbor (or evidence of teenagers next door), and check web sites locating the addresses of sex offenders. Furthermore, if sellers are required to disclose off-site defects, sellers are left in the difficult position of determining which among myriad noises, neighbors, factories, and so on, must be disclosed to the buyers. Roberts acknowledges that certain special conditions might require sellers to disclose off-site problems. This article looks both at applicable state statutes as well as developing case law on the issue.
Residential Mortgages; Predatory Lending . Prof. David Reiss examines the relationship of rating agencies to predatory lending in Subprime Standardization: How Rating Agencies Allow Predatory Lending to Flourish in the Secondary Mortgage Market, 33 Fla. St. U. L. Rev. 985 (2006). Subprime lending has allowed borrowers with poor credit to obtain loans and purchase or refinance homes that otherwise would have been out of their reach. Yet the positives are balanced by the growth of predatory lending practices in the subprime market. Already, a well-developed literature discusses the rise of predatory lending, on the one hand, and the role of ratings agencies in the broader financial markets, on the other. Reiss brings both strands together and argues that “privileged raters are biased against the public interest.” He explains that Standard & Poor’s, Moody’s Investors Services, and Fitch Ratings are “privileged raters.” These raters “will not rate securities backed by pools of residential mortgages if any of those mortgages violate their rating guidelines relating to acceptable risk stemming from state predatory lending laws.” He points out that privileged raters are not charged with helping low- or moderate-income individuals become homeowners; rather, their goal is to protect investors. The standardization that the privileged raters have insisted on has, according to Reiss, allowed predatory lending to flourish.
Title and Zoning . Professors Michael J. Garrison and J. David Reitzel address an important set of real estate law issues in their article, Zoning Restrictions and Marketability of Title, 35 Real Est. L.J. 257 (2006). The authors initially point out that zoning regulations may have significant and adverse effects on land values, depending on the intended use of the property, and that historically courts have not deemed zoning regulations as a defect in title. For this reason, prospective purchasers of real property must not only determine the zoning classification of property but also carefully treat zoning contingencies and concerns in the purchase and sale contract. Many states recognize one exception to the rule that zoning is not a defect in title: violations of zoning that exist at the time the contract is executed render title unmarketable. Garrison and Reitzel suggest that courts have not developed a strong underlying theory for the exception, leading “to confusion and uncertainty as to its scope and application, and to a lack of clarity regarding the circumstances under which a zoning restriction will impair marketability of title.” The authors argue for an approach that seems to take the best of the property law and contract law worlds. They suggest that courts should “presume that zoning laws are not encumbrances” because this comports with the traditional and limited property concept of encumbrances; and that because of contract law, courts should presume that the seller impliedly represented “that the existing uses of land and its structures are legally permissible.” In their well-thought-out article, the authors review the “guiding concepts” underlying marketable title, the nature and definition of “encumbrances,” and the expectations of parties concerning zoning. The authors draw on case law from a wide selection of jurisdictions.
LEGISLATION
Arkansas enacts the Uniform Limited Partnership Act. 2007 Ark. Acts 15.
Michigan allows the owner of residential property to discharge a construction lien recorded on her property by an unlicensed person. The homeowner may recover the costs and legal fees. 2006 Mich. Legis. Serv. 497.
New York passes the Registered Mortgage Loan Originators Act. Any person who assists a customer in soliciting, negotiating, explaining, or completing a residential mortgage loan must comply with the registration and education requirements of the Act. Attorneys who represent the homeowner or purchaser are exempt. 2006 N.Y. Sess. Laws 744.
Ohio modifies the rules for notices of commencement for home construction contracts. Among other changes, if a mortgage and a notice of commencement on the same improvement are filed on the same day, the mortgage is considered to have been filed first. 2006 Ohio Laws File 169.
