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New Developments In Real Estate Law

By Phillip Vermont

On July 15, 2011, California Code of Civil Procedures Section 580e was passed by the California Legislature. That section changes the law of short sales for residential properties in two significant ways. First, it expands the protection for a borrower in a short sale scenario, so that if all lenders whose loans are secured by the property approve the short sale, none of the lenders may seek a deficiency judgment against the former borrower.

Also, it adds an additional protection by stating that none of the lenders who approve the short sale may require the former borrower to pay any additional compensation, aside from the proceeds of the short sale, in exchange for the written consent of the sale.

Prior to July 15, 2011, in a short sale situation, the former borrower still had to address a second or third loan, or for that matter, an equity line, recorded against the property. Only the first lender was prohibited from seeking a deficiency judgment.

Next, a significant case was decided in 2011, protecting commercial landlords. In that case, Frittelli, Inc. v. 350 North Canon Drive LP, the California Court of Appeal enforced the landlord’s liability exemptions in a commercial lease at the summary judgment stage of a litigation brought by the tenant alleging that the landlord’s renovation of the shopping center destroyed the tenant’s business. Specifically, the exculpatory clause in the commercial lease had exempted the landlord from liability for breach of lease, breach of the implied covenant of quiet enjoyment, rescission, and ordinary negligence. The lawsuit had arisen from the landlord’s alleged interference with the tenancy in remodeling the shopping center; the clause at issue stated that the landlord had no liability under “any circumstances” for breaches of the lease, and/or negligence for damages or injury arising from any cause in the areas of the shopping center outside the leased premises, or for injuries to the tenant’s business.

The lease was a “net lease”, which the court found ordinarily signals that the parties intended to transfer from the landlord to the tenants the major burdens of ownership of the real property over the life of the lease.

The lease at issue was a standard form agreement entitled “Standard Retail/Multi-Tenant Lease-Net”. While the court’s decision did not specify which form lease was utilized, in the commercial leasing field, it is quite common to use form leases which often contain similar types of exculpatory language.

This is an excellent case for commercial landlords. It is highly unlikely though that these types of exculpatory provisions would apply in a residential lease context.

Conversely, however, a decision of the Court of Appeal in Avalon Pacific – Santa Ana LP v. HD Supply Repair and Remodel LLC reached a decision that was not favorable for the landlord. In that case, the court found that the landlord could not recover costs of repair damages for the tenant’s breach of maintenance and repair obligations when the lease had neither expired nor been terminated. Similarly, the court found that when the lease will be in effect for an extended term, the landlord may only recover waste damages before the lease expiration of termination or a showing of substantial and permanent damage resulting in a reduced market value.

In other words, the court found that the time for a landlord to raise maintenance and repair damages (arising from the condition of the property) is when the lease expired, or was terminated from some action of the landlord, such as in an eviction action.

Phillip Vermont Receives Award from East Bay Association of Realtors

Congratulations to partner Phillip G. Vermont. He was awarded the “Affiliate of the Year” earlier this month by the Bay East Association of Realtors, a professional trade association serving over 5000 real estate professionals throughout the San Francisco Bay Area.

California Participated in the Multi-Billion Dollar Settlement Over Wrongful Foreclosures

In a press release today, California Attorney General Kamala Harris announced California’s participation in a nationwide settlement with the top five mortgage banks (Bank of America, Wells Fargo, Chase, CitiBank, and Ally) over wrongful foreclosures, robo-signing, and other mortgage servicing misconduct.

Calfornia’s settlement is valued at $18 billion.  Unlike past mortgage crisis relief programs, the five banks have purportedly agreed to make principal reductions for California homeowners of at least $12 billion total.   AG Harris also noted that the California settlement is unique from “the larger multistate agreement, which is enforceable in a federal court in Washington, D.C.,” in that the AG can enforce the settlement agreement in California state court.  Also, the settlement does not include mortgage loans owned by the government sponsored enterprises (“GSEs”) Freddie Mac and Fannie Mae, which make up around 60% of residential mortgages nationwide.

AG Harris also took this opportunity to announce that she will propose “a comprehensive legislative agenda to protect homeowners in the mortgage market…including a single point of contact for mortgage-holders and an end to the unfair and confusing system of dual-track foreclosures.”  These proposals are very relevant to the foreclosure cases I have recently worked on.

In a case before a federal court in San Francisco entitled Sohal v. Freddie Mac, we recently defeated the banks’ motion to dismiss.  The primary issue was whether the foreclosing party, which sold the mortgage to Freddie Mac and merely acted as a servicer, had the standing and authority to foreclose on the property.  Freddie Mac and Fannie Mae do not service loans so the point of contact of the loans they own are the servicers, who also typically originated the mortgage.  While there have been numerous problems in dealing with the servicer, I don’t think a single point of contact will resolve the problem.  The problem lies in the tangled web of  “back-end” contracts from the securitization of the mortgages.  Servicers do not make the actual decisions.  They have to obtain consent from the “investors.”  Any proposed legislation should, instead, focus on properly define the roles, rights, and obligations of all parties in the transaction, including the originator, the servicer, the fictional “nominee” MERS, and the “investors.”

We also have a wrongful foreclosure action in state court involving dual-track.  It’s not necessarily confusing.  However, from the borrower’s point of view, it is certainly unfair that the lender can sue for foreclosure and at the same time go forward with a non-judicial foreclosure sale.  The primary advantage for the lender (in addition to forcing the borrower to incur additional attorneys fees to deal with both proceedings) is that the lender can request the Court to appoint a receiver to collect rents if there is an assignment of rents.  California’s nearly century old non-judicial foreclosure scheme was intended by the legislature to provide a streamlined process while balancing the interests of both the lender and borrower.  The trend has been and continues to be in favor of lenders.  Courts are unlikely to reverse this trend, so ultimately it will be up to legislative action to re-balance California’s foreclosure scheme.  With the public backlash and the revitalized momentum of the recent settlements, foreclosure law should have very interesting year or two.

Sales Commissions Must Be In Writing By January 1, 2013

Last Fall, Governor Brown signed AB 1396 amending California Labor Code section 2751.  The new law states:

(a)  By January 1, 2013, whenever an employer enters into a contract of employment with an employee for services to be rendered within this state and the contemplated method of payment of the employee involves commissions, the contract shall be in writing and shall set forth the method by which the commissions shall be computed and paid.

(b)  The employer shall give a signed copy of the contract to every employee who is a party thereto and shall obtain a signed receipt for the contract from each employee. In the case of a contract that expires and where the parties nevertheless continue to work under the terms of the expired contract, the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.

(c)  As used in this section, “commissions” has the meaning set forth in Section 204.1.  “Commissions” does not include short-term productivity bonuses such as are paid to retail clerks; and it does not include bonus and profit-sharing plans, unless there has been an offer by the employer to pay a fixed percentage of sales or profits as compensation for work to be performed.

According to California Labor Code section 204.1, commissions are “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.”

The California Court of Appeal, Second District, clarified that compensation will be considered “commissions” if:

  • the employees are “involved principally in selling a product or service, not making a product or rendering the service”; and
  • “the amount of their compensation [is] a percent of the price of the product or service.”

Keyes Motors v. DLSE, 197 Cal.App.3d 557, 565 (1987).

If an employee’s compensation meets the Keyes test, then the employer must meet the following requirements of Section 2751 by January 1, 2013:

  • Commission Agreements must be in writing
  • The agreement must contain the method of computation and payment
  • Employee must receive copy of signed agreement
  • Employee must sign a receipt acknowledging he or she received the signed copy

This new law reaffirms California’s well-established rule that the right of an employee to commissions are governed by the terms of the contract for compensation. See Steinhebel v. Los Angeles Times, 24 Cal.App.4th 696, 705 (2005).  Thus, it is important for employers to regularly review their sales commission agreements and consult legal counsel, if necessary, to ensure that commission computation and payment terms are clear and that they have complied with section 2751.

 

Estate Tax Law Reenacted

The following posting was created by Randick O’Dea & Tooliatos, LLP partner Nick Tooliatos.  Nick is a Certified Specialist in Probate, Estate Planning and Trust Law.  Nick recently returned to the firm after a 1-year deployment in the Army Reserves.

As you may have known, 2010 was an exciting year for me.  As an Army Reserve Officer, I spent the year deployed on active duty as the Deputy Commanding General of the 1st Theater Sustainment Command, working in Kuwait, Afghanistan, Iraq, Egypt and Kyrgyzstan.  We had the mission to logistically support both the substantial drawdown of forces and equipment from Iraq, while at the same time, uplifting the 30,000-troop surge and required equipment into Afghanistan.  It was a tremendous experience working with thousands of great American service members.  I am grateful for your continued support to the law firm and me during my absence.  I am back to work now, full-time, and I look forward to seeing you one of these days, soon.

To make matters even more interesting for all of us in 2010. . . in mid-December, Congress enacted new tax legislation that may affect your estate plan.   When the President signed the new “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” (“TRUIRJCA”, or “2010 Tax Relief Act”) the federal estate tax sprang back to life.  For at least the next two years, the IRS will collect a 35% tax on all estates worth more than $5 million. This article provides you with a brief overview of the new law, and more importantly, gives you some things to think about as you consider how it may affect you.

Continue reading ‘Estate Tax Law Reenacted’

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