REAL ESTATE LAW 12TH EDITION BY MARIANNE JENNINGS ALL CHAPTERS 1_22 SOLUTIONS MANUAL by QuentinAxel

Instructor Manual: Marianne M. Jennings, Real Estate Law, 12th Edition 2022, 9780357518649;

Instructor Manual Marianne M. Jennings, Real Estate Law, 12th Edition 2022, 9780357518649; Chapter 1-22

Chapter 1: Introduction and Sources of Real Estate Law

Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

Chapter Objectives The following learning outcomes are addressed in this chapter (see PowerPoint Slide 1-1): 01.01

List the sources of real estate law, the topics covered in each source, and where to find the sources.

01.02

Discuss the concepts of legal reasoning, interpretation of statutes, and stare decisis.

01.03

Describe the costly significance of knowing and understanding real estate law.

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Key Terms American Recovery and Reinvestment Act of 2009 (ARRA): federal law that provided funding for infrastructure and had the goal of economic recovery case precedent: doctrine of stare decisis; examining prior decisions to reach decisions in present cases citation: legal shorthand referring to cases, statutes, regulations, and ordinances cite: see citation Code of Federal Regulations (CFR): compilation of regulations of federal agencies common law: uncodified law found in cases or in the history of real property Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA): The Superfund; a program for private payment by polluting industries for cleanup of toxic waste Consumer Financial Protection Bureau (CFPB): created under the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFCPA); it will now assume that enforcement role eminent domain: process of governmental entity‘s taking title to private property for public purposes Equal Protection Clause: part of the Fifth and Fourteenth Amendments to the Constitution; requires that laws apply equally to all Fifth Amendment: provision in United States Constitution that provides guarantee of due process Fourteenth Amendment: application of due process rights to the states (including the Equal Protection Clause), which requires uniform application of laws and nondiscrimination; applied in cases in which land conveyances attempt to include racial restrictions

Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

Mortgage Reform and Anti-Predatory Lending Act: federal law that regulates subprime, title, and other types of high-interest/high-default/high-repossession rate loans; provides requirements for disclosures and processes for consumers who obtain these types of loans Ordinance: laws passed on a local level of country, state, or city governments private law: laws between individual parties; e.g., landlord‘s rules and regulations or the terms of a contract Real Estate Settlement Procedures Act (RESPA): federal statute regulating disclosure of closing costs in advance and prohibiting kickbacks for referring customers to title companies United States Code (USC): compilation of all federal laws United States Constitution: framework for federal government [return to top]

What's New in This Chapter The following elements are improvements in this chapter from the previous edition:  

  

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New introduction that gives the full history on the saying, ―Possession is nine points of the law.‖ New case in Section 1-1i that illustrates the use of precedent on an issue of nuisance and hog-farming, In Re North Carolina Swine Farm Nuisance Litigation. This case is less complicated than the two previous cases on consent for mechanic‘s liens that were a little more difficult for students to understand. The hog-farming case is easily understood and interesting and remains an ongoing issue that deals with social responsibility and ethics issues. Extra references are provided in the IM for instructors to get updates on the 26 hog-farming cases. In Section 1-1i, new Ethical Issue 1.1 on the hog-farming dispute and the interests of the parties. New Consider 1.1 in Section 1-1i that draws on the findings in the hog-farming case on who can bring an action for nuisance. In Section 1-1, updated examples on constitutions, statutes, and new example on use of judicial decisions that involves a ban on fraternity houses by the City of Bowling Green trying to deal with Bowling Green students and rowdy behavior and dropping property values in single-family neighborhoods, Yoder v. City of Bowling Green. Updated chapter problem #6 on what defines ―living space.‖

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Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

Chapter Outline In the outline below, each element includes references (in parentheses) to related content. "CH.##‖ refers to the chapter objective; ―PPT Slide #‖ refers to the slide number in the PowerPoint deck for this chapter (provided in the PowerPoints section of the Instructor Resource Center); and, as applicable for each discipline, accreditation or certification standards (―BL 1.3.3‖). Introduce the chapter and use the Ice Breaker in the PPT if desired, and if one is provided for this chapter. Review learning objectives for Chapter 4. (PPT Slides 1-3). 1-1 Sources of Real Estate Law—USE POWERPOINT SLIDES 1-2 TO 1-12 USE FIGURE 1.1 (THE PYRAMID) AND POWERPOINT SLIDE 1-3 TO HELP STUDENTS FOLLOW ALONG IN YOUR DISCUSSION OF THE SOURCES OF REAL ESTATE LAW. 1-1a

The United States Constitution 1. Found at the base of the pyramid because it is the basis of all other laws 2. Very general and provides the legal constraints within which the other laws must fall 3. Examples of U.S. Constitutional provisions affecting real estate: a. Fourth Amendment—covers unlawful searches and seizures and the issuance of search warrants for the search of property b. Fifth Amendment—due process protections See, e.g., Fuentes v. Shevin, 407 U.S. 67 (1972); debtors are entitled to notice before their property is taken. Mortgage foreclosures and due process with robo-signing and other ownership issues. c. Fifth Amendment—eminent domain procedures and protections See, e.g., U.S. v. Causby, 328 U.S. 256 (1946) (Chapter 3)—Farmer whose chickens were being killed and having nervous breakdowns because of noisy Air Force jets landing near the Causby farm was entitled to compensation for a taking. d. Fourteenth Amendment—same language as the Fifth Amendment but applicable to states; also includes the Equal Protection Clause. See, e.g., brokers and steering—Brokers‘ and agents‘ control of racial composition of neighborhoods by steering potential buyers to prevent desegregation is an example of an equal protection issue. More recently, prohibitions on group homes for retarded citizens and AIDS patients have been subject to equal protection challenges.

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Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

SEE CHAPTER 19 FOR MORE DETAILS ON CONSTITUTIONAL ISSUES RELATING TO REAL ESTATE. 1-1b

Federal Legislative Enactments 1. Passed by Congress and found in the United States Code (U.S.C.) 2. Explain system of citation—title number precedes the U.S.C. and the section number appears behind 3. Use examples listed in the text and the following: Dodd-Frank Financial Reform Act is part of U.S.C. All federal financing agencies are established in U.S.C. and provide rules and regulations for loans, contracts, assumptions, secondary sales, etc. including: Consumer Financial Protection Bureau Department of Housing and Urban Development Federal Reserve Soldier's and Sailor's Relief Act (see Chapter 15)—requires special paperwork in the event a mortgage involves active enlisted people; provides for delays in foreclosure when mortgagors are active service people on duty outside the country. NOTE: War in Iraq caused an uptick in the use of this Act with many active duty soldiers afforded protection; national guard members called into active service with resulting pay cuts were protected. The National Environmental Policy Act (see Chapter 20)—provides for maintenance and protection of the environment and imposes restrictions on use—see 42 U.S.C. Sections 4321 et seq. The post-2008 market collapse resulted in the American Recovery and Reinvestment Act of 2009 (ARRA) with mortgage relief (Discussed in Chapter 15)

1-1c

Federal Administrative Regulations 1. Federal agencies are created by Congress to enforce the U.S.C. statutes and to promulgate their own regulations on the topics covered in the statutes; will provide the details needed for compliance with the laws For example—forms for securities registration and property reports under Interstate Land Sale Full Disclosure Act (ILSFDA); forms for mortgage disclosures (adjustable rate mortgages) 2. Examples of federal agencies involved in real estate transactions EPA—Environmental Protection Agency

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Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

HUD—Department of Housing and Urban Development—involved in providing low-cost housing and enforcement of Interstate Land Sales Full Disclosure Act FHA—Federal Housing Administration—provides low interest loans and insurance for lenders Department of Energy—energy policies Interior Department—management of federal parks and lands 3. Regulations are found in the Code of Federal Regulations (CFR) Paperback series; reprinted each year; updated daily by the Federal Register 1-1d

State Constitutions 1. Will contain provisions similar to the U.S. Constitution—the organization of the state government 2. Will also contain specifics on real estate transactions a. Use examples from text b. Find examples in your own state‘s constitution c. Use the following: Texas—A section providing a homestead exemption (a protection from creditors discussed in Chapters 4 and 15) California—A section providing a right eminent domain for all frontages on navigable waters in the state (Article 10, Sect. 1)

1-1e

State Legislative Enactments 1. Describe name/cite of your state statutes: For example–Florida Statutes Annotated—F.S.A. 689.91; Colorado Revised Statutes C.R.S. 39-5-12; West's Annotated California Code West's Ann. Cal. Fin. Code 31401 2. Subject matter of state legislative enactments: Real estate licensing Insurance law Contract law Water rights Partnership and corporation law Lien laws Wills, trusts and probate Deeds and recording

1-1f

State Administrative Regulations

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Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

1. Same purpose and set-up as federal regulations 2. Describe the agencies (name) in your state responsible for each of the following: Real estate licensing Corporations Securities registration Contractors' licensing Insurance licensing and regulation Utilities regulation 1-1g

County, City, and Borough Ordinances 1. Passed at the city, county, or borough level 2. Discuss some examples in your area relating to: Zoning Construction, inspection, and permits Curfews Parking limitations Parks Building and construction codes

1-1h

Private Law 1. Created by individuals to control their relationships 2. Areas of private law Landlord/tenant—pool use, cleaning deposits, noise regulations, and other lease terms Deed restrictions—square feet minimums, architectural controls, parking restrictions, limitations on pets Homeowner Associations—rights of use, association fees, liabilities Transfer restrictions—fee simple determinable Age zoning and restrictions 3. Private land ownership rights as found in public records

1-1i

Court Decisions 1. Interpretation of all laws is necessary For example—A city ordinance prohibits ―the use of any vehicle in any form in a city park.‖ Does the ordinance apply to the following?

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Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

Bicycle—no Child's tricycle—no Car—yes City maintenance truck—no Emergency vehicle—no War memorial with a vehicle—no Reason for variations in the answers is that intent of the ordinance is probably safety and noise reduction in city parks. 2. Language of the law is examined 3. Legislative intent is examined 4. Law is applied in each case 5. Court cases are reported and published Cases appear throughout the text Explain your state court system and the appellate review of cases USE THE FOLLOWING CASE AND POWERPOINT SLIDE 1-12 TO DISCUSS WHEN A NUISANCE SUIT CAN BE FILED AND BY WHOM. CASE BRIEF: In Re North Carolina Swine Farm Nuisance Litigation 2017 WL 5178038 (E.D.N.C. 2017) FACTS:

Twenty-six individuals (plaintiffs) who lived near hog-farming operations in eastern North Carolina brought suit against Murphy-Brown, LLC, the owner and operator of the hog operations (Defendant). The nuisance claims related to the smells, flies, and general muddy messes resulting from the large operations that raised hogs for slaughter. The court consolidated the cases into one suit for purposes of addressing the same legal issues in all of the cases prior to each case proceeding to trial. The issue addressed in this decision related to the type of land interest a plaintiff must have in order to bring a nuisance suit. The plaintiffs in the cases were not actually property owners but were adults related to the property owners who lived on the properties near the hog-farming operations either in the actual owners‘ residences or on trailers parked on the properties. The plaintiffs do not have rental agreements for their use of the homes or the space for their trailers and have not paid rent. The defendant asked for a motion for summary judgment on the issue of lack of property interest as a requirement for a nuisance claim.

ISSUE:

Can those who occupy the land of another (without ownership rights, a lease, or payment of rent) have standing to bring a nuisance suit?

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Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

DECISION:

The court held that those who are on the property in a non-trespassory manner do have standing to bring a suit. The court noted that without such a conclusion those who were married to someone but did not have their name on the deed for the land on which they lived could not bring a nuisance suit. The court used a prior case that involved a beauty shop owner having to leave her shop because the smells from the plastic factory were too great for her customers to endure. She had left the premises and was not paying rent. However, the court found that her lease interest at the time of her leaving was sufficient standing to pursue a nuisance claim. Defendant additionally contends that two plaintiffs, Gertie Jacobs and Eddie Nicholson, Jr., have not even occupied any affected property. In support of this contention, defendant relies on the fact that Jacobs‘ voter registration and driver's license and Nicholson's voter registration, driver's license, and medical records reflect addresses different from the affected properties at which they claim to live. Defendant urges the court to disregard these plaintiffs‘ deposition testimony regarding the discrepancies on the ground that the testimony is ―selfserving.‖ The court declines to do so.

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Additional Activities and Assignments Answers to Case Questions 1. What are the differences between the plaintiffs in this case and the owner of the beauty shop in the Kent v. Humphries case? Kent v. Humphries

In Re North Carolina Swine Farm Nuisance Litigation

Plaintiff paid rent

Plaintiffs did not pay rent

Plaintiff had some form of lease—her name was associated with the property

Plaintiffs were not on the property title; plaintiffs did not have leases Some plaintiffs did not list the property as their addresses for mailing and voting purposes

Plaintiff was not occupying the property

Plaintiffs were occupying the property

Plaintiff left the property because of the smells

Plaintiffs remained on the property

Plaintiff lost the investment in her

Plaintiffs had no economic losses because

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Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

business

of the alleged nuisance

Commercial operations by both plaintiff and defendant

Commercial operations by defendant and none by plaintiffs

2. What effect will the court’s finding on the standing required for plaintiffs in nuisance cases have on nuisance claims? The scope of cases has broadened—more people will be able to bring nuisance cases as a result—they need not own property or even live in the area as long as they can show a right to be there. The case may make nuisance recoveries an industry with moving plaintiffs who take possession of land near nuisances and then move along to the next nuisance recovery. 3. Does the court’s use of the precedent change the nature of nuisance recovery? The recovery is now not economic-based—losing the right to use your land productively, losing the right to peaceful co-existence—recovery is the goal not abatement of the nuisance. The finding is a widening of the scope of plaintiffs in nuisance cases. Without any financial or ownership or economic requirements for occupying the land, nuisance claims can be brought by squatters or those who use others‘ property for purposes of litigation. In short, they have no skin in the game. In the 26 cases, the plaintiffs did not ask for injunctive relief (stopping the operations). They only asked for actual and punitive damages so that the farms would be put out of business.

Additional Case Information The hog-farm litigation in North Carolina is a study in civil procedure and a host of other issues as the doctrine of nuisance and litigation were used as a means to shutting down hog-farming operations. One of the interesting questions in the cases, beyond the nuisance issues, was the desire of the defendants to have the discovery sealed. They argued that the discovery in the case had significant information about their operations, their finances, and other business information that would affect their ability to compete. The decision of the court of appeals, after the lower court decisions on this issue, was that the defendants failed to overcome the common law presumption of access. Thus, a great deal of information about the hog-farming operations, particularly useful to animal rights activists, became public. In Re North Carolina Swine Farm Nuisance Litigation, 2020 WL 119736 (E.D.N.C. 2020). The suits continued after this and other determinations on general procedural issues: ―Through five trials, held from April 2018 to March 2019, juries awarded 36 plaintiffs a total of $550.5 million. (The awards were later reduced to approximately $98 million due to a state law that places a limit on punitive damages.) Those verdicts have put family farmers out of business and taken a toll on our rural communities.‖ https://www.ncfarmfamilies.com/ farmkeepersblog/all-eyes-on-richmond-an-update-on-murphy-browns-appeal-ofnuisance-lawsuits.

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Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

The cases are now on appeal in the federal fourth circuit court of appeals. For an excellent summary of the issues in the case, see https://www.ncporkreportdigital.com/ncpq/0319_fall_2019/MobilePaged Article.action?articleId=1523953#articleId1523953. The issue of the amount of damages is central to the appeals, particularly punitive damages. Also central to the cases has been the North Carolina statute that limits nuisance recovery when property occupants have moved to the nuisance. There is more on these nuisance cases in Chapter 3.

Answer to Consider (1.1) a. A farmer leasing property for purposes of growing crops who does not live on the property. The lease interest would give the farmer standing because the value of his lease and crops might be affected by the nuisance. b. A child who does not live on the property but will inherit the land from his parents. A future interest is what the child holds (see Chapter 2 for more information). There is some precedent for future land interest holders to stop the use of the land by the current owner in order to preserve its value—and there is some interest in the land. c. A mortgage lender on the property. The ability of the lender to foreclose and obtain a price for the land that will cover some or all of the mortgage amount is affected by the value of the land. And the value of the land can diminish when there is an unabated nuisance. The type of mortgage (see Chapter 15) would also influence this outcome— some states have the lender hold title and some merely have a lien, but the value of their interest is affected. d. A parent living with a child who owns the property. They would be lawfully on the property and under this decision need not pay rent or have a lease in order to bring a nuisance action. e. Employees who work daily on the property. It is possible that this one might qualify as a public nuisance (see Chapter 3 for more discussion). But they do not have a land-interest connection. It might be more difficult for them to recover under private nuisance doctrine. f. A co-owner who does not live on the property. They would have an ownership interest and could bring an action for nuisance because of the effect on the value of their interest.

Answer to Ethical Issue (1.1) The property owners have a claim related to the inability to use their property. For example, they can no longer hang their clothes outside because of the smell and there is a line at the coin laundries for drying clothes. They line up at 5:30 AM to be in there first to get their clothes dried. There are no longer outdoor gatherings in these communities because of the smells. On the other side, there is a need for food production. The farm operations are not the kind of thing that can be shut down completely. However, the owners of the farms and their operators could propose a compromise on the wet livestock waste—there are means for containing it and developing it into fertilizer as a by© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

product that would cut down on the lagoons and the smell and the waste retention. The processes would require additional expense, but it would be a means of balancing the interests of the parties—relief from the nuisance with production continuing but with more environmentally friendly processes. With ethical issues, there are nearly always compromises to be made on both sides, but the parties have to be willing to acknowledge the sentiments from the other side. How would I feel if I were on the property? How would I feel if it were my family business that I was running for a big company and I lose my means of support?

Justification for Studying Real Estate Law: Some Cautions and Conclusions  Explain to the students the complexities of real estate transactions such as recording, second mortgages, etc.  Explain the costs of not understanding the type of financing and security involved with your property.  Explain the need for a working knowledge of terms to be able to negotiate.  Explain how knowing the law can help a buyer, seller or broker ask the right questions in a real estate transaction.  Competence in legal issues can increase returns on investment by decreasing troublesome legal questions and costly litigation. The Most Frequently Asked Real Estate Questions Discuss the questions with the students. A possible class exercise is to survey the students to determine whether they have had or do have the questions as they are listed.

Answer to Consider (1.2) 1. State statutes; state regulations; local ordinances, private law (the rental agreement); case law 2. State statutes; state regulations; private law (the listing agreement/sales contract); case law 3. State statutes; state regulations; private law (the sales contract/escrow instructions); case law 4. State statutes; state regulations; case law 5. State statutes; state regulations; private law (the sales contract); local law (recording process); case law 6. State statutes; private law (insurance contracts); case law 7. State statutes; private law (antenuptial/prenuptial agreements); case law 8. State statutes; private law; case law 9. State statutes; private law (mortgage contract; note) 10. State statutes; case law 11. State statutes; local laws; case law; private law (deeds) 12. Federal statutes; federal regulation; case law 13. State statutes; private law (listing agreement); state regulations; case law 14. State statutes; local laws (recording); case law 15. State statutes; local laws (recording); case law

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Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

16. Private law for HOA rules, Constitution for rights in the event the HOA seeks to lien the property and its rights to foreclose and collect on the lien, state laws that govern HOA structure and requirements 17. Local ordinances on short-term leases, private law such as HOA restrictions on short-term leases, local and state laws on landlord and health requirements; state and local licensing requirements for being an ongoing landlord, private law for the terms of such a short-term lease

Answers to Chapter Problems 1. The most recent legislation is Mortgage Reform and Anti-Predatory Lending Act, which was part of the Dodd-Frank Act. There are specific disclosure requirements as well as rights in foreclosure, with more protections on subprime mortgage loans. Chapter 15 includes more detailed information. 2. Interstate Land Sales Full Disclosure Act—federal statutes, United States Code (USC); possibly state laws on fraud and related state and federal regulations. 3. The issue raised here is one of eminent domain and economic development. There is more on this issue later in the text. However, the law covering the situation would be constitutional law and the Fifth Amendment takings clause as well as local ordinances and zoning laws and local procedural laws. 4. Local laws on zoning and perhaps a case of misrepresentation under state law. Also, covenants and deed restrictions could help. 5. California Code Annotated—State regulatory body and related regulations. 6. Should have been drafted more clearly, but garages and porches are generally not livable areas even though they are under the roof and would not be included. The key here will be the interpretation of ―living‖ in front of space. Can one live in an unfinished basement? That would be an interesting discussion for the court. Because of these debates on square footage, many real estate agents and homeowners are not describing their square footage very carefully, using terms such as ―approximate‖ and inserting ―finished‖ in front of ―living space‖ or even just stating the amount of square footage in the basement and describing it as ―unfinished.‖ In short, leave nothing ambiguous in descriptions. 7. Case law would be helpful in defining "living space." 8. The EPA has authority to mandate clean-up under federal environmental statutes and federal regulations. 9. These federal land exchanges are quite complex and require the individuals involved to go through their Congress members, state, and local officials (including zoning boards at city and county levels). Virtually every agency at the federal and state levels is also involved from HUD to BLM to city hall.

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Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

10. State laws on broker relationships; state regulations on broker; private law which would include their listing contract and case law which has addressed this issue specifically (see Chapters 12 and 13). 11. Not even a close call—there was no agreement between the McClures and Simpson. The VPHOA had the contract and would have the right of lien enforcement, but such a lien was not possible because there was no contract between the McClures and the HOA related to tree removal. In fact, the court concluded that it was a wrongful lien filing. Not even remotely close to consent. The court even used the word ―vindictive‖ in describing the conduct of the McClures. For the defendants to succeed on their motion for summary judgment, the court must find that no express or implied contract existed requiring that the defendants provide labor or supplies to the plaintiffs. The plaintiffs in this case have not asserted that such a contract existed between them and the defendants. To the contrary, the plaintiffs have asserted that Simpson and the VPHOA performed this work without their knowledge and consent. Likewise, the defendants do not allege that such a contract existed. The undisputed facts reveal that Simpson, on behalf of the VPHOA, removed trees from some property that was within the view of the plaintiffs' home. The plaintiffs placed a lien on Simpson's home as a result of his actions. Because no contract was alleged and there was no meeting of the minds, the court finds that the first element required for a mechanic's lien has not been satisfied. Since the first element has not been satisfied, it is unnecessary to discuss the remaining elements. The court further finds that the plaintiffs are not the proper parties to file the mechanic's lien. It was Simpson and the VPHOA who performed the services. For this reason, it would have been Simpson and the VPHOA who could have placed a mechanic's lien as security for the work they performed. In order for the plaintiffs to claim a lien on Simpson's residence, the plaintiffs would have had to provide labor or supplies to Simpson. This did not occur in this case. Simpson provided services, but not pursuant to a contract; thus, neither party owed a debt to the other. McClure v. Fisher Attached Homes, 882 N.E.2d 61 (Ohio 2007).

In-Class Exercises Have the students play the role of a real estate agent and have them decide which sources of law should be consulted to provide them with the answers to the following questions: 1. How would I find out when and where I renew my license? 2. I am selling some 200-acre ranch lots in Prescott, Arizona. Where can I find out if the developer has complied with all the laws on disclosure? On land use? How would I find out who maintains the roads? Where would I find the zoning restrictions on the property? 3. I have a buyer who wants to finance the purchase of a home. How do I make sure that the lender has given him all of the necessary foreclosures? 4. I have two clients who would like to do a property exchange, but neither one of them understands what happens from a tax perspective? Where can they find help?

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Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

5. I have clients who are buying a home in a gated community with a homeowners‘ association. What source of law tells me the requirements and rights of owners in the community? 6. My neighbor has constructed a chicken coop and is now raising chickens and eggs. How would I find out if the chicken coop is legal? 7. I have a group of three clients who want to go together and purchase an apartment building. How would I find out what types of business they could form to do this? [return to top]

Resources Alexander, ―History as Ideology in the Basic Property Course,‖ 36 J. of Legal Educ. 381-89 (September 1986). Anderson, ―Comparative Perspectives on Property Rights: The Right to Exclude,‖ 56 J. Legal Educ. 539 (2006). Anderson, ―The Divergent Evolution of English Property Law,‖ 29-OCT Prob. & Prop. 50 (2015). Blackstone, Commentaries on the Laws of England, Book II, Of the Rights of Things, Baton Rouge, LA: Claitor's Publishing Division. Blumenthal, ‖‗To Be Human‘: A Psychological Perspective on Property Law,‘‘ 83 Tul. L. Rev. 609 (2009). Cribbet, ‗‘Property in the First Year,‘‘ 18 J. of Legal Educ. 55 (1965). Diamond, ‗‘The Meaning and Nature of Property: Homeownership and Shared Equity in the Context of Poverty,‘‘ 29 St. Louis U. Pub. L. Rev. 85 (2009). Eagle, ―The Really New Property: A Skeptical Appraisal,‖ 43 Indiana L. Rev. 1229 (2010). Haar and Liebman, Property and the Law, Chapter 1. Hamilton, ―The Ancient Maxim Caveat Emptor,‖ Yale L. J. Vol. XL No. 8, 1931, 1133-87. Jennings, ―The Year in Review 2006: Best of the Courts 2006 (in the humorous sense),‖ 35 Real Est. L. J. 586 (2007). Madison, ―The Real Properties of Contract Law,‖ 82 B.U.L. Rev. 405 (April 2002). Nash, ―Packaging Property: The Effect of Paradigmatic Framing of Property Rights,‖ 83 Tul. L. Rev. 691 (February 2009). Smith, ―Mind the Gap: The Indirect Relation Between Ends and Means in American Property Law,‖ 94 Cornell L. Rev. 959 (May 2009). Yeoman, ―Here Are the Rural Residents Who Sued the World‘s Largest Hog Producer over Waste and Odors—and Won,‖ Food & Environment Reporting Network, (December 2019). © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Chapter 1: Introduction and Sources of Real Estate Law

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

Instructor Manual Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

Table of Contents Chapter Objectives ...................................................................................................................................................... 18 Key Terms ........................................................................................................................................................................ 18 What's New in This Chapter ..................................................................................................................................... 20 Chapter Outline ............................................................................................................................................................ 20 Answers to Case Questions ..................................................................................................................... 24 Answer to Consider (2.1) ......................................................................................................................... 24 Answer to Consider (2.2) ......................................................................................................................... 25 Answer to Consider (2.3) ......................................................................................................................... 29 Answer to Consider (2.4) ......................................................................................................................... 31 Answers to Consider (2.5) ....................................................................................................................... 32 Answers to Case Questions ..................................................................................................................... 34 Answers to Case Questions ..................................................................................................................... 36 Answer to Consider (2.6) ......................................................................................................................... 36 Answers to Discussion Questions ............................................................................................................ 38 Additional Activities and Assignments................................................................................................................. 38 Answers to Chapter Problems ................................................................................................................. 38 In-Class Exercises ..................................................................................................................................... 43 Discussion Questions ............................................................................................................................... 44 Resources ................................................................................................................................................ 45

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

Chapter Objectives The following learning outcomes are addressed in this chapter (see PowerPoint Slide 2-1): 02.01

Describe and explain the various types of present and future land interests and list the length of those interests and discuss their transferability and characteristics.

02.02

Recognize the types of land interests that can be created.

02.03

Discuss the favorable and unfavorable aspects of various forms of land interests and the rules applicable to them.

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Key Terms contingent remainder: future interest that follows a life estate and that is not certain to follow or has unknown takers Doctrine of Worthier Title: principle of common law that gives a grantee the full fee simple title when the grant is made ―to grantee with remainder to the heirs of the grantee;‖ the two estates are merged into a fee simple estate for the grantee executory interest: future interest that is not a remainder and not an interest in the grantor fee: an inheritable interest in land fee simple: highest land interest; full title; right to convey or transfer by will or mortgage without restriction fee simple absolute: another term for a fee simple fee simple defeasible: a fee simple estate that can be lost by violation of a condition or use restriction placed in the transfer by the grantor fee simple determinable: full title to land so long as certain conduct is avoided; e.g., ―To A so long as the premises are never used for a bar‖ fee simple subject to a condition subsequent: full title provided that there is compliance with a condition; e.g., ―To A upon the condition that the property is used for school purposes‖ fee tail: full title restricted in its passage to direct descendants of the owner freehold: an interest in land that is uncertain or unlimited in duration inter vivos: during the life of; while alive; e.g., an inter vivos gift life estate: those who hold a life estate in property life tenant: those who hold a life estate in property

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

nonfreehold estates: type of land interest that is certain and definite in duration, such as a lease for a period of time possibility of reverter: future interest in the grantor that follows a fee simple determinable power of termination: future interest in the grantor that follows a fee simple subject to a condition subsequent remainder: future interest in someone other than the grantor; a remainder follows a life estate reversion: future interest in grantor that results after life estate terminates and no remainder interest was given right of entry: future interest in grantor that results when the grantee fails to honor the condition placed on the grant of a fee simple subject to a condition subsequent Rule Against Perpetuities (RAP): rule that prohibits the control of estates from the grave; provides a duration cap on contingent remainders and executory interests Rule in Shelley‟s Case: common law rule that merges future and present interests in A when grant is ―To A for life, remainder to A‘s heirs‖; has been abolished in many states; saving clause provision for alternative distribution of property being willed away; can be a defense to the Rule Against Perpetuities saving clause: clause in a will that prevents the destruction of interests or provides alternatives should any provision in the will violate the Rule Against Perpetuities testamentary: disposition by will vested remainder: a remainder that will automatically take effect when the life estate ends vested remainder subject to complete divestment: a remainder that can be completely lost if the terms of vesting are not met; not automatic on termination of the life estate vested remainder subject to partial divestment: a remainder that can be partially lost as other remainder men develop, i.e., more children are born during the life estate [return to top]

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

What's New in This Chapter The following elements are improvements in this chapter from the previous edition: 



Updated discussion of all future interests in Section 2-1c to reflect new state laws, limitations, and judicial alternatives solutions to the harsh results that some of these estates resulted in. In Section 2-1c, new case on fee simple determinables and the definition of what constitutes a ―camp‖ in a restriction on use and whether what was being operated really was a camp within the intent and meaning, Prelaz v. Town of Canton. New case in Section 2-2c, Rule Against Perpetuities, so that there is an example that students can understand and relate to. Whether an educational trust that ran for 25 years violated the Rule Against Perpetuities for a grant made in a grandmother‘s will for her grandchildren, Berry v. Union National Bank. New chapter problem #10 on the Trails Act‘s taking of landowner‘s property, Rogers v. U.S.

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Chapter Outline In the outline below, each element includes references (in parentheses) to related content. ―CH.##‖ refers to the chapter objective; ―PPT Slide #‖ refers to the slide number in the PowerPoint deck for this chapter (provided in the PowerPoints section of the Instructor Resource Center); and, as applicable for each discipline, accreditation or certification standards (―BL 1.3.3‖). Introduce the chapter and use the Ice Breaker in the PPT if desired, and if one is provided for this chapter. Review learning objectives for Chapter 4. (PPT Slides 1-3). 2-1 Land Interests: Freehold Estates and Accompanying Future Interests—USE POWERPOINT SLIDES 2-2 TO 2-18 FIGURE 2.1 AND POWERPOINT SLIDE 2-3 PROVIDE AN OVERVIEW OF ALL PRESENT AND FUTURE LAND INTERESTS. 2-1a

Freehold Estates 1. Freehold estate—unlimited in duration 2. Fee—is inheritable

2-1b

Fee Simple Absolute Ownership 1. Greatest degree of land ownership a. Can transfer title—inter vivos or by will b. Can pledge property c. No one holds any future interest in it 2. Created by language ―To A‖ or ―To A and his heirs.‖

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2-1c

Fee Simple Defeasible—unlimited or uncertain in duration with the potential of termination 1. Fee Simple Determinable and Possibility of Reverter a. Has an attached use restriction b. Compliance with the restriction is required or the estate is automatically terminated c. Examples ―To A so long as the property is used for grazing.‖ ―To State University so long as the property is used for a golf course.‖ ―To Mesa School District for the time that the property is used for a Lehi school.‖ 2. Possibility of Reverter—The Matching Fee Simple Determinable Future Interest a. b. c. d. e.

Future interest is fee simple determinable Future interest in the grantor Creation—‖To A so long as the property is used for a playground.‖ Can be transferred inter vivos or at death Statutory restrictions i. Some states limit effectiveness of restriction—40 years ii. Other states require that documents reflecting the restriction be recorded iii. Constitutionality of statutes has been questioned

3. Fee Simple Subject to a Condition Subsequent a. Has an attached use restriction b. Compliance with the restriction is required or the grantor can terminate the estate by retaking possession and title c. Examples ―To A on the condition that A is married, but if A should ever divorce, the grantor may enter and possess the property.‖ ―To A subject to the condition that no dancing ever occur on the property.‖ ―To A provided that the premises are always used for a Lutheran church.‖

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

NOTE:

Be certain the students understand that the distinction between a fee simple determinable and a fee simple subject to a condition subsequent is that the fee simple determinable automatically terminates upon violation of the use restriction. A fee simple subject to a condition subsequent terminates only if the grantor re-enters and takes the property back (generally through a quiet title action). The determination is based on the choice of language; a reflection of the parties' intent. 4. Right of Entry/Power of Termination: The Other Matching Future Interest a. Future interest that goes with a fee simple subject to a condition subsequent b. Grantor's future interest c. Creation—‖To the city of Minneapolis on the condition that the land be used for a city park, and should the land ever be used for another purpose, I reserve the right to re-enter and take possession of and title to the property.‖ d. Different from the possibility of reverter in that the grantor must take action to obtain possessory rights of the future interest whereas the possibility of reverter is automatically vested in the grantor at the time of the restriction violation e. Grantor can make inter vivos transfer or transfer by will f. Some states have restrictions similar to those noted under the possibility of reverter g. Distinctions between possibility of reverter and right of entry or power of termination i. Possibility of reverter uses timing language—‖so long as‖, ―until‖ ii. Right of entry/power of termination uses conditional language—‖if‖, ―provided that‖, ―only if‖, ―on the condition that‖ iii. Many states carry a presumption for the right of entry so that land interests are not automatically lost with the resulting confusion

CASE BRIEF: Prelaz v. Town of Canton 760 S.E.2d 389 (N.C. App. 2014) FACTS:

On May 4, 1992, Champion International Corporation conveyed title to the Camp Hope property (a 110-tract of land) to the Trustees of the Robertson Memorial Young Men's Christian Association (YMCA) by a deed that granted, ―a fee simple determinable estate in the lands‖ known as the Camp Hope property. The fee simple determinable estate would last so long as the YMCA did not violate any of the 17 conditions in the deed, which included:

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1. The property will be used for active recreational purposes. 2. The use of the property [only] for active recreational purposes such as camping for scout troops, organized camping programs for other organizations, picnicking, social and political gatherings, games such as shuffleboard, baseball, softball, tennis, football, hiking, etc. but will not permit the land to be used solely in a passive manner such as reverting to its nature state with the sole recreational use being hiking. There was another clause in the deed that provided that whatever camp was operated on the property would be ―primarily for the benefit of residents of other areas and states.‖ This clause in the deed was not part of the list of the 17 conditions. In 1996, following a YMCA violation, the deed provided that the town of Canton would then hold title to the property. If Canton failed to comply with the deed conditions, title then reverted automatically to Champion. In 2005, Canton negotiated a five-year lease with Wellspring Adventure Camp LLC to operate a weight loss and fitness summer camp at Camp Hope. Wellspring operates weight loss camps around the country and of the 978 campers who came to Camp Hope only 20 were from the Canton area. In 2006, John and Deborah Prelaz (plaintiffs) purchased a tract of land adjacent to Camp Hope. In April 2006, International Paper Company (which had merged with Champion) conveyed its reversionary interest in Camp Hope to the Prelazes. Following the Wellspring leases and activities, the Prelazes filed suit to have title to the Camp Hope property declared in their name. The jury found that title rested with Canton and the Prelazes appealed. ISSUE: Who owns the camp property? DECISION:

The decision of the trial court was reversed and remanded. The court held that Champion had created a fee simple determinable interest that provided for reversion of title for violation of any of 17 conditions listed in the deed. The deed had clear, express, and unambiguous language of reversion or termination upon condition broken. Champion intended to trigger reverter only if one of the enumerated conditions was broken. If Champion had intended to further restrain the Town's use of the property by prohibiting it from operating a summer camp that primarily benefited residents of other states, it should have done so in an enumerated paragraph. Thus, nowhere in the paragraph or in the Deed itself is it ―clearly manifested‖ that title to the property is to revert to Champion, or its successor, upon the Town's violation of the clause.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

Answers to Case Questions 1. Draw a diagram of what was conveyed and to whom. Champion conveys title to YMCA YMCA violation Reverter interest goes to Canton Champion sells its reversionary interest in property to Prelazes Canton leases the camp to Wellspring Prelazes assert title as reversionary interest holders because of local-resident clause violation Court holds there is no reversion because the 17 clauses triggered the reversion, not the residency requirement—that was an expression of intent but not a triggering clause. 2. What is the difference between a clause and a condition in a fee simple determinable deed? A clause is an expression of desire—a condition is a triggering event for automatic termination of a present interest and the creation of a future interest into a present interest (reversion). 3. What should Champion have put in the deed if it wanted Camp Hope property to be used to benefit local residents? It should have made the residency requirement the 18th condition in the deed.

Answer to Consider (2.1) The court found for the Ator heir. Below is the court‘s explanation: It is undisputed that by operation of the 1954 Warranty Deed, Thelma Ator conveyed to School District a determinable fee simple in the Subject Land and retained a transferable possibility of reverter. A determinable fee simple, also known as a determinable fee upon conditional limitation, ―is a fee simple except that it is immediately terminated by the happening of some possible event, subsequently. The estate remaining in the grantor after the conveyance of such an estate is a possibility of reverter which he may convey, it being considered an interest in the land.‖ In contrast, a fee simple subject to condition subsequent ―may be terminated by the grantor by re-entry upon the happening of some possible event, subsequently. What remains to the grantor after the conveyance of such an estate is a power [of re-entry] ... which is not an interest in the land and is not sufficiently in esse to be subject of conveyance.‖ Breach of a conditional limitation triggers automatic reversion of land, whereas breach of a condition subsequent results in forfeiture. The question before us is one of contract interpretation—whether a condition has occurred within the meaning of the 1954 Agreement and Warranty Deed triggering automatic reversion of the Subject Property to Plaintiff Ator. School District argues the ―spirit‖ of the Agreement was to benefit children by promoting football and providing School District with land on which students could practice and play the game. School District insists these objectives currently are being met by its use of the Subject Property for eighth and ninth-grade football practices as well as for FOR practices and games. School District points out that none of these goals would be advanced if Plaintiff Ator assumed control of the Subject Property, demolished the

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stadium, and prevented children from playing football there. School District notes the 1954 Agreement contains five express references to ―the students‖ of School District, but no references to the high school, its varsity football team, or to the age or grade level of football players. School District maintains FOR football games are played ―in the manner and form generally employed by high schools‖ as required by the Agreement. Plaintiff Ator counters there is no evidence Thelma Ator intended to donate the land for the promotion of football in general. Rather, the express language of the conveyance indicates she hoped to correct School District's inability to ―institute and conduct in its school system a fully organized and regularly scheduled program of football training and football games‖ by giving it property on which to ―own or maintain a football field, stadium or other facility for the use of the students of said school district in the practice and playing of football.‖ He stresses it was School District's choice to build a new stadium on separate property rather than renovate and expand the facilities on the Subject Property in keeping with its contractual obligations under the 1954 Agreement and Warranty Deed. Plaintiff Ator argues School District cannot rely on FOR's use of the Subject Property to bootstrap itself into alleged compliance with the terms of the conditional grant. We agree with Plaintiff Ator. The plain language of the 1954 Agreement and Warranty Deed indicates that Thelma Ator intended for School District, not any other entity, to (1) maintain ―upon said property a fully organized football program;‖ (2) use the Subject Property ―for the playing of a complete program of regularly scheduled football games and contests during each school year,‖ and (3) ―maintain a regularly organized football program upon said property comparable in quality and standards to similar programs maintained in other communities of like size.‖ It is undisputed none of School District's football teams have played any football games at Ator Field since 2001. The plain fact is School District no longer maintains upon the Subject Property a fully organized football program of regularly scheduled football games as required by the 1954 Agreement and Warranty Deed. We agree with the trial court that School District cannot rely on FOR as its surrogate to avoid reversion of the Subject Property to Plaintiff Ator. Ator v. Unknown Heirs, Personal Representatives, Devisees, Trustees, Successors and Assigns of Ator, 146 P. 3d 821 (Ok. App. 2006).

Answer to Consider (2.2) a. Fee simple determinable and the future interest is a possibility of reverter. b. Fee simple subject to a condition subsequent and the future interest is a right of entry/power of termination. c. Fee simple determinable and the future interest is a possibility of reverter. d. Fee simple determinable and the future interest is a possibility of reverter. 2-1d

Fee Tail Ownership 1. Uncertain or unlimited in duration

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2. Inheritable but only by bloodline or lineal descendants such as children, grandchildren, and great grandchildren 3. Created by language such as, ―To A and the heirs of his body.‖ 4. Legislation a. Many states treat fee tails as fee simple absolutes b. Other states have statutes (disentailing devices) which permit the removal of the fee tail restrictions c. Other states treat it as a life estate d. Three states recognize and enforce fee tails e. All states still recognize fee tails created before these statutes were passed 2-1e

Life Estate Ownership 1. Creation a. Freehold—lasts only as long as the life of the holder or another measuring life b. Uncertain in length c. Examples: ―To A for life.‖ − conventional life estate ―To A for the life of B.‖—life estate pur autre vie—B is the cestui or measuring life and holds no interest d. Can be an effective estate planning device to provide for a surviving spouse and still leave funds for the children i. Fee simple determinable ii. Fee simple subject to a condition subsequent iii. Fee simple determinable

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USE POWERPOINT SLIDE 2-11 TO REVIEW ALL TYPES OF INTERESTS. 2. Rights of Life Tenants a. Exclusive possession during their lives b. Obligation not to destroy the property or commit waste c. Protect interests of those who will own the land in the future Examples: Life tenant on a farm depleting the soil by failure to use proper agricultural techniques Life tenant of a residence failing to maintain property with resulting water damage Timber example from the text d. Life tenants can transfer their interests i. only while they are alive ii. cannot transfer by will iii. creditors have security in property only so long as life tenant is alive e. Tax payments on life estate allocated in each state 2-1f

Reversions 1. Follows a lesser estate—life estate 2. Future interest in the grantor 3. Creation—‖To my husband for his life‖ When the husband dies, title to the property reverts back to the grantor 4. Also follows the termination of non-freehold estates such as a tenancy for years or periodic tenancy

2-1g

Remainders 1. Follow the termination of a lesser estate—life estate 2. Future interest in one other than the grantor 3. Creation ―To my husband for life, then to my daughter, Samantha.‖ 4. Vested Remainders a. Remainder given to persons in existence who have the immediate right to the land interest when the life estate terminates b. Example:

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―To my husband for his life, then to my daughter, Samantha.‖ Samantha holds a vested interest because: i. She is in existence at time of grant ii. Upon her father's death, she has the right to the property c. Vested remainder subject to partial divestment i. Remainder given to person or persons in existence, but there could be more persons added so that the interest of each remainderman can decline ii. Generally, covers a remainder given to a group iii. Example: ―To my brother for life, then to my brother's children. At the time of the grant, the brother is alive and has two children. At the time of the grant the two children are ascertained and will be entitled to their interest of 1/2 upon their father's death. However, there could be more children born after the grant and the two children would only get 1/3 or 1/4 as opposed to 1/2 if more children are born d. Vested remainders subject to complete divestment i. Remainder given to person in existence which will automatically vest when prior estate terminates ii. However, condition subsequent could cause a complete loss of the remainder iii. Example: ―To my husband for his life, then to my daughter provided she is married.‖ The daughter's interest is vested and automatic, but if she is not married, she can lose the interest completely. 5. Contingent Remainders a. Taker is unascertained—‖To my wife for life, then to the first child of mine to reach age 21.‖ Uncertain which child will be the first to reach age 21 b. Condition precedent—‖To my wife for life, then if my daughter has graduated from college, to my daughter.‖ The daughter's interest does not automatically follow the life estate, it is preceded by a condition. DISTINCTION: Complete divestment vs. contingent remainder. In contingent remainder, the condition precedes the remainder grant. In a vested subject to complete divestment, the condition follows the grant. c. All remainders are transferable—inter vivos or testamentary

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Answer to Consider (2.3) The court held that the will did not provide for termination of life estate if property was used for business purposes or as a bed and breakfast or leased; and the will granted former resident a life estate in the property subject to termination in the event that she chose not to live there. In other words, the use for business purposes did not terminate her life estate, but she then had to live there. If she did not live there, the life estate terminated. Below is an excerpt from the opinion: ―An estate in fee simple determinable is created by a limitation in a fee simple conveyance which provides that the estate shall automatically expire upon the occurrence of a certain subsequent event.‖ Station Assoc., Inc. v. Dare County, 350 N.C. 367, 370, 513 S.E.2d 789, 792 (1999) (citing Elmore v. Austin, 232 N.C. 13, 20-21, 59 S.E.2d 205, 211 (1950)). ―Like a fee, a life estate may be defeasible if its continued existence is conditional.‖ Brinkley v. Day, 88 N.C.App. 101, 106, 362 S.E.2d 587, 590 (1987) (citing Blackwood v. Blackwood, 237 N.C. 726, 76 S.E.2d 122 (1953)). ―The law does not favor a construction of the language in a deed which will constitute a condition subsequent unless the intention of the parties to create such a restriction upon the title is clearly manifested.‖ Washington City Board of Education v. Edgerton, 244 N.C. 576, 578, 94 S.E.2d 661, 664, (1956). For that reason, the Supreme Court ―has declined to recognize reversionary interests in deeds that do not contain express and unambiguous language of reversion or termination upon condition broken‖ and has ―stated repeatedly that a mere expression of the purpose for which the property is to be used without provision for forfeiture or reentry is insufficient to create an estate on condition....‖ Station Assoc., 350 N.C. at 370, 371, 513 S.E.2d at 792, 793. However, ―in those cases in which the deed contained express and unambiguous language of reversion or termination, we have construed a deed to convey a determinable fee or fee on condition subsequent.‖ Id., 350 N.C. at 371-72, 513 S.E.2d at 793. ―The language of termination necessary to create a fee simple determinable need not conform to any ‗set formula‘‖ as long as ―‗any words expressive of the grantor's intent that the estate shall terminate on the occurrence of the event‘ or that ‗on the cessation of [a specified] use, the estate shall end,‘‖ are used. Id., 350 N.C. at 373-74, 513 S.E.2d at 794 (quoting Lackey v. Hamlet City Board of Education, 258 N.C. 460, 464, 128 S.E.2d 806, 809 (1963), and Charlotte Park and Recreation Commission v. Barringer, 242 N.C. 311, 317, 88 S.E.2d 114, 120 (1955), cert. denied sub nom., 350 U.S. 983, 76 S.Ct. 469, 100 L.Ed. 851 (1956)). As a result, the fundamental question that we must resolve in construing Item II.B.6 of Ms. Jones' will is determining whether it clearly expresses an intent that the life estate granted to Ms. Frejlach would automatically terminate upon the occurrence of one or more of the events described there. It is an elementary rule ... that the intention of the testat[rix] is the polar star which is to guide in the interpretation of all wills, and, when ascertained, effect will be given to it unless it violates some rule of law, or is contrary to public policy. In determining the testat[rix]'s intention, the primary source is the language used by the testat[rix]. Isolated

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clauses are not to be considered out of context, but rather the entire will is to be examined as a whole so as to ascertain the general plan of the testat[rix]. Edmunds v. Edmunds, 194 N.C.App. 425, 433, 669 S.E.2d 874, 879 (2008), aff'd per curiam, 363 N.C. 740, 686 S.E.2d 150 (2009) (quoting Pittman v. Thomas, 307 N.C. 485, 492, 299 S.E.2d 207, 211 (1983) (internal quotations omitted)). ―The intent of the testat[rix] must be gathered from the four corners of the will and the circumstances attending its execution.‖ Ward v. Ward, 88 N.C.App. 267, 269, 362 S.E.2d 847, 849 (1987), disc. review denied, 322 N.C. 115, 367 S.E.2d 921 (1988) (citation omitted). When interpreting a will, ―every word and clause must, if possible, be given effect and apparent conflicts reconciled.‖ Slater v. Lineberry, 89 N.C.App. 558, 559, 366 S.E.2d 608, 610 (1988). A careful analysis of the language of Item II.B.6 of Ms. Jones' will discloses that those portions of the will providing that ―[t]he house is not to be used for a business or Bed and Breakfast and is not to be leased out by [Ms.] Frejlach‖ are unaccompanied by any ―express and unambiguous language of reversion or termination upon condition broken,‖ Station Assoc., 350 N.C. at 370, 513 S.E.2d at 793, and amount to ―a mere expression of the purpose for which the property is to be used without provision for forfeiture or reentry.‖ Id. at 371, 513 S.E.2d at 793. We are particularly persuaded of the correctness of this conclusion given the Supreme Court's clear statement that the creation of defeasible interests is disfavored. As a result, we conclude that the trial court erred by construing Item II.B.6 to provide that Ms. Frejlach's life estate terminates if she ―uses the house or property for business purposes or as a bed and breakfast‖ or if she ―leases the house or property.‖ On the other hand, the language providing that Ms. Jones ―give[s] the right for life to [Ms.] Frejlach to live in the house‖ located on Gardner Road and that, ―if [Ms.] Frejlach declines to exercise this right, I give this 11 acres of property to‖ Ms. Hagaman is not merely precatory. We are unable to understand the ―right‖ to be ―exercised‖ as anything other than Ms. Frejlach's right to live on the Gardner Road property. Although this portion of Item II.B.6 lacks some of the language that is frequently found in instruments creating defeasible interests, such as ―so long as‖ or ―on the condition that,‖ the relevant provisions of Item II.B.6 do clearly state that, in the event that Ms. Frejlach does not ―exercise this right‖ to live on the property, it goes to Ms. Hagaman. As a result, we are unable to avoid the conclusion that Item II.B.6 of Ms. Jones' will does grant Ms. Frejlach a life estate in the Gardner Road property that is subject to termination in the event that she chooses not to live there. Our dissenting colleague rejects this reading of Item II.B.6 of Ms. Jones' will on the grounds that, ―[r]eading the devise in the sequence transcribed by the testatrix, it appears that Ms. Jones' intent was merely to devise appellant Frejlach a life estate in which the testatrix desired her to live in the house‖ and that, ―[a]t best, the devise to appellant in item II, paragraph (B)(6) would be defeasible only upon appellant Frejlach's death or her declining to exercise her right to the devised property, at which point the property would vest in appellee Hagaman.‖ As a result, the dissent concludes that ―this

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language would essentially create a ‗plain vanilla‘ life estate, because any life estate devised is only defeasible upon the death of the life tenant or upon a devisee's decision to renounce the estate.‖ We are not persuaded by this logic because it fails to give sufficient effect to Ms. Jones' very specific and repeated use of the word ―live.‖ As used in this context, ―live‖ means ―to make one's dwelling; reside.‖ Webster's New World Dictionary of the American Language, 857 (1957). We believe that, under the canons of construction discussed above, we must assume that Ms. Jones chose her words carefully and intended to use the language that she used. In the event that one accepts the logic of our dissenting colleague, Ms. Frejlach could retain a life estate in the Gardner Road property without ever setting foot on the premises, a result which we have difficulty squaring with Ms. Jones' explicit statement that she gave Ms. Frejlach the right ―to live in the house‖ located on Gardner Road ―for life‖ and that, if Ms. Frejlach ―declines to exercise this right, I give this 11 acres of property to‖ Ms. Hagaman. Thus, since the logic adopted by our dissenting colleague does not give effect to what we believe to be Ms. Jones' clear intention to divest Ms. Frejlach of her life estate in the event that she failed to live on the Gardner Road property, we do not find the approach taken in the dissent persuasive. Nelson v. Bennett, 694 S.E.2d 771 (N.C. App. 2010).

Answer to Consider (2.4) a. A—life estate B—vested remainder b. A—life estate B—vested remainders (language ―and his heirs‖ is simply fee simple absolute language c. B—life estate A—contingent remainder Grantor—possible reversion if A is not married at B's death d. A—life estate B's heirs—contingent remainder since heirs are unascertainable until death e. A—life estate B—vested remainder subject to complete divestment (C's interest is discussed later) 2-1h

Executory Interests 1. Future interest in one other than the grantor which is not a remainder 2. Creation a. Two fee simples; possibility of reverter is given by the grantor to another ―To A so long as the premises are used for a school, but if they are ever not so used, to my son, B.‖ b. Gap between present interests and future interests ―To A for life, then in five years after A's death to A's child.‖

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A holds a life estate but A's child's interest will not be possessory for five years; thus, the gap prevents A's child from holding a remainder c. Future freehold interest ―To my wife in fee simple in 10 years.‖ There is no present interest and the wife's future interest is not a remainder.

Answers to Consider (2.5) USE POWERPOINT SLIDES 2-15 TO 2-18. a. Life estate b. Fee simple absolute c. Fee simple absolute (in most states) d. Fee simple absolute to two people e. Fee tail female f. Fee simple subject to a condition subsequent g. Fee simple subject to a condition subsequent h. Fee simple determinable i. Life estate j. Fee simple determinable k. Fee tail (female) l. Life estate pur autre vie m. Fee simple determinable n. Fee tail o. Fee tail p. Fee simple determinable USE FIGURE 2.2 FOR REVIEW. 2-2 Special Rules Governing Interests in Land—USE POWERPOINT SLIDES 2-19 TO 2-24 2-2a

Rule in Shelley's Case 1. ―To my wife for life, remainder to the heirs of my wife.‖ 2. Ordinary construction—wife has life estate; heirs have a contingent remainder 3. Shelley's case merges life estate with contingent remainder and wife thus has a fee simple 4. Some states have abolished the rule in Shelley's case so that the two estates are not merged, and the ordinary construction applies

2-2b

Doctrine of Worthier Title (DOWT) 1. ―To A for life, remainder to my heirs.‖

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2. Ordinary construction—A has life estate Heirs have either vested or contingent remainder depending upon whether the grantor is still alive 3. Grantor holds reversion; heirs hold nothing 4. Some states have abolished the rule or courts are permitted to interpret the grantor's true intent 2-2c

Rule Against Perpetuities (RAP) 1. Rule limiting the time the grantor can control the property being transferred 2. Applicable only to a. Executory interests b. Contingent remainders 3. Interest must vest within lives and being plus 21 years 4. Use text example ―To my children for life, remainder to any and all of my grandchildren who reach 21.‖ (Grant is made in a will) Step 1—Children have life estate; grandchildren are unascertained and also must wait to take interest. There is a gap in seisin—executory interest Step 2—Since executory interest exists, RAP applies Step 3—Vesting would occur when last grandchild reached age 21 Step 4—Lives in being are those given the life estate or those who are in existence at the time of the grant (cannot be grantor; grantor is dead) Step 5—When last child dies—no more grandchildren; thus, interest would vest within 21 years after death of last child Step 6—No violation—21-year maximum met

CASE BRIEF:

Berry v. Union National Bank 262 S.E.2d 766 (W. Va. App. 1980)

FACTS:

Clara Clayton Post died on June 20, 1975. Her will created a private educational trust for the descendants of her late husband's brothers and sisters, giving her trustee absolute discretion to provide educational expenses for those descendants who met certain criteria. The trust was to last for 25 years after Clara‘s death or until the principal was reduced to less than $5,000.00, whichever came first. At the termination of the trust, the principal and interest were to be distributed per stirpes (See Chapter 17 for an explanation of how this

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

method of distribution works) to the then living descendants of her husband's brothers and sisters. The trial court found that the trust violated the RAP and was void. ISSUE:

Does the education trust that lasts for 25 years violate the RAP?

DECISION:

The appellate court reversed the trial court decision by modifying the will to change the trust duration from 25 years to 21 years, thereby bringing it within the RAP and not void. The court held that equity required a modification in order to provide a solution that was consistent with the testator‘s intent.

Answers to Case Questions 1. Explain what Clara wanted done with her estate, why, and for how long. Clara wanted to fulfill her husband‘s wishes to provide educational funds for her nieces and nephews. Once they had mostly finished their years of education, she wanted the trust funds (whatever was left) distributed to them. She put an ending time of the trust being reduced to $5,000 or 25 years. 2. What is the result if the RAP is applied? If the RAP is applied then the trust fails and the funds that would have gone into the trust would go to the other relatives Clara had designated in her will, or if she made only specific bequests to them then the general provision funds for the trust would be distributed according to intestate distribution—whatever state law provides if there is no will or the will makes no provision for any distribution. 3. What result does the court achieve by reducing the 25 years to 21 years? The result is that the trust is not void and Clara‘s will can accomplish her and her husband‘s intent, which was to provide for the education of their nieces and nephews. 4. What do you now know about precedent in West Virginia on the application and interpretation of the RAP? The court has set up a way that courts can modify provisions in wills so that the intent of the testator/testatrix can be accomplished and the RAP does not wipe out their focus and intent in making their will. CASE BRIEF:

Kennewick Public Hosp. Dist. v. Hawe 214 P.3d 163 (Wash. App. 2009)

FACTS:

Albert M. Luth executed a last will and testament in 1957. He devised his Benton County real property to the Kennewick Public Hospital District: I now give, devise and bequeath all of my right, title and interest in and to any real property owned by me at the time of my death within the County of Benton, State of Washington, to the Kennewick Public Hospital District, a municipal corporation, to keep and maintain the same, to collect the rents, issues and profits therefrom and to expend the income therefrom in the upkeep, maintenance and improvement of the hospital building and grounds as in the judgment of the duly elected commissioners of said hospital district seems best. I now direct that the real property shall not be sold but shall be retained as an investment. This devise is in perpetuity, and the property shall at no time be transferred, incumbered [sic] or otherwise alienated from the

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

purposes herein expressed and intended, and if the same or any part thereof, shall at any time be conveyed, transferred or incumbered [sic], by deed, mortgage or otherwise, then in such case I do devise all of the above mentioned real estate to the County of Benton, and in default thereof, to the State of Washington. Mr. Luth devised one-quarter of the remainder of his estate to his niece, Laura Hurd; one-quarter to his nephew, Norval Havercroft; and one-half to his sister, Alice Hawe. Mr. Luth died in 1961. In 1978, Ms. Hurd executed a will that left her estate to the Diocese. Ms. Hurd died in the 1980s. The Hospital sued to quiet title to the property in 2006. Benton County and the State both waived any interest. The court entered default judgments to quiet title against all heirs and others, except the Diocese. The Diocese and the Hospital filed cross-motions for summary judgment in 2008. The court concluded that the Hospital held the property in fee simple absolute and granted summary judgment for the Hospital quieting title. The Diocese appealed. ISSUE:

What happens to a gift when the grantor has violated the RAP? Who gets title to the land and what type of interest is it?

DECISION:

The executory interest violates Washington's version of the rule against perpetuities and is therefore void. The Diocese argues that Mr. Luth's will conveyed a fee simple determinable estate to the Hospital. And the effect of that was to transfer the property to Ms. Hurd's estate under the residuary clause in Mr. Luth's will, if and when the Hospital violates the prohibitions in the will against transfer. The rule against perpetuities requires that future estates vest or fail within ―a life or lives in being at the time of the testator's death and twenty-one years thereafter.‖ Otherwise, the limitation is void. So, Mr. Luth's devise of a future estate to the County and State fails under the rule against perpetuities because their interest may vest or fail into perpetuity. A conveyance of a fee simple estate may employ language of either ―executory limitation‖ or ―special limitation‖ to cause the created interest to automatically expire upon the occurrence of a stated event. Language creating a fee simple subject to executory limitation must ―express[ ] an intent of the conveyor that, on the occurrence of a stated event, an estate in fee simple contemporaneously conveyed or retained by the conveyor is to terminate in favor of an estate created in a person other than the conveyor.‖ By contrast, ―[a] fee simple determinable, also called a determinable fee simple, is an estate that automatically terminates on the happening of a stated event and reverts to the grantor by operation of law.‖

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

The effect of striking the County's and State's interest in the subject property is removal of the condition of defeasibility. We then agree with the trial judge that the resulting interest is fee simple absolute. We affirm the summary judgment in favor of the Hospital.

Answers to Case Questions 1. Explain which of the types of interests in land the court discusses in making its decision. The Diocese argues that once the rule against perpetuities invalidated the County's and State's interest, Mr. Luth's devise became a fee simple determinable estate that reserves the right of reverter for Mr. Luth and his heirs. The Hospital characterizes the language in Mr. Luth's will as an attempt to devise an estate subject to executory limitation. So, when the court struck the limitation, a fee simple absolute remained. 2. Why does the clause granting the rights violate the RAP? Because the interest, which was executor, could not vest within lives and being plus 21 years—it went on forever. 3. Is there anything that could have been part of the will that would have prevented the litigation? A saving clause—if anything in the will violates the RAP, then provide for a contingent disposition and make it clear.

Answer to Consider (2.6) Step 1—Children have life estate, grandchildren have executory interest Step 2—RAP applies to executory interests Step 3—Same—interest would vest when last grandchild reaches age 21 Step 4—Childrens' lives will again be the measuring lives along with grantor, since grantor is alive Step 5—Since the grantor is still alive, it is possible that additional children could be born (this is a possibility even if the grantor is 80 under RAP (the fertile octogenarian)). These children would not be included in the measuring lives and a date scenario would be as follows: Grant is made—1952 Grantor has 4 children at the time—A, B, C, D Child E is born—1965 A and B die—1972 (have 2 children—G and H respectively) C and D die—1980 (have 2 children—X and Y respectively) E's child Z is born—1987 Although G, H, X and Y will be 21 years old within the proper period, Z will not be 21 until 2008, which is 36 years after A and B's death and 28 years after C and D's death Step 6—The rule is violated because of a potential child. Emphasize that the rule is violated even if the theoretical Child E is never born. Rule turns on possibilities, not realities. USE FIGURE 2.3 TO REVIEW FUTURE INTERESTS.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

2-3

Reforms of Future Interests and Their Rules—USE POWERPOINT SLIDES 2-25 AND 226

2-4

Land Interests—Nonfreehold Estates—USE POWERPOINT SLIDES 2-27 AND 2-28 Limited in duration and non-inheritable

2-5

Economics of Land Interests (Review Posner article with students)—USE POWERPOINT SLIDE 2-29 AND 2-30 A. New Ownership Rights Needed to Provide Incentives B. Discuss Example of Farmer's Sale to Maximize Profitability and Return on Investment C. Efficient Economic Land Systems 1. Must be universal 2. Must provide for exclusive rights—protection of land interests—use and possession 3. Transferability

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

USE POWERPOINT SLIDE 2-31 TO DISCUSS RICHARD POSNER'S ARTICLE.

Answers to Discussion Questions 1. How do property rights serve to protect and ―incent‖ landowners? By giving them exclusive rights in the land and its products—crops. 2. Why is it sometimes more economically efficient for a property owner to transfer property? Second party may make the land more productive because he may be a better farmer than the first party. 3. What are the three criteria of an efficient system of property rights? Universality; exclusivity; transferability. [return to top]

Additional Activities and Assignments Answers to Chapter Problems 1. Fee simple determinable; must use it for an incinerator or lose the land. Proctor v. Inland Shores, Inc., 373 S.E.2d 268 (Ga. 1988). 2. The court reasoned that the termination of a fee simple determinable determined title to the mineral estate. The only factual issue is whether Grizzle had ceased operations—if he had, then title reverted back to Ramsey and he had the right to extract minerals. Ramsey v. Grizzle, 313 S.W.3d 498 (Tex. App. 2010). 3. The basic issue raised on the appeal is this: Does the fact that the Kinney County State Lake located on the land no longer contains a body of water of 150 acres serve as a basis for the activation of the reversion clause so as to terminate the State's title to the real estate and cause title to revert to the plaintiffs? In order to determine this basic issue, it would be helpful to consider certain general principles of law which are applicable in cases involving reversion clauses. In this case, the State, as grantee, owns a determinable or qualified fee in real estate which has all the attributes of a fee simple except it is subject to being defeated by the happening of a condition which is to terminate the estate. An estate in fee simple determinable is created by any limitation which: (1) creates an estate in fee simple and (2) provides that the estate shall automatically expire upon the occurrence of the stated event. In the past, this court has determined issues involving estates in fee simple determinable. In Curtis v. Board of Education, 43 Kan. 138, 144, 23 P. 98 (1890), it was stated that the authorities are uniform that an estate upon condition subsequent, which estate after having been fully vested may be defeated by a breach of the condition, is never favored in law, and that no deed will be construed to create such an estate unless the language to that effect is so clear that no room is left for any other construction. In Ritchie v. K.N. & D. Rly. Co., 55 Kan. 36, 57, 39 P. 718 (1895), it was held that an instrument containing a condition subsequent, working a forfeiture of an estate, is to be strictly construed and its terms will never be extended by construction. This general rule is based upon the theory that, since a deed is the

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

act of the grantor, it will be construed most strongly against him. See Rose v. School District No. 94, 162 Kan. 720, 726, 179 P.2d 181 (1947). Where, however, a deed clearly creates a fee simple determinable and reserves a reversionary interest in the grantor, such provisions will be enforced. See, for example, Thompson v. Godfrey, 191 Kan. 102, 379 P.2d 269 (1963). The clause of reversion contained in paragraph six of the warranty deed requires that the premises be used by the State, as grantee, as a ―public forestry, fish and game preserve and recreational state park.‖ At the time the deed was executed, the statutes of Kansas provided for the establishment of public forestry, fish and game preserves, and recreational grounds. G.S. 1935, 32-215 authorized the forestry, fish and game commission, among other things, to establish, maintain, and provide for sanctuaries, in which game, game birds, fur-bearing animals or fish may breed or rest; to replenish hunting and trapping grounds and water or fishing waters; and to establish, maintain, and improve recreational grounds for the purpose of affording recreational facilities for the citizens of Kansas. That statute was enacted in 1927 and was in full force and effect at the time the warranty deed was executed in the present case. These same basic powers are given to the fish and game commission today by virtue of our present statutes in K.S.A. 32-201 et seq. G.S. 1935, 32-214 gave the forestry, fish and game commission broad power and authority to acquire lands by donation or by purchase for the purpose of establishing and maintaining the same as a public forestry, recreational grounds, and fish and game preserves; to acquire or provide for the building of reservoirs, dam or lakes for impounding water and for providing for the planting of forestry trees; to supervise building and construction work of all kinds; to plant forestry trees and to make improvements on the property including the upkeep of roads and to do all and anything possible to carry out the intent of the act. Thus, by statute, the fish and game commission, acting on behalf of the State, is obviously vested with great power and discretion in using donated lands for a public forestry, fish and game preserve or a recreational state park. In the City of Wichita v. Clapp, 125 Kan. 100, 263 P. 12 (1928), it was held that the use of a portion of a public park as an airport came within the proper and legitimate uses for which public parks are created. In the opinion, at page 101, the court discussed the meaning of the term ―park purposes.‖ The court stated: ―The specific question for consideration is whether park purposes may include an airport or landing field for airplanes. Under various authorities, the expression ‗park purposes' has been held to include a race track, a tourist camp, bridle trails, boating, bathing, refreshment and lunch stands, providing bathing suits, towels and rooms for bathers, dressing pavilion, waiting room for street cars, refreshment and shelter room for the public, grandstand, ball games, baseball diamond, race meets, tennis courts, croquet grounds, children's playgrounds, hotels, restaurants, museums, art galleries, zoological and botanical gardens, conservatories, and many other recreational and educational facilities. In Bailey v. City of Topeka, 97 Kan. 327, 330, 154 P. 1014, this court quoted approvingly from Dillon on Municipal Corporations, to the effect that:

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

―‗A park may be devoted to any use which tends to promote popular enjoyment and recreation.‘ (Dillon, Municipal Corporations, 5th ed. § 1096, p. 1749.)‖ In 1955, the legislature provided for a state park and resources authority (K.S.A. 74-4501 et seq). The legislature gave broad and comprehensive definitions to the terms ―state park‖ and ―park facilities.‖ See K.S.A. 74-4502(d) and (e). These various statutes and authorities are cited to show the broad interpretation which has been given to the terms ―forestry, fish and game preserve and recreational state park.‖ The trial court in this case granted partial summary judgment in favor of the defendants, holding that the terms of the deed do not support a forfeiture of the State's interest in the property simply because the lake constructed on the premises contained a body of water of less than 150 acres prior to and subsequent to the filing of this action. We agree with the trial court. The deed should be construed to require only that the State in good faith maintain the property as a public forestry, fish and game facility and as a recreational state park. The grantor obviously had in mind an area dedicated to the protection and conservation of natural surroundings, game and fish, and a place where the people could enjoy such natural beauties. The lake is an important factor to be considered in determining whether the State in good faith has maintained the entire property for the intended uses. The maintenance of the lake, however, is not the controlling consideration but is only a part of the big picture. Under the circumstances, we hold that the trial court correctly held that the State of Kansas had not forfeited its title to the land simply because the quantity of water contained in the lake has not been sufficient to completely fill an area of 150 acres. The quantity of water contained in the lake is bound to vary from year to year depending upon the amount of rainfall and any other available sources of water in the area. As noted above, however, the trial court, instead of restricting its decision to a partial summary judgment on the single issue presented, found that all other issues in the case were moot and that judgment should be rendered in favor of the defendants and against the plaintiffs ―on their cause of action.‖ We hold that, in entering that judgment, the trial court committed reversible error. The final summary judgment rendered was erroneous because it was prematurely granted and denied to the parties the opportunity to complete their discovery and present evidence on the ultimate factual issue presented in the case: Whether the state has in good faith used and maintained the premises for the intended purposes. In Lawrence v. Deemy, 204 Kan. 299, 461 P.2d 770 (1969), this court reviewed our law relating to summary judgment and stated as follows: ―Generally before a summary [judgment] may be granted, the record before the court must show conclusively that there remains no genuine issue as to a material fact, and that the moving party is entitled to judgment as a matter of law. A mere surmise or belief on the part of the trial court, no matter how reasonable, that a party cannot prevail upon a trial will not warrant a summary judgment if there remains a dispute as to a material fact which is not clearly shown to be sham, frivolous, or so

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

unsubstantial that it would be futile to try the case (Knowles v. Klase, 204 Kan. 156, 460 P.2d 444; Green v. Kaesler-Allen Lumber Co., 197 Kan. 788, 420 P.2d 1019.) The manifest purpose of a summary judgment is to obviate delay where there is no real issue of fact. A court should never attempt to determine the factual issues on a motion for summary judgment but should search the record for the purpose of determining whether factual issues do exist. If there is a reasonable doubt as to their existence, a motion for summary judgment will not lie. (Secrist v. Turley, 196 Kan. 572, 412 P.2d 976.) A court, in making its determination, must give to the party against whom summary judgment is sought the benefit of all inferences that may be drawn from the facts under consideration. (Shehi v. Southwest Rentals, Inc., 199 Kan. 265, 428 P.2d 838; Jarnagin v. Ditus, 198 Kan. 413, 424 P.2d 265; Brick v. City of Wichita, 195 Kan. 206, 403 P.2d 964.) ―Regardless of how refined or sophisticated we attempt to state the summary judgment rule, we always return to the language of the statute itself (K.S.A. 60-256[c] )—there must remain ‗no genuine issue as to any material fact.‘ ― 204 Kan. at 301-02, 461 P.2d 770. Although there was apparently some evidence presented to the trial court at the informal discovery conference that improvements had been made on the land and that the lake had contained water intermittently down through the years and that various sums of money have been spent on the property, such evidence has not been included in the record on appeal and the parties have not been furnished a full opportunity to complete their discovery and develop evidence to be presented on the primary issue in the case, set forth above, or on other issues raised by the parties. We have no hesitancy in holding that final summary judgment in the case was prematurely granted and that the case must be remanded to the trial court for further proceedings. The judgment of the district court is affirmed in part and reversed in part and remanded for further proceedings in accordance with the views expressed in this opinion. Kinney v. State of Kansas and Kansas Fish and Game Commission, 710 P.2d 1290 (Kan. 1985). 4. a. A—life estate A‘s widow—life estate A‘s children—contingent remainder (do not know which children will be living) Grantor—reversion DOWT does not apply to heirs—not ―to heirs‖ but ―to children‖; RAP not violated because it vests immediately upon death of the measuring life (the widow) b. A—life estate Grantor—reversion c. A—fee simple subject to a condition subsequent G—right of entry/power of termination d. A—life estate B—vested remainder subject to complete divestment G—reversion D—estate for years (subject to termination if A dies during the 10-year period) © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

e. A—fee simple determinable G—possibility of reverter If G left all of his estate to A, A would then have a fee simple f. A—has an executory interest which will eventually be a fee simple interest G—has nothing No violation of RAP since A and G are measuring lives g. A—life estate Children—life estate Grandchildren—vested remainder subject to partial divestment (there could be more grandchildren) h. A—life estate B—vested remainder subject to complete divestment C—executory interest i. A—life estate Heirs of A—contingent remainder (if Rule in Shelley's case applies, A holds fee simple) j. A—life estate B—vested remainder subject to complete divestment 5. Fee simple determinable = present interest (Church of God); possibility of reverter = future interest (Collins and heirs); no, RAP does not apply. Collins v. Church of God of Prophecy, 800 S.W.2d 418 (Ark. 1990). 6. The court held that (a) daughters received vested remainder subject to divestment, not contingent remainder; (b) as a matter of first impression, when a life tenant is explicitly given the right to consume or invade the corpus, absent a showing of waste, she may do so at her discretion without need to petition the court for permission or provide notice of the invasion or an accounting; and (c) wife was not required to provide notice to daughters when wife invaded corpus or to provide accounting. Hammons v. Hammons, 327 S.W.3d 444 (Ky. 2010). 7. There was a violation of the use restriction because the P-1 building is used only to test the siren. Fire Department no longer owns the land. It reverted back. Long v. Pompey Hill Volunteer Fire Dept., 539 N.Y.S.2d 1014 (1989). 8. Edna has a life estate. Edna also has an alternative executory interest if she becomes a widow. Dover v. Grand Lodge of Nebraska Ind. Order of Oddfellows, 206 N.W.2d 845 (Neb. 1973). 9. Alice has a life estate with a remainder to the heirs of the grantor thus creating a Doctrine of Worthier Title situation. It is a void grant and the grantor thus keeps the reversion. Harris Trust & Savings Bank v. Beach, 495 N.E.2d 1170 (Ill. 1986). 10. The court held that there was a reversionary property interest. The Trails Act prevents a common law abandonment of the railroad right-of-way from being affected, thus precluding state law reversionary interests from vesting. Stated in traditional property law parlance, upon abandonment or termination of a railroad easement, ―the burden of the easement would be extinguished, and the landowner‘s property would be held free and clear of any such burden.‖ By preventing the abandonment and concomitant restoration of a fee simple © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

unburdened by the easement, the Trails Act effects a taking. Rogers v. U.S., 101 Fed. Cl. 287 (Fla. 2011).

In-Class Exercises 1. Have the students develop the following: a. A property grant from their parents to them that would restrict their use of the property. b. A property grant to their children (or potential children) that would restrict their use of the property. c. A donation of land from them to a College or University that would restrict the college's or university's use of the land. 2. Have the students create a life estate in which they hold both the life estate and the future interest accompanying it. 3. Have the students read the following case and answer Chapter Problem #7: LONG v. POMPEY HILL VOLUNTEER FIRE DEPT. 539 N.Y.S.2d 1014 (1989) Richard J. Long, and Mary Long, his wife, conveyed by warranty deed dated September 30, 1949, to the Pompey Fire Department a parcel of land (called P-1). The deed, which was properly recorded in the Onondaga County Clerk's Office on November 15, 1949, stated that the grant of the parcel was given for the purpose of ―erecting thereon a fire house.‖ The deed also included the following language: In the event that the said premises are no longer used to house a fire department, then and in that event the land and building erected thereon is to revert to Richard J. Long and Mary Long, or their heirs and assigns. Shortly after the conveyance, a fire house was erected on P-1. The building is a two-story structure with a cinder block first floor and a wood frame second floor. The first floor contains three large bays to house fire trucks and equipment. The building was used continuously from 1950 to 1985 to house the Fire Department. In 1984, the Fire Department (defendant) acquired another parcel of land (P-2) located about 300 yards from P-1. P-2 had an elementary school which was remodeled to include vehicle bays and other features of a well-equipped fire house. In November 1985, the Fire Department moved its essential equipment and the majority of its functions to the P-2 facility. Paul Long and others who are the heirs of Richard and Mary Long (plaintiffs) brought suit to have title to P-1 vested in them for violation of the restriction placed on the property in the original grant. MORDUE, Justice The issue now before this Court is whether P-1 is still being used to ―house a fire department‖. Based upon the credible evidence adduced at trial, I find that P-1 has been used as follows.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

Originally, the building on P-1 housed all activities including meetings, the maintenance and storage of equipment, the maintenance and storage of vehicles, training programs, and fund raising activities. In addition, P-1 had running water, toilet facilities, and heat, and was well maintained. P-1 had a telephone system installed and was the official address for the defendant. The building on P-1 was the response place where the fire fighters would go to get equipment at emergency times. The use of P-1 to house the fire department in the above stated manner continued for several decades and until 1984. When the defendant bought its new building at P-2 in 1984, most activities at P-1 stopped. The last monthly meeting held at P-1 was in the winter of 1984. The telephone as well as the water pump were disconnected, thereby precluding lavoratory [sic] use as well as outside communication. P-1 was no longer used for storage of emergency vehicles or equipment, nor was it used for training programs. For all intents and purposes, P-1 was virtually abandoned by the defendant from the fall of 1985, through the summer of 1986. The classrooms were gone, no longer were any chairs in the building, snow was no longer removed, telephone services were removed, lavoratories [sic] were inoperable due to removal of water, heat was turned off, and the outside of the building was no longer being maintained although it was in need of paint and repair. In addition, the 1986-87 telephone book listed P-2 as defendant's address. The evidence reflects that this state of disuse and unkemptness continued until 1988. After the Demand for Delivery of Real Property was served on the defendant on June 3, 1986, and as the instant lawsuit came closer to fruition and resolution, activities increased at P-1. A few training sessions covering extrications and first aid of car accident victims were held. In addition, a bus that had always been parked across the street in a vacant parking lot, was suddenly being stored in P-1. To demonstrate ―activity‖ at P-1, in 1988, defendant conducted a series of air-mask training programs at P-1. At the present time, P-2 houses the fire department's activities. All matters dealing with fund raising and medical training are conducted at P-2. In addition, the mandatory monthly meetings are held at P-2. Furthermore, at the present time, there are approximately 1,200 square feet of space in P-2 that are not being used by the defendant. Hence, there appears to be no reason for P-1 to be used by the defendant despite the fact that there is still a siren located at P-1 that is automatically tested every day at 12:00 o'clock noon. The testing of the siren appears to be the only use to which P-1 is devoted by the defendant. Based on the foregoing, this Court finds that the defendant no longer uses the conveyed premises (P-1) to ―house a fire department‖. As such, the land and building thereon should revert to Richard J. Long and Mary Long or their heirs or assigns, the plaintiffs herein. Title was vested in the Plaintiffs (the heirs of the Longs).

Discussion Questions 1. 2. 3. 4. 5.

When was the property originally conveyed to the Fire Department? What restriction was placed on its use? What happened in 1985 to change the character of its use? How was P-1 used after 1985? What type of interest did the heirs of the Longs have?

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 2: Land Interests: Present and Future

6. What type of interest did the Fire Department have? [return to top]

Resources Andersen, ―Present and Future Interests: A Graphic Explanation,‖ 19 Seattle U.L. Rev. 101 (1995). Barros, ―Toward a Model Law of Estates and Future Interests,‖ 66 Wash. & Lee L. Rev. 3 (2009). Becker, ―Uniform Probate Code Section 2-707 and the Experienced Estate Planner: Unexpected Disasters and How to Avoid Them,‖ 47 UCLA L. Rev. 339 (December 1999). Black, ―The Historical Background of Some Modern Real Estate Principles,‖ 34 Real Est. L. J. 327 (2005). Burby, Real Property, Chapters 11, 16 and 17. Cohan and Melton, ―Using Powers of Appointment to Increase the Period Assets Are Held in Trust,‖ 54 Real Prop. Tr. Est. Law J. 1 (2019).. D‘Emilio, ―Frontier Feudalism: Agrarian Populism Meets Future Interest Arcana in the Land of Manifest Destiny,‖ 70 Okla. L. Rev. 943 (2018). Dukeminier and Krier, “The Rise of the Perpetual Trust,‖ 50 UCLA L. Rev. 1303 (2003).

―Dynasty Trusts and the Rule Against Perpetuities,‖ 116 Harv. L. Rev. 2588, 2609 (2003). Entin, Jonathan L., ―Defeasible Fees, State Action,‖ 34 William and Mary L. Rev. 769 (1993). Festa, ―Property and Republicanism in the Northwest Ordinance,‖ 45 Ariz. State L.J. 409 (2013). Foster, ―Fifty-One Flowers: Post-Perpetuities War Law and Arkansas's Adoption of USRAP,‖ 29 U. Ark. Little Rock L. Rev. 411, 487 (2007). ―From the Courts: Technology, Real Estate, and Livery of Seisin,‖ 41(3) Real Estate L. J. 331-7 (2012). Guzman, ―Worthier for Whom?‖ 88 Okla. L. Rev. 779 (2016). Harding, ―Perpetual Property,‖ 61 Fla. L. Rev. 285 (April 2009). Helfman, ―Land Ownership and the Origins of Fiduciary Duty,‖ 41 Real Prop. Prob. & Tr. J. 651 (2006). Hopperton, ―Teaching Present and Future Interests: A Methodology for Students that Unifies Estates in Land Concepts, Structures, and Principles,‖ 26 U. Tol. L. Rev. 621 (Spring, 1995). Huber, ―The Durability of Private Claims to Public Property,‖ 102 Geo. L.J. 991 (2014).

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Jennings, ―Real Property Could Use Some Updating,‖ 24 Real Est. L.J. 103 (Fall 1995). Mahoney, “Perpetual Restrictions on Land Use and the Problem of the Future,‖ 88 Va. L. Rev.

739, 743 (June 2002). “Modern Status of the Rule in Shelley’s Case,” 99 American Law Reports 1161 (2019).

Orth, ―Requiem for the Rule in Shelley‘s Case,‖ 67 N.C. L. Rev. 681 (1989). Pollman and Edwards, ―Scholarship By Legal Writing Professors: New Voices in the Legal Academy,‖ 11 Legal Writing: J. Legal Writing Inst. 3, 212 (2005). Powell, Real Property, Volume 3, 169-260. Schneider, ―A Rule Against Perpetuities For The Twenty-First Century,” 41 Real Prop. Prob. & Tr. J. 743 (Winter 2007). Shepherd, ―A Uniform Perpetuities Reform Act,‖ 16 New York University Journal of Legislation and Public Policy 89 (2013). Singer, ―Democratic Estates: Property Law in a Free and Democratic Society,‖ 94 Cornell L. Rev. 1009 (May 2009). Waggoner, “The Uniform Statutory Rule Against Perpetuities: The Rationale of the 90-Year Waiting Period,‖ 73 Cornell L. Rev. 157, 162 (1988). [return to top]

Instructor Manual Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

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Answer to Ethical Issue (3.2) ................................................................................................................... 62 Answers to Case Questions ..................................................................................................................... 63 Answer to Consider (3.3) ......................................................................................................................... 67 Answer to Ethical Issue (3.3) ................................................................................................................... 68 Answers to Case Questions ..................................................................................................................... 69 Answer to Consider (3.4) ......................................................................................................................... 70 Answers to Case Questions ..................................................................................................................... 71 Answer to Consider (3.5) ......................................................................................................................... 71 Answer to Consider (3.6) ......................................................................................................................... 73 Answer to Consider (3.7) ......................................................................................................................... 73 Answers to Case Questions ..................................................................................................................... 74 Additional Activities and Assignments................................................................................................................. 75 Answers to Chapter Problems ................................................................................................................. 75 In-Class Exercises ..................................................................................................................................... 82 Resources ................................................................................................................................................ 82

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

Chapter Objectives The following learning outcomes are addressed in this chapter (see PowerPoint Slide 3-1): 03.01

Discuss ownership of surface, subsurface, and above surface portions of property.

03.02

Discuss solar and light rights.

03.03

Discuss mineral and water rights.

03.04

Discuss oil and gas rights.

03.05

Discuss land protection including nuisance and trespass.

03.06

Describe the duties of landowners to those persons on their property.

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Key Terms air lot: that portion of the airspace from 23 feet above the Earth‘s surface to the heavens air rights: property ownership rights in the air above the surface centerline rule: rule that, for landowners with adjoining streams and rivers, provides for ownership of the land beneath these waters to the centerline of the river or stream column lot: portion of air rights from the surface of the Earth to 23 feet above the surface Doctrine of Ancient Lights: theory that originated in England that provides right to light if so used for 20 years or more; this prescriptive form of rights is no longer followed in the United States Doctrine of Correlative Rights: term in oil and gas law that limits recovery of oil and gas in situations where others‘ rights or deposits would be destroyed equitable relief: court remedies that require parties to perform certain acts or specifically perform a contract fee interest: in oil and gas ownership, owner owns both the surface and subsurface rights geothermal energy: form of energy that is the result of naturally formed pockets of hot steam; can be a mineral right invitee: party who is specifically invited to enter another‘s property or is a member of the public in a public place licensee: party who enters another‘s land with express or implied permission; e.g., a social guest mineral interest: ownership right to minerals on property; could also be a lease

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mineral rights: subsurface rights in property; the rights to mine minerals; also known as mineral interest mineral servitude: easement across the surface of the land for access to the land monetary relief: form of remedy for contract or trespass that awards money damages for breach nonownership states: method for oil and gas ownership that disallows ownership of oil and gas until they have been captured through drilling nuisance: use of property so as to interfere with another‘s use and enjoyment of property; e.g., bad smells and loud noises oil and gas lease: transfer of rights to remove oil and gas in exchange for payment to landowner; generally payment is in the form of royalties ownership state: method for oil and gas ownership right determination that states mineral rights can be lost only if someone first captures the oil and gas by drilling Prior Appropriation Doctrine: water allocation policy of first to use the water gets the rights to that water profit a prendre: right to enter another‘s land for the purpose of removing soil, water, minerals, or another resource Riparian Doctrine: in water rights, governs the landowner who adjoins water; a theory that entitles all riparians to use of their water; does not allow one riparian to use all of the water royalty interest: interest landowner retains upon leasing of oil well Rule of Capture: in mineral rights, a first-in-time-is-first-in-right philosophy in which the first to take subsurface minerals has title regardless of property boundary lines solar easement laws: negative easements that prevent the servient estate from doing anything that would block the sunlight access of the dominant estate spite fences: prohibit the erection of fences (trees or fencing materials) that are erected maliciously or exceed a certain height trespass: invasion of the property of another by a person or object trespasser: one who is on the property of another without permission water rights: system of priority for water use [return to top]

What's New in This Chapter The following elements are improvements in this chapter from the previous edition:

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

     

New Consider 3.1 in Section 3-1a on noise from Super Hornet jets affecting property owner‘s use and enjoyment of her property. In Section 31b, new and expanded discussion of the issues with drones—explosion of legislative, regulatory, and judicial activity in this area; all since 2012. New drone case in Section 3-1b on harassment and drone activity, F.W.T. v. F.T., regarding a father using a drone to dive-bomb contractors on his son‘s property. Expanded coverage of building height restrictions (San Francisco changed its mind) in Section 3-1b. In Section 3-1d, expanded solar coverage, including statutes and cases on new developments. In Section 3-1e, expanded wind power surface, subsurface, air rights, and environmental issues as well as an ethical issue and updates on current status including the impact of the climate change movement on willingness to allow the wind farms; new Ethical Issue 3.1 on the failure of the Cape Wind project and a discussion of the parties involved. That is in contrast to the text discussion of the recently approved Martha‘s Vineyard project (smaller wind farm, but still approved).



New case in Section 3-1f on the right to a view involving the Cubs and Wrigley field, Right Field Rooftops, LLC v. Chicago Baseball Holdings, LLC.



New case in Section 3-2a on whether fossils are minerals and subsurface rights or whether these very valuable dinosaur bones and fossils belong to the surface owner or the minerals rights owner, Murray v. BEJ Minerals, LLC.

 

In Section 3-2c, expanded discussion of fracking and the issues there. Updated discussion of geothermal new expansion as a lean resource and new protection in Section 3-2d. In Section 3-2e, revised water rights section to simplify the issues and shift coverage to environmental coverage.

 

  

New case in Section 3-3a on trespass when the mortgagor is in default and the lender sends inspectors regularly to check on the condition of the property, Prather v. Bank of America, N.A. New landowner liability case in Section 3-4d in which skateboarder is killed after hitting a poorly adjusted manhole cover; Bertsch v. Mammoth Community Water District. Deleted Consider 3.1 from previous edition and repurposed it into chapter problem #9, Goodman v. U.S. New chapter problem #10 on intentional trespassing, Crystal Lotus Enterprises Ltd. v. City of Shoreline.

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this chapter (provided in the PowerPoints section of the Instructor Resource Center); and, as applicable for each discipline, accreditation or certification standards (―BL 1.3.3‖). Introduce the chapter and use the Ice Breaker in the PPT if desired, and if one is provided for this chapter. Review learning objectives for Chapter 4. (PPT Slides 1-3). 3-1 Land Interests Above the Surface—USE POWERPOINT SLIDES 3-2 TO 3-15 USE FIGURE 3.1 AND POWERPOINT SLIDE 3-3 TO INTRODUCE THE CONCEPT THAT LAND INTERESTS EXTEND BEYOND SURFACE RIGHTS 3-1a

Air Rights 1. Who Can Use the Air?

CASE BRIEF: U.S. v. Causby 328 U.S. 256 (1946) FACTS:

Causbys owned land near airport outside Greensboro, N.C. U.S. Government used the airport for landing all types of crafts. Causbys lost 6-10 chickens each day from chickens flying into walls caused by fright induced by aircraft noise. Causbys sued in eminent domain, saying U.S. was taking their air. The lower court found for the Causbys and the U.S. appealed.

ISSUE:

Did the flying of airplanes through the Causbys' airspace constitute a taking?

DECISION:

Yes—this type of flight was a taking because although every property owner must be subject to some flying where such flying causes property to diminish in value or become uninhabitable, there is a taking.

Answers to Case Questions 1. What type of business did the Causbys operate and how did the low-flying planes affect that business? The Causbys operated a chicken farm. The runway was located 2,220 feet from the Causby's barn and 2,275 feet from their house. The planes flew over 67 feet above the house, 63 feet above the barn, and 18 feet above the highest tree. In fright, the chickens flew against the walls and killed themselves. 2. Can the use of airspace diminish the value of the surface of the land? Yes, according to court as in this case where property becomes uninhabitable. 3. What does the court establish as the standard for determining whether a place is flying too low? The court says that the determination of whether a plane is flying too low is found in the amount of damage done to the surface property. How you know if a flight is too low is determined by what happens to the owners of the surface property over which they are flying.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

Answer to Consider (3.1) The court held that: [1] Andrews failed to state inverse condemnation claim; [2] If the students read the facts carefully, they will notice that the Navy was there first. The Super Hornet program was in place and there had been a public announcement prior to Andrews‘ purchase in 2006 of the property. Andrews lacked requisite protectable property interest when any takings claim accrued due to announcement that fighter jets would be deployed to naval station or as a result of that deployment; and [3] Takings claim based upon gradual increase in noise from overflights accrued when deployment was announced and began. The court noted that noise from aircraft as well as altitude can be a factor in determining a taking, but noted that Andrews was not able to show that the noise level increased during the time she held title to the property. She arrived as an owner when the noise was in full swing. The case was dismissed. Andrews v. U.S., 108 Fed Cl. 150 (2012). 3-1b

Some Complex Issues in Air Rights 1. Trees and Overhang (of tree branches, eaves, etc.) a. Can bring suit for removal b. Some states allow self-help—removal of branches 2. Drones, Airspace, and Privacy a. Federal Regulation of Drones i. Federal Aviation Administration (FAA) regulated drones weighing less than 55 pounds ii. Drones above 55 pounds are prohibited iii. Permitted uses of drones: a) Line-of-sight requirements for operators − must be able to see them b) Maximum speed of 100 mph c) Aerial photography, mapping, ranching observations, and agricultural monitoring d) Limits on ―twilight‖ operating e) No operating above 400 feet

iv. Commercial drones v. Drone Advisory Committee (DAC) b. State and Local Regulations of Drones CASE BRIEF: F.W.T. v. F.T.

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101 N.E.3d 336 (Mass. App. 2018) FACTS:

F.W.T. (FWT/son/plaintiff) and F.T. (FT/father/defendant), as the court phrased it, ―have been engaged (since 2014) in numerous legal disputes.‖ The disputes resulted after FWT purchased adjacent commercial property from his father. Following that sale, FWT developed the land and appeared to be using it in a way that competed with his father‘s business. The son brought this suit seeking a harassment prevention order to stop his father from flying a drone over his property. FWT presented evidence showing that there were three to five incidents of drones flying over FWT‘s property, including an alleged buzzing of a contractor as he operated heavy equipment. The lower court issued a harassment prevention order for a period of one year. FT moved to vacate the order on the grounds that FWT had not presented sufficient evidence of harassment required under the harassment statute. The lower court upheld the order and FT appealed.

ISSUE:

Was there sufficient information offered to establish harassment through the use of a drone?

DECISION:

The court held that FWT had not presented sufficient evidence to establish harassment for purposes of the statutory harassment prevention order. The court also noted that there were no findings it was making with regard to whether what FT did constituted a trespass or other forms of interference with use and enjoyment of property. Also, there was no proof of intent to harm a particular person or that the drone flights were done with malice. Reversed.

Answers to Case Questions Explain the basis of this particular suit between father and son. This was a statutory action based on a state harassment prevention statute that required proof of malice or intent to harm a particular person as well as three separate incidents of harassment. Based on the court’s decision, what type of drone activity would be necessary to result in a harassment order? There would need to be multiple uses of the drone and the drone being directed at a particular person or with the intent to do harm or frighten those on the property. What about the issue of privacy and business operations? Corporate espionage? The case is a narrow decision that was based on a state statute that was intended for another purpose to be used for preventing drone flights. The court was unwilling to extend the statute that far, but it did leave the door open for the use of other theories such as trespass as a means for halting drone flights. If the drones were being used to obtain trade secrets or other protected information, the case would be decided on different grounds. Because the regulation is spotty, the theories used in cases vary significantly and courts are carving out protections depending on the theory of the complaints filed in the cases.

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3. What Air Rights Can Be Transferred?—SEE DIAGRAM BELOW a. Column lots—up to 23' b. Air lots—everything above 23' c. Examples of transferred air space i. Chicago—Prudential Mid-America building is built in the air and column lots above Illinois Central Terminal ii. Boston—52-story Prudential Tower is built in the air and column lots above the Massachusetts Turnpike iii. New York—59-story MetLife Building is built in the air and column lots above Grand Central Station iv. New York—Trump Tower built above Tiffany's d. Condominium construction and purchase is the purchase of a portion of the air space Discuss PRACTICAL TIPS with students on land sales and air rights issues and the sale of air rights. air

air lots 23' column lots

surface subsurface

cylindrical or caisson lots

3-1c

The Right to Light 1. Issue of solar energy and collectors—what if access is blocked? 2. Some statutory protections a. b. c. d. e.

Solar easement laws Laws for unobstructed use Zoning laws Shade control acts California prohibits deed restrictions that prevent installation of solar systems

3. No common law protection a. Doctrine of ancient lights not adopted here © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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b. Adverse possession of light if you used it over a 20-year period CASE BRIEF: Fontainebleau Hotel Corp. v. Forty-Five Twenty-Five, Inc. 114 So.2d 357 (Fla. 1959) FACTS:

Luxury hotel Fontainebleau constructed in Miami in 1954, faces the ocean. 1955—Eden Roc constructed—also facing ocean. 1955—Fontainebleau began construction of addition that would block sunlight on Eden Roc pool after 2:00 p.m. Eden Roc brought suit challenging construction because of shadow. The trial court found for Eden Roc and Fountainebleau appealed.

ISSUE:

Does a landowner (Eden Roc) have the right to the free flow of light and air from adjoining land?

DECISION:

No, because: (1) common law doctrine of ancient lights is not adopted in the United States; (2) decision better left to legislative bodies; and (3) no existing statutory bases for protection.

Answers to Case Questions 1. Will the court recognize the Doctrine of Ancient Lights? Does the presence of spite make any difference in recognition of a right to light? See Carlson v. Calusa Golf, Inc., 498 So.2d 461 (Fla. 1986). No—the doctrine is not recognized in the United States. 2. Will the court recognize an easement for the sunlight? No—no authority to do so. 3. What remedy does the court suggest? Be sure to recall this case during the discussion of nuisance. Some legislative remedy—zoning, statute, etc. Today, a solar easement might help. 3-1d

The Right to Solar Light 1. Solar Laws: Regulating Shade 2. Solar Easement Laws a. Solar Easements: Drafting Issues 3. Solar Laws: Government Mandates 4. Solar Laws: Doctrine of Prior Appropriation 5. State and Local Solar Development Laws 6. Solar Incentive Programs 7. Buildings and Light

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Answer to Consider (3.2) The court concluded that the Association's restrictions did not prohibit the installation or use of the Carsons' solar device and were merely process requirements that the Carson had to follow. Below is an excerpt from the opinion: 1. Content and language of restrictions or guidelines, and conduct of homeowners association in interpreting and applying them. The CCRs and the related guidelines specifically acknowledge that the Association may not bar installation of solar devices. Nevertheless, the CCRs establish that homeowners must receive approval of the Architectural Committee before installing solar panels, and both the CCRs and guidelines explicitly mention the requirement that such devices must be shielded from view. Moreover, the evidence shows that the CCRs and guidelines apply to every property owner in the Fox Creek Community, and the Association actively enforces the provisions pertaining to solar devices. The Committee's interpretation of the restrictions allows solar devices, but requires them to be screened, by fencing, landscaping, or other materials. 2. Whether the architectural requirements are too restrictive to allow solar devices as a practical matter. Other community homeowners have installed solar energy devices with the approval of the Association and in compliance with the architectural guidelines. The Carsons themselves have installed solar panels on the roof of their home to heat their swimming pool. The Committee also approved another homeowner's installation of a solar device like the one at issue here, provided it was installed in the owner's fenced rear yard. 3. Whether alternatives utilizing solar energy are available that will be comparable in cost and performance, and the feasibility of making required modifications. In reviewing the Carsons' post-installation application, the Committee required the Carsons either to move the device to their fenced backyard or build a block wall to screen it. The Association's expert evaluated conditions in the Carsons' backyard and testified that moving the device to the backyard would reduce its efficiency and performance only minimally. He testified it would be less costly and more efficient to install the device in the backyard than to fence the device in its existing location. The Carsons argue, however, that the cost of building a block wall or moving the solar device to their backyard is so great that the Association effectively has barred them from installing the device. The Carsons presented evidence it would cost $12,800 to $15,200 to install a block wall around the device, but they offered no evidence of what it would cost to install the solar device in their backyard or the amount by which that cost would exceed what they paid to install it beyond the fence. In the absence of that evidence, the Carsons did not demonstrate that the cost © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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of satisfying the Association's requirements effectively bars installation. To the contrary, the evidence supported the superior court's conclusion that it would be feasible to install the device in the backyard or − though more expensive − to fence it in its current location. 4. Extent to which the property at issue is amenable to the required changes. No evidence was offered of any property limitations or city ordinances that would prevent the Carsons from installing the solar device in their backyard or fencing it at its current location. 5. Whether the restrictions impose too great a cost in relation to what typical homeowners in the community are willing to spend. As discussed above, the Carsons presented no evidence of what it would cost to install the solar device in their backyard. However, another property owner in the same subdivision installed the same type of solar device in his backyard, a fact that supports the conclusion that the restrictions the Committee imposed do not render the installation of such devices cost-prohibitive. After examining the evidence relating to the relevant Garden Lakes factors, we conclude substantial evidence supports the superior court's findings that ―the CCRs are a reasonable restriction on the installation of solar energy devices in the Fox Creek community and neither the CCRs nor the Association effectively prohibit the installation of such,‖ and ―the CCRs as applied to the Carsons' [solar] installation at issue in this case are not too restrictive and did not unreasonably affect the costs to the Carsons of installing the SED.‖ Accordingly, we affirm the court's conclusion that the restrictions the Association imposed did not violate A.R.S. §§ 33-1816 or -439. The Architectural Committee likewise did not act unreasonably in conditioning its approval of the Carsons' application on relocation or screening of the solar device. See Tierra Ranchos Homeowners Ass'n v. Kitchukov, 216 Ariz. 195, 201, ¶ 25, 165 P.3d 173, 179 (App. 2007) (homeowners association must ―act reasonably in the exercise of its discretionary powers including rulemaking, enforcement, and design-control powers.‖) (quoting Restatement (Third) of Property: Servitudes § 6.13(1)(c) (2000)). B. The Superior Court Did Not Err By Granting Injunctive Relief. The Carsons argue that even assuming they breached the CCRs by installing the solar device beyond their backyard fence, the superior court abused its discretion by granting the Association's request for injunctive relief. A declaration of covenants, conditions and restrictions is a contract between a community's owners collectively and the individual lot owners. Ahwatukee Custom Estates Mgmt. Ass'n v. Turner, 196 Ariz. 631, 634, ¶ 5, 2 P.3d 1276, 1279 (App. 2000). Such restrictions properly may be enforced by injunctive relief. Heritage Heights Home Owners Ass'n v. Esser, 115 Ariz. 330, 333, 565 P.2d 207, 210 (App. 1977). ―An

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injunction is an equitable remedy, which allows the court to structure the remedy so as to promote equity between the parties.‖ Scholten v. Blackhawk Partners, 184 Ariz. 326, 331, 909 P.2d 393, 398 (App.1995) (supplemental opinion). We reject the Carsons' contention that the Association was not entitled to injunctive relief because it failed to show irreparable injury or that it lacked an adequate remedy at law. ―[A] party seeking to enforce a valid deed restriction may demonstrate adequate harm merely by proving that to tolerate a violation would diminish the protection provided to all homeowners by the deed restrictions.‖ Ahwatukee Custom Estates, 196 Ariz. at 636-37, ¶ 19, 2 P.3d at 1281-82 (citing Cont'l Oil Co. v. Fennemore, 38 Ariz. 277, 285-86, 299 P. 132, 135 (1931)). The Carsons' unauthorized solar device affected other residents in the subdivision in that it was visible from some locations in the community. Additionally, as in Ahwatukee Custom Estates, requiring the offending homeowners to comply with the community documents ―would serve to vindicate and preserve the [Committee's] future authority to enforce the subdivision's CC & Rs and Guidelines.‖ 196 Ariz. at 636-37, ¶ 19, 2 P.3d at 1281-82. CONCLUSION For the reasons set forth above, we affirm the superior court's judgment. We award the Association its costs and reasonable attorney's fees on appeal. Fox Creek Community Ass'n v. Carson, 2012 WL 2793206 (Ariz. App. 2012).

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3-1e

Other Renewable Energy Sources and Ownership Rights: Wind Power 1. Severability of Wind Rights: Eminent Domain and Safety 2. State and Local Regulation of Wind Farms 3. Wind Power and Environmental Litigation a. Preconstruction Litigation b. Litigation During Operation 4. Wind Power and Nuisance Effects a. Wind turbines face challenges from property owners i. Noise ii. Harms to birds iii. Wakes and use of wind b. Some laws have been passed that are similar to the early solar energy laws to allow use of land for generation and turbines

Answer to Ethical Issue (3.1) The wind power development is a classic right-to-a-view case (and there is none) when there is a public interest in alternative energy sources. However, protections for wind power, unlike for solar power, do not exist. Parties are in a dispute that has no current laws. Discuss the stakeholders listed in the facts and any other stakeholders the students can think of. Walk them through the various interests affected, both long- and short-term effects. Perhaps most important, from a critical thinking perspective, is to help students understand that there are competing interests in the development of wind power. Their beliefs about whether it is good or bad need to be revisited as they realize the complexity of the issue and the impact of permitting the wind farms and denying their approval. Also, good discussion is noting that many who supported clean energy—Cronkite and Kennedy—changed their views when their views from their homes on Cape Cod were affected. And the Koch brothers had their interests in oil and gas as a key source of energy. Motives, hypocrisy, etc. are ethical issues on both sides. 3-1f

Right to a View 1. Relatively new area of law 2. Has developed because of considerable number of recreational properties in areas in which views are important 3. In the absence of zoning laws, deed restrictions or private agreements, landowners have not had much luck in establishing a right

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CASE BRIEF: Right Field Rooftops, LLC v. Chicago Baseball Holdings, LLC 87 F. Supp.3d 874 (2015); aff‘d, 870 F.3d 682 (7th Cir. 2017), cert. denied, 138 S.Ct. 2621 (2018) FACTS:

The Right Field Rooftops (Rooftops) control two buildings and businesses that sell tickets to view Cubs baseball games and other events at Wrigley Field. Since Wrigley Field's construction in 1914, spectators on the roofs of the buildings across the street on Sheffield have enjoyed a view into Wrigley Field. Starting in the 1980s, owners of the buildings began to turn their roofs into grandstands for spectators and in 1998, the City of Chicago enacted an ordinance formally allowing the rooftop businesses to operate for profit. By 2002, there were eleven rooftop businesses operating for profit by selling tickets to patrons who wanted to watch Cubs games and other events from the roofs. Before the beginning of the 2002 Major League Baseball season, the Cubs installed a large green windscreen above the outfield bleachers. The windscreen impacted views from the rooftop businesses. The Cubs filed suit against a number of the rooftop businesses, claiming that the rooftop businesses were misappropriating the Cubs' property by charging admission fees to watch Cubs games from the roofs. That suit was settled through a License Agreement in which the rooftop businesses agreed to pay the Cubs a royalty of 17% of their gross revenues in exchange for views into Wrigley Field until December 31, 2023. The agreement also provided that if the Cubs erected anything (from bleachers to screens) that blocked the view from the Rooftop, the Cubs would repay either all or 50% of the gross revenues received from the Rooftop to that point or there could be a reduction in the revenues paid. However, the agreement provided that the license would end if the Cubs constructed anything that was approved by the City of Chicago. The Chicago City Council had designated Wrigley Field as a Landmark Property, something that meant it was unlikely that alterations would be permitted that altered the historic structure of the facility. In late 2011 and early 2012, the Cubs released an illustration of the intended construction to all the rooftop business owners and the illustration showed that the rooftop businesses would be largely blocked by the construction. After many meetings and public hearings over the course of two years, the City of Chicago approved the Cubs final plan to construct a total of eight outfield signs above the bleachers, including a video board in both left and right field. The Cubs are placing the right field video board directly in front of the Rooftops, while the Cubs-owned rooftop businesses are left unobstructed. The Rooftops filed for a preliminary injunction to halt the planned construction at Wrigley Field.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

ISSUE:

Were the Rooftops businesses entitled to protection for their view of Cubs games?

DECISION:

The court denied the preliminary injunction and allowed the Cubs to begin construction of the expansions (signs). The court found that there was no breach of the right-to-a-view license that the parties had negotiated through their agreement to settle their suit over the rooftop customers viewing the Cubs‘ games. The court held that Subsection 6.6 of the License Agreement provides that ―any expansion of Wrigley field approved by governmental authorities shall not be a violation of this Agreement.‖ The proposed video board had been approved by a governmental authority. The court noted that ―expansion‖ does not mean ―seat expansion,‖ and any addition to the structure of Wrigley Field would be an expansion—triggering the contract termination clause. The court also noted that the Rooftops owners were counting on the City of Chicago to not permit any alterations to Wrigley Field because of its Landmark designation. However, that approval came, and the contract provisions then applied. The court noted that they were savvy businesspeople who should have anticipated some change. ―Bottom line, they were wrong.‖ The Landmarks Commission approved the Cubs' proposed construction. The court also noted that the argument that the businesses would become insolvent immediately was not established by the evidence. The request for a preliminary injunction was denied. [The Cubs began making the changes to Wrigley Field.]

Answers to Case Questions 1. What commentary does the court make about the business savvy of the Rooftops owners? The court notes that they were wrong to assume that the City would never approve changes to Wrigley Field. Its designation as a Landmark was certainly an indication of its historic nature, but time and change might necessitate structural changes. The court pointed out that they were wrong in their assessment. 2. Based on this decision, is there any presumptive right to a view that can evolve over time? In this case, the views from the rooftops had a long history, supported by the view license and a great deal of reliance. Still, there was no protected right to a view because the parties did not effectively negotiate terms to preserve their view. 3. If you were working on the license agreement for the view, how would you change the language? The language should have been focused on ―expansions that result in an

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

obstruction of the view from the Rooftops.‖ The License Agreement provided the Ricketts with a way out if they could persuade the city to approve their plans—they were able to do so. 4. Evaluate the ethics of the Ricketts family in this case. One of the troubling aspects of the case is that the businesses that they purchased from the Rooftops group would not be blocked by the proposed expansions. In other words, they protected their business interests on the rooftop. The plan to seek city approval was already in the works when they negotiated the revenue-sharing and license agreement with the Rooftops. Perhaps they lulled the Rooftops into a sense of comfort and neighborly sharing whilst they had a different plan all along. NOTE ON PRACTICAL TIP: Discuss with the students how property owners could protect a view through private agreements and introduce the notion of easements that will be discussed in the next chapter. Also, deed restrictions, discussed in Chapter 22, could also be introduced as a method of private agreement for protection of a view.

Answer to Ethical Issue (3.2) The problem presents for student discussion the classic conflict between developers and residents who want to preserve the status quo in terms of population, buildings, homes, traffic, etc. In this case, the residents want to preserve their long-standing view. However, Trump has no legal obligation to preserve that view. Ethics requires an examination of the Trump project in light of the following: 1. 2. 3. 4. 5.

How will Trump‘s actions affect his business in the future? How does the new development affect the community? Would Trump object if someone did the same to him? Didn‘t the owners understand city limitations and new buildings? Is it right for the owners to demand more now when their legal rights were clear long before Trump proposed his development? Are they changing the rules?

3-2 Surface and Subsurface Rights—USE POWERPOINT SLIDES 3-16 TO 3-29  Landowners own to center of earth (see air lot illustration)—REFER TO FIGURE 3.2 AND USE POWERPOINT SLIDE 3-18  Can convey these interests 3-2a

Mineral Rights

CASE BRIEF: Murray v. BEJ Minerals, LLC 908 F.3d 437 (9th Cir. 2018) En banc rehearing granted, Murray v. BEJ Minerals, LLC, 920 F.3d 583 (9th Cir. 2019)

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FACTS:

Once upon a time, in a place now known as Montana, dinosaurs roamed the land. On a fateful day, some 66 million years ago, two such creatures, a 22-foot-long theropod and a 28-foot-long ceratopsian, engaged in mortal combat. While history has not recorded the circumstances surrounding this encounter, the remnants of these Cretaceous species, interlocked in combat, became entombed under a pile of sandstone. In 2006, an amateur paleontologist uncovered the well-preserved fossils of the ―Dueling Dinosaurs‖ on a Montana ranch. Lige and Mary Ann Murray (plaintiffs) in this action, own the surface estate of the ranch where the fossils were found. In 2005, prior to the discovery of the fossils, Jerry and Robert Severson (―the Seversons‖) (defendants) and previous owners of the ranch, sold their surface estate and one-third of the mineral estate to the Murrays. In the conveyance, the Seversons expressly reserved the remaining 2/3 of the mineral estate, giving them ownership, as tenants in common with the Murrays, of all right, title, and interest in any ―minerals‖ found in, on, and under the conveyed land. These fossils are now quite valuable. The Murrays filed suit seeking to be declared owners of the fossils because of their surface rights. The Seversons asserted a counterclaim seeking a judgment that the Montana Fossils belong to them as holders of the mineral estate. The district court found that the Montana Fossils are not ―minerals‖ under Montana law and therefore are not part of the mineral estate and granted summary judgment for the Murrays. The Seversons appealed.

ISSUE:

Were the dinosaur bones and fossils surface materials or mineral rights?

DECISION:

The appellate court reversed the decision of the lower court and found that the fossils were minerals using a combination of precedents from Montana and Texas. The composition of the fossils and bones may have been quite ordinary, but the rarity of the finds made them quite valuable and should therefore be classified as minerals, thereby belonging to the Seversons. Under the appellate decision, the Seversons own 2/3 of the mineral rights and therefore 2/3 of the cash in escrow.

Answers to Case Questions What is the Heinatz/Farley test for determining what is a mineral for purposes of title to subsurface discoveries? The test is one that goes on a case-by-case basis. It depends. Sand can be a mineral if it is a type that has the rare quality for making glass. Sand used in road construction is not a mineral and is surface material. The dinosaur bones were rare and extraordinary and therefore minerals. Is sand always a mineral? Why or why not? It depends on how the sand can be used. The test is one of the value of the substance, not necessarily its mineral composition. What happens to the dinosaur bones now? The Seversons have the right to negotiate their sale.

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What will happen to the money that is being held in escrow from the Murrays’ sales of some of the dinosaur bones? The Seversons, as majority owners of the mineral estate, will own two-thirds of the Montana Fossils and will receive 2/3 of the cash in escrow. The Murrays get the remaining 1/3. Had the decision gone the other way, the Murrays would get the full value of the dinosaur bones. 3-2b

Mineral Rights: Oil and Gas Ownership 1. Nature of Oil and Gas a. b. c. d. e.

Oil is liquid form of petroleum Formed by pressure in various sedimentary layers beneath the surface Still moving; pockets are not stable Drilling is the only way to confirm its presence Ownership of oil and gas i. Initially courts followed the Blackstone theory that you owned what was beneath the surface ii. Shifting nature of interests makes that difficult iii. Oil and gas are fungible goods, and it is difficult to tell from whence they came iv. Also following Blackstone's rule would create trespass issues v. Rule of capture followed a) Ownership of all oil and gas produced by wells on your land b) True even if oil came from deposit on adjoining land vi. Ownership v. non-ownership states: difference in rules is simply who owns rights prior to capture; no one owns mineral rights until capture in non-ownership and in ownership deed holder owns rights which could be lost through capture vii. Exceptions to rule of capture a) b) c) d) e)

Does not apply to stored oil or gas that escapes Enhanced recovery operations Sweeping Doctrine of correlative rights Government regulation in the form of conservation and prorationing

2. Classification of Oil and Gas Interests a. b. c. d.

Profit a prendre—right to enter land of another and take oil and/or gas Fee simple determinables Separate sets of state laws to govern Taxation issues

3. Types of Oil and Gas Interests

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a. Fee interest—surface and sub-surface rights b. Mineral rights—subsurface rights and easement to use the surface for removal (mineral servitude in Louisiana) c. Oil and gas lease d. Working interest or operating interest e. Royalty interest 3-2c

Water Hydraulic Fracturing: Fracking Horizontal and direct hydraulic fracturing to recover hydrocarbons 1. Federal Regulatory Oversight 2. State and Local Regulatory Oversight

3-2d

Geothermal Energy 1. Regulation of Geothermal Energy: What Is Geothermal Energy? a. Is it mineral or water? i. Federal court—not minerals ii. States—water or neither (statutes)

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2. Federal Regulation of Geothermal Energy a. Geothermal Steam Act of 1970 and Geothermal Energy Research, Development, and Demonstration Act—encourage development of geothermal resources b. Energy Improvement and Extension Act of 2008 c. The Energy Policy Act of 2005 3. Prior Appropriation Issues in Geothermal Resource Development 3-2e

Water Rights 1. Water Rights: Type of Water a. Two major theories applicable to natural and artificial lakes, rivers, and streams; apply to navigable waters or water that could be used for navigation even though not used so presently b. Riparian Theory—east of Mississippi i. No priorities—equality ii. Must own land abutting or touching water iii. Natural flow vs. reasonable use theories a) Natural flow—cannot benefit non-riparian land b) Reasonable use—can benefit non-riparian land so long as no interference with other riparian rights iv. Use for natural (artificial—irrigation, power, mining, industry) purposes given priority a) b) c) d)

Household uses Drinking water Stock watering Garden irrigation

v. Riparian has right of water free from problems vi. English doctrine c. Prior Appropriation Theory i. First in time/first in right ii. No equality/no limitations on reasonable use iii. Must do following a) b) c) d)

Appropriate water with intent to appropriate Divert water Put to beneficial use File necessary administrative forms

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

iv. Need not own land (Arizona is an exception where water used for irrigation) v. Can use water on riparian and non-riparian land vi. No distinction between artificial and natural purposes—only required to put property to beneficial use vii. First appropriator has exclusive right to water—no waste viii. Statutory on state by state basis 2. Water Rights: Ownership of Riverbeds These theories do not apply to ownership of land beneath river; subject to centerline rule which means you own land beneath to center of stream 3. Water Rights: Private Ponds Private ponds belong to real estate owner 4. Water Rights: Ground Water Percolating or underground water—subject to Riparian and Prior Appropriation rules and include aquifers, artesian waters, underground lakes, and unknown sources

Answer to Consider (3.3) Under the Riparian doctrine, Shanty Hollow would have violated the rights of other riparians by excessive use. Under Prior Appropriation, it is quite possible for one landowner to have this extensive use so long as it was in a position of having done so first, or, in some states, in a position of priority for use. Yes, there could be a permit issued here under government police power authority in order to facilitate the beneficial use of property. Catskill Center v. N.Y. Dept. of Environ., 642 N.Y.S.2d 986 (1996). 5. Water Rights: Rainwater Harvesting a. New source of water amidst scarcity b. States have different approaches—if you capture it, it is yours, but if water goes into other sources (groundwater, ponds, rivers, and streams), then the other water rights rules apply 6. Water Rights at the Crossroads a. Water rights have become a hot-button issue in development b. Environmental concerns for animals and plants around water being used c. Government agencies have become more involved i. Reviewing proposed projects ii. Using a ―reasonable or wasteful‖ summary d. Changes in law taking place—water is only real property until captured and then it is personal

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e. Supply and demand issues drive intervention in water issues

Answer to Ethical Issue (3.3) Point out to the students that Great Spring‘s use of the water could be done. Whether it should be done requires an examination of good faith, intent, and the impact of future generations. Perhaps at the heart of the Great Springs litigation was the sense of its competitors that something was terribly wrong with the business model that was able to slip so ably in between federal and state regulation and have an unregulated source of water. The prior appropriation doctrine played a role in its success in the case. In considering, for example, utilitarianism, the plaintiffs in the case were unable to point to anyone who was deprived of water because Great Springs was bottling water from federal lands. The reality was that no one was using the land and hence the lack of challenge from landowners. The competitors brought suit because Great Springs had tapped into (literally and figuratively) a source of water that was cheap and not subject to restrictions. 3-3 Protection of Property Rights—USE POWERPOINT SLIDES 3-30 TO 3-34 3-3a

Trespass 1. Intentional interference with landowners' use and enjoyment of their property 2. Any physical presence or instigated presence is trespass a. Persons b. Bullets c. Water 3. Precautions to prevent trespassing a. Signs b. Barricades c. Injunctions

CASE BRIEF: Prather v. Bank of America, N.A. 2017 WL 1929474 (D. Mont. 2017) FACTS:

Ryan and Carey Prather bought a home in Frenchtown, Montana that they financed through a mortgage loan for $243,079.00 with Countrywide Bank. The loan was secured with a Deed of Trust on the property. Countrywide Bank, a collapsed bank following the 2008 market crash, assigned the note to Bank of America (BANA). The Prathers defaulted on their loan when they failed to make a mortgage payment between August 23, 2013 and October 21, 2013.

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From 2013 through 2015, a BANA property inspector visited the property to conduct inspections. The inspector took pictures of the exterior of the Prathers‘ home but did not enter or attempt to enter the home or garage. The inspector would walk to the front door and leave a door hangar. The Prathers did not post any signage or otherwise restrict the ability of delivery drivers, postal workers, or other service providers from entering their property. The Prathers‘ claim that when the inspectors would take photos or place door hangars on their home it caused them distress, anxiety, and loss of sleep. On December 14, 2015, the Prathers filed suit alleging BANA‘s misconduct during the servicing of their home loan. BANA moved to dismiss, and the Court granted the motion but the Prathers had remaining claims against BANA for trespass and invasion of privacy. BANA moved for summary judgment on those claims. ISSUE:

Can mortgagors recover for trespass from a lender who sends a property inspector following a default on the mortgage?

DECISION:

The court held that there was no trespass because: 1. Under the terms of the deed of trust, once the Prathers were in default, the holder of the mortgage had the right of inspection of entry onto the property. 2. Federal laws limiting causes of action against consumer mortgage lenders prevented a private suit for privacy. 3. No boundaries were crossed, no entry into the home was made and the open nature of the Prather property meant that there was no seclusion subject to trespass. 4. No one else was prohibited from entering the property by any signage 5. The deed of trust permitted access upon default.

Answers to Case Questions Explain why BANA was permitted to enter the property. There was a contractual provision in the deed that gave the holder of the mortgage joint access with the borrowers to the home and the right to conduct inspections. Federal law did not permit private rights of action against lenders for enforcing their rights. What damages did the Prathers claim as a result of the inspectors’ presence on their property? They said that the door hangars caused them to have anxiety and sleeplessness. What facts did the parties admit that allowed the court to grant a summary judgment on the trespass issue? That there had been a default. That the inspectors did not try to enter the home or the garage. That the deed of trust provision permitted access by BANA.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

Answer to Consider (3.4) The court found that there was indeed a trespass. A ―trespass‖ is an intrusion on a party's right to exclusive possession of his property. Anything BNSF leaked over was a trespass. To establish intentional trespass, a plaintiff must show (1) invasion of property affecting an interest in exclusive possession; (2) an intentional act; (3) reasonable foreseeability the act would disturb the plaintiff's possessory interest; and (4) actual and substantial damages. A cause of action for continuing intentional trespass (as opposed to permanent trespass) arises when an intrusive substance remains on a person's land, causes actual and substantial harm to that person's property, and is abatable. The remedies for a continuing trespass are limited to injunctive relief and damages for injury incurred during the three years prior to filing the action. The concept of trespass includes trespass by water. Burley v. Burlington Northern & Santa Fe Railway Company, 273 P.3d 825 (Mont. 2012). 3-3b

Nuisance 1. Unreasonable interference with another's use and enjoyment of property 2. Private nuisance—one affecting a small group of landowners 3. Public nuisance—one affecting a great or indeterminate number of landowners 4. Remedies a. Equitable—injunction to halt nuisance activity b. Monetary—money for damages caused by the nuisance

CASE BRIEF: Spur Industries, Inc. v. Del E. Webb Development Co. 494 P.2d 700 (Az. 1972) FACTS:

Spur Industries operated a cattle feedlot near Youngtown and Sun City (communities 14 to 15 miles west of Phoenix). Spur had been operating the feedlot since 1956, and the area had been agricultural since 1911. In 1959, Del E. Webb began development of the Sun City area, a retirement community. Webb purchased the 20,000 acres of land for about $750 per acre. In 1960, Spur began an expansion program in which it grew from an operation of 5 acres to 115 acres. Webb began to experience sales resistance on the lots nearest Spur‘s business because of strong odors. Nearly 1,300 lots could not be sold. Webb then filed suit alleging Spur‘s operation was a nuisance because of flies and odors constantly drifting over Sun City. At the time of the suit, Spur was feeding between 20,000 and 30,000 head of cattle, which produced 35 to 40 pounds of wet manure per head per day, or over one million pounds per day.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

The trial court enjoined Spur‘s operations and Spur appealed. ISSUE:

Could Spur be enjoined from operating on the grounds of being a nuisance? Did Webb owe compensation?

DECISION:

The court held that the cattle operations created a public nuisance that needed to be enjoined. However, the court also noted that Del Webb had moved to the nuisance and Spur had begun operations in a remote area before the city had grown and that it could not anticipate that it would have caused a nuisance in that remote area at the time of its creation. Therefore, Del Webb was required to compensate Spur—an amount of $11 million was later agreed upon by the parties.

Answers to Case Questions 1. Did Spur create a nuisance? The court found that the flies and smell were a public nuisance that required an injunction. Too many people were affected by the smell and flies and the result was rendering the surrounding land unusable. 2. Should it make any difference that Spur was there first? The court finds that equity requires taking note of the fact that Spur was there first and could not have anticipated that, in that remote area, it would ever create a nuisance. However, the city moved out its way. The court must balance first-come rights with the resulting condemnation of surrounding property that occurs when growth occurs. 3. How does the court balance retirement communities and beef production, which are two of Arizona's biggest industries? Spur must be compensated—it must recoup the

costs of moving to a more remote location. Webb gets to use the land free of the nuisance, but it must compensate those who were there first. Webb paid the $11 million it cost for Spur to move. UPDATE:

There are now farm nuisance protection laws that cut back on litigation by people who move to the farm nuisance.

Answer to Consider (3.5) Point out that this was a case where the property owner wanted to use its own airspace but could not because its airspace for flight purposes was blocked by the use of airspace in the adjacent property for a transmission line. The court held that APS carried its burden of establishing that there was no genuine dispute that Brenteson's use of the airstrip created an unreasonable risk of a trespass and potentially serious accident. The court found for APS not on a trespass theory, but on a nuisance theory. The court found that:

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―Overflights which do not enter the plaintiff's airspace may still unreasonably interfere with the landowner's use of the land. In such a case the liability will rest upon the basis of nuisance rather than trespass.‖ Restatement, supra at § 159, comment m. A nuisance does not necessarily involve a physical intrusion on the land or an interference with the plaintiff's possession in the land. Id. at § 821D, comment d. Although Brenteson had asked for compensation because its property was unusable for its purposes, the court did not permit recovery because APS‘s rights in the property existed prior to Brenteson‘s purchase and use. Although the transmission line was built much later than Brenteson‘s purchase, APS had the title first and had gone through all necessary governmental approval processes. The court also discussed the Spur case: Because the facts of the present case do not fit the narrow holding of Spur, we do not believe that the superior court was obligated to award damages to Brenteson. However, the facts here fall within the broader equitable principle stated in Spur. Spur instructs that the superior court may invoke its equity powers to award some compensation, at least when the landowner whose use constituted the nuisance was present in the area prior to the plaintiff landowners. In this case, Brenteson's operation predated the APS power lines. The erection of the power lines rendered Brenteson's property unsuitable for use as an airstrip, and some compensation might be appropriate. However, the superior court considered Brenteson's claim based upon Spur and expressly rejected that claim. On this record, we cannot say that the court abused its discretion in determining that equity did not require that APS compensate Brenteson. Moreover, Brenteson fails to urge any error in this regard on appeal, resting on the sole contention that compensation is constitutionally required because the injunction was equivalent to a taking. The court also noted that any landowner would have been entitled to the air protection rights that Brenteson was violating with its takeoffs from the airstrip. You might also discuss the issues of precedent with the students since both cases came from Arizona and the issue of moving to the nuisance and the distinction between the cases is a good means for discussing differing facts and effects on precedent. Brenteson Wholesale, Inc. v. Arizona Public Service Co., 803 P.2d 930 (Ariz. 1990). 3-4 Duties of Landowners—SEE FIGURE 3.3 AND USE POWERPOINT SLIDES 3-35 TO 3-40 Various Duties Depending upon Nature of Party Involved 3-4a

Trespassers—Duty to not intentionally injure

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Answer to Consider (3.6) The town lawyers are correct in their assessment of liability. The boys have the right to be on town property, but only as a citizen passing by. They cannot take possession of the property and cannot build on it. They are invitees, but for a limited purpose. You cannot change the structure of a business or store simply because you have a right of access. In that sense, they are trespassers. However, they are elevated from trespassers to licensees or invitees to the extent the city allows them to remain there with their games. The city is thus liable for injuries that occur on its property of which they are aware, and they are aware of the Wiffle ball activities. The adjoining landowners probably have a nuisance issue because the boys do play at night. There could be time constraints placed on the game. There is the noise, traffic, and gathering problem. The engineers have a valid point, too, because even if the boys owned the property they could not use it in a way that affected the public health and welfare, i.e., caused flooding—causing flooding onto others property is, of course, a trespass. Peter Applebome, "Build a Wiffle Ball Field and Lawyers Will Come," New York Times, July 10, 2008, L1. 3-4b

Licensees 1. Those on property with some form of permission 2. Duty to not intentionally injure and to warn of any defects

3-4c

Invitees 1. Those in public places, stores, etc. 2. Those on premises by express invitation 3. Highest duty—inspect, warn, and correct

Answer to Consider (3.7) a. b. c. d.

Paramedic—licensee in most states Customer—invitee Researcher—licensee Burglar—trespasser 3-4d

Breach of Duty—liability is imposed

CASE BRIEF: Bertsch v. Mammoth Community Water District 247 Call. App. 4th 1201, 202 Cal. Rptr. 3d 757 (3d Dist. 2016, review denied August 17, 2016) FACTS:

Brett Bertsch was skateboarding with his brother in Mammoth Lakes, California. The two were traveling downhill at a ―pretty fast‖ speed (estimated at 8–10 mph),

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sans helmets, when the front wheels of Brett‘s skateboard hit a small gap between the paved road and a cement collar around a manhole cover. The wheels on the skateboard stopped, but the laws of physics being what they are, Brett kept going and his fall caused him to hit his head on the pavement. The resulting brain injury eventually resulted in his death. Brett‘s father and brother, Richard and Mitchell Bertsch (plaintiffs), brought a wrongful death action against Mammoth Community Water District, which inspects and maintains the manhole cover, and Sierra Star Community Association, the owner of the road where the accident occurred (defendants). The trial court granted summary judgment, and the Bertsches appealed. ISSUE:

What is the level of duty and liability of the city and the subdivision for the use of public streets for recreational activity?

DECISION:

The court held that the doctrine of assumption of risk meant that the landowners were not responsible for the injuries when the plaintiff is engaged in an activity that carries an assumption of risk. Skateboarding is a dangerous activity. That a skateboarder experiences greater injury because of property conditions when skateboarding on another‘s property is not the issue. The issue is the dangerous activity—going downhill on a skateboard on the wrong side of the road is dangerous activity. The parties did not dispute that Brett was on the wrong side of the road because that side was where the manhole was located. That an injury resulting from such activity is made worse because of the placement of a manhole cover does not change the risk or the assumption. In addition, requiring all landowners to anticipate risky uses and adjust the conditions in their property accordingly would impose far too great of a cost and burden on landowners. The court noted, ―Finally, the policy reasons stated in Calhoon, for declining to impose such a duty on homeowners apply equally to the defendants in this case. To require road owners and water districts, whether private or public, to make their roads and utility access points safe for skateboarding would amount to an unnecessary burden.‖ Affirmed.

Answers to Case Questions 1. Was the skateboarding a means of transportation or part of a recreational ride? What facts does the court point to in order to establish its conclusion on this issue? The court found that the young men transformed their ride for meeting their father into something more than just a means of transportation on the street. They found that the young man had to sort of circle back around to get to the top of the hill and that there was no reason to use the street except for the thrill of a downhill ride on a skateboard. The father‘s testimony about where

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he was meeting the boys established the change in their route from the most direct to one that involved the hill. They did not dispute Brett was on the wrong side of the street. Indeed, because the manhole cover was in the oncoming lane, Brett would have had to have been in this lane in order for the gap between the road and the cement collar around the manhole cover to have caused the accident. 2. Why does the assumption of risk doctrine apply here? It applies because skateboarding is an inherently risky activity, particularly when the young men were not wearing helmets. It is true that in both this case and the Calhoun case that their injuries were made worse by conditions on the property but when there are risky activities and there is no special relationship between the parties (i.e., it is not an area designed for skateboard use or a skate park or an area used for skating) the court choose not to impose extra duties in terms of making land safe for all types of activities because it is too much of a burden. 3. Why does the court not impose a duty on either the town or the association to make the street safe for skateboarders? The burden for landowners to anticipate every possible use of their land and take precautions, even for inherently dangerous types of assumption of risk activities would impose too great of a burden on landowners. They need only make their properties safe for usual uses. CAUTIONS AND CONCLUSIONS for Landowners—go through checklists with students. [return to top]

Additional Activities and Assignments Answers to Chapter Problems 1. This is an action in inverse condemnation brought by Petitioners against Northeast Lake Washington Sewer and Water District, a municipal corporation. Inverse condemnation is an action to ―recover the value of property which has been appropriated in fact, but with no exercise of the [condemnation] power.‖ ―Our constitution requires that just compensation be paid a landowner in the event of either a governmental ‗taking‘ or ‗damaging‘ of property.‖ Under a general takings analysis, the elements of an inverse condemnation action are not in dispute. However, the only Washington case which considered a property owner‘s right to a view is State v. Calkins. In that case the court stated: ―Clearly, there has been no specific declaration by our legislature of an intention to pay compensation for nonexistent property rights; i.e., access, air, view, and light; furthermore, absent such rights, the condemnation proceedings herein do not violate Art. I, Section 16, of our state constitution, which requires the payment of just compensation for the taking or damaging of property rights.‖ Although Calkins was not an action for inverse condemnation based upon interference with a property owner‘s right to a view, it is nevertheless somewhat indicative of this

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

court‘s position on the matter. Because our own decisions have not squarely addressed this issue, we may look to decisions from other jurisdictions. In Pacifica Homeowners’ Ass’n v. Wesley Palms Retirement Comm’ty, 224 Cal. Rptr. 380 (1986), the California Court of Appeal concluded that ―[a]s a general rule, a landowner has no natural right to air, light or an unobstructed view and the law is reluctant to imply such a right.‖ However, ―[s]uch a right may be created by private parties through the granting of an easement or through the adoption of conditions, covenants and restrictions by the Legislature.‖ In Pacifica, the Homeowners‘ Association (Association) attempted to enjoin the Wesley Palma Retirement Community from allowing trees on its property to grow higher than the Association‘s five-story building. The Association claimed a conditional use permit placed a limitation on tree height, which was ―imposed particularly for the benefit of the uphill landowners including the Association.‖ However, the court rejected the Association‘s arguments and stated that ―[i]n the absence of any agreement, statute or governmentally imposed conditions on development creating a right to an unobstructed view, it cannot be said Wesley Palms...interfered with any right.‖ In Gervasi v. Board of Comm’rs of Hicksville Water Dist., 256 N.Y.S.2d 910 (1965), the facts closely parallel those in this case. The plaintiffs in that case sought to enjoin the water district from completing construction of a water tank or to recover damages measured by the reduced value of their homes caused by construction of the water tank. In that case, the water district constructed a storage tank on its own property. The plaintiffs claimed construction and maintenance of the tank reduced the market value of their properties. The Court concluded that the plaintiffs had failed to state a cause of action because they had not been deprived of ―property within the meaning of that provision as it ha[d] been construed by the courts.‖ The court determined that the plaintiffs had no cause of action because the water district constructed the water tank on its own property. The court found no deprivation of property under the takings clause of the New York Constitution. Similarly, in the case now before us, the District constructed a water tank on its own property. We conclude that Petitioners have not been deprived of any property rights because the District is acting only upon its property. The court in Gervasi further concluded that ―[d]amages cannot be recovered because of the unsightly character of a structure and aesthetic considerations are not compensable in the absence of a legislative provision.‖ ...we conclude that Petitioners are not entitled to compensation for damages solely because of the unsightly character and the unaesthetic appearance of the water tank. Following the reasoning of...Pacifica...and Gervasi, we conclude that Petitioners do not have a cause of action for inverse condemnation based on their claimed ―right to a view.‖ The water tank was a permissible use constructed and maintained solely upon the property of the District.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

Property value, or landowners‘ economic interest in their property, may be considered an essential element of ownership. In Highline Sch. Dist. 401 v. Port of Seattle, 548 P.2d 1085 (1976), this court concluded that ―an inverse condemnation action for interference with the use and enjoyment of property accrues when the landowner sustains any measurable loss of market value . . .‖ Although Highline involved inverse condemnation based on aircraft noise and vibration, the premise that a measurable loss in a market constitutes interference with a landowner‘s use and enjoyment of property would be applicable in this case only if the decline in market value was caused by unlawful government interference. In this case, based upon appraisal of Petitioners‘ property, there is no dispute that there was in fact a measurable loss in market value after construction of the water tank. David E. Hunnicutt conducted an appraisal and concluded that construction of the tank had caused an actual loss in value to Petitioners‘ property of at least $30,000.00. However, our prior decisions do not lead to the conclusion that loss in market value of Petitioners‘ property is of itself evidence of governmental interference with the use and enjoyment of property entitling them to compensation. If property, or a substantial portion of that property, is destroyed by the government for a public purpose, the landowner would unquestionably be entitled to compensation.... That section, however, does not ―authorize compensation merely for a depreciation in market value of property when caused by a legal act.‖ Petitioners claim they are entitled to compensation because the unaesthetic appearance of the unsightly water tank and the proximity of the tank to their property has caused a loss in market value. This court has not allowed compensation based merely upon proximity of a building or structure. Petitioners further claim the overbearing presence of the water tank interferes with their use and enjoyment of their property and that they should therefore be compensated for damages. ―Damages for which compensation is to be made is a damage to the property itself and does not include a mere infringement of the owner‘s personal pleasure or enjoyment. Merely rendering private property less desirable for certain purposes, or even causing personal annoyance or discomfort in it use, will not constitute the damage contemplated . . . but the property itself must suffer some diminution in substance, or be rendered intrinsically less valuable by reason of the public use.‖ Petitioners are not entitled in this case to just compensation under the takings clause of the Washington Constitution. They cannot establish a property right or interest in their right to a view. Affirmed. Pierce v. Northeast Lake Washington Sewer and Water District, 870 P.2d 305 (Wash. 1994). 2. The court determined that the Christmas lights were a public and private nuisance. But what form of relief is appropriate? Providing token damages or even compensation for the diminished market value or rental value of their property during the Christmas season would not address the wrong, and would hardly be an adequate remedy at law, as equity demands before denying relief. Reducing the size of the display or the number of the lights and limiting its expansion might control the nuisance, just as limiting the number of cattle on © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

land from sixty to ten did. But the chancellor‘s solution was merely to limit the number of days the display would be turned on. In other words, the nuisance will be in operation on Monday, but not on Tuesday. ...OF CONTEMPT SANCTIONS PER CURIAM. On December 5, 1994, this court, on de novo review, issued an injunction enjoining the Osbornes from placing a massive Christmas light display on and about their home. The trial court and this court determined the Osborne display was a private and public nuisance. This court directed the Osbornes to reduce substantially the size and extravagance of the display so it will not attract the large crowds that had been drawn to the neighborhood in the past. On December 13, 1994, the Osbornes sought a motion for stay of mandate, announcing their intentions to petition for a writ of certiorari with the Supreme Court. On December 15, 1994, the appellees, by response, opposed the Osborne motion, suggesting to this court an ominous course of conduct by the Osbornes and their representatives, indicating plans to willfully disobey the court's directives. We denied the Osborne motion for reasons set out by per curiam dated December 16, 1994. In denying that motion, this court retained jurisdiction... ...court's December 16, 1994 opinion stated the following: On December 5, 1994, this court, on de novo review, enjoined the Osbornes from placing a massive Christmas light display on and about their home we specifically directed the Osbornes to reduce substantially (1) the size and extravagance of the display at and about their home so the display will not attract large crowds to the residential neighborhood Nor do we find merit in the Osbornes' suggestion that the court's injunction is extremely broad and vaguely worded. This court's directives as reiterated above are clear...... Power v. Osborne, 890 S.W.2d 575 (Ark. 1994). 3. Following a bench trial, Rony was awarded $22,530 in actual damages, which the court doubled to $45,060 under a statutory double-damages provision. The trial court also awarded Rony attorney fees under Code of Civil Procedure section 1029.8, which authorizes a fee award against an ―unlicensed person who causes injury or damage to another person as a result of providing goods or performing services for which a license is required.‖ The appellate court affirmed and held that the trial court's award of an additional $15,000 for loss of aesthetics was supported by substantial evidence. Rony's testimony, corroborated by photographs and the experts' testimony, demonstrated that while Guifarro may have cut just 30% of the cypress, he drastically reduced the tree's aesthetics and compromised its ability to provide shade. Lichter's trunk formula method may account for a tree's placement and condition in a utilitarian sense, but Lichter did not testify that method fully accounted for the intangible, but very real, loss in aesthetic pleasure to Rony. Thus, the trial court could have rationally concluded a further award was necessary to compensate Rony for the wellestablished aesthetic loss. Although Rony never quantified the loss of aesthetics at $15,000, she need not have done so. As with other hard-to-quantify injuries, such as emotional and reputational ones, the trier of fact court was free to place any dollar amount on aesthetic harm, unless the amount was ―so grossly excessive as to shock the moral sense, and raise a reasonable presumption that the [trier of fact] was under the influence of passion or prejudice."

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

Given the hack job Guifarro (the day laborer) inflicted on Rony's tree while trespassing on her property, we do not find the trial court's award ―shocking‖ and will not second-guess the amount the trial court selected after carefully considering the evidence before it. Rony v. Costa, 148 Cal. Rptr. 3d 642 (Cal. App. 2012). 4. Riparian rights are subject to reasonable regulation. Police power can authorize regulation and is not an unreasonable interference with riparian rights. Great Cove Boat Club v. Bureau of Public Lands, 672 A.2d 91 (Me. 1996). 5. Bono went back and forth with fellow co-op owners over the issue during his first winter at the San Remo. As winter passed, fireplace use ceased, and the battle eased up. The topic comes up at association meetings on occasions, but it appears that Bono and his family have made peace with the neighbors. He was still living at the San Remo with all the fireplaces as of March 2012, when he served as a reference for a new owner, Courtney Love. The court probably would have done some balancing—the fireplaces could be used with filters, limited hours, depending on air flow, etc. The court probably would not have shut down all the fireplaces in the building. And Bono did know when he bought the place that there were fireplaces in the units. A little of moving to the nuisance because the fireplaces were there first. 6. Do line of sight rights supercede the rights of property owners who might subsequently build on their property and block the line of sight? No. The line of sight right is analogous to the property law issue of implied easements for light, air, and view. Courts have almost unanimously repudiated the English ―doctrine of ancient lights.‖ This doctrine states that the owner of land has a legal action against an adjoining landowner who erects a structure that blocks the owner‘s light. Under U.S. law, the owner of land generally has no legal right to prevent his neighbors from obstructing his light, air, or view, in the absence of statute, express easement, or contract. Thus, it appears that only a statute, an express easement, or a contract would protect a customer‘s line of sight right. Since such a statute would contradict the prevailing repudiation of the doctrine of ancient lights and almost surely present intractable problems of public policy, no legislature is likely to enact one. Site questions will arise only in developed areas, where other video delivery systems will probably be available. In this competitive video environment, allowing unimpeded building construction would generally seem to outweigh the benefit of individual access to a particular source of video programming. However, zoning regulations that unreasonably prevent reception by requiring a dish be screened so that line of sight is obscured are preempted by the need for the spread of the technology. In the Matter of Preemption of Local Zoning or Other Regulation of Receive-Only Satellite Earth Stations, 59 Rad. Reg. 2d (P & F) 1073, 1986 WL 292763 (F.C.C. 1986). 7. Landowners have a duty to take reasonable precautions to protect their invitees from foreseeable criminal attacks. Taco Bell did owe a duty to its customers, including Winchell, to use reasonable care to protect them from injuries caused by other patrons and guests on their premises. The line of sight between the employees of Taco Bell and the drive-thru was obstructed and the video monitoring system was in a closet and not readily accessible to © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

Taco Bell employees. No security guard was on duty that night. There had been previous calls to the police from the Taco Bell, including one in which there was also violence. Taco Bell owed Winchell a duty as a matter of law and there were questions of fact regarding the elements of breach and causation. The trial court improperly granted Taco Bell‘s motion for summary judgment. Reversed. Winchell v. Guy, 857 N.E.2d 1024 (Ind. 2006). 8. The case of the ski resorts is one in which the property rights were granted for purposes of operating a ski resort, but if those property/water rights were transferred then the area is affected as are other users in the area. The federal government wants to control that allocation. The issues are due process as well as the deprivation of a property interest without some form of due process. Ann Zimmerman, "Water Fight Hits the Slopes," Wall Street Journal, March 7, 2012, p. A3. 9. The court held that it is possible that she was entitled to additional compensation if the nature of the use originally planned had changed substantially. Introduction of new aircraft and new uses can result in additional burdens on the adjoining landowner, for which they would be entitled to compensation. First, a change in the elevations or flight paths of existing aircraft may impose such a substantial burden on the affected property so as to take a second easement. In Herring v. United States, 162 F.Supp. 769 (Ct.Cl.1958), for example, the plaintiffs purchased a parcel of land within the approach zone to a runway on a military installation and improved that property with a house and parking areas for trailers. When the plaintiffs purchased the property, the base had been used for years to train pilots on single-engine, propeller-driven planes, but a number of tall trees between the runway and the property required those planes to reach an elevation of at least 75 feet before entering the airspace over the property. With the owners' permission, the government removed between forty and fifty of the tallest trees on the property, which allowed planes to pass over the property only 15 feet above the house and between 7 and 9 feet above an antenna on the roof of the house. These lower flights resulted in a substantial increase in noise on the property. The court concluded that any claims based on the alleged taking of an avigation easement for overflights above 75 feet were untimely under section 2501, but further held that the lower flights made possible by the removal of the tall trees on the property resulted in a second incremental taking for which the plaintiffs were entitled to compensation. See also Town & Country, 180 Ct.Cl. at 570 (dismissing a claim alleging the taking of an avigation easement because, inter alia, ―[t]he traffic pattern followed by jet aircraft taking off from this runway toward the northwest, and the traffic pattern followed by jet aircraft approaching this runway from the northwest preparatory to landing in a southeasterly direction, have been substantially the same from 1957 until the present time‖). Second, a substantial increase in the number of overflights over a property can result in a second incremental taking of an avigation easement, regardless of whether that increase is the result of an increase in the total number of operations at the base or a change in the flight patterns or routes of aircraft at the base. In Klein v. United States, 152 Ct.Cl. 221 (1961), the plaintiffs purchased a parcel of land in 1939 and built a house on the property. Two years later, the government commenced construction of Andrews Air Force Base in close © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

proximity to the property. Beginning in 1943, propeller-driven planes from the base began passing over the plaintiffs' property. Beginning in 1947, a number of P-80 jet aircraft were stationed at the base and began passing over the plaintiffs' property. Finally, in 1954, the base commander instituted a new flight pattern for the P-80s that dramatically increased the number of flights over the property. In its initial decision, Klein v. United States, 152 Ct.Cl. 208 (1960), the court held that the plaintiffs' suit was barred by the six-year statute of limitations set forth in section 2501 because their takings claim first accrued when the P-80s started passing over their property. On reconsideration, however, the court held that the extent of the government's use of the plaintiffs' airspace was neither known nor ascertainable prior to 1954, when the base adopted a new flight pattern for the P-80s, and the total number of overflights increased substantially. See also Boardman v. United States, 376 F.2d 895, 897 (Ct.Cl.1967) (dismissing a claim alleging the taking of an avigation easement because ―[t]he volume and varieties of flights and aircraft prior to December 1957 (the date six years prior to suit) were not substantially different from those thereafter from the standpoint of increasing the interference with use of plaintiffs' land‖); Town & Country, 180 Ct.Cl. at 569 (dismissing a takings suit as time-barred because, inter alia, there was no increase in the number of planes assigned to the military base at issue, nor was there any increase in the number of flight operations at that base, during the six-year period preceding the filing of the complaint). Finally, the introduction of new planes on a military base may result in the taking of a second avigation easement, even when there is no change in the total number of overflights. In Davis, 295 F.2d at 931, for example, the plaintiffs' property had been subjected to frequent overflights by B-36 jets from a nearby military installation for several years. The plaintiffs conceded that those flights substantially interfered with the use and enjoyment of their property, and also conceded that any takings claim based on those flights was thus barred under the six-year statute of limitations. The plaintiffs further argued, however, that the introduction of B-52s and KC-135s on the base, and their frequent low-altitude flights over the property, resulted in a second taking. The Court of Claims agreed, holding that overflights by the larger and substantially louder B-52s and KC-135s rendered the plaintiffs' property uninhabitable. See also Branning v. United States, 654 F.2d 88, 101 (Ct.Cl.1981) (holding that the introduction of new aircraft and their use for field mirror landing practice resulted in the taking of a second avigation easement); Avery v. United States, 330 F.2d 640, 642 (Ct.Cl.1964) (holding that ―the introduction of larger, heavier, noisier aircraft can constitute a fifth amendment taking of an additional easement even though the new aircraft do not violate the boundaries of the initial easement‖); Persyn v. United States, 32 Fed.Cl. 579, 583 (1995) (―Even where the government has acquired an avigation easement a new taking can occur if the government increases its intrusion by flying substantially noisier planes within existing easements, or by flying at lower altitudes.‖); Powell, 1 Cl.Ct. at 673 (―It is well established by the cases, for example, that although the Government, at an earlier time, has taken an avigation easement in the airspace above a tract of land, a ‗second taking‘ may occur if the Government later begins to overfly the land with noisier aircraft.‖) (citations omitted). Goodman v. U.S., 100 Fed. Cl. 289 (2011).

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

10. To establish intentional trespass, a plaintiff must show (1) invasion of property affecting an interest in exclusive possession, (2) an intentional act, (3) reasonable foreseeability the act would disturb the plaintiff's possessory interest, and (4) actual and substantial damages. A cause of action for continuing intentional trespass (as opposed to permanent trespass) arises when an intrusive substance remains on a person's land, causes actual and substantial harm to that person's property, and is abatable. The remedies for a continuing trespass are limited to injunctive relief and damages for injury incurred during the three years prior to filing the action. This claim fails, because Crystal Lotus does not allege that either Shoreline or Lake Forest Park engaged in an intentional act regarding the stormwater system since Crystal Lotus acquired its property. This precludes injunctive relief. And Crystal Lotus presented no evidence of actual or substantial damages occurring in the past three years: no expert testimony about diminution of property value, no government property tax assessments, no photos, or descriptions of physical deterioration. Rather, Crystal Lotus merely asserts the property is currently ―unusable and unmarketable.‖ Such bare assertions do not suffice to defend a motion for summary judgment. Crystal Lotus Enterprises Ltd. v. City of Shoreline, 274 P.3d 1054 (Wash. App. 2012).

In-Class Exercises 1. Have the students develop a list of nuisances they have experienced that are not included in the text; they may also use a list of nuisances they could anticipate. 2. Have the students develop a list of questions they would ask before entering into an oil and gas lease. 3. Have the students develop a "neighbor" checklist for things they would want to know about their potential neighbors before buying property. [return to top]

Resources Boyer, General Survey of the Law of Property, 3rd ed. pp. 270-300. Carlton, ―New Heights, New Uses, and New Questions: Can Individuals Enforce Their Property Rights Against the Impending Rise of Low-Flying Civilian Drones?‖ 59 Boston College L. Rev. 2135 (2018). Chapman, ―Offshore Renewable Energy Regulation: FERC and MMS Jurisdictional Dispute Over Hydrokinetic Regulation Resolved?,‖ 61 Admin. L. Rev. 423 (Spring 2009). Ferrey, "Follow the Money! Article I and Article VI Constitutional Barriers to Renewable Energy in the U.S. Future," 17 Va. J.L. & Tech. 89 (Summer 2012).

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

Jennings, ―Air, Light, and Other Ancient Doctrines Springing Into Courts,‖ 26 Real Est. L.J. 395 (Spring 1998). Jennings, ―News in Nuisance,‖ 29 Real Est. L.J. 140 (Fall 2000). Jennings, ―The Continuing Saga of Landowner Liability,‖ 28 Real Est. L.J. 158 (Fall 1999). Jennings, ―The Problems, Nuisance and Otherwise, With Fauna,‖ 42(2) Real Est. L. J. 221–8 (2013). Law, ―Wind Power: Developing Real Property for a Wind Project,‖ 23-AUG Prob. & Prop. 57 (July/August 2009). Lui, ―Watch Domino‘s Pull Off the World‘s First Commercial Pizza Delivery by Drone, ―Fortune (November 16, 2016), http://fortune.com/2016/11/16/dominos-new-zealand-first-commercialpizza-delivery-drone/[https://perma.cc/T4PV-APL8]. Markey, ―Money From Heaven: Should Qualified Air Rights Donations Be Characterized as Interests in Land or Buildings? Why Does It Matter?,‖ 50 Clev. St. L. Rev. 283 (2002-2003). Mormann, "Enhancing the Investor Appeal of Renewable Energy," 42 Envtl. L. 681 (Summer 2012). Powell, Real Property, Volume 5 Section 705 et seq. Raskin, ―The Definitive Guide to Tree Disputes in California,‖ 21 Hastings J. Environ. L. & Policy, 113 (2015). Rule, ―Airspace in an Age of Drones,‖ 95 B.U. L. Rev. 155 (2015). Salkin, ―Among the Rich and Famous, A New Dispute Over Air Rights,‖ New York Times, (May 2007), p. Al. ―The ‗Who Knew‘ Syndrome,‖ 17(6) Corporate Finance Review 27-32 (2013). Valenza, ―Private Property Rights Need to Be Defined and Respected While Commercial Drone Services Are Poised to Fill the Airspace,‖ 45 Real Est. L. J. 470 (2017). SOLAR Alden, "Declaring Solar Access Interference a Private Nuisance," 10 Temp. Envt'l. L. & Tech. J. 93 (1991). Bradbrook, "Future Directions in Solar Access Protection," 19 Envt'l. L. 167 (1988). Bronin, ―Solar Rights,‖ 89 Boston U. L. Rev. 1217 (2009). Detsky, ―The Global Light: An Analysis of International and Local Developments in the Solar Electric Industry and Their Lessons for United States Energy Policy,‖ 14 Colo. J. Int'l Envt'l. L. & Pol'y 301 (Spring 2003). DuVivier, ―Solar Skyspace,― 15 Minn. J.L. Sci. & Tech. 389 (2014).

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

La Ferla, ―Flamboyance Gets a Facelift,‖ New York Times, November 2, 2008, SS, p. l. Landis, ―Sunny and Share: Balancing Airspace Entitlement Rights Between Solar Energy Adopters and Their Neighbors,‖ 72 Vanderbilt Law Review 1075 (2019). Rule, ―Airspace in a Green Economy,‖ 59 UCLA L. Rev. 270 (2011). Rule, ―Property Rights and Modern Energy,‖ 20 Geo. Mason L. Rev. 803, 824 (2013). WATER Bracken, "Water Reuse in the West: State Programs and Institutional Issues. A Report Complied by the Western States Water Council," 18 Hastings W.-N.W. J. Envtl. L. & Pol'y 451 (Summer 2012). Brownlee, ―The Public Vote in the Game of Water Wars: An Unquenchable Thirst to Define and Implement ‗Public Values‘ in Western Water Laws,‖ 70 UMKC L. Rev. 647 (Spring 2002). Burns, ―Floating on Uncharted Headwaters: A Look at the Laws Governing Recreational Access on Waters of the Intermountain West,‖ 5 Wyo. L. Rev. 561, 575-84 (2005). Elder, ―Judicial Recognition of the Public Interest in Water Recreation: Nebraska and United States Supreme Court Realities,‖ 15 Pub. Land L. Rev. 199 (1994). Geon, ―A Right to Ice? The Application of International and National Water Laws to the Acquisition of Iceberg Rights,‖ 19 Mich. J. Int‘l. L. 277 (1997). Gould, ―An Introduction to Water Rights in the Twenty-First Century: The Challenges Move East,‖ 25 U. Ark. Little Rock L. Rev. 3 (Fall 2002). Grant, ―Western Water Rights and the Public Trust Doctrine: Some Realism about the Takings Issue,‖ 27 Ariz. St. L. Rev. 423 (Summer 1995). Hall, ―Protecting Freshwater Resources in the Era of Global Water Markets: Lessons Learned from Bottled Water,‖ 13 U. Denv. L. Rev. 1 (2009). Klein, ―The Constitutional Mythology of Western Water Law,‖ 14 Va. Envt'l. L.J. 13 (Winter 1995). Leshy, ―The Prior Appropriation Doctrine of Water Law in the West: An Emperor with Few Clothes,‖ 19 J. of The West 5 (1990). Marder, ―The Battle to Save the Verde: How Arizona‘s Water Law Could Destroy One of Its Last Free-Flowing Rivers,‖ 51 Ariz. L. Rev. 175 (Spring 2009). McPherson, "Water Use and Water Law in Texas From an Oil and Gas Perspective," 44 Tex. Tech L. Rev. 939 (Summer 2012). Mossman, ―Whiskey is for Drinkin‘ but Water is for Fightin‘ About: A First-Hand Account of Nebraska‘s Integrated Management of Ground and Surface Water Debate and the Passage of L.B. 108,‖ 30 Creighton L. Rev. 67 (1996).

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

Peck, ―The Kansas Water Appropriation Act: A Fifty-Year Perspective,‖ 43 U. Kan. L. Rev. 735 (July 1995). Rivera, ―Irrigation Communities of the Upper Rio Grande Bioregion: Sustainable Resource Use in the Global Context,‖ 36 Nat. Resources J. 521 (1996). Tokuyama, ―Riparian Rights,‖ 22 Pepp. L. Rev. 1352 (Apr. 1995). Wells, ―Leasing Water Rights for Instream Flow Protection: The Opportunities and Impediments to Improved Public Interest Involvement in Colorado's Instream Flow Protection Regime,‖ 7 U. Denv. Water L. Rev. 309, 324-33 (2004). Wilkinson, ―The First Half Century of Western Water Reform: Have We Kept Faith With the Rivers of the West?,‖ 36 Envtl. L. 1115 (2006). MINERALS Alspach, ―Surface Use By the Mineral Owner: How Much Accommodation is Required Under Current Oil and Gas Law?,‖ 55 Okla. L. Rev. 89 (Spring 2002). Brown, The Law of Oil and Gas. Feriancek, "Federal Mineral Conflicts: Public Policy Runs Into First in Time Principle," 7 Natural Resources & Environment 34 (1993). Fredericks, "When Did Congress Deem Indian Lands Public Lands?: The Problem of BLM Exercising Oil and Gas Regulatory Jurisdiction in Indian Country," 33 Energy L.J. 119 (2012). Kerner, "Fracturing the Environment?: Exploring Potential Problems Posed by Horizontal Drilling Methods," 1 U. Balt. J. Land & Dev. 235 (Spring 2012). Miller, ―A Journey Through Mineral Estate Dominance, the Accommodation Doctrine, and Beyond: Why Texas is Ready to Take the Next Step With a Surface Damage Act,‖ 40 Hous. L. Rev. 461 (Summer 2003). "Mineral Law," 63 La. B.J. 151 (2015). Mullins, ―The Equity Illusion of Surface Ownership in Coalbed Methane Gas; The Rise of Mutual Simultaneous Rights in Mineral Law and the Resulting Need for Dispute Resolution in Split Estate Relations,‖ 16 Mo. Envtl. L. & Pol‘y Rev. 109 (Winter 2009). Novotny, ―State of Wyoming v. U.S. Dept. of Interior: Confused Agency Overlap with Preclusion: BLM Had Authority to Promulgate the Fracking Rule for Public Lands, Not Tribal Lands,‖ 9 Ariz. J. Envtl L. & Pol‘y 25 (2019). Ottinger and Williams, ―Renewable Energy Sources for Development,‖ 32 Envt'l. L. 331 (Spring 2002). Plaskov, ―Geothermal‘s Priori Appropriation Problem,‖ 83 U. Colo. L. Rev. 257 (2011).

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 3: Extent of Real Estate Interests

WIND Associated Press, ―Wind Energy Company Pleads Guilty to Eagle Deaths,‖ Houston Chronicle, (November 2013). Chesto, ―Vineyard Wind Project Lands in Rough Waters,‖ Boston Globe, (July 2019). ―Energy Collaborative Argues for Wind Farm,‖ February 14, 2003, http://www.capewind.org. Green, ―Earth and Wind Industries Playing with Fire: The Concurrent Rights of Wind Farm Operators, Oil and Gas Developers, and Landowners in Kansas,‖ 61 U. Kansas L. Rev. 1089 (2013). Hamilton, "Finding New Power in the Wind, the Earth, and the Sun: A Survey of the Regulation of Alternative Energy Generated on American Indian Reservations in the United States and First Nation Reserves in Canada," 44 Conn. L. Rev. 1383 (April 2012). Lovewell, ―Cronkite Withdraws Ad Against Turbines,‖ Vineyard Gazette, (August 2003). Murawski, ―Proposed Pantego Wind Farm Stalls,‖ The News & Observer, (January 2013). Paez, ―Preventing the Extinction of Candidate Species: The Lesser Prairie-Chicken in New Mexico,‖ 49 Nat. Resour. J. 525 (2009). Preer, ―Coastal Worries Fuel Local Support for Wind Farm,‖ Boston Globe, (January 2005). Seelye, ―After 16 Years, Hopes for Cape Code Wind Farm Float Away,‖ New York Times, (December 2017). Seelye, ―Windmills Sow Dissent for Environmentalists,‖ New York Times, (June 2003), p. Cl. PREMISES LIABILITY ―From Saws to Horses and Fallen Light Fixtures: Contractors and Premises Liability,‖ 42(1) Real Est. L. J. 83–91 (2013). Kolbe, Mardis, and McNamara, ―Bodily Injury Liability and Residential Property Values: Canine Risks,‖ 34 Real Est. L. J. 43 (2005). Miller, California Real Estate, ―Liability of Hotel, Motel, Resort, or Private Membership Club or Association Operating Swimming Pool, for Injury or Death of Guest or Member,‖ 55 ALR5th 463, (3d ed. 2000). Miller, California Real Estate, ―Modern Status of Rules Conditioning Landowner's Liability Upon Status of Injured Party as Invitee, Licensee, or Trespasser,‖ 22 ALR4th 294, (3d ed. 2000). Sterk, "Strict Liability and Negligence in Property Theory," 160 U. Pa. L. Rev. 2129 (June 2012). [return to top]

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 4: Nonpossessory Interests in Real Estate

Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 4: Nonpossessory Interests in Real Estate

Table of Contents Chapter Objectives ...................................................................................................................................................... 88 Key Terms ........................................................................................................................................................................ 88 What's New in This Chapter ..................................................................................................................................... 89 Chapter Outline ............................................................................................................................................................ 90 Answers to Case Questions ..................................................................................................................... 92 Answers to Consider (4.1) ....................................................................................................................... 93 Answers to Case Questions ..................................................................................................................... 96 Answer to Consider (4.2) ......................................................................................................................... 96 Answers to Case Questions ..................................................................................................................... 98 Answer to Consider (4.3) ......................................................................................................................... 99 Answer to Consider (4.4) ....................................................................................................................... 100 Answer to Consider (4.5) ....................................................................................................................... 103 Answer to Consider (4.6) ....................................................................................................................... 104 Additional Activities and Assignments............................................................................................................... 107 Answers to Chapter Problems ............................................................................................................... 107 In-Class Exercises ................................................................................................................................... 113 Discussion Questions ............................................................................................................................. 115 Discussion Questions ............................................................................................................................. 117 Discussion Questions ............................................................................................................................. 118 Resources .............................................................................................................................................. 118 Cases ..................................................................................................................................................... 119

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 4: Nonpossessory Interests in Real Estate

Chapter Objectives The following learning outcomes are addressed in this chapter (See PowerPoint Slide 4-1): 04.01

Discuss all nonpossessory land interests and their creation.

04.02

Understand the circumstances in which nonpossessory land interests are unnecessary.

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Key Terms affirmative easement: an easement that involves the use of another‘s property; e.g., a right of access conservation easement: a negative easement given by a property owner that provides that the property will not be used in such a way as to destroy a historic site on the property covenant: promise in a deed that affects or limits the use of the conveyed property dominant tenement (estate): a property owner who holds an appurtenant easement in another‘s property; the land enjoying the benefit of an easement through another‘s property easement: right to use another‘s property for access, light, and so on easement appurtenant: easement that benefits a particular tract of land; generally an access easement or right-of-way easement by express grant: easement given in a deed by the original landowner to provide a means of access for the purchaser of one part of the land easement by express reservation: easement reserved in a deed by the original landowner to provide a means of access across a purchaser‘s land easement by implication: easement that arises based on need because of previous use of the property in the same manner when the property was owned in a single tract easement by necessity: easement given by circumstances that require it; the property is inaccessible or unusable without it easement in gross: an easement that does not benefit a particular tract of land; e.g., utility easements that run through all parcels of land in an area equitable servitudes: restriction on land use arising because an area has a common scheme or development that puts buyers on notice that particular uses and construction are required or prohibited license: revocable right to enter another‘s property

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 4: Nonpossessory Interests in Real Estate

negative easement: an easement that prohibits a property owner from doing something that affects the property of another; e.g., a solar easement is a negative easement prescription: process of acquiring an easement through adverse use of the easement over a required period of time profit: rights of removal in another‘s property; shorthand for profit a prendre profit a prendre: right to enter another‘s land for the purpose of removing soil, water, minerals, or another resource quasi easement: a right-of-way as it existed when there was unity of ownership in a parcel of land rule of reason: in easements, the standard followed in making decisions regarding the expansion of easement use; in antitrust, a standard for determining non–per se violations servient tenement (estate): land through which an easement runs or that is subject to the easement Uniform Commercial Code (UCC): uniform statute adopted in most states that governs commercial transactions; Article 9 deals with security interests in fixtures [return to top]

What's New in This Chapter The following elements are improvements in this chapter from the previous edition: 



  

New case brief in Section 4-1c that brings together all of the uses related to easements and licenses from their creation to their expansion to their modification—what to do when there is a roof that hangs over pursuant to a license only, JCRE Holdings, LLC v. GLK Land Trust. In Section 4-1d, new case brief on termination of easements/licenses and the confusion that results from the language parties use in creating their access rights—auto dealer sign and access from a state route to the auto sales lot, Joseph Brothers Company, LLC v. Dunn Brothers, LTD. New practical tip in Section 4-1d on cautions in drafting access rights. New chapter problem #1 on an easement in gross, Dunes of Seagrove Owners Association, Inc. v. Dunes of Seagrove Development, Inc. New chapter problem #8 on whether a tree‘s roots violated an easement, Brown v. ConocoPhillips Pipeline Company.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 4: Nonpossessory Interests in Real Estate

Chapter Outline In the outline below, each element includes references (in parentheses) to related content. ―CH.##‖ refers to the chapter objective; ―PPT Slide #‖ refers to the slide number in the PowerPoint deck for this chapter (provided in the PowerPoints section of the Instructor Resource Center); and, as applicable for each discipline, accreditation or certification standards (―BL 1.3.3‖). Introduce the chapter and use the Ice Breaker in the PPT if desired, and if one is provided for this chapter. Review learning objectives for Chapter 4. (PPT Slides 1-3). 4-1 Easements—USE FIGURE 4.1 AND POWERPOINT SLIDES 4-2 TO 4-21 4-1a

Types of Easements: Appurtenant Versus Easements in Gross 1. Easement Appurtenant a. Attaches to or benefits a particular tract of land b. Generally used for access 2. Easement In Gross a. b. c. d.

Not created to benefit any particular tract of land Public utilities hold easements in gross At common law—not freely transferable State statutes provide they are freely transferable

3. Affirmative easement a. Right to use another's property b. Means of egress and ingress is example 4. Negative easement a. Restriction prohibiting certain use of property b. Restrict building heights, interference with light, or with sun c. Solar easement to prevent blockage of solar panels i. Tax advantage of scenic easement is possible charitable deduction ii. Second tax advantage is reduction in value of property caused by restriction on use

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d. Conservation easement—negative easement not to destroy a building for its historical or architectural significance i. Recently used to halt development ii. Called Purchase and Development Rights (PDR contracts) 4-1b

The Parties: Dominant Versus Servient Estates 1. Dominant estate or dominant tenement—holder of easement 2. Servient estate or servient tenement—property that is subject to the easement

4-1c

Creation of Easements 1. Easements by Express Grant or Express Reservation—USE FIGURE 4.2 a. Must be in writing b. Express grant is made when landowner/transferor will retain that portion of property with access route and thereby grants an easement to the purchaser/transferee c. Express reservation is made when landowner/transferor will retain that portion of property without the access route and thereby reserves an easement in the property being transferred d. Easement language should be specific about what is actually being created i. ii. iii. iv. v.

Accurate description of location, length, and width of easement Describe intended use Set forth any limitations on use Describe who is responsible for maintenance Describe any time limitations on use of the easement

e. Need not have a division of property to create an easement—can be done by two parties without the transfer of land—e.g., a solar easement CASE BRIEF: Dianne v. Wingate 84 So.3d 427 (Fla. App. 2012) FACTS:

Adrian and Charline Wingate (Appellees) own and occupy a home adjoining Gloria Dianne and Freddie L. Wingate‘s (Appellants) property. On February 1, 1999, Appellant Freddie L. Wingate and his (now deceased) wife, Peggy Ann Wingate (now Peggy Dianne), granted an easement over and across their property, providing ingress and egress to Adrian and Charline, which was recorded. Around October 21, 2009, Freddie and Peggy placed speed bumps across a paved portion of the easement, which is used by Adrian and Charline to gain access to their residence. Freddie and Peggy also placed concrete barriers on either side of the speed bumps to prevent vehicles from going around the speed bumps. The speed bumps have proven dangerous to drivers and their passengers and have damaged vehicles passing over them. Adrian and Charline

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 4: Nonpossessory Interests in Real Estate

demanded summary judgment as well as a permanent injunction restraining Freddie and Peggy from keeping the speed bumps across the easement. The court granted summary judgment and ordered the removal of the speed bumps. Peggy and Freddie appealed. ISSUE:

Were the speed bumps an unreasonable interference with the dominant easement holders‘ rights?

DECISION:

There was at least a factual question about the degree of burden. The court held that there were issues of fact about the burden that the speed bumps caused the dominant easement holders. The issues that require examination are whether there are underlying reasons for the control of ingress and egress, whether the easement language offers guidance on what the servient interest holder can do, and if there are other means for accomplishing whatever safety goals the servient interest holder may have. Dominant interest holders do not have a right of absolute prohibition of ingress and egress restrictions unless such is spelled out in the easement grant itself. The decision is reversed, and the lower court must hold a trial on all of these issues. Reversed and remanded.

Answers to Case Questions 1. Who owns the dominant easement estate? Adrian and Charline are the dominant tenements with the right of ingress and egress. 2. Who owns the servient easement estate? Freddie and Peggy granted the right of access and are the servient estate holders. 3. Explain the precedent on easement barriers and the court's requirements for proof of unreasonable interference with an easement owner's rights. The standard, when the easement grant itself does not spell out what may and may not be erected, is whether the access controls unreasonably interfere with the right of ingress and egress. The court notes one case in which a locked gate that was installed by the servient estate holder constituted an unreasonable burden on the right of way. The facts will balance the language of the easement, the safety needs, and the burden on the dominant estate. 2. Easements by Implication a. Must have been unity of ownership in the property b. Must have been a quasi-easement when the parcel was one tract i. Access route or use was in existence ii. Called quasi- since you cannot have an easement in your own property c. Prior quasi-easement must have been apparent i. Apparent need not mean obvious—discernible ii. Continuous—used as an ordinary landowner would use it d. If easement is not implied, an unreasonable expense will be required

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 4: Nonpossessory Interests in Real Estate

Answers to Consider (4.1) a. Negative easement Appurtenant easement Bill holds the servient estate Angela holds the dominant estate b. Affirmative easement Easement in gross Neighbors hold servient estate, but there is no dominant estate since the easement is in gross c. Negative easement Appurtenant easement Oscar holds the dominant estate Oscar's neighbor holds the servient estate d. Affirmative easement Easement appurtenant Nordstrom has the dominant estate; city of Scottsdale has the servient estate 3. Easements by Necessity a. b. c. d.

Must have absolute necessity Need not establish prior use Last only as long as the necessity lasts No other means of access

4. Easements by Prescription a. Similar to adverse possession—do not possess but simply use b. Elements: i. Use for the appropriate prescriptive period a) Varies from state to state b) Generally between 10 and 20 years ii. Must be adverse a) No permission from owner b) Permission must be mutual—both parties aware of it iii. Open and notorious a) Use in such a way that landowner would be aware b) Landowner need not have actual knowledge iv. Continuous and exclusive a) Use of same area for easement

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 4: Nonpossessory Interests in Real Estate

b) Claim made by one party i) ii)

Need not be sole user Tacking can be used

c. Note: restatement simplifies requirements d. Preventing a prescriptive taking i. Written protest ii. Court injunction iii. Use of gates CASE BRIEF: JCRE Holdings, LLC v. GLK Land Trust 136 N.E.3d 202 (Ill. App. 2019) FACTS:

JCRE Holdings, LLC (Plaintiff-Appellee) owns property located next to property owned by GLK Land Trust (Defendant-Appellant). The two properties share a common wall, which is located on the south side of JCRE‘s property and the north side of the GLK property. In 1982, the prior owners of the properties entered into and recorded a Party Wall Agreement. The agreement designates the shared wall as a common support wall. In 1996, James Stewart owned GLK‘s property, and Douglas and Cynthia Hall owned JCRE‘s property. Stewart asked the Halls for permission to use the party wall to construct a sloped metal roof that would hang over a portion of the Halls' roof. The Halls orally agreed, and Stewart constructed the roof. The roof hangs approximately 32 inches off of the common wall onto the neighboring property. GLK purchased its property from Stewart in March 2001. The roof Stewart constructed was still in place at that time and was in place when Gregory Comfort purchased the Halls' property in April 2002. The deed from the Halls to Comfort states that title to the property is ―[s]ubject to covenants, conditions, restrictions, reservations and to easements apparent or of record.‖ J.D. Comfort, Gregory's brother, and owner of JCRE Holdings, has been involved with the property since Gregory purchased it. In 2013, Gregory transferred the property to JCRE Holdings, LLC, soon after it was formed. In 2014, JCRE filed suit against GLK for trespass and sought a mandatory injunction ordering GLK to remove all parts of their roof ―overhanging any part of the common wall between the properties.‖ The complaint also alleged nuisance and asked for money damages. Both parties moved for summary judgment and the court held that the oral agreement between the Stewarts and the Halls was a license that JCRE had revoked.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 4: Nonpossessory Interests in Real Estate

The court issued a mandatory injunction that ordered GLK to remove that part of the encroaching roof, guttering systems and components extending from the centerline of the party wall towards the JCRE property. GLK appealed. ISSUE:

Was there an easement or a license? Does the license still exist? What is an appropriate remedy?

DECISION:

The court held that Stewart and the Halls had a license for the roof overhang. However, a license is not a land interest, and when the Stewart and Hall properties were transferred to others, the license was revoked. There could not be a prescriptive easement because the roof was place there with permission. Here, the oral agreement entered into by the Halls and Stewart in 1996 allowing Stewart to build a roof encroaching on the Halls' property was a license. That license terminated in 2001, when defendants purchased Stewart's property. Once the license terminated, defendants' roof constituted a trespass to the neighboring property. Thus, the trial court properly found that defendants' property constituted a trespass to plaintiff. Having found that defendants committed a trespass against plaintiff, we must next determine if the relief granted by the trial court, a mandatory injunction, was appropriate. A mandatory injunction is an extraordinary remedy that may be granted only in the exercise of sound judicial discretion in cases of great necessity. When a property owner intentionally encroaches on the land of an adjoining owner, injunctive relief compelling the removal of the encroachment is generally appropriate. However, if an encroachment is unintentional, injunctive relief may be denied. Where the cost for removing an encroachment is great, the corresponding benefit to the adjoining landowner is small, and damages can be had at law, courts will ordinarily refuse to grant injunctive relief requiring a party to remove an unintentional encroachment. Here, Stewart constructed the roof encroaching on the Halls' property only after receiving permission to do so. Therefore, the encroachment was not intentional. Defendants' cost to remove and replace the roof would be great, while plaintiff suffered minimal damage from the encroachment. Under these circumstances, the trial court abused its discretion in granting injunctive relief to plaintiff. Thus, we reverse the trial court's grant of summary judgment to plaintiff.

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Answers to Case Questions 1. Why is there not an easement by prescription for the roof? An easement is a privilege in land, distinct from ownership of the land itself, and is an estate or interest in itself. An easement cannot be created by an oral agreement but only by grant or prescription. A license, on the other hand, is permission to do an act or a series of acts upon the land of another without possessing any interest in the land. A license is merely permission to do things on the land of another and is not an estate in itself. A license cannot ripen into an easement regardless of the amount of time the license is enjoyed. A license terminates upon the transfer of title. A court will presume that an oral agreement to impress property with a servitude is intended as a license only and not as an easement or other interest in land. A license protects against an action for trespass for acts done under it before termination. However, upon termination of a license, the licensee‘s failure to remove its property from the licensor‘s land constitutes a trespass. 2. Does it matter that the party wall agreement was recorded? It was not an issue for the court because it was never discussed. The parties may have thought that by recording it they were making something permanent, but it was still just a license agreement with no intent to convey title. 3. What is the standard for requiring the removal and replacement of the roof? Because of the expense involved, the court notes that there needs to be something extraordinary—great harm as a result of the trespass; great expense as a result of the trespass; or intentional conduct by the trespasser, which was not present here. 4. Does the oral agreement help the defendants in this case? Why? It helps with the damages and remedy question because the appellate court was not willing to just order removal because there really was no resulting harm to JCRE.

Answer to Consider (4.2) What should the court do in the case and why? The court found two problems with the easement by prescription. First, others used the gravel road from the lots in the area so there was not exclusive use, a requirement for prescription. The second problem was the damaging testimony of Ms. Mayworm which seemed to indicate that the use was permissive and not hostile. Interestingly, the counsel for Nationwide simply asked her the legal standard, ―Was your use hostile?‖ And she replied that it was not, that they were all friendly and got along very well. The Pobudas‘ counsel objected to the use of the legal term, but her testimony about their relationship came out anyway and the court found that the use was neither exclusive nor hostile and was by permission. The Mayworm testimony was needed to establish tacking—the Pobudas did not have the 25 years needed without her testimony. They had only 22 years and needed the tacking by privity of contract. Nationwide Financial, L.P. v. Pobuda, 21 N.E.2d 381 (Ill. 2014). 4-1d

Scope and Extent of Easements 1. Express easements

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a. b. c. d.

Interpretation of language Rule of reason employed Use general interpretations and glean parties' intent Questions of scope and expansion i. Use examples in text ii. No right to expand easement to cover other properties

2. Prescriptive easements a. Scope and extent controlled by use made during the prescriptive period b. Private prescriptive use does not allow commercial use unless commercial use is made for another prescriptive period 3. Implication a. Scope and extent expand with normal development of the property b. Easement for truck passage could expand to include other vehicles c. Easement for cars for restaurant patrons could be expanded to include access for a newly-constructed motel 4. All easements can be expanded through prescriptive use CASE BRIEF: Joseph Brothers Company, LLC v. Dunn Brothers, LTD 148 N.E.3d 1260 (Ohio App. 2019) FACTS:

In 1985, the Joseph Brothers Company (Plaintiff/Appellant) owned commercial property bordering State Route 2 in Oregon, Ohio. State Route 2 (a.k.a. Navarre Avenue) is a ―main commercial thoroughfare.‖ Joseph Brothers Company operated a commercial shopping center on the property, which stretched from State Route 2 to Dustin Road. Dustin Road is one block to the south and runs parallel to State Route 2. There was an additional parcel of land to the south of Dustin Road, which Joseph sold to Dunn Brothers on December 27, 1985. Dunn Brothers began operating its car dealership on that parcel. After the sale, and from north to south, the order of the land was State Route 2, the Joseph property, Dustin Road, the Dunn property. The Dunn property had no direct access to State Route 2, so the parties entered into a license agreement (the Agreement). One part of the Agreement granted Dunn Brothers and its customers ―continuous, uninterrupted access‖ across the Joseph property from State Route 2 (the ―access license‖). The second part granted Dunn Brothers an ―irrevocable and perpetual license‖ to install an ―identification sign‖ on the Joseph property, near State Route 2, so that it could identify its car dealership (―sign license‖). In 1995, Oregon constructed a new public roadway (Harbor Drive) that connects State Route 2 and Dustin road, which gave public access to the Dunn property.

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 4: Nonpossessory Interests in Real Estate

In 1997, Dunn Brothers reorganized its business from a partnership to its present limited liability company. As part of the reorganization, the license rights were transferred from the partnership to the LLC. Joseph filed suit to end the license for access and the sign because of the new road providing access. The suit also sought a declaration terminating the sign license because Dunn had erected a much larger and ―garish‖ sign that exceeded the original 125 feet size granted in the license. The trial court found in favor of Dunn on both the access and sign license issues. Joseph appealed. ISSUE:

What is the status of the sign license and the Route 2 easement access road?

DECISION:

The court held that the license for the sign was always irrevocable and was more of an easement. The court noted that if there was a change in the scope of the easement, that change had taken place years ago and that Joseph had waived the right to object on scope grounds when it had, for 13 years, allowed the expansion. It seems that the electronic nature of the sign put him over the edge, but he waived that right because the bottom pole was still within the 125-feet range granted even if the top might have been garish. The access license was to remain in effect so long as the ―Grantee‖ is ―the record owner‖ of the benefited property. The Agreement defines ―Grantee‖ as ―DUNN BROTHERS, its employees, customers and invitees, an Ohio general partnership, the purchaser of the Benefited Property.‖ The definition does not include any entity other than Dunn Brothers, nor does it contemplate a change in ownership or legal status. The parties agree that Dunn's reorganization from partnership to limited liability company amounted to a change in ―legal status.‖ The result is that there was a transfer, and the effect is that the license is lost, as all licenses would be. The Agreement was also very specific that the access license ―shall be binding upon and inure to the benefit of Grantee and Grantor, and Grantor's successors and assigns.‖ It does not include the grantee's successors and assigns—with respect to the access license—whereas it does include the grantor's successors and assigns, and it includes both parties' successors and assigns with respect to the sign easement. The irony is that the decision makes a split decision out of the same agreement— careful drafting is so important on licenses and easements.

Answers to Case Questions 1. Explain the two issues in the case for property rights. The first situation was one for access— the language granting access was different from the language granting the rights to place the sign. That language difference was critical because it was not granted in perpetuity—it was granted to a specifically named entity, and that entity changed hands, thereby revoking © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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the license. The sign issue is one of scope of the easement because the court concludes that it is an easement. The suit was just not brought in time to challenge the expansion of the original sign. The ship had sailed in terms of increasing the scope of the sign easement by the time this sign went up. 2. Why is the language in the parties’ original agreement so important in the case? The grantor had drawn distinctions. It seems as if they always intended to allow the sign on their property, but left the door open on the access road—perhaps because of the view that there could be other roads constructed that would provide access. But, again, the language was limited to an entity and not tied to the land itself. 3. Why is the sign permitted to remain? Because it had been expanded years ago and there was no objection. The original pole remained, but what was above the pole had grown larger. However, the failure to object when the original ―growth‖ of the sign took place deprived Joseph of the right to raise the issue now—13 years later. 4. Does the presence of another access road to the property influence the court’s decision? It was not part of the court‘s discussion, but it had to realize that by denying the transfer of the easement it was eliminating access unless there was another way—there was indeed another way.

Answer to Consider (4.3) The trial court held that the use by Shooting Point‘s development would not ―overburden the servient estate.‖ On appeal, the court, after finding the exact location of the easement and hence resolving the parties‘ ongoing battles with pegs and markers, held that the increased usage as a result of the development of the parcel would not overburden the servient estate. The court noted that the easement must include some restrictions if it is to prohibit use following development. Noting that such a use of land, and its development into residential lots, was easily contemplated and, there being nothing to restrict the easement‘s use, the court found for Shooting Point. The court was clear in stating that there is a difference between a change in the use of an easement and the additional burden of increased use of the easement. Shooting Point residents were using the same easement; they were just using it more often and expanded use in contemplated in easements that carry no restrictions. The court noted: Although the number of vehicles using the easement would increase substantially as a result of the proposed use, this fact demonstrates only an increase in degree of burden, not an imposition of an additional burden, on the servient estate. Servient estate owners who envision pristine and limited use of the easements they grant should limit their easements‘ use in the granting clause. This case would require restrictions on either development or number of trips per day in order for a restriction to apply to an expanded use of the property that could be envisioned at the time of the easement‘s creation. ―Land gets developed‖ is the message of the court when it comes to permissive use of easements granted in bucolic fervor. Shooting Point, LLC v. Wescoat, 576 S.E.2d 497 (Va. 2003).

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4-1e

Rights and Obligations of Estate Holders in an Easement 1. Dominant estate holder has responsibility of maintenance and repair a. Can enter land of servient estate to make repairs b. May construct fences and install gates so long as access is not denied 2. Transfer a. Easement passes with dominant estate b. Passes even without specific mention in deed c. Servient estate is sold subject to the easement

4-1f

Termination of Easements 1. Merger of dominant and servient estates—one owner for two parcels 2. Easement by necessity terminates when necessity terminates 3. Abandonment a. Non-use for prescriptive period b. Intent to abandon c. Actions reflecting abandonment i. Growing tomatoes in the right-of-way ii. Building another access route

Answer to Consider (4.4) The Bakers, Dominant estate owners (acquired title through the Thompsons), filed action for declaratory judgment regarding location of express easement, and servient estate owner (Walnut Bowls—acquired title through the Thompsons and then the O-Reillys and Capoferris) filed counterclaim to quiet title. The Circuit Court entered judgment for servient estate owner. Dominant estate owner appealed. Below is an excerpt from the court‘s opinion: An easement may be extinguished by abandonment, which must be proved by clear and convincing evidence. Once an easement is established in a party, the opposing party has the burden to show abandonment. To establish abandonment, non-use of the easement alone is insufficient; the non-use must be coupled with an act showing a clear intention to abandon the easement. Mere nonuser of an easement acquired by grant, however long continued, does not of itself constitute abandonment. The reason mere nonuse will not destroy an easement is that it is a property right and thus it is not necessary that the owner make use of it to keep his right. Further, once an easement is established or acquired, it is not abandoned

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Instructor Manual: Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 4: Nonpossessory Interests in Real Estate

or destroyed by mere nonuser or by the use of another means of ingress and egress. The fact that the easement holder finds a more convenient alternative route does not deprive the easement holder of the easement that remains for the holder's use and enjoyment whenever the holder has occasion to use the right. An easement is considered abandoned when there is a history of nonuse coupled with an act or omission showing a clear intent to abandon. Accordingly, to prove an abandonment, there must be evidence of an intention to abandon as well as of the act by which that intention is put into effect; there must be a relinquishment of possession with intent to terminate the easement. The acts claimed to constitute the abandonment must be of a character so decisive and conclusive as to indicate a clear intent to abandon the easement. Acts evidencing an intention to abandon must clearly demonstrate the permanent relinquishment of all rights to the easement. ―An easement is a property right, which the [easement holders] could use or not use, as they wished.‖ Id. While they had ―‗abandoned‘ the use of the roadway ... there is no substantial evidence that they were thereby permanently relinquishing their right to an easement.‖ Id. (emphasis in original). The opposing party therefore ―failed in her burden to prove abandonment by clear and convincing evidence.‖ Id. The Bakers contend the evidence was insufficient to prove that they abandoned their easement. They argue that there was no proof that they, or their predecessors in title, committed any act exhibiting a clear intent to abandon the easement. We agree. The record before us contains no evidence of any act sufficient to prove an intention by the Bakers, or their predecessors in title, to abandon the easement. While there was ample evidence of non-use, such proof by itself is insufficient to establish abandonment. In the Bakers' third point, they contend the trial court erred in finding that their easement had been extinguished by adverse possession. An easement can be extinguished by adverse possession. ―To establish title to a tract of land by adverse possession, a claimant must prove that his possession of the land was (1) actual, (2) hostile and under claim of right, (3) open and notorious, (4) exclusive, and (5) continuous for ten years.‖ As the party claiming title by adverse possession, Walnut Bowls had to prove each element by a preponderance of the evidence. ―[F]ailure to establish any one of the elements of adverse possession will necessarily defeat the claim.‖ An easement merely grants a right to use land for particular purposes. St. Charles County v. Laclede Gas Co., 356 S.W.3d 137, 139 (Mo. banc 2011). For an easement to be exclusive, the language used to create it must exclude the servient tenant from participating in the rights granted to the dominant owner. Grider, 325 S.W.3d at 448; Maasen v. Shaw, 133 S.W.3d 514, 518 (Mo.App. 2004). The absence of such language in the deeds creating the Bakers' easement means it is non-exclusive. As the owner of land burdened by this non-exclusive easement, Walnut Bowls therefore retained the right to control and use its property in any way that did not substantially interfere with the reasonable use of the easement by the easement holder. See Earth City Crescent Associates, L.P. v. LAGF Associates–Mo, L.L.C., 60 S.W.3d 44, 46 (Mo.App. 2001). As Peasel

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explains, ―[r]elevant precedent suggests that, to extinguish an easement by adverse possession, a landowner's use must be incompatible with the easement holder's right of use.‖ Peasel, 279 S.W.3d at 546. ―An easement may be created even though its precise location is not described in the grant.‖ Hall v. Allen, 771 S.W.2d 50, 53 (Mo. banc 1989). ―If the location is not precisely fixed when the easement is first created, the grantee is entitled to a convenient, reasonable and accessible use.‖ Id. When the location of the easement is unknown initially, the location can subsequently be fixed by express agreement or inferred from proof of the use of a particular way. Beery v. Shinkle, 193 S.W.3d 435, 441 (Mo.App. 2006). If the easement is not fixed by subsequent express agreement or selection, however, ―the trial court must fix the location of the easement.‖ Id. (emphasis added). In doing so, the easement holder is entitled to ―a convenient, reasonable and accessible use.‖ Hall, 771 S.W.2d at 53; Beery, 193 S.W.3d at 441. Because the precise location of the ingress-egress easement was not specified in the grant, the Bakers and their predecessors in title were entitled to convenient, reasonable, and accessible use. The relevant question, in determining Walnut Bowls' adverse possession claim, is whether it used its property in such a way that, for a ten-year period, there was no available route for ingress or egress across its 21-acre tract. See Peasel, 279 S.W.3d at 546. Such proof is necessary to prove the actual, hostile, open and notorious, and continuous elements of Walnut Bowls' claim. See id. We find no such evidence in the record. The construction and improvements to the Walnut Bowls property in 1974-75 did not substantially interfere with the reasonable use of the easement because passage from the eastern to the western part of the property was not completely obstructed. Clark's presence in the house to provide night-time security likewise presented no physical barrier to ingress, egress, or passage between the two tracts. The use of cables across the driveways was a physical barrier to entry, but it was a transient condition used only at night for security purposes. This type of transient event is different than the complete obstruction of an easement by a permanent boundary fence or locked gate, like that eventually used by Walnut Bowls in 2010. See, e.g., Humphreys v. Wooldridge, 408 S.W.3d 261, 269 (Mo. App. 2013) (Furthermore, none of the foregoing actions prevented Laclede, another easement holder, from using its easement during that same time frame. While the trial court found that vehicular access to the west side of the property was blocked from 1999 to 2007 by the modular home business, that eight-year time period was insufficient to meet the ten-year time limit for continuous possession. Based upon our review of the record, the evidence was insufficient to prove that the Bakers or their predecessors in title were wholly excluded from having any available east-west route for ingress and egress for a continuous ten-year period. Because Walnut Bowls failed in its burden to prove all of the elements of adverse possession, its claim must fail. See id.; Franck Bros., 301 S.W.2d at 811-12; Peasel, 279 S.W.3d at 546; Flowers, 979 S.W.2d at 471-72. The trial court's conclusion that the Bakers' easement was extinguished by adverse possession was erroneous. Point III is granted. © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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In the Bakers' first point, they contend the trial court misapplied the law by deciding that evidence of an express agreement or past usage was necessary for the court to locate the easement. The Bakers argue that, even in the absence of such evidence, the trial court must determine a convenient, reasonable, and accessible course for the easement. We agree. As already noted above, an easement can be created notwithstanding the absence of a precise description of its location in the grant. If the grant does not precisely fix the easement's location, ―the grantee is entitled to a convenient, reasonable and accessible use.‖ Id. (holding that the trial court erred in its declaration that an easement must be described in a deed in order to be conveyed). In such a case, the location can be fixed by express agreement or inferred from past use of a particular way. Beery, 193 S.W.3d at 441. If neither of these methods can be used, however, it is the trial court's obligation to fix the location of the easement so as to provide the easement holder with convenient, reasonable and accessible use. Hall, 771 S.W.2d at 53; Beery, 193 S.W.3d at 441. The grant creating the Bakers' easement did not fix its precise location. As the trial court found, there was no evidence of any express agreement concerning the easement's location or any way to infer its location from past use. By stopping there and concluding that there was no easement at all, however, the trial court misapplied the law. See Hall, 771 S.W.2d at 53; Beery, 193 S.W.3d at 441. On remand, ―the court should undertake to outline a route of access consistent with the interests of convenience, and reasonable, accessible use.‖ Hall, 771 S.W.2d at 53; see also Chisholm v. MBM, LLC, 348 S.W.3d 821, 824-25 (Mo. App. 2011). Once a definite route is determined, the judgment must contain a legal description of the easement. The trial court has the inherent authority to order a survey to establish a proper legal description. See Harmon v. Hamilton, 903 S.W.2d 610, 615 (Mo.App.1995); Dillon v. Norfleet, 813 S.W.2d 31, 33 (Mo. App. 1991). The judgment of the trial court is reversed, and the cause is remanded for further proceedings consistent with this opinion. Baker v. Walnut Bowls, Inc., 423 S.W.3d 293 (Mo. App. 2014). 4. Termination by provisions in grant, e.g.—‖Easement only until Highway 17 is completed‖ 5. Estoppel a. Servient holder builds structure on right-of-way b. Dominant holder does not object

Answer to Consider (4.5) No. A sign is not sufficient. A trespass is how a prescriptive easement begins. Wooster v. Department of Fish and Game, 151 Cal.Rptr. 3d 340 (Cal. App. 2012). 4-2 Profits—USE POWERPOINT SLIDES 4-22 AND 4-23 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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A. Easement with the Right of Removal 1. Right to remove water 2. Right to remove ice from pond 3. Right to remove minerals 4. Right to remove timber B. Can Benefit an Adjoining Tract—Water C. Can be Commercial—Permitting an Oil Company to Drill D. Can be Given to More Than One Party E. UCC Regulation of Contracts for Removal of Timber, Other Resources

Answer to Consider (4.6) The court held that there was a profit created and it was not transferrable because it was a personal grant. The Court finds that the bankruptcy court properly applied Utah law in reaching the conclusion that CWM held no title to the coal in situ. The Trustee's arguments to the contrary are unavailing. The Trustee asserts that the Operating Agreement did not provide a profit à prendre, but rather an exclusive or ―true lease‖ of COP's properties. This argument is not supported by the language of the Operating Agreement. That agreement provides in relevant part that CWM shall have the exclusive right to, and use of the described property for purposes reasonably incident to the mining and removal of coal, including any existing underground workshops or facilities heretofore placed in or upon the leased area. [CWM] shall also have unrestricted use of all access roads leading to and from the described property. This language is substantially similar to that found in the lease provision at issue in Benton, and fits squarely within the definition of a profit à prendre, which is ―[a] right or privilege to go on another's land and take away something of value from its soil or from the products of its soil (as by mining, logging, or hunting).‖ However, the court noted that CWM had expanded a substantial amount of money in preparing for abstraction of the coal and it had a future right, in some form, to that call. Therefore, the court held that the future right to possession gave them some right and interest in the already mined coal. CWM was entitled to some compensation from Hiawathe. An excerpt appears below: That being said, a finding that CWM did not have title to the coal in situ is not determinative of the issue of whether CWM had any property interest in the Severed Coal for purposes of § 541(a) at the time the bankruptcy petition was filed. The bankruptcy court recognized in its decision that ―[t]he property of the [bankruptcy

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estate] was [CWM's] contractual right to mine coal under the [Operating Agreement]‖ and that, under Benton, that contractual right gives ―the holder ‗an incorporeal hereditament, a right to quarry and take stone from the area involved.‘‖ An issue not addressed by the bankruptcy court is whether such an ―incorporeal hereditament‖ is a property interest under § 541(a). An incorporeal hereditament is ―[a]n intangible right in land, such as an easement.‖ In other contexts, Utah courts have recognized an incorporeal hereditament as an interest in real property. In addressing a case involving a license to prospect and mine ore, the Utah Supreme Court discussed the potential for a mining license to ripen into an incorporeal hereditament and stated: This is not to say that a license is an incorporeal hereditament; it means that the grant was a license as long as it remained executory because it was not in proper form for a conveyance of an incorporeal hereditament. It ripened into an incorporeal hereditament when the licensee entered into enjoyment thereof and made expenditures and improvements. Other jurisdictions hold that revocation will not be allowed in such a case unless the licensee be compensated for his improvements. This language supports a conclusion that the holder of an incorporeal hereditament would be considered the holder of a form of property interest entitling it to compensation under Utah law. This conclusion is supported by the express language of Benton. As indicated previously, the court in Benton quoted approvingly the following language from Jones Cut Stone Co. v. New York: Equivalent lease provisions have been interpreted to ―not transfer the land, but [to give the lessees] an incorporeal hereditament, a right to quarry and take stone from the area involved. This stone [becomes] the property of [the lessees] only upon its actual severance. There can be no property in rock, and the title thereto cannot be divested or acquired until it has been taken from the earth.‖ Appellees focus on the latter part of this quote in support of the assertion that there can be no title to the Severed Coal until it is actually severed and removed from the earth. The first line, however, supports the argument that CWM held an intangible property interest in the coal, namely an incorporeal hereditament. The facts of Jones Cut Stone provide further support for this argument. In that case, a lessee on a mineral lease brought suit against the State of New York (the ―State‖) to recover damages for the appropriation of an easement over quarry lands leased from the Onondaga Indian Reservation. The State and the lessee had competing interests on the Onondaga lands. Similar to CWM, the lessee had the exclusive right to mine and remove minerals from Onondaga lands. The State, on the other hand, held an easement right over Onondaga lands to maintain a highway. The State decided to take action to alter and reconstruct its highway through Onondaga lands. As part of this process, the State

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expanded its right of way. The lessee brought suit to recover, among other amounts, ―damages caused by its inability to quarry the stone ... due to its proximity to the newly constructed highway and service road connected therewith‖. The New York Court of Appeals concluded, as quoted above, that the lessee held only an incorporeal hereditament, a right to quarry and take stone from the area involved. This led the court to hold that ―[t]he material quarried and removed by claimant during the term of its lease belonged to it, but what it did not quarry out and sever from the land remained the property of the owner of the fee.‖ Nevertheless, the court stated that the claimant's incorporeal hereditament was infringed upon by the State extending in width its original right-of-way so as to prevent claimant from cutting, quarrying and removing a small segment of stone should the necessity require it. This right, easement or incorporeal hereditament is a property right for which claimant is entitled to compensation for such damage as it in fact sustained. The court went on to award the lessee nominal damages because the lessee failed to meet its burden of proof as to the damages it suffered as a result of the State's infringing actions. Id. at 748. In this case, the Trustee has come forward with evidence demonstrating that CWM expended over $14 million in preparing to extract the Severed Coal. Further, it is undisputed that the coal removed by Hiawatha was the coal that was most readily extractable from the Bear Canyon mine. While the parties may dispute the extent to which the coal was prepared for extraction or the source of the funds used to prepare the Severed Coal for extraction, they do not appear to dispute that actions were taken by CWM to prepare the severed coal for extraction. Thus, the Trustee has provided sufficient evidence at this stage of the proceeding to demonstrate that the bankruptcy estate suffered damages as a result of the removal of the Severed Coal. Under the reasoning of Jones Cut Stone, these damages are the result of the infringement of CWM's incorporeal hereditament, ―a property right for which claimant is entitled to compensation for such damage as it in fact sustained.‖ In light of the foregoing, the Court finds that prior to the filing of the bankruptcy petition and the removal of the Severed Coal, CWM held, under Utah law, an incorporeal hereditament or intangible property interest in the Severed Coal. The question that remains is whether such right would be recognized under § 541 and federal law. ―Under federal law, the bankruptcy estate includes, with enumerated exceptions, ‗all legal or equitable interests of the debtor in property as of the commencement of the case.‘‖ The Tenth Circuit has held that ―the scope of § 541 is broad and should be generously construed, and that an interest may be property of the estate even if it is ‗novel or contingent.‘‖ Particularly on point here, the Tenth Circuit has quoted approvingly language from another circuit holding: ―When a bankruptcy petition is filed, virtually all property of the debtor at that time becomes property of estate.... [E]very conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of 11 U.S.C. § 541.‖

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The property interest CWM held in the Severed Coal at the time the bankruptcy petition was filed was an incorporeal hereditament, or, in other words, a future right to possession. While such a property right is insufficient to maintain a claim for conversion or trover, as demonstrated in Benton, it does not necessarily follow that such a right would not be recognized by § 541. As expressed above, § 541 covers every conceivable interest of the debtor, including future, nonpossessory, and contingent interests. Given this broad reach, the Court finds that CWM's incorporeal hereditament is a property interest recognized by § 541. In re C.W. Min. Co., 489 B.R. 431 (D. Utah 2013). 4-3 Licenses—USE POWERPOINT SLIDES 4-24 AND 4-25 A. Right to Use Land—Does Not Constitute a Land Interest B. Privilege Which is Revocable at any Time C. Can be Oral 4-4 Covenants—USE POWERPOINT SLIDES 4-26 AND 4-27 A. Restrictions in Deeds B. Equitable Servitudes—Enforceable Against Transferees Review questions in CAUTIONS AND CONCLUSIONS for helping students to anticipate issues in property uses and purchases. [return to top]

Additional Activities and Assignments Answers to Chapter Problems The Court held that the Developer had granted an easement in gross to the vendor, which it now held. The Association argued that there was only a license because easements in gross were for utility types of access. However, the court held that Florida placed no restrictions on who could hold easements in gross, and that the title of the agreement and its recording indicated the intent to create an easement, not a license. Point out that with a third party handling beach services, the Association condo owners had to pay more for beach services as opposed to simply contracting out the services to a third party—they had to pay the prices the Developer charged and could not control costs. Discuss with the students the ethics of a developer retaining an interest in furnishing services to projects after it has completed the project. Dunes of Seagrove Owners Association, Inc. v. Dunes of Seagrove Development, Inc., 180 So.3d 1209 (Fla. Ct. App. 2015). 2. USE POWERPOINT SLIDE 4-28. Yes. It was unreasonable to require the trucks to go to the front of the store or attempt difficult maneuvering. On the merits, the crucial issue is

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whether, in conveying that portion of its property now owned by the defendants (parcel B), the plaintiff retained easements by implication over the driveways in question. The easement implied from a prior or existing use, often characterized as a ―quasieasement,‖ arises when an owner of an entire tract of land or two or more adjoining parcels, after employing a part thereof so that one part of the tract or one parcel derives from another a benefit or advantage of an apparent, continuous, and permanent nature, conveys or transfers part of the property without mention being made of these incidental uses. In the absence of an expressed agreement to the contrary, the conveyance or transfer imparts a grant of property with all the benefits and burdens which existed at the time of the conveyance of the transfer, even though such grant is not reserved or specified in the deed. The Restatement [of Property] describes a doctrine creating easements ―by implication from the circumstances under which the conveyance was made.‖ This implication ―arises as an inference of the intention of those making a conveyance.‖ The Restatement operates on the basis of eight ―important circumstances‖ from which the inference of intention can be drawn: whether the claimant is the conveyor or the conveyee; the terms of the conveyance; the consideration given for it; whether the claim is made against a simultaneous conveyee; the extent of necessity of the easement to the claimant; whether reciprocal benefits result to the conveyor and the conveyee; the manner in which the land was used prior to its conveyance; and the extent to which the manner of prior use was or might have been known to the parties. These eight factors vary in their importance and relevance according to whether the claimed easement originates out of necessity or for another reason. In applying the Restatement’s eight important circumstances to the present case, the fact that the driveways in question had been used by the plaintiff or its predecessors in title since the 1960s, when the respective properties were developed; that the driveways were permanent in character, being either rock or gravel covered; and that the defendants were aware of the driveways‘ prior uses before they purchased parcel B would tend to support an inference that the parties intended easements upon severance of the parcels in question. [The] defendants, nevertheless, argue that there are two factors which overwhelmingly detract from the implication of an easement: That the claimant is the conveyor and that the claimed easement can hardly be described as ―necessary‖ to the beneficial use of the plaintiff‘s properties. Relying on the principle that a grantor should not be permitted to derogate from his own grant, the defendants urge this court to refuse to imply an easement in favor of a grantor unless the claimed easement is absolutely necessary to the beneficial use and enjoyment of the land retained by the grantor. The defendants further urge this court not to cast an unreasonable burden over their land through imposition of easements by implication where, as here, available alternatives affording reasonable means of ingress to and egress from the shopping center and apartment complex allegedly exist. While the degree of necessity required to reserve an easement by implication in favor of the conveyor is greater than that required in the case of a conveyee, even in the case of the conveyor, the implication from necessity will be aided by a previous use made apparent by the physical adaptation of the premises to it.

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The requirement that the quasi-easement must have been ―important for the enjoyment of the conveyed quasi-dominant [or quasi-servient] parcel‖ is highly elastic. Some courts say that the use must be one which is ―reasonably necessary to the enjoyment of the [conveyed or retained] land.‖ Others demand a use which is necessary for the beneficial, convenient, comfortable or reasonable enjoyment of such land. Notwithstanding their difference in use of terminology, the authorities agree that the degree or extent of necessity required to create an easement by implication differs in both meaning and significance depending upon the existence of proof of prior use. Hence, given the strong evidence of the plaintiff‘s prior use of the driveways in question and the defendants‘ knowledge thereof, we must agree with the appellate court majority that the evidence in this case was sufficient to fulfill the elastic necessity requirement. The evidence, moreover, regarding the difficulty of making deliveries to the front of the shopping center was sufficient to demonstrate the unreasonableness of such an alternative measure. Granite Properties Limited Partnership v. Manns, 512 N.E.2d 1230 (Ill. 1987). 3. Family ejected from cemetery while attempting to hold memorial service for deceased stated cause of action for alleged breach of family's right of access in violation of their statutory easement permitting ingress and egress for visitation purposes. The Mallocks also appeal the dismissal of their claim for damages for an alleged breach by the cemetery of the Mallocks' right of access pursuant to section 704.08, Florida Statutes (1987). That statute provides, in part, ―The relatives and descendants of any person buried in a cemetery shall have an easement for ingress and egress for the purpose of visiting the cemetery at reasonable times and in a reasonable manner.‖ Because the legislature employed the term ―easement,‖ the easement should be enforced in accordance with the principles applicable to easements generally. Mallock v. Southern Memorial Park, Inc., 561 So.2d 330 (Fla. Ct. App. 1990). 4. The Parking Rules issued by the Burkas impermissibly interfere with the easement. The Declaration provides: The [Burka Trust] shall, at its expense, maintain the driveways and parking areas located on [Lot 807] at its sole expense. The [Burka Trust] shall have the right to relocate the driveways and parking areas on [Lot 807] in its sole discretion, provided that such relocation shall not unreasonably interfere with the rights granted hereunder. The [Burka Trust] shall have the right to establish uniform and reasonable rules, regulations and conditions governing the use of the driveways and parking areas as may be appropriate for the convenience and safety of the persons making use thereof. The parking rules issued by the Burkas limit AU to the minimum spaces required by zoning regulations, less all spaces (including non-qualifying vault spaces) in the garage under AU's Building. The law school must provide no more than 147 qualifying spaces to meet minimum zoning requirements. The garage under the law school's building contains 300 spaces, of which 185 qualify for zoning purposes, 80 are non-qualifying vault spaces, and 35 are non-

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qualifying undersized spaces. Applying that formula to the facts in this case, the effect would be to preclude AU's use of any easement parking at all. The parking rules also require AU to pay monthly fees to the Burkas and impose other limitations that find no basis in the users' safety or convenience. See Taylor v. Eureka Inv. Corp., 482 A.2d 354 (D.C.1984) (when easement for parking silent with respect to fees, the attempt to impose fees violated the easement). Also, the rules are not uniform. There is no evidence that they even apply to the Burkas' other tenants. Because the parking rules impermissibly interfere with the rights granted by the easement, the Court shall enjoin their enforcement. Burka v. Aetna Life Ins. Co., 945 F.Supp. 313 (D.D.C. 1996). 5. The deed is silent as to the pool, and the contract made the use of the pool available only to ―purchaser and his family.‖ The trial court found this language consistent with appellees‘ theory that a mere license and not an interest in land was created.... The trial court further found that no easement had been created by implication for there was neither a showing of preexisting use of the easement prior to the conveyance by Temco to the Wynns, nor any showing that the use of the swimming pool was essential to the beneficial enjoyment of the land conveyed. The Wynns and their family were given a mere license to use the swimming pool. Bunn v. Offutt, 222 S.E.2d 522 (Va. 1976). 6. While PG & E is responsible for maintenance of the power lines in the easement, the court will not allow Prince to recover because it would defeat the recreational immunity statutes. The following excerpt from the court‘s opinion reveals its reasoning: Finally, Prince contends equitable considerations support her claim for implied contractual indemnity because (1) ―the extraordinary hazard of high-voltage electricity emphasizes the need to give utilities strong incentive to maintain easements in safe condition,‖ (2) ―the typical liability limits of homeowners' insurance of typical servient tenement owners are unlikely to compensate the injured person,‖ and (3) ―the public benefits of electric power counsel that the rate paying public should pay for both public safety and injured persons' compensation through power rates.‖ Although equitable considerations are properly considered when assessing the awarding of indemnity in individual cases, at least two of the identified concerns essentially amount to policy arguments for excluding utilities from the protective scope of section 846, and are more appropriately directed to the Legislature. In any event, Prince's indemnity claim fails because she cannot make the required showing that PG & E bears some legal responsibility for Jackson's injuries. To the extent Prince complains that a requirement of joint liability would expose property owners to extensive liability that rightfully should be borne by PG & E, we note that PG & E's immunity under section 846 would not be triggered unless a person were to engage in a recreational activity with respect to PG & E's easement. We perceive no unfairness in the Legislature's policy decision to provide for immunity when, for instance, kite flyers poke metal poles into power lines, or people race up and down power poles. © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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In sum, we conclude, as a matter of law, that PG & E's immunity under section 846 bars Prince's claim for implied contractual indemnity. Contrary to Prince's assertions, there is nothing inequitable about this outcome. It is undisputed that Prince, like PG & E, may defend against Jackson's suit by claiming the benefit of the recreational use immunity provided in section 846. In fact, Prince herself relies on section 846 as an affirmative defense, and the only reason Jackson's case against her remains pending is that a disputed issue of material fact exists as to whether Prince expressly invited Jackson onto her property, so as to trigger a statutorily listed exception to immunity. (See § 846, 4th par., subd. (c).) If that issue is ultimately resolved in Jackson's favor, then there is no question that Prince's ability to claim the statutory immunity, and to avoid the damages for which she seeks indemnity (i.e., her costs in defending the action and her potential liability for Jackson's damages), will have been defeated by her own conduct. Under these circumstances, considerations of equity and fairness fail to support Prince's unilateral efforts to partially or completely shift responsibility for her loss to PG & E, which did nothing to except either Prince or itself from the statutory immunity. Prince v. Pacific Gas & Elec. Co., 202 P.3d 1115, 90 Cal.Rptr.3d 732 (Cal. 2009). 7. In the case the court held that the parties could not reduce by agreement a land interest granted in the public records. Court would allow reasonable expansion of easement and reasonable use of property. Booths could not block access since that was the purpose of the easement. Waikiki Business Consolidated Amusement v. Plaza, 719 P.2d 1119 (Haw. 1986). 8. Conoco was permitted to remove the tree, largely because of the safety issues admitted by her own expert. The following language from the court opinion can help students understand the issues as well as the risks that legal battles present when we do not always know what witnesses will say in response to questions not anticipated. Brown testified that she did not want to lose the tree because it is the only tree in her backyard, it shades her house and yard, and her granddaughter likes to play under it. She called a horticulturist, Phillip Hogan, as an expert, who testified that 80% or 90% of the tree‘s roots were located within 3 feet of the surface. Hogan testified that tree roots take the path of least resistance, meaning that if they ran into the pipeline, they would go around it because soil is softer than the pipe. He testified that while the top of a tree moves with the wind, tree roots are stable and do not move. He estimated that if the tree was cut down and a new one planted, Brown would be over 90 years old before the replacement tree would reach the current tree‘s size. On cross-examination, Hogan admitted the tree‘s roots could extend over and across the pipeline if the pipeline was located within the first 3 or 4 feet of the ground‘s surface. He conceded that the pipeline could be damaged by the tree‘s roots if the pipeline is located close to the surface within a few feet of the tree, much in the same way that tree roots can damage a house‘s foundation if the house is too close to a tree. He also admitted he did not know the depth at which the pipeline had been buried nor did he know the pipeline‘s location in relation to the tree. Finally, Hogan

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admitted he knows nothing about gas pipelines, or the safety concerns related to pipelines and tree roots. Conoco called Michael Kemp, a claims consultant, and Todd Tullio, a regulatory compliance planning manager. Both Kemp and Tullio testified that the pipeline was located about 1 or 2 feet from the edge of the tree. Tullio was unsure of the precise depth at which the pipe had been buried in 1963 but estimated its present location was less than 36‖ under the ground‘s surface. Tullio testified that the close proximity of the tree to the pipeline could damage the pipeline. Tullio explained that the pipeline moves when gasoline is being pumped through it and that the sustained friction between the pipeline and the roots could lead to the loss of the protective coating. The resulting corrosion of the pipeline could lead to a number of different problems, including large or small gasoline leaks, pipeline ruptures, environmental impacts, or possibly an explosion. He also presented pictures showing the effects tree roots can have on pipelines. Tullio testified that if there were problems with the pipeline on Brown‘s property, Conoco would be unable to excavate around the pipeline until the tree was cut down because of safety concerns and the inability to access the pipeline due to its close proximity to the tree. He estimated Conoco would be delayed from immediately accessing the pipeline by ―at least a couple of days.‖ The parties agree that Conoco holds a properly recorded pipeline easement across Brown‘s property, giving Conoco the right to ―lay, maintain, operate, inspect and remove‖ its pipeline. Once an easement has been formed, the landowner is the servient tenant, and the holder of the easement is the dominant tenant. The servient tenant may make any use of his or her property which is consistent with or not calculated to interfere with the use of the easement granted. Courts determine the character and extent of each parties‘ rights under the easement by examining the language of the grant and the extent of the dominant tenant‘s use of the easement at the time it was granted. An obstruction or disturbance of an easement is something that wrongfully interferes with the privilege to which the dominant tenant is entitled by making its use of the easement less convenient and beneficial. However, an obstruction or disturbance of an easement is not actionable unless it is of such a material character as to interfere with the dominant tenant‘s reasonable enjoyment of the easement. The risk of damage the tree roots could cause to the pipeline alone is sufficient to show that the tree materially interferes with Conoco‘s privilege to use its easement, let alone the undisputed testimony that the tree causes a significant interference with Conoco‘s ability to inspect its pipeline. Considering there was no dispute that the tree roots can cause significant harm to the pipeline, the district court‘s conclusion that the tree did not cause a material interference with Conoco‘s easement was unsupported by substantial competent evidence.

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The district court‘s injunction is vacated, and the matter remanded so that Conoco can exercise the privileges it enjoys under the easement. Some other issues to discuss with the students: (1) What are Conoco‘s needs for maintenance of the pipeline? and (2) What role do you think the risk issues played in the court‘s analysis? Use the language of the court‘s opinion reproduced here to discuss what happened with the expert witness for the homeowner. It is an interesting way to discuss the risks of trial and what can be admitted under cross-examination. Brown v. ConocoPhillips Pipeline Company, 271 P.3d 1269 (Kan. App. 2012) 9. The court held that the gravel driveway was sufficient to meet the need and scope of the easement and that the planting of the hay was not a problem for the owners of the easement. The court held that the easement owners could always bring a future action if the hay crop interfered with their use in the future or they desired to have a reasonable expansion of the easement. Murdaugh v. Patterson, 435 S.W. 3d 689 (Mo. App. 2014). 10. The court found there was express or implied permission that cut off prescriptive rights. In this case, the district court found Hughes had implied permission from Fisher to use the Path. Plaintiff Terry Whittier is the only plaintiff claiming to have used the Path before Fisher owned the property and the district court found him not credible due to inconsistencies in his testimony. It is well settled that, on review, this Court gives due regard to the district court's special opportunity to judge the credibility of the witnesses who personally appear before the court. All other plaintiffs began using the Path after Fisher purchased the property. Fisher testified he gave express permission to many individuals and his willingness to let his neighbors use the Path was common knowledge. Fisher worked in the ski industry and granted permission to promote business and ―good neighborliness.‖ When Fisher moved off the property in 1992, he instructed his tenants to continue to allow others to use the Path. Fisher's testimony was not contradicted by Hughes. Instead, Hughes argues their use was not permissive because they did not ask for or receive permission to use the Path. Hughes' argument would have merit if the district court's finding of permission was based on express permission. However, the district court found Hughes had implied permission to use the Path, and Hughes has not shown that determination was clearly erroneous. Hughes v. Fisher, 129 P.3d 1223 (Idaho 2006).

In-Class Exercises 1.

WESTBROOK V. WRIGHT 477 S.W.2d 663 (Tex. 1972) The property involved in the action consists of a number of lots that are adjacent to each other. The diagram depicts the locations and relationships of the lots. All lots were originally owned by H.C. Whitaker. The sewer lines were laid in 1923 while Whitaker owned all of the lots. In 1942, Merill Wright and his wife (plaintiffs/appellees) acquired title to lots 3, 4, 5, and 6. Mr. and Mrs. H.C. Whitaker died in 1953 and 1958

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respectively, and left lots 7 and 8 to their children, one of whom is Mrs. Carrie Westbrook (defendant/appellant).

In 1963, Mrs. Westbrook had a plumbing company sever the sewer line across lot 8. A new line was installed to replace the old one, but it was placed at such an elevation that Mr. and Mrs. Wright were unable to connect their line and sewage backed up on lot 5. The Wrights then had a box installed at the back of lot 8 to collect sewage and compensate for the elevation with a new line. Mrs. Westbrook had their line disconnected in 1968 and the Wrights had it reconnected. This volley of disconnections and reconnections continued until the Wrights brought suit seeking the adjudication of their easement across lot 8. The trial court found that the Wrights held a sewer easement across lot 8 and Westbrook appealed. JOHNSON, Justice There is a distinct difference in the proof required to establish an implied easement appurtenant and an easement by way of necessity. There are four essential elements necessary for the establishment of an implied easement appurtenant: (1) There must have originally been unity of ownership of the dominant and servient estate; (2) the use must have been apparent at the time of the grant; (3) the use of the easement until the time of the grant must have been continuous; and (4) the easement must be reasonably necessary to a fair and enjoyable use of the dominant estate. Whether these requirements are met is to be determined at the time the grantor, the one imposing the quasi-easement on one portion of his property for the benefit of another portion, conveys away the dominant tenement, that portion benefited, and retains the servient tenement.

In the instant case the common ownership of the dominant and servient estate was stipulated. It was such owner, Whitaker, who installed the original sewer lines, used them for an extended number of years and subsequently conveyed lots 3, 4, and 5 with the lines in place, functioning and performing their intended use across lot 8 which he retained. Subsequent to the grant the use of the line across lot 8 was again continued for an extended number of years. We believe it to be apparent that Whitaker's probable intention accords with the granting of the easement. The record further makes clear that the use of the easement was apparent at the time of the grant. It was in existence at the time of the conveyance by Whitaker and had been for an extended number of years. The fact that subsurface installations might not be obvious to a stranger to the transaction upon casual observation will not necessarily defeat the requirement of apparency.

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―Apparent‖ in instances involving subsurface installations that are installed to avoid being seen cannot be considered to be synonymous with ―visibility.‖ It may be considered to be apparent if its existence is indicated by signs which might be seen or known on a careful inspection by persons ordinarily conversant with the subject. The use of the easement until the time of the grant was quite obviously continuous and there is not serious contention to the contrary. Lastly the easement must be reasonably necessary to a fair and enjoyable use of the dominant estate. The rule to be applied in cases of implied grant of an easement appurtenant is one of reasonable, rather than strict, necessity. The degree of the necessity required to establish an easement by implied grant is merely such as renders the easement necessary for the convenient and comfortable enjoyment of the property as it existed when the severance was made. It was stipulated that at the time such lines were laid there were no sewers in the street to the south of the lots involved and that the flow through lot 8 to the sewer in Gregg Street was the most natural and convenient. In its findings of fact, the trial court recited that the use of the easement was essential to the use of the dominant estate at the time of the conveyance by Whitaker and necessary after the severance. We find that the record supports such findings. Affirmed.

Discussion Questions 1. Who owned the land originally? 2. Were the sewer lines a part of the original parcel? 3. What lots are owned by the Wrights? 4. How did Westbrook come to own lot 8? 5. What action did Westbrook take on the sewer line? 6. What action did the Wrights take? 7. Who won at the trial court level? 8. What is the appellate court's definition of apparent? 9. What is the appellate court's definition of necessity? 10. Who wins at the appellate court level? 2.

HUNT V. ZIMMERMAN 216 N.E.2d 854 (Ind. 1966) The pertinent facts about property locations and relationships are represented in the diagram. Both plots of land were previously owned by Harry Borst, who had constructed and used the garage on plot 2. In 1941, Borst died. Plot 1 was sold to Smith in 1947 and then to R. W.

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Hunt (defendant/appellant) in 1948. In 1951, the Zimmermans (plaintiffs/appellees) purchased plot 2 from the trustees of the Borst estate. Between 1947 and 1951, Hunt used the garage for parking pursuant to a rental agreement with Mrs. Borst. When the Zimmermans moved onto plot 2, Hunt tried to rent the garage but was unsuccessful. The Zimmermans began parking their car in the garage, using the Hunts' backyard as a driveway. The Hunts, over a period of months, threw rubbish into the driveway and erected a gate in an attempt to stop the Zimmermans' use of the driveway. The Zimmermans brought suit and asked that the Hunts be enjoined from blocking the driveway. The Zimmermans further stated that there was no other feasible way to get from the street to their garage. The Zimmermans were given an injunction and the Hunts appealed. SMITH, Chief Justice The question presented for determination is whether a way of necessity existed for appellees to use appellants' backyard as a driveway for ingress and egress to and from the garage. There seemed to be some confusion on the trial level among the parties involved as to the concept of an implied easement by way of necessity.... There seemed to be some disagreement in Indiana, for some time, as to whether it is a question of strict necessity or one of only reasonable necessity. However, in the case at bar, we need not concern ourselves with the question of strict versus reasonable necessity. The question presented for our determination is whether a necessity, if any, exists.

It is settled law that if one conveys a part of his land in such a form as to deprive himself of access to the remainder, unless he goes across the land sold, he has a way of necessity over the portion conveyed. This is because the law presumes an understanding of the parties that the one selling a portion of his land shall have a legal right of access over the part sold to the remainder, IF HE CANNOT REACH IT IN ANY OTHER WAY. It is a well-reasoned rule that for a necessity to exist, there must be no other means of ingress and egress to the property in question. A right of way by necessity cannot apply to property which is already accessible to the landowner. To hold otherwise would be to hold that a right of way by necessity is determined by convenience or benefit to the landowner,

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and this would be clearly erroneous. Thus, in the case at hand, the appellee already had a method of ingress and egress, for his property fronted on LaSalle Street. It may be true that he had no ingress or egress for the use of his garage in the manner for which it had been designed, but this is not our concern. We are concerned only with the land as a whole, and not to the use of a particular building located on the land. We are of the opinion that the judgment of the trial court should be reversed and said injunction dissolved. Reversed.

Discussion Questions 1. Who owned the two parcels originally? 2. Who owned which parcels at the time of the action? 3. Who had used the garage prior to and after 1941? 4. What action was taken to prevent use of the driveway and garage? 5. Who brought suit? Who won at the trial court level? 6. What level of necessity is required for the court's definition of an easement by necessity? 7. Did an easement by necessity exist in the case? 3.

MINOGUE V. MONETTE 551 N.Y.S.2d 427 (1990) Charlotte Minogue (plaintiff) and John Monette (defendant) are sister and brother. Each inherited a home from their father through his last will and testament. Charlotte inherited her father‘s actual residence at 90 Hawthorne Avenue in Albany, New York. John inherited the contiguous parcel located at 88 Hawthorne Avenue. A blacktop driveway, approximately 10 feet wide, runs between the two houses. A survey in 1988 showed the driveway to be located on John‘s property. A concrete cinder-block garage is located at the rear of Charlotte‘s two-family home. The driveway had provided access for her father to the garage and to Charlotte and her tenants until John blocked such use in 1988. Charlotte filed suit seeking a declaration of easement for ingress and egress over the driveway. The trial court found Charlotte had an easement by necessity and John appealed. CASEY, Justice Presiding The facts being undisputed, the only issue is whether, as a matter of law, the facts provide an implied easement or an implied easement by necessity to plaintiff. Generally, an implied easement arises upon severance of ownership when, during unity of title, an apparently permanent and obvious servitude was imposed on one part of an estate in favor of another part, which servitude at the time of severance is in use and is reasonably necessary for the fair enjoyment of the other part of the estate. An easement by necessity is also an implied

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easement dependent on the unity of ownership followed by a severance thereof. An easement by necessity, however, rests not on preexisting use, but on the need for the way for this beneficial use of the property after conveyance. In our view, plaintiff has demonstrated her legal entitlement to the easement she seeks under both legal theories present here. Affirmed.

Discussion Questions 1. Who originally owned the two tracts of land? 2. When did the present owners take title to the severed tracts? 3. What passageway is at issue? 4. Is there an easement by implication or an easement by necessity? [return to top]

Resources Arpad, “Private Transactions, Public Benefits, and Perpetual Control Over the Use of Real Property: Interpreting Conservation Easements as Charitable Trusts,” 37 Real Prop. Prob. & Tr. J. 91 (2002). Boyer, Survey of the Law of Real Property, pp. 515-621. Burby, Real Property, Chapter 7. Byrne, ―Hallowed Ground: The Gettysburg Battlefield in Historic Preservation Law,‖ 22 Tul. Envtl. L.J. 203 (Summer 2009). Chelstrom, ―Property: Prescriptive Easements and a Change from Permissive to Hostile Use— Boldt v. Roth,‖ 28 Wm. Mitchell L. Rev. 1283 (2002). Cribbet, Principles of the Law of Real Property, pp. 335-360. Dnes and Lueck, ―Asymmetric Information and the Law of Servitudes Governing Land,‖ 38 J. Legal Stud. 89 (January 2009). ―Easements: What is Excessive Use?,‖ 38-FEB Real Est. L. Rep. 2 (February 2009). Eitel, ―Wyoming's Trepidation Toward Conservation Easement Legislation: A Look at Two Issues Troubling the Wyoming State Legislature,‖ 4 Wyo. L. Rev. 57 (2004). Fellows, ―Environmental Tax Policy and Conservation Easements,‖ 32 Real Est. L.J. 240-52 (2003). Fellows, ―Valuation of Real Estate for the Charitable Deduction,‖ 35 Real Est. L.J. 36-49 (2006).

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French, ―Relocating Easements: Restatement (Third), Servitudes § 4.8(3),‖ 38 Real Prop. Prob. & Tr. J. 1, 11 (2003). Hernandez, ―Restating Implied, Prescriptive, and Statutory Easements,” 40 Real Prop. Prob. & Tr. J. 75 (Spring, 2005). Jennings, ―A Glass Walkway, a Pipeline, an Easement, and a Tree,‖ Real Est. L. J. 41(1): 79-86 (2012). Jennings and Happel, ―The Eight Principles of the Microeconomics and Regulatory Future of Ticket Scalping, Ticket Brokers, and Secondary Ticket Markets,‖ 28 Journal of Law and Commerce 15 (2010). Kahr, ―The Right to Exclude Meets the Right to Ride: Private Property, Public Recreation, and the Rise of Off-Road Vehicles,‖ 28 Stan. Envtl. L.J. 51 (February 2009). Kertz, ―Conservation Easements at the Crossroads,‖ 34 Real Est. L. J. 139 (2005). Kohtz, ―Improving Tax Incentives for Historic Preservation,‖ 90 Tex. L. Rev. 1041 (March 2012). Krueger, ―Conservation Easements as a Way to Preserve Wisconsin‘s Farmland: Why Wisconsin Should Adopt a Transferable Tax Credit Program,‖ 99 Marquette Law Review 1073 (2016). Orth, ―The Burden of an Easement,‖ 40 Real Prop. Prob. & Tr. J. 639 (2006). Owley, ―The Enforceability of Exacted Conservation Easements,‖ 36 Vt. L. Rev. 261 (Winter 2011). Parke, ―How Much is Fair?: Will Senate Bill 18 Ensure Condemnors Pay Just Compensation for Land Taken Due to the Crez Transmission Lines?,‖ 44 Tex. Tech L. Rev. 1121 (Summer 2012). Powell, Real Property, 401-426. Senate Finance Committee Hearing, The Tax Code and Land Conservation: Report on Investigations and Proposals for Reform, June 8, 2005. Statement of Steven McCormick, President, The Nature Conservancy, p. 3. Tesini, ―Working Forest Conservation Easements,‖ 41 Urb. Law. 359 (Spring 2009). Thompson, Real Property, Volume 2.

Cases Baseball Publishing Co. v. Bruton, 18 N.E.2d 362 (Mass. 1938). Brennan v. DeCosta, 511 N.E.2d 1110 (Mass. 1987). Collins v. Ketler, 719 P.2d 731 (Col. 1986). Consolidated Amusement Co., Ltd. v. Waikiki Business Plaza, Inc., 719 P.2d 1119 (Haw. 1986).

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Dethiefs v. Beau Maison Dev. Corp., 511 So.2d 112 (Miss. 1987). Frederick v. Consolidated Waste Services, Inc., 573 A.2d 387 (Me. 1990). Haskell v. Borschowa, 532 P.2d 14 (Or. 1975). Meine v. Hren Ranches, Inc., 342 P.3d 22 (Mont. 2015). Pergament v. Loring Properties Limited, 599 N.W.2d 146 (Minn. 1999). Poire v. Manchester, 506 A.2d 1160 (Me. 1986). Sally-Mike Properties v. Yokum, 332 S.E.2d 597 (W.Va. 1985). Shors v. Branch, 720 P.2d 239 (Mont. 1986). Squaw Peak Community Church v. Anozira Dev. Inc., 719 P.2d 295 (Ariz. 1986). Twain Harle Homeowners Assoc. v. Patterson, 239 Cal. Rpt. 316 (1987). [return to top]

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Table of Contents Chapter Objectives .................................................................................................................................................... 122 Key Terms ...................................................................................................................................................................... 122 What's New in This Chapter ................................................................................................................................... 123 Chapter Outline .......................................................................................................................................................... 123 Answers to Case Questions ................................................................................................................... 125 Answer to Consider (5.1) ....................................................................................................................... 125 Answers to Case Questions ................................................................................................................... 128 Answer to Ethical Issue (5.1) ................................................................................................................. 128 Answers to Case Questions ................................................................................................................... 130 Answer to Consider (5.2) ....................................................................................................................... 131 Answer to Consider (5.3) ....................................................................................................................... 133 Answer to Consider (5.4) ....................................................................................................................... 134 Answers to Case Questions ................................................................................................................... 140 Answer to Consider (5.5) ....................................................................................................................... 141 Answer to Consider (5.6) ....................................................................................................................... 141 Additional Activities and Assignments............................................................................................................... 142 Answers to Chapter Problems ............................................................................................................... 142 In-Class Exercises ................................................................................................................................... 145 Discussion Questions ............................................................................................................................. 147 Discussion Questions ............................................................................................................................. 149

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Resources .............................................................................................................................................. 149 Cases ..................................................................................................................................................... 150

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Chapter Objectives The following learning outcomes are addressed in this chapter (see PowerPoint Slide 5-1): 06.01

Discuss the tests for determining whether an item is a fixture or personal property.

06.02

Experience application of those tests in cases and case problems.

06.03

Discuss the creation and perfection of security interests under Article IX.

06.04

Determine priorities among security interest holders, mortgagees, and lienors.

[return to top]

Key Terms Article 9: section of the Uniform Commercial Code that governs security interests in personal property and fixtures Doctrine of Emblements: in landlord/tenant relationship, the right of the tenant to remove crops from the leased premises even after the lease expires if the tenant is responsible for their production emblements: growing crops and other products produced by, under, or through use of the land financing statement: document filed to protect a security interest; must contain information about the parties and a description of the collateral fixture: personal property that becomes attached to and is so closely associated with real property that it becomes a part of the real property fructus industrials: vegetation that grows on property as result of work of owner or tenant; i.e., crops fructus naturales: vegetation that grows naturally on property; not the result of efforts of the owner or tenant perfection: process of gaining priority on an Article 9 security interest; requires a filing of a financing statement to give public notice of the creditor‘s interest purchase money security interest (PMSI): under Article 9 of the UCC, a security interest given to a lender who financed the purchase of the property that is the collateral security agreement: under Article 9, the contract that gives the creditor a lien in the personal property or fixture; makes it the collateral for the loan security interest: creditor‘s right in collateral under Article 9; the lien on the personal property or fixture

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trade fixture: personal property that is attached to real property but is used in the operation of a business; remains the tenant‘s property; a misnomer in that it is personal property Uniform Commercial Code (UCC): uniform statute adopted in most states that governs commercial transactions; Article 9 deals with security interests in fixtures [return to top]

What's New in This Chapter The following elements are improvements in this chapter from the previous edition:   

New UCC Article 9 priority case brief in Section 5-3e on drilling rig in Alaska and the priority of an Article 9 security interest vs. lienors, In re Naknek Electric Association. New Consider 5.5 on guttering and whether it is a fixture, In Re Williams. New chapter problem #9 on fixture classification, Schleinitz v. Maclay.

[return to top]

Chapter Outline In the outline below, each element includes references (in parentheses) to related content. "CH.##‖ refers to the chapter objective; ―PPT Slide #‖ refers to the slide number in the PowerPoint deck for this chapter (provided in the PowerPoints section of the Instructor Resource Center); and, as applicable for each discipline, accreditation or certification standards (―BL 1.3.3‖). Introduce the chapter and use the Ice Breaker in the PPT if desired, and if one is provided for this chapter. Review learning objectives for Chapter 4. (PPT Slides 1-3). 5-1 Definition of a Fixture—USE POWERPOINT SLIDE 5-2 TO 5-18  Personal property which becomes real property  Importance of distinction between real and personal property   5-1a

Does the property pass with the land? Creditors' rights and priorities in the property Degree of Annexation Test 1. How firmly is fixture attached? 2. English rule—mortar, nail, screw, or bolt attachment—fixture

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3. Currently degree of attachment determined by item's relationship to the property a. b. c. d.

Carpeting in home Net and poles on tennis court Slide with a swimming pool Use text examples also

4. Accessions not covered a. b. 5-1b

Once personal property but become part of construction Doors, bricks, paint, etc.

Nature and Use of the Property 1. Relationship of property to the effective functioning of the building a. b. c.

Pizza oven in pizza restaurant Pool equipment for house with swimming pool Remote control for automatic garage door opener

2. Could property be used elsewhere? 5-1c

Relationship Between Annexor and Premises 1. What type of land interest owned by annexor? 2. The higher the degree of ownership the more likely the item will be treated as a fixture 3. Landlord/Tenant a. b. c.

Did the tenant intend to leave the item? Will removal cause substantial damage? Irreparable damage? Paper towel holder—fixture; wall hangings—personal

CASE BRIEF: In re Trackwell 520 B.R. 788 (W.D. Mo. 2014) FACTS:

The Trackwells were the owners of 7,800 acres of real estate in Oregon known as the Imnaha Ranch. Sheldon Good and Company held a public auction to sell the Imnaha Ranch. The Wikstroms were the successful bidders at the auction and the Court approved the sale to them. However, prior to the closing of the sale, a dispute arose as to whether the sale included a particular cattle chute which had been located on the property. The court ordered that the cattle chute not be removed from the Imnaha River Ranch. Shortly before closing, however, the Wikstroms discovered that the chute had been removed. They agreed to proceed with closing and put $15,000 of the sale proceeds pending resolution of the question of whether the cattle chute had been included in the sale.

ISSUE:

Is the chute included with the sale of the property?

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DECISION:

The court held that the contract was very clear that no personal property was included in the sale. Also, an examination of the chute revealed that it was not attached, could be moved anywhere, and could be used at another ranch. The representations of the auctioneer were irrelevant because the contract was clear and the parol evidence rule would prohibit introduction of that oral evidence. The Debtors are permitted to keep the cattle chute. First American Title Company of Oregon is ORDERED, within 7 days, to disburse the $15,000 being held in escrow to Debtors' counsel.

Answers to Case Questions 1. Explain what the sale agreement provided. That there was no personal property included in the sale. 2. Could the cattle chute be used anywhere? Yes, it was movable, and it was not attached. 3. Why does the representation of the auctioneer about the chute not matter? Because the contract provided otherwise, the contract is clear, and you can‘t sue parol evidence to contradict the terms of a clear contract. 5-1d

5-1e

Intent 1.

Parties reach agreement

Can label item as they choose Trade Fixtures

1. Items which are attached but are used in a trade or business are classified as personal property 2. Factory equipment, store merchandising materials, and signs

Answer to Consider (5.1) The court held that the trash bin was freestanding and not a part of the real property. The decision of whether the freestanding trash bin at the Shapleigh waste facility constitutes an appurtenance to a public building turns on the definition of the term appurtenance as it is employed in section 8104-A(2) of the MTCA. The MTCA does not define the term, nor is it otherwise defined in Maine statutes. We have previously considered the exception for appurtenances established in section 8104A(2) without having defined the term. In Kitchen v. City of Calais, 666 A.2d 77, 78-79 (Me. 1995), we concluded that the raised blacktopped curbing in the parking area of a police station was not an appurtenance to the police station. In Stretton v. City of Lewiston, 588 A.2d 739, 741 (Me.

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1991), we determined that an unimproved athletic field was not an appurtenance to a public high school. Preliminarily, we acknowledge that the function-based definition employed by the Superior Court in concluding that the trash bin is an appurtenance is sensible and offers a practical standard. Nonetheless, for the reasons that follow, we decline to adopt a function-based approach and rely instead on a more restrictive understanding of the term. An appurtenance is traditionally regarded as ―[s]omething that belongs or is attached to something else,‖ and appurtenant means being ―[a]nnexed to a more important thing.‖ Black’s Law Dictionary 98 (7th ed. 1999). ―‗Appurtenances' are things belonging to another thing as principal and which pass as incidents to the particular thing….‖ 7 Am. Jur. 2d Vendor and Purchaser § 99 (1997). The term is commonly employed in connection with land conveyances to describe objects or things that pass to a grantee as an incident of the transfer. ―[A]s used in conveyances, the term passes nothing but the land and such things as belong thereto and are a part of the realty.‖ Id. Appurtenances generally include buildings and fixtures, but do not include personal property. Id. Fixtures are distinguished from personal property because they are ―regarded as an irremovable part of the real property‖ with which they are associated. Black’s Law Dictionary 652 (7th ed. 1999). Our construction of the term appurtenance as used in section 8104-A(2) must also be informed by the exacting approach we follow when construing the exceptions to immunity under the MTCA. The general rule under the MTCA is that ―all governmental entities shall be immune from suit on any and all tort claims seeking recovery of damages.‖ 14 M.R.S.A. § 8103(1). ―[S]overeign immunity is the rule, and liability for governmental entities [is] the statutorily created, narrowly construed exception.‖ Clockedile v. Me. Dep't of Transp., 437 A.2d 187, 189 (Me. 1981). We construe exceptions to immunity strictly so as to adhere to immunity as the general rule. Thompson v. Dep't of Inland Fisheries & Wildlife, 2002 ME 78, ¶ 5, 796 A.2d 674, 676. In addition, because the MTCA employs appurtenance as a technical term, we are guided by the rule that ―[t]echnical words and phrases and such as have a peculiar meaning convey such technical or peculiar meaning.‖ 1 M.R.S.A. § 72(3) (1989). Accordingly, for purposes of section 8104-A(2), an appurtenance is an object or thing that belongs or is attached to a public building, and does not include personal property maintained outside the building. Cf. Adriance v. Town of Standish, 687 A.2d 238, 239-40 (Me. 1996) (holding that a waste transfer station was a public building under 14 M.R.S.A. § 8104-A(2) where the plaintiff sustained injuries while using a trash bin inside the facility). This definition is consonant with the strict construction required for exceptions to immunity under the MTCA. In contrast, a function-based definition of appurtenance would expand governmental liability by including personal property integral to the activities undertaken at a public building without regard to whether the property belongs or is attached to the building. A function-based definition would compel us to construe section 8104-A(2) as establishing an exception to immunity for all property that is functionally integral to the ―construction, operation or maintenance of any public building,‖ such as the trash bin at issue in this case. 14 M.R.S.A. § 8104-A(2). Such a construction is not supported by the statute's plain language or purpose.

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The freestanding trash bin outside of the Shapleigh waste facility building is personal property that does not belong and is not attached to the building. Because the trash bin is not an appurtenance, Sanford's injury is one for which the Town of Shapleigh is afforded governmental immunity from suit by section 8103(1). Sanford v. Town of Shapleigh, 850 A.2d 325 (Me. 2004). 5-1f

Who Wants to Know? 1. Often controlling 2. Equity notion

CASE BRIEF: In re Ryerson 519 B.R. 275 (D. Idaho 2014) FACTS:

Denny Ryerson (Debtor) filed for bankruptcy and Anaconda (mortgage creditor) asked for relief from the stay to sell the property securing the mortgage notes. The property securing the notes is located on the shore of Lake Coeur d'Alene. A residence and related structures sit on two contiguous lakefront lots, and there are two additional lots adjacent thereto. The two primary lots total 2.18 acres. The residence, a luxury custom home, is about 11,000 square feet in size. There is a separate 1,500 square foot caretaker residence and a separate 900 square foot garage with a dwelling unit over it. The court valued the lots and residences, excluding moveable personal property (i.e., extensive furniture and art) at $9,000,000. Anaconda foreclosed on the deeds of trust. There was a $7,000,000 bid that Anaconda obtained for the residence property. At a separate foreclosure sale on April 15, Anaconda obtained a $145,000 bid for the adjacent lots. Ryerson was entitled to remove personal property such as furniture and art, but he also removed fixtures and Anaconda sought remedies for the loss of the improperly removed fixtures. Anaconda requested that Ryerson, who had ―stripped‖ over $550,000 worth of ―fixtures‖ from the property, be required to return them. Ryerson maintains that the items are not fixtures and intends to sell the nonfixture personal property and devote the proceeds to payment of creditors under the Chapter 11 plan.

ISSUE:

Which items are fixtures, and which are not?

DECISION:

The court decided for the debtor with respect to some of the property and the creditor in others: (1) under Idaho law, recessed ―can‖ lighting, in-cabinet lighting, wall sconces, installed indirect lighting, and outdoor ―carriage lights‖ were fixtures, but suspended or hanging lighting, including large chandeliers, were not;

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(2) the French-made gas and electric range, though a wedding present from debtor to his wife, was ―installed‖ in a manner that spoke objectively to the intent that it be a permanent accession, and so was a fixture; (3) the other appliances were not fixtures; (4) the house's sound system was a fixture; (5) the house's standby generators were not fixtures; (6) debtor's two large bronze statues were not fixtures; and (7) the dock built for use in conjunction with the property was not a fixture. The decisions were based on degree of attachment, damage upon removal, relationship of the item to the property, and whether its use could be transferred elsewhere.

Answers to Case Questions 1. List the fixtures and the court’s finding with each one and why. (1) Under Idaho law, recessed ―can‖ lighting, in-cabinet lighting, wall sconces, installed indirect lighting, and outdoor ―carriage lights‖ were fixtures, but suspended or hanging lighting, including large chandeliers, were not; (2) the French-made gas and electric range, though a wedding present from debtor to his wife, was ―installed‖ in a manner that spoke objectively to the intent that it be a permanent accession, and so was a fixture; (3) the other appliances were not fixtures; (4) the house's sound system was a fixture; (5) the house's standby generators were not fixtures; (6) debtor's two large bronze statues were not fixtures; and (7) the dock built for use in conjunction with the property was not a fixture. 2. What factors does the court use in reaching its conclusions on the removed items? The court looks at the damage through removal, the weight, the relationship to the property, and whether the items could be used in another home. In some cases, such as the vacuum and the garage door openers, the items were integral to an installed system and had to remain.

Answer to Ethical Issue (5.1) Discuss what happens to the value of the property when it is stripped, especially in situations where it is a close call as to whether an item is a fixture. There was also an order in place to remove only the art and paintings, not the fixtures. CASE BRIEF: Kohn v. Darlington Community School District 698 N.W.2d 794 (Wis. 2005) FACTS:

It is a stroke of bad luck when the home team is winning but your daughter falls through the bleachers at the high school football stadium. On September 29, 2000, Elaine Kohn and her then four-year-old daughter, Lori Kohn, attended the homecoming football game at Darlington High School. At about 2:30 p.m. on a glorious Wisconsin Saturday afternoon, young Lori fell through the space at the foot of her seat in the home bleachers to the ground 15 feet below, sustaining injuries.

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Initially, the Kohns filed suit against Darlington and its insurer for breach of their duty of care to the invitees in the bleachers. Later, however, the Kohns amended their complaint to include ITW as a defendant, alleging that the bleachers were in a defective condition that was unreasonably dangerous and resulted in the accident involving their daughter. The Kohn‘s suit was dismissed initially because Wisconsin has passed a statute of repose. Under Wis. §893-89(2), there is a 10year statute of limitations on recovery for injuries caused by improvements to real property. Following the dismissal of the Kohns‘ suit, the Wisconsin Court of Appeals reversed the lower court‘s dismissal. The court of appeals concluded that the bleachers were not an improvement to real property because there was no evidence that the bleachers were anchored to the ground. The court of appeals held that the Kohns' claims were governed by the three-year statute of limitation on personal injury and product liability actions (within which their 2001 filing date found them), rather than being dismissed under the 10-year period of repose. The Wisconsin Supreme Court then stepped, carefully, as it were, into the fray. ISSUE:

The lower court had not addressed the three critical issues the Kohns raised: 1. Were the bleachers an ―improvement‖ to real property? 2. If the bleachers are an improvement thereby barring the Kohn‘s claim, is the Wisconsin statute of repose (893.89) a violation of the Wisconsin constitutional right (Article I Section 9) to a remedy? 3. Does the Wisconsin statute (893.89) violate the equal protection clause of the Wisconsin and federal constitutions?

DECISION:

The court concluded that the bleachers at Darlington High School constitute a "permanent addition to" the Darlington High School stadium and track. The home bleachers are a huge structure. They are 15 rows tall, over 100 feet long, and contain a 50-inch-wide walkway elevated 30 inches above the ground. They can seat nearly 1500 individuals. They adjoin a rather large press box and incorporate a wheelchair access ramp. While it is unclear whether they are anchored to the ground, they clearly are not readily moveable. The Kohns focused on the fact that the bleachers can be disassembled and would not require any excavation to be removed. However, while the bleachers could theoretically be disassembled, that is true of almost any addition to property. Almost any structure that is assembled and installed can be dissembled and removed, even, as ITW artfully notes, a structure as large as the Eiffel Tower.

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Answers to Case Questions 1. Describe the structure, cost, and installation of the bleachers. The home team bleachers at Darlington High School were manufactured by Standard Steel Industries, Inc. (Standard— later purchased by Illinois Tool Works (ITW)) and purchased by the school for $16,167 in 1969. As part of that contract, Standard agreed to ship the bleachers and supervise their installation at the high school football field. The bleachers as they were installed (and whether they are anchored to the ground remained an ongoing issue at the appellate level) are 15 rows tall and over 100 feet long. They contain nearly 1,500 aluminum seats and a 50inch-wide walkway elevated 30 inches above the ground. Darlington later added a press box and wheelchair accessible ramp to the bleachers. The slide was not an improvement to real property because the water slide was not a permanent addition to the property. While it was bolted to concrete pads at the bottom of the pond, it was designed to be and was removed every winter for storage and amounted to little more than a removable piece of playground equipment. Further, the slide was only used at the Twin Ponds area for three months out of the year from 1974 to 1983 and was permanently removed from the area after the 1983 season. There was no decrease in the capital value of the Twin Ponds recreational area because of the slide‘s removal. By contrast, a stadium without seats is worth less because it cannot sell tickets. The addition of the press box and the handicap access to the bleachers made its permanence more obvious. 2. Why is it important to the Kohns that the bleachers not constitute an improvement to real property? Initially, the Kohns filed suit against Darlington and its insurer for breach of their duty of care to the invitees in the bleachers. Later, however, the Kohns amended their complaint to include ITW as a defendant alleging that the bleachers left Standard in a defective condition that was unreasonably dangerous and resulted in the accident involving their daughter. Still the Kohn‘s suit was dismissed initially because Wisconsin has passed a statute of repose. Under Wis. §893.89(2), there is a 10-year statute of limitations on recovery for injuries caused by improvements to real property. Section 893.89(2) provides, in part: Except as provided in sub. (3), no cause of action may accrue and no action may be commenced, including an action for contribution or indemnity, against the owner or occupier of the property or against any person involved in the improvement to real property after the end of the exposure period, to recover damages for any injury to property, for any injury to the person, or for wrongful death, arising out of any deficiency or defect in the design, land surveying, planning, supervision or observation of construction of, the construction of, or the furnishing of materials for, the improvement to real property. Following the dismissal of the Kohns‘ suit, the Wisconsin Court of Appeals, in a per curiam slip opinion, reversed the lower court‘s dismissal. If they are not an improvement to real property, the statute does not bar their claim. 3. What is the significance of the fact that the contracts for the bleachers described them as "portable"? In the Kohns‘ case, if the bleachers are portable, there is less likelihood that they are fixtures because they are not attached and that makes it easier for them to avoid the statute of repose.

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4. What is the purpose of statutes of repose? To prevent unending and unlimited liability for those who make improvements to real property but then have no control over its use, maintenance, and misuse and disrepair.

Answer to Consider (5.2) a. In addressing whether chattel or an article of property becomes so affixed to the land that it becomes part of the real estate, we stated in Gore v. Bethlehem Area School District, 113 Pa. Commonwealth Ct. 394, 398, 537 A.2d 913, 915 (1988) that: A fixture is an article in the nature of personal property which has been so annexed to the realty that it is regarded as part and parcel of the land. Black's Law Dictionary 575 (5th Ed. 1979). The considerations to be made in determining whether or not a chattel becomes a fixture include (1) the manner in which it is physically attached or installed, (2) the extent to which it is essential to the permanent use of the building or other improvement, and (3) the intention of the parties who attached or installed it. McCloskey, 101 Pa. Commonwealth Ct. at 113-4, 515 A.2d at 644 citing Clothier, The Law of Fixtures in Pennsylvania, 32 Pa. B.Q. 66, 66-67 (1960-61). See also J.W. Dobbins v. Lacefield, 35 Ark. App. 24, 811 S.W.2d 334 (1991); Michigan National Bank v. City of Lansing, 96 Mich. App. 551, 293 N.W.2d 626 (1980). Sheetz argues that because they paid Pennsylvania sales and use tax on the canopies when sold to them and that they took a federal income equipment deduction for federal tax purposes, that is evidence that the canopies are personalty. As to the imposition of sales and use tax, there is nothing inconsistent in paying a sales and use tax on the sale of the personalty, and then, when installed and a fixture, being taxed as real estate. If you buy a kitchen faucet, you pay a sales tax, but once you install it, it is incorporated into the real estate and is taxable as such. As to the federal equipment deduction, Sheetz urges us to consider JFM, Inc. and Subsidiaries v. Commissioners, 67 T.C.M. 3020, 1994 WL 223949 (1994), a single-judge opinion of the Tax Court that held that for purposes of depreciation under the Federal Tax Code, canopies were subject to personal property depreciation standards. Quoting from Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664, 672-673, 1975 WL 3184, the Tax Court judge points out that ―[l]ocal law shall not be controlling for purposes of determining whether property is or is not ‗tangible‘ or ‗personal‘. Thus, the fact that under local law, property is held to be personal property or tangible property shall not be controlling. Conversely, property may be personal property for the investment credit, even though under local law, the property is considered to be a fixture, and, therefore, real property.‖ Just as federal courts are not required to follow state court taxes, the federal government classifies property for the purposes of the federal tax laws based on their regulations is not determinative on how Pennsylvania courts will classify property under Pennsylvania tax statutes. See Pittsburgh Institute of Aeronautics Tax Exemption Case, 435 Pa. 618, 258 A.2d 850 (1969). Finally, as to Sheetz's contention that because the Blair County Board of Assessment doesn't assess signs, then canopies should not be assessed. Ignoring for the moment that determination itself has never been held to

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be proper, whether the Board assesses or doesn't assess signs as real property is irrelevant to a determination as to whether canopies should be assessed. As to the first consideration—the manner in which the article is installed—while a canopy can be removed with little damage to the real property requiring only removal of the concrete and bolts, to ―unaffix‖ the canopy, significant effort is required to disassemble it into its component parts yet leaving the poured concrete foundation in place. Even if the canopies could be removed with no damage or little effort would not necessarily mean that they were not taxable as real estate. Modern construction methods and types of structures allow material that stays for years on a piece of property to be moved with little damage to the property. Acoustic ceiling panels ―affixed‖ by gravity and removable with no damage to the property are nonetheless taxable as real estate as are door handles and kitchen faucets when attached to a structure. In Streyle v. Board of Property Assessment, 173 Pa. Superior Ct. 324, 98 A.2d 410 (1953), the Superior Court examined whether a trailer home was realty or personalty. The Superior Court said that ―[h]ouse trailers, so long as they remain mobile, i.e., equipped with wheels, are personal property...and not subject to taxation as real estate.‖ Id. at 327, 328, 98 A.2d at 412. If a house trailer can be taxable as real estate when its wheels are removed, even though it can be moved by replacing the wheels with no damage to the real estate, a canopy affixed by bolts to a specially poured concrete foundation and then covered by concrete is substantially affixed to the land. The degree of attachment necessary to evidence an intent of permanence is not high. As one commentator has pointed out: It is easiest to satisfy the mechanical approach suggested by the annexation factor if the item is cemented, bolted, or welded into place, so the realty and the fixture are united. Powell on Real Property, § 652[2] pp. 57-32 (emphasis added). As to the second factor— whether it is essential to the use of the improvement—canopies are a customary and usual part of a gasoline station to protect customers and pumps from the elements. Sheetz's chief financial officer testified that canopies were needed to improve Sheetz's overall image or customer perception of product quality and provide for significant improvement in lighting for the sales area and the customer parking lots to provide for a safer environment. Moreover, he testified that those locations that have canopies installed have a significant increase in volume. The essential nature of canopies is confirmed by the number of land use cases where owners sought variances to allow canopies because they are necessary for the operation of modern gasoline stations with self-service pumps. M & M Sunoco v. Upper Makefield Township, 154 Pa. Commonwealth Ct. 316, 623 A.2d 908 (1993); Atlantic v. Zoning Hearing Board of Upper Merion Township, 133 Pa. Commonwealth Ct. 261, 575 A.2d 961 (1990); Mobil Oil Corp. v. Zoning Hearing Board of Tredyffrin Township, 100 Pa. Commonwealth Ct. 480, 515 A.2d 78 (1986); Amoco Oil Co. v. Ross Township Zoning Hearing Board, 57 Pa. Commonwealth Ct. 376, 426 A.2d 728 (1981); Whitehall Township v. B.P. Oil Inc., 46 Pa. Commonwealth Ct. 144, 406 A.2d 250 (1979). Finally, of paramount importance is the intention of the parties when they attach the property and whether they want it to be a permanent part of the real estate. The prior considerations—the manner in which the property is affixed and the reason it is done in the particular situation—can be looked at as merely objective manifestations that aid in determining the intention of the parties. 5 Powell on Real Property, § 652[2]; Tiffany, Real Property, § 607 (3rd Ed.); 1 Thompson on Real Property, § 566. That is so because the

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intention of the party ―is not so much what a particular party intended his legal rights to be, as it is what intended use of the property was manifested by the conduct of the party.‖ McCloskey v. Abington School District, 101 Pa. Commonwealth Ct. 110, 114, 515 A.2d 642, 644 (1986) (quoting Clothier, The Law of Fixtures in Pennsylvania, 32 Pa. B.Q. 66, 66-67 (1961)). ―The permanence required is not equated with perpetuity. Just because they have been and can be moved does not mean the intention was not to make them permanent. It is sufficient if the item is intended to remain where affixed until worn out, until the purpose to which the realty is devoted is accomplished or until the item is superseded by another item more suitable for the purpose.‖ Michigan National Bank, 96 Mich. App. at 554, 293 N.W.2d at 627. Nothing in the record indicates that the canopies are an item that anyone intends to remove as long as the property is being used as a convenience store selling gasoline. They are an integral part of Sheetz's property and will be affixed until worn out or Sheetz no longer occupies the premises. As such, they are part of the realty and are taxable as real estate. While the courts of this Commonwealth have never addressed whether canopies are considered real estate or personalty, courts of other jurisdictions have found them to be real estate. In Crown CoCo, Inc. v. Commissioner of Revenue, 336 N.W.2d 272 (Mich.1983), that case dealt with a 60-by-54 foot canopy moved from another location and installed over Crown's gasoline pumps. As here, the canopy was bolted to concrete footing so as to protect the customers and gasoline pumps from inclement weather. Finding, albeit with a different standard, that while the canopy had no walls, it essentially served the same shelter function as a building and the Michigan Supreme Court found that it was real property. In J.W. Dobbins, the Arkansas Court of Appeals, finding that a 24-by-32-foot canopy was real estate under a lease, said that the owner of the property was entitled to all improvements made to the land. In re Appeal of Sheetz, Inc., 657 A.2d 1011 (Pa. Cmwith.), petition for allowance of appeal denied, 666 A.2d 1060 (Pa. 1995). b. The court held the diner was a trade fixture, personal property and hence not subject to property taxation. J. K. S. P. Restaurant, Inc. v. Nassau County, 513 N.Y.S.2d 716 (1987). c. The court held that the pumps were fixtures and as such were not covered under the terms of the policy for personal property. The court noted that the gas pumps are an essential part to the completeness of the gas station. Also, the pumps were placed there with the intent of keeping them permanent. A and A Market v. Perkin Insurance Company, 713 N.E.2d 1199 (Ill. App. 1999).

Answer to Consider (5.3) USE POWERPOINT SLIDES 5-14, 5-15, AND 5-16. a. Probably fixture—depends on degree of annexation, ease of removal; lease agreement would control b. Directly related to house and garage—a fixture c. Fixtures d. A fixture unless parties agree otherwise

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e. As purchased, personal property; if stove is installed, then fixture (In re Rolle, 218 B.R. 636 [Bkrptcy. v. S. D. Fla. 1998]) f. Probably a trade fixture because it is commercial and tenant attached it—refrigerator is generally not a fixture (Hot Shots Burgers and Fries, Inc., v. FAS FAX Corp., 169 B.R. 920 [E. D. Ark. 1994]) g. Trade fixtures h. Probably a fixture; difficult to use it elsewhere i. Built-in—a fixture; serial number ties it to bank j. Fixture k. Trade fixtures l. Trade fixtures in some cases, fixture in others m. Fixtures in a real property taxation case; trade fixtures in a real property lease case n. Trade fixtures o. Trade fixture if commercial; if city owns it, a fixture (Ali v. City of Detroit, 554 N.W.2d 384 [Mich. App. 1996]) 5-1g

A Word on Precautions in Fixtures—REMIND STUDENTS OF FIXTURE ANALYSIS CHART IN FIGURE 5.1 AND POWERPOINT SLIDE 5-17

5-1h

Attachments 1. Fructus Naturales a. Trees, bushes, grasses b. Transfer with the land 2. Fructus Industriales (emblements) a. Crops b. Belong to tenant (Doctrine of Emblements)

Answer to Consider (5.4) The trial court erred in ordering that defendant-appellant forfeit his interest in the crops that he had planted on his farm real estate that were subsequently sold at a judicial sale. Appellant maintains that while the court had the authority to order the farm real estate to be sold at judicial sale, it did not have the authority to order appellant to be divested of his interest in the crops that he had planted on the farm real estate prior to the judicial sale. Appellant asserts that the key issue is ―whether a farmer, who has planted and cultivated crops on his property, loses his financial and possessory interest in those crops when the farm real estate is later sold at judicial sale.‖ Under Ohio law, when full title of land is transferred by way of sale or conveyance from the owner of the land (vendor) to another (vendee), the growing crops, unless otherwise expressly reserved by the vendor, will pass to the vendee with the land. Herron v. Herron (1890), 47 Ohio St. 544, 547, 25 N.E. 420. Unless the crops are reserved by the vendor, they are presumed to

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have been intended to pass with title to the vendee. Id. Otherwise, the purchaser of the land would be subject to the intrusion of the vendor to gather the crop. Id. However, when the realty is sold at judicial sale the title holder of the land generally does not lose his or her interest in crops growing on the land. Id . ―The reason given for excluding growing crops from judicial sales is that all lands before exposure to sale are required to be appraised, and… [a]nnual crops are not included in such appraisal, and hence to include them in the sale would be to give to the purchaser property which had not been subject to appraisal…‖ Id. at 548, 25 N.E. 420, citing Cassilly v. Rhodes (1843), 12 Ohio 88. While an interest in growing crops does not generally transfer to a buyer who purchases realty at a judicial sale, application of this proposition of the law is dependent upon the facts of the particular case. In cases cited by appellant, and others reviewed by this court, where the title holder of land with crops growing thereon retained an interest in the crops after the judicial sale, the crops had been planted prior to the date on which a judicial sale was ordered by the court. For example, see, Cassilly v. Rhodes (1843), 12 Ohio 88; Mason v. Lemmon (1895), Ohio Com.Pl., Ottawa County, affirmed by Mason v. Lemmon (1897), 56 Ohio St. 793, 49 N.E. 1113. The case sub judice, however, is factually different. Appellant herein planted the crops on or about April 21, 2003, a mere ten days prior to the May 1, 2003, judicial sale of the farm real estate. It is undisputed that appellant, as a party to the action hereto, at all times had proper notice of the orders of the trial court. Despite having notice that the trial court ordered the farm real estate to be sold at sheriff's auction; that an appraisal of the farm real estate had been filed with the court on March 21, 2003, for the purpose of holding a judicial sale; and that notice of the judicial sale was published in a local daily newspaper for three weeks from March 26 to April 9, 2003, stating that the farm real estate would be offered for sale at public auction on May 1, 2003; appellant, nevertheless, chose to have the crops planted on or about April 21, 2003. The facts and circumstances of this case dictate that the general rule, rather than the exception, must govern the outcome of this matter. The appellant, with awareness of the impending judicial sale and with heedless indifference to the effect of the trial court's orders, voluntarily planted the crops just days before the scheduled sale, nevertheless. Moreover, appellant failed to notify the trial court at any time prior to the sale that he either intended to, or that he already had, planted crops on the property. Appellant, by his imprudent conduct after the judicial sale had been ordered and scheduled, acquired no interest in the planted crops separate and apart from the interest in the real estate, itself. Consequently, the crops passed with the land. Accordingly, appellant's assignment of error is overruled. While factually distinct from this case, the Supreme Court of Ohio similarly held in Herron v. Herron (1890), 47 Ohio St. 544, 550, 25 N.E. 420 that ―…the husband sows with full knowledge that the land is liable to be adjudged to the wife, and that, when the crop ripens, he may have no right of entry to gather it…. He cannot claim profits, for it is by his own folly that he has sowed that which he could not reap.‖ See also, Vlack v. Vlack, (Nov. 16, 1982), Franklin App. No. 82AP-335 wherein the Tenth District Court of Appeals, pursuant to Herron, held that because the husband did not reserve any rights in the wheat and because the crops were not severed and

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harvested before the divorce decree ordering the transfer of the realty from husband to wife, the wife was then rightfully entitled to receive the profits from the sale thereof. Having found no error prejudicial to appellant herein, in the particulars assigned and argued, we affirm the judgment of the trial court. Judgment affirmed. Rose v. Rose, 2004 WL 830957 (Ohio App. 3 Dist). 5-2 Transfer of Title to Fixtures and Personal Property—USE POWERPOINT SLIDES 5-19 AND 5-20  Use Bill of Sale to transfer goods title; deed transfers fixture titles 5-3 Creditors' Rights in Fixtures—USE POWERPOINT SLIDES 5-21 TO 5-32  Article 9—U.C.C.  U.C.C.—Uniform law drafted to help obtain consistency in commercial transaction 5-3a

Scope of Article 9 1. Creditors' rights and responsibilities in collateral 2. State version of Article 9 may vary—chapter uses actual U.C.C. version—note any differences in your state

5-3b

Creation (Attachment) of Security Interest (9-203) 1. Security Agreement (9-105) a. b. c. d.

In writing or reduced to electronic form Signed by the debtor (authenticated under Revised Article 9) Language creating a security interest Description of collateral i. Reasonably identify collateral ii. Description of real property helpful but not required iii. Rules are liberalized under Revised Article 9

2. Debtor's Rights in Collateral (9-202) a. Most cases occur with creditor selling goods to debtor b. Debtor acquires rights at the time of delivery 3. Value Given by Creditor (9-203) a. b. c. d.

Agreement to extend credit Turning over collateral to buyer/debtor Perfection Security interest i. Gives creditor priority over unsecured parties

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ii. Gives creditor right of repossession 4. Purchase Money Security Interest in Fixtures (9-103) a. Given to secure all or part of the purchase price of the collateral b. Buying a water heater on credit from hardware store—hardware store's security interest is a PMSI 5-3c

Perfection of Security Interest (9-301) 1. Financing statement a. b. c. d. e. f.

Written (record) Names of debtor and secured party Signature of debtor (authentication under Revised Article 9) Address of secured party from which information can be obtained Mailing address of debtor Statement describing the collateral—including legal description of property—ABSOLUTELY NECESSARY SINCE FILED WITH LAND RECORDS— rules are liberalized for descriptions under Revised Article 9

2. Filing the Financing Statement a. Central and local filing still exists under Article 9, but all filings except real estate fixtures which are filed locally in the land records office for the state/jurisdiction b. Filing gives creditor perfection i. Priority over creditors filing later ii. Even some priority over prior filed creditors 3. Length of Perfection (9-515) a. Perfected for five years (can renew in last six months for another five years)—six years in Arizona and twelve years in Louisiana 5-3d

General Rules of Priority Among Secured Creditors (9-317) 1. General rules a. Secured creditor has priority over unsecured creditor. Example: Creditor X sells D an air conditioner—no security agreement. Creditor Y gives D a loan secured by a recorded second mortgage. Y has priority over X even though Y's transaction is later since Y is secured. b. Perfected secured party has priority over subsequent real estate interests. Example: Creditor X sells D an air conditioner—security interest and files financing statement. Creditor Y gives D loan secured by recorded second mortgage. X has priority since he filed before Y. c. Prior real estate interests have priority over subsequent security interests. Example: Creditor Y gives D a loan secured by a recorded second mortgage.

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Creditor X sells D an air conditioner—security interest and filing. Y now has priority since the X transaction was after the recorded mortgage. d. Between perfected secured parties—first to file has priority. Example: D needs an air conditioner. X will sell it to him with 50% down. X executes a security agreement and files a financing statement for the other 50%. D borrows the 50% down from Bank Y. Y files a financing statement on the same air conditioner. X has priority as first to file.

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5-3e

Exceptions to General Rules 1. Purchase Money Security Interest (PMSI) Exception (9-324)/(9-334) PMSI creditor takes priority even over prior real estate encumbrances if a financing statement is filed before the goods become fixtures or within 20 days after the goods become fixtures. Example: D purchases a home with funds lent by Y. Y has recorded a mortgage (January 18, 2006). D purchases an air conditioner from X on credit and X files a financing statement before putting the air conditioner in on May 31, 2009. X has a PMSI, filed before the air conditioner became a fixture and thus has priority over Y. Rationale: Allow property owners to obtain credit for improvements.

CASE BRIEF:

In re Naknek Electric Association

471 B.R. 225 (D. Alaska 2012) FACTS: Debtor Naknek Electric Association, Inc. (Naknek/debtor) is an electric utility cooperative that serves members in the remote western Alaska communities of King Salmon and Naknek. Naknek was using diesel fuel to generate electricity. There was significant increase in the price of diesel fuel from 2005 to 2008. Naknek decided to pursue geothermal power as a supplemental generation method. In mid-2009, it obtained a permit to conduct geothermal drilling on its property. Naknek acquired a drilling rig (Rig No. 7), improved it, transported it to the property, and started drilling an exploratory well. The efforts to drill and develop a successful well were costly, and Naknek hit costly regulatory obstacles as well. The cash burn rate was high, and Naknek filed a Chapter 11 bankruptcy petition on September 29, 2010. The line of contractors and vendors that had provided services, materials, and goods on credit was long as was the list of liens on Naknek property. Two of the Naknek's largest creditors, CoBank and Baker Hughes, had obtained and recorded judgments against Naknek‘s property (plaintiffs). CFC, which had a security interest Rig No. 7 had filed a financing statement with the UCC Central Filing Office on October 14, 2009, that describes Rig No. 7 as its collateral. The result of all these liens, judgments, and security interests was a significant priority dispute over which of the parties would be paid first. CFC filed a motion for summary judgment on its Article 9 perfected security interest. ISSUE:

Whose claims cover what property? Is the rig a fixture or personal property?

DECISION: The court found that the mining and mechanic‘s liens were valid claims against the real property. The court did distinguish between claims that were valid against the land and claims that were valid against the rig because the court determined that the rig was not real property but personal property. Because Naknek never intended to attach the rig to the property, it was personal property and not a fixture.

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However, the court also held that CFC did not have priority over the claims against the property or the rig because it should have done a local recording of its financing statement and it only recorded centrally. As a result, its financing statement was not valid with respect to the subsequent liens attached to the rig by other creditors and contractors. The case has a confusing aspect because if the rig was not a fixture, then the local recording was not necessary, and CFC was properly perfected in equipment. If it was a fixture filing, then the lienors should have filed against the property, not the rig. There is a great deal of criss-crossing in the decision and the Article 9 issues get lost among the inconsistent findings.

Answers to Case Questions 1. What was the problem with CFC’s perfection? CFC had filed centrally in Alaska and the point of the lienors and the court was that there should have been a local filing because it related to real estate and that filing had to come before the rig was on the property. 2. There is a portion of the court’s opinion not included here that concludes that the rig itself was not part of the real property, that Naknek always intended to remove it once the exploration was complete. Does that finding affect the validity of the liens against the real property? Does that finding change what the judge concluded on CFC’s place of recording? Perhaps this is one of those times when the judge may not have realized the inconsistencies in the findings. If the rig is not a fixture and just personal property, then there is an issue of whether the liens based on real property apply or at least places them in a category different from CFC. In addition, if the rig is personal property, then CFC‘s central filing was indeed valid and would have taken priority in the personal property (not the real property in which the lienors had their interests). In effect, taking what the judge found and applying it in a different way from the UCC perspective nets a completely different result. That would then be a security interest in equipment which only requires that CFC notify the other equipment creditors of its interest after filing its financing statement centrally. However, the judge only looked at CFC as a real property UCC creditor, not a personal property UCC creditor. The judge based the decision solely on fixture status and real property—but he mixed them together. If the rig was personal property, then the lienholders on real property were in a different category from CFC and rights are determined according to UCC Article 9 exceptions for equipment. 3. What do you learn about the validity of liens and security interests based on this decision? The number of secured creditors in the case was great, the debts were high, and there were even two large funders (CoBank and Baker Hughes) who were able to obtain a judgment on the real property prior to the bankruptcy filing. There is a question suggested in the case that there might be an issue of voidable preference with regard to that judgment.

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Answer to Consider (5.5) Wells Fargo had an agreement with the Debtor that the property purchased was to be treated as personal property even after it was annexed to the real property. It is well settled that parties can agree that an item remain personal property and not become a fixture upon attachment, but only to an extent. When removal of the article would do substantial damage to the realty, where the parties could not have intended this, the contract will not control. Looking at the four factors, [this] Court finds that this contract will control. The nature of the personalty are gutters attached to the roof. Logic dictates that gutters are removable because they wear out and have to be replaced. It is hard to imagine, nor was any evidence offered, that the removal of a guttering system would so harm the property that extensive damage would result. The agreement provides that the gutters were to be bought for “personal, family, or household purposes” and the type of product involved comes within the definition of a consumer good. The Court therefore finds that the gutters fall within the purview of consumer goods and Wells Fargo’s security interest is perfected without filing. Wells Fargo has a perfected security interest in the guttering system. Wells Fargo’s claim of $2,865.00 is allowed as a secured claim. In Re Williams, 381 B.R. 742 (W.D. Ark. 2008) 2. Construction Mortgage Exception 3. Readily Movable Exception 4. Tenant Exception 5. Good-Faith Purchaser Exception

5-3f

Default by Debtor and Rights of Secured Party (9-604) 1. Creditor has right to remove collateral from real estate 2. Must reimburse owner for cost of removal or repair any injury to the property 3. Need not compensate for decrease in value 4. Creditor can foreclose on property and take priority 5. It is creditor‘s choice

USE FIGURE 5.2 AND POWERPOINT SLIDES 5-30, 5-31, AND 5-32 TO DISCUSS THE PRIORITIES IN FIXTURES UNDER ARTICLE 9.

Answer to Consider (5.6) The Capers were borrowing a great deal in a short amount of time. Three creditors were, in essence, relying on the same security. Creditors are given the choice of extending credit. Their wisdom and screening is the market place regulation of credit extension. Those borrowing, however, should understand the moral component of promises to pay. Sears had perfected its security interest by filing a financing statement covering the fixtures in the Hunterdon County Clerk‘s Office where the first mortgage held by plaintiff was recorded. The purchase money interest of Sears attached to the goods or chattels before they became

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affixed to the realty as fixtures. By perfecting the security interest, Sears was able to make its security interest in the fixtures permanent, or until paid or discharged. The point to be made is that Sears‘ security interest is limited to the fixtures and does not extend to the realty otherwise. By statute, Sears‘ purchase money security interest, when perfected, ―has priority over the conflicting interest of an encumbrancer or owner of the real estate....‖ This means the purchase money security interest of Sears in the goods or chattels which became fixtures gives it a ―super priority‖ as to those goods or chattels which became fixtures. Under Revised Article 9, Sears can remove the fixtures and pay the cost of repairs. Sears can foreclose or Sears can enjoy first priority on the proceeds in the event there is a foreclosure on the property. Under old Article 9, Sears only rights were to remove the fixtures. Under both old and revised Article 9, Sears is not responsible for the diminution of value in the property caused by the removal of the fixtures, which, in this case, because it is an entire kitchen, substantial. Under Revised Article IX, Sears has three choices: (1) foreclosure with priority, (2) removal of the fixture or (3) creditor‘s choice to proceed against the property or the fixture. Revised Article 9 overrules previous decisions that did not allow fixture creditors to foreclose. The case, Maplewood Bank and Trust v. Sears, Roebuck and Co., 625 A.2d 537 (N.J. Super. A.D. 1993), has been superseded by the since-revised Article 9. See FGB Realty Advisors v. Bennett, 672 A.2d 545 (Conn. 1995) for a decision AFTER the revision, i.e., the priority applied only to the swimming pool the creditor had financed through a secondary mortgage.

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Additional Activities and Assignments Answers to Chapter Problems 1. a. b. c. d.

Fixture If part of structure—fixtures; if movable metal shelves—personal property or trade fixture Degree of annexation, damage cost; probably a fixture Is it necessary for the building—fixture; is it necessary for the operation of the factory— trade fixture e. Fixture—farm buildings in sale are generally treated as fixtures f. Fixture g. Not a fixture, trade fixture; removable by lessee Reynolds v. State Bd. Community Colleges, 937 P.2d 774 (Colo. App. 1996).

2. a. Yes, if Bill was permitted to remove the shelves under the lease. b. Restore any damage caused by removal. © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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c. No, not if Bill has the right of removal. d. Mortgagee would have priority—Carl would be an unsecured creditor. 3. The court held that the cooler and condenser were fixtures. Ngo caused a walk-in cooler to be installed in the store. The condenser was placed on a pallet outside the building and was electrically connected to the cooler through the store's breaker box. Hayden modified the condenser to meet the store's need for a refrigeration system. The condenser and cooler were intended to serve the convenience store and to be operated on the premises. The installation of the walk-in cooler and the condenser evidenced Ngo's intent that the cooler and condenser be annexed to the realty. Accordingly, the condenser was an improvement under section 95.002(2) of the civil practice and remedies code. Gorman v. Ngo Meng, 335 S.W.3d 797 (Tex. App. 2011). 4. Fixtures—use Michigan National Bank case as an assignment. (1) All items are annexed (bolts and pneumatic tube system connecting elements) (2) Items necessary for building to function; cannot be used elsewhere (3) Permanent intentions by bank (4) Trade fixture rule is applicable only in landlord/tenant situations, not here Michigan National Bank, Lansing v. City of Lansing, 293 N.W.2d 626 (Mich. App. 1980); aff‘d 322 N.W.2d 173 (Mich. 1982). 5. a. Depends on damage upon removal, degree of annexation. Intent was probably not to benefit landlord but to make property usable b. Probably is a fixture transferred with property c. Probably will be real property—interpreted against insurer d. Probably will be fixture 6. a. b. c. d.

First Federal—Tanks did not file Tanks would have priority Tanks would have priority even over them if filed first Tanks can repossess and repair damage caused by removal

7. While the case originally held that KPL, Western Resources, had no priority in the proceeds because it was not entitled to such under Article 9, new Article 9 would allow KPL, Western Resources, that first position because PMSI fixture creditors are now permitted a choice of remedies beyond just repossession of the fixtures from the property. Capitol Federal Sav. and Loan Ass’n v. Hoger, 880 P.2d 281 (Kan. App. 1994). 8. In the list here, these are all permanent parts of real property, integral to its use and difficult to remove. They are fixtures and part of the real property. 9. The court held that both the septic and sewer system and the water system were integral parts of Hillside College and belonged to the cottage and not the trust. The relevant portion of the opinion appears below. Schleinitz v. Maclay, 874 N.W.2d 573 (Wis. 2015).

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Whether an item is an ―improvement to real property‖ ... is a question of law that we review de novo. An improvement to real property, as stated by the Wisconsin Supreme Court is: ―a permanent addition to or betterment of real property that enhances its capital value and that involves the expenditure of labor or money and is designed to make the property more useful or valuable as distinguished from ordinary repairs.‖ Kohn, 283 Wis.2d 1, ¶ 17, 698 N.W.2d 794 Relying on this definition, the circuit court concluded that the septic tank was not an improvement to the Trust because it was an essential part of Hillside Cottage and was installed at the time the cottage was built. The court also determined that the water system, though also a part of the cottage's initial structure and integral to the use of the cottage, was an improvement to the Trust property because it could be used by other buildings on the Trust. We conclude that neither system was an improvement to the Trust, but rather was an integral part of Hillside Cottage. The Maclays built and paid for the Hillside Cottage in the 1950s. The home was built with Rene von Schleinitz's knowledge when he was alive on a portion of what became the Cedar Lake Trust land under his will. After von Schleinitz's death in 1972, the 1975 probate judgment confirmed that Hillside Cottage was not part of von Schleinitz's Trust property. The septic system was installed in the home at the time the home was built and is obviously essential to the home's functioning. It would defy logic for us to conclude that the system responsible for disposing of the cottage's wastewater from the time the cottage was built is an ―improvement‖ belonging to an entity other than the owners of the cottage (i.e., the Trust). Accordingly, we agree with the circuit court and conclude that the septic system was not an ―addition ... as distinguished from ordinary repairs.‖ See id., ¶ 17 (citations and quotation marks omitted). Rather, the system had been an essential component to the home's structure and functioning since the 1950s, and, in accordance with the terms of von Schleinitz's will, belongs to the Maclays. [Applying the same logic and the same definition of ―improvement,‖ we also conclude that the water system belongs to the Maclays as it is an essential component of their home. The circuit court reasoned that because the water system could be used to provide water to other buildings on the Trust real estate, it was not exclusively a part of Hillside Cottage. The Maclays installed and paid for the well and pump as a part of their original construction contract for Hillside Cottage. The well and pump are connected to the house and run on the cottage's electricity. Even Lindemann (co-trustee) acknowledged that the cottage has had the water system since its construction in the 1950s. Lindemann has not established that Hillside Cottage's water system in fact supplies water to any of the other buildings on the Trust property, nor has she established that the system was an ―addition‖ to the original home.

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The circuit court applied inconsistent criteria to two utility systems equally integral to the use of the Hillside Cottage. The practical effect of the circuit court's finding suggests that the water system is an amenity that can be severed from the home. This is contrary both to the intent of the Trust—which clearly established that Hillside Cottage was the exclusive property of the Maclays—and to logic. Hillside Cottage would be uninhabitable without a functioning water system. The septic system could not function without a water supply. A legal conclusion that the septic system is part of the ―improvement known as Hillside [C]ottage,‖ while the water system upon which the septic system depends is not, is inconsistent both in law and in common sense. Both are as much utilities as the electric system and the lighting system. The record does not provide a reasonable factual basis for the circuit court's conclusion to the contrary. We conclude that neither system was an improvement to the Trust real estate. Both systems are integral to the functioning of Hillside Cottage. Both systems were installed and paid for by the Maclays when they built Hillside Cottage. Without either system, they would be unable to occupy and use the cottage as they have for decades and prior to implementation of the Trust von Schleinitz created. Consequently, we conclude both systems belong to the Maclays as a part of their home under the terms of the Trust, which states: ―[T]he occupancy of any cottage shall include the right to use the grounds and other buildings customarily used with the cottage.‖ 10. The court held that the ski chairlift is a fixture and attached with concrete pads, adapted to ski hill, and intended by debtor to be permanently affixed. In re Cliff’s Ridge Skiing Corp., 123 B.R. 753, 13 UCC Rep.2d 1309 (Mich. 1991).

In-Class Exercises 1. Have the students classify items in the classroom as fixtures or personal property: desks chairs chalkboard chalk

overhead/slide screen lectern lighting floor covering

overhead projector bulletin boards wall decorations (paintings) clock doors

2. Have the students classify the following as fixtures or personal property if they are located in a leased property: bookshelves (attached by the tenant) stove refrigerator draperies

telephone jack ceiling fan mini-blinds intercom

bathtub deadbolt sofa microwave

bedspread

oven

Be sure to have students clarify additional information they would need to answer (if necessary). © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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3. Additional case reading (use for answer to Chapter Problem #4): MICHIGAN NATIONAL BANK, LANSING V. CITY OF LANSING 293 N.W.2d 626 (Mich. 1980) The Michigan Tax Tribunal held that Michigan National Bank‘s (petitioner) night depository equipment, drive-up window equipment, vault doors, and remote transactions units, which were physically integrated with the bank‘s land and buildings, were fixtures and subject to taxation as realty by the city of Lansing (respondent). The bank appealed. GILLS, Presiding Judge This is an appeal from a Michigan Tax Tribunal order affirming six real property assessments made by the respondent on certain items of petitioner's property. Five of the assessments concern properties owned by the petitioner and one of the assessments involves property leased by the petitioner. The matter in dispute is whether certain items of bank equipment, specifically, bank vault doors, night depository equipment, drive-up teller window equipment and remote transaction systems, are subject to assessment and taxation as real property or whether they are items of personal property and are exempt from taxation. The test to be applied in order to ascertain whether or not an item is a fixture summarizes three factors: 1. Annexation to the realty, either actual or constructive. 2. Adaptation or application to the use or purpose of that part of the realty to which it is connected or appropriated. 3. Intention to make the article a permanent accession to the realty. The intention which controls is that manifested by the objective, visible facts. It is sufficient if the item is intended to remain where affixed until worn out, until the purpose to which the realty is devoted is accomplished or until the item is superseded by another item more suitable for the purpose. Applying these factors to the present case necessitates the conclusion that the Tribunal properly found the items in question to be fixtures. All four items are physically annexed to the realty. The night depository equipment, drive-up window equipment and the vault doors are all cemented into place. Once installed, they are integrated with and become part of the wall in which they are mounted. The remote transaction units are also physically integrated with the land and the buildings. Such a unit consists of a roof-type canopy supported by pillars which extends from the building wall or roof over the customer unit. The customer unit is mounted with steel bolts to a specially constructed concrete island. A pneumatic tube system runs either up into the canopy or down into the ground and then into the building. Furthermore, each item is adapted to the use of the realty. In fact, not only is the present use of these buildings dependent on the presence of these items, none of these items can be used unless they are affixed to a building or land. Taken together, these factors establish the petitioner's intent to permanently affix these items to the realty. The petitioner further contends that, even if these items are found to be fixtures, they are trade fixtures and as such are classified as personal property which is exempt from taxation.

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A trade fixture is merely a fixture which has been annexed to leased realty by a lessee for the purpose of enabling him to engage in a business. The trade fixture doctrine permits the lessee, upon termination of the lease, to remove such a fixture from the lessor's real property. With respect to the lessee's right of removal, a trade fixture is characterized as personalty. The doctrine by its terms applies only in leasehold situations. The rule regarding trade fixtures which arose out of commercial necessity for the limited purpose of protecting tenants in the ownership of certain kinds of property has no application between other parties in other relationships. Although as between lessor and lessee trade fixtures might be personal property, as to third parties they are properly considered as a part of the realty. Affirmed.

Discussion Questions 1. Describe the property in question. 2. Why was a determination of real versus personal property necessary? 3. What factors did the court of appeals examine in determining whether a fixture was involved? 4. Did the rule for trade fixtures apply? 5. Were the items real or personal property? 4. For an assignment, have the students read and analyze the following case and the questions included at the end. R.C. MAXWELL COMPANY V. GALLOWAY TOWNSHIP 679 A.2d 141 (N.J. 1996) R. C. Maxwell is a New Jersey corporation that has conducted outdoor advertising since 1894. At the time of the case, Maxwell had 900 outdoor advertising displays in New Jersey. Maxwell leased property owned by Scola, Inc., in Galloway Township for the purpose of erecting four billboards. Maxwell‘s billboards have traditionally been taxed by the state as business personal property. Maxwell also pays licensing and permit fees to the state pursuant to the Outdoor Advertising Act, and more recently the Roadside Sign Control and Outdoor Advertising Act. On November 25, 1991, the Attorney General issued an advisory opinion on behalf of the Director, Division of Taxation, that the billboards were taxable as real property. The result was that Galloway Township‘s assessment for Scola‘s real property increased from $86,700 to $90,400. Maxwell and Scola challenged the assessment, but the Board of Taxation upheld the assessment. Maxwell and Scola appealed, but the tax court granted summary judgment for Galloway Township. The court of appeals affirmed, and Maxwell and Scola appealed. JUDICIAL OPINION

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Handler, Justice. The taxpayers contend that billboards are personal property that is exempt from taxation as real property. Subsection (a) of N.J.S.A. 54:4-1 classifies improvements ―consisting of personal property‖ that are ―affixed to the real property‖ as ―within real property‖ and therefore taxable. The taxpayers argue that under this statutory framework, billboards should be classified not as improvements to realty but only as personal property because (1) they can be removed without material injury to either the real property to which they are affixed or to the billboard itself, and (2) they are ordinarily not intended to be affixed permanently to real property. Maxwell‘s billboards are comprised primarily of wood with some metal components such as bolts and nails. The advertising copy is located on what is known as the face of the billboard, which rests on a grid of vertical planks known as uprights and horizontal planks known as stringers. Backbracing connects the uprights to anchors, which are planks that are almost entirely stuck to the ground. Three of the billboards in this case have 12-foot by 25foot faces and one has an 8-foot by 15-foot face. Illuminated billboards also have the following additional components: (1) a one hundred amp service panel with timer clock; (2) six quartz or fluorescent fixtures; (3) a maximum of 110 lineal feet of rigid pipe; (4) a service entrance cable; and (5) a ground rod. Because approximately 85% of Maxwell‘s billboard signs are made of wood, there is a constant need for new or recycled replacement parts. Maxwell regularly repairs or replaces its billboard parts that either are damaged by the elements or succumb to rot. Maxwell contends that if a billboard location is lost, it is able to disassemble the billboard and salvage a high percentage of its wooden parts for reuse at another site. On close review, we determine that Maxwell‘s wooden billboards can be removed without being materially injured. A billboard‘s utility is not destroyed when it is removed. Approximately 80% of a billboard‘s support structure is salvageable on removal. The advertising face, which is the key component of a billboard, is not damaged by removal and is normally completely reusable. The ultimate determination depends on an objective view of what the ―ordinary intent‖ was for installing the billboards. The actual history of the billboards suggests that they might have been intended to be affixed permanently. The billboards have been at their current sites for approximately thirtyfive years. Post-installation history of property has been considered to support a finding that the ordinarily [sic] intention was one of permanence. The course of billboard industry practices demonstrates that the ordinary intent for the billboards is not to have them permanently affixed to the land. First, billboard owners typically do not own the land on which their displays are constructed. Second, billboard leases are generally short-term ones. Third, wooden billboards are regularly constructed without a concrete foundation. Fourth, billboards often relocate on short notice due to state land condemnations and landlords‘ decisions not to renew leases. Billboards remain the property of the billboard company and do not ordinarily pass with title to the realty on which they are erected. Billboard companies do not leave billboards when their leases end and they vacate a location; rather, they remove them and erect them at new sites. Billboards are frequently resold separately from real property. Every year,

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hundreds of billboards are sold in New Jersey from one company to another. Accordingly, we determine on the record in the case that billboards are not ordinarily intended to be affixed permanently to the land. Of course, there are some billboards of steel and concrete that may not qualify for the tax exemption. We focus here on traditional wooden billboards and do not determine whether steel and concrete billboards can be removed without being materially injured or were not ordinarily intended to be affixed permanently to the real estate. Reversed.

Discussion Questions 1. List the factors the court reviews in determining whether the billboards are real or personal property. 2. Why does the court not determine whether steel and concrete billboards are also exempt from real property taxation? 3. List some parties you think would have been involved as amicus curiae (friend of the court) in this case and would have intervened for purposes of having the taxation issue determined. 4. What is different about this case from the Mulford case?

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Resources ―A Primer on Fixtures, Stripping, and Chutes,‖ 44(1) Real Est. L. J. 58-68 (2015). Boyer, Survey of the Law of Property, Chapter 14, p. 327. Burby, Real Property, Section 654. Christenfeld and Kopec, ―Purchase-Money Security Interests,‖ 41 UCC L.J. 3 Art. 6 (Winter 2009). Jennings, ―Reposing: An Evolving Issue,‖ 34 Real Est. L. J. 470 (2006). John, ―Status of Building or Structure as Trade Fixture,‖ 1 Am. Jur. Proof of Facts 2d 171 (1974). Klimkiewica, ―In Re Sheetz, Inc.: The Commonwealth Court Holds That Canopy Structures Covering Gasoline Pumps Are Fixtures to Real Estate and Are Thus Subject to Real Property Taxation,‖ 5 Widener J. Pub. L. 917 (1996).

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Livingston, "Bewitched, Bothered and Bewildered: The Courts and Revised Article 9 of the Uniform Commercial Code Ten Years Later," 9 DePaul Bus. & Com. L.J. 169 (Winter 2011). Long, ―Eminent Domain—Fixture Qualification—Property Is a Fixture in Condemnation if it Satisfies the Three Step Analysis, and the Condemnee May Elect to Receive the Value-in-Place or the Detach/Reattachment Costs for the Fixtures,‖ 75 U. Det. Mercy L. Rev. 717 (Summer 1998). Nowlin, "'Hey! Look at Me!': A Glance at Texas's Billboard Regulation and Why All Roads Lead to Compromise," 44 Tex. Tech L. Rev. 429 (Winter 2012). Powell, Real Property, Sections 650-661. Restatement (Second) of Property, Section 12.2(4). Roark, "Groping Along Between Things Real and Things Personal: Defining Fixtures in Law and Policy in the UCC," 78 U. Cin. L. Rev. 1437 (Summer 2010). Thompson, Real Property, Volume 1. Uniform Commercial Code, Article IX. Weise, ―Le Menu: The UCC and Food,‖ 18-JUN Bus. L. Today 10 (May/June 2009). White and Summers, Uniform Commercial Code, Chapter 22, p. 875. Wisner, ―Manufactured Home Developments in Texas,‖ 56 Consumer Fin. L.Q. Rep. 205 (Spring 2002).

Cases Citizens Bank of Michigan City v. Hansom, 497 N.E.2d 581 (Ind. 1986). Crawford v. Gulf Cities Gas Corp., 387 So.2d 993 (Fla. 1980). Barron v. Barron, 615 S.W.2d 394 (Ark. 1981). Farrier v. Farrier, 61 B.R. 950 (Pa. 1986). In Re Estate of Horton, 606 S.W.2d 792 (Mo. 1980). In Re Findley, 76 B.R. 547 (Miss. 1987). In Re Galvin, 39 B.R. 1016 (1984). In Re Greeman, 48 B.R. 611 (NM 1985). In Re Redd, 54 B.R. 871 (N.D. 1985). In Re Williams, 381 B.R. 742 (W.D. Ark. 2008). Kaheawa Wind Power, LLC v. County of Maui, 456 P.3d 149 (Haw. 2020).

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Northwest Equipment Sales v. Western Packers, 623 F.2d 92 (9th Cir. 1980). [return to top]

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Chapter Objectives The following learning outcomes are addressed in this chapter (See PowerPoint Slide 6-1): 06.01 Discuss the types of liens. 06.02 Discuss the effect of liens. 06.03 Describe how to obtain, perfect, and execute a mechanic's lien.

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Key Terms consent statutes: statutes that permit the attachment of a lien if the property owner consented to the work done by the lienor even though there was no direct contract with the owner contract statutes: with references to liens, statutes that require lienors to have a direct contractual agreement with property owners to be able to place a lien on property on which work was performed contractual lien: liens that arise because of a contractual agreement between the lienor and the owner of the liened property equitable lien: lien created as a result of a mortgage arrangement; also referred to as a contractual lien homestead exemption: debtor protection that entitles the debtor to a certain amount in real property that is exempt from attachment by creditors involuntary lien: lien that does not result from a contractual arrangement; e.g., a tax lien or a judicial lien judicial lien: lien on property that is the result of a judgment; lien to collect a court judgment lien: interest in real property that serves as security for repayment of a debt lienee: person whose property is subject to a lien lienor: party who places a lien on real property materials liens: lien on property for the amount due for materials furnished to the owner or to others performing work on the land mechanic‟s lien: lien placed on real property to secure amount due to those who performed work or supplied materials for improvements or other projects on the land statutory lien: right in land created by statute as a means of ensuring payment for work, materials, or other obligations

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stop notice statutes: statutes that allow subcontractors and materials suppliers to record a document and/or give service or notice of their rights to payment to the owner or general contractor so that disputed payment issues are resolved before there is double payment or end of funding trapping statutes: another name for stop notice statutes voluntary lien: a lien created because of a contract (as opposed to a tax lien, which is involuntary) waiver agreement: in liens, a document that waives the right of a supplier or laborer to lien the property; generally given in exchange for payment

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What's New in This Chapter The following elements are improvements in this chapter from the previous edition: 



 

Restructured the chapter to make the lien requirements and processes flow a little better and more understandably. Section 6-2a, Who is Subject to Liens?, crossed over into the 2nd and 3rd questions, and was confusing—now it is better organized. New case brief in Section 6-2a on landownership being held by someone different from the person operating on the land and the right to lien, Guniganti v. C & S Components Company, LTD. New Consider 6.1 in Section 6-2a, Denco CS Corp. v. Body Bar, LLC, on wrongful lienfiling. In Section 6-4b, new case brief that brings concepts together on liens so that they can study an integrated case with contractor and subcontractors, Ground Control, LLC v. Capsco Industries, Inc. New chapter problem #1 on mechanics liens, Tarlton v. Miller’s of Claflin. New chapter problem #9 on lawful filing of a mechanics lien, Stafford-Smith, Inc. v. Intercontinental River East, LLC.

PREPARATION: Because lien statutes vary significantly from state to state, it is probably best to obtain your state statutes so that you can fit your procedures into the chapter. The chapter discusses all views and knowing your state law enables you to clarify for the students. Figure 6.1 provides an illustration of one difference.

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Statutory Liens 1. Can exist because a statute authorizes their existence 2. Mechanics' liens 3. Property tax liens

6-1b

Equitable Liens 1. Also called contractual liens 2. Mortgages—created in advance by the parties 3. Purchase money mortgages 4. Debt security mortgages

6-1c

Voluntary Versus Involuntary Liens 1. Voluntary Liens a. Mortgages b. U.C.C. Article IX c. Arise pursuant to an agreement between the property owner and another 2. Involuntary Liens a. Tax liens b. Judicial Liens c. Sometimes mechanics' liens

6-1d

Judicial Liens 1. Created by and through the court for satisfaction of a judgment entered against the property owner 2. Property sold to satisfy debt

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3. Judgment or abstract recorded in all land record offices 4. Recorded judgment gives plaintiff priority in the event property is sold 6-1e

Mechanics' and Materialmen's Liens—USE FIGURE 6.1 AND POWERPOINT SLIDE 6-7 1. Arise from construction, improvement, alteration or repair of real property or structures thereon 2. NOTE: Uniform Mechanic's Lien statute has never been able to work; there is a NCCUSL proposal called Uniform Construction Lien Act; not yet adopted in any state.

6-2 Creation of Mechanic‟s Liens (CHECK YOUR STATE FOR EXACT PROCEDURES)—USE POWERPOINT SLIDES 6-8 TO 6-16 6-2a

Who Is Subject to Liens? 1. Verifying Contract Authority for the Lien Work a. State and federal properties not subject to lien b. Quasi-public entities—utilities—may or may not be subject to a lien c. Express or implied contract vs. consent i. State views vary ii. Contract states—to obtain lien must attach a copy of the contract when filing a) Formalities for contract states i) ii) iii) iv) v) vi)

Writing Amount due under the contract Time of completion Type of work/description of tasks Location of real property Parties' signatures (in community property states or where property is held in tenancy by entirety—need both parties' signatures) vii) Regulation Z disclosure if consumer property viii) Provisions for breach of the agreement b) Make sure party signing has proper authority i) ii) iii) iv)

Churches Foundations Corporations Trustee/executors—do they have authority to improve or alter real property

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iii. Consent states—need only establish owner was familiar with the work and allowed it to continue iv. Description of liened property is critical 2. Verifying Land Ownership for Lien Work CASE BRIEF: Guniganti v. C & S Components Company, LTD 467 S.W. 3d 661 (Tex. App. 2015) FACTS:

Prabhakar Guniganti and his wife (appellants) created the 1999 Trust and transferred a 495–acre parcel of land to the trust. They named Daya Puskoor, Guniganti's brother-in-law, as trustee. In 2010, Guniganti and Puskoor agreed that they did not need to bring in a thirdparty to run a sand processing plant on the property. Guniganti founded Triple PG in February 2011 for the purpose of constructing and running a new sand plant. C & S, owned by Danny Kautz and his wife, sells components for sand processing plants. When an employee of Triple PG, Mark Burnett, requested a quote from C & S for sand plant components, Kautz sent a detailed proposal on June 1, 2011. Although no formal contract was ever signed by the parties, the parties followed the terms of the June 1 proposal as a contract between C & S, Triple PG, and Guniganti. The total contract price in the proposal was $1,217,959. C & S received the first payment of $365,387.70 on June 8, 2011 and within a few weeks began delivering components. C & S received a second payment in the same amount on August 4, 2011 and delivered the majority of the ordered components by November 2011. The components were manufactured by Classifying Flotation Systems (CFS) and a local fabricator. In mid-September 2011, Burnett notified Kautz of problems with welding work on some of the components. On February 21, 2012, Kautz, Burnett, Guniganti, and two manufacturer representatives met to discuss the issues with the components. Guniganti's daughter, Prathima Guniganti, who owned her own consulting firm and had been managing the payroll and billing for Triple PG, also attended the meeting. Kautz and the Gunigantis then exchanged emails concerning credits to be given for some of the components. On February 28, Kautz sent an email to Prathima, ―[s]ee the attached, I think this is what you are looking for. If you need anything else, please call.‖ Prathima responded a day later and copied Guniganti and his wife, ―Thank you for making the revisions to the invoice to reflect the adjustments from our discussion. I have included Dr[.] and Mrs[.] Guniganti so they have the correct invoice for their records and payment.‖ Attached to the emails was a C & S invoice showing a total contract price of $1,061,572 (a reduction from the original price of

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$1,217,959) and a balance due of $294,530.74. An additional invoice attached to the emails shows freight charges of $30,068.04 for a total balance due of $324,598.78. Kautz did not receive payment for the amount in the new invoice and C & S filed suit as well as a mechanic‘s lien against the plant property. The Gunigantis counterclaimed for breach of contract as well as a claim for the filing of a fraudulent lien. The trial court held that the e-mail string and attached invoices were a modification of the parties‘ original contract and that both had breached the contract. The jury awarded $312,345.78 to C & S, found that C & S did not file a fraudulent lien, and awarded C & S attorney‘s fees. The trial court entered judgment for that amount but neglected to discharge the lien. The Gunigantis appealed. ISSUE:

Did C & S have the authority to lien the trust property?

DECISION:

In Texas, a lien requires the lienholder to be in privity of contract with the landowner. See, e.g., Denco CS Corp. v. Body Bar, LLC, 445 S.W.3d 863, 870–71 (Tex.App.–Texarkana 2014). No one disputes that C & S did not have a contract with the 1999 Trust. The trial court submitted two questions to the jury inquiring whether Guniganti or Triple PG ―effectively controlled the 1999 Trust through ownership of voting stock, interlocking directorships, or otherwise?‖ The jury answered both questions in the negative. However, even though C & S attempted but failed to establish privity with the 1999 Trust, the trial court did not declare the constitutional lien invalid or order it discharged in the final judgment. The court concluded, based on the undisputed and well-established facts that there was no privity of contract between C & S and the trust, and C & S possessed no right to take a lien on the 1999 Trust's property. Still, C & S declined to stipulate or even acknowledge that it would not attempt to refile its lien. But the jury also found that the lien was not fraudulent. Even though the jury declined to find that a preponderance of the evidence established Triple PG or Guniganti effectively controlled the 1999 Trust, there is significant evidence of a close, interconnected relationship between Guniganti, Triple PG, and the 1999 Trust. Moreover, it is clear that Kautz dealt exclusively with Guniganti and other Triple PG representatives, even though the sand processing plant in question was to be built on property owned by the 1999 Trust. The evidence supported the conclusion that because of his dealings with Triple PG and Guniganti and their apparently close, interconnected relationship with the 1999 Trust, Kautz believed that he was also dealing with the 1999 Trust and did

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not realize he could not take a valid constitutional lien on the trust's property when he filed for the lien. The judgment was modified to state that no privity of contract existed between C & S and the 1999 Trust at the time the lien was filed and therefore C & S was not entitled to a lien against the 1999 Trust's property. Affirmed with the modification on the invalidity of the lien.

Answers to Case Questions 1. Explain the relationships between and among the 1999 trust and the plant on the 1999 trust property. The Gunigantis created the trust and they transferred the plant property into the trust. The trustee for the trust was Daya Puskoor, Dr. Guniganti‘s brother-in-law. Triple PG was a company they created to run the processing plant on the property. The Gunigantis‘ daughter was a business consultant and also apparently worked for the trust or the plant. And the Gunigantis apparently continued to be involved in operations because they were copied on the e-mail negotiations on the price reductions. All-in-all, it was very confusing just reading the case who was running the show, let alone who had authority to run the show. Even the court says that the contract was negotiated between C & S and Gunigantis. 2. Discuss why the lien status was so important to the Gunigantis and the trust. The lien had to be cleared from the property in some way. The Gunigantis wanted the lien to be declared invalid so that it did not cloud the title, but the status of the lien was left in the air by the trial court‘s judgment. The appellate court modified the judgment to find the lien invalid but did not find that it was created maliciously. 3. Make a list of the lessons you take away if you were a contractor about contract negotiations, contract signatures, and contract modifications. Check the ownership of whatever entity you are contracting with. Find out who owns the land and be sure that their signature or the signature of their agent is on the contract. Get a written contract from the outset. Be careful about modifications and the authority on modifications—who can sign for those changes? And are the same people agreeing who negotiated the first contract? If not, do they have authority. The daughter was not involved at all in the contract negotiations, but she handled the billing dispute and modification.

Answer to Consider (6.1) [Denco‘s] lien affidavit listed Bre Throne as the owner of the property sought to be encumbered. Yet, there is no evidence in the record establishing that either Regency or Bre Throne contracted with Denco or that Body Bar was the agent of either at the time it entered into the contract for improvements or when Denco‘s additional charges supposedly accrued. ―[W]here the contract for labor, materials or construction is not made with the owner or his duly-authorized agent, a lien may not be fixed on his property.‖ The mechanic‘s lien affidavit was not filed until after Regency had sold to Bre Throne.

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The court found that there was no privity of contract and that the lien was wrongfully filed. In addition, the court found the following: We affirm the trial court‘s summary judgment (1) granting Body Bar‘s declaratory judgment claim and (2) disposing of all of Denco‘s claims. We reverse the portion of the trial court‘s summary judgment granting Body Bar‘s breach of contract claim and awarding $25,000.00 to Body Bar. Denco had not fulfilled its contract obligations because its code issues were supposed to be its expertise. Denco CS Corp. v. Body Bar, LLC, 445 S.W.3d 863 (Tex. App. 2014). Cover PRACTICAL TIP on contractor registration for tenants. 6-2b

Who Is Entitled to a Lien? 1. Statutory Categories of Qualifying Lienholders a. Varies from state to state b. Generally i. ii. iii. iv. v. vi.

Laborers Mechanics Materialmen General contractors Subcontractors Architects

2. Licensing Requirements for Qualifying Lienholders—in some states a prerequisite to a lien claim 3. Indirect Privity Requirements: Subcontractors, Vendors, and Suppliers

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a. In contract states—need a direct contractual relationship for lien

b. Consent states—privity would be irrelevant c. Amount of lien i. Some states limit amount of lien to contract price ii. Other states allow total amount to exceed contract price CASE BRIEF: Ontiveros v. Sanchez 3 P.3d 695 (N.M. C.A. 2000) FACTS:

Ricardo and Geraldine Sanchez and Nancy Bustamante (Homeowners) each contracted with William C. Parker, the general contractor, for the construction of their respective homes. The original contracts specified that the Sanchezes would pay $63,000 and Bustamante would pay $73,000 for the completed homes. Parker purchased building materials, which included doors and windows, from Rawson and hired Ontiveros to install insulation and a heating system. The services and materials were provided for the homes as contracted for by Parker, and the parties agree that, as a result, value was added to the homes. Unfortunately for all involved, Parker, the general contractor, declared bankruptcy prior to completing construction of the homes, but after Subcontractors had provided the labor and materials. At the time of bankruptcy, Parker had finished some portion of the work. Also, at this point in time, the Sanchezes had paid Parker $26,000, or approximately 41% of the original contract price, and Bustamante had paid him $45,000, or approximately 62% of her original contract price.

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Upon Parker's default, homeowners completed their homes by other means. Completion of each home ultimately cost the Sanchezes $125,456 and Bustamante $120,851, including the cost of purchasing the land. The postconstruction appraisal of the Sanchez and Bustamante homes ultimately exceeded the actual costs of construction by approximately $19,000 and $20,000, respectively. While the stipulated facts do not indicate the pre-construction appraised value of Bustamante's home, such that any comparison can be made, the post-construction appraised value of the Sanchezes' home was $14,000 greater than the pre-construction appraisal. Both subcontractors filed suit for unjust enrichment. The trial court found for the subcontractors and the homeowners appealed. ISSUE:

Can a subcontractor recover from a homeowner when the general contractor for the home fails to pay the subs?

DECISION:

In the case, yes, because there would be unjust enrichment as the homeowners have property worth more than they paid in construction and their default has put the subs into the position of having nowhere to turn because the general contractor is bankrupt as well.

Answers to Case Questions 1. What happened with the general contractor? The general contractor went bankrupt before paying the subcontractors for their supplies and work. 2. What percentage of the contract price had been paid? The homeowners had paid 41% and 62% of their contract purchase price to the general contractor. 3. Where are the homeowners now and how much are their homes worth? The homeowners defaulted on their mortgages and the homes are in foreclosure and they are in bankruptcy and the subcontractors are simply trying to collect some of the proceeds from the sale of the homes in foreclosure. 4. Why does the court make an exception and allow the subcontractors to recover? The court allows the subs here to collect because the homeowners had not suffered. Indeed, they were in a better position and their default put the subs in an untenable position—the subs had tried every avenue to collect the amounts due, but the general contractor was bankrupt and then the homeowners went bankrupt with a foreclosure that would bring more than they owed and more than they had invested in the home. 5. What is a quasi contract? Quantum meruit? Unjust enrichment? These three terms are synonymous for the equitable remedy of compensating someone who may not have a direct contract, but has furnished another with work or materials that increase their value—to prevent someone taking advantage of another, the courts imply the existence of a contract and award payment under that contract.

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Answer to Ethical Issue (6.1) The homeowners were trying to use lien laws to their advantage to avoid paying for the work actually done. The statute may have been ambiguous, but the value and work were not.

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6-2c

What Property Is Subject to a Lien? 1. Real property 2. Structures—not simply structures that were the subject of the work 3. Applies to the whole property 4. Attaches to both building and lot 5. Government immunity and exemptions from liens

6-3 Procedural Aspects of Obtaining a Lien (OBTAIN FORMS AND PROCEDURES FOR YOUR OWN STATE)—USE POWERPOINT SLIDES 6-17 TO 6-21

A. Preliminary Notice Step (prenotification procedure) 1. Given by those without privity of contract 2. Served upon all parties involved a. Owner of property b. General contractor c. Construction lender 3. Only alerts parties to a. Who is doing what work b. The possibility of a lien 4. Party giving notice should have proof that all received copies B. Perfection of the Lien 1.

Must file lien in land records office

Must file within a certain statutory time (will vary from state to state)

Lien should have accurate land description

C. Execution of the Lien 1.

Must be done within a specified statutory period

Bring suit or enforce or lien is lost

CASE BRIEF: Wagner Interior Supply of Kansas City, Inc. v. Associated Drywall Contractors, Inc. 318 P.3d 577 (Kan. App. 2014) FACTS:

On April 19, 2010, Associated Drywall Contractors, Inc. entered into a contract for the installation of drywall with DGP Construction Company, the general contractor, for the construction of a Best Western Hotel in Wyandotte County, Kansas. The hotel building and real property are owned by Jay Ambe Property LP. Jay Ambe and DGP are under the common control and ownership of Dilip Patel, who is the president of DGP and the sole general partner of Jay Ambe.

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Wagner is a distributor of construction products, including drywall and related materials. In 2010 and 2011, Wagner supplied drywall materials to Associated Drywall for use in the Best Western construction project. Wagner timely delivered to the hotel the materials and supplies bargained for under the materials contract with Associated Drywall. DGP paid Associated Drywall in full for its work and the materials supplied under the drywall subcontract. The Best Western ultimately was completed and opened for business. On or about May 18, 2011, DGP issued two checks jointly payable to Associated Drywall and Wagner. One check was in the amount of $13,006.41, and the other was in the amount of $16,382.46. Wagner endorsed the checks over to Associated Drywall. The joint checks were endorsed over to Associated Drywall because the two companies were working together on a number of projects. Associated Drywall paid Wagner for materials with its own checks, and Wagner applied the payments to various accounts as designated by Associated Drywall. However, Wagner ultimately failed to receive payment from Associated Drywall for $34,626.36 worth of materials it delivered to the Best Western. On July 25, 2011, Wagner timely filed a mechanic's lien against the hotel property. Wagner attached a general warranty deed to the mechanic's lien statement, and the deed contained a legal description of the hotel real estate and identified Jay Ambe as the owner. Wagner also attached its unpaid invoices which included Wagner's business address. The lien statement was signed and verified by John Phillip Garcia, who was employed as Wagner's controller. The lien statement claimed that Wagner was owed $34,626.36 on the Best Western construction projects. On December 8, 2011, Wagner filed a petition against Associated Drywall, DGP, Jay Ambe, and other parties to recover the unpaid value of the materials and supplies used in construction of the Best Western and for foreclosure of Wagner's mechanic's lien. Jay Ambe and DGP filed an answer alleging that Wagner's mechanic's lien failed to meet the statutory requirements of K.SA. 60–1101 et seq. and, therefore, Wagner could not foreclose on its lien. The district court found that Wagner's mechanic's lien was fatally deficient because the lien statement failed to verify Wagner's address for service of process as required by K.SA. 60–1102 and K.S.A. 60–1103. The district court specifically found that the lien statement failed to properly verify Wagner's address for service of process even though the invoices attached to the lien statement included Wagner's address. Wagner appealed. ISSUE:

Was the lien valid?

DECISION:

Wagner's mechanic's lien statement was deficient because the statement failed to verify Wagner's address sufficient for service of process as required by K.SA. 60–

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1102(a). Although Wagner's lien statement included attached invoices that contained Wagner's business address, Jay Ambe and DGP argued that the lien statement itself made no reference to the invoices in relation to Wagner's address. Jay Ambe and DGP also argued that Wagner did not properly verify its mechanic's lien statement because the statement was signed by Wagner's controller, Garcia, who did not identify his affiliation with Wagner. In its journal entry of judgment, the district court did not address the argument by Jay Ambe and DGP that Wagner did not properly verify its mechanic's lien statement because the statement was signed by Garcia who did not identify his affiliation with Wagner. Instead, the district court ruled that Wagner's mechanic's lien statement was fatally deficient because the statement failed to verify Wagner's address sufficient for service of process as required by statute. In reaching its decision, the district court relied on this court's decision in Buchanan v. Overley, 178 P.3d 53 (Kan. 2008). Returning to the facts of our case, the lien statement at issue designated the claimant as ―Wagner Interior Supply of Kansas City, Inc.‖ The lien statement was signed and verified by ―John Phillip Garcia.‖ Garcia was Wagner's corporate controller. However, the lien statement itself does not indicate that Garcia was signing and verifying the statement as an agent of the corporation. Instead, Garcia seemingly signed and verified the lien statement as an individual claimant, whereas the real claimant was Wagner Interior Supply of Kansas City, Inc. Although the lien statement herein was filed on behalf of a corporate materials supplier, the individual who signed and verified the lien statement did not indicate that he was an agent signing on behalf of the corporation. Wagner has failed to properly verify its lien statement in accordance with the applicable statute. Wagner's lien statement was not properly verified, and the district court did not err in denying Wagner's request to foreclose the lien. Although the district court did not rely on this reason in denying the lien foreclosure, a district court's decision will be upheld if it is correct for any reason. Because we conclude that Wagner's lien statement was not properly verified, we will not address whether Wagner's mechanic's lien statement was deficient because the statement failed to verify Wagner's address sufficient for service of process as required by K.SA. 60– 1102(a). Affirmed.

Answers to Case Questions 1. Why did the trial court deny Wagner the right to foreclose on the lien? Because it did not contain the address on the form. 2. Why does the appellate court affirm the decision to not allow foreclosure on the lien? Because the person who signed the lien did not identify himself as an agent of the creditor. © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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3. Make a list of what suppliers and subcontractors, as well as owners and general contractors, can learn about liens from this case. Be very careful about how payments are made, identified, and structured. If you have to file a lien, be certain that every portion of the lien form is completed including the address as well as identification of the person filing the lien. Set up payment pools that require verifications of payment.

Answer to Consider (6.2) Once National City asserted its lack of notice at the summary judgment stage, Hillside had to prove that Hillside actually received notice. Hillside admitted that it could not produce documentation that it even sent notice, let alone documentation that notice was received. Consequently, the trial court granted summary judgment for National City. The lien is not valid. Hillside could try and collect as an unsecured creditor of the Jakinows, but it had no rights in the real property. National City Mortg. v. Hillside Lumber, Inc., 966 N.E.2d 1076 (Ill. App. 2012). 6-4 Priority of Lien Interests—USE POWERPOINT SLIDES 6-22 TO 6-28 6-4a

Attachment of Lien 1. Controlled by states' definitions of when the law attaches a. In majority of states—attachment goes back to the date construction began (filing date is irrelevant so long as done within allotted time) b. Second group of states—attachment at time lienor's individual work began c. Other states—attachment is as of the date of filing Example:

January 15, 2020—construction began July 15, 2020—construction ended July 30, 2020—mortgage recorded August 15, 2020—plumber filed lien

States where attachment dates back—plumber has priority States where attachment is upon filing—mortgage has priority 6-4b

Rights of Purchasers 1. Controlled by states' rules on attachment 2. Residential property exemption in some states that protects new home buyers from liens by subs, etc.

CASE BRIEF: Ground Control, LLC v. Capsco Industries, Inc. 214 So.3d 232 (Mississippi 2017) FACTS:

In 2009, sub-subcontractor Ground Control, LLC sued subcontractor Capsco Industries Inc. for payment for work on the Margaritaville Hotel in Biloxi. Ground Control also sued the project's general contractor, Yates, and owner, Harrah's

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Entertainment, Inc. (Harrah's) (defendants). But the trial court discovered Ground Control's subcontract with Capsco was void by statute, because neither party had a certificate of responsibility, as required under Mississippi law. The trial court granted the defendants summary judgment on all of Ground Control's claims because they stemmed from the void subcontract. The case was remanded for further proceedings on unjust enrichment and quantum meruit. On remand, Ground Control supplemented its complaint against Capsco with claims for contract damages as a third-party beneficiary of the contract between Harrah‘s and Yates. During a six-day trial, Frank Beaton, the principal of Ground Control, testified that Ground Control had $920,252.80 in unpaid labor and materials. But on crossexamination, he admitted some expenses were counted twice or did not apply to the Margaritaville project. He also admitted that his company had been paid more than a half-million dollars before it stopped working on the project. Beaton conceded that, once the figures were added up, Ground Control's claim for unpaid labor and services was only $199,096. The trial court granted a directed verdict for the defendants, on all counts except quantum meruit, including the third-party beneficiary claim. The jury found, under quantum meruit, that Ground Control was entitled to $862,228, and apportioned the liability 95.75% to Capsco ($825,583.31) and 4.25% to Harrah‘s ($36,644.69). Beaton and Ground Control appealed on their third-party beneficiary claim. Capsco and Yates appealed on the amount of the judgment on quantum meruit. ISSUE:

Can a sub-subcontractor that lacks a certificate of responsibility recover for work completed from the subcontractor? From the contractor? From the owner?

DECISION:

The court found the following: 1. Ground Control‘s contract claims failed because there was no relationship with Yates or Harrah‘s. 2. There was no intent to benefit Ground Control under a third-party beneficiary contract relationship. 3. Because Ground Control lacked a license, it could not use quantum meruit as a theory because public policy required licensed contractors for liens. 4. The amount of damages awarded was incorrect because Ground Control could not recover without a license. 5. The court reversed and remanded only for the amount of quantum meruit damages being $199,096.

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Answers to Case Questions 1. Outline the parties involved in the contract and their relationship. Yates was the contractor for Harrah‘s for building the Margaritaville hotel. Ground Control was a subcontractor and Beaton was the owner. 2. List all of the theories Ground Control used to recover for its work. Contract recovery; lien recovery; third-party beneficiary theory; lien foreclosure. 3. What testimony resulted in a contradiction to Ground Control’s claim for damages? The amount being claimed was actually for other projects and Beaton admitted he had overstated. 4. Why can’t Ground Control recover under a contract theory? Because it lacked a contractor‘s license. 5. Why can’t Ground Control recover under a third-party beneficiary theory? It would be against public policy to allow him to recover because a contract and liens required a licensed contractor. 6. What is the public policy issue that arises because Ground Control was not licensed? That if recover was allowed then there would be unlicensed contractors doing work and the quality would suffer.

Answer to Consider (6.3) The court held that because a lien had been created validly that communication between the owner and a subcontractor was perfectly appropriate for the owner to get the lien removed and the sub to get paid. Furthermore, the sub had waited a long time to be paid and the money that was paid should have been paid to Pioneer and was not—Pioneer was just working to obtain its payment. South Texas Pioneer Millwork v. Favalora Constructors, Inc., 90 So.3d 1092 (La. App. 2012). 6-4c

Priority Among Mechanic's Liens (VARIES FROM STATE TO STATE) 1. All liens are equal dating back to start of construction 2. Liens given priority according to the date of views filing 3. Certain lienors (wage earners) given priority over other lienors 4. Liens given priority according to the time the individual lienor's construction began 5. Common law rule—dates back to time of construction beginnings (majority of states) a. Definition of beginning varies b. Most states—any equipment, work or workers is the start of construction 6. Insufficient funds to pay equal priority mechanics Example:

A's lien

$15,000

$15,000 left

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B's lien

$10,000

to be

C's lien

$ 5,000

distributed

$30,000 Proportions: A

$15,000 = 1/2 $30,000

$10,000 = 1/3 $30,000

$ 5,000 = 1/6 $30,000

A = 1/2 x $15,000 = $7,500 B = 1/3 x $15,000 = $5,000 C = 1/6 x $15,000 = $2,500 6-4d

Mechanic‘s Liens and Fixture Filings 1. Governed by U.C.C. Article IX 2. PMSI can have priority if financing statement recorded prior to fixture attachment or within 10 days of attachment

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6-4e

Mechanic‘s Liens and Homestead Exemption 1. Protection for homeowner 2. Prevents lien foreclosure where property is used as a residence 3. Amount varies from state to state

6-4f

Mechanic‘s Liens and Mortgages 1. States' date of attachment of lien will control who has priority 2. Construction lenders in beginning of construction rule states should make sure no work has begun before mortgage is recorded

6-5 Termination of Mechanic's Liens—USE POWERPOINT SLIDES 6-29 TO 6-31 6-5a

Waiver or Release by Agreement 1. Recognized as valid in some states in the original contract, in other states invalid 2. Can be validly given during or after construction 3. Go over language in text 4. Release a. Given after payment b. Should be recorded 5. Breach a. b. c. d.

Contractor does not perform according to terms of contract Cannot validly execute a lien If executed, owner can reduce lien by amount of damages owed for breach Breach of contractor can (in some states) be a defense for the owner against subs

6. Sale a. Does not terminate lien b. Property is subject to the lien 7. Operation of Law—lien is lost if not foreclosed upon within statutory period (6 months)

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USE FIGURE 6.2 AND POWERPOINT SLIDE 6-31 TO SUMMARIZE LIEN ISSUES. 6-6 Lien Alternatives—USE POWERPOINT SLIDES 6-32 AND 6-33 A. Some States Now Enacting Statutes to Affect Fund Disbursement Instead of Waiting for Liens B. Stop Notice Statutes or Trapping Statutes 1. Suppliers and subcontractors notify fund disbursers of their interests 2. Disburser can stop payment until issues are resolved C. Issues About Alternative Statutes Remain 1. Liability for stopping payment 2. Halt in all payments 3. Due Process 6-7 Constitutionality of Mechanic's Liens—USE POWERPOINT SLIDES 6-34 AND 6-35 A. Most Lien Statutes Have Been Declared Constitutional B. Supreme Court 1. Did not address issue (417 U.S. 901 (1974)) 2. Affirmed Spielman-Ford, Inc. v. Handon's, Inc., 379 F.Supp. 997 (Ariz. 1973)

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Additional Activities and Assignments Answers to Chapter Problems 1. The court held that S & H and Miller were subcontractors of Gisick who failed to perfect their liens as subcontractors by giving the statutorily required notice to the owners and struck down their liens. The court also held there was not enough proof to establish a relationship with the homeowner for purposes of payment and that there was also a problem with procedural compliance. The following excerpt from the court‘s opinion explains its conclusion: There is no question that Miller and S & H did not comply with the statutory requirement that subcontractors give the owners this warning statement. The case turns on whether Miller and S & H were subcontractors of Gisick, the general contractor, or whether they had independent, direct contracts with the Tarltons to supply materials and labor to the project. Whether contracts existed between the Tarltons and these claimants are questions of fact. © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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First, we must determine who has the burden of proof on the issue of the status of Miller and S & H vis-a-vis the Tarltons. The Tarltons brought this interpleader action against a number of suppliers on the project. They claimed in their petition that S & H and Miller ―have or may have claims.‖ The Tarltons tendered into court $13,389.17, ―the amount remaining for distribution and payment to the Defendants now making claims.‖ The Tarltons did not ask for affirmative relief with respect to the lien claims of S & H and Miller. The Tarltons denied the allegation that a contractual relationship existed between them and S & H and Miller. S & H and Miller acknowledged the duty of subcontractors to provide the warning statement described in K.S.A. 60–1103a but asserted that they were direct contracting parties with the Tarltons and not subcontractors of Gisick, the general contractor. S & H and Miller have the burden of bringing themselves within the aegis of our mechanic‘s lien laws. Their lien claims are at risk if they cannot establish what they claimed in their counterclaim: that they are not subcontractors of Gisick but direct contracting parties with the Tarltons. Accordingly, they have the burden of proof on the claim that they had contractual relationships with the Tarltons. There were at least eight separate documents with different dates wherein [S & H] sold materials to Gisick Construction, who then provided the materials to the plaintiff.... Even though [S & H] attempts at this time to claim Gisick was only an agent of the [Tarltons], the documents make it clear Gisick was the contractor and [S & H] was the sub-contractor.... There was no warning statement sent, and therefore, the lien is defective and ... must be cancelled. The documents before the court clearly indicated that S & H was a subcontractor of Gisick. Each of the invoices that S & H relies on contains the statement: ―Sold To Gisick Const.‖ Nevertheless, S & H maintains on appeal that the Tarltons entered into an oral contract with Gisick, who was the Tarltons‘ agent for supplying materials for the project. There is no evidence that Gisick was the Tarltons‘ agent. He contracted to build a home for them, not to serve as their agent. ―[W]here the relationship of principal and agent is in issue, the party relying on an alleged agency relationship has the burden of establishing its existence by clear and satisfactory evidence.‖ The evidence supporting Miller‘s lien claim consists of two documents attached to Miller‘s lien statement: an invoice and a sales order form. These two documents are the entirety of the documentary evidence bearing on the issue of Miller‘s relationship to the Tarltons. The invoice was generated from information contained on the sales order form. The sales order form lists ―Chris and Sara Tarlton‖ as the customer. However, the ―Special Instructions‖ portion states: ―Send to Chad.‖ This apparently refers to Chad Gisick, the general contractor. Send what to Chad and at what location? Clearly not

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the purchased items of carpet, laminate, and tile. There would be no reason to deliver these items to the general contractor rather than to the job site. After all, Miller was responsible for installation of at least part of the materials, and the flooring in particular. There would be no reason to send these materials to Gisick rather than to the job site. However, if this reference on the document means that the materials should be sent to Gisick, that would tend to prove that Gisick was the contracting party, not the Tarltons. On the other hand, ―Send to Chad‖ may refer to this sales order form itself, not the materials being sold. If that is the case, then this would also tend to prove that Gisick was the contracting party. Otherwise, why would Gisick have any interest in what particular flooring and tile the Tarltons selected or what they agreed to pay for it? A notation on the bottom of the sales order form suggests the latter alternative. The form states: ―Miller‘s make no express warranties. We honor and follow factory warranties only. Orders are noncancelable upon manufacturer‘s acceptance. Please review policies on reverse side of your ticket. Accepted By: X Phone (Chad Gisick).‖ We find no explanation in the evidence why Miller would obtain Gisick‘s acceptance of the order if the Tarltons were the contracting parties. Miller had the duty to come forward with evidence from which one could conclude that it is more probably true than not that the Tarltons were the contracting party, not Gisick. From what meager evidence was provided, we cannot say that Miller met its burden of proof. Tarlton v. Miller’s of Claflin, 227 P.3d 23 (Kan. App. 2010). 2. The court held that CK could enforce its lien. The court held that: a. Materialman that was barred by debtor's Chapter 7 filing from taking any action to enforce its materialman's lien could preserve its lien, and prevent lapse thereof, only by giving notice of lien; b. Even assuming that materialman could give notice of its lien, as required to maintain perfection thereof, simply by filing proof of claim in debtor's Chapter 7 case, its proof of claim, which was filed 182 days after it last furnished labor or materials to debtor's property, was untimely; and c. Under North Carolina law, 180-day period for commencement of action to enforce materialman's lien is not the statute of limitations, but an element of enforcement action, that is not tolled by bankruptcy proceeding. In other words, the lien right existed when CK properly filed—bankruptcy did not discharge his rights even if he did not file within 180 days in the bankruptcy court from the time of his work completion. In re Orndorff Const., Inc., 394 B.R. 372 (M.D.N.C. 2008). 3. Notice should have been given to those occupying the home; failure to do so costs them the lien. Lien is invalid. Barker v. Brownsburg Lumber Co., Inc., 399 N.E.2d 426 (Ind. 1980); see also Gravett v. Covenant Life Church, 841 A.2d 342 (Md. App. 2004).

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4. Beginning construction states—A, B, C, D and E have equal priority as of August 1, 2020. If the mortgage was recorded prior to the start of work on August 1, then the mortgage has priority over A, B, C, D and E. Filing states—mortgage has first priority. A, B, C, D and E have equal priority unless filed at different times—would have priority according to their times. Beginning individual project states—(if mortgage recorded prior to B's work—priority). Priority B, D, E, C and A. 5. Beginning construction states—workmen have priority Filing states—homeowners win Beginning individual work states—workmen 6. Neither construction contractor’s act of staking out improvements nor its soil testing constituted act that could be considered component-part of structure; therefore, neither act was sufficient to establish effectiveness of contractor’s mechanic’s lien and give its lien priority over mortgage filed after such acts took place. Bank One properly filed its open-end mortgage on May 31, 1989. Therefore, the mechanic’s lien will take priority over appellee’s mortgage only if visible work or labor was performed or materials were delivered prior to May 31, 1989. Schalmo Builders, Inc. v. Malz, 629 N.W.2d 52 (Ohio App. 1993). 7. Mechanics’ lien claims against owner and owner’s mother were invalid due to lack of agency relationship between contractor, owner, and owner’s mother, where subcontractors’ belief that contractor was acting as owner’s and mother’s agent in contracting for work was reasonable. Thomas Hake Enterprises, Inc. v. Betke, 703 N.E.2d 114 (Ill. App. 1998). 8. In most states Morris would not have a valid lien because the filing was not where the properties were located, the amount was wrong and the procedural requirement of notice of commencement of work had not been met. The key for the students is that liens require strict procedural requirements because they are placed on property unilaterally and without court supervision, but they do affect title and the ability to transfer and mortgage property. Here the filing was so incorrect and so wrong on the amount that it bordered on bad faith. The court refused to find that there was fraud but found that the lien was not valid. In re Spire Communications, Inc., 2002 WL 1343463 (Bank. Ct. D. Del. 2002). 9. The court did not permit the lien—below is an excerpt from the court‘s opinion: The purpose of the Mechanics Lien Act (770 ILCS 60/1 et seq. (West 2006)) is ―to require a person with an interest in real property to pay for improvements or benefits which have been induced or encouraged by his or her own conduct.‖ Section 1 of the Act requires that a person must enter into a contract with the owner of the land, ―or with one whom the owner has authorized or knowingly permitted‖ to contract with the person, to improve the land in order to be entitled to a lien. 770 ILCS 60/1 (West 2006). Nevertheless, in order to perfect that lien, the contractor must record its lien claim in the office of the recorder of deeds in the county in which the property is located within a certain amount of time. 770 ILCS 60/ 7 (West 2006). In order to assert a lien against a third party, such as a ―creditor or incumbrancer or purchaser‖ of the property, the contractor must record the claim within four months after it completed

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work. 770 ILCS 60/7 (West 2006); This four-month recording time requirement is intended to give third parties dealing with the property notice of the lien. However, the need for notice is ―less significant‖ when a contractor seeks to enforce a lien against a party with an ownership interest in the property. Thus, a contractor has two years from the date it completed work under the contract to record its lien claim against an owner. 770 ILCS 60/7 (West 2006); see also Norman A. Koglin Associates, 176 Ill.2d at 391, 223 Ill.Dec. 550, 680 N.E.2d at 286. This scheme evidences the secondary purpose of the Act, which is to protect the innocent from having their interests in real estate encumbered by liens of which they may be unaware and have no reasonable opportunity to ascertain or avoid Here, the parties do not dispute that IRE was not the owner of the premises when Max & Benny's was authorized to contract with Stafford-Smith, as contemplated by section 1 of the Act. Rather, Stafford-Smith claims that IRE is an owner for purposes of section 7 of the Act because IRE could have been a beneficial owner of the premises under the doctrine of equitable conversion at the time of the October 4, 2005, contract. The doctrine of equitable conversion provides that when the owner of land enters into a valid and enforceable contract for its sale, the owner continues to hold the legal title to the land but does so in trust for the buyer. Thus, the buyer becomes the equitable, or beneficial, owner. The buyer is also considered to be holding the purchase money for the land in trust for the seller. The doctrine of equitable conversion thus stems from the principle that equity regards as done that which ought to be done. However, the doctrine is not without limitations. Because the doctrine is premised on carrying out the intentions of the parties to a contract, it has been held to have no effect on the rights of third parties to the contract. Equitable conversion has been employed to subject property to a mechanics lien where the purchaser/beneficial owner has contracted for improvements to the property. Whether the seller/legal owner's interest in the property is also subject to the lien depends on whether the seller has knowledge of the purchaser's contract. Here, in contrast, Stafford-Smith seeks to employ the doctrine to define IRE as an owner for purposes of section 7 of the Act. Stafford-Smith maintains that because IRE recorded a deed evidencing its purchase of the property on January 9, 2006, IRE ―must have been‖ a beneficial owner of the property at some unspecified earlier date ―significantly before the deed was transferred.‖ There is no evidence of such a contract in the record. We decline to accept such an argument for three reasons. First, we will not engage in such speculation as to assume that IRE entered into a contract to purchase the property at some earlier date where there is no such suggestion in the record. There is similarly nothing in the record to suggest that IRE authorized Max & Benny's to contract with Stafford-Smith. Second, our research has revealed no cases employing the doctrine to impose a lien against a purchaser's interest in land as a result of a © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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seller's failure to pay for improvements for which the seller contracted. To extend the doctrine of equitable conversion in this manner would be for the benefit of a third party, namely, the contractor, which the doctrine was not designed to do. Third, to consider IRE an owner as opposed to a purchaser would deprive IRE of advance notice where IRE might not have been aware of the contract between Stafford-Smith and Max & Benny's because the contract predated IRE's ownership of the property.. This would run contrary to the Act's secondary purpose of protecting innocent parties from liens of which they may be unaware and have no opportunity to defend against. Because IRE was not the owner at the time of the contract between Max & Benny's and Stafford-Smith, we find that IRE was a purchaser within the meaning of section 7 of the Act (770 ILCS 60/7 (West 2006)). Thus, to enforce its lien against IRE, StaffordSmith would have had to record a proper lien claim within four months of the completion of its work under the contract. 770 ILCS 60/7 (West 2006). Stafford-Smith admits that it failed to do so here. Therefore, Stafford-Smith cannot enforce its lien claim against IRE or any other ―creditor or incumbrancer or purchaser.‖ Accordingly, we affirm the order of the circuit court of Cook County dismissing count one of Stafford-Smith's complaint against IRE with prejudice. Affirmed. StaffordSmith, Inc. v. Intercontinental River East, LLC, 881 N.E.2d 534 (Ill. App. 2007). 10.

The court found that the absence of a correct address was a fatal flaw for the lien. Below is an excerpt from the opinion as well as a dissent: The purpose of a mechanic‘s lien statute is to afford security to any persons or entities furnishing labor, equipment, material, or supplies used or consumed for the improvement of real property under a contract with the owner or the owner‘s general contractor. While we liberally construe our mechanic‘s lien statute once a lien has attached, Kansas law requires strict compliance with the procedure prescribed in the statute in order to perfect a mechanic‘s lien. Haz-Mat Response, Inc. v. Certified Waste Services Ltd., 259 Kan. 166, 170, 910 P.2d 839 (1996). The statute does not require the filing of any particular form of mechanic‘s lien statement, only that the requisite information be included. A verified mechanic‘s lien statement need not be composed of a single document. In fact, K.S.A. 60-1102(a) specifically contemplates the incorporation by reference of information contained in an attachment to the mechanic‘s lien statement. K.S.A. 60-1102(a)(4) permits the attachment of a promissory note to the claim in lieu of an itemized statement. Nevertheless, Kansas law is clear that a mechanic‘s lien statement must not only contain the requisite information but also be fully verified. The problem in the present case arises when we consider whether Buchanan properly verified his address. Here, Buchanan used a preprinted lien statement form that identified the Overleys as the owners, Buchanan as the contractor, the legal description of the property, and the amount claimed for which a lien was asserted. It also specified that ―said labor and materials and the items thereof, as nearly as

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practical, are set forth in the bill of items hereto attached, made a part of this statement, and marked Exhibit ‗A‘.‖ (Emphasis added.) There followed Buchanan‘s signature and his verification of the truth of his lien statement. Exhibit A, attached to the lien statement, consisted of a multitude of bills and invoices for labor and materials provided to the project, many of which contained a mailing address for Buchanan in Derby. The contract between Buchanan and the Overleys was a cost-plus contract that obligated the Overleys to ―pay for all materials and labor required to construct the residence to the point of occupancy.‖ Buchanan‘s fee was ―a 10% contracting fee‖ applied to the overall cost of construction. The invoices attached to Buchanan‘s lien statement, which showed his address, were invoices sent to him by suppliers of labor and materials to the project. The address for Buchanan shown on the invoices was the address used by the suppliers. The present dispute is typical of those between owners and contractors. An owner who is dissatisfied with the adequacy of the work often stops progress payments to the contractor and demands corrections. When negotiations stall, either the contractor files a mechanic‘s lien, or the owner hires another contractor to complete the job and files an action against the original contractor for breach of contract, or both. In 1992, the legislature amended K.S.A. 60-1102 to require that the lien claimant provide an address sufficient for service of process. The purpose of the 1992 amendment is to provide the owner with an address in order to perfect service of process on the contractor in, for example, such a breach of contract suit. Here, an address for Buchanan was contained in the invoices incorporated by reference into the lien statement. There apparently is no contention that the address was insufficient to effect service of process on Buchanan. However, it has long been the law of this state to demand strict compliance with our statutory requirements in order to perfect a mechanic‘s lien. This court is duty bound to follow Kansas Supreme Court precedent, absent some indication the court is departing from its previous position. In summary, the statute requires that the claimant verify the truth of the facts asserted in the mechanic‘s lien statement. The mechanic‘s lien statement asserted that the labor and materials supplied to the project were set forth in the attached Exhibit A. Buchanan verified this fact: that the labor and materials supplied to the project were set forth in Exhibit A. He did not state, nor did he verify, his address for purposes of service of process, as required by the statute. Accordingly, Buchanan failed to comply with the requirements of the statute for perfection of a mechanic‘s lien. Because Buchanan failed to strictly comply with the requirements of K.S.A. 60-1102 by not verifying his address sufficient for service of process, the district court erred in holding that the lien was valid.

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Reversed. DISSENTING OPINION Greene, Presiding Judge I respectfully disagree. Examining the lien statement itself, there is no question that the ―address sufficient for service of process of the claimant‖ is present at least 21 times on the attachments referenced as Exhibit A and ―made a part of [the lien] statement.‖ Jerry and Carol Overley concede as much but argue that Buchanan failed ―to include his address on the face of the lien statement‖ and failed to verify the address as sufficient for service of process. There is no contention that the address shown on the invoices was incorrect or otherwise inadequate for service of process. With all due respect to my colleagues, however, I believe they have taken ―strict compliance‖ to a level never before required by our case law and beyond. I believe we should recognize that liens for labor and material are codified within our code of civil procedure and subject to its general rule that its provisions ―shall be liberally construed and administered to secure the just, speedy and inexpensive determination of every action or proceeding.‖ For all of these reasons, I would affirm the district court. Buchanan v. Overley, 178 P.3d 53 (Kan. App. 2008).

In-Class Exercise 1. Janet Lowe hired Gem Construction, Inc. to complete a renovation on her small office complex. Janet paid Gem the full contract price of $225,000. However, Janet has learned Gem failed to pay the drywaller (PBX Drywall, Inc.—$12,000), the plumber (White Plumbing, Inc.—$36,000), the roofing contractor (Cherry Tops, Inc.—$60,000), and the flooring company (The Flooring Company—$24,000). Gem is now bankrupt. Demands for payment forced Ms. Lowe into bankruptcy. After sale of her building and satisfaction of the first mortgage, there is $60,000 left to be distributed among the various subcontractors. Using the text example as a format, how much will each subcontractor be paid? Would the answer be different under your state law? 2. Have students read the following case and answer the discussion questions. DUNLAP V. HINKLE 317 S.E.2d 508 (W.Va. 1984) In October 1981, Robert E. Hinkle (appellee) leased to Raymond Arington the Raina or Dixie Plaza in Upshur County, West Virginia. The lease agreement contained the following clause: Any improvements made to the leased premises shall, upon termination of this lease or the termination of any extension thereof become the property of the lessor.

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Arington hired Dunlap and others (appellants) to do electrical and carpentry work to a building located on the premises. Arington went out of business shortly thereafter, owing Dunlap money for wages and materials. On 3 March 1982, Dunlap filed a mechanic's lien against the property. That same day he filed a suit to enforce the lien against Arington and Hinkle. The trial court dismissed the suit on the grounds that there was no express or implied contract between Hinkle and Dunlap and that the lack of privity prevented the attachment and foreclosure of a lien on his property. Dunlap appealed. McHUGH, Chief Justice The issue in the case before us revolves around the interpretation of W.Va. Code, 38-2 1 (1931). That statute provides as follows: Every person, firm or corporation, which shall erect build, construct, alter, remove or repair any building or other structure, or other improvement appurtenant to any such building or other structure, under and by virtue of a contract with the owner for such erection, building, construction, alteration, removal or repair, either for an agreed lump sum or upon any other basis of settlement and payment shall have a lien upon such building or other structure or improvement appurtenant thereto, and upon the interest of the owner thereof in the lot of land whereon the same stands, or to which it may have been removed, to secure the payment of such contract price or other compensation therefore. Lilly v. Munsey involved a lease wherein the owners of a certain parcel of real estate leased such real estate to the lessee for the purpose of constructing and operating a race track, "and it was provided that the said lessee was authorized to erect all buildings necessary to the operation of the said race track, or for any other lawful purpose, on the land owned by...[one of the lessors]...and included in said leased premises" (63 S.E.2d at 520). The lessee hired the plaintiff to construct the racetrack which included grading work. The plaintiff was not paid for the grading work and he filed a mechanic's lien against the property interest of the lessors and sought to enforce it in the circuit court. This Court reversed the circuit court's judgment in favor of the plaintiff and held as follows: A mechanic's lien for supplies and labor used and employed in the improvement of real estate, to bind the interest of the owner of such real estate, or any interest therein, must be based on contract for such improvement with such owner, of said real estate or interest therein, or his duty authorized agent. This Court's holding in Lilly v. Munsey is in accord with the general view that: In the absence of some special provision creating a lessee as an agent for the lessor, the mere relation of lessor and lessee does not make the lessee the agent of the lessor to contract for work on leased premises, although the interest of the lessee in the land, created by the lease, may be made the subject of a mechanic's lien.

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Where the terms of a lease simply authorize a lessee to make improvements to the leased premises, although the improvements become the property of the lessor upon termination of the lease, a party with whom the lessee has contracted to make the improvements may not assert a mechanic's lien against the property interest of the lessor in the leased premises. There must be some other evidence that the lessee was acting as the agent of the lessor in making improvements to the leased premises; however, mere acquiescence or inactive consent by the lessor of the leased premises to the improvements by the lessee is not sufficient to constitute a finding of agency between the lessor and lessee for the purpose of asserting a mechanic's lien against the property interest of the lessor. Usually, a mechanic's lien will arise against the property interest of the lessor if the improvements made to the property by the lessee are performed pursuant to an express agreement between the lessor and the lessee or where the terms of the lease impliedly obligate the lessee to make the improvements. See generally 57 C.J.S. Mechanic's Liens 65(c) (Supp. 1983). However, when such conditions do not exist, as in the case before us, it has been noted that "[I]n determining whether an agency should be implied the courts have often, perhaps of necessity, gone beyond the agreement and into the whole circumstances of the letting in order to find the answer. This Court has held in numerous cases that "[t]he trial court, in appraising the sufficiency of a complaint, should not dismiss the complaint, unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." The complaint in the case before us alleges that "Defendants [appellee and Arington] caused plaintiffs to enter upon the hereinabove described premises during the months of October, November and December, 1981, to perform labor and supply materials in and for the remodeling, rewiring, reconstruction and alterations of said premises" and demands judgment therefor. Although the appellants rigidly assert that they should be afforded relief under W.Va. Code, 38-2-31 (1939), the appellants should not be precluded from asserting a mechanic's lien theory under W.Va. Code, 38-2-1 (1931). Based upon the principles set forth above, the complaint is sufficient to allege that a contract, express or implied, existed between the appellants and the appellee which caused the appellants to perform the labor in question. For the sole purpose of asserting a mechanic's lien against the lessor's property interest in the leased premises pursuant to W.Va. Cod, 38-2-1 (1931), the appellants should be afforded the opportunity, if they so desire, to present evidence, as contained in the lease and surrounding its execution, that Arington was acting as the agent of the appellee when he contracted with the appellants to perform work on the leased premises. Reversed and remanded.

Discussion Questions 1. Who owned the property? 2. Who contracted for the improvements? © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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3. 4. 5. 6. 7.

Is there privity of contract between Hinkle and Dunlap? Why did the trial court dismiss the action for lien foreclosure? What provision in the lease is relevant? Will Dunlap be able to foreclose on the lien? Is there an issue of unjust enrichment involved?

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Resources Bogdanowicz, "Mechanics Liens, Public Projects and the Code: An Uneasy Coexistence," 31APR Am. Bankr. Inst. J. 40 (April 2012). Bohan, "Managing the Risk of Mechanics' Lien Coverage," 8 The Practical Real Estate Lawyer 43 (1992). Bowmar, ―Mechanics‘ Liens: Creation, Perfection or Enforcement in the Face of a Stay,‖ 6 Hofstra Prop. L.J. 153 (1993). Chaskin, "Representing Policyholders in Insurance Cases Leading Lawyers on Educating Clients About Insurance Contracts and Navigating Different Types of Disputes Title Insurance Coverage for Mechanic's Liens," 2012 WL 2166324 (July 2012). Cushman, ―The Proposed Uniform Mechanics‘ Lien Law,‖ 1932 U. Penn. L. Rev. 1083 (1932). Diepenbrock, Schoenfeld and Spencer, ―Lessor Liability for Mechanics‘ Liens Under the California Participating Owner Doctrine,‖ 24 Pac. L.J. 83 (1992). Fowler, ―Lien on Me: An In-Depth Analysis of Tennessee‘s Mechanics‘ Lien Statute with Regard to Real Property,‖ 32 U. Mem. L. Rev. 967 (Summer 2002). Genovese, ―Precision Industries v. Qualitech Steel: Easing the Tension Between Sections 363 and 365 of the Bankruptcy Code?,” 39 Real Prop. Prob. & Tr. J. 627 (Fall, 2004).

Greenwald, ―Substantial Completion as it Relates to the Colorado Mechanic‘s Lien Act,‖ 26 Colo. Law. 45 (February. 1997). Hage, "If You Build It: What You Should Know About Mechanic's Liens in Bankruptcy," 30OCT Am. Bankr. Inst. J. 14 (October 2011). Hess, ―Priority Conflicts Between Security Interests and Washington Statutory Liens for Services or Materials,‖ 25 Gonz. L. Rev. 453 (1990). Hinchey, ―Mechanics‘ Liens,‖ 15 Constr. L. 84 (April 1995). Howdeshell, ―Didn‘t My General Contractor Pay You? Subcontractor Construction Liens in Residential Construction Projects,‖ 61 Fla. L. Rev. 151 (January 2009). Hughes and Dunning, ―Holding on to What You Have Been Paid: Defending a Preference Action Against a Contractor, Subcontractor or Supplier,‖ 16 Constr. L. 15 (January 1996).

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Kirsh, et. al., ―Construction Liens Across Canada: An Updated 2009 Survey,‖ J. Can. C. Const. L. 122 (2009). Little, ―The Rhode Island Mechanics‘ Lien Law: A Plea (and Proposal) for Clarity and Fairness,‖ 3 Roger Williams U.L. Rev. 207 (Spring 1998). McGill, "Liens and Arbitration," 13 Const. L. 3 (April 1993). McGreevy and Hawk, ―What Have We Done to the Lien Waiver?,‖ 23-FEB Prob. & Prop. 53 (January/February 2009). Reed and Jones, ―Construction and Surety Law,‖ 55 SMU L. Rev. 775 (Summer 2002). Robinson, ―Survey of Rhode Island Property Law: An Act Relating to Mechanics‘ Liens,‖ 3 Roger Williams U.L. Rev. 597 (Spring 1998). Rubin and Wordes, ―Life at the Bottom of the Heap: Default Termination from the Subcontractors‘ and Suppliers‘ Perspective,‖ 17 Constr. L. 29 (Apr. 1997). Sauer, ―Ohio‘s New and Improved Mechanics‘ Lien Statutes: In Pursuit of Legitimacy,‖ 22 Ohio N.U.L. Rev. 895 (1996). Silverstein, ―Florida Mechanics‘ Lien Law—Visible Commencement,‖ 7 U. Miami L. Rev. 477 (1953). Simmons, Book Review, Michigan Construction Liens, by John F. Robe, Charlottesville: The Michie Company, 1995, Det. C.L. Mich. St. U.L. Rev. 29 (Spring 1996). Thompson, Real Property, Section 5100 et. seq. Zerman, ―Don‘t Wing It!,‖ 23-JUN Prob. & Prop. 12 (May/June 2009).

Cases Denco CS Corp. v. Body Bar, LLC, 445 (S.W.3d 863 (Tex. App. 2014). Select Portfolio Servicing, Inc. v. Saddlebrook West Utility..., 455 Md. 313 (2017). Tarlton v. Miller’s of Claflin, 227 P.3d 23 (Kan. App. 2010). Waterview Site Services, Inc. v. Pay Day, Inc. 11 A.3d 692 (Conn. App. 2010). [return to top]

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Table of Contents Chapter Objectives .................................................................................................................................................... 184 Key Terms ...................................................................................................................................................................... 184 What's New in This Chapter ................................................................................................................................... 185 Chapter Outline .......................................................................................................................................................... 185 Answers to Case Questions ................................................................................................................... 186 Answer to Consider (7.1) ....................................................................................................................... 187 Answer to Consider (7.2) ....................................................................................................................... 188 Answer to Ethical Issue (7.1) ................................................................................................................. 188 Answer to Consider (7.3) ....................................................................................................................... 190 Answer to Consider (7.4) ....................................................................................................................... 191 Answers to Case Questions ................................................................................................................... 193 Answers to Case Questions ................................................................................................................... 195 Additional Activities and Assignments............................................................................................................... 196 Answers to Chapter Problems ............................................................................................................... 196 In-Class Exercise .................................................................................................................................... 198 Discussion Questions ............................................................................................................................. 201 Discussion Questions ............................................................................................................................. 202 Resources .............................................................................................................................................. 202 Cases ..................................................................................................................................................... 204

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Chapter Objectives The following learning outcomes are addressed in this chapter (see PowerPoint Slide 7-1): 07.01 Discuss the various methods of describing land interests. 07.02 Describe the importance of accurate and complete land descriptions. [return to top]

Key Terms baselines: in the United States Government Survey, the major east–west guidelines bounds: see metes and bounds description grid: the 24-mile square created between each guide meridian and parallel in the United States Government Survey guide meridians: vertical lines placed every 24 miles on the United States Government Survey; intersect with parallels to create 24-mile squares used for describing land parcels metes: see metes and bounds description metes and bounds description: method of land description that begins with a permanent object and then describes the parcel of land through distances and directions parallels: horizontal guidelines in the United States Government Survey plat map: method of land description that relies on a recorded map of a subdivision, with each deed making reference to the map and the particular lot being transferred prime meridians: the key vertical lines in the United States Government Survey principal meridians: see prime meridians range: in the United States Government Survey, the lines placed vertically every 6 miles between the guide meridians section: in the United States Government Survey, 1-mile squares in townships township: term in the United States Government Survey for the 6-mile squares formed between the guide meridians and the parallels United States government survey: national survey of land [return to top]

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What's New in This Chapter The following elements are improvements in this chapter from the previous edition:  New case brief in Section 7-1a on metes and bounds description; sisters feuding over the place-marker, In Re the Estate of Wylie.  In Section 7-2b, eliminated confusing case brief (Hardey v. Shell) and substituted a simpler/newer Consider 7.5 that is easier to understand and fits better with the coverage in this part of the chapter.  Eliminated the older reading from The Practical Lawyer because there was not much value added.  New chapter problem #8 on proper property descriptions, Dickerson v. Davis. [return to top]

Chapter Outline In the outline below, each element includes references (in parentheses) to related content. "CH.##‖ refers to the chapter objective; ―PPT Slide #‖ refers to the slide number in the PowerPoint deck for this chapter (provided in the PowerPoints section of the Instructor Resource Center); and, as applicable for each discipline, accreditation or certification standards (―BL 1.3.3‖). Introduce the chapter and use the Ice Breaker in the PPT if desired, and if one is provided for this chapter. Review learning objectives for Chapter 4. (PPT Slides 1-3). 7-1 Methods of Describing Land Interests—USE FIGURE 7.1 AND POWERPOINT SLIDES 7-2 TO 7-10 7-1a

Metes and Bounds 1. Method of describing parcel by describing location of the boundary lines in relation to some reference point 2. Important to use stable beginning point to insure endurance of description

CASE BRIEF: In Re the Estate of Wylie 226 So.3d 114 (Miss. App. 2017) FACTS:

Vernon Marie Horn Wylie died on March 25, 2006, leaving a 1972 will and a 1979 codicil. The documents left to her daughter, Sheila Russell (Russell), ―the South part of the bottom ... and this is the portion where she has her house situated.‖ and, to her other daughter, Donnie Byrd (Byrd), ―the North part of the bottom.‖ The remainder of her property was divided between her daughters, ―share and share alike.‖ In May 2008, Byrd filed a motion to construe the will, because the description in her mother‘s will was ―confusing.‖ The language in the will was so general that the parties had to go back to the original deed for the property, which was also confusing. The dispute came down to which sister owned how much, and if the

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deed was insufficient, they would both simply have an equal portion of the property under the will‘s residuary clause. The lower court (chancellor) determined that the meets and bounds description was adequate after determining the meaning of its references, an interpretation that favored Byrd. Russell appealed. ISSUE:

Was the description adequate to convey the two parcels? What should be used as the beginning points for the description?

DECISION:

The court found against the sister, Russell. The problem with the will was that the description was far too general. As a result, the parties had to resort to the original deed, that involved their father‘s acquisition of the property. That description was confusing because one of the monuments in the metes and bounds description was reference to water. There was a man-made ditch and a creek. The court used evidence from a surveyor and the language from the deed to conclude that the reference was to the ditch. However, there was other evidence, including a deed transferring property to a cousin that indicated there was a distinction in the mind of Wylie as to the ditch and the creek. The difference between which marker was used meant that there was a difference in acreage each of the sisters received. The court agreed that it was risky to use a man-made ditch as a starting point but declared the description to be valid because reading the deed as a whole it was possible to conclude that the ditch was meant as the starting point. One sister had land records with the Farm Service Agency to show something different, and the appellate court even indicated that it might not agree with the decision. Nonetheless, the court held that the lower court had its reasons and could not reverse because of factual grounding for that decision. The case had significant procedural elements that were excluded here including one sister missing the deadlines for filing due to a battle with her attorney. The whole case seems ugly as two sisters fight over what their mother intended in her will. Affirmed.

Answers to Case Questions 1. Explain why the will was not clear in what land was being transferred to each daughter. The will just had generic references to the south and north part of the property and ―where the house is located.‖ It was impossible to tell from the will what property was intended to go to each sister without reference to the deed. But there were problems in the deed as well with that description. 2. What were the problems with the metes and bound description in the original deed? The deed referred to a water landmark, but there was a creek and there was a man-made ditch. Which

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one was used as a marker for the description affected the size of the acreage that each sister would have. The court recognized that there was risk in using a man-made ditch as a landmark, but risk does not mean that its use made the description invalid. 3. What evidence favored Russell’s interpretation of the deed language? Russell had evidence that she was listed as the owner in Farm Service Agency records. That evidence seemed to show that Wylie acknowledged Russell‘s ownership. There was testimony offered about conversations with Wylie and what she intended. There was evidence in another conveyance that Wylie had referred to Martin Creek branch as a ―ditch.‖ The court even notes that it might have decided a different way in the case but that the lower court had supported its decision with adequate findings of fact and so the interpretation of the lower court stands. 4. List what lessons you learned about the language in wills and deeds from this case. Generic references in wills when awarding real property present problems. Referencing the deed could be helpful, if the deed is clear. But the language in this will was far too general. Deeds require clarity in describing monuments. If there is more than one body of water, be clear in identifying what body of water is the starting point. Could you walk it out based on the description is the determining factor in the validity of metes and bounds descriptions. But, being able to walk it out means that you have to know a starting point, and where there are two starting points possible because of a general description of water—the description could be invalid or you may not get all the land that was contemplated. Families can be brutal when fighting over a will. This case also had significant procedural issues and battles between the sisters and their lawyers and even between one sister and her lawyer. It was ugly. That procedural and personal ugliness was not included, but you can gather from the battle itself that the two sisters were quite involved in getting a larger share of their mother‘s property. The brutality makes it even more important to have clarity in all aspects of property ownership and transfer. Especially in description. Emphasize PRACTICAL TIP on the dangers of relying on old descriptions.

Answer to Consider (7.1) The language provides no reference to the location of the 17-acre tract mentioned, no means within the deed to locate the tract, and no reference within the deed to any existing extrinsic writing which might assist in determining the location. 1) The distances provided have no identified terminal points; 2) the courses are defined only generally (southeasterly, southwesterly, etc.) without angles, so there are no metes and bounds (defined as boundary lines of land, with their terminal points and angles); 3) the reference to the ―northwest corner of a 17-acre tract‖ does not describe a terminal point because the location of the tract is not identified; 4) the partition deed referenced in the 28-acre deed describes several tracts, one of which (Share 6) is the 399.5 acre tract, providing no information to fix the location of the 28 acres within the acreage; 5) the deed references a survey of the land out of which the 28 acres is taken, but does not provide a clue as to where within it the 28 acres can be found; 6) the only monument referenced—a line parallel with Hwy 59—provides a directional orientation of one boundary line but no information about its location; and 7) the monument the Daniels‘

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surveyor found which he says is the start point, at the edge of 17 acres owned by the Daniels, is not referenced in the deed, and the deed does not make any reference to the Daniels as owners of contiguous acres or state the 17 acres is actually a combination of two tracts. The Daniels presented parol evidence showing taxing authorities, TxDOT, and oil exploration companies identified the Daniels as the owners of the 28-acre tract. They also introduced photos showing a fence Daniel said he rebuilt and a gate he erected and testified that ―everyone‖ knew they owned the land. However, none of this evidence is relevant to the sufficiency of the deed because it was not referenced within the deed. Gaut v. Daniel, 293 S.W.3d 764 (Tex. App. 2009) 7-1b

Plat Map 1. Common method of description for residential property—particularly when such property is located in a subdivision 2. Map is recorded in appropriate land office where records are kept 3. Map contains the following a. b. c. d.

Names of streets Lots with numbers and sizes Indications of alleys and easements List of covenants and descriptions

Answer to Consider (7.2) The description is sufficient to "allow the conclusion that the mutual or common intent of the parties to the writing was to deal with the particular property...." The trial judge allowed the admission of extrinsic evidence (the plat map) to clarify the property description. Wilson v. Head, 707 So.2d 127 (La. App. 1998).

Answer to Ethical Issue (7.1) Our Supreme Court has held ―that determining which property is legally secured by a deed of trust is a proper issue and element of proof before the Clerk of Superior Court. Therefore, if a party contends that the property is not secured,‖ as petitioners here do, ―then such contention may be raised as a defense to the four requisite findings under N.C.G.S. § 45-21.16(d).‖ In re Foreclosure of Michael Weinman Associates, 333 N.C. 221, 228, 424 S.E.2d 385, 389 (1993). Additionally, this Court has specifically held that the forgery of loan documents is a proper legal defense to a lender's assertion that a ―valid debt‖ exists. Espinosa, 135 N.C.App. at 308, 520 S.E.2d 108 at 111. Thus, the trial judge did not exceed his authority by examining the underlying validity of the loan documents. As we held in Espinosa, such inquiry relates to the finding of a ―valid debt‖ under General Statutes section 45-21.16. The trial judge properly concluded as a matter of law that ―the debt claimed by the lender/creditor pursuant to this Note is not valid.‖ The court held that there could be no foreclosure unless and until the description questions and issues were clarified. In re Hudson, 642 S.E.2d 485 (N.C. App. 2007).

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7-1c

Government Survey 1. History Done in 1785 to simplify subdivision of huge parcels 2. Principal Meridians and Baselines a. Prime or principal meridians i. Run north to south ii. 35 prime meridians altogether iii. Usually named according to their location—Salt Lake, Gila, and Salt Rivers, etc. b. Baselines i. Run east to west ii. 32 baselines altogether 3. Guide Meridians and Parallels a. b. c. d. e.

Placed to compensate for curving of the earth's surface Placed every 24 miles Guide meridians placed north to south Parallels placed east to west Result is 24-mile squares

4. Townships and Ranges—USE FIGURES 7.2, 7.3, AND 7.4 a. Each 24-mile square formed by guide meridians and parallels and is broken down into squares i. 16 in total ii. Six miles square

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b. Called townships c. Numbered according to their distance from the prime meridians and baselines Example—first row north of baseline will always be Township 1 North and first row south will be Township 1 South (T1N - T1S); first row east of prime meridian will be Range 1 East and first row west will be Range 1 West (R1E - R1W) d. East/west measurements are ranges, and north/south measurements are townships 5. Description and Size a. Each township is divided into 36 one-mile squares i. Each called a section ii. Numbered in a right/left—left/right direction starting in upper righthand corner iii. Each section consists of 640 acres iv. Describe portions of sections by referring to their fractional directional location in the square

Answer to Consider (7.3) The following diagram provides the full description of all 16 squares in the 24-mile square. PARALLEL (First Parallel North)

R5W T1N

G U I D E

R4W T4N

R3W T4N

R2W T4N

R1W T4N

R4W T3N

R3W T3N

R2W T3N

R1W T3N

M E R I D I A N

R4W T2N

R3W T2N

R2W T2N

R1W T2N

R4W T1N

R3W T1N

R2W T1N

R1W T1N

P R I M E

R1E T4N

M E R I D I A N

R1E T2N

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R1E T3N

R1E T1N

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BASELINE

R1W T1S

R1E T1S

A = W-1/2 or NE-1/4 of NW-1/4

D = N-1/2 of the SW-1/4

B = NW-1/4 of NE-1/4

E = S-1/2 of the SW-1/4

C = SE-1/4 of NE-1/4 PRACTICAL TIP: Proof deeds, right down to ―ofs‖ and ―froms‖.

Answer to Consider (7.4) This case turns on what is obviously a typographical error in the range number of the property description contained in the preamble to the quitclaim deed that purported to convey fee title to the Pierces [Appellants]. The strip is described as being located in Section 1, Township 45 North, Range 4 West, rather than Range 5 West where the strip was in fact located. The error would make no sense if the quitclaim deed is read in conjunction with the deed to the land—the error is obvious. Respondents claimed that the mistake in range number caused the deed to be totally defective so as to not convey the 20–foot strip at all. However, this does not follow the established principles of deed interpretation. Courts ―reject an interpretation that conveys nothing in favor of one that conveys something.‖ ―We will declare a deed void for uncertainty of description only where, after resorting to oral or other extrinsic proof, that which was intended by the parties remains a ‗mere matter of conjecture.‘‖ If a deed allows for one reasonably skilled in determining land locations to figure out the location of the property, the description is considered sufficient. Here, the quitclaim deed would convey nothing if read literally, with Range 4 West instead of Range 5 West. This is not the favored means of deed interpretation. Further, both professional land surveyors who testified at trial testified they believed the range number to be a mistake, and that they still found the 20–foot roadway strip easily even with the wrong range number listed. Both agreed this was clearly a mistake, citing as evidence: prior deeds and surveys of record, the metes and bounds description in the body of the deed after the preamble, the reference to the land being in Gasconade County and not several miles away in Franklin County, and their own physical inspections of the property and the monuments from prior surveys they found. The two surveyors were reasonably skilled in determining land locations and had no trouble determining what 20-foot strip the quitclaim deed was meant to convey. Pierce v. Sanderlin, 460 S.W.3d 9 (Mo. App. 2014).

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7-2 Adequacy of Descriptions—USE POWERPOINT SLIDES 7-11 TO 7-17  Must describe so that only one possible piece of land can be identified 7-2a

Description by Popular Name 1. May be insufficient where landowner owns more than one piece 2. May be insufficient where the name is issued for another tract

CASE BRIEF: 303, LLC v. Born 823 N.W.2d 269 (Wis. App. 2012) FACTS:

On September 18, 2003, the Borns accepted a written offer from 303, LLC to purchase the Borns' fifty-acre farm and home. The sale closed on November 6, 2003. Neither the warranty deed nor any of the closing documents memorialized the right of first refusal nor identified the ―remaining acreage‖ referred to in the written offer to purchase. Pursuant to the lease-back provision, the Borns rented back the fifty-acre parcel and continued to live on and farm the land. No written lease for the fifty acres was executed. The Borns owned approximately 128 acres of land in September 2003, leaving the Borns with nearly eighty acres of property after they sold the fifty-acre parcel to 303, LLC; some of the land was contiguous to the fifty-acre parcel and some was not. Walter Born died unexpectedly in 2004. Alice Born continued to live on and farm the land. In 2005, Alice sublet approximately thirty-four of the fifty acres to Scott and Paulette Ditter. Going forward, Alice utilized approximately twelve acres for her own activities of pasturing cows and hay operations. The Ditters paid rent to Alice and also helped her with the farming activities previously performed by her husband, including cutting and baling hay for Alice's cows. Alice mailed 303, LLC a USDA crop form in 2005 requesting 303, LLC allow the Ditters to report crops on the 303, LLC property. 303, LLC refused consent, asserting that Alice and Walter were to farm the land rather than sublet it to other people. 303, LLC did not take further action. On October 24, 2005, the Ditters offered to buy a 28.5-acre parcel owned by Alice. Alice accepted the offer and the transaction closed on December 22, 2005, with the knowledge of 303, LLC. On February 12, 2009, the Ditters offered to buy an 8.5-acre parcel owned by Alice. Alice accepted the offer and the transaction closed on April 7, 2009. On June 10, 2009, 303, LLC sued Alice for breach of contract and the Ditters for tortious interference with contract related to the ―disregard‖ of 303, LLC's contractual right of first refusal on Alice's ―remaining acreage.‖ 303, LLC's claim against Alice also alleged she had breached her contract with 303, LLC by subletting the thirty-four acres to the Ditters.

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The trial court found that the phrase ―remaining acreage‖ in the contract was too indefinite to meet the statute of frauds requirements, and the case was dismissed. ISSUE:

Was the description ―remaining acreage‖ adequate to enforce the contract?

DECISION:

The test to employ when land is not specifically identified in a written contract is not what the parties (or even the ―reasonable man‖) intended, but what the contract in fact describes. Before parol evidence can be used in the context of the statute of frauds the description in the conveyance must furnish some foundation, link, or key to the oral or extrinsic testimony that identifies the property. For example, the ―key‖ or ―link‖ provided by the description of ―enclosed by a fence‖ in a contract for the sale of property lends sufficient definiteness to the property description such that parol evidence provided by a surveyor related to the fence would allow a third party to pinpoint a specific property. There is no written link to specifically identify what property was meant by ―remaining acreage‖ in 303, LLC's offer to purchase. ―Remaining acreage‖ is not sufficiently specific such that a person might know to a reasonable certainty from examining the offer to purchase which Born parcel or parcels the right of first refusal referred to. ―[R]emaining acreage‖ does not provide a key or link to what specific land attached to the right of first refusal, and therefore, any parol or extrinsic evidence would be improper as the evidence would be offered for what the parties intended rather than for what the written conveyance described. As the description ―remaining acreage‖ is, on its face, insufficient to identify the specific property, parol evidence would not be admissible under the statute of frauds. As ―remaining acreage‖ is too indefinite to satisfy the statute of frauds, we affirm the circuit court's dismissal of 303, LLC's action grounded upon a claim of right of first refusal.

Answers to Case Questions 1. What would have made the description adequate? If there was some kind of key or point from which the remaining acreage could have been determined. 2. What opportunities did 303, LLC have to object that it did not use? Did that have a bearing on the court’s decision? When the land was leased, when the crop form was sent—the objections could have been made so that the issue of the option could have been raised sooner. 3. What advice can you give to buyers and sellers based on this case? The contract has to be as clear as the deed to satisfy the statute of frauds. You must be clear which property is being sold and there must be an adequate description. If there is not an adequate description— get it firmed up so that the contract is clear.

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7-2b

Description by Street Number 1. Numbers and streets can change 2. Generally insufficient

ANSWER TO CONSIDER (7.5): USE POWERPOINT SLIDES 7-14, 7-15, and 7-16 to illustrate the property and the conveyances. Following a trial, the trial court found that the 1995 warranty deed containing the express easement contained a latent ambiguity because of its use of the term ―chapel.‖ The chancellor went on to resolve the ambiguity and further found that the easement was created with the intent to establish a perpetual easement for ingress and egress onto the Ray property. On appeal, the court held that the deed contained an easement ―for the purposes of ingress and egress on, over and across the above-mentioned property to be used only for access to the chapel.‖ It is obvious in this case that the use of the term ―chapel‖ is ambiguous or unclear. First, the term that the parties are at dispute over refers to a structure that is no longer in existence. Second, and more importantly, both parties agree that the term ―chapel‖ does not represent its plain and ordinary meaning—neither now, nor at the time of the easement's creation. Before trial in the chancery court, the Ryans and the Rays stipulated to the fact that at the time of the 1995 warranty deed containing the easement provision, ―the building referred to as the ‗chapel‘ was actually used as a residence and not as a chapel that was conducting any type of religious services (including weddings, funerals, and any other religious ceremonies).‖ The parties also stipulated that ―at no time since the 1995 warranty deed has the building referred to as the ‗chapel‘ been used for any such religious ceremonies.‖ As such, the easement's use of the term ―chapel‖ is subject to more than one interpretation—its plain sense and its colloquial meaning understood by the parties and their predecessors in interest. Thus, it is clear that the language granting the easement presents an ambiguity. Applying a de novo review, we affirm the chancellor's finding that the easement was ambiguous. The court held that based on the later descriptions of easements for both properties that the use of the term ―chapel‖ was a colloquialism used to describe the need for easement access once the property was split, and the easiest way to describe it was to use the name of a building that was part of the property listed when the land was divided initially. Ryan v. Ray, 270 So.3d 230 (C.A. Miss. 2018).

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7-2c

General Conveyances—Such as "All My Real Estate" are Inadequate

7-2d

Impermanent Descriptions 1. Metes and bounds tied to movable or nonpermanent object 2. Create boundary problems and are insufficient

7-3 Interpretation of Descriptions—USE POWERPOINT SLIDES 7-18 TO 7-21 A. Construe Ambiguous Language Against the Seller/Grantor B. If Two Descriptions are Available—Unambiguous One Used C. Can Turn to Extrinsic Evidence to Clarify Ambiguities 1. Oral testimony 2. Related documents 3. Latent ambiguity—typing error—extrinsic evidence permitted 4. Patent ambiguity—parties never agreed—no extrinsic evidence is permissible CASE BRIEF: Withington v. Derrick 572 A.2d 912 (Vt. 1990) FACTS:

The Withingtons and the Derricks dispute ownership of property as indicated in the text diagram. The descriptions in their deeds contained ambiguities because they referred to adjacent owned lots and had the wrong owners for the lots. The deeds referenced a right of way that did not exist and the metes and bounds description did not close the property. The trial court awarded the segment of property in dispute to the Derricks and the Withingtons appealed.

ISSUE:

How should the deeds be clarified to determine title to the property in dispute?

DECISION:

The court held that where there is a conflict between a plat map and a metes and bounds description, the map will control. The deeds describe Lot 36 and on the map the boundaries are clear. The unambiguous description by lot number should control over an ambiguous detailed description. The Withingtons should have title.

Answers to Case Questions 1. What deed language created the confusion about ownership? The language that referred to the wrong owners of the lot; the failure to close off the parcel and the reference to a non-existent right-of-way. 2. To whom does the trial court award title and why? What does the appellate court do? The trial court awards the title to the Derricks relying on their more detailed description. The appellate court reversed the trial court's decision.

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3. In reviewing the deeds and the ambiguities, what rules does the appellate court follow? That the map and reference to the lot number should control. 4. What is the significance of "Haff" versus "Hoff"? The deed uses the name Hoff, but there is no such landowner. There is a Haff, but their lot is so far from the premises in dispute that the name problem really has no significance in resolving the dispute. CAUTION AND CONCLUSIONS: Review list of questions with students and the article on surveys and the things to look for in using surveys. [return to top]

Additional Activities and Assignments Answers to Chapter Problems 1. a. Use charts in text to point out locations. b. Use charts in text for section. Diagram is as follows:

c. Use charts in text. 2. Commencing at a point where the south side of Ash Street and the east side of Elm Street intersect and proceeding thence 50 feet east parallel to the south side of Ash Street and from there south 50 feet parallel to the east side of Elm Street and from there west 50 feet parallel to the south side of Ash Street and from there north 50 feet along the east side of Elm Street to the point of beginning. If a metes and bounds description is not enclosed, the court cannot complete the description and the description is inadequate. 3. Although the trial court gave no explanation for its decision, it appears that one question to be determined is the sufficiency of the legal description in the deed from Nash (appellee) to Smith. The sufficiency of a property description is a question of law for the court; the identity of the property is a question of fact. McCann v. Miller, 177 Ga.App. 53, 54(2), 338 S.E.2d 509 (1985). We cannot say that the legal description at issue was insufficient as a matter of law. Perfection in legal descriptions of tracts of land is not required. ―If the premises are so referred to as to indicate... [the grantor's] intention to convey a particular tract of land, extrinsic evidence is admissible to show the precise location and boundaries of such tract. The test as to the sufficiency of the description of property contained in a deed is whether or not it discloses with sufficient certainty what the intention of the grantor was with respect to

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the quantity and location of land therein referred to, so that its identification is practicable.‖ Id. at 54, 338 S.E.2d 509. Further, it must be determined if the deed contains sufficient ―keys‖ to clarify any indefiniteness in the description. Wisener v. Gulledge, 251 Ga. 419, 421, 306 S.E.2d 642 (1983). The legal description of the property contains several distance calls which are rendered indefinite by the phrase ―more or less‖ and by running to undefined points; further, the general directional calls, such as ―northwesterly‖ and ―southeasterly,‖ are unspecific. However, the description references a plat which contains two keys to clarify the intention of the grantor. A scale of 1 inch to 200 feet and a designation for north appear on the plat. Applying these two keys to the configurations on the plat, the exact distances and directions, as well as the property conveyed, can be identified. See Grant v. Fourth Nat. Bank of Columbus, 229 Ga. 855(2), 194 S.E.2d 913 (1972). Appellee apparently bases his motion for summary judgment on the argument that no genuine issue of material fact exists because the documents disclose that the disputed property was not included in his deed to Smith. Appellee supported his motion with a copy of the deed and his own affidavit which contains no explanation but simply restates his contention. Appellant (Lawyers Title) submitted copies of all relevant documents and plats as well as an affidavit of an expert title examiner who analyzed in detail the legal descriptions to support the assertion that the disputed property was in fact conveyed by appellee. After a review of the record, we conclude that appellee did not pierce the appellant's pleadings and did not carry his burden to show that there exists no genuine issue of material fact. Waits v. Makowski, 191 Ga.App. 794(1), 383 S.E.2d 175 (1989). Accordingly, we reverse the grant of appellee's motion for summary judgment and affirm the denial of appellant's motion for summary judgment. Lawyers Title Insurance Corp. v. Nash, 396 S.E.2d 284 (Ga. 1990). 4. a. In Stuesser v. Ebel, 120 N.W.2d 679 (1963), the court found the description to be too indefinite. b. Held insufficient in Thiel v. Jahns, 30 N.W.2d 189 (Wisc. 1947). c. Held insufficient in Wiegand v. Gissal, 138 N.W.2d 740 (Wisc. 1965). d. Acceptable in majority of states. e. Acceptable in majority of states. f. Could be insufficient if more land is owned or name is confusing. g. Insufficient—does not tell location of section in terms of township and principal meridian. 5. No. Stadium is not marked on map; tracks are not identified; impossible to tell what is being leased. Have students read the River Road case for an In-Class Exercise. River Road Association v. South Texas Sports River Road Association, 720 S.W.2d 551 (Tex. 1986). 6. The description in one lot was held sufficient while the description in the other lot was held to be insufficient. The trial court's decision was affirmed. Have students read the Brasher case (located in In-Class Exercises) to answer this problem. Brasher v. Tanner, 353 S.E.2d 478 (Ga. 1987).

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8. The trial court concluded that the property description contained in the quitclaim deed did not sufficiently describe the property so that it could be located and identified. Specifically, the trial court noted that the quitclaim deed had only two (of potentially three or four) boundaries recorded in the description—―Above by Thibodaux Brickworks‖ and ―Below by Julia Davis.‖ The quitclaim deed itself fails to fully describe the property's boundaries and size. And although there appears to be references to other documents within the description— purportedly to deeds or other documents filed in the Lafourche Parish conveyance records— the referenced documents or instruments were not made part of the record. Since we are prohibited from speculating when interpreting the quitclaim deed, we are unable to determine whether those references make the description of the property clear. Dickerson v. Davis, 2010 WL 4273178 (La. App. 2010). 9. The court held that, on the face of the agreement, it is impossible to identify the subject property with the degree of certainty necessary to satisfy the statute of frauds. If the description is insufficient for a contract, it is insufficient for a deed. TR-One, Inc. v. Lazz Development Co., Inc., 945 N.Y.S.2d 416 (N.Y. A.D. 2012). 10. Here, the legal description referenced lots partitioned and conveyed to Marie Rotter. The record discloses that Rotter was initially deeded a one-quarter undivided interest in a larger parcel and that two lots were later partitioned and conveyed to Rotter. We conclude that the reference to Rotter's deed and the terms ―back lot‖ and ―frontage lot‖ were not sufficiently definite to adequately describe the location of the easement. The description assumes that the only deed to Rotter was a partition deed and the lot that bordered the lake was a ―frontage‖ lot. The deed itself provides no basis for these assumptions. Accordingly, the description is inadequate. Kampinen v. Bierman, 617 N.W.2d 908 (Wis. App. 2000).

In-Class Exercise 1. Have students read the Brasher case below and respond to Chapter Problem #6: BRASHER v. TANNER 353 S.E.2d 478 (Ga. 1987)

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Joe Tanner, Commissioner of the Department of Natural Resources, brought suit against employees of the Department of Natural Resources (DNR), who were responsible for the management of Sapelo Island. Tanner brought suit because the employees prevented Tanner and others (plaintiffs) from landing their planes on two lots on Sapelo Island. The DNR employees claimed the state owned the lots (Lot 7 and Lot 4) and Tanner's claim to any interest or title in the lots was void. DNR claimed that the description in the deed to Tanner was insufficient to pass title. The trial court granted a judgment NOV for the DNR employees on lot 4 and for Tanneron on lot 7. Tanner appealed. PER CURIAM [P]laintiffs appeal the judgment NOV granted in favor of the DNR employees as to Lot 4. The trial court held that the description in that deed is insufficient to convey any interest in that property to the plaintiffs. We agree with the trial court. The test for definiteness of the description of land in a deed is well set out in Blumberg v. Nathan, 190 Ga. 64, 65-66, 8 S.E.2d 274 (1940): "A description of land in a deed, in order to be valid, must identify the land or must contain a key by the use of which the description may be applied by extrinsic evidence. Possibly this idea of a 'key' has been overworked and it has certainly been frequently misunderstood. There need not be confusion about this word and no confusion will result if the word is given its true and literal meaning.... [A]ny descriptive words in a contract for the sale of land, which will lead unerringly to the land in question, constitute the key which the law contemplates, but no amount of words in such a contract which fail to lead definitely to the land therein will constitute a key. If such words, when aided by extrinsic evidence, fail to locate and identify a certain tract of land, the description fails and the instrument is void." The legal description of Lot 4 in the plaintiffs' deed is as follows: All of that certain lot, tract or parcel of land situate, lying and being in the 1312 District, G.M., McIntosh County, Georgia, at Raccoon Bluff on Sapelo Island, containing Twenty-One (21) Acres, more or less and being Lot (4) Four of the Raccoon Bluff Subdivision of William Hillary. Said property being bounded Northerly by Lot 3, Easterly by Blackbeard Island River; Southerly by Lot 5; and Westerly by the outline of Raccoon Bluff Tract. This being that same property conveyed to Ben Brown by deed and plat from William Hillary dated July, 1 882 and recorded in Deed Book 'U' at Page 298 and 299, to which said deed and plat reference is hereby made for all intents and purposes. The plaintiffs claim only one and one-half acres from this 21-acre conveyance and no key is furnished to the location of that lot within the larger tract. The plaintiffs here claim three acres of Lot 7, which is only a part of the original 35-acre lot. The three acres were first conveyed from the larger lot in a deed from James Robinson to Anthony Handy in March 1907. The legal description from the warranty deed from Jack Handy's heirs is as follows: "that certain tract of land in McIntosh County on Sapelo Island, (3) acres, more or less, and being in the 1312 District, and bounded on the North by Tom Handy and brothers, on the East by public Road, South by John Bailey and West by Sam Roberts." In Glover v. Newsome, 132 Ga. 797(3), 65 S.E. 64 (1909), the rule is set out that "[w]here a parcel of land conveyed is described as bounded on one side by the lands of a named

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person other than the grantor, it is competent to show what were the lands of such person, for the purpose of applying the description and locating the boundary. While title to real estate cannot be proved by a parol statement thereof, the description of this particular boundary will be sufficient, if it be made to appear that the maker of the deed recognized such other person as the owner and as claiming the land, and the boundary line of the adjacent tract is established by competent extrinsic evidence." The main issue in Glover is whether the metes and bounds description in the deed was valid when it did not appear from the deed in what town, county or state the land was located or even where the deed was executed or recorded. There is no indication whether the court considered the description in the deed to have been a facially valid description or one which only provided a key to the exact identification of the property conveyed. Generally, valid descriptions fall into two categories. The first category is those descriptions which provide by words a means of identification of land without resort to information beyond the words contained in the description. The second category is those descriptions which, while not sufficient to independently identify the land, provide a key which will unlock the mystery to the location of the real estate conveyed. Whether a description is independently valid or presents only a key and requires extraneous evidence for the identification and location of land becomes important for burden of proof reasons. We hold that an independently valid description amounts to prima facie evidence of the identification of the land and will stand unless the party attacking the deed can overcome this evidence by extraneous evidence showing that the words of the description fail in fact to describe a parcel of land. For instance, if a party attacking a deed can show a recited boundary does not exist or that the point of beginning of a courses and distances description does not exist, the deed falls unless it is saved by additional words in the description. The burden under these circumstances rests upon the party attacking the deed. If, however, the description provides only a key to the exact location of the land, the deed is admissible in evidence, but standing alone does not afford proof of a good conveyance. The party asserting claim under such a deed must support the deed with extraneous evidence of just what mystery the key unlocks. In this case we face the first question of whether the metes and bounds description of the three acres is an independently valid description or whether it simply presents a key. From early times we have given greater weight to metes and bounds descriptions than to courses and distances descriptions. In fact, we have held, "Courses and distances occupy the lowest, instead of the highest grade, in the scale of evidence, as to the identification of land." Riley v. Griffin, 16 Ga. 141, 142 (1854). The fact that the boundaries given in a metes and bounds description are in the form of adjoining lands owned by parties other than the grantor, rather than natural or artificial monuments, does not invalidate the description, nor does it lower its grade from one which is independently valid rather than one which only provides a key. Therefore, the burden of showing that the boundaries recited do not exist rests upon the party attacking the deed. No such evidence was presented here, and the trial court was correct in finding the description valid. Affirmed.

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Discussion Questions 1. Who is disputing title to the land? 2. What type of description is involved? 3. What does the court hold about using another‘s property line for a metes and bounds description? 4. From an ethical perspective, is it troublesome to see a state commissioner litigating with state employees over title to property? 5. Is the description in the case adequate? 6. What standard will the court apply in determining whether a metes and bounds description is adequate? 2. Have the students read the River Road case below and respond to Chapter Problem #5: RIVER ROAD ASSOCIATION v. SOUTH TEXAS SPORTS RIVER ROAD ASSOCIATION 720 S.W.2d 551 (Tex. 1986) The San Antonio Independent School District (defendant) entered into a lease agreement with South Texas Sports, Inc., for the lease of Alamo Stadium and other tracts of land nearby. The validity of the lease was challenged by several homeowners' associations, including River Road (plaintiffs). The homeowners were challenging the lease on administrative grounds, potential nuisance effects and the insufficiency of the lease agreement itself. The trial court found for South Texas Sports and River Road appealed. CADENA, Chief Justice The only attempt at description is found in the statement, in Article I of the lease instrument, that District was leasing "that certain tract of land located in Bexar County, Texas, together with all improvements located thereon, such land and improvements being more particularly described and shown on the plot plan attached hereto as Exhibit 'A'." Exhibit "A" appears to be a map on which eight tracts of land are marked. Alamo Stadium is not shown as one of the tracts being leased. The problem with Exhibit "A" is that it contains nothing which even attempts to describe the location of the land shown on the map or of the eight tracts of land marked. It does not indicate that the land is in the City of San Antonio, and only the reference to Bexar County in Article I of the lease furnishes a basis for the conclusion that the land is in Bexar County. It is, of course, proper to attach to a deed or lease a map showing the property conveyed or leased, and such map can be looked to in aid of a defective written description in the instrument. But a map can cure a defective description only if the map contains enough descriptive information which, when considered in connection with the attempted written description in the deed or lease, to make location of the land possible. In this case the lease instrument recites that the land is in Bexar County. The map gives no clue as to the portion of Bexar County in which the land is located. It identifies no streets, highways, streams, or other landmarks indicating, even in a general way, the location of the eight tracts of [sic] and marked on the map. The result is that, considering the lease

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instrument and the map together, we can ascertain only that the leased premises are in Bexar County. Since the lease does not furnish, within itself or by reference to some other existing writing, the means or data by which the leased land can be identified, the lease is invalid for lack of an adequate description. The trial judge stated that location of the leased premises was easily ascertainable because the deed by which the City of San Antonio conveyed the site of what is now Alamo Stadium to District in 1939 was in evidence and contains a metes and bounds description of the land. The problem with this theory is that the lease contains no reference to the 1939 conveyance. The same is true of the trial judge's remark that the deed from City to District was on record where any person could see it. We do not accept the theory that instruments not referred to in a lease are read into and become a part of the property description merely because they are recorded. The learned trial judge cited no authority supporting the assumption that all recorded instruments are read into a lease, even if the lease contains no reference to them. STS cites no such authority in its brief in this Court. Defendants contend that the map attached to the lease "affords sufficient clues or keys so that the land can be identified with reasonable certainty." Their brief contains no effort to point out what those "clues or keys" are, Since the eight marked tracts contain no identifying names or numbers which correspond to anything contained in the lease instrument, we find no clues or keys. The absence of written or printed matter which supplies any help as to the name or location of the city block, new city block, subdivision, survey, etc., or even the city, in which the land shown on the map is located cannot constitute a sufficient "key or clue" to make possible the identification or location of the land with reasonable certainty. The description in the Alamo Stadium lease is even less informative than the description ruled insufficient in Lubel v. Uptmore, 680 S.W.2d 518 (Tex.App.-San Antonio 1984). Reversed.

Discussion Questions 1. 2. 3. 4. 5.

What property was at issue? Why were the neighborhood associations challenging the lease agreement? How was the property described in the lease? What flaws does the court point to in the description? Is the description valid?

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Resources Burby, Real Property, Section 887. Jennings, ―From the Courts,‖ 38 Real Est. L. J. 66 (Summer 2009).

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Makar & Makar, “Geographic Information Systems: Legal and Policy Implications,” 69 Fla. B.J. 44 (November. 1995). Melton, “What We Teach When We Teach Construction Law,” 29-SUM Const. L. 8 (Summer 2009). Onstrud, “Law and Information Policy for Spatial Databases: A Research Agenda,” 35 Jurimetrics J. 377 (1995).

Phillips, ―A Portal to Reliable Real Estate Data or a Door to Nowhere?—A Look at How State and Local Dissemination Policies Have Impacted the Development of the National Spatial Data Infrastructure and Geospatial One-Stop Portal,‖ 34 Real Est. L. J. 9 (Summer, 2005). "Property Misdescriptions," 137 Solicitors J. 315 (April 1993). Zerman, ―Don‘t Wing It! Practical Safeguards for Effective Mortgage Modifications,‖ 23-JUN Prob. & Prop. 12 (May/June 2009).

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Cases Boca Petroco, Inc. v. Petroleum Realty II, 666 S.E.2d 12, 15 (2008). Gaut v. Daniel, 293 S.W.3d 764 (Tex. App. 2009). Hahn v. Love, 2012 WL 2153675 (Tex. App. 2012). Hardey v. Shell, 144 So.3d 668 (Fla. App. 2014). In re Thulis, 474 B.R. 668 (W.D. Wis. 2012). Wallboard, Inc. v. St. Cloud Mall, LLC, 758 N.W.2d 356 (Minn. Ct. App. 2008).

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Additional Activities and Assignments............................................................................................................... 226 Answers to Chapter Problems ............................................................................................................... 226 In-Class Exercises ................................................................................................................................... 231 Discussion Questions ............................................................................................................................. 232 Resources .............................................................................................................................................. 233 Cases ..................................................................................................................................................... 235

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Chapter Objectives The following learning outcomes are addressed in this chapter (see PowerPoint Slide 8-1): 08.01 Discuss the methods of co-ownership. 08.02 Understand rights and responsibilities of parties under various forms of co-ownership.

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Key Terms antenuptial agreements: premarital contract in which the spouses-to-be waive their interests in each other‘s properties that will be accumulated during the course of the marriage community property: method of married persons‘ co-ownership of property; limited to certain states community property states: states that have marital property systems based on the Spanish system community property with right of survivorship: relatively new form of marital property ownership that has a couple owning the property subject to their marital interests while alive, with automatic vesting in surviving spouse upon death of one spouse co-ownership: label given to ownership of property by more than one person curtesy rights: right of husband to a life estate in all real property owned by his wife during their marriage provided they had children domestic partnership: a non-marital status that provides participants with the same rights as married couples dower right: rights of widow in husband‘s estate; not applicable in all states joint tenancy: method of co-ownership that gives title to the property to the last survivor premarital agreements: contract that serves to waive marital property rights of the spouses; must be voluntary and carefully drafted prenuptial agreement: agreement in advance of marriage that alters statutory marital property rights postnuptial agreement: an agreement between married individuals that provides for separate ownership of their individual incomes and properties strawman transaction: transaction that is artificial and nonpermanent; generally used to satisfy the unities required for creating a joint tenancy

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tenancy by entirety: method of co-ownership that is a joint tenancy between husband and wife tenancy in common: simplest form of co-ownership; unless otherwise stated, the presumed method of ownership for multiple landowners tenancy in partnership: form of co-ownership in which the parties are partners; similar to joint tenancy in that the partners have a right of survivorship Uniform Marital Property Act: uniform law that provides for ownership of property by married persons and means of division of property in the event of divorce or death Uniform Premarital Agreement Act (UPAA): uniform law adopted in some states that governs the drafting and execution of premarital agreements unities: in co-ownership, the presence of requirements on creation; i.e., the interests must have been created at the same time, with the same title and interest, and with equal possession rights [return to top]

What’s New in This Chapter The following elements are improvements in this chapter from the previous edition: 

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New case brief in Section 8-1d on who owns what in a case of multi-generational transfers that darted back and forth between joint tenancies and tenancies in common title transfers, Edwin Smith, LLC v. Synergy Operating LLC. In Section 8-2, new case brief on creditor rights when one person borrows on the property without the other owners knowing, Countrywide Home Loans, Inc. v. Reed. In what was a mighty brouhaha in California and across the nation, the Blumenthal v. Brewer unmarried cohabitant property rights case was reversed and resulted in some clarity on the rights of unmarried cohabitants. This portion of the chapter (Section 8-4d) has been updated with a new case to substitute for the two old, and now outdated and overruled, cases. New case brief in Section 8-4d, In the Matter of the Domestic Partnership of Joling and Joling, on domestic partnerships and the award of real property interests when there is no agreement, formal marriage, or registered domestic partnership. In Section 8-4e, updated discussion of prenuptial, antenuptial, postnuptial agreements; updated prenup chart of the rich and famous (McCourt and Los Angeles Dodgers, Tiger and Elin Woods, etc.). New chapter problem #2, Jennings v Atkinson, on beneficiary grants and deeds. New chapter problem #9 on a New Jersey family feud that would be a great assignment for students on what family disputes do to joint property ownership, Jimenez v. Jimenez. New chapter problem #10 on a family feud in Petrone v. Petrone.

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Tenancies in Common—USE POWERPOINT SLIDES 8-2 TO 8-24 1. May be equal or unequal shares 2. Can acquire interests at different times 3. Each tenant entitled to equal possession 4. Presumption of tenancy in common in many states

8-1b

Joint Tenancies—USE FIGURE 8.1 1. Nature of joint tenancy a. Survivors take full title b. Heirs have no interest in joint tenancy property c. Inter vivos conveyance of joint tenancy interest—severs the joint tenancy EG:

8-1c

A, B, C—joint tenants C conveys to D A and B—joint tenants (1/3 each) C—tenant in common (1/3)

The Language of a Joint Tenancy Clear language (in some cases statutory language is mandated)

8-1d

Other Requirements for Joint Tenancy Creation: The Unities 1. Unity of Time—obtain interest at the same time

Answer to Consider (8.1) In a Colorado Supreme Court decision in which there was a dissent, the court upheld the transfer and the creation of a tenancy in common from a joint tenancy that is done unilaterally, without the formality for the unity. The court noted that at the time a JT interest is created, any rights in the property are not vested and therefore the unilateral act does not take away any property rights.

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We conclude, in light of Colorado's statutory and precedential approach to joint tenancy, that a joint tenant may sever a joint tenancy by conveying the property to himself or herself as a tenant in common, without the need for an intermediary strawman. The statute, which permits the grantor and grantee to be one and the same, and which bypasses the four unities, does not preclude such a termination of the joint tenancy. The underlying premises that gave rise to the fiction of the strawman transaction in the first place have disappeared in the law of real property; and the law does not require a futile act. The strawman transaction does not protect the other joint tenant to any greater degree than the direct transfer, and we repeat, the overriding consideration is that the survivorship interest is not vested. Taylor v. Canterbury, 92 P.3d 961 (Colo. 2004). 2. Unity of Title—must obtain title from same source or grantor 3. Unity of Interest—must have equal shares 4. Unity of Possession—equal rights of possession required CASE BRIEF: Edwin Smith, LLC v. Synergy Operating L.L.C. 285 P.3d 656 (2012) FACTS:

The facts of this case are best understood in linear fashion. (USE POWERPOINT SLIDES 8-10 TO 8-22 FOR DIAGRAMS OF VARIOUS TRANSFERS) 1. In 1924 Herman Hasselman acquired a one-half interest in a 160-acre tract in San Juan County, New Mexico (the property). 2. Herman Hasselman died in 1931. 3. Herman, by his will, left his one-half interest in the New Mexico property to the following: • • • •

Margaret Hasselman Jones, his widow Julia Hasselman Keller, daughter May Hasselman Kouns, daughter Jennie Hasselman Hill, daughter These four individuals are referred to as ―the Hasselman women‖.

In 1951, the Hasselman women used a strawman transaction and conveyed their title to the property to Earl Kouns (May‘s husband) who then conveyed the property back to the Hasselman women ―not in tenancy in common but in joint tenancy‖. In 1958, a quiet title action suit over the property entered judgment for the Hasselman women as ―AN UNDIVIDED ONE–HALF OF‖: The Southwest Quarter (SW ¼) of Section Eight (8), Township Twenty Nine (29) North, Range Eleven (11) West, N[ew] M[exico]P[rincipal] M[eridian].‖ In 1959, the Hasselman women, along with Margaret‘s and Jennie‘s husbands entered into a lease agreement with Hugh J. Mitchell to develop oil and gas on the property.

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In 1959, the Pan American Petroleum Corporation was made the mineral lessee for the property. 8. May died in 1962. 9. In 1964, the surviving Hasselman women, along with Margaret‘s husband and May‘s four children executed a power of attorney appointing Henry Hill, Jennie‘s husband, as their ―true and lawful agent and attorney-in-fact for the purpose of granting and conveying easements, surface leases and mineral leases, on and over the [Property], to the extent of our right, title and interest in and to such real estate....‖ The power of attorney gave Henry ―full power and authority to do the acts aforesaid as fully as we ourselves could do such acts.‖ 10. Unfortunately, Henry died later in 1964, and in 1965, the same group that had given Henry authority executed a ―Designation of Agent‖ agreement appointing Jennie as their ―agent and attorney in fact for the purpose of receiving, for their account, any and all royalties.‖ The document indicated that May‘s interest had passed to her children ―share and share alike‖ and that Henry‘s interest was ―now owned in its entirety by Jennie.‖ The Designation also indicated that Margaret‘s and Jennie‘s husbands had also entered into the 1959 lease agreement. 11. In 1965, Jennie entered into an oil and gas lease with Claude Smith. 12. In 1965, Pan American Oil Corporation prepared a division order title opinion that provided:   

Each surviving Hasselman woman owned a 1/8 share of the property Each of May‘s children owned a 1/32 share Jennine distributed royalties according to this allocation until the lawsuit began in 2006.

13. Julia died in 1973. 14. Margaret died in 1974. 15. In 1981, Jennie executed a warranty deed conveying one-half interest in the property to herself and her daughter June Hill Walmsley as joint tenants. 16. Jennie died in 1988. 17. Before her death, June Hill Walmsley (Jennie‘s daughter) deeded the property through her will to a bypass trust administered by her husband, Jerry Walmsley. 18. In 2004, fifteen heirs of Julia, Margaret, and May (Respondents) assigned all of their interests to Synergy Operating LLC (Petitioner). 19. Not surprisingly, in 2006, the Respondents filed suit seeking a judgment confirming their sole ownership of the property. Jerry Walmsley also sought sole ownership of the property as the heir, assign, and successor of the Hasselman women. 20. The lower court held that none of the Hasselman women had severed their joint tenancy despite actions taken to convey their interests. The property

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remained in joint tenancy and, after Jennie died, the estate passed to her daughter, June, and then to June‘s trust. 21. Not surprisingly, Synergy appealed. 22. The appellate court held that ―none of the alleged acts of the Hasselman women destroyed one of the four unities that is necessary . . . in New Mexico.‖ ISSUE:

After all of the transfers and conveyances, what type of land interest was there when the last sister died? Was there still a joint tenancy? Or was it a tenancy in common that could be conveyed?

DECISION:

For such a long statement of facts, the only issue is whether the Hasselman women had severed the joint tenancy that was left to them for the 160-acre tract. Apparently, the oil and gas rights were worth something and no one wanted to lose those rights. The court finds that the four unities need not be broken for the joint tenancy to be severed. If the parties‘ intent and behaviors indicate a desire to sever the joint tenancy, then the joint tenancy is severed. Such is not the law in all states, and some states have statutes specifically addressing this issue—New Mexico does not. The case must now go back for a complete trial on the actions and intent of the parties. That will be a tall order since those involved are all now dead. The evidence will have to be from other documents (if they exist) and perhaps some admissible hearsay from survivors. The summary judgment was reversed, and the case was sent back for trial.

Answers to Case Questions 1. List the acts of the Hasselman women that would have severed the joint tenancy in other states. The easiest way to do this is to take the facts that show possible severance or at least intent. 



In 1951, the Hasselman women used a strawman transaction and conveyed their title to the property to Earl Kouns (May‘s husband) who then conveyed the property back to the Hasselman women ―not in tenancy in common but in joint tenancy‖. JOINT TENANCY IS CREATED BY STRAWMAN TRANSACTION. In 1959, the Hasselman women, along with Margaret‘s and Jennie‘s husbands entered into a lease agreement with Hugh J. Mitchell to develop oil and gas on the property. HERE IS THE FIRST ACTION AND INTENT ISSUE—MARGARET AND JENNIE—DID THEY CONVEY AN INTEREST TO THEIR HUSBANDS AND THEREBY SEVER THE JOINT TENANCY LEAVING THE HUSBANDS AS TENANTS IN COMMON OR BOTH OF THEM AS TENANTS IN COMMON? In 1959, the Pan American Petroleum Corporation was made the mineral lessee for the

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property. SINCE THEY ALL CONSENTED TO THE LEASE, THE ISSUE OF JOINT TENANCY WOULD NOT AFFECT THE LESSEE‘S RIGHTS. May died in 1962. HER DEATH, IF IT WERE A JOINT TENANT WOULD MEAN THAT HER INTEREST GOES TO HER SISTERS AND HER INTEREST IS OVER. In 1964, the surviving Hasselman women, along with Margaret‘s husband and May‘s four children executed a power of attorney. HERE WE HAVE ANOTHER INDICATION OF MARGARET‘S INTENT TO SEVER THE JOINT TENANCY AND WE CAN ADD MAY INTO THE EQUATION BECAUSE SHE NOW HAS INVOLVED HER CHILDREN AS IF SHE IS A TENANT IN COMMON AND NOT A JOINT TENANT WHOSE INTERST WILL LAPSE UPON HER DEATH. Appointing Henry Hill, Jennie‘s husband, as their ―true and lawful agent and attorney-in-fact for the purpose of granting and conveying easements, surface leases and mineral leases, on and over the [Property], to the extent of our right, title and interest in and to such real estate....‖ The power of attorney gave Henry ―full power and authority to do the acts aforesaid as fully as we ourselves could do such acts.‖ AGAIN, THE GRANTING OF AGENCY RIGHTS TO ANOTHER—EVEN THOUGH A HUSBAND IS NOT AN ACT OF SEVERANCE—THIS IS AN OPERATIONAL ISSUE AND NOT INDICATIVE OF ANY OWNERSHIP TRANSFER. HOWEVER, JENNIE HAD EARLIER DESIGNATED HER HUSBAND AS PART OF THE DEAL—MORE TENANT IN COMMON THAN JOINT TENANT. Unfortunately, Henry died later in 1964, and in 1965, the same group that had given Henry authority executed a ―Designation of Agent‖ agreement appointing Jennie as their ―agent and attorney in fact for the purpose of receiving, for their account, any and all royalties.‖ THIS IS AN AGENCY ISSUE AND NO LAND TRANSFER OCCURRED BUT IT MAY HAVE BEEN A WAY FOR EVERYONE TO SAY THAT THE JOINT TENANCY WAS STILL PART OF THE PICTURE. The document indicated that May‘s interest had passed to her children ―share and share alike.‖ THIS INDICATES TENANCY IN COMMON BECAUSE SHE BELIEVED THE INTEREST WOULD PASS TO HER CHILDREN—NOT THE CASE IN A JOINT TENANCY and that Henry‘s interest was ―now owned in its entirety by Jennie.‖ NOT CLEAR WHAT HAPPENED HERE BUT IT APPEARS THAT JENNIE HAS VOTED HERSELF BACK ONTO THE JOINT TENANCY ISLAND WITH HENRY‘S DEATH ALTHOUGH THERE WAS NO FORMAL DEED ON ANY OF THESE ARRANGEMENTS BETWEEN HUSBAND AND WIFE. The Designation also indicated that Margaret‘s and Jennie‘s husbands had also entered into the 1959 lease agreement. THAT THEY WERE PARTIES TO THE LEASE AGREEMENT OR CONFIRMED AS SUCH SEEMS TO INDICATE THAT THEY BELIEVED THEY HAD TENANCY IN COMMON RIGHTS, NOT JOINT TENANCY RIGHTS THAT WOULD END. In 1965, Jennie entered into an oil and gas lease with Claude Smith. THIS IS AN AGENCY ON BEHALF OF THE OTHERS TYPE OF ACT. In 1965, Pan American Oil Corporation prepared a division order title opinion that provided:  

Each surviving Hasselman woman owned a 1/8 share of the property Each of May‘s children owned a 1/32 share THIS IS AN INDICATION AT THAT TIME THAT IT WAS FINE WITH EVERYONE THAT CHILDREN WERE PART OF THE ROYALTIES PICTURES EVEN THOUGH WITH JOINT TENANCY, THEY WOULD NOT HAVE HAD SUCH A PART.

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

  

 



Jennie distributed royalties according to this allocation until the lawsuit began in 2006. THE PAYMENT WAS AN ACT THAT AFFIRMED THE RIGHTS OF THE CHILDREN EVEN THOUGH THE DEATH OF THEIR MOTHER WOULD HAVE ENDED ANY RIGHTS SHE HAD IN THE PROPERTY IF THERE WERE A JOINT TENANCY.

Julia died in 1973. Margaret died in 1974. In 1981, Jennie executed a warranty deed conveying one-half interest in the property to herself and her daughter, June Hill Walmsley, as joint tenants. JENNIE WAS STILL THE LAST HASSELMAN WOMAN STANDING. WHAT INTEREST SHE OWNS IN THE PROPERTY REMAINS AN ISSUE BECAUSE THE CHILDREN ARE CLAIMING AN INTEREST THROUGH THE SEVERANCE OF THE JOINT TENANCY. IF THE JOINT TENANCY HAS SURVIVED, JENNIE HAS THE RIGHT TO DISPOSE OF THE PROPERTY AS SHE SEES FIT. IF THE JOINT TENANCY WAS SEVERED, THE OTHERS‘ CHILDREN HAVE RIGHTS. Jennie died in 1988. Before her death, June Hill Walmsley (Jennie‘s daughter) deeded the property through her will to a bypass trust administered by her husband, Jerry Walmsley. AGAIN, HER RIGHTS DEPEND UPON HER MOTHER‘S RIGHTS AND THE NEW TRIAL WILL HAVE TO DETERMINE THE OUTCOME. In 2004, fifteen heirs of Julia, Margaret, and May (Respondents) assigned all of their interests to Synergy Operating LLC (Petitioner). THE POOR OIL AND GAS COMPANIES JUST NEED TO KNOW WHO CAN NEGOTIATE CONTRACTS, WHAT RIGHTS THEY HAVE, AND TO WHOM THEY SHOULD PAY THE ROYALTIES. Not surprisingly, in 2006, the Respondents filed suit seeking a judgment confirming their sole ownership of the property. Jerry Walmsley also sought sole ownership of the property as the heir, assign, and successor of the Hasselman women. IF THERE WAS A JOINT TENANCY, THEN THEY HAVE NO RIGHTS. IF THE JOINT TENANCY WAS SEVERED THEN THEY HAVE INTERESTS THROUGH THEIR MOTHER FOR THEIR SHARES OF THE PROPERTY.

2. What actions do you think showed intent to keep the joint tenancy? What acts show intent to sever the joint tenancy? See the commentary on the list above to walk through all of the actions and intent elements. The problem is the acts are inconsistent, and, frankly just wild at times. There was a great deal of back and forth. 3. What problems with evidence do you see in establishing intent? Everyone who was around at the time of all of the shifting, allocations, powers of attorney, and designations is dead—it will be difficult to prove intent and there are factual inconsistencies in terms of proving intent. 4. What lessons should families learn from the experience of this family on inherited, shared property? Make sure that everyone understands what the deeds and form of title mean. There were so many people involved and so many documents created that they seemingly did not understand what they were doing as they shifted things back and forth. The formal document that they have is the strawman document that created the joint tenancy. That was not changed by deed. But they certainly brought in a great many people by actions and that is what the trier of fact has to cope with.

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5. Who gets what? Diagram the possible outcomes depending on the intent outcome. If there is a joint tenancy, it all comes down to Jennie and her heirs. If there is a tenancy in common, then you have the children of the Hasselman women and the complexities of determining their interests, some of which were computed as they distributed royalties to them while the sisters were alive. If there is a tenancy in common, then Jennie can only give away ¼ of the title to the property and the remaining ¾ would go to the others. It has been a long time that they have been receiving royalties from the property after their mothers died. This is one messy case that seems as if no one was really obtaining legal advice on what their actions were doing to their interests in the property. The court throws a wrinkle in with noting that a joint tenancy can be severed by actions apart from just a new deed. That may add to confusion in estates going forward.

Answer to Consider (8.2) The Supreme Court properly granted that branch of the plaintiffs' cross motion which was for summary judgment declaring that they each own an undivided 25% interest in the Brooklyn property. The plaintiffs established their entitlement to judgment as a matter of law by showing that the decedent and the defendant signed a deed transferring an undivided 25% interest in the Brooklyn property to each of them as tenants in common. The plaintiffs established that the defendant was not fraudulently induced to sign the deed (see Dalessio v. Kressler, 6 A.D.3d 57, 61, 773 N.Y.S.2d 434), and that the transfer was neither the result of undue influence nor unconscionable (see Hearst v. Hearst, 50 A.D.3d 959, 961-962, 857 N.Y.S.2d 596). Contrary to the plaintiffs' contention, statements of a decedent are not rendered inadmissible under the ―Deadman's Statute‖ (see CPLR 4519) when offered in opposition to a motion for summary judgment (see Rosado v. Kulsakdinun, 32 A.D.3d 282, 284, 820 N.Y.S.2d 239; Beyer v. Melgar, 16 A.D.3d 532, 533, 792 N.Y.S.2d 140; Salemo v. Geller, 278 A.D.2d 104, 718 N.Y.S.2d 35). Lauriello v. Gallotta, 873 N.Y.S.2d 690 (2009). 8-1e

Tenancies by Entirety and Other Survival Marital Property Interests 1. Requires four unities of joint tenancy 2. Also requires unity of person—parties must be married 3. Inter vivos conveyance requires signature of both spouses 4. No testamentary conveyance—right of survivorship applies 5. Effect of divorce a. Some states—joint tenancy results b. Other states—tenancy in common 6. States have specific language requirements for creation of this type of tenancy 7. Some states have abolished

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8-1f

Tenancy in Partnership 1. Exists in property contributed to the partnership or paid for with partnership funds 2. Has characteristics of joint tenancy a. Upon death of one partner—remaining partners hold title b. Deceased partner's estate gets value of partner's interest in the firm, but not the actual property 3. All partners have right to use and possession of partnership property for partnership purposes 4. In some states, waiver or spouses' signatures may be necessary for transfer

Answer to Consider (8.3) A, B, C—Joint Tenants; C conveys to D If B dies, A and D are tenants in common with A owning 2/3 and D owning 1/3.

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8-2 Creditors' Rights and Co-Ownership—USE POWERPOINT SLIDES 8-25 AND 8-28 A. Creditors' Rights Limited by Extent of Debtors' Interests 1. Tenant in common—can only pledge portion of property as security and not entire property 2. Can foreclose only on part of property 3. Joint tenant's pledge is only good to extent of survivorship; question of whether the JT survives the pledge of collateral and issues with rights of creditors (some variations in decisions and states) 4. Tenancy by the entirety—pledge requires signature and consent of both husband and wife B. Priorities 1.

General rule is first in time, first in right

Important to determine priority with regard to creditors holding interest in entire parcel

CASE BRIEF: Countrywide Home Loans, Inc. v. Reed 725 S.E.2d 667 (N.C. App. 2012) FACTS:

On March 25, 2001, Margaret D. Smith (Mrs. Smith) and Mrs. Smith's daughter and son-in-law, Judy and Troy Reed (Defendants), executed an offer to purchase and contract to buy a home in Mooresville, North Carolina. Countrywide Home Loans, Inc. (Plaintiff) agreed to finance the purchase of the home with a loan to Mrs. Smith of $117,900.00. The general warranty deed named the grantees as ―Margaret D. Smith and Troy D. Reed and wife, Judy C. Reed Joint Tenants with rights of survivorship[.]‖ The deed of trust to secure Countrywide‘s loan and promissory note had Mrs. Smith's name only and was executed on May 1, 2001 by Mrs. Reed, as attorney in fact for Mrs. Smith. Neither Mr. nor Mrs. Reed signed the deed of trust or promissory note as individuals. The Reeds lived together in the home with Mrs. Smith and cared for Mrs. Smith, so that Mrs. Smith did not have to go to a nursing home. By October 19, 2001, the three had defaulted on the loan and Countrywide began foreclosure proceedings. The whole process rested in limbo for some time. On February 7, 2004, Mrs. Smith passed away. After Mrs. Smith's death, the Reeds negotiated a loan modification agreement with Countrywide. The agreement ―amend[ed] and supplement[ed] (1) the Mortgage, Deed of Trust, or Deed to Secure Debt (the ‗Security Instrument‘).‖ The Reeds signed the agreement on July 6, 2004.

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The Reeds made payments on the loan to Countrywide until approximately August or September 2004. The Reeds did not make any additional payments after 2004. On November 16, 2004, Countrywide gave the Reeds the opportunity to cure the default by paying or seeking a loan modification. In 2006, the Reeds requested a loan modification. The modification was denied because Mr. Reed failed to provide proof of income. On January 22, 2009, Countrywide filed a complaint against the Reeds asking the court to reform the deed of trust to reflect the intent of the parties by making the Reeds liable on the loan (obligors). The trial court found that Mrs. Smith‘s portion of the property was subject to the deed of trust, but the Reeds were tenants by entirety whose interest in the property was not subject to the deed of trust. After Mrs. Smith‘s death, the Reeds owned her portion of the property subject to the deed of trust. The court also held that the loan modification did not encumber the Reeds‘ share of the property. The Reeds appealed. ISSUE:

What type of interest did Mrs. Smith have and with her death, what type of interest did the Reeds have and what were Countrywide‘s rights?

DECISION:

The court made the following decisions:  



 

The deed of trust severed the joint tenancy. Troy D. Reed and Judy C. Reed, as Tenants by Entireties, own a one-half undivided interest in the subject real property which is not encumbered by the deed of trust to the benefit of Plaintiff. The deed of trust executed by Mrs. Smith only encumbered Mrs. Smith's interest in the property—the portion of the property owned by Mrs. Smith as a tenant in common after the severance of the joint tenancy by the filing of the deed of trust. Mrs. Smith's interest in the property converted to a tenancy in common, which has no right of survivorship. Troy D. Reed and wife, Judy Reed, do not own the real property in fee simple absolute.

Answers to Case Questions 1. Explain what happened with the joint tenancy with right of survivorship. The deed of trust severed the joint tenancy leaving Mrs. Smith as a tenant in common and Troy and Judy Reed owning their interest as tenants by the entirety 2. Who owns what now? Troy and Judy do not get Mrs. Smith‘s property. The whole transaction was set up this way so that Mrs. Smith‘s rights would pass to the other joint tenants upon her death. Because the joint tenancy was severed, she was a tenant in common and title to

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her portion of the property must go through her estate and be distributed according to her will or by intestate statute. 3. Does Countrywide have a mortgage? Yes, but it only has a mortgage on the Smith half of the property. 4. Are Troy and Judy liable for the mortgage? Is their property subject to the mortgage? No, they are not liable for the mortgage because they did not sign the note. No, because a joint tenant would not have the authority to mortgage the full property, so their mortgage is only on Mrs. Smith‘s half. The parties will have to work something out—Countrywide really cannot foreclose, and the Reeds are not personally liable on the mortgage. The parties might do well to just settle on the case and let the Reeds pay something and just write off the mortgage.

Answer to Ethical Issue (8.1) If the husband, wife, heir-at-law, beneficiary under a will, joint tenant with the right of survivorship or the beneficiary under any insurance policy takes the life of the decedent and is convicted therefore of a felony, the person so convicted forfeits all interest in and to the property of the decedent, including any interest he would receive as surviving joint tenant, and the property interest so forfeited descends to the decedent's other heirs-at-law, unless otherwise disposed of by the decedent. Joint tenants, as were Newton and Sanders herein, may deal with the property between them as they wish, making decisions as individuals, and not as one entity. Indeed, if one joint tenant decides to convey his or her interest in the property, the joint tenancy is destroyed. Each tenant may deal with the property independently of the other. Essentially, in a tenancy by the entirety, the feature distinguishing it from joint tenancy is that the survivor of a joint tenancy by the entirety takes at the death of the other not by virtue of the death, but because by law each was viewed to own the entire estate from the time of its creation. In a joint tenancy, however, each is merely entitled to enjoyment of the estate with an interest passing at death to the survivor. Both Newton and Sanders each had their own separate ownership share and could have conveyed their respective interest in the property whenever and to whomever they chose. Had Sanders conveyed her interest to another, she would be conveying a life estate with a right of survivorship. We are thus in agreement with the Estate, and Newton himself concedes, that by killing Sanders he forfeits his right of survivorship. Thus, the interest which would otherwise have been his but for his criminal act vests in the heirs of Sanders. However, we cannot agree that the statute, as written or interpreted by the courts of this Commonwealth, strips Newton of the ownership of property that was already vested in him. Had Sanders not died at the hand of Newton, he would have taken the entire property as a result of his right of survivorship. Because of the crime he committed, Newton must forfeit that right, which has, we believe correctly, passed to the heirs of Sanders. We believe the result to have been reached in this regard by the trial court to be equitable and in accordance with the law.

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Courts must be careful in reaching decisions in the case of murder among co-owners of property because they do not want to encourage deadly actions to get property titles. The way property is distributed upon the death of an owner at the hand of a co-owner can send powerful signals and create incentives for future murders. Newton v. Newton, 365 S.W.3d 565 (Ky. App. 2011). SEE FIGURE 8.2 AND POWERPOINT SLIDE 8-28 FOR A COMPARISON OF THE METHODS OF COOWNERSHIP. 8-3 Rights and Responsibilities of Cotenants—USE POWERPOINT SLIDES 8-29 TO 8-31 8-3a

Expenditures 1. Payment for land—apportion interest according to their share of the payment 2. All tenants responsible for taxes and mortgage payments 3. Payments can be used to offset rents collected by possessing tenant 4. Improvements expenditures a. No right of contribution b. Solely expense of improving tenant 5. Repairs a. Treated as improvements b. No way to distinguish

Answer to Consider (8.4) Some states have traditionally followed the Statute of Anne which entitles each co-tenant to a proportionate share of profits. Under this statute, X is entitled to one-half of the net profits. Thus, X does bear some of the burden for insurance, utilities, etc. Y can deduct from those profits X's one-half of the taxes. In some states, X can offset this amount by value of Y's exclusive use. Ordinarily, a cotenant is not responsible for payment for improvements, but in this case, the mortgage payment must be taken out before net profits are determined, so in a way, X does pay part of the mortgage on the cabin. NOTE: Statute of Anne is not mentioned in the text. It is a piece of common law trivia noted here for the scholars of real estate law. 8-3b

Partition and Ouster 1. Partition—physical division of the property so that co-owners become neighbors 2. Severance—still co-owners but method of co-ownership has changed 3. Circumstances for partition

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a. Voluntary b. Involuntary i. One tenant dispossesses the other tenant ii. One tenant refuses to pay expenditures iii. One tenant refuses to distribute rents and profits from exclusive possession iv. Other circumstances court deeds appropriate—feuding, etc. 4. Impossibility of division—court orders sale of property and division of proceeds

Answer to Consider (8.5) In a decision that is difficult to follow, the court held that Mrs. Asterbadi held a tenancy in common with right of survivorship (because of the marital property rights). Accordingly, I determine that the title held by the Asterbadis upon their acquisition of the property was held as a tenancy by the entirety, and therefore plaintiff's acquisition of Dr. Asterbadi's interest cannot impair Mrs. Asterbadi's right of survivorship. If the status quo continues, Mrs. Asterbadi will, if she is still living, succeed to an undivided fee simple interest in the property at Dr. Asterbadi's death, and plaintiff will similarly succeed to such an interest at Mrs. Asterbadi's death, if Dr. Asterbadi is then living. I consider this arrangement, then, to be a ―tenancy in common with a right of survivorship,‖ which, despite its relatively oxymoronic phraseology, is not an unprecedented result. Inasmuch as plaintiff and Mrs. Asterbadi thus hold their interests in the Property as tenants in common, albeit with a right of survivorship in each of them, the issues relating to plaintiff's claim for partition must then be considered. As such, she was entitled to full possession, and, upon her death, her property goes to her heirs. Capital acquired only a limited interest in the property, limited for the life of Mrs. Asterbadi. The court found that because the property was used as a family vacation home that partition was not appropriate. In view of the fact that other remedies are available and would adequately protect plaintiff's economic interest in the property in the event that partition were to be denied, the fact that the property is not the ―family home‖ that the Newman Court insulated from partition is not by itself dispositive so as to require a partition on these facts. Certainly, in the balancing of the relative equities of the parties, the fact that the property is a vacation site rather than a ―family home‖ is a factor militating in favor of partition, but with other remedies available to plaintiff, partition does not appear to be the appropriate course. The remaining questions thus presented deal with the remedies that are appropriately and equitably to be afforded to plaintiff. However, because of the tenancy in common and the ouster, Capital was entitled to compensation for Mrs. Asterbadi‘s exclusive use of the property.

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Plaintiff demanded an accounting from Mrs. Asterbadi immediately upon succeeding to its interest. That demand is certainly appropriate. Mrs. Asterbadi shall account to plaintiff for her occupancy and possession of the property from July 20, 2005. The parties shall, by agreement or litigation, establish a fair rental value for the Property, which shall form the basis for Mrs. Asterbadi's financial responsibilities to plaintiff during her possession and occupancy. She shall also provide, as and when requested, any documentation as to the payment of real estate taxes and insurance premiums. To the extent that the parties have agreed on the nature and extent of appropriate insurance coverages, plaintiff shall account to Mrs. Asterbadi for its share of all such costs; these charges, together with the property taxes and any other municipal assessments levied against the property, shall be paid as and when due by Mrs. Asterbadi and plaintiff's share thereof may be credited against any sums that Mrs. Asterbadi owes plaintiff for her possession and occupancy. Mrs. Asterbadi shall also permit, upon reasonable notice and at reasonable intervals, inspections of the Property by plaintiff or its representatives. The parties shall, other than in an emergency, obtain consent from each other before effecting any alterations to the property or any capital repairs. The figure of $50,000 annually means that Capital would be entitled to one-half of the potential income. The court also noted that it would need information on the expenses, the mortgages on the property before computing what Capital was entitled to for ouster: Several questions remain. First, the parties have not addressed or briefed the issue of the responsibility for the payments on account of the two mortgages encumbering the Property. I will direct Plaintiff and Mrs. Asterbadi to submit supplemental briefs on that question within 20 days; unless good cause is otherwise indicated, I expect to resolve that question on the basis of the briefs. Secondly, I will direct the parties to confer and advise the court, within 20 days, as to whether they can agree between themselves as to the process to be undertaken to establish a fair rental value of the Property or whether additional proceedings will be needed before me, in which event we will establish a discovery and trial schedule for that purpose. Capital Finance Co. of Delaware Valley, Inc. v. Asterbadi, 912 A.2d 191 (N.J. 2006). 8-4 Marital Property Rights: Co-Ownership by Marriage—USE POWERPOINT SLIDES 8-32 TO 8-44 8-4a

Common Law: Dower Rights 1. Protection of widow was original purpose 2. Widow had one-third interest for life in any property owned by her husband during their marriage 3. Interest existed even if property not owned at death 4. Many states have abolished dower a. Have statutory protections b. Homestead protections

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8-4b

Common Law: Curtesy Rights 1. For surviving husband 2. Gave him a life estate in all real property owned by his wife during their marriage 3. Applied only if there were issues in the marriage 4. Modified by statute in most states

8-4c

Statutory Marital Law: Community Property 1. Exists in 11 states 2. Spanish in origin 3. Idea is both parties work for benefit of the community and all property acquired during the marriage is owned equally 4. Some states apply to unmarried cohabitants 5. Separate property a. Property owned prior to marriage b. Gifts and inheritances during marriage 6. Debts a. Obligation of the community b. Each spouse is 50% responsible 7. Signature of both spouses required for real property transactions 8. Uniform Marital Property Act—considered in many states as a more equitable property schematic; more like community property (adopted only in Wisconsin)

8-4d

Extension of Property Rights to Relationships Beyond Marriage 1. Common-Law Marriage 2. Rights of Unmarried Cohabitants 3. ―Palimony‖ Suits and Meretricious Relationships 4. Statutory Responses to Increasing Cohabitant Litigation 5. The Court‘s Unjust Enrichment Responses 6. Domestic Partnerships a. Differing types of relationships b. Different standards for recognition c. Civil union laws

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CASE BRIEF: In the Matter of the Domestic Partnership of Joling and Joling 443 P.3d 724 (C.A. Ore. 2019) FACTS:

Ronald Dean Joling (Petitioner) and Jackie Diane Joling (Respondent) participated in a religious wedding ceremony in California in 1993. They decided not to obtain a California wedding license. Ronald's father, a self-ordained minister who performed the marriage ceremony, told them that a marriage license was unnecessary because ―marriage is between God and the couple.‖ He also incorrectly told Diane that she and Ronald would be legally married because Oregon had common-law marriage. During the ceremony, the couple exchanged vows. Ronald vowed that he would ―love, honor, and care for‖ Diane. In return, Diane vowed that she would ―love, honor, and obey‖ petitioner. They also exchanged traditional vows that they would ―take‖ each other as ―wedded husband‖ and ―wedded wife,‖ ―to have and hold from this day forward. For better, for worse; for richer, for poorer; in sickness and in health; to love and to cherish 'til death do us part.‖ They also signed a written marriage covenant stating that ―before God and witnesses [they] were united in Holy Matrimony.‖ Ronald, Diane, Ronald‘s father (the minister), and 10 witnesses signed the covenant. For 21 years following, Ronald and Diane lived as a married couple. They cohabitated, had three children, and listed their tax status as married when preparing their tax forms. Ronald worked outside the home as a general contractor. Diane maintained their home, raised the children, and, for a time, homeschooled them. Diane testified that she sacrificed opportunities for further education or to obtain other job skills. Diane also supplemented the family income, including working at an auto parts store, as a secretary and data entry clerk, and as a teacher's assistant. Ronald had saved approximately $50,000 before their ceremony, and he used $24,000 as a down payment for the property where they built their home. Ronald also invested $25,000 for supplies to build a barn on the property. The home was titled in both of their names as ―a married couple.‖ Just before the suit, the home was appraised at $488,900. In 2015, they decided to divorce. Ronald moved out but continued to pay living expenses for Diane and the children. They were told by their attorneys that they were not legally married. Ronald then reduced his payment to Diane but continued to pay child support. Ronald petitioned for the dissolution of a domestic partnership and custody of their minor child. Diane counterclaimed for breach of a marriage contract based on his vows to support her.

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The trial court concluded that Ronald had breached an express and implied contract of marriage and awarded Diane the house as damages for the breach. The court awarded the home to Diane because it questioned its authority to award spousal support in a domestic partnership case that was not a legal marriage. ISSUE:

What are the property rights of a couple that has lived together as husband and wife but were not married? Does legislative policy prevent any property rights similar to marital property rights?

DECISION:

The court held that the Oregon Supreme Court did not prevent the enforcement of an express agreement between unmarried partners to share equally in the real and personal property accumulated. The court found that such was not void against public policy. The Supreme Court abrogated prior law that refused to recognize such contracts. The court held that equal distribution is possible but that the courts should look to find the parties‘ intent. In this case, there is no question that the parties intended to share in the property, but there was no indication of an agreement that there would be a surrender of the most valuable asset to one party. The court held that the trial court abused its discretion in giving Diane the house. The court noted that it did not address the support aspect of the case because the trial court had not raised it and the trial court did not raise it because it was unclear if support could be imposed when there was no underlying marriage. However, the inability to award support should not prevent an appropriate distribution of the assets. The court remanded the case to the trial court to work a different distribution of the property.

Answers to Case Questions 1. Why did the court not find an express contract for the house? While there might have been a contract in the marriage ceremony, that contract did not specifically promise the house. There are damages for a breach of that contract, but the court has to determine a fair and equitable distribution. 2. Why is no child support awarded? Because the trial court was not sure if child support can be awarded if there is no marriage. The trial court was probably correct in that call, but it cannot use the lack of child support as a factor in distributing the property. 3. What will the trial court now have to do? The court will have to find a more equal division of the house—perhaps by a requirement that Diane keep and pay Ronald or vice versa for the value they have put into the house.

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Answer to Consider (8.6) When they broke up, it was determined that, although they participated in a Balinese marriage ceremony in 1990, they did not comply with the Balinese marriage formalities. Under English law, it was determined that they were not married, and she had only a right to claim child support; no other rights or obligations arose under English law due to their cohabitation. Had this case arisen in the United States today, in most states the result may well have been the same, because under the laws of most states, "cohabitation" alone does not create a status that confers rights and obligations.

Answer to Consider (8.7) The court found that there was insufficient evidence that Sandra Jennings was Hurt's commonlaw wife; Hurt had filed Putative Fathers' affidavit which would have been unnecessary if they were married. Promise to have child in exchange for support is void as against public policy. Jennings v. Hurt, 554 N.Y.S.2d 220 (1990). 8-4e

Prenuptial, Premarital, Postnuptial, or Antenuptial Agreements 1. Majority of states have adopted the Uniform Premarital Agreement Act 2. Means for dividing property 3. Courts examine disclosure and voluntariness components of the agreements very carefully a. Time allowed for review b. Independent counsel c. Disclosure of assets

Answer to Consider (8.8) The court classified the agreement as the same and refused to enforce it. Wife seeks to distinguish Diosdado by arguing that the present "agreement was a contract independent of the court, and required no court action," while the agreement in Diosdado "could only be implemented in the context of a divorce suit." True, the Diosdado agreement would only be effective upon a dissolution. Thus, the policy considerations are slightly different. It is also correct that in theory, and assuming the agreement were valid, once husband started again using illicit drugs, wife could have invoked her rights under the agreement and acquired the community property assets without obtaining a divorce. But such a scenario would not affect the relationship of the parties in the same manner as a transfer of these property interests following a divorce. And, significantly, wife did not seek to obtain the transfer of husband's share of the community property when he again relapsed into

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his addiction; she sought it as part of the dissolution proceedings. Further, the very issue determining whether she was entitled to the property would necessarily involve a judicial determination concerning husband's drug use, a factual adjudication of fault that the no-fault statute seeks to avoid. In re Marriage of Mehren & Dargan, 118 Cal. App. 4th 1167, 13 Cal. Rptr.3d 522 (2004).

Answer to Consider (8.9) The Supreme Court held that the husband had demonstrated his prima facie entitlement to judgment as a matter of law on claim, so the prenuptial agreement was valid; but in a twist, the court also held that there were triable issues of fact with regard to agreement's fairness. The court remanded the case for trial on the fairness of the provisions in the agreement. So, they had a prenup—sort of. The husband escaped marital property rights distribution but would probably not get the full impact and effect of the prenup. McKenna v. McKenna, 994 N.Y.S.2d 381 (2014).

Answer to Ethical Issue (8.2) Go over chart on how to make your prenup work—USE POWERPOINT SLIDES 8-40, 8-41, 8-42, 8-43, AND 8-44. Discuss the implications for marriage and children of honoring prenups. Ask the students if they would have a prenup and why or why not. GO OVER FIGURE 8.3 ON FAMOUS PRENUPS. CAUTIONS AND CONCLUSIONS—Co-Ownership Who co-owns? What type of co-ownership? How much authority does one co-owner have and what interest? Are all necessary signatures obtained?

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Additional Activities and Assignments Answers to Chapter Problems 1.

Althea is correct. As the sole remaining joint tenant, title to the property vested in her at the moment of Agnes' death, Agnes' family has no interest in the property. NOTE: There may be tax issues, upkeep issues, etc. that Althea may be liable for due to her lack of participation during all those years (if, in fact, she did not pay taxes and expenses).

2. Franklin and Bertha had deeded their property to Russell Ray Atkinson under a sort of special statutory conveyance—a beneficiary deed. Missouri and a number of other states

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have created an estate planning tool called a beneficiary deed. Under such a deed, prior to the death of the owner, the beneficiary has no rights in the property, and the owner may engage in transactions for the property without the signature or agreement of the beneficiary. Miss. Statutes § 461.031.1. Also, a beneficiary deed may be revoked in whole or in part and the beneficiaries changed during the lifetime of an owner or surviving joint owner. Such statutes are an estate planning tool—you get an automatic transfer of property to a third party without the probate process. In this case, Franklin conveyed his interest in the couple‘s tenancy by the entirety to his wife. The two questions in this problem are: Could Franklin convey his entirety interest to Bertha? When he did so, what happened to the beneficiary grant to Atkinson, and who owns the property? And from these questions we can answer who gets the property following Bertha‘s death. As noted, the beneficiary deed is a revocable interest—although Franklin and Bertha had conveyed an interest to Atkinson—there is no right on his part to assert ownership until their deaths. They obviously changed their minds and so, part of estate planning, Franklin conveyed his share of the tenancy by entirety to his spouse. Such a conveyance is permitted because it does not terminate spousal rights to the other spouse and the conveyance means that the granting spouse if conveying his interest to the other spouse. With those questions answered we can move to Bertha‘s estate—the property passes through Bertha‘s estate and is given to beneficiaries as directed in her will. If she had no will there are intestate statutes that decide who gets what. Chapter 17 covers wills and probate. Jennings v. Atkinson, 456 S.W.3d 461 (Mo. Ct. Appeals 2014). 3. Mrs. Herring severed the joint tenancy when she conveyed to Mr. Carroll, making Mr. Carroll a tenant in common. Absent any marital property rights, Mrs. Herring could sever the joint tenancy. Upon Mr. Herring‘s death, Mr. Carroll owned one-half the property and the heirs of Mr. Herring owned the other one-half (the heirs could be Mrs. Herring, leaving her with onehalf ownership and Mrs. Carroll with the other one-half). Herring v. Carroll, 300 S.E.2d 629 (Ct. App. W. Va. 1983). 4. The 2003 deed created a joint tenancy with right of survivorship among Mrs. Roland, Kirby, David, Victoria, and Eric. By reserving a life estate, Mrs. Roland created a present possessory (but non-freehold) interest that would allow her to reside on her farm during her lifetime. By granting concurrent remainder interests to her four children and to herself, and subjecting those interests to a joint tenancy with right of survivorship, Mrs. Roland conveyed future and contingent fee simple interests in the Property to whichever of her four children survived her, while preserving her right to own the Property in fee simple absolute, without the necessity of probate, in the event that all four of her children pre-deceased her. The viable consequences of Mrs. Roland's life estate plus a possibility of reverter during her lifetime can be demonstrated in the following potential scenarios created by the 2003 deed:

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Scenario 1: If Mrs. Roland died before any of her four children, then her life estate would end, her possibility of reverter would be extinguished, and the contingent remainders of all four children would vest, so that each of the four children would then have an undivided fee simple interest in the Property, held in joint tenancy with the right of survivorship. Scenario 2: If one or two of Mrs. Roland's four children died before her, then each deceased child's contingent remainder in the Property would be extinguished, so that the surviving children would still have contingent remainders and Mrs. Roland would still have her life estate and a possibility of reverter. Scenario 3: If three of Mrs. Roland's four children died before her, then each deceased child's contingent remainder in the Property would be extinguished, and the remainder of the sole surviving child would remain contingent, rather than becoming vested and indefeasible, because Mrs. Roland would still hold both her life estate and her possibility of reverter. Scenario 4: If all four of Mrs. Roland's children died before her, then all their contingent remainders would be extinguished and Mrs. Roland's possibility of reverter would vest, so that the Property would revert to her in fee simple, with her life estate merging into that interest, resulting in a fee simple absolute in Mrs. Roland. As the third and fourth scenarios illustrate, Mrs. Roland's possibility of reverter, rather than a nullity that could never materialize, was potentially dispositive in determining ownership rights in the Property. In the third scenario, if Mrs. Roland had not conveyed a ―remainder‖ to herself, then upon the death of three of her children, the remainder interest of the fourth child would have become indefeasible because he or she would be the sole surviving joint tenant. ―A joint tenancy ... ends once there is only a single surviving joint tenant,‖ who ―becomes the sole owner of the property pursuant to the right of survivorship.‖ At that point, although Mrs. Roland would still hold her life estate, the surviving child would have had a fully vested and undivided remainder, along with the right to convey that indefeasible fee simple interest to whomever he or she wished, either inter vivos or upon death. But, by conveying the remainder in the Property to her four children and herself, Mrs. Roland ensured that, upon the death of three of her children, the lone surviving child's remainder interest would remain contingent during Mrs. Roland's lifetime. That contingency would have dispositive consequences in the event that the fourth and last child died during Mrs. Roland's lifetime. Specifically, Mrs. Roland ensured that if the fourth child died during her lifetime, his or her contingent remainder would be extinguished, and that the fee simple absolute interest in the Property would revert to Mrs. Roland, who would be free to convey the Property to whomever she wished, either inter vivos or upon death. Moreover, Mrs. Roland also retained the unilateral right to convey that fee simple interest during her lifetime, even though it was a future interest that was both contingent and nonpossessory. (―It has long been settled that a remainder, contingent only as to the event and not as to the person to take, is descendible, devisable and assignable‖). There is nothing in © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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the 2003 deed that limits Mrs. Roland's right to transfer either of her interests in the Property; nor is there any language precluding her from eliminating the right of survivorship in that interest by conveying her possibility of reverter to a third party. Under established property law principles, [a] joint tenancy can be severed by a unilateral act of one of the tenants that is inconsistent with the continued existence of the joint tenancy or that operates to destroy or terminate any one or more of the essential unities, and such act effects conversion of the joint tenancy into a tenancy in common and destruction of the right of survivorship.... In the absence of a valid contrary agreement among the joint tenants, each joint tenant is privileged to unilaterally sever the joint tenancy by conveying, encumbering, or contracting to convey his or her undivided fractional interest.... The grantee becomes a tenant in common with the other joint tenant or tenants, while any two or more other joint tenants remain joint tenants with one another. For these reasons, we are not persuaded that Mrs. Roland's conveyance of a ―remainder‖ interest to herself in joint tenancy with a right of survivorship (i.e., a reservation of a possibility of reverter) was a ―legal nullity‖ because such an interest ―could never be fulfilled‖ during her lifetime. This argument ignores that, as set forth above, Mrs. Roland reserved cognizable fee simple property rights in the Property, so that during her lifetime, it was possible that fee simple absolute title would revert to her, and it was permissible for her to break the joint tenancy and convey her possibility of reverter to a third party. We therefore hold that the trial court did not err in concluding that, in the 2003 deed, Mrs. Roland validly granted to herself both a life estate and a ―remainder.‖ In doing so, Mrs. Roland effectively reserved a contingent future interest that qualifies as a possibility of reverter, which she held concurrently with the contingent remainders simultaneously conveyed to David, Kirby, Victoria, and Eric. Thereafter, by conveying their future interests to a third party in the 2005 deed, Mrs. Roland, David, and Kirby exercised their rights to transfer their future interests, and in doing so severed the joint tenancy created by the 2003 deed and eliminated the survivorship contingency with respect to their future interests. Under that deed, Messersmith held a possessory estate for the life of Mrs. Roland, an interest known as an estate per autre vie (literally, an estate for the life of another − in this instance, Mrs. Roland). In addition, Messersmith acquired the concurrent future interests held by Mrs. Roland, David, and Kirby. Messersmith, as a third-party grantee, held those non-contingent remainder interests as a tenant in common with Victoria and Eric. Mrs. Roland's death extinguished Messersmith's estate per autre vie, and the remainders held by Messersmith, Eric, and Victoria became vested, fee simple absolute interests. Therefore, the trial court did not err in determining that Messersmith holds a 3/5 interest in the Property as a tenant in common with Eric and Victoria, each of whom hold a 1/5 interest, and in ordering partition of the Property according to those percentage interests. Roland v. Messersmith, 56 A.3d 806 (Md. App. 2012). 5. The court held that, under New Jersey law, the disclosures Mr. DeLorean made would not have been adequate and the prenup was void. However, the court ruled that California law © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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applied and that the disclosures made by Mr. DeLorean were sufficient and that the prenup was, therefore, valid. DeLorean v. DeLorean, 511 A.2d 1257 (N.J. 1986). 6. The court held that if Joseph‟s transfer to Monica was fraudulent, it must be set aside. If it is set aside, then Joseph died while the joint tenancy still existed and upon his death, full title vested in Monica. Kovanda‟s lien was then filed after Joseph‟s debt and the debt was not Monica‟s but Joseph‟s and could not be a lien against her property. Gayton v. Kovanda, 857 N.E.2d 929 (Ill. App. 2006). 7. The disability benefits were Carolyn's separate property. If those funds purchased the trailer and household items, then they too are separate property absent any evidence that she made a gift. Cummings v. Cummings, 765 P.2d 697 (Idaho 1988). 8. Marion was a tenant in common, owning one-half because Clayton severed the joint tenancy when he conveyed his interest to Marion. Clayton originally conveyed the property to himself and Bernis as joint tenants with right of survivorship as a way of paying back Bernis for advancing him the funds to satisfy the financial demands of his second wife in their divorce. Afterwards, Clayton conveyed his portion of the property to Marion. The inter vivos conveyance by one joint tenant to an outsider severs the joint tenants and leave the remaining joint tenant and the conveyee as tenants in common. The complicating factors were the death of Bernis and his brother, Johnsie. Clayton and Bernis did not understand each other‘s assumptions about the property. Bernis assumed the full property was his as a payback for his advance of money to Clayton. Bernis died and could not offer details on the nature of the agreement and the underlying assumptions. However, a joint tenant can sever a joint tenancy. Estate of Gulledge, 673 A.2d 1278 (D.C. 1996). 9. We agree with defendant (Raul) that N.J.S.A. 46:3–17.4 precludes the partition and forced sale of the real property because defendant and his wife own it as tenants by the entirety. We recognize Section 17.4 literally commands that ―neither spouse‖ may sever, alienate, or otherwise affect their shared interests in the tenancy by the entirety, and that plaintiffs are not Gwyn Jimenez's ―spouse.‖ Even so, we conclude the statutory prohibition applies to a situation where, as here, one spouse's failure to pay his personal debts to third-party creditors has resulted in a money judgment entered against him alone. Otherwise, a freewheeling spouse, by amassing such individual debt, could detrimentally ―affect‖ the other spouse's interests in their co-owned property. A statute must be construed in a sensible fashion to give meaning to its provisions. State v. Harper, 229 N.J. 228, 237–38, 160 A.3d 1281 (2017); Wilson ex rel. Manzano v. City of Jersey City, 209 N.J. 558, 572, 39 A.3d 177 (2012). There would have been little point for the Legislature to have enacted Section 17.4 if it only intended to continue established principles of case law regarding tenancies by the entirety, The ―default‖ approach in N.J.S.A. 46:3– 17.2—which essentially treats a wide range of conveyances of title enumerating a ―husband and wife‖ as tenancies by the entirety—bespeaks a legislative intent to maximize each spouse's protection from a non-consensual diminution of his or her interests. Although there is no reported New Jersey opinion directly on point interpreting N.J.S.A. 46:3–17.4 in this third-party creditor context, the interpretation we adopt today has been echoed by other courts. For example, in In re Wanish, 555 B.R. 496, 499 (Bankr. E.D. Pa. 2016),

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the United States Bankruptcy Court for the Eastern District of Pennsylvania highlighted the difference in controlling New Jersey law before the adoption of N.J.S.A. 46:3– 17.4 (when Newman v. Chase and similar equity-based case law applied to tenancies by the entirety) and circumstances arising after the effective date of the statute in 1988. The creditors cannot foreclose on the marital Mansfield property. Jimenez v. Jimenez, 185 A.3d 953 (N.J. Super. 2018). 10. The court referred to the case as a ―family feud.‖ The appellate court affirmed what the lower court had found. The trial court held that plaintiff (Rose) and defendant (Diane) each owned fifty percent of the property as joint tenants. The court also ordered that the house be sold, and the proceeds be distributed equally subject to adjustments for certain expenditures made by the parties. They had a joint tenancy, but the extensive evidence of the parties‘ disagreements and disputes led the court to sever the joint tenancy for the sale of preserving the property (and perhaps some lives given the disputes that are well worth reading about in the court‘s opinion). The term dysfunctional family comes to mind with one son stealing his blind parents money disappearing, one wife, forging Rose‘s signatures on checks. Ironically, Diane, a casino employee, seems to have been the most responsible of the lot and she is being pushed out by her mother. It is a case study in family dynamics. Petrone v. Petrone, 2013 WL 5777894 (Sup.Ct. N.J. 2012).

In-Class Exercises 1. Have the students interview a married couple to determine how they own their property. Have them bring the information to class and compare the methods of ownership. 2. Have the students list issues they would cover if they were drawing up their own prenuptial agreements. 3. Have the students read the Cranston case: CRANSTON v. WINTERS 238 N.W.2d 647 (N.D. 1976) In February 1952, James and Syvilla Ballantyne acquired title, as joint tenants, to a lot in the city of Minot. They lived there in a house located on the lot. On 10 April 1959, James Ballantyne died, leaving a will that purported to devise the lot to his wife, Syvilla, for life, with the remainder to his eight children by a previous marriage. James and Syvilla had no children of their marriage, and the probate court awarded Syvilla a life estate and a remainder to the eight children as part of the final distribution of James's estate. Syvilla occupied the home and paid the taxes on it until her death on 11 May 1973. She did not remarry and left a will that did not mention the lot but left the residue of her estate to her sisters (appellants) and her brother. After Syvilla's death, James's eight children took possession of the property and attempted to sell it. At that time, the discovery of the joint tenancy was made, and Syvilla's sisters brought suit. The trial court awarded the property to the eight children, and the sisters appealed.

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VOGEL, Justice [W]e note the fundamental fact that title to joint-tenancy property in this State vests immediately in a surviving joint tenant upon the death of the other joint tenant. It passes to the survivor upon the death of the other joint tenant. It passes to the survivor or by right of survivorship and not by will. Therefore, Syvilla Ballantyne became the owner of the fee title to the property immediately upon the death of her husband, James, regardless of the provisions of his will. The joint tenant who dies leaving a surviving joint tenant has no interest which he may devise. The children of James argue that she made a choice by proceeding with the probate which gave her a life estate, but there is nothing to show that she knew there was a choice to be made. In fact, the record indicates that James either did not know or forgot that the joint tenancy existed; otherwise, he would not have attempted to devise what passed immediately to his joint tenant upon his death. Obviously, neither the county judge nor the attorneys who probated the estate of James were aware of the facts; otherwise, they would not have performed the idle acts involved in listing the property in the inventory and final decree. We find no reason to assume that Syvilla knew what neither her husband, the county judge, or the attorneys knew. As we said in Sittner v. Mistelski, 140 N.W.2d 360, 368 (N.D. 1966): We cannot expect this from wife, inexperienced in business and unfamiliar with probate and real estate law, to know the true state of title to land, when none of the lawyers or the county judge concerned with the probate sale knew the title's true state. It is possible of course, that she wanted the children of James to have the property. If so, and if she had known she had the fee to dispose of as she wished, surely she and her legal advisers would have chosen to deed the property to the children of James, retaining a life estate, or she would have made a will devising the property to them. She did neither, and we find it hard to believe that she knowingly, or even carelessly, chose to hazard establishing a life estate in herself. We reluctantly conclude that the trial court erred as to the law, and the judgment is therefore reversed, and the case is remanded for entry of judgment in favor of appellants as to title. Reversed.

Discussion Questions 1. Who held the joint tenancy? 2. What happened to the property upon James‘s death? 3. Was the property passed through probate? 4. Who claimed the property upon Syvilla‘s death? 5. Did Syvilla waiver her rights to the property?

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6. Who ends up with the property?

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Resources Atwood, "Marital Contracts and the Meaning of Marriage," 54 Ariz. L. Rev. 11 (Spring 2012). Bala, ―The Debates About Same-Sex Marriage in Canada and the United States: Controversy Over the Evolution of a Fundamental Social Institution,‖ 20 BYU J. Pub. L. 195 (2006). Bohl, ―Gay Marriage in Rhode Island: A Big Issue in a Small State,‖ 12 Roger Williams U. L. Rev. 291 (2007). Bonauto, ―Ending Marriage Discrimination: A Work in Progress,‖ 40 Suffolk U. L. Rev. 813 (2007). Browne, "The Intriguing Potential of Postnuptial Contract Modifications," 23 Hastings Women's L.J. 187 (Summer 2012). Cahill, ―The Genuine Article: A Subversive Economic Perspective on the Law‘s Procreationist Vision of Marriage,‖ 64 Wash. & Lee L. Rev. 393 (2007). Carlson, ―Deconstruction of Marriage: The Swedish Case,‖ 44 San Diego L. Rev. 153 (2007). Collett, ―Constitutional Confusion: The Case for the Minnesota Marriage Amendment,‖ 33 Wm. Mitchell L. Rev. 1029 (2007). Cooper, ―Who Needs Marriage?: Equality and the Role of the State,‖ 8 J. L. & Fam. Stud. 325 (2006). Curci, ―The Evolution of the Legal Concepts of ‗Family‘ and ‗Marriage‘ in the EU Legal System and its Impact on Society,‖ 18 St. Thomas L. Rev. 227 (2005). Dorocak, ―Same-Sex Couples and the Tax Law: Tax Filing Status for Lesbians and Others,‖ 33 Ohio N. U. L. Rev. 19 (2007). Drobac and Page, ―A Uniform Domestic Partnership Act: Marrying Business Partnership and Family Law,‖ 41 Ga. L. Rev. 349 (2007). Duncan, ―Constitutions and Marriage,‖ 6 Whittier J. Child & Fam. Advoc. 331 (2007). Duncan, ―Portrait of an Institution: How Recent Cases Distort Our Understanding of Marriage,‖ 50 How. L. J. 95 (2006). Eastman, ―Full Faith and Republican Guarantees: Gay Marriage, FMPA, and the Courts,‖ 20 BYU J. Pub. L. 243 (2006). Eichner, ―Marriage and the Elephant: The Liberal Democratic State‘s Regulation of Intimate Relationships Between Adults,‖ 30 Harv. J. L. & Gender 25 (2007).

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Eichner, ―Principles of the Law of Relationships Among Adults,‖ 41 Fam. L. Q. 433 (Fall 2007). Fletcher, ―Same-Sex Marriage, Indian Tribes, and the Constitution,‖ 61 U. Miami L. Rev. 53 (2006). Frantz and Dagan, ―Properties of Marriage,‖ 104 Colum. L. Rev. 75 (January 2004). Goldberg, ―The Schemes of Adventuresses: The Abolition and Revival of Common-Law Marriage,‖ 13 Wm. & Mary J. Women & L. 483 (2007). Graff, ―Free Exercise and Hybrid Rights: An Alternative Perspective on the Constitutionality of Same-Sex Marriage Bans,‖ 29 U. Haw. L. Rev. 23 (2006). Grodin, ―Same-Sex Relationships and State Constitutional Analysis,‖ 43 Williamette L. Rev. 235 (2007). Hay, ―Recognition of Same-Sex Legal Relationships in the United States,‖ 54 Am. J. Comp. L. 257 (2006). Hsu, ―Why the Politics of Marriage Matter: Evaluating Legal and Strategic Approaches on Both Sides of the Debate on Same-Sex Marriages,‖ 20 BYU J. Pub. L. 275 (2006). Jacobi, ―How Massachusetts Got Gay Marriage: The Intersection of Popular Opinion, Legislative Action, and Judicial Power,‖ 15 J. Contemp. Legal Issues 219 (2006). Kachroo, ―Mapping Alimony: From Status to Contract and Beyond,‖ 5 Pierce L. Rev. 163 (2007). Kubasek and Glass, ―A Case Against the Federal Protection of Marriage Amendment,‖ 16 Tex. J. Women & L. 1 (2006). Landers, ―A Marriage of Principles: The Relevance of Federal Precedent and International Sources of Law in Analyzing Claims for a Right to Same-Sex Marriage,‖ 41 New Eng. L. Rev. 683 (2007). Law, ―Who Gets to Interpret the Constitution? The Case of Mayors and Marriage Equality,‖ 3 Stan. J. C.R. & C.L. 1 (2007). Lorenz, "Cohabitation Agreements After the Civil Union Act," 100 Ill. B.J. 308 (June 2012). Lurvey, "Love Letters: Premarital Agreements Help Smooth Divorces—Or Do They?" 79 ABA J. 85 (1993). ―Marriage as Contract and Marriage as Partnership: The Future of Antenuptial Agreement Law,‖ 116 Harv. L. Rev. 2075 (May 2003). McClain, ―‘God‘s Created Order,‘ Gender Complementarity, and the Federal Marriage Amendment,‖ 20 BYU J. Pub. L. 313 (2006). Missirian, ―Separate But Equal? Same Sex Couples in New England, 35 Real Est. L. J. 558 (2007).

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"More Ordinary People Sign Before They Wed," Wall Street Journal, April 8, 1991, p. B1. Nelson, ―Social Instrumentalism in the Jacksonian Decade: State High Court Decisions Regarding Marriage and Religion, 1828-1837,‖ 48 Am. J. Legal Hist. 1 (2006). Nichols, ―Multi-Tiered Marriage: Ideas and Influences from New York and Louisiana to the International Community,‖ 40 Vand. J. Transnat‘l L. 135 (2007). Pleasence and Balmer, "Ignorance in Bliss: Modeling Knowledge of Rights in Marriage and Cohabitation," 46 Law & Soc'y Rev. 297 (June 2012). Powell on Real Property, 4. Rasul, ―Marriage Markets and Divorce Laws,‖ 22 J. L. Econ. & Org. 30 (2006). Rosettenstein, ―Alimony and Alimony Surrogates and the Imputation of Income in American Family Law,‖ 25 Quinnipiac L. Rev. 1 (2006). Starnes, ―Mothers, Myths, and the Law of Divorce: One More Feminist Case for Partnership,‖ 13 Wm. & Mary J. Women & L. 203 (2006). Thompson on Real Property, Sections 1700-1800. Tilly and Hetrick, "North Carolina's Reincarnated Joint Tenancy: Oh Intent, Where Art Thou?," 93 N.C. L. Rev. 1649 (2015). Thorup, ―TIC or Treat: How Tenant-in-Common Real Estate Sales Can Avoid the Reach of the Securities Laws,‖ 34 Real Est. L. J. 422 (2006). Ver Steegh, ―Annual Survey of Periodical Literature,‖ 41 Fam. L. Q. 907 (Winter 2008). Zurcher, ―I Do or ‗I Don‘t?‘ Covenant Marriage after Six Years,‖ 18 Notre Dame J.L. Ethics & Pub. Policy 273 (2004).

Cases Ashworth v. Bullock, 304 P.3d 74 (Utah App. 2013). Blumenthal v. Brewer, 24 N.E.3d 168 (Ill. App. 2014). Cranston v. Winters, 238 N.W.2d 647 (N.D. 1976). Edwards v. Miller, 378 N.E.2d 583 (Ill. 1978). Estate of Sherman ex rel. Maddock v. Estate of Sherman ex rel. Snodgrass, 359 S.C. 407, 597 S.E.2d 850 (Ct. App. 2004). First National Bank v. Energy Fuels Corp., 618 P.2d 1115 (Colo. 1980). Goodridge v. Dep't of Pub. Health, 798 N.E.2d 941 (Mass. 2003).

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In re Domestic Partnership of Branam and Beaver, 202 P.3d 886 (Or. App. 2009). Malek v. Flagstar Bank, 70 F.Supp.3d 23 (D.D.C. 2014). Marvin v. Marvin, 557 P.2d 106 (Cal. 1976). Robertson v. Hagan, 782 S.W.2d 780 (Oh. 1990). [return to top]

Instructor Manual Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 9: The Landlord-Tenant Relationship

Table of Contents Chapter Objectives .................................................................................................................................................... 237 Key Terms ...................................................................................................................................................................... 237 What's New in This Chapter ................................................................................................................................... 238 Chapter Outline .......................................................................................................................................................... 239 Answers to Case Questions ................................................................................................................... 240 Answers to Case Questions ................................................................................................................... 242 Answers to Case Questions ................................................................................................................... 243 Answers to Case Questions ................................................................................................................... 244 Answer to Consider (9.1) ....................................................................................................................... 245 Answer to Ethical Issue (9.1) ................................................................................................................. 246 Answer to Consider (9.2) ....................................................................................................................... 246 Answers to Case Questions ................................................................................................................... 249 Answer to Consider (9.3) ....................................................................................................................... 250 Answers to Case Questions ................................................................................................................... 251 Answer to Consider (9.4) ....................................................................................................................... 251 Answers To Case Questions................................................................................................................... 253 Answer to Consider (9.5) ....................................................................................................................... 254 Answers to Case Questions ................................................................................................................... 258 Answers to Case Questions ................................................................................................................... 260 Answer to Consider (9.6) ....................................................................................................................... 260 Answer to Consider (9.7) ....................................................................................................................... 262 Additional Activities and Assignments............................................................................................................... 263 Answers To Chapter Problems .............................................................................................................. 263

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In-Class Exercises ................................................................................................................................... 265 Discussion Questions ............................................................................................................................. 267 Discussion Questions ............................................................................................................................. 268 Discussion Questions ............................................................................................................................. 270 Resources .............................................................................................................................................. 270 Cases ..................................................................................................................................................... 271

Chapter Objectives The following learning outcomes are addressed in this chapter (See PowerPoint Slide 9-1): 09.01 Describe the types of common law tenancies. 09.02 Discuss appropriate provisions for the lease agreement. 09.03 Discuss the rights and responsibilities of the parties to the lease agreement. [return to top]

Key Terms action for dispossession: court proceeding by landlord to have tenant removed from property; generally brought for nonpayment of rent or destruction of landlord‘s premises assignments: process of transferring contract rights to another; e.g., assignment of a mortgage or lease cleaning deposit: the amount in a lease that a tenant is required to pay prior to commencement of the lease to cover the cleaning of the premises when the tenant has gone; under URLTA, the lease must state whether this deposit is nonrefundable constructive eviction: process whereby a tenant is forced to leave leased premises because the premises are in a state of disrepair and uninhabitable forcible detainer: action by landlord for rent; requires tenant to pay or be evicted by court order implied warranty of habitability: implied warranty given by contractors of new homes to buyers; between landlord and tenant, the landlord‘s guaranty that the premises are fit for habitation and, if not, will be put into that condition periodic tenancy: temporary possessory interest in land that runs on a period-to-period basis, such as a month-to-month lease rent control: statutory maximum for rent on residential property

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repair and deduct: a tenant‘s right to repair leased premises when the landlord fails to do so and to deduct the cost of the repairs from his/her rent security deposit: in the lease, the amount of money prepaid by the tenant to secure performance of the lease; often provides the amount of liquidated damages if the tenant does not perform self-help: remedy for tenants with premises in disrepair; the right to repair defects on the property and then seek reimbursement sublease: arrangement in which a tenant leases rental property to another, and the tenant becomes landlord to the subtenant tenancy at sufferance: tenancy wherein the tenant is on the property of the landlord but has no right to be and may be evicted at any time tenancy at will: tenancy wherein the tenant remains as long as both parties agree; either party may terminate at any time and without notice tenancy for years: tenancy for a stated period of time Uniform Residential Landlord Tenant Act (URLTA): uniform law governing residential leases [return to top]

What's New in This Chapter The following elements are improvements in this chapter from the previous edition: 

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In Section 9-3a, new case brief, Young v. Northington, on landlord liability for a tenant injury in a common area. Tenant slips and falls in trying to escape raw sewage pouring into the laundry room of the duplex where he lived. Three new, short case briefs on habitability, Gawad v. Aviad, Felice v. Warf, and Harvey v. Photo Property Services. These flea and bedbug cases walk through the processes and requirements for tenants moving out and how damages are computed; the shorter cases allow for more detailed instruction on what happens in habitability cases and what tenants fail to do that costs them damages or a defense for breach—new approach for the book in teaching. Provides a way for students to see precedent and variances in facts. Lead-based paint discussion in Section 9-2b updated. In Section 9-2b, mold discussion updated. In Section 9-2c, the section called ―Deposits‖ is now changed to ―Tenant Fees‖ because so much has changed and we have brokers‘ fees and add-ons that may be regulated already and some headed that way because of abuses. New case brief in Section 9-2c, De Stefano v. Apts. Downtown, a case of four college students with a 70-paragraph lease and disputes over fees charged by their landlord. Added a discussion of Airbnb and vacation rentals under subleases in Section 9-2i.

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

  

In Section 9-3a, added discussion of ordinances that now prohibit landlords from asking applicants about their criminal history or the criminal history of anyone in their households. Deleted Consider 9.6 on inadequate lighting and reworked it into chapter problem #3, Harris v. Delta Development Partnership. New chapter problem #9 on renting to registered sex offenders. New chapter problem #10 on the warranty of habitability and constructive eviction.

[return to top]

Tenancy for Years 1. Time period for lease is specified 2. Automatically terminates at end of that time

9-1b

Periodic Tenancy 1. Runs for amount of time for which rent is paid 2. Usually month-to-month 3. Terminates with a period's notice 4. Rent can be increased with a period's notice

9-1c

Tenancy at Will 1. No agreement as to term 2. Either party can terminate at any time

9-1d

Tenancy at Sufferance 1. Holdover tenant 2. Can become periodic tenancy if landlord accepts rent

CASE BRIEF: Meek v. Mallory and Evans, Inc. 734 S.E.2d 109 (Ga. App. 2012)

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FACTS:

Clay Meek signed a lease for a one-year term beginning August 17, 2007 and ending August 16, 2008. The amount of rent for the initial one-year term was $1,700 a month. The lease provided for two additional one-year terms. If Meek wished to extend the term of the lease, he was required to give written notice to the landlord not less than one month prior to the expiration of the current lease. The rent for the second one-year term was $1,900. The lease provided for a security deposit of $2,000, $1,000 of which was payable by check and the other thousand was paid by Meek's performing work on the property, including painting and landscaping. At the end of the lease, however, only the $1,000 payment was refundable to Meek. Should Meek hold over at the expiration of a term, the monthly rental would be one-and-a-half times the rental paid for the last month of the lease. The first 12-month term of the contract expired, and Meek did not request an extension. Meek continued to pay $1,700 a month until May 2009. Meek moved out of the house in mid-June 2009. Mallory and Evans (Landlord) sued Meek for breach of the lease; Meek counterclaimed, alleging that landlord did not refund the entire $2,000 security deposit plus an additional amount of money spent by Meek in completing ―substantial repairs‖ to the property. The trial court granted the landlord's motion for summary judgment. Meek appealed.

ISSUE:

What kind of a tenant was Meek and how much did he owe in rent?

DECISION:

The Court of Appeals held that: (1) lease was extended for additional 12-month period when tenant held over and continued to pay rent after initial term of lease expired, and thus leasehold did not become tenancy at will; (2) tenant's surrender of leased premises by written notice of intent to vacate did not absolve tenant of rent obligation for remainder of lease term; (3) tenant who breached lease was not entitled to recover security deposit of $2,000 upon vacating leased premises plus additional $1,000 for services rendered in making improvements to property; and (4) statute authorizing award of attorney fees upon finding that party acted in bad faith or was stubbornly litigious did not permit award of fees to landlord on summary judgment. Judgment affirmed in part and reversed in part.

Answers to Case Questions 1. What is the difference between a lease extension and a holdover tenant? Here the parties had an agreement if Meek decided to stay more than a year and it provided for rent increase and how it would be handled. Not technically a holdover. 2. What mistakes did both Meek and the landlord make in their situation? Both did not

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communicate, and the landlord did not give any indication that it was following the lease agreement and continued to accept the old rent. Meek did not clarify his rights on the deposit and subsequent improvements. Nor did he seek to clarify the rent. 3. What lessons do you learn about being a tenant or a landlord from this case? Get something in writing when the lease ends even if there is an extension, so everyone is reminded about the terms of the lease agreement. 9-2 Terms of Lease Agreement—USE POWERPOINT SLIDES 9-9 TO 9-27 9-2a

Need for Lease Agreement 1. Statute of frauds a. Leases longer than one year usually must be in writing b. Writing can be memo or letters i. ii. iii. iv.

Parties Lease term Rent Signatures

2. Need for details and specificity of writing 9-2b

Habitability 1. No common law requirement 2. Some states and local governments have enacted laws requiring habitable premises 3. Other states have used violations of building codes to hold leases void 4. Other states have ruled an implied warranty of habitability exists

CASE BRIEF: Harvey v. Photo Property Services 63 Misc.3d 165(A) (N.Y. Sup. Court 2019) FACTS:

Gladys Harvey (plaintiff) brought a small claims action to recover $5,000 from her landlord, Photo Property Services (defendant), to purchase new furniture because of the damage that the bedbugs that had infested her apartment caused to it. Following a trial, the lower court awarded her $2,000. The landlord appealed.

ISSUE:

Could the tenant recover for bedbug damage to her furniture? If so, what is the proper measure of damages?

DECISION:

Damage to furniture is not contemplated under the warranty of habitability. The tenant failed to establish that the landlord had caused the infestation or had ―failed to act with reasonable diligence upon being advised by plaintiff of the bedbug infestation in [her] apartment.‖

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In addition, the tenant did not have sufficient proof of cost and replacement in order to determine damages. It is also not clear how the Civil Court arrived at $2,000 as the amount to be awarded. We find that substantial justice requires a new trial. Reversed.

Answers to Case Questions 1. What proof was missing from Harvey’s case? Proof of the cost of the furniture; proof of the extent of the infestation issues; proof that the landlord had caused the infestation; proof that the landlord had not stepped up to remedy the situation. 2. What was wrong with her proof of her damages? She was seeking recovery for what she spent on new furniture instead of providing information on the value of her old furniture and the cost of replacement. CASE BRIEF: Gawad v. Aviad 960 N.Y.S.2d 50 (Sup. Ct. N.Y. 2012) FACTS:

Aisha M. Gawad and Natalia Ospina (plaintiffs) were roommates in an apartment building owned by Dalia Aviad. Their lease began on May 1, 2010 and the women found bedbugs in their apartment on May 23, 2010. They vacated the apartment on May 23, 2010. They brought suit in small claims court seeking return of their rent for the last 9 days in May as well as their security deposits and the cost of utilities in the apartment for those nine days. Aisha was awarded $1,986.78 in damages, and Natalia was awarded $2,234. Aviad appealed.

ISSUES:

What are the landlord and tenant obligations under the lease when there is a report of a habitability issue? Did the landlord and tenant fulfill those obligations?

DECISION:

The proof of the habitability issue was sufficient, but the damages are the issue. Because the apartment was uninhabitable as of May 23, 2010, they are not liable for future rents, June 1, 2010 and beyond; they are each entitled to the return of their respective $625 security deposits. They are not entitled to recover, as damages for a breach of the warranty of habitability the rent that they paid for the last nine days of May 2010, as defendant was not notified of the bedbug condition until May 23, 2010, because the landlord was entitled to that time to try and fix the problem. They were not entitled to reimbursement for their utility bills from May 23 until June 1. In addition, plaintiffs are not entitled to recover any damages for breach of the duty owed pursuant to the Multiple Dwelling Law, as plaintiffs did not

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introduce competent proof to establish that defendant had been on notice before May 23, 2010 of the bedbug condition Finally, no basis was shown for an award to plaintiffs of the utility charges they had incurred after May 23, 2010. Consequently, we find that substantial justice between the parties requires that the award to each plaintiff be reduced to the principal sum of $625, and we modify the judgments accordingly.

Answers to Case Questions 1. Provide the timeline for the tenants’ case. May 1—lease begins May 23—they find bedbugs May 23—they notify the landlord about the bed bugs May 23—they move out 2. What had the tenants established by their evidence, and what was missing from their cases? They established infestation but neglected to take into account the time a landlord is permitted to repair a habitability issue. They also were not clear on their utility damages. 3. What are the damages reduced to and why? They owe no rent starting June 1. Because they had not given the landlord a time to respond, they still owe for the rent from May 23 until the end of the month. They are entitled to the return of their security deposit. CASE BRIEF: Felice v. Warf 106 N.Y.Supp. 2d 837 (2019) FACTS:

Jerry Felice and Debra Coley (claimants) rented their property to Robert Warf and Susan Webers (defendants) for 5.5 months for $1,450 per month, beginning January 15, 2019 and ending May 24, 2019 (with an option to renew). Warf and Webers reported on January 23, 2019, that there were bedbugs in the home. Felice and Coley had an exterminator at the home on January 25. The exterminator found no evidence of bedbugs but treated the home anyway. Felice and Coley reduced the February rent to $730 for the inconvenience. The complaints continued, with Webers claiming that she had flea bites on her feet and face, but her doctor did not agree that they were flea bites. The exterminator came back again on February 4, 2019, because of Webers‘ complaints, found no fleas, but was not permitted to treat for them because there must be two weeks between treatment. The exterminator came again on February 16 but did not find any activity despite having put out glueboard traps. Webers and Warf complained again on February 28th and moved out on March 6th. The exterminator came again on March 15th and found no evidence of fleas. Felice and Cooley filed suit seeking $5,000 in damages for breach of their rental agreement.

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ISSUES:

What are the responsibilities of the landlord when there is a habitability issue? Did the landlord fulfill those responsibilities? If so, what are his damages? If not, what are the tenants‘ damages?

DECISION:

[The] Defendants breached the lease by moving out before the end of the term and failing to pay the rent due for March, April, and May 2019. However, the habitability issue has to be studied. In a claim of constructive eviction, however, the deprivation must be ―substantial and effectual.‖ A bedbug or other insect infestation can cause a breach of the warranty of habitability. The damages are not always constructive eviction and refund. There is abatement—the value of the apartment without fleas vs. the value with fleas. Defendants would be entitled to a 12% abatement of the rent due to fleas, but only for the period from January 23, 2019 (when the Defendants first reported the allegation to the Claimants) to March 6, 2019 (when the Defendants moved out). Since one month's rent was $1,450.00 and the abatement period was approximately one and a half months, the entire abatement would be $261.00. The Claimants, as an accommodation and in response to the Defendants' complaint of fleas, already voluntarily and in good faith gave the Defendants a rent abatement of $720.00 for the month of February 2019, and that far exceeds $261.00. As a result, the Defendants are owed no further abatement. [T]he Defendants owe the sum of $4,350.00 (for rent due because they breached the lease agreement) to the Claimants, and the Claimants can apply the security deposit of $1,450.00 against that amount, and it is further that the Defendants' Counterclaim is dismissed, and that judgment shall issue for the Claimants in the amount of $2,900.00 ($4,350.00 less the security deposit of $1,450.00), plus costs.

Answers to Case Questions 1. Is the remedy for breach of the warranty of habitability always ending the lease? Why or why not? No—constructive eviction is possible, but it is a high bar to meet. If that bar is not cleared, then the tenant is in breach of the lease agreement. 2. Explain why the prompt response of the landlord to the tenants’ complaint about fleas is important. The landlord shows good faith and is minimizing the problems for the tenant and issues with the lease when the problem is resolved as quickly as possible. 3. Discuss how the court computes the damages and who owes how much to whom. The tenants end up owing money because they breached their lease and because the landlords had already given them an abatement in the form of half-rent in February. However, the tenants who had breached do owe the landlords damages because their property was vacant with no rental income.

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Answer to Consider (9.1) The court held that gutter disrepair is not a breach of the implied warranty of merchantability. Below is an excerpt from the court‘s opinion: Fitness and habitability entails such defects as lack of water or heat, faulty wiring or vermin infestations' and does not include such items as missing handrails. Avila v. Gerdenich Realty Co., 6th Dist. No. L-07-1098, 2007-Ohio-6356, ¶ 9 quoting Parks v. Menyart Plumbing and Heating Supply Co., Inc., 8th Dist. No. 75424, (Dec. 9, 1999); Accord Mullins v. Grosz, 10th Dist. No. 10AP-23, 2010-Ohio-3834, ¶ 34 (―[W]e cannot find that the lack of a handrail or gating in the porch/step/walkway area of the premises constitutes a defective condition rendering the premises unfit and uninhabitable.‖) The facts in this case indicate that the front porch was not equipped with gutters or downspouts for the duration of appellant's tenancy and indeed for the entire time appellee has owned the home since 1999 or 2000. We find that the absence of gutters, in this case, did not as a matter of law render the home unfit or uninhabitable. Accordingly, liability may not be predicated under R.C. 5321.04(A)(2), and appellant's second assignment of error is not well taken. For the foregoing reasons, we conclude that summary judgment was appropriate in this matter, as appellee was entitled to judgment as a matter of law. Accordingly, all three assignments of error are found not well taken, and the judgment of the Huron County Court of Common Pleas is affirmed. It is ordered that appellant pay the court costs of this appeal pursuant to App. R. 24. Gress v. Wechter, 2013 WL 1092731 (Ohio App. 2013). 5. Parties can provide for repair and upkeep in the lease agreement 6. Application and extension of implied warranty 7. Applicable statutes on condition of property a. b. c. d.

Residential lead-based paint Imposes restrictions on use Requires disclosures by landlord Mold regulations, disclosure, and clean-up requirements

8. Specific Issues in Habitability a. Lead paint b. Mold Cover PRACTICAL TIP on mold.

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Answer to Ethical Issue (9.1) The judge is applying the standard of business ethics: Would you and your family be willing to endure the same conditions you are subjecting your tenants to? 9-2c

Tenant Fees 1. Security deposit a. b. c. d.

URLTA limits amount Some states require separate account and payment of interest on deposit Some states include prepaid rent as part of security deposit Can be used as a liquidated damage clause—tenant must be given notice under URLTA if deposit is to be kept—damages allowed if wrongfully retained

Answer to Consider (9.2) Under the URLTA, the amount of the security deposit is okay. The deposit could be labeled liquidated damages, otherwise the damages would be three times $1,050, or $3,150. The damages would be two times the $1,050/month or $2,100.00. The one-month‘s rent mitigates the tenant‘s damages. 2. Cleaning Deposit a. Redecorating, etc. b. Under URLTA, must state if non-refundable c. Can be incentive for tenant to maintain premises 3. Prepaid Rent a. First and last month's rent b. Allows landlord rent if tenant abandons c. Limitations do not apply in commercial leases 4. Broker Fees: Issues evolving on whether they are permitted and, if so, in what circumstances and what limitations apply 5. Mind Your Fee Labels Courts are examining true purpose of fees, not just following the labels CASE BRIEF: De Stefano v. Apts. Downtown 879 N.W.2d 155 (Iowa 2016) FACTS:

In July 2010, four University of Iowa students—Elyse De Stefano, Hillary Block, Meghan Crotty, and Jennifer Connelly (tenants)—rented a four-bedroom home in Iowa City from Apts. Downtown, Inc., (Apartments Downtown/landlord) under a written lease agreement. The lease ran from July 31, 2010, to July 26, 2011. The

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rent was $1,635 per month, and the tenants paid a rental deposit of one month's rent. The preprinted lease contained seventy tightly spaced paragraphs featuring many subparts and considerable detail. In paragraph 30 the lease provided, ―Tenants agree to pay for all damages to the apartment windows, screens, and doors, including exterior unit doors (including random acts of vandalism).‖ The lease also provided in paragraph 33, ―Unless the Landlord is negligent, Tenants are responsible for the cost of all damages/repairs to windows, screens, doors, carpet, and walls, regardless of whether such damage is caused by residents, guests or others.‖ Additionally, the lease contained a $452–$690 estimated cost for the repair or replacement of a prehung entry door. Under the lease, Iowa City Maintenance would perform all repairs at rates specified in the lease. Iowa City Maintenance is an alter ego of Apartments Downtown. The lease also included an automatic charge for carpet cleaning at the conclusion of the lease term for a charge starting at $95 (efficiency) not to exceed $225 (6+ bedrooms). There was a burglary at the house in October 2010. The tenants filed a police report with the Iowa City Police Department. The report stated that the burglary had left the exterior doorframe damaged and the door lock broken. The landlord had the door repaired, but then billed the tenants. The tenants refused to pay the bill. In May 2011, the tenants found individuals to sublease the home during the summer months. The tenants contacted the landlord to ask permission to sublease, as required under their lease. The lease also provided, however, ―Only apartments whose rental accounts are in good standing may sublease. All rent/fees on the account must be paid before Landlord consents to a sublease.‖ Because of the door payment issue, the landlord refused to consent to any sublease. The tenants paid regular rent on a monthly basis for the lease term, including for the months of June and July 2011 after failing to receive Apartments Downtown's approval for a sublease. On August 25, 2011, the tenants received a ―Security Deposit Statement‖ from the landlord with the following details: Charges to the tenants' rental account: Carpet Cleaning:

$191.00

Cleaning Charges:

$280.00

Past Due Rent & Fees on Acct:

$1,308.45

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$210.00 for lawn care $598.46 for replacement of exterior door $150.00 for failure to timely pay for replacement of the door $349.99 for replacement of a refrigerator gasket and two broken screens Lawn Clean Up:

$60.00

Screens (Kitchen, BR 2):

$150.00

Blinds (BR 2, 4):

$99.00

Removal & Disposal of Tenants Items (Bed mattress in front lawn): $50.00 Total Deductions (-)

$2,138.45

Total Due:

$(503.45)

One of the tenants responded to the landlord and protested the bill for the door on the grounds that the lease provision for imposing such costs was ―unconscionable and thus unenforceable by a court.‖ A month later, De Stefano and the other tenants received an email from the landlord with additional cleaning fees and late fees. De Stefano responded with an email asking for the return of the deposit and characterizing the landlord's charges against the account as illegal and unreasonable. The landlord wrote back confirming the charges and tying them to provisions in the lease. The balance due of $503.45 was referred for collection. On October 4, De Stefano brought a small claims action against Apartments Downtown. De Stefano requested $5,000 from Apartments Downtown as well as attorneys' fees and court costs. The small claims court found that the carpet-cleaning provision in the lease was unenforceable, the lease provisions making tenants responsible for the damage to the door caused by a burglary were unconscionable and thus unenforceable, and that punitive damages were warranted. The court awarded De Stefano $4,520 in damages and $200 in statutory punitive damages for a total of $4,720. On appeal, the district court reversed in part and affirmed in part. The court's holdings reduced the award to De Stefano to $851.54. This figure was calculated by taking the $1,635 deposit and reducing it by $385 (the deductions authorized by the small claims court and not challenged by De Stefano on appeal), and $598.46 (the charge for the door replacement), then adding on $200 in punitive damages. Both parties appealed. ISSUES:

Could the landlord require payment for the repair of the door damaged by a break-in? Other questions emerged from this issue such as damages, rent due (if any), and the failure to grant permission for a sublease.

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DECISION:

The issues were all under the Uniform Residential Landlord and Tenant Act (URLTA): (1) whether a landlord may enter into a contract with a tenant that requires the tenant to assume the cost of making repairs necessary to maintain the premises in a fit and habitable condition. The court held no, the shift to the tenant was unconscionable and removed the legislatively-assigned duty of the landlord. (2) whether a landlord can refuse to approve a sublease based upon the refusal of the tenant to assume the cost of maintaining the premises in a fit and habitable condition. It is reasonable for a landlord to require tenants to be in good standing before transferring rights under the lease. (3) whether a landlord may automatically deduct a fee for carpet cleaning at the conclusion of the lease term. Cleaning fees are perfectly fine, but they cannot be automatic—they must be based on the condition of the property because the tenant might have cleaned the carpet—it has to be based on what the tenant did to the property. (4) whether statutory punitive damages are available for willful violation of the URLTA in this case. It was not willful or dishonest for the landlord to put the provision in the lease—they were wrong under the law, but the landlord was honest about it—there was full and fair, albeit inaccurate, disclosure up front.

Answers to Case Questions Explain the inconsistency between the landlord obligation of habitability and the provisions for repairs being billed to tenants. The landlord has an obligation to maintain the premises in a fit and habitable condition. Shifting the cost burden to the tenant means that the tenant loses that statutory protection. The landlord simply has to collect rent and reimbursement and need not assume the assigned statutory responsibility. Why was the landlord’s decision to disallow the sublease upheld? It was reasonable to require that tenants be in good standing and have all fees paid before permitting a sublease, even if there was a dispute over the door fees. Explain why the court does not uphold the punitive damages. The landlord was doing something the URLTA did not permit, but the landlord was upfront about it—all of his terms and conditions were in the lease—there was no dishonesty or fraud. The landlord may have been wrong, but the landlord did not mislead the tenants. What lessons do you learn from the importance of understanding lease terms? Do you have the power of negotiating terms? Read the lease, and then check to see if there are some things that are negotiable. If during the course of the lease an issue of law or interpretation comes up—get it clarified through small claims court or other means before allowing the fees to accumulate. 9-2d

Amount of Rent

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1. Late Fees 2. Rent Increases 3. Rent Control—statutes that limit rent in certain areas—USE POWERPOINT SLIDE 9-8 a. Rent-control enforcement—results in ―hotels as residences‖ (still subject to rent control) b. Rent control exceptions i. Waivers are ineffective ii. Fisher v. City of Berkeley, California—the government, in the exercise of its police power, is controlling/stabilizing rent prices

Answer to Consider (9.3) The economic issues in rent control statutes are as follows: 1. In both New York and San Francisco, there is limited unit availability. 2. Properties that are exempt are in high demand for the market is artificially small. 3. Landlords, unable to earn a decent return, take their residential property off the market, thus exacerbating the shortage. 4. There are no incentives for new residential lease property; builders construct condos to avoid limits on returns. 5. No incentives for fixing up properties because there is no return on the investment. Demand exceeds supply but prices are not permitted high enough to generate new housing supplies of available rental property. 9-2e

Lease Term 1. Options to renew 2. After termination—periodic tenancy 3. Holdover problems 4. Termination and termination notice

9-2f

Attorney's Fees 1. When recoverable 2. Protection for both parties

9-2g

Rules and Regulations 1. Valid under URLTA

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2. Tenant must be informed of them 3. Can change during lease—notification and no change of contract terms 4. Must serve purpose and not be arbitrary CASE BRIEF: Berlinger v. Suburban Apartment Management 454 N.E.2d 1367 (Oh. 1982) FACTS:

Gary Berlinger was a tenant in an apartment that had a rule that prohibited, among other things, motorcycles being kept on the premises. Berlinger stored a motorcycle on his patio for four days. He was notified of the violation and fined $50 per day (according to the rule) or $200 total. Berlinger moved out and SAM kept his security deposit to satisfy the fine. Berlinger sued to have the deposit returned. The trial court returned $20 and Berlinger appealed.

ISSUE:

Was the rule and the $50 fine valid and enforceable?

DECISION:

The $50 fine per day was unreasonable and unenforceable. The appellate court returned the fine to Berlinger.

Answers to Case Questions 1. What rule was at issue? A rule that prohibited motorcycles and other things from the premises and carried a $50 per day fine for violations. 2. Was the fine excessive? The appellate court held the fine was excessive since it bore no relationship to the nature of the violations. PRACTICAL TIP: Violating rules is grounds for eviction.

Answer to Consider (9.4) The court held for the tenant both on the grounds that the rules were not clear and also because the tenant was not given the opportunity to respond to the allegations and alleged violations of the rules. The case was remanded so that the tenant could be given a chance to respond to the allegations. Nealy v. Southlawn Palms Apartments, 196 S.W.3d 386 (Tex. App. 2006). 9-2h

Landlord's Right of Access 1. URLTA—two days' notice 2. Emergency exception 3. Abandonment exception

9-2i

Assignment and Sublease

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1. Rights and Responsibilities of Parties to a Lease Assignment—complete surrender of leasehold interest 2. Rights and Responsibilities of Parties to a Sublease a. Surrender of leasehold interest for only part of the lease period b. Original tenant remains liable on the lease c. Parties may agree to approval before assignment or sublease or agree to prohibit altogether 3. Short-Term Subleases: Airbnb, HomeAway, and Vacation Rentals a. Landlord Litigation on Short-Terms Rentals b. City and Local Controls on Short-Term Leases 9-2j

Unconscionability 1. Section in URLTA prohibits it 2. Courts examine bargaining power of parties and fairness to determine validity of lease

9-3 Rights and Responsibilities of Parties to Lease Agreement—USE POWERPOINT SLIDES 9-28 TO 9-34 9-3a

Responsibilities of Landlords and Rights of Tenants 1. Maintenance of the Premises a. At common law—no such duty existed b. Some states have said implied warranty of habitability continues and landlord will be responsible for upkeep or lease terminates c. Doctrine of constructive eviction i. ii. iii. iv.

Obligation to repair No repairs made Premises are basically uninhabitable Tenant must move out

PRACTICAL TIP: If landlord agrees to assume responsibility for maintenance, then must honor commitment and maintain premises. CASE BRIEF: Newkirk v. Scala 935 N.Y.S.2d 176 (N.Y.A.D. 2011) FACTS:

Lisa Newkirk and her children rented a home from William Scala (defendant) for the period from December 2003 to December 2004. She paid nine months' rent and made a security deposit. The home's tap water had an overpowering odor from the outset. The home's tap water had a sickening smell that prevented its use for any purpose. The water's stench was so extreme that it made her and her

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children nauseous, ruined clothes washed in it, and forced them not only to launder clothes, but to bathe and eat, elsewhere. The certified water specialist who first installed the water treatment system at the residence, Bruce Leighton, investigated the situation at Mr. Scala's request and agreed that the water had a ―horrible smell,‖ akin to burnt rotting eggs. Mr. Leighton advised Mr. Scala that the odor could be corrected by replacing part of the water treatment system. Despite this information and Ms. Newkirk‘s repeated pleas, Mr. Scala failed to act. Following Mr. Scala‘s prolonged failure to correct the problem, Ms. Newkirk and her children moved out in June 2004. Ms. Newkirk filed suit based on Mr. Scala‘s breach of the warranty of habitability. The trial court awarded her $10,100 in damages, plus interest, costs, and disbursements. Mr. Scala appealed. ISSUES:

Was there constructive eviction? Was there a breach of the warranty of habitability? What are the damages to the tenant?

DECISION:

Giving deference to Supreme Court's assessment of credibility, we conclude that the foregoing [facts] amply supports the court's finding that defendant breached the implied warranty of habitability. Turning to the amount of damages awarded, ―the proper measure of damages for breach of the warranty is the difference between the fair market value of the premises if they had been as warranted, as measured by the rent reserved under the lease, and the value of the premises during the period of the breach‖. There is no dispute as to the rent charged under the lease and, inasmuch as the breach was severe and persisted throughout plaintiff's occupancy due to defendant's inaction, Supreme Court properly determined that the rental value of the premises was halved.

Answers To Case Questions 1. Describe what made the premises uninhabitable. The water had a ―rotten egg‖ smell, and it made the tenants smell when they bathed, and also made their laundered clothes smell. 2. Explain how the damages were determined. The court determined that the value of the property was cut in half by the problems with the water and smell and awarded the tenant one-half of the lease amount. 3. What advice would you give a tenant in this situation? A landlord? The tenant probably should have moved out sooner—she stayed for one-half of the lease and could have justified constructive eviction sooner. The landlord should have taken the advice of his own expert and fixed the problem.

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Answer to Consider (9.5) It is quite clear that in New York it is the public policy of the state to protect potential victims of a sex offender from ―the risk of a repeated offense by such sex offender and the threat posed to public safety‖ by that sex offender in limiting where such offender may go or work and requiring notification to the public via Internet postings and phone where this offender lives as well as imposing an obligation to notify ―vulnerable organizational entities‖ that deal with potential victims in general and children in particular. What strikes the Court is the emphasis in the notification requirements and the other laws on keeping a sex offender away from the vicinity of children. This reflects the universal concern of society and any parent of a child when a sex offender is found in the proximity of where that child is located. A reasonable parent or caretaker of a child will either institute heightened vigilance and/or remove the child physically from the zone of danger around the sex offender to reduce the risk to the child of becoming a victim of the sex offender repeating a sexual offense against the child. It is clear that isolating a child from the sex offender puts enormous pressure on a parent to remove the child from the location where the sex offender is located as being the first line of defense to keep the child from becoming a victim of a sex attack. In this case, the fact that a Level 3 Sex Offender took up residence in an apartment adjacent to where the tenant with three young daughters lived and there was no means to protect them from being victims of a potential repeat offense by this Level 3 Sex Offender except to remove them from the threat by vacating the apartment and moving away, the Court agrees that the tenant had valid grounds to request an early termination of the lease. The Court finds that the alternative choice to remain in the apartment until the end of the term six months later and exercising a constant vigilance to protect the children would place unreasonable pressure on the tenant and would completely destroy the peaceful and quiet enjoyment of the apartment expressly covenanted by the lease.

Warranty of Habitability In this case, assuming the natural and reasonable concerns expressed by the tenant for the welfare of his family due to having a Level 3 Sex Offender move in to the neighboring apartment was a ―safety threat‖ that fell ―within the reach of the warranty of habitability‖ then the landlord‘s duty ―which encompasses a third party‘s foreseeable criminal conduct‖ would be to force the sex

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offender move elsewhere but only if he ―… could have taken [such a] step‖ (Cohen v. Werner (1975), 82 Misc.2d 295, 298, 368 N.Y.S.2d 1005). However, Real Property Law Section 235-f prohibits a landlord from removing a Registered Sex Offender either as a guest or occupant of a tenant‘s leasehold as has occurred in this case based solely on that designation unless perhaps his right ―to restrict occupancy in order to comply with federal, state or local laws, regulations, ordinances or codes‖ could be construed to apply if the leasehold was located within an area which excluded sex offenders. The Court finds that Real Property Law Section 235-b does not impose a duty on a landlord to remove a Registered Sex Offender who has become a legal occupant of his rental property merely due to that designation. Unconscionability Real Property Law Section 235-c(1) states ―[I]f the court as a matter of law finds a lease or any clause of the lease to have been unconscionable at the time it was made the Court may refuse to, or it may enforce the remainder of the lease without the unconscionable clause, or it may so limit the application of any unconscionable clause so as to avoid any unconscionable result.‖ The Court concludes that the ―abandonment‖ clause in the contract which gives the landlord various options including continuing to charge the tenant the full rent due for the balance of the term if the tenant quits the leasehold before the end of the one-year term without regard to the reason the tenant abandons the promise even for good cause was ―unconscionable‖ under Real Property Law Section 235-c(1) for that reason when it was made. Good Faith and Fair Dealing Judge Posner in discussing contract law remedies observed, ―[T]he concept of the duty of good faith … is a stab at approximating the terms the parties would have negotiated had they foreseen the circumstances that have given rise to their dispute.‖ Judge Posner explains that, ―[A]t the formation of the contract the parties are dealing with present realities; performance still lies in the future. As performance unfolds, circumstances change, often unforeseeably; the explicit terms of the contract become progressively less to the governance of the parties‘ relationship; and the role of implied conditions and with it the scope and bite of the good faith doctrine grows.‖ The Court finds in this case ―a reasonable person in the position of the promisee [tenant] would be justified in understanding‖ the landlord would allow him to terminate the lease in the event a Level 3 Sex Offender moved into the next door apartment because neither he or the landlord would have expected any objection to such an early termination in such an event when the

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landlord could not force the Level 3 Sex Offender to vacate the apartment for the safety of the tenant‘s family. The landlord also expressly warranted to the tenant peaceful and quiet enjoyment of the leasehold which he could no longer provide when a Level 3 Sex Offender moved into the adjoining apartment. Since he could not remove this sex offender under Real Property Law 235-f so as to restore to the tenant quiet enjoyment of his leasehold, he should allow the tenant to vacate his apartment without further rent obligations so he could afford to move his family to safer surroundings. For the landlord to refuse to allow an early termination of this lease and insisted [sic] on full payment of the rent due until the end of the original term six months later would be a violation of the covenant of good faith and fair dealing implicit in all New York contracts based on the facts of this case. Real Property Law Section 227-c (C. 73, L.2007), effective August 3, 2007, allows a victim of abuse for whom an order of protection has been issued to terminate a residential lease without incurring any further liability for future rent. Real Property Law Section 227-c states that one of the criteria for allowing relief where ―… there … exists a substantial risk of physical or emotional harm to such person or such person‘s child … if the parties remain in the premises and that relocation will substantially reduce such risk‖ (RPL 227-c[2] [b][i] ). This legislation should be expanded to allow similar rights to a tenant endangered when a Registered Sex Offender moves into the same building to allow a tenant to relocate to avoid similar risks. ―[T]he day of caveat emptor, caveat lessee and … Simon Legrees are over as a matter of law for the tenants of this State‖. This conclusion is based on the fact that if State law prohibits a Registered Sex Offender from selling ice cream to children from a truck, then a tenant should have a right to remove his children from a living unit when a sex offender resides next door in order to also keep a sex offender away from his children. The plaintiff is awarded $150 as a partial refund of the $450 security deposit after allowing defendant $300 credit for the balance due on the January 2007 rent together with costs of $15. The defendant‘s counterclaim for $2,700 in rent due under the lease agreement for the period from February 2007 until July 2007 is denied. Knudsen v. Lax, 842 N.Y.S.2d 341 (2007). d. Repair and deduct is better—tenant need not move e. Self-help i. Provided for in URLTA ii. Must give landlord notice and an opportunity to act iii. Repair and deduct f.

Tort liability of landlord

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i. Tenant repairs ii. Can recover in tort for harms prevented 2. Retaliatory Actions by Landlords a. Tenant protected in exercising right to repair and deduct; unionize or file complaint with agency b. URLTA gives one-year presumptive period if tenant thrown out c. Presumed retaliatory unless it can be shown that tenant breached d. Lease termination i. Tenant uses constructive eviction ii. Or lease is void for housing violations 3. Maintenance of the Common Areas a. Landlord's responsibility to maintain b. Includes stairways, halls, etc. CASE BRIEF: Young v. Northington 2019 WL 5490986 (C.A. Kentucky 2019)1 FACTS:

James Young was a tenant at a duplex property owned by Dwight Northington. In exchange for doing routine maintenance jobs at the duplex, Young received a reduction in this rent. Each side of the duplex had a basement with laundry facilities that shared sewer service. While doing his laundry, Young noted water on the basement floor that quickly turned into a gush of raw sewage. Young picked up his laundry basket in order to save his clothing. In doing so, he got raw sewage on the bottom of his orthopedic boot that he was wearing from an injury he received because of a home invasion at the duplex. While climbing the stairs to get out of the basement, Young slipped and received an abrasion on his injured leg from the stair carpeting. Young put antiseptic on his leg immediately, but over the next few days, his leg began to swell. He was treated for the swelling and pain at the hospital and then admitted due to an MSRA (Methicillin-resistant Staphylococcus aureus—a bacterium that is difficult to treat because it is resistant to many antibiotics) infection and an abscess on his leg. Over a two-year period, Young had multiple surgeries, and his left leg is now shorter than his right leg. The possibility of amputation looms in his future.

Although the case is an unpublished opinion, it provides an excellent discussion of liability on a compelling set of facts.

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Young filed suit against Northington for his negligence in the maintenance and repair of the plumbing that then resulted in his injury. The trial court granted Northington‘s motion for summary judgment. ISSUE:

Can a landlord be held liable for direct and subsequently following injuries from the failure to maintain proper plumbing?

DECISION:

The court holds the following:        

Landlords are responsible for the maintenance and safety in common areas. The laundry room was a common area. By statute, landlords are responsible for keeping the heating, plumbing, electricity in safe and working order. Landlords are responsible for fixing those things they are aware of. Landlords are responsible under the Restatement for inspection to determine working order of property and its safety. Testimony from another tenant and her e-mail established that there had been complaints about the water, plumbing, and sewage smell. There is a factual issue about the knowledge of the landlord that must be resolved at trial. The case is reversed because summary judgment was not appropriate.

Reversed.

Answers to Case Questions 1. What duties would Young present as being breached by Northington? The duties would focus on the basic maintenance of the water supply, the plumbing, and the sewage disposal and functions. Is there causation for Young’s eventual medical condition? The cause of the injuries is an interesting question that the court does not address because it is focused on the landlord‘s duty and the need to establish that duty and its breach. The eventual harm to Young was the result of, perhaps, improper treatment and attention to the injury he received on the stairs. The issue of the germs getting into the cut in an injured leg required perhaps more attention than just cleansing the wound. He did wait to obtain treatment. However, the escape of raw sewage in a residence carries with it far-reaching potential damages and harm. 3. Why is the e-mail and testimony from another tenant so important in the case? That evidence is the key to establishing that the landlord was aware of problems in the building with the plumbing, the water, and the smells from the sewage issues. 4. Duty to Maintain Premises to Prevent Injury CASE BRIEF: Yu Fang Tan v. Arnel Management Co. 170 Cal.App.4th 1087, 88 Cal.Rptr.3d 754 (Cal. App. 2009) FACTS:

Arnel Management Company (Defendant) manages the Pheasant Ridge Apartments. Pheasant Ridge is a 620-unit, multi-building apartment complex,

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with over 1,000 residents, situated on 20.59 acres in Rowland Heights, California. Before the gated entrance to the complex are two parking lots, one is a visitor lot, and the other is the parking lot for the leasing office, located on the other side of the road. There are two security gates just past the parking lot. The gates are remote-control operated. Most of the property's parking spaces lie behind these gates by the apartments. Yu Fang Tang and his wife, Chun Kuei Chang, and their child (Plaintiffs) moved into Pheasant Ridge in July 2002 and received one assigned parking space. Tenants could pay an additional fee for a garage, but Tang chose not to rent one. Tenants with a second car could park in unassigned parking spaces located throughout the complex, or in one of the two lots described as long as the car was removed from the leasing office lot before 7:00 a.m. At around 11:30 p.m. on December 28, 2002, Tang returned home and tried to find an unassigned open parking space because his wife had parked the family's other car in their assigned space. Unable to locate an available space, he parked in the leasing office parking lot outside the gated area. As Tang was parking his car, an unidentified man approached him and asked for help. When Tang opened his window, the man pointed a gun and told him to get out of the car because the man wanted it. Plaintiff responded, ―Okay. Let me park my car first.‖ But the car rolled a little, at which point, the assailant shot Tang in the neck. The incident rendered Tang a quadriplegic. Tang and Chang filed suit against Arnel for their negligent management of the complex as well as its policy on not having sufficient parking inside the gated area and charging more for such additional spaces. The trial court granted judgment on the pleadings for Arnel and Tang and Chang appealed. ISSUE:

Is the landlord/owner liable for the injuries caused by the criminal conduct of third parties on the premises?

DECISION:

There had been three alleged prior incidents of violence in the ungated area of apartment complex that were sufficiently similar as to impose on landlords a duty of care to provide relatively minimal security measures, in order to protect tenants from foreseeable third party criminal acts. All three acts were sudden, unprovoked, increasingly violent assaults on people in ungated parking areas on the premises by strangers in the middle of the night, causing great bodily injury, and all three incidents were within two years before the attack on tenant. The security measures that tenant proposed to prevent harm from foreseeable third-party criminal acts on apartment complex premises were minimal and not onerous. The tenant merely proposed that landlords should have placed gates before the leasing office parking lot similar to the ones before the tenants' parking lot, and that landlords should have added a ―minor extension‖ to the fence around the premises to close a gap; the estimated cost of the existing gates was $13,050. Reversed.

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Answers to Case Questions 1. List the three areas a court must review before imposing liability on a landlord for a criminal act by a third party on a tenant. The court must examine the proposed security measures a tenant has that would have prevented the problem and, secondly, provide information on the costs of those measures. Finally, the tenant must show foreseeability, something demonstrated through the examination of past criminal incidents on the property. Here the cost to put up a partial fence or gate was minimal and there was extensive criminal activity that preceded the injuries to Tang. 2. What lessons on security precautions should landlords take from the decision in this case? Security guards are not always necessary, but where safety can be increased at a relatively minor cost, landlords should take those steps. Landlords should also be keeping track of crimes and incidents so as to track where they need extra precautions and when and how.

5. Duty to Comply with Statutes and Regulations: The Americans with Disabilities Act (ADA) a. Must remove barriers b. Landlord is responsible for common areas c. There is some duty to make reasonable accommodation for tenets with disabilities—however, if the tenant interferes with other tenants' use and enjoyment of the property, the landlord can evict them, e.g., shouting racial epithets at other tenants 6. Duty to Comply with Statutes and Regulations: Convicts, Registrants, and Leasing a. Public housing guidelines b. Drug use restrictions and right of eviction by landlord for one-time use c. Department of Housing and Urban Development (HUD) v. Rucker

Answer to Consider (9.6) The facts in this case reveal that Harris was an innocent tenant—CMHA seeks to evict her based upon the conduct of a guest, not a member of her household, whom she neither knew nor should have known was involved in drug-related criminal activity. Harris cooperated with the CMHA police arresting the guest and allowed them to search her apartment. The search turned up no evidence of drugs or drug activity. To permit the eviction of Harris under these circumstances would be to hold that public housing tenants can have no guests or, equally implausible, to hold that public housing tenants must conduct a thorough search of each guest every time guests enter PHA property. This court is not prepared to make such a holding. This ruling should not be construed to require the PHA to prove that a tenant was aware of the drug-related criminal activity of a guest in order to secure an eviction of the tenant; rather, in

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this case, this tenant has established to the satisfaction of the court that equity prohibits her eviction from the premises. Have the students discuss whether this case is consistent with the U.S. Supreme Court ruling. Cuyahoga Metro. Housing Auth. v. Harris, 2006 WL 3859205 (Ohio Mun. Ct. 2006). See also, Cuyahoga Metro. Hous. Auth. v. Davis, 967 N.E.2d 411 (Ohio 2011). 7. Liability to Third Parties a. b. c. d.

Responsible if accident is in common area Responsible if accident is in tenant's dwelling if they had duty to maintain Responsible if code violations New issue of responsibility for adequate security

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8. Use of Exculpatory Clauses a. Hold-harmless clauses b. Ineffective as unconscionable c. Landlords should carry insurance 9-3b

Rights of Landlords and Responsibilities of Tenants 1. Payment of rent a. b. c. d.

Many cities have attempted rent control Rent must be timely Paid in proper form and at proper place Nonpayment i. Must give tenant notice ii. If payment not made—termination of lease iii. Action for dispossession or forcible detainer a) Summary proceedings b) Tenant's defenses are limited

e. Landlord must reinstate right to timely payment if late payments have been accepted f. If tenant abandons, bring action for lost rents g. Landlord has duty to mitigate and try to find a substitute tenant 2. Breach of lease agreement a. Tenant disobeys rules b. Disturbs others' rights c. Landlord can bring dispossession action

Answer to Consider (9.7) Yes, eviction on the basis of interference with other tenants (unreasonable conduct) is possible; non-payment of rent is only one reason for eviction. Taylor v. Gill Street Investments, 743 P.2d 345 (Alaska 1987). CAUTIONS AND CONCLUSIONS—Checklist for Leases Factors to be Weighed or Considered: 1. 2. 3. 4.

Writing requirement Lease term Rights upon termination Options to renew

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5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Notice of termination Attorney's fees Exculpatory clauses and liability Maintenance responsibilities Fixtures Assignments and subleases Access of landlord Deposits—amounts and refundability Utilities Warranty of habitability Payment of rent—where, when, late

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Additional Activities and Assignments Answers To Chapter Problems 1. Yes, the landlord is liable because hot water is a basic requirement of habitability and scalding water breaches that. Further, landlord was on notice of problems. Bennett M. Lifter, Inc. v. Varnado, 480 So.2d 1336 (Fla. 1985). 2. Yes, if children had become ill from eating lead paint, landlord would have been liable; can recover for the prevention of a tort. New York City later passed legislation allowing the "repair and deduct" self-help method for tenants. Have students read the Garcia case in the In-Class exercises. Garcia v. Freeland Realty, Inc., 314 N.Y.S.2d 215 (1972). 3. The jury apportioned fault in the case. Based upon the evidence and its assessment of the witnesses' credibility, the jury made a considered determination that the lighting was not as significant a contributing factor in the occurrence of the accident as Mr. Guice's negligence. Mr. Guice admittedly was aware that plaintiff would be following him toward the apartment doorway when he entered the apartment to turn on the lights. The overnight bag was not large, and presumably could easily have been picked up and brought into the apartment by Mr. Guice after he unlocked the door. Additionally, Mr. Guice admitted that he had not left his exterior light on, as was his usual custom, and there was evidence suggesting that that light's bulb was burned out at the time the accident occurred, preventing it from adding light to the location. Although defendant's property manager, Mr. Holmes, confirmed that defendant assumed responsibility for replacement and repair of the exterior lights for each apartment, he and his wife testified that defendant relied upon each tenant to bring any such problem to the attention of the resident manager. No contrary evidence was presented to dispute that testimony. The jury also obviously concluded that plaintiff's actions in failing to maintain a proper lookout while walking in a darkened area and in choosing to enter the still-dark apartment

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while carrying the computer hard drive before her were as significant in terms of causing the accident as the inadequate illumination. Additionally, the jury no doubt gave substantial weight to the absence of any other accidents attributable to the apartments' lighting situation over the prior twenty years. The photographs introduced into evidence were taken in daylight. One depicts a dark overnight bag on the concrete walkway near the doorway. The jury conceivably could have concluded that the dark overnight bag would still have been somewhat visible at night, given its contrast with the light tone of the concrete walkway. After careful consideration of the record, we find that its ultimate determination is supported by the evidence and entitled to deference. We therefore affirm the judgment incorporating the jury's findings and apportionment of fault. The jury also found Mr. Guice and plaintiff negligent and apportioned the following percentages of fault to the parties: defendant: 17%; plaintiff: 17%; and Mr. Guice: 66%. Harris v. Delta Development Partnership, 994 So.2d 69 (La. App. 2008). 4. The court held that Schwann had breached the rental agreement because the premises were not habitable. Because county authorities locked out the tenant, the tenant‘s damages would be the costs of finding another place to live as well as the rent that was required because his lease was terminated through bad conditions. Erlach v. Sierra Asset Servicing, LLC, 173 Cal.Rptr.3d 159 (Cal. App. 2014). 5. In the case, the two rule violations plus a failure to pay rent resulted in an eviction, but the rule violations alone would be enough, particularly in government subsidized housing. The rules are very strict and, in this case, the rule was for health and safety reasons. Washington v. Related Arbor Court, LLC, 357 S.W.3d 676 (Tex. App. 2011). 6. No, the landlord has a duty to mitigate, can only collect damages if unable to re-rent, cannot do nothing and collect the full amount. 7. Yes, the landlord is liable. The court held that the failure of Post to take care of the sealed window meant that it could not be opened during the fire. The fingerprints indicated that Abson was trying to open the window so that she could breathe. Since the houseguests and children were able to survive by opening windows and breathing until they were rescued indicates that her cause of death was the inability to open the window. Martini v. Post, 313 P.3d 473 (Wash. App. 2013). 8. No. Landlord is not an insurer of the premises. There was no complaint about the shower and landlord had no knowledge of any problems that made the premises uninhabitable. Armstrong v. Cione, 736 P.2d 440 (Haw. 1987). 9. There is currently a movement to prevent landlords from inquiring about criminal backgrounds. And sex registrants are required to make these disclosures. Presently, landlords have the right to refuse to rent to those with criminal records and public housing

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landlords have federal standards that prohibit leasing to convicted drug offenders. The conflicting standards with state, local, and federal regulations are placing landlords in an impossible situation for proper screening, liability, and their decisions. 10. If there is constructive eviction, then the warranty of habitability has been breached. But, there are issues with the warranty of habitability that may not rise to constructive eviction— the lack of air conditioning in a hot climate is a breach of the warranty of habitability but it may not be constructive eviction because some homes, even in hot climates, do not have air conditioning. It is possible to survive. A stove that does not work might be a breach of the warranty of habitability but not constructive eviction.

In-Class Exercises 1. Have the students evaluate the legality of their leases or a lease you provide with respect to the URLTA or your own state laws. 2. Have the students evaluate the enforceability of apartment complex rules for their own apartment (or you could furnish a set of rules for their evaluation). 3. Have the students list the steps they should take in the event their apartment/home has no water, and the landlord is not responding. Have them use the URLTA or your state law. 4. Have the students read the Calkins v. Fox case: CALKINS v. FOX 792 P.2d 36 (N.M. 1990) Daniel Enriquez, an eight-year-old boy, was killed when he was struck by an automobile on a frontage road in the vicinity of the apartment complex where he lived with his grandparents. In the complex there was a playground built by the owner, the Cox Estates (respondent), for use by the children in the complex. The play area was enclosed by a fence. Immediately outside the fenced-in playground was a flood ditch, the frontage road, and the Interstate 25. A hole in the fence allowed the children to escape from the playground into the street area. Fred Calkins, the personal representative for Daniel's estate (petitioner), filed suit against the property owner/landlord for its negligence in failing to maintain the fence. The trial court granted Cox Estates summary judgment and Calkins appealed. BACA, Justice This case raises issues of duty and proximate cause. Integral to both elements is a question of foreseeability. In determining duty, it must be determined that the injured party was a foreseeable plaintiff—that he was within the zone of danger created by respondent's actions; in other words, to whom was the duty owed? In determining proximate cause, an element of foreseeability is also present—the question then is whether the injury to petitioner was a foreseeable result of respondent's breach, i.e., what manner of harm is foreseeable? Both questions of foreseeability are distinct; the first must be decided as a matter of law by the

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judge, using established legal policy in determining whether a duty was owed petitioner, and the second, proximate cause, is a question of fact. The court must determine as a matter of law whether a particular defendant owes a duty to a particular plaintiff. The existence of a duty is a question of policy to be determined with reference to legal precedent, statutes, and other principles comprising the law. This difficult question, whether respondent had a duty toward the young child, can be answered with reference to our statutes and well-established common law traditions. The issue presented involves the duty of a landowner to maintain a common area. Specifically, the question is whether respondent, who undertook to provide a playground for children in a potentially hazardous area, was under a legal obligation to maintain the playground in a reasonably safe condition, so that children playing on the playground would be unable to escape from the playground and potentially be injured beyond its confines. Petitioner has asked us to define respondent's duty in terms of the general negligence standard of care—the landlord owes his tenants a duty to protect them from foreseeable harm caused by unsafe conditions on the landlord's property. He requests that the duty be framed as requiring the landlord to take reasonable steps, commensurate with foreseeable harm, to protect the safety of his tenants. In terms of the present case, he contends that the jury should be allowed to balance the reasonableness and costs of respondent maintaining, or even erecting, a fence against the foreseeability of resulting harm. In the case presented to us today, it is not necessary for us to balance the policy interests to determine whether defendant owed plaintiff a duty. Reference to our statutes and common law establishes that plaintiff was owed a duty based on the landlord-tenant relationship. Thus, we find that the present case does not require us to frame respondent's duty as broadly as requested by petitioner. It is well established in New Mexico jurisprudence that, although a landlord is under no affirmative obligation to inspect or maintain areas over which control has been relinquished, a landowner is responsible for maintaining, in a reasonably safe condition, areas that expressly or impliedly are reserved for the common use of some or all of his tenants. On the facts as presented for this appeal, it is apparent that the play area in the apartment complex in which Enriquez lived, which was owned by respondent, was an area reserved for the common use of the tenants. As such, respondent was obligated to maintain and repair it. Respondent chose to erect a fence and he reaped the economic benefits from providing a fenced play area at the complex. Undoubtedly at least one purpose of the fence was to keep children playing behind the complex in the area and out of the arroyo. Every landlord is not required, as a matter of law, to fence in his property or to insure the safety of his tenants' children. However, when a landowner undertakes to provide a common area for the use of his tenants, he undertakes to maintain it in a reasonably safe condition. Parents have the primary obligation of ensuring the safety and well-being of their children, but they are also entitled to rely on their landlord's taking reasonable precautions to maintain the common areas of the property in a reasonably safe condition. Respondent contends that he cannot be liable for injuries occurring beyond his property's borders—his duty is only to keep the property safe so that invitees are not injured on the premises. He maintains that the scope of the duty must be limited to the scope of the

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landlord-tenant relationship, and that a landlord is not required to become an insurer of his tenants. We do not interpret the law of landlord-tenant and negligence so rigidly. The scope of the landlord's duty, as described previously, is to maintain the common areas of his property in a reasonably safe condition. However, injury resulting from a breach of that duty need not occur on the property for the lessor to be liable if the breach proximately causes the harm. We are not requiring a landlord to protect his tenants from damages beyond the premises— we merely require that he keep his premises in a reasonably safe condition. If the injury occurs outside the boundaries of the property, but a jury can find that the landlord's breach was responsible for the injury, we find no reason to deny liability as a matter of law. Having established a duty, the foreseeability of injury determines the scope of the duty. As an Arizona court recently stated: "The fact that [plaintiffs] injury occurred beyond the boundaries of the [eased premises may well be relevant in determining whether the Landlord acted reasonably, but it does not compel the conclusion that the Landlord owed [plaintiff] no duty of care in the first place." Accordingly, we hold that respondent-landlord's duty was to maintain the common areas of his property in a safe condition, as a reasonably prudent person would under the circumstances. Statute dictates that a landlord has a responsibility to maintain the common areas reserved to the use of the tenants. This responsibility creates a duty to use care for the benefit of the tenants. The limits of this duty should be determined not with reference to geographical boundaries, but with reference to the foreseeability of injury to the petitioner from the unsafe condition. The legal question of duty for the court to decide then becomes whether the plaintiff in a case may foreseeably be injured by a breach of the duty. In this case, young Enriquez was a foreseeable plaintiff. The landlord was aware that children played in the area—he erected a playground for them; and Enriquez was foreseeable playing in the area he lived in the building. Thus, it was reasonably foreseeable that, because of respondent's failure to exercise reasonable care in maintaining the fence, Enriquez would be harmed. In accordance with the foregoing opinion, we remand to the district court for a determination of this matter on the merits. Reversed and remanded.

Discussion Questions 1. Who was injured and how? 2. Where did the injury occur? 3. Why should a landlord be held responsible for injuries that occur off the leased premises? 4. Does the court address the responsibilities of parents and guardians? 5. Was the injury foreseeable? 6. What does the court order? 5. Have the students read the Czerwinski v. Sunrise Point Condominium case:

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CZERWINSKI v. SUNRISE POINT CONDOMINIUM 540 So.2d 199 (Fla. 1989) Jennifer Czerwinski (appellant) was a tenant at Sunrise Point Condominium. Using a ladder from the condominium's unlocked storage room, an intruder entered Czerwinski's apartment through a second-story window and robbed and sexually assaulted her. The area surrounding the point of entry was unlit and dense with foliage. Czerwinski filed suit against Sunrise (Association) for failure to secure and maintain the premises so as to provide a reasonable degree of safety from the foreseeable criminal acts of third parties. The trial court entered a summary judgment for the Association, and Czerwinski appealed. PER CURIAM It is undisputed that in the five years preceding the attack on Czerwinski, the Association had actual knowledge of two violent crimes committed in the condominium parking lot—a rape and an armed robbery—and nine apartment burglaries. The Association contends that most of the evidence of prior crimes was not relevant for the reasons that (1) burglary offenses are different in nature from crimes to persons, (2) the violent crimes occurred in the common areas and not in the apartments, and (3) the prior assault, which occurred four years earlier, was too remote in time from the attack on the appellant. The trial court agreed that the prior crimes were insufficient, as a matter of law, to give rise to the foreseeability of the instant criminal act and that the Association, therefore, owed no duty to Czerwinski. We disagree. A landlord generally has no duty to insure the safety of his tenants or to protect them from the criminal acts of third persons unless the criminal occurrence is reasonably foreseeable. In determining whether a duty exists, the landlord's knowledge of prior crimes against both persons and property is relevant to the issue of foreseeability, even if the prior criminal acts are lesser crimes than the one committed against the plaintiff. Neither does the law require that the prior crimes occur at the same location, on or about the premises, as the subsequent crime in order to be relevant to the foreseeability of the later crime. Further, evidence of a violent sexual assault which occurred on the premises four years earlier is not so remote in time as to be inadmissible on the question of foreseeability. Where there was a history of crimes occurring on the premises against persons and property, within a five-year span, the trial court erred in ruling that the attack on the appellant was not foreseeable as a matter of law. Reversed and remanded.

Discussion Questions 1. 2. 3. 4.

Who was attacked and how? Was there any history of previous attacks? Does the landlord owe a duty to protect against such attacks? Is the landlord held liable?

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6. Have the students read the Garcia v. Freeland Realty, Inc. case following and discuss the ethical and public policy issues involved: GARCIA v. FREELAND REALTY, INC. 314 N.Y.S.2d 215 (1972) Garcia (plaintiff) lived in a tenement house in the East Harlem section of Manhattan with his two young children. The paint in one of the rooms and in the bathroom was flaking off the walls, and Garcia's children were eating the paint and the flakes. When Garcia made several complaints to the landlord (defendant), the landlord did not remedy the problem. Garcia then expended $29.53 for materials and $70 for labor to replaster and repaint the walls in the rooms. He brought suit for the recovery of these amounts from his landlord. The court took judicial notice of the fact that the peeling paint and plaster contained lead, which if ingested by children, could cause lead poisoning leading to mental retardation and death. GOODELL, Judge The issue here, in light of the uncontested facts, is whether a recovery by the plaintiff is barred as a matter of law in view of the common law rule that the landlord, in the absence of an express covenant, is not obligated to repair or paint. The practical question that faced the plaintiff, was whether he was bound to sit by and do nothing despite the landlord's inactivity...or whether he should take prompt steps to prevent irreparable damage to his children and charge the cost to his landlord. In these circumstances, the plaintiff had the right to remove the menace to the health and life of his children and to charge the cost to the landlord for the following reasons: While it has been held that making of repairs by a tenant does not entitle the tenant to reimbursement from the landlord in the absence of an express covenant by the landlord, the landlord is nevertheless liable for injuries suffered by the tenant or members of his family as a result of the landlord's failure to make repairs. It cannot be said now, with positiveness, what the result might have been had the condition in the plaintiff‘s apartment continued unchanged. It does seem fair to conclude, however, that had the condition continued unchanged, after notification had been given to the defendant, as testified to by the plaintiff, and had the plaintiff's children become, as a result, the victims of lead poisoning, that in those events a tort action might have been instituted by the plaintiff on behalf of his children and himself to recover damages for resultant injuries suffered. The plaintiff, therefore, by his act, prevented the commission of an actionable tort that might have resulted from inaction. If damage based upon the commission of a tort is an appropriate award, then...it is proper and desirable to reimburse a plaintiff for the reasonable cost of preventing or averting the commission of a tort after the defendant has had a reasonable opportunity to act and failed to do so in circumstances calling for action on his part. As Prosser has said in his discussion of "prevention":

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The "prophylactic" factor of preventing future harm has been quite important in the field of torts.... While the idea of prevention Is seldom controlling, it very often has weight as a reason for holding the defendant responsible. In the circumstances of this case involving the concurrent conditions of an immediate threat to health and life of children and a critical shortage of housing, it is my view that the prevention of an actionable tort, the plaintiff warrants his reimbursement for the cost of materials and the reasonable value of labor applied to the accomplishment of that result. Judgment for the plaintiff.

Discussion Questions 1. 2. 3. 4. 5.

Who is the tenant? Who is the landlord? What corrective action did the tenant take and why? What is the plaintiff‘s theory for recovery? What amount is sought? Is the decision limited to a particular type of factual situation?

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Resources Brennan, ―The Next Step in the Evolution of the Implied Warranty of Habitability: Applying the Warranty to Condominiums,‖ 67 Fordham L. Rev. 3041 (1999). Dunlevy, "Internet Immunity: The Limits of Contributory Trademark Infringement Against Online Service Providers," 22 Fordham Intell. Prop. Media & Ent. L.J. 927 (Summer 2012). Geurts, Mintz, and Gavin, ―Ethical Behavior in the Residential Landlord-Tenant Relationship: The Dilemma of the Tenant,‖ 33 Real Est. L. J. 27 (Summer, 2004). Green, "Imagining a Right to Housing, Lying in the Interstices," 19 Geo. J. on Poverty L. & Pol'y 393 (Summer 2012). Grimm and Grimm, ―Colorado Implied Warranty of Habitability for Residential Tenancies: An Overview,‖ 38 Colorado Lawyer 5 (May 2009). Jennings, ―Landlords, Criminals, and Liability,‖ 27 Real Est. L.J. 92 (Summer 1998). Jennings, ―Those Mitigating Circumstances: Landlords are Now in Them,‖ 26 Real Est. L.J. 294 (Winter 1998). Kaiser, ―Giving Up on Voluntary Surrender: The Rights of a Sublessee When the Tenant and Landlord Cancel the Main Lease,‖ 24 Cardozo L. Rev. 2149 (May 2003). Kelly, ―South Dakota Supreme Court Opens the Door to Landlord Liability for Criminal Attacks Committed by Third Parties on the Premises: Smith v. Lagow Construction & Developing Company,‖ 48 S.D. L. Rev. 365 (2002-2003).

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Kroll, "The Landlord/Tenant Warranty of Habitability and the Covenant of Quiet Enjoyment," 21 Colorado Lawyer 1159 (1992). "Landlord and Tenant," 15 J. Consumer & Com. L. 124 (Summer 2012). Leyhane, "Why Tenants Can Seldom Be Sued for Causing a Fire," 79 Ill. Bar. J. 284 (1991). Peñalver, ―Land Virtues,‖ 94 Cornell L. Rev. 821 (May 2009). Rabin, Real Property. Saltz and Miner, ―Subleases: A New Approach Revisited,‖ 41 Real Prop. Prob. & Tr. J. 1 (2006). Saxer, ―‘Am I My Brother's Keeper?‘: Requiring Landowner Disclosure of the Presence of Sex Offenders and Other Criminal Activity,‖ 80 Neb. L. Rev. 522 (2001). Stein, ―Assignment and Subletting Restrictions in Leases and What They Mean in the Real World,‖ 44 Real Prop. Tr. & Est. L.J. 1 (Spring 2009). Stevens, "Landlord's Liability for Abusive Communication," 10 Real Est. L. J. 275 (Fall 1981). Uniform Residential Landlord Tenant Act. Young, ―Handling a Drug-Related Eviction from Public Housing," 25 Clearinghouse Rev. 793 (1991). Your State's Landlord/Tenant Statute and/or Local Regulations.

Cases Bender v. Green, 874 N.Y. S.2d 786 (N.Y. Civ. Ct. 2009). Bessent v. Matthews, 543 So.2d 438 (Fla. 1989). Cappaert v. Junker, 413 So.2d 378 (Miss. 1982). Chibs v. Fisher, 960 A.2d 588 (D.C. 2008). Durante T/A Franklin Square Builders v. Gadino, 364 A.2d 575 (N.J. 1978). Housing Authority v. Jones, 499 A.2d 1020 (N.J. 1985). In re City of New York (Melrose Commons Urban Renewal Area), 899 N.E.2d 933 (N.Y. 2008). Kendall v. Ernest Pestana, Inc., 709 P.2d 837 (Cal. 1985). Klager v. Robert Meyer Co., 290 N.W.2d 132 (Mich. 1980). Marini v. Ireland, 265 A.2d 526 (N.J. 1970). Mid-Island Properties, Inc. v. Manis, 570 A.2d 1070 (Pa. 1990).

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Scott v. Future Investments of Miami, Inc., 559 So.2d 726 (Fla. 1990). Soybel v. Gruber, 518 N.Y. Supp. 920 (1987). Steenes v. MAC Property Management, LLC, 16 N.E.3d 243 (Ill. App. 2014). Zanelli v. McGrath, 82 Cal. Rptr. 3d 835 (Ct. App. 2008).

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Table of Contents Chapter Objectives .................................................................................................................................................... 273 Key Terms ...................................................................................................................................................................... 273 What's New in This Chapter ................................................................................................................................... 274 Chapter Outline .......................................................................................................................................................... 274 Answers to Case Questions ................................................................................................................... 276 Answer to Ethical Issue (10.1) ............................................................................................................... 277 Answer to Consider (10.1) ..................................................................................................................... 277 Answers to Case Questions ................................................................................................................... 280 Answer to Consider (10.2) ..................................................................................................................... 281 Answers to Case Questions ................................................................................................................... 283 Answers to Case Questions ................................................................................................................... 285 Answer to Consider (10.3) ..................................................................................................................... 285 Answer to Consider (10.4) ..................................................................................................................... 286 Answer to Consider (10.5) ..................................................................................................................... 287 Answer to Ethical Issue (10.2) ............................................................................................................... 287 Answer to Consider (10.6) ..................................................................................................................... 288 Answers to Case Questions ................................................................................................................... 290 Answer to Consider (10.7) ..................................................................................................................... 290 Answers to Consider (10.8) ................................................................................................................... 291 Answers to Case Questions ................................................................................................................... 293 Answers to Case Questions ................................................................................................................... 296 Answer to Consider (10.9) ..................................................................................................................... 296 Additional Activities and Assignments............................................................................................................... 297

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Answers to Chapter Problems ............................................................................................................... 297 Supplemental Readings ......................................................................................................................... 301 In-Class Exercises ................................................................................................................................... 303 Discussion Questions ............................................................................................................................. 304 Resources .............................................................................................................................................. 305 Cases ..................................................................................................................................................... 306

Chapter Objectives The following learning outcomes are addressed in this chapter (see PowerPoint Slide 10-1): 10.01 Discuss the nature of commercial leases. 10.02 Describe the provisions in a commercial lease. 10.03 Discuss the distinctions between commercial and residential leases. [return to top]

Key Terms Americans with Disabilities Act (ADA): 1990 federal law prohibiting discrimination on the basis of disability and requiring reasonable accommodation by employers and landowners anchor tenant: the tenant in a shopping center that leases the largest space and will draw the greatest amount of traffic; e.g., grocery store in a plaza or major department store in a mall common area maintenance (CAM): fee charged to tenant in commercial leases to pay costs of maintenance of sidewalks in shopping and other commercial centers; fee is often a pro rata share of expenses based on that paid in other commercial projects Consumer Price Index (CPI) adjustment clause: clause that allows for rent increases when the CPI changes escalation clause: clause generally in a lease, providing for increasing rent fixed rent: in shopping center and commercial leases, rental standard of paying net rent (after utility costs or other fees specific in lease) gross rent: flat rent in commercial lease; no percentage of profits net-net-net: see triple net operating expenses: in commercial leases, the costs of running the property; variable and defined by lease

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percentage rent: rent for commercial properties expressed as a percentage of net or gross income sick building syndrome (SBS): conditions in building that cause respiratory and other ailments in occupants; causes vary from lack of ventilation to use of various materials; EPA and OSHA have developed guidelines and standards for ventilation and remediation specific happenings increase provisions: in commercial leases; provisions that result in increase in rental fees triple net: form of commercial lease rental formula; tenant pays taxes, insurance, and maintenance and fixed rent above these amounts [return to top]

What's New in This Chapter The following elements are improvements in this chapter from the previous edition: 

    

Because of shifts in the law, the premises condition has three different types of rules for landlord liability: initial condition and lease terms, promised improvements and lease terms, and landlord disruption in conditions. Section 10-2b in the chapter is restructured and includes a new case brief, South Willow Properties, LLC v. Burlington Coat Factory of New Hampshire, LLC, ambiguities coupled with limited commercial tenant rights and liability of the tenant. Another new case brief, Tri-City Associates, L.P. v. Belmont, Inc., deals with landlord‘s failure to complete promised renovations. New discussion of renovation and closures in commercial leases with a new case brief, Lord & Taylor, LLC v. White Flint, L.P. New Consider 10.3 in Section 10-2b on constructive eviction, Old City Hall LLC v. Pierce County Aids Foundation. New Consider 10.4 in Section 10-2c on mold in a commercial property, Davis v. Borough of Montrose. New Ethical Issue 10.2 in Section 10-2d on the obligations of landlords in assessing common area expenses to tenants. New case brief in Section 10-2g on injuries from syringes in the parking lot of a commercial facility, Garrison v. Target Corporation. In Section 10-2h, new practical tip on the handicapped parking space litigation.

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chapter and use the Ice Breaker in the PPT if desired, and if one is provided for this chapter. Review learning objectives for Chapter 4. (PPT Slides 1-3). 10-1 Formation of the Commercial Lease—USE POWERPOINT SLIDES 10-2 TO 10-5 10-1a Negotiations 1. Cover all details 2. Avoid reliance on representations; seek independent verification CASE BRIEF: Puro v. Neil Enterprises, Inc. 987 A.2d 935 (Vt. 2009) FACTS:

Neil Enterprises (defendant) leases display booths in the Antiques Mall at Quechee Gorge Village (the Mall). Timothy Puro and Steven Yoken are tenants who leased booths at the mall (plaintiffs). The Mall has about 450 booths. Mr. Puro leased a display booth in 2005 to sell coins and currency. Mr. Yoken leased a display booth in 2002 to sell high-end custom jewelry. After hours on September 7, 2005, thieves broke into the Mall through the rear door and quickly stole jewelry and coins from the display booths. The alarm sounded and the security company notified the police. By the time police arrived, the thieves had fled. The Mall contains security cameras, some of which were attached to video recorders, but the images of the thieves were not recorded because the cameras were not operating at the time. The stolen merchandise was never recovered. Mr. Puro lost goods valued at $25,293; Mr. Yoken lost goods valued at $31,698. Messrs. Yoken and Puro filed suit against Neil alleging negligence and that they were fraudulently induced to lease the display booths by the Mall owner's misrepresentation of the Mall's security system and practices. Neil argued that an exculpatory clause in its agreement with the two tenants, which both signed, precluded any recovery. The clause provides: Shareholders, directors, officers, agents, employees, and staff shall not be held liable for any damages to or loss of property from any cause whatsoever, including but not limited to fire or theft, it being understood that to the extent desired and at [the dealer's] option, that this property shall be insured by the undersigned dealer/licensee. However, before each of them signed their leases, they discussed security issues with the mall‘s general manager. The general manager said that the mall had ―video cameras everywhere‖ and that he lived ―within minutes of [the Mall], and if anything ever happened [he] would be there first.‖ The manager also stated that the Mall had an alarm system, infrared sensors, and cameras covering every booth at all times. He also described the alarm system as ―state-of-the-art.‖

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At the time they signed their leases, the two tenants also received a copy of the ―Quechee Gorge Village Dealer Handbook.‖ In a section headed ―Security,‖ the handbook included the following: The Antique Mall is equipped with cameras and customer service personnel who watch over your merchandise. In addition, all dealers, while stocking their booths, are asked to report any suspicious activity to the manager. The building is secured by an alarm system with a direct link to the central office. All doors are alarmed as well as infrared motion detectors in strategic areas. The entire building is covered by a sprinkler system in case of fire. All keys for locks are accounted for on a daily basis. They are signed out and in each business day. However, the handbook also included the following clause: ―[d]ealers are responsible for their own lost or damaged merchandise. This does happen, and we encourage our dealers to get insurance for the items in their booths.‖ Neither tenant had obtained insurance for his merchandise. The superior court granted Neil summary judgment. The tenants appealed. ISSUES:

Does an exculpatory clause eliminate a landlord‘s liability for problems with the leased premises? What is the relationship between misrepresentation and fraud and exculpatory clauses?

DECISION:

The court held that the exculpatory clause was valid because it was a commercial lease. However, the court also held that the exculpatory clause does not prevent a tenant from recovering on misrepresentation and fraud. The result is that the tenants‘ case can go forward because of the spoken and written misrepresentations about security at the mall.

Answers to Case Questions 1. How effective is an exculpatory clause in a commercial lease? Discuss when it is limited. In commercial leases, exculpatory clauses are generally valid. However, such a clause cannot allow a landlord to misrepresent or intentionally mislead a tenant. In this case, the representations about security were simply false. 2. Make a list of the precautions tenants should take in negotiations as well as in their operations based on what happened that led to this litigation as well as the result. Verify everything the landlord or agent says about the property. Ask for written verification of material information conveyed to you. Talk to other tenants about their experience in the mall. Look for exculpatory clauses. Understand their impact and how your avenues for recovery may be limited. Landlords need to be careful about what is said and what agents say about the property and what promises they make. Turn to third parties for more

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complete information on all items communicated orally. Do your own due diligence on the property, the landlord, and the security issues.

Answer to Ethical Issue (10.1) The statements are classified as puffing, and so cannot be used as a basis for recovery for misrepresentation. However, making the statements is an ethical problem because the landlord is placing his or her reputation on the line—acting in good faith earns the landlord a reputation. Making unverified statements about the property hurts that reputation and makes renting in the future more difficult. It is legal, but it is not ethical to make statements, even when they are puffing, that do not represent accurately how well tenants do in their businesses on the property.

Answer to Consider (10.1) The court held that Primo‘s was not entitled to rely upon oral representations and had to be bound by what was in the lease, and there was no language in the lease regarding exclusive use of the parking lot. Because they were corporations in an arms-length transaction, there are not the usual consumer protections regarding promises outside the lease documents. In this case, appellees (Primo‘s) presented no evidence that Cheung–Loon had superior knowledge related to the lease transaction. Nor did it present any evidence of a fiduciary or confidential relationship. And, even if we assume Cheung–Loon's alleged statement was both intended and understood to be a representation of fact, the evidence shows that Cheung–Loon and Primo's were both corporations involved in an arms-length transaction, not parties in an unequal bargaining position. Because appellees presented no evidence to support its assertion that Cheung-Loon made an actionable misrepresentation of fact, we conclude the trial court erred in failing to grant a no-evidence summary judgment on appellees' fraud claim. CheungLoon, LLC v. Cergon, Inc., 392 S.W.3d 738 (Tex. App. 2012). Emphasize PRACTICAL TIP of due diligence. 10-1b The Lease Agreement 1. State laws require leases over 6 months to 1 year in length to be in writing 2. Month-to-month need not be in writing 3. Despite requirements, should get lease in writing 10-2 Topics in the Commercial Lease—USE POWERPOINT SLIDES 10-6 TO 10-20 10-2a The Lease Term 1. Some leases exist prior to construction 2. Start dates are critical—seasonal swings

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3. Is there an obligation to do business? 10-2b Premises Condition 1. Premises Condition: Initial and Ongoing Issues a. b. c. d.

No implied warranty Issues of repairs and warranties must be covered in the lease Possibility of constructive eviction Richard Barton Enterprises, Inc. v. Tsern (1996)

CASE BRIEF: South Willow Properties, LLC v. Burlington Coat Factory of New Hampshire, LLC 986 A.2d 506 (N.H. 2009) FACTS:

In 2002, Burlington Coat Factory of New Hampshire, LLC (BCF), a retail clothing merchant, assumed the obligations for retail space under a 1974 lease in a shopping plaza in New Hampshire. When BCF moved into the premises, there were occasional leaks in the roof that were satisfactorily repaired by South Willow. In 2003, BCF undertook renovations to the property that included removing an interior concrete load-bearing wall, which caused serious structural problems. As a result of these renovations, the roof developed numerous, severe leaks. In 2004, BCF acknowledged responsibility for the structural problems, including the leaks, and agreed to pay for the engineering services and construction costs required to remedy them. In September 2004, South Willow informed BCF that ―none of the outstanding issues,‖ including those concerning roof damage, had been resolved. The parties continued to disagree about the adequacy of BCF's repairs to the roof into 2005. In August 2005, BCF alleged that fixing the roof leaks was South Willow's responsibility and that it would replace the roof if South Willow did not. South Willow responded by instructing BCF not to engage in any type of roof replacement without its written consent and notifying BCF that doing so would be ―a default under the lease.‖ On September 8, 2005, BCF sent a letter to South Willow in which it stated, ―[R]eplacement of the roof is Landlord's responsibility under Article 14 of the Lease. Further, under Article 28 of the Lease, in the event Landlord fails to perform any of its obligations under the Lease, and after seven (7) days‘ notice, Tenant may cure such default on Landlord's behalf.‖ South Willow told BCF that repairing the roof would be a default. BCF sent an email to South Willow attaching bids for a new roof and requesting a decision by October 19. On October 31, without notification to South Willow, BCF signed a contract for replacement of the roof.

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On February 23, 2006, South Willow sent a letter to BCF stating that it was locating a contractor to install a new roof. On March 2, BCF faxed a letter to South Willow stating that it had ―already contracted with a roofing contractor to replace the roof.‖ Demolition of the roof commenced that same day. South Willow responded on March 2, instructing BCF to cease all roof work, but BCF proceeded to have its contractor replace the existing roof. South Willow served an eviction notice. Following a bench trial, the court ordered the issuance of a writ of possession (BCF was ordered evicted). BCF appealed. ISSUES:

Who breached the rental contract? Was it BCF‘s submission of plans with insufficient detail? Was it BCF proceeding despite objection by South Willow? Was it Willow‘s delays? Should South Willow get a free roof? Did BCF need to fix the roof to be able to stay on the premises?

DECISION:

The court held that BCF was required to submit plans and specifications for the proposed work to South Willow and receive its written approval. It is only after the landlord, despite receiving plans and specifications, refuses to authorize ―alterations, additions or changes‖ that the tenant may exercise self-help under paragraph 28 of the lease. However, the court noted that the Academy Roofing quote, like the other bids received, only provided ―a general description‖ of the work the roofer intended to perform. The quote lacked specificity because it did not discuss, for example, how the flashing would be installed, the details for preventing water leakage around each of the vents and pipes to be installed with the HVAC units, how the 84,000 square feet of old roofing material would be disposed of, and whether the material contained asbestos and, if so, how it would be treated in compliance with New Hampshire environmental laws. The court agreed with the trial court that the bids forwarded to South Willow on October 13, 2005, ―were not plans and specifications, as those terms are normally used, to satisfy the requirements of paragraph 15.‖ BCF argues that because South Willow delayed before serving notice and commencing an eviction action and because it ―received a ... brand new roof with a fifteen year warranty,‖ it was erroneous for the trial court to find a material breach of the lease. However, we conclude that the record supports the trial court's finding that BCF's unauthorized demolition and reconstruction of the roof, over South Willow's express written objection, justified eviction. Finally, BCF argues that the trial court erred in finding the evidence insufficient to prove the property was not safe or unsuitable for its intended use. When BCF undertook renovations to the property in 2003 the work initially resulted in ―severe and numerous leaks.‖ However, ―[o]ver the course of the next year various repairs were made ... [which] lessened the number and severity of the leaks.‖ There was testimony at trial that the leaks required employees to ―move racks of

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clothing,‖ ―[c]over them with plastic,‖ ―[b]ring out barrels to catch the drips,‖ and ―tape off some areas where customers couldn't get in there till we got it mopped and got it cleaned up.‖ Based upon the record, we affirm the trial court's finding that ―[a]lthough there was evidence the leaks were inconvenient, there was insufficient evidence to prove the property was not safe or unsuitable for its intended use.‖ Affirmed.

Answers to Case Questions What were the problems with the language in the three paragraphs in the parties’ lease? You have three clauses spread throughout the agreement that sent the parties in different directions. Paragraph 14—Imposes on the landlord a duty to make the premises ―safe, dry, and tenantable.‖ But the tenant also has responsibilities to keep the premises in good repair. Paragraph 15—Tenant can make alterations, additions, and changes but it requires prior notice and written consent to plans and specifications (for structural alterations, additions, or changes). Landlord cannot withhold consent if building is not impaired. Paragraph 28—The default section, which allows tenant to do work if Landlord does not do it within 7 days. In this situation BCF had a combination of: a. b. c. d. e. f. g. h.

Alterations Resulting problems with the roof Continuing problems with the roof Hiring of a roofer by BCF Silence by South Willow Ongoing roof problems Sufficiency of notice and approval What type of issue were we dealing with—improvements, necessary repairs, landlord obligations?

Bringing the three clauses together resulted in confusion among and between all the parties. 2. What steps should the parties have taken to avoid the need for litigation? The biggest thing was not following the processes outlined in the lease—all the processes so that no matter how the roof issues were classified both sides were covered in terms of what could and could not be done. Whenever one party just goes ahead having heard nothing, there is almost always litigation. 3. What takeaways would you have for both commercial landlords and commercial tenants? Get everything in writing; define what a bid must include; put time limits on approval; require signatures for approval; provide notification for work beginning; contractors should be notified of the lessee and lessor rights.

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Answer to Consider (10.2) The court held: (1) evidence was inadequate as a matter of law to establish constructive eviction, but (2) common-law rule of independent covenants in commercial leases would be abandoned in favor of modern rule of mutually dependent covenants and, under this rule, tenant was entitled to terminate lease and recover relocation costs. The case represents a shift in some states to affording tenants more rights under commercial leases. Wesson v. Leone Enterprises, Inc., 774 N.E.2d 611 (Mass. 2002). 2. Initial Improvements and Renovation a. b. c. d.

Maintenance issues should be covered Repair and upkeep Emergency repairs Business interruption for repairs

CASE BRIEF: Tri-City Associates, L.P. v. Belmont, Inc. 881 N.W.2d 20 (S.D. 2016) FACTS:

Tri-City owned and operated the Northgate Shopping Center in Rapid City, South Dakota. A written lease agreement with Belmont in April 2006 was for unfinished commercial space. A ―work letter‖ attached to the lease allocated the initial construction work between Tri-City and Belmont. The lease also required Belmont to give written notice to Tri-City of any alleged breach and give Tri–City the opportunity to cure any breach within 30 days. Under the terms of the lease, Belmont could not exercise its remedies rights available by law or the agreement until Tri–City had been afforded the opportunity to cure. The parties experienced considerable difficulties in completing the terms of the lease. Tri-City proposed to move the start date of the lease to January 15, 2007. Belmont did not respond to the requested modification. Ultimately, Tri-City did not deliver the premises to Belmont on August 1, 2006, in the condition required under the lease and did not complete its allocated initial construction work. After Belmont did not pay rent for the first few months of the lease, Tri-City served Belmont with a notice of default and then with a notice to vacate the premises and, in April 2007, sued to evict Belmont. Belmont answered that Tri-City materially breached the lease, which Belmont asserted relieved it of its duty to pay rent. Belmont counterclaimed for damages for Tri-City's failure to perform the renovations. Tri-City responded by saying Belmont had an ―as is‖ clause in its lease and that it was not given a chance to respond to the alleged breach. The lower court held that Tri-City's breach constituted a material breach because Tri-City's ―failures and delays defeated the very object of the Lease[.]‖ The court concluded that Tri-City's material breaches excused Belmont's duty to pay rent

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and excused Belmont's default. The court held that ―because [Belmont's] actions are excused,‖ Tri-City ―is not entitled to damages.‖ The court then awarded Belmont a judgment against Tri-City in the sum of $89,220.67 for material breaches. The court also awarded Belmont reasonable attorney's fees and costs because the terms of the parties' lease allowed for such an award to the prevailing party. Tri-City appealed. ISSUES:

Who breached the lease agreement? Was it the failure to do the renovations? Or was it the landlord‘s failure to deliver the premises in the condition promised?

DECISION:

On appeal, Tri–City did not dispute that it materially breached the parties' lease. It asserted that ―Belmont's defense and counterclaim were barred as a matter of law by: (1) the lease provision in which Belmont accepted the premises as is, and (2) Belmont's failure to give Tri–City notice of its alleged breach and an opportunity to cure.‖ The lease provision provides: ―Tenant may not exercise any remedies available to it under this Lease, at law or in equity until Landlord has been afforded the cure periods described in this Paragraph 48[.]‖ The cure period is 30 days. And, here, it is undisputed that Belmont did not attempt to exercise its legal remedies until months after Tri-City repudiated the lease by filing its lawsuit against Belmont for possession of the premises and damages. At that point, written notice to Tri–City affording Tri–City an opportunity to cure would have been futile. This Court recognizes that ―[t]he law does not require futile acts.‖ Here, Tri-City's suit against Belmont for possession of the premises and damages indicates that it would be meaningless to require Belmont to provide Tri-City written notice affording the cure period. Tri-City repudiated any intention to perform under the lease, excusing the requirement that Belmont strictly comply with the notice-andcure provision. The circuit court did not err when it entered judgment in favor of Belmont. Both parties move for appellate attorney's fees. Their motions are accompanied by separate verified, itemized statements of legal services rendered. Belmont seeks $8,286.35 in attorney's fees, sales tax, and costs. Tri-City seeks $7,452.70 in attorney's fees, sales tax, and costs. The parties do not dispute that the prevailing party is entitled to recover reasonable attorney's fees and costs under the terms of the lease. The specific provision provides that ―the prevailing party in such action or proceeding shall be entitled to recover the reasonable fees of its attorneys and other costs of suit and its costs and attorney's fees in collecting any judgment or award,‖ if ―any action or proceeding is brought by any party to enforce or interpret the provisions of this Lease, or if any other action or proceeding is brought arising out of or relating to this Lease[.]‖ Because Belmont is the prevailing party, we award its requested fees.

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Affirmed.

Answers to Case Questions 1. What is the court addressing when it observes that the law does not require ―futile acts‖? Why is that important to its decision? The tenant did not give notice because it had been through months of frustration and postponements of work such that the premises were not ready for occupancy. Tri-City was not trying to finish the project and not responding. 2. What advice would you give to commercial tenants in the future when they are faced with nonperformance on renovations? As frustrating as the lack of response and nonperformance might be and as often as there has been contact about the problems, the formal notice and timing requirements will always serve the tenant well should litigation, as it did here, result. In this case, the tenant escaped the failed notice because of the significant problems, but that takes a special finding by the court. The easiest way to establish non-breach for a tenant is to have strict compliance with all lease requirements. 3. What was the effect of the ―as is‖ clause in the lease? Will specifically agreed-upon renovations in a lease override an ―as is‖ provision in the same lease? The landlord tried to use the ―as is‖ clause against the tenant. You have a lease agreement with the usual boilerplate language in commercial leases that disclaims liability for property conditions, and such clauses are enforceable. However, because there were specifically negotiated renovations attached to the lease, the ―as is‖ clause was contradictory at least as far as those changes and improvements were involved in making the property unusable. 3. Tenant Rights During Renovation CASE BRIEF: Lord & Taylor, LLC v. White Flint, L.P. 849 F.3d 567 (4th Cir. 2017) FACTS:

Lord & Taylor operated a department store along the Rockville Pike in Montgomery County, Maryland, beginning in 1977. White Flint was the developer for a mall project that began in 1975 when Lord & Taylor agreed to build its stand-alone store that would then be the anchor tenant for the mall that eventually brought in a Bloomingdale‘s store as a co-anchor in the mall project as it grew. The original agreement required White Flint to obtain Lord & Taylor‘s permission before adding anything to the mall or making alterations to the mall‘s design or appearance. While the parties disagree about how it happened, the mall experienced a drop in business. White Flint says it was the general shift to e-commerce that caused the decline, and Lord & Taylor believed it was White Flint offering tenant buyouts. By 2013, all the tenants, including Bloomingdale‘s had left. The mall closed officially in 2015, but White Flint already had an agreement with the Montgomery County Council to redevelop the mall area into a mixed-use area with residential, office space, retail, and recreational space. By the time the

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mall closed, White Flint had demolished Bloomingdale‘s and the rest of the mall, all done without Lord & Taylor‘s permission. The redevelopment plan would negatively affect Lord & Taylor‘s business by making customer access less convenient and denying the store foot traffic. Negotiations between the parties proved to be fruitless, and Lord & Taylor filed suit, seeking to stop the projected $70 and $100 million in damages for its lost profits during the redevelopment and for costs in adjusting the store design to work around the foot-traffic issues created by the plan. Following a lengthy trial, a nonunanimous jury verdict found that White Flint had breached its agreement with Lord & Taylor and awarded Lord & Taylor $31 million in damages for lost profit and estimated construction costs between $30 and $36 million. Both parties appealed. ISSUES:

Did White Flint breach the lease agreement in not providing sufficient notice to Lord & Taylor? What is the proper measure of damages if there is a breach?

DECISION:

The parties agreed that White Flint had breached the portion of the agreement on notification and permission. It just proceeded with the redevelopment plan without consulting Lord & Taylor. White Flint challenged the damage award on the grounds that the positive impact on Lord & Taylor was not considered. However, the court held that such a determination was speculative. And no one even had a schedule for the determination of start of project and timelines. Even the location of the buildings was speculative. [D]eciding when anticipated future profits from such an enterprise have been established as ―reasonably certain‖ is a fact-intensive judgment call, within the sound discretion of a trial court. The district court did not abuse that discretion here. Lord & Taylor separately claimed damages for the cost of reconfiguring and renovating its store to accommodate the new site plan and, in particular, the loss of several entrances that had connected it to the original Mall. Lord & Taylor argued that it had property rights—easements and use restrictions—―separate and distinct‖ from its right to operate a store on the site, and that it should be separately compensated for the loss of those rights. The court held that ―Allowing a commercial plaintiff to recover for lost damages and also for abridged property rights would amount to a double recovery‖—or, in the apt phrase of the district court, to ―getting six or more pieces of pie out of a four-piece pie.‖ ―The district court committed no legal error or other abuse of discretion in applying long-established Maryland law to reject Lord & Taylor‘s claim to separate damages for the taking of property rights. Affirmed.

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Answers to Case Questions Explain why the parties agreed on the breach. The provision was a simple one—Lord & Taylor had to give permission for any changes to the structure or appearance of the mall. White Flint had not done that and had just gone ahead with a redevelopment plan with the support of the county without obtaining Lord & Taylor‘s consent. There was no dispute over the clause or the lack of permission. What testimony established the construction and modification costs? Why was an issue raised with the testimony? The testimony that Lord & Taylor offered on the costs of changes was from a corporate executive—he was not an expert but did have practical experience with the stores and was permitted to give his testimony based on that experience—as long as he based it on his experience and not any science or formula. What additional damages did Lord & Taylor want that the court refused to award? It wanted compensation for the taking of its easement/license rights on the property. However, the court said that you cannot recover lost profits and then losses on the use of the property— the two are intertwined.

Answer to Consider (10.3) The court found for Gross and the Foundation. Below is a salient excerpt: Gross and the Foundation moved for summary judgment on the issue of liability for rent based on the constructive eviction defense. The trial court granted Gross and the Foundation summary judgment on liability for any rent owed after they vacated thenleaseholds on September 23, 2008, and December 30, 2009, respectively. However, recognizing that constructive eviction cannot eliminate liability for rent accrued before the tenant vacates the leasehold, the trial court declined to grant summary judgment for liability on any rent owed by Gross or the Foundation before they vacated the building. Old City Hall appealed. A constructive eviction involves ―‗an intentional or injurious interference by the landlord or those acting under his authority‘‖ that ―‗deprives the tenant of the means or the power of beneficial enjoyment of the demised premises or any part thereof, or materially impairs, such beneficial enjoyment.‘‖ Undisputed evidence in the record demonstrates that conditions in the building had become unsanitary, unbearable, unworkable, and unsafe. (trash piling up and cleaning services not performed because Old City Hall failed to pay the bill between October 2008 and April 2009); (feces found in the common areas March 2008); (failure to address concerns about the HVAC FN3 units in the building led to intolerable temperatures in the summer and winter); (Gross‘s clients not comfortable coming to her offices); (locking of the Commerce Street entrance made it extremely difficult for the Foundation‘s clients to come to its offices); (Foundation employees felt unsafe in building because of the lack of security and the unauthorized residents); (safety concerns due to multiple burglaries in the

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building); (Old City Hall‘s failure to pay utility bills on time interfered with the Foundation‘s ability to carry on its business). Given the undisputed evidence about the state of the building, a reasonable fact finder could only conclude that Old City Hall deprived Gross and the Foundation ―‗of the means or the power of beneficial enjoyment of the demised premises‘‖ or that it materially impaired such beneficial enjoyment. Our Supreme Court has recognized that landlords may have incentives to engage in wrongful behavior in order to force tenants to vacate so that the landlord can put the leasehold to another use more beneficial to it. In these cases, the neglect of the premises is an obvious tool the landlord might use to force the tenant to break the lease. It would contradict public policy to allow the landlord to make the leasehold untenantable and gamble on the possibility that it would suffer no consequences for its actions if the tenant fails to quickly give up, break the lease, and move out. Old City Hall‘s lawsuit and this appeal arose out of the lease, since Old City Hall was seeking the payment of back rent under it. Gross and the Foundation have prevailed in this appeal. Therefore, we award them attorney fees for reasonable expenses incurred for this appeal. Affirmed. Old City Hall LLC v. Pierce County Aids Foundation, 329 P.3d 83 (Wash. App. 2014). 10-2c Condition of the Premises: The Sick Building Syndrome 1. Costly issues 2. EPA and OSHA working to develop standards

Answer to Consider (10.4) The trial court awarded the landlord $99,981.81 in damages for breach of contract and the Borough appealed. The salient points of the court opinion are: Even if impracticability of performance had occurred, Borough ―waived the difficulty‖ by continuing with the lease. See Hart, 884 A.2d at 335. Borough first tested the building for mold on March 13, 2013, approximately three months after the signing of the lease, and the building tested positive for mold. See id. at 98. Borough did not notify Landlord of the results. Id. at 99. Borough conducted a second testing for mold in July of 2013, which again tested positive for mold. Id. Borough conducted a third testing for mold in August of 2013, which also revealed mold. Id. Borough did not terminate the lease after receiving the results of any of the three tests. Moreover, Borough did not notify Landlord of the results of these tests. It was not until the end of August of 2013 that Borough contacted Landlord regarding the mold issue, and not until December 31, 2013, that it terminated the lease agreement. For all of the foregoing reasons, we conclude the trial court did not abuse its discretion in finding that the presence of mold did not entitle Borough to terminate the lease.

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The cost of remediating the building was high, but not impossible to do. Further, those in the Borough only walked through the property once and had no experts evaluate the premises. Commercial leases are an ―as is‖ proposition. The landlord won on appeal, but with the court remanding for a recalculation of damages that covered the entire remaining part of the lease plus interests because the Borough had breached the lease and Davis had not been able to find another tenant. Davis v. Borough of Montrose, 194 A.2d 597 (Pa. 2018). 10-2d Rent and Rent Terminology 1. Older leases have a gross or fixed rent 2. Most common is triple net or net-net-net a. Tenant pays for taxes, insurance, and maintenance b. Landlord receives fixed rent net of these three payments 3. Many leases carry CPI adjustment 4. Some leases increase rent upon specific events 5. Common area maintenance (CAM) Tenant pays certain percentage for overall premises maintenance based on their square footage 6. Operating expenses a. Marketing b. Right to see records c. Expenses caps 7. Percentage rent a. Landlord gets percentage amount of sales of tenant; need precise definitions in these clauses b. Circle K Corporation v. Collins (1998)

Answer to Consider (10.5) No. The language of the contract distinguished between service charges and sales and thus indicates some intent by the parties to include only sales of merchandise, not these other categories. Washington National Corporation v. Sears, Roebuck & Co., 474 N.E.2d 116 (Ind. 1985).

Answer to Ethical Issue (10.2) Landlords have a great deal of control over assessments, contract pricing, etc. The less-thantransparent computations are troublesome to tenants particularly now when retail merchants

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are dwindling in numbers. To avoid regulation in this area and litigation, landlords should consider transparency in the expenses and formulas. Candor cuts litigation. 8. Method of payment a. Payee b. Time c. Place 9. Security deposit 10-2e Fixtures and Alterations 1. What can be done 2. Who bears cost 3. Who gets them at end of lease 4. Prior approval for alterations 5. What tenant can add 6. To whom do the fixtures belong 7. Trade fixture issues

Answer to Consider (10.6) Because these were trade fixtures, the court held, despite the damages that resulted from their removal, that these items were the personal property of the tenant and the tenant could take them with him. The tenant then used the famous trade fixtures to open a new club with the same decor.

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10-2f Operations 1. Hours of access 2. Air conditioning and heating 3. Hours of operation 10-2g Common Areas 1. Managing Access a. Parking issues b. Cleaning, maintenance 2. Managing Free Speech—constitutional issues; rights to leaflet distribution and solicitation a. States have limits on imposing free speech access on commercial property b. Seventeen states now limit access to commercial properties 3. Managing Safety on Commercial Premises 4. Civil Liability for Injuries on Commercial Property CASE BRIEF: Garrison v. Target Corporation 838 S.E.2d 18 (S.C. App. 2020). FACTS:

Carla Denise Garrison (Denise) and her eight-year-old daughter were in a Target parking lot. As Denise was looking through her coupon book on the hood of her car her eight-year-old daughter brought her a syringe with a needle, asking, ―Mommy, what is this?‖ Denise swatted the syringe out of her daughter's hand, and in the process punctured her right palm. Denise went inside the store to wash her hands several times and spoke to the store manager, Shelby Brintnall. They both took photographs of the syringe lying in the parking lot. Brintnall took possession of the syringe and completed a ―Guest Incident Report‖ form. In response to the form's question, ―Was the floor/ground clean and dry,‖ Brintnall checked the ―No‖ box. Brintnall advised Denise to get medical treatment and give the bill to her. The next day, Denise visited the local hospital emergency room, where a nurse referred Denise to an infectious disease specialist. She was treated by the specialist who prescribed several medications targeted at preventing HIV and hepatitis. The medications put her into a ―zombie-like state,‖ and caused her to have night terrors. Denise was bedridden, her husband took unpaid leave to care for Denise, and her mother-in-law cared for the Garrisons' four children. Denise had her blood tested every three months for approximately one year. The jury awarded $100,000 in compensatory damages and $3.5 million in punitive damages. Target moved for a judgment notwithstanding the verdict for reversal

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of the punitive damages, and the judge granted Target‘s motion. Denise appealed. ISSUE:

What is the duty of Target with regard to its parking lot safety and was that duty breached?

DECISION:

The court found that Target had been negligent in its clean-up of the parking lot. The Garrisons showed that Target's employees were aware of the importance of inspecting and cleaning the parking lot to keep it safe for customers and of keeping good records of these efforts. Yet, immediately after Denise reported the injury to Target's manager, the employee assigned to the parking lot could not be located. The Garrisons also established that the parking lot was not cleaned on a regular basis despite Target‘s claim. Brintnall and Property Maintenance Technician (Jonathan Jackson) both testified that a third-party vendor sent a cleaning truck to sweep Target's parking lot once a week on Thursday night. Brintnall and Jackson also testified that cart attendants regularly checked the lot for debris. However, the inspection logs did not reflect that diligence, or they were not kept accurately. Denise‘s husband camped out in Target's parking lot on a Thursday night, from 11:45 p.m. to 5:30 a.m. and no one came to clean the lot. The court found that there was sufficient evidence of Target‘s failure to regularly inspect and clean its parking lot. The court reversed the decision on punitive damages but remanded the case for lower court proceedings to reduce the amount consistent with the circumstances of the case.

Answers to Case Questions 1. Explain why the condition of the syringe is important. That tells how long it had been there and that there was a failure to patrol, police, and pick up in the parking lot—the basic duties of the owner. 2. What should landlords of commercial parking lots be doing to ensure safety? There should be walk-abouts, pick-ups, sweeping, and vigilance by employees in clearing the parking lots. 3. Why are punitive damages proper in the case? The court determined that Target was acting as if it was doing its job of taking care of the parking lots and it was not. Just the amount of trash was a problem, and the dangers are high. 5. Criminal Liability for Injuries on Commercial Property

Answer to Consider (10.7) Restrict access; limit group size; require those under 18 to be accompanied by an adult; additional security. 10-2h Americans with Disabilities Act

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1. The Basics of the Law 2. ADA Lease Provisions a. Applies to commercial facilities b. Access facilities c. Reasonable accommodation required i. Modifications ii. Policy changes d. Tenant should check if there is compliance (see PRACTICAL TIP) e. Who pays for costs of modification and upkeep?—get lease provisions clear

Answers to Consider (10.8) The court held that: (1) customer had constitutional standing; (2) constitutional standing was not limited to only those barriers that customer had encountered or about which he had personal knowledge; (3) customer did not establish that store's aisles were less than the 36 inches required by ADA wheelchair accessibility guidelines; and (4) store's exclusion of customer from employees-only restroom did not violate ADA. Affirmed in part; vacated and remanded in part. The good news for property owners is that ADA claimants must actually experience the barriers to bring suit. Doran v. 7-Eleven, Inc., 524 P.3d 1034 (9th Cir. 2008). 10-2i Landlord's Right of Entry 1. When?—specify times and hours 2. How much notice? 10-2j Destruction and Damage to Premises 1. EG: World Trade Center bombing 2. Business insurance for interruption 3. Landlord liability for interruption

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4. Obligation to rebuild 5. When is there complete destruction? 10-2k Breach 1. Formulas for damages 2. Attorneys' fees CASE BRIEF: Winchell v. Schiff 193 P.3d 946 (Nev. 2008) FACTS:

Calvin Winchell, d/b/a CGL Seafood, Inc. (appellant), owned and operated a wholesale fresh fish business in Las Vegas, Nevada. Winchell's business grew from $36,780 in sales in 1996 to $759,711 in 2000. With such dramatic growth, Winchell was in need of a much larger storage facility for his inventory. Renate Schiff, Respondent, owned a cold storage facility and offered to lease a portion of that space to Winchell. Winchell accepted her offer, and the parties executed a two-year lease agreement that expired in December 2000. Under the terms of the agreement, Winchell was required to indemnify Schiff and maintain insurance for the mutual benefit of Schiff and Winchell. Additionally, the agreement provided that Schiff and her agents were permitted to enter the storage space at any reasonable time for inspection or maintenance purposes. A few months before the lease was set to expire, on August 21, 2000, while Winchell was out of town, Schiff's property manager, Beryl Duncan, became concerned that Winchell may have abandoned the premises. Having had prior experience with tenants abandoning cold storage units, turning the power off, and leaving unrefrigerated fish behind, Duncan was apparently concerned about whether the electricity had been shut off. Duncan attempted to contact Winchell by telephone, to no avail. Duncan subsequently determined that it was necessary to inspect the storage unit. To gain access into the unit, Duncan hired a locksmith and directed him to drill out and replace the locks. As the locksmith pried the door to the storage unit open, the security alarm was triggered. Duncan directed the locksmith to cut the wires and disable the alarm. Once inside the storage unit, Duncan conducted a preliminary inspection and verified that the electricity was on. The storage unit was full of inventory. Following the inspection, the locksmith secured the storage unit and provided Duncan with the new set of keys. Winchell returned to Las Vegas on August 23, 2000. Upon arriving at the storage unit, Winchell quickly discovered that the locks had been changed. Winchell immediately called Schiff and the police. Shortly thereafter, Schiff's representatives and the police arrived at the storage unit. Upon entering, Winchell noticed that somewhere between $30,000 and $45,000 worth of

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inventory had been removed. A review of the alarm records (the locksmith had not disabled the recording portion of the system) revealed that an unaccounted for entry was made on the morning of August 23, 2000. Winchell filed a claim under his insurance policy and received $33,084 in compensation for the lost inventory. This disruption in Winchell's supply led to the demise of his business in October 2000, approximately two months prior to the expiration of the lease agreement. Winchell discontinued paying rent, removed the remaining inventory, and vacated the storage unit. Subsequently, Winchell filed suit against Schiff for conversion, breach of quiet enjoyment, breach of contract, and trespass, and he sought compensatory and punitive damages. Schiff's answer included a counterclaim for breach of contract based on Winchell's early termination of the lease agreement. The jury awarded Winchell $210,000 in losses for the demise of his business. Schiff was awarded $2,880 for Winchell‘s failure to pay rent for two months. Schiff appealed. ISSUE:

Who owes whom how much and why as between this landlord and tenant?

DECISION:

The court held that the landlord properly entered the premises but that the landlord‘s actions resulted in the loss of the inventory as well as the damage to the business. The landlord owes the value of the loss of the business less the amount recovered from insurance less the two months‘ rent that the tenant failed to pay.

Answers to Case Questions 1. List what causes of actions the court finds against each party and which it does not. The court held that the landlord had the right to enter the property under the lease terms and could not have been guilty of trespass or conversion. However, the court also holds that the tenant needed to pay the remaining two months' rent. However, the court also finds that the damages to the tenant were not just the loss of the property but also the loss of the business and the jury was correct in awarding the $210,000—that amount must be offset by the amount recovered from the insurance company. 2. Was the entry by the landlord justified? Yes, the court held that under the terms of the lease and because the tenant could not be reached that the landlord could enter and had not violated the lease or committed trespass. 3. Does the case create substantial exposure for landlords? Yes, the case extends damages to tenants for business losses resulting from problems with leased property that involve the tenet‘s inventory. 10-2l Landlord‘s Responsibility for Tenant‘s Conduct 1. Trademark infringement

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2. Landlords have been held liable when they know tenants are infringing Emphasize PRACTICAL TIP on lease clause for infringement. 10-2m Assignment of Leases 1. When? 2. Is landlord approval required? 10-3 Shopping Center Leases: Specific Provisions—USE POWERPOINT SLIDES 10-21 TO 10-23 10-3a

The Anchor Tenant 1. Large store that attracts shoppers 2. One in a freestanding center and several in malls 3. Must obtain and retain commercial mix a. Longer leases to ensure stability b. Covenants not to compete c. Problems arise if tenant signs and then does not open for business

10-3b

Business Restrictions 1. Make-up of center controlled by use restrictions 2. Some new leases have covenants of continuing operations 3. Type of business and covenants not to compete a. Used to achieve proper mix b. Generally valid

CASE BRIEF: Redner's Markets, Inc. v. Joppatowne G.P. Ltd. Partnership 918 F.Supp.2d 438 (D. Md. 2013) FACTS:

Joppatowne owns and manages the Joppatowne Plaza Shopping Center in Maryland. The departure of a major tenant created a substantial vacancy in the Shopping Center. The vacancy attracted the attention of Brian Miller, an entrepreneur who operates a large, successful flea and farmer‘s market. Miller was interested in opening a second flea market and farmer‘s market at Joppatowne. On October 21, 2009, Joppatowne entered into a 10-year lease with, JTF, LLC, Miller‘s limited liability corporation. JTF leased approximately 108,000 square feet. This space is divided between the flea market (roughly 96,000 square feet) and the Amish Farmer‘s Market (roughly 12,000 square feet). The two sections are physically separated by a fence that encloses the Amish Farmer‘s Market.

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Redner‘s is a Pennsylvania corporation that operates about 40 grocery stores, with a location at the Joppatowne Plaza Shopping Center. Redner‘s stores sell the type of items typically found in a grocery store or supermarket, but at lower prices made possible by the company‘s no-frills, food warehouse approach. Joppatowne and Miller recognized that they were running the risk that the Amish Farmer‘s Market would violate the restrictive covenant in Redner‘s lease. To address this risk, Joppatowne, in a letter agreement dated October 15, 2009, agreed that ―in the event of legal action based on the issue of a breach of the restrictive covenants in the Redner‘s Lease,‖ it would defend and indemnify JTF. Although the Amish Farmer‘s Market is promoted as such, each stall is separately owned and operated. Each has its own trade name and signage. The seven stalls within the enclosure are Dutch Delights, Dutch Pantry Fudge, Kreative Kitchen, Lapp‘s Fresh Meat, King‘s Cheese & Deli, Beiler‘s BBQ, and Beiler‘s Baked Goods. The eighth stall, All Fresh Seafood & Produce, is located outside the enclosure. Redner‘s Market filed suit alleging that the lease to JTF (because of the Amish Farmer‘s Market) has resulted in a violation of the lease‘s Restrictive Covenant that prohibits competing grocery stores. Joppatowne moved to dismiss the case. ISSUE:

Did the leases to the various businesses violate the lease restrictions on competing businesses?

DECISION:

The court held that there were unique characteristics of each of the individual stores that resulted in some being violations and others not. Lapp‘s Fresh Meats is a ―butcher shop‖ within the intendment of section 13.01(a)(i) of the Lease. Lapp‘s is not an ―ethnic or specialty food store‖ and Ruth‘s Grill, the small grill at one end of the meat counter, does not turn Lapp‘s into a ―restaurant.‖ Accordingly, Lapp‘s Fresh Meats is a use that violates the Restrictive Covenant. Dutch Pantry A sells homemade fudge (about 20 different types), chocolate, candy apples, caramel apples, fudge apples, chocolate covered pretzels, fudge pretzels, and chocolate covered bacon and fruit. Dutch Pantry A does not violate the Restrictive Covenant. The store does not meet the definition of ―food supermarket or grocery store.‖ Even if it did, Dutch Pantry A would fall within the safe harbor of section 13.01(b)(ii) as both a ―candy store‖ and a ―specialty food store.‖ Dutch Pantry B [sells] candy, chips, cheese puffs, snacks, and other ―junk food‖ items that one finds in a typical convenience store. Dutch Pantry B does not run afoul of the Restrictive Covenant. Dutch Pantry B is [not] a ―food supermarket or grocery store.‖ Redner‘s seems to be offended most by Dutch Pantry B‘s substantial offering of nuts, trail mix, and other ―bulk‖ items often found in a grocery store like Whole Foods. None of these items, however, are listed.

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The Kreative Kitchen stall is demarked by a sign announcing ―Kreative Kitchen: Homemade Pot Pie Soups Salads Subs Deserts.‖ Kreative Kitchen would fall within the safe harbor applicable to ―restaurants of any kind.‖ Joppatowne and Redner‘s agree that Dutch Delights is a ―food court style operation.‖ Beiler‘s operation dedicated to the sale of fresh, uncooked chicken is simply too significant to view the stall as a restaurant. The foods that Beiler‘s sells do not claim to be foods characteristic of the Amish. Barbequed and fresh chicken are not the type of unique, high quality, specialized foods associated with a specialty store. It violates the covenant. Beiler‘s Baked Goods tracks that of Beiler‘s BBQ. A bakery is not a prohibited use. King‘s is not an ―ethnic or specialty food store.‖ Nor is King‘s a ―table service delicatessen,‖ because it does not ―provid[e] at least one-half (1/2) of its leasable floor space, exclusive of office and stock room for tables and chairs.‖ It violates the covenant.

Answers to Case Questions 1. Explain why the Amish Farmer's Market is not a violation of the Restrictive Covenant against another grocery store in the center. It is not a violation because there are specialty stores

and restaurants that do not compete with a grocery store. 2. What are the key factors the court uses in evaluating each of the stall stores? The court

relies on the language of the lease for prohibited and permitted uses. Restaurant facilities and unique goods are two major criteria in determining whether they violate the restrictions. 3. What lessons can landlords and tenants learn from this dispute? The language on the restrictions should be very specific in outlining what types of businesses will be considered competition and which types will be permitted as a way of increasing traffic.

Answer to Consider (10.9) The biggest difference in the two cases is that, in the Office Depot case, the landlord sought input from Office Depot before entering into the lease. Such approval means that the exclusivity clause is not a problem. Office Depot tried to use it later as a means for getting out of the lease. There is an interesting question as to whether the manager had the authority to approve the product line of School Box for the company or if that was beyond his agency authority. Office Depot, Inc. v. District at Howell Mill, LLC, 710 S.E.2d 685 (Ga. App. 2010). [return to top]

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Additional Activities and Assignments Answers to Chapter Problems 1. Judge Posner in the case noted there is a battle between granting an injunction and awarding damages and there must be a careful balancing of the evidence. ―Sara Creek makes a beguiling argument that contains much truth, but we do not think it should carry the day. For if, as just noted, damages have been awarded in some cases of breach of an exclusivity clause in a shopping center lease, injunctions have been issued in others.‖ Child World, Inc. v. South Towne Centre, Ltd., 634 F.Supp. 1121, 1134-35 (S.D. Ohio 1986). The choice between remedies requires a balancing of the costs and benefits of the alternatives. The task of striking the balance is for the trial judge, subject to deferential appellate review in recognition of its particularistic, judgmental, fact-bound character. The plaintiff who seeks an injunction has the burden of persuasion—damages are the norm, so the plaintiff must show why his case is abnormal. But when, as in this case, the issue is whether to grant a permanent injunction, not whether to grant a temporary one, the burden is to show that damages are inadequate, not that the denial of the injunction will work irreparable harm. "Irreparable" in the injunction context means not rectifiable by the entry of a final judgment. The case was remanded for a determination of this balancing of damages vs. injunction. Walgreen Co. v. Sara Creek Property Co., B.V. 966 F.2d 273 (7th Cir. 1992). 2. Judicial Opinion (Circuit Judge Loken). Boardwalk based its fraud defense primarily upon the trial testimony of Rittmueller and Tandy. Rittmueller testified that he had more than a dozen conversations with Morris between October 1988 and the signing of the lease in March 1989. During four or five of those conversations, Morris orally provided sales figures for other tenants of the newly opened food court. According to Rittmueller, Morris sent him a typewritten sheet listing four months‘ sales for four or five of the food court tenants—a document Rittmueller subsequently lost—but never showed him a Cumulative Monthly Sales Report. If Rittmueller‘s testimony is believed, the sales figures that Morris provided were substantially inflated. Tandy‘s trial testimony supported Rittmueller. However, Rick Smith, manager of the franchise restaurant, testified that he, Tandy, and Rittmueller were given a Cumulative Monthly Sales Report. Morris testified that he discussed the sales volumes of other food court tenants with Rittmueller and Tandy before the lease was signed and that he responded truthfully to Rittmueller‘s and Tandy‘s inquiries about sales figures. Specifically, he told Rittmueller that Chick-Fil-A reported $130,000 in sales in August 1988, and that Sbarro‘s pizza restaurant reported sales of $77,000 to $80,000 for part of November and December 1988—figures that are consistent with the Cumulative Monthly Sales Reports for that period. On appeal, Boardwalk contends that the district court erred in finding that Marathon‘s agent, William Morris, committed no misrepresentation. The monthly sales of other food court tenants declined significantly between the Park Plaza Mall‘s opening in July 1988 and the signing of Boardwalk‘s lease in March 1989. Boardwalk argues that Morris had a continuing

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affirmative duty to disclose that fact. In addition, Boardwalk claims that Morris at least had an obligation to disclose those declining sales in response to repeated requests for sales figures by Rittmueller and Tandy over the course of the lease negotiations. We reject Boardwalk‘s contention that, under Arkansas law, Marathon had an affirmative duty to disclose the declining sales experienced by other food court vendors. ―As a general rule there is no duty between vendor and purchaser to disclose any information affecting the value of property in an arm‘s length transaction.‖ There was no special relationship between these parties giving rise to such a duty. As the district court found, Boardwalk is an experienced and knowledgeable restaurant franchising company that can be expected to know what information it needs to obtain in negotiating leases of this type. In these circumstances, Arkansas law imposes no affirmative duty to disclose other tenants‘ declining sales figures over the course of the lease negotiations. Arkansas law does impose a duty on parties negotiating a real estate transaction to respond truthfully to material inquiries: [W]hen parties...deal at ―arm‘s length‖ and in no confidential relationship, the prospective purchaser is under no obligation to volunteer information to the vendor; but if in such a situation, the vendor makes inquiry of material matters and the purchaser undertakes to make answers, then such answers must be truthful, unequivocal and non-evasive. Relying on the testimony of Rittmueller and Tandy, testimony the district court expressly rejected, Boardwalk asserts that, in response to repeated inquiries, Morris provided Rittmueller and Tandy with a list of inflated sales figures. However, they claimed to have lost that list and, as the district court observed, ―their explanation for the loss of this very important document is unconvincing and unsatisfactory.‖ Rittmueller and Tandy also testified that they never saw a computerized Cumulative Monthly Sales Report until after the lease was signed. Morris testified that he responded truthfully to all inquiries about other food court vendors‘ sales, and the district court credited that testimony. The sales figures that Morris testified he provided orally to Tandy and Rittmueller were consistent with the Cumulative Monthly Sales Reports. On this record, we cannot conclude that the district court‘s finding that credited Morris‘s recollection of these conversations, rather than Rittmueller‘s and Tandy‘s, is clearly erroneous. Finally, we note that the testimony of Boardwalk‘s vice president, Csicsek, provides independent support for the district court‘s decision. Csicsek testified that he, not the prospective franchisees, Rittmueller and Tandy, was solely responsible for negotiating the lease‘s economic terms. Csicsek testified that he made the decision to enter into the lease based upon one phone call to Morris. Csicsek admitted that he never saw a computergenerated printout of other tenants‘ sales volumes, nor the document Rittmueller claimed to have received from Morris listing the sales figures for various tenants. In these circumstances, we agree with the district court that Boardwalk made an inadequate inquiry

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before signing the lease. If Boardwalk considered the prior sales of other tenants in the newly opened food court material, it should have unambiguously requested that Marathon provide the required information. Thus, Boardwalk‘s defense of fraud in the inducement is without merit. Affirmed. Herring-Marathon Master Partnership B v. Boardwalk Fries, Inc., 979 F.2d 1326 (8th Cir. 1992). 3. The court held that the lease was not properly terminated according to the agreement. The attempted termination of lease was improper and did not trigger lease's liquidated damages provision. However, as a result, Marriott had breached lease and would owe damages to Hyman. There were some questions as to whether there really was an assignment because all Hyman had was a city business certificate indicating that a Hyman affiliate was operating the kiosk and that did not establish assignment of lease to affiliate. The result was that Marriott owed money to Hyman‘s, which was in bankruptcy. In re Hyman Companies, Inc., 440 B.R. 390 (Bkrptcy Ct. Mass. 2010). 4. Most courts do require tenants to honor a built-in assumption to do business. However, in this case, the court held payment of minimal rent was sufficient without anything due from "doing business." The court held that there were factual issues that required the court to look at parties' intent, past practices, etc., to determine whether the sublease would cause the percentage clause to kick in. 45-02 Food Corp. v. 45-02 43rd Realty LLC, 37 A.D.3d 522, 830 N.Y.S.2d 304 (2007). 5. The court held that the trial court‘s dismissal of the case should be upheld. There were some issues with inconsistencies and lack of clarity on the tenant‘s part on the representations. However, even still, the provision in the lease made it clear for the tenant to not rely on such representations. Discuss with the students the importance of a saving clause and the language in the saving clause. Hinesley v. Oakshade Town Center, 37 Cal.Rptr.3d 364 (2006). 6. In the case, the court refused to grant AMC a summary judgment indicating that there were factual issues surrounding the question of whether there could be integration of wheelchairs even as they maintain the safety of others theater partons. The case needed to be tried because there were factual issues related to that critical issue of the ADA exception on safety. Fiedler dismisses the threat to safety he poses as de minimis. He has, he says, ample upper body strength to move his own wheelchair rapidly up the aisles at the Avenue Grand. He also never attends a performance in a theater with a steeply sloped aisle unless he is accompanied by a companion who is willing and able to assist him in the event of an emergency. Moreover, he states, he customarily waits for the other patrons to exit before he leaves a movie theater. He observes that the likelihood of a theater fire is so remote—none having occurred in the United States, he says, in more than fifty years—and of a magnitude sufficient to force a general evacuation of the audience, given modern fire safety precautions, is such as to render the risk to others virtually non-existent.

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AMC is not so sanguine. By scattering wheelchair seating throughout the audience, unless all of a theater's emergency exits are equipped with ramps (as those at the Avenue Grand are not), a wheelchair-bound patron can exit only at the rear, which he can reach only by negotiating his way up the aisle from a seat toward the screen. In event of an emergency evacuation, he would be proceeding against substantial crowd traffic heading for nearer exits in the opposite direction. Even those patrons moving in the same direction but behind the wheelchair will be able to proceed only at a pace determined by the ability of the occupant of the wheelchair to propel his or her chair upgrade. A theater fire, moreover, while representing the classic crisis situation, is not the only event that could precipitate the flight of the audience: a bomb threat, a deranged patron with a gun, or a riot could have a similar effect. Fiedler v. American Multi-Cinema, Inc., 871 F.Supp. 35 (D.D.C. 1994). 7. Taco Bell is released from the lease. It showed due diligence. Gotlieb v. Taco Bell Corporation, 871 F.Supp. 147 (E.D.N.Y. 1994). 8. Yes, if tenant cannot use property, as here—landlord owes damages for constructive eviction. Thus, from our overview, we hold, according to the mentioned authorities, that Ms. Barton was constructively evicted from the premises at the time of her departure and, therefore, has no responsibility for rent thereafter. Here, the landlord was advised of the difficulty. The landlord acknowledged responsibility and agreed to remedy the situation and had the means to do so. The terms of the lease with reference to noise could have been enforced against Body Electric. The walls could have been insulated. Yet the landlord did nothing. Despite the damage to her business, Ms. Barton waited a reasonable time for the landlord to act. Barton v. Mitchell Company, 507 So.2d 148 (Fla. 1987). 9. The court held that the tenant knew of the elevator work, which was ongoing at the time he signed the lease. Also, the tenant was still able to use the premises. While there was, unquestionably, a seven-week delay in the availability of elevator service (calculating from the agreed-on delayed lease commencement date), the evidence fails to establish that plaintiff was deprived of any expected use of the premises during that period. On the contrary, it appears that the tenant was given—and took—the degree of possession of the property that was contemplated when the lease was signed. First, the delivery and acceptance of the key to the premises establishes that the tenant was initially given the contemplated access. Although the elevator was not operational, the undisputed testimony of Rokosz, the landlord's principal, establishes that Ricci, the tenant's principal, and the tenant's employees and contractors, could, and did, gain access to the leased premises from the stairway. Indeed, Rokosz testified that all the other tenants of the building moved in before December 4th, using only the stairs for access. Ricci also physically accepted delivery of the elevator key on December 4th, which reflects that the tenant did not, at that time, take the position that the lease was a nullity due to a failure to deliver possession before then. Second, the tenant's acts of delivering hardwood flooring to the premises in early November 2006 in accordance with the work letter accompanying the lease and instructing Rokosz to © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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hold off on its installation in view of the subflooring concerns, and then having plywood delivered in December 2006, further reflect that the tenant actively cooperated in the process of readying the place for the contemplated future business operations. Under such circumstances, it is inaccurate to say that the tenant was not given the possession contemplated by the lease. Also, the tenant failed to show exactly how he was evicted when he continued to use the premises. Pacific Coast Silks, LLC v. 247 Realty, LLC, 76 A.D.3d 167, 904 N.Y.S.2d 407 (N.Y.A.D. 2010). 10. The court held that tenant was not constructively evicted from the leased premises as a result of leaks in the roof. A constructive eviction requires that the tenant be compelled to abandon the premises as a result of actions by the landlord. Here, there is no evidence that the landlord's failure to fix the roof forced the tenant to move out. To the contrary, the tenant continued to operate its business on the premises during the time that roof was said to be leaking. It was only after the leaks had been repaired and eviction proceedings had been instituted that the tenant left. As a result, there was no constructive eviction. JAL Dev. V. LivFitNutrition, L.L.C., 2014 WL 4378752 (Ohio App. 2014).

Supplemental Readings BORMAN'S V. GREAT SCOTT SUPERMARKETS, INC. 433 F.Supp. 343 (E.D. Mich. 1975) Borman's (plaintiff) a grocery-store operator, wished to enter into a leasing agreement for space to operate a supermarket in the Lincoln Park Shopping Center. The landlord refused to lease to Borman's on the grounds that its lease with Great Scott (defendant) prohibited it from leasing to a competitor within the same shopping center. Borman's brought suit, alleging that the prohibition in the lease violates the Sherman Act (15 U.S.C. Section 1). Great Scott sought an injunction to prevent the leasing of the property to Borman's. PRATT, District Judge Neither research nor the briefs have been able to discover any Michigan authority relative to the enforceability of restrictive covenants in shopping center leases. In the annotation "Lease-Covenant Against Competition" 97 A.L.R.2d 4 (1964), the commentators have found that such provisions generally have been held to be enforceable. They have neither been found to be unreasonable nor void as against public policy nor void as violative of state antitrust law. In light of the general trend of state authority permitting enforcement of such clauses, it is most likely that the Michigan courts would enforce them under state law. The plaintiff argues that the instant clause is violative of antitrust laws because: (a) the defendant has evinced an anti-competitive motive and intent to restrain trade; (b) the most recent developments in the area of restrictive shopping center leases constitute a per se violation or at least a trend in that direction. Each of these arguments will be discussed seriatim....

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[Plaintiff argues that if] defendant intended to reduce competition, then an antitrust violation has been made out. This appears to be an oversimplification of the issue and an overbroadening of the reaches of the principle.... A forbidden restraint would be monopolization, group boycotts, price fixing, or the like, not a mere intent to reduce competition. In short, ...a person violates the antitrust laws when either he commits a per se violation or performs some innocuous acts which are intended to have the same effect as would a per se violation. As will be discussed later, it is clear that the defendant's actions do not constitute a per se violation. Accordingly, evil motive, standing alone is insufficient. The plaintiff seeks to assert that a per se violation has been made out because the instant clauses have the same effect as would a price fixing arrangement.... To hold that all restraints on competition are per se violations because they result in stabilized prices is to ignore the well recognized statement of law that it is only unreasonable restraints of trade and/or competition that infringe upon the antitrust laws. In "The Antitrust Implications of Restrictive Covenants in Shopping Center Leases" 86 Har. L. Rev. 1201 (1973) the author concluded that these lease provisions "should be held to be per se violations of the antitrust laws." However, such a rule would disregard important distinctions between and among the types of shopping centers involved, the type of store involved, and the type of restraint involved. Since very real distinctions should be made depending upon the facts, any per se rule of illegality, or legality, should not be formulated. The burden is upon the plaintiff to come forward with evidence that the defendant's covenant violates the antitrust laws. The plaintiff alleges two theories of liability: (a) evil motive vis-à-vis price fixing, and (b) a per se rule. For the reasons aforediscussed, none of these legal theories seem to apply to the instant case and thus it cannot be contended that the plaintiff has sustained its burden as to any of them. In the absence of the applicability of these theories, the present analysis must be directed to the question of whether the plaintiff has sustained its burden under the rule of reason. In applying the rule of reason to the case at bar, this Court must necessarily assess what the effects on competition and trade are. In order to assess these effects, the Court must determine what the relevant market is in which the effects are felt. The plaintiff has ... made no attempt to establish what the relevant market is. Even assuming that the plaintiff establishes a relevant market, it must be shown that this market has been unreasonably affected by the instant lease provision.... This tentative conclusion is reached because of the apparent factual context, i.e., a relatively small neighborhood center serving a restricted area, as opposed to a regional type of center; the presence of two supermarkets in the center; the site and configuration of the center; the presence of other supermarkets in the area, including plaintiff's supermarkets; and the exclusive covenant having a restricted real effect. The injunction is denied.

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In-Class Exercises 1. Have the students develop a checklist of questions they would ask if they were starting a small retail business and were leasing a pad in a strip shopping center. What additional questions would they ask if they were leasing a small store in a shopping mall? 2. Have the students develop a checklist of questions they would ask if they were leasing a small office suite in a two-story commercial office building. 3. Have the students read the Safeway case following and compare it with other cases in the chapter.

FIRST AMERICAN BANK & TRUST CO. v. SAFEWAY STORES, INC. 729 P.2d 938 (Az. 1986) On March 8, 1968, Betz leased to Safeway space in a shopping center located at the intersection of South 12th Avenue and Ajo Way in Tucson. The lease commenced April 2, 1968. It provided for a term of 20 years with an option to extend the lease for four additional 5-year terms. The square footage leased to Safeway represented at least one-half of the total number of square feet available for lease in the center. Under the terms of the lease, Safeway agreed to pay a fixed minimum monthly rent of $2,500, or $30,000 per year, and to pay a percentage rent of 1.25 percent of its gross sales, offset by certain expenses, in excess of $2,000,000 per year. The lease contained a clause that the lessee made no representations or warranties regarding expected sales. Betz was prohibited from leasing any of the remaining shopping center space to any business that would compete with Safeway. Paragraph 13 of the lease provided: 13. Assignment and subletting. Lessee may assign this lease or sublet., the whole or any part of the leased premises. If lessee assigns this lease, lessee shall remain liable to lessor for MI performance of lessee's obligations. On December 24, 1983, Safeway ceased operating the grocery store, closed the store, boarded up the windows, and vacated the premises. Safeway maintained that the opening of a Fry's Food Store nearby made the Safeway location unprofitable. Betz terminated the lease on January 20, 1984, but Safeway refused to surrender possession. Betz then brought suit in forcible detainer for possession of the premises. During the trial, Safeway allowed its subsidiary, Liquor Bam, to operate in 15,000 square feet of the premises and sublet the remaining 5,000 square feet to Pistol Pete's Pizza Parlor. Safeway paid the base rent but paid no percentage rents from December 24, 1983, forward. The trial court found that Safeway had an implied duty of operations and granted restitution of the premises to Betz as well as damages for the percentage rent not paid. Safeway appealed. HOWARD, Presiding Judge

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In Walgreen Arizona Drug Co. v. Plaza Center Corp., 132 Ariz. 5 12, 515, 647 P.2d 643, 646 (App.1982), the court discussed implied covenants of continuous operation and pointed out that certain conditions must be satisfied before a covenant will be implied: (1) the implication must arise from the language used ... ; (2) it must appear from the language used that it was so clearly within the contemplation of the parties that they deemed it unnecessary to express it; (3) implied covenants can only be justified on the grounds of legal necessity; (4) a promise can be implied only where it can be rightfully assumed that it would have been made if attention had been called to it; (5) there can be no implied covenant where the subject is completely covered by the contract. In agreements where the rental is based either upon a straight percentage of sales, or upon a minimum fixed rental and additional rental based upon a percentage of sales, the inadequacy of the base rent implies a covenant of continuous operation. Safeway contends that the testimony of Betz' expert appraisal witness does not support the trial court's conclusion that the base rent was inadequate and that the provision of the lease allowing Safeway to assign the lease precludes the trial court from finding the existence of an implied covenant of continuous operation. We do not agree. The expert witness unequivocally testified that the base rent was not equal to the fair rental value of the premises leased to Safeway. He testified that the percentage clause of the lease had to be considered in calculating the fair rental value of the property and, absent the percentage provisions, the monthly minimum rental was not sufficient to satisfy the obligations that the landlord would incur in financing the construction and development of the property. The court found that there was no incongruity between paragraph 13 of the lease, which allowed Safeway to sublet and assign the lease, and an implied covenant of continuous operation. Safeway argues that an implied covenant of continuous operation is repugnant to the provision of the lease allowing it to assign the entire lease. On that issue, we agree with the conclusion of law made by the trial court: The presence of a right to assign or sublet is not necessarily inconsistent with an implied covenant of continuous operation. The two covenants can be harmonized to permit subletting or assignment to a business of the same character. Affirmed.

Discussion Questions 1. 2. 3. 4. 5. 6. 7.

Describe the lease terms between Safeway and Betz. Why did Safeway cease operations? Who occupied the premises at the time of trial? When did Safeway stop paying percentage rent? Is percentage rent due? Must Safeway surrender possession? Does the base rent represent the commercial value of the property?

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Resources Adler, ―A Moving Experience: Acquiring Good, Affordable Office Space Can Provide a New Lease on Life,‖ 81 A.B.A.J. 87 (February 1995). Ahner, "Ten Questions to Ask When Leasing Office Space (And the Answers You Should Get!)," 23 Law Off. Econ. & Mgmt. 494 (Winter 1983). Betesh and Davids, ―Negotiating Common Area Maintenance Costs,‖ 23-JUN Prob. & Prop. 40 (May/June 2009). Blair, ―A Matter of Trust: Should No Reliance Clauses Bar Claims for Fraudulent Inducement of Contracts?‖ 92 Marquette Law Rev. 423 (2009. Carbone, ―Negotiating a Letter of Intent for an Anchor Store,‖ 11 Prac. Real Est. Law 85 (May 1995). Di Sciullo, ―When Disaster Strikes—Will Your Lease Survive?‖, 9 Prob. & Prop. 34 (July-August 1995). Earle, "Combating the New Drug Trade of Counterfeit Goods: A Proposal for New Legal Remedies," 20 Transnat'l L. & Contemp. Probs. 677 (Winter 2012). Field, "The Americans With Disabilities Act Readily Achievable Requirement for Barrier Removal: A Proposal for the Allocation of Responsibility Between Landlord and Tenant," 15 Cardozo L.R. 569 (1993). Goldberg, ―Protecting Reliance,‖ 114 Colum. L. Rev. 1033 (2014) Goldman, ―Drafting a Fair Right of First Offer Lease Option (with Form),‖ 11 Prac. Real Est. Law 79 (January 1995). Goldman, ―How to Draft a Fair Office Downsizing Option (with Forms),‖ 10 Prac. Real Est. Law 47 (July 1994). Homburger and Grant, ―A Changing World: A Commercial Landlord's Duty to Prevent Terrorist Attacks in Post-September 11th America,‖ 36 J. Marshall L. Rev. 669 (Spring 2003). Jennings, ―Tippecanoe and Anticompetitive Covenants, Too!,‖ 34 Real Est. L. J. 77 (2005). Jones, "Commercial Leases Under the Americans With Disabilities Act," 22 R.E.L.J. 185 (1994). Korobkin, ―The Borat Problem in Negotiation: Fraud, Assent, and the Behavioral Law and Economics of Standard Form Contracts,‖ 101 Cal. L. Rev. 51 (2013). Markatos, "Property Law: The Growing Accountability of Landlords for Third-Party Criminal Attacks," 41 Defense L.J. 731 (1992). Marsh, "Too Big to Fail vs. Too Small to Notice: Addressing the Commercial Real Estate Debt Crisis," 63 Ala. L. Rev. 321 (2012). © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Marsh, "Transforming Lease Covenants Into Real Covenants," 29-OCT Prob. & Prop. 35 (2015). Mastroianni, ―Caveat Lessor: Courts‘ Unwillingness to Find Implied Covenants of Continuous Use in Commercial Real Estate Leases,‖ 25 Real Est. L.J. 236 (Winter 1996). McKinney, ―Are You Trying to Imply Something?: Understanding the Various State Approaches to Implied Covenants of Continuous Operation in Commercial Leases,‖ 31 U. Ark. Little Rock L. Rev. 427 (Spring 2009). Murray, ―The Evolution of Implied Warranties in Commercial Real Estate Leases,‖ 28 U. Rich. L. Rev. 145 (March 1994). Murtaugh and Despin, "Managing the Retail Anchor Tenant Lease," 9 Prac. Real Est. Law. 67 (1993). Myster, ―Protecting Landlord Control of Transfers: The Status of ‗Sole Discretion' Clauses in California Commercial Leases,‖ 35 Santa Clara L. Rev. 845 (Summer 1995). Natsis, Greger and McFadden, ―Credit Enhancements in Commercial Leasing Transactions: Lessons Learned From the Front Lines of Dot.com Bankruptcies and Proposed Legislative Resolutions,‖ 35 Loy. L.A. L. Rev. 787 (April 2002). Newman, "Common Area Costs—The Hidden Rent," 19 Real Est. Rev. 65 (1990). Note, ―Better Late than Never: Texas Landlords Owe a Duty to Mitigate Damages When a Tenant Abandons Leased Property: Austin Hill Country Realty, Inc. v. Palisades Plaza, Inc., 40 Tex. Sup. Ct. J. 228 (Jan. 10, 1997),‖ 28 Tex. Tech L. Rev. 1281 (1997). Offenkrantz, ―The Warning from Pittsburgh‘s Golden Triangle: Home of the Steelers, the Pirates and the Amorphous Favored Nation Clause in the Commercial Lease,‖ 23 Fordham Urb. L.J. 69 (Fall 1995). Plane, ―Going After the Middleman: Landlord Liability in the Battle Against Counterfeits,‖ 99 Trademark Rep. 810 (May/June 2009). Powell, ―Unconscionability in the Lease of Commercial Real Estate,‖ 35 Real Prop. Prob. & Trust J. 197 (Spring, 2000). Schindler, "The Future of Abandoned Big Box Stores: Legal Solutions to the Legacies of Poor Planning Decisions," 83 U. Colo. L. Rev. 471 (Winter 2012).

Cases Dart Drug Corp. v. Peoples Drug Stores, Inc., 1977-1 CCH Trade Case, paragraph 61, 281 (1977). Downtown Realty, Inc. v. 509 Tremont Bldg., Inc., 748 S.W.2d 309 (Houston 1988). Harold Friedman, Inc. v. Thorofare Markets, Inc., 587 F.2d 127 (3rd Cir. 1978). © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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In re Hyman, 440 B.R. 390 (E.D. Pa. 2010). Old City Hall LLC v. Pierce County AIDS Foundation, 329 P.3d 83 (Wash. App. 2014). Payless Drug Stores Northwest, Inc. v. City Products Corp., 1975-2 CCH Trade Case, paragraph 60, 325 (1978). Pichardo v. Big Diamond, Inc., 215 S.W.3d 497 (Tex. App. 2007). Prudential Ins. Co. of America v. Italian Cowboy Partners, Ltd., 270 S.W.3d 192, 205 (Tex. App. 2008). [return to top]

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Chapter Objectives The following learning outcomes are addressed in this chapter (see PowerPoint Slide 11-1): 11.01 Discuss the definitions of and differences between the forms of multiunit ownership. 11.02 Describe the requirements for creation of the various forms of multiunit housing. 11.03 Discuss the liability of owners of multiunit housing. [return to top]

Key Terms attached homes: a form of multiunit housing; each generally has common walls with other homes business judgment rule: standard for imposing liability on directors of corporation; they must give time and thought to decisions bylaws: in multiunit housing, the document governing the details of operation—voting rights of members, meetings, notices, etc. condominium: form of multiunit housing in which the owner owns the area between the walls and ceiling conversion restrictions: laws that regulate the conversion of leased premises into multiunit houses to afford protection for the existing tenants cooperative: form of multiunit housing in which a corporation owns the property, and owners of the shares in the corporation live in each of the units declaration of condominium: master deed for condominium project; the document recorded to reflect the units involved on the real property; see also declaration of horizontal property regime and covenants declaration of covenants, conditions, and restrictions (CC&Rs or CCRs) declaration of horizontal property regime and covenants: another name for the declaration of condominium; multiunit housing is often referred to as horizontal housing regimes; the master deed recorded to reflect the existence of the multiunit housing and the location and number of units on the property garden home: form of multiunit housing; usually a townhouse that includes a small enclosed yard or patio horizontal property acts or regimes: multiunit housing laws that govern forms of housing such as condominiums, cooperatives, and townhouses master deed: in a condominium development, the document recorded to reflect the location of the project and the individual units

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Model Real Estate Cooperative Act: model act on co-ops Model Real Estate Time-Share Act: model act on time-share real property interests owners‟ associations: corporation or other organized entity with private laws that control the architecture, use, and modification of property within a subdivision or multiunit housing development patio home: form of multiunit housing that generally includes a closed-in yard or patio area proprietary lease: interest of cooperative owner in a dwelling unit recreational lease: in multiunit housing, a lease that runs for a short period of time during each year; sometimes called time-sharing time-sharing: form of multiunit housing in which owners own the unit for a limited period of time during each year townhouse: form of multiunit housing in which the owner owns the area in the unit and also owns the land on which the unit is located Uniform Common Interest Ownership Act: uniform law on multiple-ownership issues Uniform Condominium Act: uniform law adopted in some states governing ownership, rights, and obligations in condominium interests vacation license: form of time-sharing interest ownership [return to top]

What's New in This Chapter The following elements are improvements in this chapter from the previous edition:   



  

Updated discussion of level of HOAs and multiunit housing in U.S. in Section 11-7. Restructured the co-op section (Section 11-3) to cover materials before getting into the case and other features—they are easier to understand now. New case brief in Section 11-3b on issues in acquiring ownership in multiunit housing and the risks of co-op purchases, Moutopoulis v. 2075-2081 Wallace Avenue Owners Corp. In Section 11-5, updated the discussion of timeshares to discuss the lease form vs. the deed form and add details that have happened over the last five years; there is also a discussion of the booming timeshare buy-back industry. Restructured association governance section (Section 11-7c) to eliminate repetition and more clearly call out the role and powers of the Board and HOA. In Section 11-7c, new case brief on board action and Airbnb problems in communities, Community Services Associates, Inc. v. Wall. New Figure 11-2 in Section 11-7c that shows how courts interpret CC&R restrictions when dealing with the Airbnb issues.

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  

New Ethical Issues 11.2 in Section 11-7c on board actions and Airbnb issues in communities. Deleted Cape May Harbor Village and Yacht Club Ass’n, Inc. v. Sbraga case brief and repurposed it into chapter problem #1. Deleted Hawaiian Properties, Ltd. v. Tauala case brief and reworked it into chapter problem #11.

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Multiunit Housing—USE POWERPOINT SLIDES 11-2 TO 11-4 11-1a The Applicable Laws 1. Horizontal Property Act is typical name in many states 2. Uniform Condominium Act—passed in one-fourth of states 3. Other uniform laws a. Model Real Estate Cooperative Act b. Model Real Estate Time-Share Act c. Uniform Common Interest Ownership Act 4. Significant variation from state to state 5. Chapter covers general principles of law for each time of multiunit housing

11-2

Condominiums—USE POWERPOINT SLIDES 11-5 TO 11-11 11-2a Definition and Characteristics 1. Fee simple interest in unit 2. Joint ownership of common areas 3. Owner can sell, transfer, and mortgage individual unit 11-2b Creation of a Condominium Development 1. Proper filing and paperwork required

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2. Conversion Restrictions: states have notice provisions for condominium conversions a. Notice requirements b. Minimum time requirements c. Option to use out lease 3. Declaration of Condominium or Master Deed a. b. c. d. e. f. g. h. i. j. k.

Legal description Detailed description of the building Mailing address Common areas Limitations on the use of common areas Monetary value of the building Voting rights Use restrictions Legal representative Voting procedures Amendment methods

4. Incorporation—Status Required for Creation a. Not authorized in all states b. Advisable for common area liabilities 11-2c Deeds 1. Legal description 2. Mailing address 3. Use restrictions 4. Title warranties 11-3

Cooperatives—USE POWERPOINT SLIDES 11-12 TO 11-17 11-3a Nature of Cooperatives 1. Not fee simple ownership 2. Owners have an undivided interest in land and buildings 3. They own shares in a nonprofit corporation 4. Transfer restrictions may apply 11-3b Creation of a Cooperative 1. Articles of Incorporation and Evidence of Incorporation

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a. b. c. d.

Information varies Generally, must specify share structure, name, and a legal representative Certificate of incorporation Corporate charter

2. Bylaws a. Operation of co-op b. Provisions for meetings c. Transfer procedures and restrictions 3. Proprietary Lease a. Length will be perpetuity or 99 years b. No rent, but association fees c. Should also cover selling rights and damage to premises CASE BRIEF: Moutopoulis v. 2075-2081 Wallace Avenue Owners Corp. 10 N.Y.S.3d 823 (Civ. Ct., City of New York 2015) FACTS:

Stavros Moutopoulis (plaintiff) submitted successful bids during two non-judicial auction sales of shares of 2075–2081 Wallace Avenue Owners Corp., a co-op (Defendant or Wallace) and the proprietary leases for Units 172 and 567. Stavros made a $5,000 deposit on each unit. The terms of the sale provided that the shares were transferred ―AS IS‖ on a quit claim basis without any guarantee, warranty, or representation, express or implied by Wallace. Shortly after the purchase, Stavros learned that Wallace had an unpaid lien against property in which the units were located for $225,000.00. Stavros filed suit for the return of his $10,000. Stavros moved for summary judgment. Wallace moved for dismissal of the complaint. Wallace moved for summary judgment on the grounds that the plain language of the contracts between the parties, specifically the certificates, memoranda, and notices (containing Terms of Sale) of sale for each of the units, clearly and unequivocally establish that each sale is ―AS IS‖ and that, as set forth in the Terms of Sale agreed to by Stavros.

ISSUES:

Is the sale of the shares for two co-op units governed by the UCC or common law? Can the sale be set aside?

DECISION:

The court held that what was purchased was governed by the UCC and the term ―AS IS‖ meant UCC ―AS IS‖ and not real property ―AS IS.‖ As a result, Stavros purchased an interest in a co-op that was financially troubled. There were no representations about the financial condition of the co-op. He got it ―AS IS‖ and did not ask any questions about the financial reports or condition. ―Cooperative apartments are personal property, not real property.‖ [Applying the UCC to this transaction], . . . The plain language of the Terms of Sale for each

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transaction indicates that the shares are being transferred without any guarantee, warranty, or representation, express or implied on the part of Defendant. Nothing in the Terms of Sale accepted by Plaintiff, as evidenced by his signature on both memoranda of sale, indicates that the sales are conditioned upon the financial status of the Defendant or conditioned in any other way. Moreover, Plaintiff's complaint is with the liens or [encumbrances] on the Defendant corporation, not liens or encumbrances on the individual apartments in the cooperative. Therefore, Plaintiff's emphasis on the terms ―as-is‖ and ―quitclaim‖ is misplaced because those terms relate to the shares and proprietary leases appurtenant to individual apartment units 172 and 567 and not the liens or encumbrances on the Defendant corporation. Because the cooperative shares are not realty, but goods, as defined under Section 2 of the UCC, UCC Section 2–718 governs the measure of damages stemming from breach of a contract for the sale of a cooperative apartment. The Terms of Sale here provide for liquidated damages amounts of $5,000.00 each where the Plaintiff's successful bids for the total purchase price were $50,000.00 and $47,000.00. The Court finds that the $5,000.00 liquidated damages amounts for each transaction are not unreasonably large so as to be void and that therefore the Terms of Sale control. Accordingly, Defendant's cross motion for summary judgment is granted and summary judgment is awarded to Defendant and the matter is dismissed with prejudice.

Answers to Case Questions Explain what is governed by common law and what is governed by the UCC in this scenario. The sale of the interest in the co-op is personal property and governed by the UCC, according to the court. Although the cases involving discrepancies over that issue tend to go with the UCC. Because it is UCC, the term ―AS IS‖ applies to all aspects of the sale, not just the real property. ―AS IS‖ meant the lease itself. Whom do the courts find is in breach of contract and why? Moutopoulis is in breach because he paid the deposits but then failed to close on the leases. As a result, Wallace gets to keep the $10,000. Wallace made no representations about its solvency and Moutopoulis did not ask. They are not required to give the information unless one is looking to buy a car or house— now creditors fear catching a different strain. 3. What do you learn about buying a co-op from this case? Learn about the co-op corporation itself—you are buying a share in that corporation and its financial stability affects how your units and the common area will be kept up and whether bills will be paid, etc. If review of financials is not in the contract, get it into the contract. It is unlikely, however, given that this was an auction sale that a purchaser would hold any sway in changing contract terms.

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Answer to Ethical Issue (11.1) The reasons could be security—with all the attention and paparazzi, it is difficult to keep control in and around the building. There could also be extra costs associated with increased security. It is not discrimination under the law to not allow ―Hollywood types,‖ but a more substantive reason, such as security, would allow the co-op boards to be consistent. Point out to the students that there are book buyers used to help them get through the co-op board interviews. Also, in the movie ―Green Card,‖ there is a scene in which Andie McDowell faces questioning from a co-op board and gains approval. "New York Apartment Buyers Face Powerful Co-Op Boards," The Epoch Times, January 27—February 2, 2005, p. 13. Cover PRACTICAL TIPS on how to get approval by a co-op board. 11-4

Townhomes—USE POWERPOINT SLIDES 11-18 TO 11-20 11-4a Nature of Townhouses 1. Own actual area of townhome 2. Own joint interest in common areas 3. Actual land ownership is key distinction 11-4b Creation of Townhouses 1. Declaration of Covenants, Conditions, and Restrictions (CC&Rs) a. Rights and responsibilities of owners b. Use restrictions c. Recorded 2. Articles of Incorporation a. For homeowners' association b. Non-profit corporation c. Part of incorporation records, not land records

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3. Bylaws a. Day-to-day operations b. Voting procedures c. Control committees 4. Regulations a. Use of common facilities b. Repairs and maintenance 11-5

Timeshare Interests—USE POWERPOINT SLIDE 11-21 TO 11-23 11-5a Nature of Timesharing Ownership 1. Fee simple timeshares a. Fee simple interest with right of possession limited in time on an annual basis (generally) b. Transferable right c. Issues of buying actual unit or right to use a unit d. Recreational leases are form of time-sharing but are not fee simple and are subject to rent increases 2. Lease Timeshares a. Vacation license—no fee simple interest, but grantor sells time slots 11-5b Creation of Timeshare Interests 1. Recreational lease 2. Proprietary lease 3. Interval-ownership grants—recurring estate for a given period of time 4. Tenancies in common for specific time block 5. Some states regulate timesharing via their condominium laws

11-5c Timeshare Interests and Caveat Emptor Cover PRACTICAL TIP on FTC warnings. 11-6

Hybrids—USE POWERPOINT SLIDES 11-24 AND 11-25 A. Combinations of Various Forms of Multiunit Housing B. New Names

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1. Patio homes 2. Garden homes 3. Attached homes Cover PRACTICAL TIP on verifying types of multi-unit housing. 11-7

Managing Close Quarters: The Issues of Owners‟ Associations—USE POWERPOINT SLIDES 11-26 TO 11-41 

Necessary in all forms of multi-unit housing and now also in subdivisions, gated communities  State laws vary  There is a Uniform Planned Community Act with limited adoptions

11-7a Governance: Creation of the Owners‘ Association 1. Created with community 2. Developer/builder holds control initially 3. Nonprofit corporation 4. Duties a. b. c. d. e.

Found in bylaws Maintain common areas Arrange for delivery service Tax members through regular and special assessments Protect neighborhood aesthetics and property values

11-7b Governance: The Board 1. Composition and Election of the Board 2. Fiduciary Duties of the Board (see Figure 11.1) CASE BRIEF: Davis v. Dyson 387 Ill.App.3d 676, 900 N.E.2d 698 (2008) FACTS:

From 1998 through 2003, Joe Dyson and others served on the board of the Granville Homeowner‘s Association. Larson Property Management, Inc. (LPI) served as the property manager for Granville. Warren Larson, LPI‘s principal, embezzled $550,000 from the association by forging the signature of Anna Skalka, the director who served as the treasurer for the association, on 100 association checks. During this period, the directors never reviewed the bank statements for the association, nor did they order any type of audit or even a financial review. The

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embezzlement was not discovered until July 2003 when the onsite manager looked at just one of the bank statements. To add insult and injury to embezzlement, the association did not have a bond covering the Larson crowd. To add outrage to insult, injury, and embezzlement, the directors never sought legal counsel regarding their duties, processes, and responsibilities. To add expenses to the outrage, insult, injury, and embezzlement, the association had to fork out between $200,000 and $250,000 to pay legal and accounting fees for the investigation to determine exactly how much had been pilfered. The board did obtain $60,000 from an insurer and $4,000 from the bank, but the total uncompensated loss still exceeded $800,000. Evelyn Davis and other homeowners (plaintiffs) brought suit against former board members (defendants) of the Association. The homeowners sought damages as individuals as well as on a derivative basis and for breach of the business judgment rule. The trial court dismissed the claims and the homeowners appealed. ISSUE:

What causes of action did the homeowners have against the board of directors of their association for the embezzlement that occurred on their watch?

DECISION:

The homeowners could recover for breach of fiduciary duty under the business judgment rules. The court also held that the homeowners could bring a derivative action against the directors on the part of the homeowners, but that they could not bring individual actions against the directors. Affirmed in part, reversed in part, and remanded.

Answers to Case Questions 1. What lessons do homeowners' association directors learn from this case? Directors need to pay close attention to actions of management company; director should have an audit of the finances done; directors should at least look at bank statements of the association, directors need training on their responsibilities; and directors need insurance. 2. List the rights of recovery and their bases that homeowners have against their association boards. The court held the homeowners could bring a derivative action on behalf of the association, just as any corporate shareholder could; the homeowners could not bring an individual suit to recover for themselves; the homeowners could bring an action for breach of fiduciary duty under the business judgment rules. 11-7c Governance: The Powers of the Board 1. Management Powers of the Board a. Bylaws—document for owner interrelationships i. Rules for day-to-day operations ii. Topics

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a) b) c) d) e) f)

Governing board Meeting details Maintenance and repairs Association fees Procedures for amending Use restrictions

2. Appearance Control Powers of the Board a. Rules and regulations i. ii. iii. iv.

Similar to apartment rules and regulations Use of facilities Architectural control Committees for enforcement

CASE BRIEF: Reiner v. Ehrlich 66 A.3d 1132 (Md. App. 2013) FACTS:

The Reiners own a house located in a community known as ―Avenel.‖ The Avenel community is comprised of over 900 homes in thirteen villages. The Reiners have lived there for 18 years. The Avenel community is governed by a homeowners‘ association (appellee). The original roof of the Reiners' home was made of cedar shake material. In 2010, the Reiners submitted a request to the Association for approval to install an asphalt roof. The Association denied the Reiners' request on the basis that asphalt roofs were not permitted in the village of Player's Gate. The Reiners filed a complaint with Montgomery County's Commission on Ownership Communities (―CCOC‖). While that case was pending, the Reiners notified the Association − in writing − that they had signed a contract to install a new roof using asphalt shingles. The Association served the Reiners with a ―cease and desist‖ notice, warning against the replacement of the Reiners' roof with asphalt shingles, or any other product not permitted by the bylaws of the Association.

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On October 7, 2011, the Reiners filed suit and made a motion for summary judgment. Article XI of the Association's Declaration of Covenants, Conditions and Restrictions (hereinafter, the ―Avenel–Declaration‖) provides in part: It shall be prohibited for any Owner or Vacant Lot Owner to undertake (i) any construction, which term shall include, in addition to the actual erection of a dwelling and its appurtenances, any staking, clearing, excavation, grading, or other site work, (ii) any landscaping, plantings or removal of plantings or removal of plants, trees or shrubs, or (iii) any modification, change or alteration of a Lot or Residential Unit, whether functional or decorative, except in strict compliance with this Article XI, and until the approval of either the New Construction Committee, Modifications Committee or Control Committee, as applicable, has been obtained. Article XI of the Avenel-Declaration established a Modification Committee to be responsible for considering requests for modifications, alteration, or additions to existing homes: Section 2. Modifications Committee. Subject to Section 3 below, the Modifications Committee (―MC‖) shall have exclusive jurisdiction over modifications, additions, or alterations made on or to existing Residential Units and the Lawn and Garden Areas appurtenant to such residential Units. The MC shall also be responsible for enforcing the Use Restrictions set forth in Article XII of this Declaration. The Avenel-Declaration also contained a provision regarding roofing materials that may be used by homeowners. The provision, which was dated December 4, 2006, indicated that asphalt roofs were expressly prohibited, subject to certain exceptions: Asphalt roofs are expressly prohibited unless used by the builder as part of the original roof of your home or as part of the original roofs of other homes within your village, as outlined below. The roofing materials listed as available options for homes in Player's Gate include natural cedar shake or natural slate, synthetic cedar, and synthetic slate. The 2006 Roof Specifications also referred to ―different UL performance standards for fire, impact and wind‖ and listed materials that have been identified as ―Class A fire rated roofs‖. The trial court entered summary judgment in favor of the Association. The Reiners appealed. ISSUE:

Was the denial of approval for the asphalt roof proper?

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DECISION:

Yes. The materials met fire code, there were provisions in the CCRs that required those materials, and the committee did not engage in fraud or act in bad faith in denying the Reiners the asphalt shingles. Affirmed.

Answers to Case Questions 1. What argument do the Reiners raise about the cedar shake roof versus the asphalt shingle roof? The argument is that the fire safety of some of the approved materials violates city code (fire code), but the evidence was not submitted to establish that. 2. What would the Reiners have to show to set aside the lack of approval for their roof? That there was bad faith or fraud on the part of the committee because they are protected by the business judgment rule. 3. What advice would you give to home buyers in reviewing the CCRs for a neighborhood based on what happened in this case? Pay close attention to the materials restrictions—particularly if you are buying a used home because the cost of replacement is much higher if you are required to use certain types of materials and obtain approval. 3. Use Control Powers of the Board: Airbnb Owners (see Figure 11.2) CASE BRIEF: Community Services Associates, Inc. v. Wall 808 S.E.2d 831 (Ct. App. 2017) FACTS:

In 1970, the Sea Pines Company adopted the following covenants for the Sea Pines Plantation community located in Hilton Head Island: 4. All lots in said Residential Areas shall be used for residential purposes exclusively. No structure, except as hereinafter provided[,] shall be erected, altered, placed or permitted to remain on any lot other than one (1) detached single family dwelling not to exceed two (2) stories in height and one small one-story accessory building [that] may include a detached private garage and/or servant's quarters, provided the use of such dwelling or accessory building does not overcrowd the site and provided further[ ] that such building is not used for any activity normally conducted as a business. Such accessory building may not be constructed prior to the construction of the main building. 5. A guest suite or like facility without a kitchen may be included as part of the main dwelling or accessory building, but such suite may not be rented or leased except as part of the entire premises[,] including the main dwelling, and provided, however, that such guest suite would not result in over-crowding the site. In 1998, Stephen and Maria Wall purchased a home at 48 Planters Wood Drive in Sea Pines Plantation. The home has one kitchen on the north side of the first

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floor. The second story of the home has a guest suite, accessible only by an outside staircase. In 2012, the Walls began renting out the guest room in their residence through Airbnb. The Walls' listing with Airbnb was titled ―Hilton Head Organic B&B, Sea Pines‖ and was depicted as suitable for three individuals. Part of the offering was a breakfast for their guests. Community Services Associates, Inc. (CSA) (the property management firm for Sea Pines) confronted the Walls about their rental activity. Thinking that they might come into compliance with the covenants, the Walls changed the wording in their Airbnb listing to the ―Whole House‖ category and switched around who got what in their house. The Walls then rented out the first floor of their home and began living in the second-story guest suite. They also dropped the title ―Hilton Head Organic B&B, Sea Pines‖ and stopped cooking breakfast for their renters. During this time, Maria Wall wrote a letter to the editor of The Island Packet, a local newspaper, touting the benefits of allowing residents to participate in Airbnb housing versus the problems the construction of a new hotel would bring to the island. In 2015, CSA brought suit seeking an injunction to stop the Walls‘ Airbnb activity. The magistrate denied the request. CSA appealed. ISSUES:

Is the rental of the main house a violation of the deed restriction that prohibited rental of guest suites? Subissue: Is a hot plate sufficient to make a kitchen?

DECISION:

On appeal CSA argued that the master erred in finding that the Walls home had only one kitchen. CSA had presented the following critical kitchen facts:  

The Walls kept an induction plate, a toaster oven, and a mini-refrigerator in the guest suite. The Walls occasionally prepared food for themselves with these appliances.

The court concluded that the addition of a few ―dormitory‖ appliances did not a kitchen make. Relying on the dictionary definition of a kitchen, which requires a separate room, the guest suite did not result in two kitchens. While the parties disputed the issue of the kitchen, the court‘s resolution meant that the Walls did not violate that provision. Following through then, the court held that the covenants in paragraphs 5 and 6 require the owners of a home with a guest suite to rent it in its entirety. However, the court found no express or plain prohibition on the owners staying in the guest suite whilst renting out the rest of the house.

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Short-Term Rentals The court also held that the Walls were engaged in short-term rentals that did not violate the residential use restrictions in Sea Pines. The Walls had only their dwelling on their lot and were not renting out their guest suite (kitchen issues aside). Furthermore, the appellate court noted that the president of CSA testified at the hearing that there had been no complaints of overcrowding, traffic, or congestion because of the Walls‘ rental activities.

Answers to Case Questions How strictly does the court interpret the restrictions in the CC&Rs? The court basically said that if what the Walls did was not explicitly prohibited, then they were permitted to do it—the dormitory kitchen was not a kitchen for purposes of violating the restrictions. What lessons should HOAs learn about the language and enforcement of restrictions of short-term leases? See below in discussion of the ethical issue, but they must be very specific in their language and detailed so that there is no room for finding a way around what is intended to prevent short-term leasing.

Answer to Ethical Issue (11.2) ―We believe this letter demonstrates [Mrs.] Wall's actual view of the ‗sustainable business model‘ as she described it—calling it ‗a far better solution than a new hotel.‘ She also calls for a town meeting to ‗engage in healthy dialogue‘—an apparent admission that this business model does not comport with the current covenants and restrictions.‖ The critical lesson from the case is that covenants must be drafted specifically to address the issues of short-term rentals. It seems, on initial reading of the covenants, that Sea Pines had things covered when it comes to the new market of disruptive rentals. However, the court appears to be requiring specificity that addresses clearly when there is a prohibition. Modification of existing covenants may bring resistance because of the lucrative market for vacation homes. However, new developments should heed the warning of this case—draft carefully and with full details if you want to prohibit short-term rentals. It was clear what Sea Pines was trying to accomplish—no short-term rentals, but the Walls found a loophole. The issue is what will happen going forward as more and more owners take advantage of the Wall loophole and what the community will look like as short-term occupants descend for weekend visits with no interest in the long-term quality of life in the community. They could do what they did under the language of the restrictions, but the ethical question is ―should we do it?‖ and ―how are others affected by our decision?‖ 11-7d The Board‘s Role in Rules and Enforcement 1. Ex Post Facto Enforcement a. Regulations for a smoothly running community

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b. Source of enforcement power and areas of focus Cover PRACTICAL TIP on how boards avoid litigation.

Answer to Consider (11.1) The court found for the unit owner because Washington state law requires that 67% be the level for approval and HOAs cannot up that approval requirement when it comes to individual uses of their condominium unit. An association could require higher levels of approval for rules and regulations, but not for individual use. Otherwise the 2/3 can hold owners hostage because of the difficulty of achieving 90% approval. Filmore LLP v. Unit Owners Association of Centre Pointe Condominium, 333 P.2d 498 (Wash. App. 2014). 2. Consistent standards for association rule enforcement a. Often battles over who controls and which sets of documents/rules control b. Basic principles i. ii. iii. iv.

CCRs control over bylaws CCRs give rights associations, bylaws, and rules cannot take away CCRs give a property interest Bylaws cannot impose requirements that are not part of the CCRs

c. Bylaws and rules cannot violate anti-discrimination laws i. Adult day-care center prohibition on condo unit held invalid ii. Adults only restrictions—valid 3. The Requirement of Purpose in Association Rules CASE BRIEF: Schuman v. Greenbelt Homes, Inc. 69 A.3d 512 (Md. App. 2014) FACTS:

Greenbelt Homes is a nonstock, nonprofit corporation housing cooperative organized under the laws of Maryland. The units at GHI are townhouses that share common walls. Since 1995, Schuman has been a resident, member, and shareholder of GHI. His unit immediately adjoins the unit owned by the Popovics, who moved into the cooperative in 1996. Schuman complained to GHI of cigarette smoking by the Popovics the same year they moved in. Schuman was concerned that cigarette smoke was entering his home, mainly in the bathroom. GHI sealed the cracks between the two units to try to mitigate Schuman's exposure to the smoke. Afterward, GHI hired an Industrial Hygienist to test the air in Schuman's unit. At that time, no detectable level of nicotine was found. Schuman said that the problem was resolved, until 2008.

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In 2008 spanning into 2009, Schuman renovated his townhome. During the renovations, some drywall was removed on the wall shared with the Popovics' unit. When Schuman started smelling cigarette smoke in his unit again, he sent several letters to both the Popovics and GHI. The Popovics purchased a new air filter, but Schuman still smelled the smoke. Further discussions between GHI, Schuman, and the Popovics did not solve the problem. Since GHI's management could not adequately address Schuman's complaint, the management referred the case to the Member Complaints Panel. On September 28, 2009, Schuman presented his evidence to that body. Eventually, GHI's president sent Schuman a letter explaining GHI's position. The cooperative would seal any additional areas in Schuman's unit, but it would not request that the Popovics stop smoking, because GHI is not a smoke-free community. Mrs. Popovic then became ill and was diagnosed with a brain tumor. This caused Mrs. Popovic to quit smoking and Mr. Popovic to stop smoking inside his unit. Mr. Popovic continued to smoke outside on the patio in the evening for twenty minutes to an hour and a half. In April 2012, Mrs. Popovic passed away of a cancerous brain tumor. Mr. Popovic remained in the townhome and continued his smoking. Mr. Schuman filed suit to have the smoking stopped. After a bench trial, the court ruled against Schuman. Schuman appealed. ISSUE:

Did the smoking violate the association‘s CCRs? Was the smoking a nuisance?

DECISION:

The court held that: (1) tobacco smoke is not a nuisance per se; (2) owner failed to establish that neighbor's smoking on his outdoor patio for up to an hour and a half each evening constituted a nuisance in fact; (3) association's failure to stop unit owner's neighbor from smoking did not breach any implied covenant of quiet enjoyment; (4) owner failed to establish that smoke entering his unit amounted to a trespass; and (5) owner failed to establish that secondhand smoke caused him any harm, and thus failed to establish that association was negligent. The ―authorized use of premises‖ clause of the membership contract is the primary focus of Schuman's argument that Mr. Popovic violated that contract. It provides: Authorized Use of Premises. It shall be the duty of Member to respect the comfort and peace of mind of neighbors as well as of all members and tenants of GHI, not to engage in conduct that is objectionable conduct, and to ensure that all persons occupying or visiting in the Premises so act. Member agrees not to do or allow to be done, or do or allow any act or thing that shall or may be a nuisance, annoyance, inconvenience, or damage to GHI or its members or tenants, or to the occupants of adjoining dwellings or of the neighborhood. Schuman interprets the contract terms ―respect the comfort and peace of mind of neighbors‖ and ―nuisance, annoyance, inconvenience‖ as covering Mr. Popovic's

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smoking. He asserts that these contract terms actually provide him with greater rights than he would have if he did not live in the community and merely sued Mr. Popovic under a common law nuisance theory. Schuman argues that any amount of secondhand smoke is harmful and annoying and, therefore, should constitute a nuisance. We do understand that although the true effects of secondhand smoke are still being assessed, it obviously can be harmful. However, that does not make it a nuisance per se. Affirmed.

Answers to Case Questions 1. Why does Mr. Popovic’s smoking not violate the co-op’s rules and regulations? The association was a smoking association when both parties signed their purchase agreements and were aware of it. There is not interference with use and enjoyment of property and no evidence that anything had been done to mitigate the problem. 2. Why is Mr. Popovic’s smoking not a nuisance? The smoke is not sufficiently annoying or health-infringing that it needs to be stopped. There are alternatives to prohibitions. 3. What is the court’s position on second-hand smoke in other cases? The court is not making a general decision, but, rather, deciding this case on the basis of its facts as well as on the basis of the association‘s documents. 4. The Litigious Area of Enforcement 5. Tools for Enforcement: Association Fee Collection a. Collection of fees is major issue b. Tools are: i. Fines ii. Liens iii. Foreclosure c. Enforcement is now emotionally charged with many regulations around the country i. Limits on foreclosure ii. Limits on triggers for foreclosure iii. Time limits and protections 6. Constitutional Issues in Rules Enforcement a. Posting signs (speech) b. Restrictions on use and public policy, e.g., all-adult covenants c. Restrictions on transfer (sex offenders) 11-8

Liability Issues in Owners' Associations—USE POWERPOINT SLIDES 11-42 TO 11-45

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11-8a HOA Liability Issues 1. Liability for Unpaid Bills of Developers a. b. c. d.

Developer is responsible Homeowners did not exist when contract entered into Problems with developer's construction Some states simply dismiss debts and liens when developer turns over title e. Some states apply warranty of habitability protections 2. Owner Association Liabilities: Maintenance 3. Owner Association Liabilities: Injuries a. Ice and snow, jagged walkways, loose rugs, etc. b. Extends to visitors, repair persons, government personnel (such as fire and medical personnel), and any others authorized to be on the premises, including unit owners CASE BRIEF: Erwin v. HSBC Mortg. Services, Inc. 983 N.E.2d 174 (Ind. App. 2013) FACTS:

On August 12, 2003, Kermit Avedon purchased a home in the Ian's Pointe subdivision. Avedon financed the transaction with two conventional mortgage loans, which HSBC purchased shortly after the closing. The subdivision is governed by the HOA. CASI is the management company for the HOA. Avedon installed an in-ground pool with an automatic safety cover in his backyard. Thereafter, he erected a three-sided fence that did not completely enclose the backyard or pool, but simply provided privacy. Avedon did not obtain approval from the HOA prior to installation of the pool or fence. There were no apparent safety violations when the pool and cover were installed. In the summer of 2007, Avedon filed a Chapter 13 bankruptcy petition, which he converted to a Chapter 7 in October 2007. At that time, HSBC ordered a drive-by inspection of the property and began paying the real estate taxes on the subject property to protect its interest in the property. In January 2008, Avedon and his family abandoned the property. Avedon called HSBC prior to leaving and stated, ―I'm leaving my property. I filed bankruptcy. There is a pool. There is a cover on it. There is a pump. There is no power to the home. It is your home now. I'm leaving on [January 28].‖ In addition to shutting off the utilities, Avedon cancelled his homeowner's insurance policy. HSBC received notice of cancellation of the policy from the insurance company in February 2008. By late winter and early spring of 2008, the swimming pool and cover were in a gross state of disrepair. A substantial amount of water had accumulated on top

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of the pool cover causing the cover to tear from its track on one side and sink several feet into the pool. The pool cover, which was almost entirely underwater, was covered in algae. The murky water also contained debris, including boards from the adjacent fence. The pool and its cover were openly dangerous. Neighbors began complaining about the dangerous condition of the pool. In April 2008, Jose Romero called CASI and discussed the state of the pool. The CASI representative thanked Romero for the call and assured him that his concerns would be ―taken care of.‖ Romero made another call to CASI about a week later when it appeared no action had been taken with regard to the pool. Lynn Shelton, who lived adjacent to the property and maintained contact with the Avedon family, spoke with Avedon about the deteriorating condition of the pool. Avedon indicated that he could not go back onto the property, but that he would contact HSBC about Shelton's concerns. Avedon called HSBC in mid to late April and informed an HSBC representative about the situation. Shelton followed-up with a phone call to HSBC in May and left a voicemail message about the dangerous condition of the pool on the abandoned property. On May 31, 2008, five-year-old Sheyenne Jenkins was spending the day at the home of her grandparents while her mother and stepfather were working. Her grandparents, Melvin and Janice Jenkins, lived two houses down from the abandoned property. While Janice was in the driveway talking with another neighbor that afternoon, Sheyenne wandered from the home. Shortly thereafter, Janice went inside to look for Sheyenne. When she and Melvin could not locate the child in or around their home, Janice ran toward the pool. She found Sheyenne floating in the five to six feet of water that had accumulated on the sunken pool cover. The child was not able to be revived. There was a beach ball floating on top of the water, and finger and shoe prints on the algae-covered pool cover showed where the young child had attempted to climb out of the pool. Further, access to the pool's ladder was blocked by the sunken cover. Secrena D. Erwin, Sheyenne‘s mother, filed suit against Avedon, HSBC, the HOA, CASI, and the Jenkinses, alleging that their negligent acts and omissions resulted in Sheyenne's death. The trial court issued summary judgment for HSBC, the HOA, and CASI. Ms. Erwin (Mother) appealed. ISSUE:

Are any of those involved with the property liable for the death of the child? HOA, Lender? Owner? Neighbor?

DECISION:

The HOA had no duty to act—these were not common area issues, but homeowner issues. For an actor to gratuitously assume a duty, the actor must specifically undertake to perform the task he is charged with having performed negligently. In the instant case, Mother has failed to designate evidence that CASI took affirmative steps to remedy the condition of the pool. She simply directs us to an ambiguous statement by CASI that the issue regarding the pool would be ―taken care of.‖ Even if we were to take the leap with Mother and infer that this

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was an assurance that CASI would go onto the property and secure the pool, the fact is that CASI did not act upon this promise in any way. Thus, contrary to Mother's assertions on appeal, her allegations amount to a claim of nonfeasance by CASI, requiring a showing of detrimental reliance or increased risk of harm. Mother makes no claim that CASI increased the risk of harm, and she directs us to no evidence that Mother, Sheyenne, or the Jenkinses detrimentally relied on CASI's promise to another neighbor. In fact, there is no indication in the record that they were even aware of the conversation prior to the drowning. The trial court properly granted summary judgment. Judgment affirmed.

Answers to Case Questions 1. Make a list of everyone who was aware of the pool problem. The HOA, the management company, the lender, the neighbors 2. Why is the HOA not liable? Why is CASI not liable? They did not undertake a gratuitous duty with respect to the pool. They did not have to remedy the pool and had no duty to do so. 3. What lessons should HOA, lenders, and neighbors learn from this case? Follow-up, follow-up, follow-up—that kind of danger requires that everyone who sees it speak up to get it straightened around. They cannot trespass and fix it themselves, but they can keep hounding folks and REMIND them of liability potential and risk. 11-8b Owner Individual Liability Issues in Associations 1. Injury Liability in Homes and Units 2. Contractual Liability of Unit Owners CAUTIONS AND CONCLUSIONS: Always do thorough investigation; see checklist in text for outline of investigation before buying. [return to top]

Additional Activities and Assignments Answers to Chapter Problems 1. Via explained that the Association had no one who would be able to enforce violations of the Declaration for the homes. Basically, there had never been any problems with noise or unruly behavior by the owner-occupants of the homes or their families or guests, and the Association members wanted to keep it that way. It was anticipated that weekly tenants would not be likely to have the same concerns and attitudes about the importance of maintaining a quiet residential neighborhood atmosphere. This community was not a typical seasonal rental area that commonly exists in many New Jersey seashore communities, and the Association members were determined to preserve the stable and non-transient

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character of their community. Judicial review of the amendment should be guided by the reasonableness standard or the business judgment rule. The lower court noted that the community was small, exclusive, and had no history of rentals. The court also determined that it was ―legitimate‖ to forecast that having tenants in the community could have an ―impact on the neighborhood‖ and its image, and that members might prefer the community not to have a ―transient flavor.‖ Additionally, the court observed that condominium associations and homeowners‘ associations often place restrictions, though perhaps not absolute, on renting. The court conceded the analysis might change if there were a history of homeowners renting, or if the community was larger, with ―thousands of homes,‖ or if it was not a ―somewhat exclusive community.‖ Although the original Declaration did not prohibit (and indeed contemplated) leasing of homes, it also contained provisions authorizing amendments of its provisions. Therefore, any purchaser was on notice that the provisions in the Declaration were not immutable. Second, the reasonableness rule, by its very nature, requires a fact-sensitive analysis of the restriction on a case-by-case basis, taking into consideration all relevant circumstances. Applying the Restatement of Property factors, the circumstances in this case support a finding of reasonableness. Those imposing the restraint, namely, the Association members, who are the homeowners in the community, clearly possess an interest in the land they are seeking to protect by enforcement of the restraint. The enforcement of the restraint accomplishes a worthwhile purpose by preserving the stable residential character of the community. The Association members had a rational basis for believing that the peace and tranquility of the community would be disrupted if such rentals were permitted. Leasing to third parties would not likely be employed to a substantial degree by any of the homeowners. This is evidenced by the fact that no homeowner in the history of the community had ever leased his or her home to a third party, and, indeed, some of the homeowners did not even know that leasing was permitted under the original Declaration. Even appellant would be leasing only for the period of time it would take her to sell her home. Thus, the number of persons to whom the alienation is prohibited is small. Correspondingly, the Restatement of Property factors that would tend to support a conclusion of unreasonableness are not present here (with the same caveat regarding the unlimited duration of the restraint). In particular, the constraint is not capricious. It is founded on a rational basis, a legitimate concern of the Association members, and in accordance with the past practices and customs in the community. Likewise, the restraint was not imposed for spite or malice. There is nothing to suggest any personal animus against appellant, and she has not made any such allegation. The restraint applies equally and uniformly to all homeowners in the community. This brings us to appellant‘s other contention, namely, that, even if deemed reasonable, the amendment cannot apply to her because it was enacted after she purchased her property. We find no merit in this argument. Appellant cannot claim a vested and immutable right in one provision of the Declaration, to the exclusion of the applicability of another provision that authorizes amendments to the © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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document. The Declaration provides that all lots in the community ―shall be held, transferred, sold, conveyed, leased and occupied subject to this Declaration and all amendments and supplements thereto.‖ Appellant‘s contention that the amended Declaration cannot be enforced against her because it ―serves as a restriction in her chain of title‖ ignores the fact that the property has been and remains bound by the Declaration and its amendments. There is no new restriction on the title because the restriction has always existed. As long as the amendment is substantively valid, the fact that the amended restriction was not part of the Declaration extant at the time of appellant‘s purchase is of no consequence. Cape May Harbor Village and Yacht Club Ass’n, Inc. v. Sbraga, 22 A.3d 158 (N.J. Super. 2011). NOTE: Although the case is still good law, it is from 2011 and runs contra to all the cases on Airbnb—the law has evolved to being against HOAs making changes. However, their HOA declarations did permit changes and they had a rational basis for it. 2. Roofs are covered but balconies are not included under breach of warranty theory. Roundtree Villas Association, Inc. v. 4701 Kings Corporation, 321 S.E.2d 46 (S.C. 1984). 3. Luster and Friedman are liable for the canopy because the contract specified their liability and the purchase price included improvements. 20 East Cedar Condominium Association v. Luster et al., 349 N.E.2d 586 (Ill. 1976). 4. Even though Mr. Croce is the majority owner, he must follow all the procedures required under the bylaws for the increase of association fees. The two-unit owners have rights despite Mr. Croce‘s controlling interest and were entitled to notice, a meeting, and the right to input and objection despite a certain outcome. Artesani v. Glenwood Park Condominium, 750 A.2d 961 (R.I. 2000). 5. Yes, but the bylaws must be as generic as these. Without such authorization, such self-help would be a due process issue. Some states now have statutes prohibiting such action. San Antonio Villa Del Sol Homeowners Association v. Miller, 761 S.W.2d 460 (Tex. 1988). 6. The ban on signs interfered with public policy and free speech rights and was not a valid rule. Following is an excerpt from the court‘s opinion: Here, the Association restricted political speech, which lies ―at the core‖ of our constitutional free speech protections. The First Amendment protects speech about the state itself—those who govern, how they govern, and who might govern better. ―[T]here is practically universal agreement that a major purpose of that Amendment was to protect the free discussion of governmental affairs. This of course includes discussions of candidates ... and all ... matters relating to political processes.‖ Free speech protections assume particular importance in the context of a person campaigning for public office. ―The candidate, no less than any other person, has a First Amendment right to engage in the discussion of public issues and vigorously and tirelessly to advocate his own election and the election of other candidates.‖ Buckley v. Valeo, 424 U.S. 1, 52, 96 S.Ct. 612, 651, 46 L.Ed.2d 659, 707 (1976).

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In this case, the Association's restriction prevented Khan from advancing his own candidacy for Town Council by posting signs at his residence. As the United States Supreme Court has recognized, ―residential signs have long been an important and distinct medium of expression‖—―a venerable means of communication that is both unique and important.‖ In addition to ―play[ing] an important part in political campaigns,‖ the Court noted that ―[r]esidential signs are an unusually cheap and convenient form of communication.‖ Residential signs are important for another reason as well: ―[p]recisely because of their location,‖ they connect the message directly to the speaker and thus add to the words on display. Here, Khan's neighbors and other passers-by would have been able to evaluate the content of Khan's signs as well as their source. A near-complete ban on residential signs, which bars all political signs, cannot be considered a minor restriction as to Khan. For him, it hampers the most basic right to speak about the political process and his own candidacy for office. And ―[t]he more important the constitutional right ..., the greater the ... need must be to justify interference with the exercise of that right.‖ Yet, here, there is only minimal interference with the Association's property or common areas. Khan did not erect a billboard, put up a soapbox, or use a loudspeaker. He posted two signs in the window and door of his home, which people passing by could choose to view or ignore. Political signs advancing a resident's candidacy are not by their nature incompatible with a private development. They do not conflict with the purpose of the development—unlike signs that might encourage shoppers to leave a mall and shop elsewhere. Rather, signs that support or discuss our political leaders and candidates for office are a small but important part of the fabric of our society. As part of that important debate, a window sign in support of a candidate is a relatively minor interference with private property. The Association, of course, had the power to adopt reasonable time, place, and manner restrictions to serve the community's interests. The homeowners' association in Twin Rivers accomplished that by limiting the number and location of residential signs. Reasonable limits could also be placed on the size of signs. The Association here instead imposed a total ban, with the exception of ―For Sale‖ signs. We also note that tens if not hundreds of thousands of New Jersey residents live in developed communities like Mazdabrook. The proliferation of residential communities with standard agreements that restrict free speech would violate the fundamental free speech values espoused in our Constitution—the ―highest source of public policy‖ in New Jersey. For that reason, we cannot accept that a complete waiver of free speech rights in one's home could be possible in this context. Instead, as discussed earlier, the exercise of those rights can be subject to reasonable time, place, and manner restrictions. Mazdabrook Commons Homeowners' Ass'n v. Khan, 46 A.3d 507 (N.J. 2012). © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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7. The rule on assessments is that the association, as long as it is provided for in the bylaws, can vote in assessments that apply to owners. The owners have voting rights, but if a new provision is approved, then those fees and assessments are due, and the owners owe them. The only constraint is that any rules, changes, etc., have to be reasonable—the managers gave a valid reason for the differences in fees—the higher amount was not unreasonable or arbitrary. Thiess v. Island House Assoc., Inc., 311 So.2d 142 (Fla. App. 1975). 8. The water could not be shut off to enforce common area assessments. The Association was authorized only to use legal means which would be legal proceedings. Contrast with #5. Key difference is authorization in bylaws. Western v. Chardonnay Village Condominium Association, Inc., 519 So.2d 243 (La. 1988). 9. The court held there was no duty to protect condo owners from the criminal acts of third parties and granted summary judgment for the condo association. Morgan v. 253 East Delaware Condominium Association, 595 N.E.2d 36 (Ill. 1992). 10.

The court held that the effect of the association‘s restrictions were to make solar panels impractical and too costly, a breach of the Arizona law that prohibited associations from forbidding them. Courts have upheld general restrictions on location of the panels so long as they are reasonable and universally applicable. A quote from the court‘s decision appears below: We believe that evidence of cost was properly presented in this case. A distributor of solar pool heaters in Arizona testified that in the Phoenix and Tucson markets, most people will not buy a solar system that costs more than $4,500. He explained that because solar systems generally cost more than gas and electric heating devices, solar companies must show consumers that they can recoup the difference in three to five years when the fuel costs for the other methods are considered. If the recoupment period goes beyond five years, most people will not purchase a solar system. We emphasize that cost alone should not be dispositive. For example, if the increased cost of complying with the architectural restrictions was $7500 but the homes in the subdivision ranged in value from $500,000 to $1,000,000, the trier of fact might conclude that the increased cost did not effectively prohibit the installation of SEDs. 28 We conclude that substantial evidence supported the trial court's finding that the Association's guidelines effectively prohibited the installation and use of SEDs. The evidence is sufficient to support a finding that the patio cover was not a viable option for the Speaks because the added expense would have dissuaded homeowners in the community from undertaking the project and the size of the patio cover would have violated applicable city restrictions. The evidence also supports a finding that the proposed screen was no more than an idea that would not work in execution. The decreased solar efficiency and additional cost of the screening provide further support for the court's conclusion. Garden Lakes Community Ass’n, Inc. v. Madigan, 62 P.3d 983 (Az. 2003).

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11. Ownership of a cooperative membership, combined with the right to occupy a unit in the cooperative project, is a form of property ownership, even though cooperative owners do not directly hold the title to their properties. This form of home ownership is unlikely to have the economic value of fee simple ownership or a conventional long-term leasehold interest, but it has value and constitutes a right of property beyond mere possession. Indeed, for some low-income families, it may be the only form of home ownership that is economically possible. [W]e conclude that a cooperative member‘s right to occupy their cooperative unit cannot be cancelled or terminated in a district court summary possession action. Hawaiian Properties, Ltd. v. Tauala, 254 P.3d 487 (Haw. App. 2011).

In-Class Exercises 1. Based on the cases and problems in the chapter, have the students develop lists of questions they would ask before purchasing one or all of the following: condominium, townhouse, or time-share interest. Examples: For condominium: Do you have bylaws for the association? Could I review them? For any: Do you supply security? 2. Have the students read the Ebner case and answer discussion questions: EBNER v. 91st STREET TENANTS CORP. 481 N.Y.S.2d 198 (1984) Ronald and Roseanne Ebner (plaintiffs) are shareholders and tenants under a proprietary lease of an apartment in Manhattan multiple dwelling owned by 91st Street Tenants Corporation (defendant). The Ebners sought to assign their shares and their lease to Janusz Gorzynski (coplaintiff). They made application to the corporation's board of directors, but the consent to transfer was denied on the grounds that Gorzynski is a psychiatrist who intends to use the apartment primarily for treating patients and only secondarily as a residence. The board also pointed out that Gorzynski would allow other physicians to use his residence when he is out of the city. The Ebners then used Article 11, Section 6 of the proprietary lease, which permits a tenant to make an assignment without the consent of the board so long as there is written consent from a majority of lessees owning capital stock. The Ebners believe they have obtained such consent, but they have obtained only one signature in many cases when the shares are jointly owned. STETCHER, Justice The plaintiffs rely on section 612, subdivision (h) of the Business Corporation Law which provides in part that "[i]f shares are registered on the record of the shareholders of a corporation in the name of two or more persons, whether fiduciaries, members of a

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partnership, joint tenants, tenants in common, tenants by the entirety or otherwise...unless the secretary of the corporation is given written notice to the contrary ... their acts with respect to voting shall have the following effect: (1) [i]f only one votes, the vote shall be accepted by the corporation as the vote of all..." The defendants point out that this provision refers only to the qualifications of voters to vote at shareholder's meetings. Neither party has submitted any case in point and research fails to disclose any case in point concerning shareholder consents. I am of the opinion that it was the intention of the: Legislature in amending section 612(h), BCL, as recently as 1981 to permit a stockholder who is one of several owners to act alone under the circumstances presented here. There are few actions which a stockholder may take with respect to the management of a corporation except to vote his shares at a stockholders' meeting. To be sure there are other acts such as the grant of proxies, the consent to dissolution, the commencement of shareholder actions and the like which differ in character from voting at shareholders' meetings. In the case of proxies I see no difference between one joint tenant voting his stock or granting the right to another to vote his stock; and there can be little doubt that subdivision (h) of section 612, BCL, applies not only to voting but to proxies as well [BCL, Section 609). It is probably otherwise where the purposes of the consent are so radical an occurrence as the termination of the corporation [BCL 1002] or the transfer of title to shares which terminates a party's interest. Where, as here, the intention is to act as shareholder giving consent to the transfer of another's interest the act of one shareholder in giving consent is the act of all tenants in common in the absence of a disclaimer or other action provided for in subdivision (h) of section 612, BCL. Here, as a practical matter, there was ample time for the defendants to ascertain whether or not the co-owners of the consenting shares objected and to give the latter an opportunity to voice their objections. Indeed, it is not the corporation which may be damaged by recognizing the consent of only one of two or more multiple tenants of shares of stock, but the silent members of those groups. Under all of the circumstances of this case, the consent of one or two or more shareholders in common is the consent of all. Had the shareholders no right to overrule their board of directors in this fashion, there can be little question that neither summary judgment nor interlocutory relief could be granted, for the issues concerning Dr. Gorzynski's proposed use of the apartment will be substantial. That, however, will be an issue between Dr. Gorzynski and the board of directors once he takes occupancy. The lease which he wishes to have assigned to him expressly provides that "lessee shall not, without the prior written consent of lessor, occupy or use any part of the apartment or permit the same to be used or any part thereof to be occupied or used for any purpose other than a private dwelling apartment for the lessee, the family, employees and servants of the lessee or for a purpose for which the apartment was being used as of December 1, 1969, with the consent of the then owner of the building except such space in the building as may be allocated for professional offices by the board of directors of the lessor." The right of Dr. Gorzynski to practice his profession in that apartment is not a matter on which the Court can make a judgment on a motion for partial summary judgment. For one thing, he is not yet a tenant of the premises; for another, if the board of directors will not license such use, its good faith will be an issue.

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Accordingly, the motion for partial summary judgment is granted to the extent only that upon delivery by the plaintiffs to the corporate defendant of an instrument of assignment executed and acknowledged by the assignor, assigning all the shares of stock and the propriety lease; an acknowledged agreement by the assignee assuming the proprietary lease and agreeing to perform and comply with all of its covenants and conditions on and after the effective date of the assignment. [return to top]

Resources American Law Institute, Condominium Law and Practice. Belmas, ―Pushing Patriotism: Why Flag Encouragement Doesn‘t Fly,‖ 14 Comm. L. & Pol‘y 341 (Summer 2009). Bowen, ―Timeshare Ownership: Regulation and Common Sense,‖ 18 Loyola Consum. Law Rev. 459 (2006). Buck, "Complying with the New Condominium Project Requirements," 10 Prac. Real Est. Law. 85 (1994). Cameron and Maxwell, ―Protecting Consumers: The Contractual and Real Estate Issues Involving Timeshares, Quartershares, and Fractional Ownerships,‖ 37 Real Est. L. J. 278 (Spring 2009). "Can Associations Have Priority Over Fannie or Freddie?," 29-AUG Prob. & Prop. 26 (2015). Chen, “Time Sharing,” Real Estate Investing, July 30, 2018. Davidson, “Bankruptcy Protection for Community Associations as Debtors,‖ 20 Emory Bankruptcy Developments Journal 583 (Spring 2004). Evans, "Anarchy and Tyranny in Idaho's Homeowner Associations: Why We Need New Common Interest Ownership Regulation," 55-MAY Advocate (Idaho) 24 (May 2012). Fleming, ―Regulation of Political Signs in Private Homeowner Associations: A New Approach,‖ 59 Vanderbilt L. Rev. 571, 581 (2006). Gamalski and Thursam, "Beta Test: Proposed Revisions to Section 67(3) of the Condominium Act," 39 Mich. Real Prop. Rev. 18 (Summer 2012). Giantamosi, “A Balancing Act: The Foreclosure Power of Homeowners' Associations,” 72 Fordham Law Review 2503 (May 2004). Goldmintz, "Lien Priorities: The Defects of Limiting the 'Super Priority' for Common Interest Communities," 33 Cardozo L. Rev. 267 (October 2011). Grassmick, ―Minding the Neighbor's Business: Just How Far Can Condominium Owners' Associations Go in Deciding Who Can Move Into the Building?,‖ 2002 U. Ill. L. Rev. 185 (2002). © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Heller, Connery and Holtzschue, ―Cooperative Apartment Contracts and Closings,‖ 495 PLI/Real 439 (June 18, 2003). ―HOAs, Fees, Laches, and Litigation,‖ 43(2) Real Estate L. J. 195-201 (2014). Hyatt, "The Duties and Responsibilities of the Community Association," The Practical Real Estate Lawyer, September 1989 at 69. Kaufman, ―Because the Co-Op Board Says So,‖ New York Times, May 26, 2013, p. RE8. Knaust, "Guilt by Association: Assessment Liability to Homeowners' Associations After Foreclosure," 41 Stetson L. Rev. 835 (Spring 2012). Korngold, "Cutting Municipal Services During Fiscal Crisis: Lessons From the Denial of Services to Condominium and Homeowner Association Owners," 15 N.Y.U. J. Legis. & Pub. Pol'y 109 (2012). Kubasek, ―The Conflict Between Homeowners‘ Associations and the Environment,‖ 33 Real Est. L. J. 203 (2004). Lacoste, ―Legal Implications for Green Buildings Within Condominium and Homeowners Association Regimes in Maryland: Striking a Balance Between the Promotion of Green Retrofits to Existing Housing Stock and Maintaining Aesthetics by Homeowners Associations and Condominium Associations,‖ 38 U. Balt. L. Rev. 411 (Spring 2009). McCarl, ―When Homeowners Associations Go Too Far: Political Responses to Unpopular Rules in Common Interest Communities,‖ 43 Real Estate Law Journal 453 (2015). Nachman, "When Mixed Use Development Moves in Next Door: Finding a Home for Public Discourse and Input," 23 Fordham Envtl. L. Rev. 55 (Spring 2012). Pike, ―Green Building Red-Lighted by Homeowners‘ Association,‖ 33 Wm. & Mary Envtl. L. & Pol‘y Rev. 923 (Spring 2009). Schiller, "Limitations on the Enforceability of Condominium Rules," 22 Stetson Law Rev. 1133 (1993). Siegel, "A New Paradigm for Common Interest Communities: Reforming Community Associations Through the Adoption of Model Governing Documents That Reject Intricate RuleBound Legal Boilerplate in Favor of Clarity, Transparency and Accountability," 40 Real Est. L.J. 27 (Summer 2011). Singer, ―Democratic Estates: Property Law in a Free and Democratic Society,‖ 94 Cornell L. Rev. 1009 (May 2009). Timirados, ―Condo Boards Take on Lenders,‖ Wall Street Journal, June 18, 2009, p. A3. Uniform Condominium Act, 7 U.L.A. 97.

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Van Der Merwe, ―A Comparative Study of the Distribution of Ownership Rights in Property in an Apartment or Condominium Scheme in Common Law, Civil Law and Mixed Law Systems,‖ 31 Ga. J. Int'l & Comp. L. 101 (Fall 2002). Your state statute on these forms of housing.

Cases Cape May Harbor Village and Yacht Club Ass’n, Inc. v. Sbraga, 22 A.3d 158 (N.J. Super. 2011). City of Miami Beach v. Arlen King Cole Condominium Ass'n., Inc., 302 So.2d 777 (Fla. 1975). Hawaiian Properties, Ltd. v. Tauala, 254 P.3d 487 (Haw. App. 2011). North Fork Motel, Inc. v. Grigonis, 461 N.Y.S.2d 414 (1983). Stuewe v. Lauletta, 418 N.E.2d 138 (Ill. 1981). White v. Cox, 95 Cal. Rptr. 259 (1971). [return to top]

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Answers to Case Questions ................................................................................................................... 371 Answer to Ethical Issue (12.4) ............................................................................................................... 371 Answer to Consider (12.3) ..................................................................................................................... 374 Answers to Case Questions ................................................................................................................... 378 Answers to Case Questions ................................................................................................................... 381 Additional Activities and Assignments............................................................................................................... 381 Answers to Chapter Problems ............................................................................................................... 381 In-Class Exercise .................................................................................................................................... 387 Discussion Questions ............................................................................................................................. 389 Resources .............................................................................................................................................. 389

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Chapter Objectives The following learning outcomes are addressed in this chapter (see PowerPoint Slide 12-1): 12.01 Discuss the fiduciary responsibilities of brokers to their principals and to third parties. 12.02 Discuss the standards of care of brokers. 12.03 Discuss the requirements for becoming a real estate broker/salesperson. 12.04 Discuss the types and drafting of listing agreements. 12.05 Discuss antitrust implications of the broker's role. [return to top]

Key Terms agent: one who acts on another‘s behalf; in real estate, the party who works to bring the buyers and sellers of real estate together in exchange for payment (generally a commission) as is: clause in contract that waives any warranty protection broker: party who is licensed to handle property listings condition precedent: in a contract, a requirement before the contract can be performed; e.g., delivering marketable title or qualifying for financing designated agency: agency relationship in which seller names agent to act on his/her behalf in closing transaction dual agency: agency relationship in which broker represents both the buyer and the seller errors and omissions insurance: professional liability insurance for brokers and agents exclusive agency listing: listing agreement that requires the seller to pay the commission to the broker only if the listing broker sells the property; the seller may sell the property independently and not be required to pay a commission exclusive right-to-sell/listing-to-sell: listing that requires the seller to pay the broker/agent a commission regardless of who obtains a buyer for the property intermediary: another name for a statutory broker limited agent: agent whose authority is limited in time or scope listing agreement: contract between a broker and landowner for the broker‘s services in helping to sell the owner‘s property multiple listing: a listing that appears on more than one broker‘s inventory of homes

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multiple listing service (MLS): a specific multiple listing service that is nationwide and to which most brokers subscribe National Association of Realtors (NAR): professional organization of brokers and agents; has standards for admission and maintenance of membership net listing: type of listing that allows the broker to collect as a commission any amount received that is above the figure set as the seller‘s net take on the sale of the property no deal, no commission clause: provision in listing agreement that requires a sale of property to close before any commission is due and owing to the broker nonagent broker: broker who sells property via multi-listing but is not the listing broker open listing: listing that pays a commission to whichever broker or salesperson sells the property; permits the owner to list with more than one broker and be liable for only one commission procuring cause of the sale standard: standard of determining commission among brokers under an open listing agreement Realtor®: trademark/name used by the National Association of Realtors (NAR) to refer to one of its members salesperson: sometimes called an agent; see agent statutory broker: term used in some states to describe a broker who represents both buyer and seller; special disclosures required to serve in this capacity transaction broker: broker used for a sale who is not the listing broker [return to top]

What's New in This Chapter The following elements are improvements in this chapter from the previous edition:   

  

Added new case brief in Section 12-2b on dual agency, Horiike v. Coldwell Banker Residential Brokerage Company, related to disclosure obligations and conflicts in dual agency listings. Updated MLS discussion in Section 12-2l to reflect market movement to other types of online listing and selling services Added discussion in Section 12-2l on online listing services, what they do, what they charge, and rights of those who list their home on services such as Zillow. Includes discussion of fierce competition with MLS. New case brief in Section 12-3f on when commission is due and owing, Reyher v. Finkeldey. Updated discussion of mandatory disclosure laws in Section 12-5e. In Section 12-7c, new case brief on agent discipline for violating state law on services required by agents, Colorado Real Estate Commission v. Vizzi.

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

Removed Likens v. Prickett’s Properties, Inc. case brief on agent duties and reworked it into chapter problem #9.

[return to top]

Nature of Brokers/Agents Role—USE POWERPOINT SLIDES 12-2 TO 12-4 12-1a Definition Broker is an agent hired by property owner or a buyer to find a buyer or aid in finding property 12-1b Traditional Principal/Agent Concepts Versus Principal/Broker Roles 1. Traditional role is agent acts for principal—strict lines of authority and duty 2. Real estate agencies are more flowing

12-2

Types of Real Estate Broker Relationships—USE POWERPOINT SLIDES 12-5 TO 12-8 12-2a The Listing Agent 1. Works with seller 2. Lists property but also shows property 3. 72% of buyers believe this agent represents them 12-2b The Dual Agent 1. Structure of Dual Agency Relationships a. Agent represents both buyer and seller b. Some states permit such arrangement provided both parties know c. Parties should use consent to act forms 2. Statutory Mandates on Dual Agency a. Some states have disclosure requirements telling buyers that broker represents seller b. National Association of Realtors (NAR)

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CASE BRIEF: Horiike v. Coldwell Banker Residential Brokerage Company 383 P.3d 1094 (Cal. 2016) FACTS:

In 2006, Chris Cortazzo, a salesperson in Coldwell Banker's Malibu West office, held a listing to sell a luxury Malibu beach property owned by a family trust. There were differing amounts in public records on the property square footage, but Cortazzo used a figure of 15,000 square feet in the listing as opposed to the lesser figures in the public records. Cortazzo lost a sale after the couple buying asked for more time to verify the square footage after Cortazzo told them it was not verifiable without an expert. There was a dual agency issue with the second buyer because a Coldwell-Banker agent was representing the buyer. All the forms required by law and by ColdwellBanker were signed by the buyer. When the second sale came along, Cortazzo was not as forthright in disclosures about the square footage and the property sold. The buyer discovered the discrepancy and sued Cortazzo and Coldwell-Banker on grounds that they had breached their fiduciary duties toward Horiike (the buyer) by either deliberately misrepresenting the square footage of the living area of the [residence] and failing to act with the utmost care, integrity and honesty as to Horiike and/or failing to determine the accuracy of the living area square footage. The case was tried to a jury and the jury returned a verdict in favor of Coldwell Banker on all causes of action. The Court of Appeal reversed the judgment on the breach of fiduciary duty claim against Cortazzo and Coldwell Banker. The court concluded that Cortazzo, as a salesperson working under Coldwell Banker's license, owed a duty to Horiike ―equivalent‖ to the duty owed to him by Coldwell Banker. The court concluded that a properly instructed jury could find that ―Cortazzo breached his fiduciary duty by failing to communicate all of the material information he knew about the square footage,‖ including the apparent contradiction between Cortazzo's representations and the square footage measurements in public record documents. The court remanded the case for a new trial on Horiike's breach of fiduciary duty claim. The defendants appealed.

ISSUES:

Did the broker as well as the associate agent owe a duty to verify the square footage claims? Is it a breach of fiduciary duty in a dual agency to disclose accurate information about the property to the buyers?

DECISION:

The sole question before us is whether Cortazzo, as an associate licensee representing Coldwell Banker in the sale of the Malibu residence, owed a duty to Horiike to take certain measures to inform him about the residence's square footage. Defendants acknowledge that Coldwell Banker was a dual agent, and, as such, owed this fiduciary duty of disclosure to both Horiike and the trust. But

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defendants contend that Cortazzo himself exclusively represented the trust and therefore could not have breached any fiduciary duty toward Horiike—who, they assert, was represented exclusively by Namba. The court held that Coldwell-Banker‘s duties to find out the truth about the property did not end because there was a dual agency. As an agent for his principal, Cortazzo also owed that duty and he was not breaching any client confidence by making accurate disclosures or finding out the square footage because he found it in the public records. Defendants argue that charging associate licensees with the same duties as their brokerages would force salespeople ―into dual agency with buyers and sellers whose interests inherently conflict,‖ requiring them to breach their clients' confidence and harm their clients' interests. While we do not gainsay defendants' concerns about the potential for conflicts of interest in the dual agency context, the narrow disclosure duty at issue in this case creates no such conflict. The fiduciary duty of disclosure that Horiike alleges Cortazzo breached is, in fact, strikingly similar to the nonfiduciary duty of disclosure that Cortazzo would have owed Horiike in any event. Even in the absence of a fiduciary duty to the buyer, listing agents are required to disclose to prospective purchasers all facts materially affecting the value or desirability of a property that a reasonable visual inspection would reveal. We express no view about whether, as a factual matter, Cortazzo breached this duty. For present purposes, the critical point is only that to disclose such information, or to alert Horiike that his representations were unverified, would not have required Cortazzo to reveal any confidential information he had obtained from the trust, nor would it otherwise have compromised his ability to fulfill his fiduciary obligations toward the trust. To the extent there is any uncertainty about the scope of a dual agent's fiduciary duties in other contexts, the Legislature certainly could enact defendants' preferred solution to the problem by, for example, adopting legislation to uncouple associate licensees' duties from those of the brokers they represent. (See, e.g., Alaska Stat., § 08.88.640; Conn. Gen. Stat., § 20-325i; 225 Ill. Comp. Stat. 454/15-50.) But as presently written, the statute provides no basis for distinguishing between a broker's duty to learn of and disclose all facts materially affecting the value or desirability of the property and its associate licensee's duty to do the same. We affirm the judgment of the Court of Appeal.

Answers to Case Questions 1. Explain what distinction the court is making about information the seller’s agent holds in dual agency listings. The court is saying that Coldwell Banker still owes a duty as a listing broker

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to verify whatever information it is putting out there about a property. That duty is not lost because the listing agent is involved in a dual agency. The court also notes that it is not holding that the agent or broker must violate seller confidentiality—it is only holding that when the agency or agent has independent information about inaccuracies that the agent and agency have the responsibility to clear up the discrepancies and ensure their accuracy when there is material information, such as square footage. 2. What effect did the different approaches with buyers that the seller’s agent took have on the court’s decision? The first buyers were really given sufficient information to want to check, but the deal fell through. So, the agent for the seller chose to disclose less in the second goround—the distinction was perhaps important in zeroing in on the materiality of the information to buyers. 3. What advice would you give real estate agents and brokers about disclosure? In this case, when you see this type of discrepancy do not use the numbers in advertising or in the listing. Putting that number out there, when it was disputed by government agencies, was an invitation for litigation. Verify before printing. Verify before listing information with the property description. 4. Would this case be decided the same way in all states? No, the court says that if its reading of the statute and the results for brokers and agents is troublesome, then the legislature in California can do what has been done in other states and uncouple the broker relationship with the agent in the case of dual listings.

Answer to Ethical Issue (12.1) Being a dual agent is ethically risky. The agent has a great deal of information from each party that the other party would want to know but should not be communicated. For example, a seller may say, ―I am really desperate to sell. I'd take anything for this house right now.‖ That type of statement is more of a statement of frustration to a type of counselor. Those types of communications or confidential information about the seller's personal life should not be communicated. The buyer may also confide in the agent that he or she has some financial issues—the seller would want to know that—but it is confidential information. The dual agent will constantly be walking a thin line. The reality of dual listings is that dual agents will always have information from each party that would affect the purchase and sale and some of it they will not be able to disclose. They are leading people into a transaction that will eventually result in some difficulty for one of the parties. There is a type of privilege that is given with dual agencies—you do not have to disclose what your client tells you in confidence. That same dilemma exists with the lawyer-client privilege. A lawyer cannot disclose information a client admits to. That information is protected, and the lawyer need not volunteer it. However, lawyers may know that a client did commit a crime and then participate in getting the client acquitted. That is a difficult ethical challenge for lawyers, especially when the client goes on to harm someone else. The knowledge of harm to another is a difficult burden. Lawyers are inherently conflicted between their duties regarding representation of their clients (and they take an oath to uphold those duties) and their duties as members of a civil society to stop wrongdoing. Brokers and agents in dual agency are conflicted

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between two people who have differing interests in a transaction. One could benefit from a broker/agent disclosure and the other could be harmed. But the law permits/requires them to withhold that information. 12-2c The Buyer Broker 1. Works for buyer 2. Gets up-front nonrefundable fee 3. Does get percentage of sales price as commission upon final sale Possible conflict: higher the purchase price, the more they get; would exclude lower-priced homes 12-2d The Open Listing Agency 1. Whoever sells property gets commission 2. Seller can list with more than one broker 3. Seller can sell and not be liable for commission 12-2e The Exclusive Agency 1. One broker given listing 2. Seller can sell property without being liable for the commission 12-2f The Exclusive Right-to-Sell or Exclusive Listing-to-Sell Agency 1. One broker given listing 2. Broker gets commission regardless of who sells the property

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12-2g Multiple Listing Agency 1. Not a form of listing agreement 2. Service available in broker organizations to expand marketability of the property 12-2h The Subagency 1. Function of MLS 2. Listing broker is agent 3. Different agent who sells is the subagent (72% of buyers believe subagent represents them) 12-2i Net Listing Agency 1. Broker‘s commission is whatever buyer pays above and beyond seller‘s request and costs of sale 2. No specified commission rate 3. Can be used in combination with open, exclusive, or exclusive right-to-sell 12-2j The Designated Agency 1. One broker firm represents both buyer and seller 2. Broker designates one of its agents to represent buyer and one to represent seller 3. Both agents work for one company 12-2k The Nonagent Broker 1. Transaction broker, intermediary, limited agent, or statutory broker 2. Represent both buyer and seller but have no fiduciary obligations to either 3. Only recognized in about 18 states

Answer to Ethical Issue (12.2) Tom, as a buyer's agent, will constantly be facing a conflict of interest. Because he wants the deal to close, he works both sides, but in the process, as in this situation, he is breaching confidences. He is sharing information about the buyers with the sellers—information the sellers would not have if there were another agent involved representing the seller. An agent in these circumstances gets confidential information from both sides and has to be ever vigilant in not crossing that line into breaching his duty as an agent of the buyer. 12-2l The Online Property Sellers

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1. What are the Online Listing Services, and What Do They Do? 2. How Do the Sites Work and are Agents Involved? 12-3

Listing Agreements for Hiring Brokers/Agents—USE POWERPOINT SLIDES 12-9 TO 12-16 12-3a Agreements in Writing or Electronic Record (fax okay; PDFs used) 1. Most states require 2. Cannot collect commissions on oral agreement in some states; true even though sale is completed

Answer to Ethical Issue (12.3) The decision was reversed after several appeals. The final court determined that we were not really dealing with a listing agreement, but an agreement to find a buyer for a business—not the sale of property. As a result, the writing requirement did not apply and there could be an action for the commission. The ethical issue is reliance on a legal exception when the parties were clear on their intent to have an arrangement. Excerpts from the case appear below: The premise for the district court's decision was that the agreement between Stewart and Sisson was a ―listing agreement‖ under rule 193E-1.23. We have previously held that this administrative rule makes oral listing agreements unenforceable upon proper objection. Hubbell Commercial Brokers, L.C. v. Fountain Three, 652 N.W.2d 151, 156 (Iowa 2002) (citing Milholin v. Vorhies, 320 N.W.2d 552, 554 (Iowa 1982)). The district court considered the motion for summary judgment as an objection and relied upon this authority to dismiss the contract claim, as well as all other companion claims. See Maynes Real Estate v. McPherron, 353 N.W.2d 425, 426-27 (Iowa 1984) (holding brokers cannot recover for quantum meruit under properly-objected-to oral listing agreement; reasoning ―the legislative intent underlying section 1.23 was to forbid any recovery by a broker or sales agent under an oral agreement‖ (emphasis added)). But see Restatement (Second) of Torts § 530 cmt. c, at 64-65 (1977) (stating misrepresentation claims are still viable when contract and quasi-contract claims fail due to the lack of a writing); W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 109, 764 & n. 7 (5th ed.1984) (opining that rules barring recovery on oral contracts should not also bar tort claim of misrepresentation because ―the policy which invalidates the promise is not directed at cases of dishonesty in making it‖). Thus, we must decide if the district court properly applied the law. See Westfield Ins. Cos. v. Econ. Fire & Cas. Co., 623 N.W.2d 871, 876 (Iowa 2001) (stating when we review for correction of errors at law, ―we determine whether the district court correctly applied the law‖ to the undisputed facts). Rule 193E-1.23, entitled ―Listings,‖ is an administrative rule promulgated by the Iowa Real Estate Commission pursuant to its rulemaking authority under Iowa Code section 543B.9

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(1999). ―[R]ules properly adopted by the commission have the force of a statute.‖ Hubbell Commercial Brokers, L.C., 652 N.W.2d at 155 (citing Milholin, 320 N.W.2d at 553). In construing an administrative rule, ―[a]s with a statute, we seek to ascertain and give effect to the intent of the drafters‖ and ―construe it liberally ‗to promote its objects and assist the parties in obtaining justice.‘‖ Rodgers v. Baughman, 342 N.W.2d 801, 805 (Iowa 1983) (quoting Iowa Code § 4.2 (1983)). Rule 193E-1.23 provides: All listing agreements shall be in writing, properly identifying the property and containing all of the terms and conditions under which the property is to be sold, including the price, the commission to be paid, the signatures of all parties concerned and a definite expiration date. It shall contain no provision requiring a party signing the listing to notify the broker of the listing party's intention to cancel the listing after such definite expiration date. An exclusive agency or exclusive right to sell listing shall clearly indicate that it is such an agreement. A legible copy of every written listing agreement or other written authorization shall be given to the owner of the property by a licensee as soon as reasonably practical after the signature of the owner is obtained. Thus, at least with respect to ―listing agreements,‖ the rule changes the common law, which recognized the enforceability of oral brokerage agreements. Maynes Real Estate, Inc., 353 N.W.2d at 426 (citing McHugh v. Johnson, 268 N.W.2d 225, 227 (Iowa 1978)). We have said that rule 193E-1.23 ―is analogous to the statute of frauds applicable to contracts.‖ Hubbell Commercial Brokers, L.C., 652 N.W.2d at 156 (citing Milholin, 320 N.W.2d at 554); see also Rodgers, 342 N.W.2d at 805 (―[L]ike a statute of frauds the rule is intended to be available as a shield and not a sword.‖ (citing Warder & Lee Elevator, Inc. v. Britten, 274 N.W.2d 339, 342 (Iowa 1979))). ―The rule essentially means that a broker must normally comply with the requirements of the rule to recover a commission. The rule both protects the public and provides guidance for brokers in their business dealings with the public.‖ Hubbell Commercial Brokers, L.C., 652 N.W.2d at 156 (citing Milholin, 320 N.W.2d at 554). In Hubbell, we observed that ―[t]he term ‗listing agreement‘ is not a defined phrase under chapter 543B or the commission rules.‖ We did not define the term but concluded that it did not encompass agreements between brokers. We also noted: The language of the rule as a whole is consistent with the common definition of a listing agreement as ―[a]n agreement between a property owner and an agent, whereby the agent agrees to try to secure a buyer or tenant for a specific property at a certain price and terms in return for a fee or commission.‖ The primary, and dispositive, issue presented on appeal is whether an agreement to procure a buyer without listing the property is a listing agreement under rule 193E-1.23. The structure of the rule itself reveals that it is not. The definitional provision of the real estate commission's rules provides different definitions for ―listing broker‖ and ―selling broker.‖ Compare Iowa Admin. Code r. 193E-1.1 (―‗Listing broker’ means the real estate broker who obtains a listing of real estate or of an interest in a residential cooperative housing corporation.‖), with id. (―‗Selling broker’ means a real estate broker who finds and

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obtains a buyer in a transaction.‖). In addition, while rule 193E-1.23 applies to ―listing agreements,‖ a different rule—rule 193E-1.42—applies to ―brokerage agreements.‖ Rule 193E-1.42 similarly provides that ―[a]ll brokerage agreements shall be written.‖ Rule 193E-1.1 defines ―brokerage agreement‖ as ―a contract between a broker and a client which establishes the relationship between the parties as to the brokerage services to be performed.‖ The code defines ―brokerage services‖ as: 1. Sell[ing], exchang[ing], purchas[ing], rent[ing], or leas[ing] real estate. 2. List[ing], offer[ing], attempt[ing], or agree[ing] to list real estate for sale, exchange, purchase, rent, or lease. 3. Advertis[ing] or hold[ing] oneself out as being engaged in the business of selling, exchanging, purchasing, renting, leasing, or managing real estate. 4. Negotiat[ing], or offer[ing], attempt[ing], or agree[ing] to negotiate, the sale, exchange, purchase, rental, or lease of real estate. 5. Buy[ing], sell[ing], offer[ing] to buy or sell, or otherwise deal[ing] in options on real estate or improvements on real estate. 6. Collect[ing], or offer[ing], attempt[ing], or agree[ing] to collect, rent for the use of real estate. 7. Assist[ing] or direct[ing] in the procuring of prospects, intended to result in the sale, exchange, purchase, rental, or leasing of real estate. 8. Assist[ing] or direct[ing] in the negotiation of any transaction intended to result in the sale, exchange, purchase, rental, or leasing of real estate. 9. Prepar[ing] offers to purchase or purchase agreements, listing contracts, agency disclosures, real property residential and agricultural rental agreements, real property commercial rental agreements of one year or less, and groundwater hazard statements, including any modifications, amendments, or addendums to these specific documents. This scheme is instructive. The distinction made between selling and listing brokers and the broad definition of brokerage services shows that listing property for sale is just one of many brokerage services that a broker can provide to a client. This indicates that a listing agreement is just one type of brokerage agreement between a broker and a client. Clearly, the rules and statutes distinguish between ―listing‖ property and other brokerage services, and we must give this distinction meaning in defining agreements relating to the services. Thus, the statutory and regulatory framework reveals that the term ―listing agreements‖ under rule 193E-1.23 would not encompass agreements between a broker and a client in which the parties agree not to ―list‖ the property. To conclude otherwise would render the listing-agreement rule a virtual nullity because listing agreements would necessarily be covered by the brokerage-agreement rule. See In re Interest of G.J.A., 547 N.W.2d 3, 6 (Iowa 1996) (―The ‗statute should not be construed so as to make any part of it superfluous unless no other construction is reasonably possible.‘ We will presume the legislature enacted each part of the statute for a purpose and intended that each part be given effect. [Furthermore, w]e will not presume that the legislature intended words in the statute be given a redundant meaning.‖ (Citations omitted.)); Messina v. Iowa Dep't of Job Serv., 341 N.W.2d 52, 56 (Iowa 1983) (―Generally, the rules of

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statutory construction and interpretation also govern the construction and interpretation of rules and regulations of administrative agencies.‖ (Citation omitted.)). Agreements to perform brokerage services other than ―listing‖ the property are ―brokerage agreements‖ under rule 193E-1.42 but are not ―listing agreements‖ under rule 193E-1.23. The remaining question is what it means to ―list‖ a property. The Minnesota Supreme Court has held that ―listing,‖ in the context of Minnesota's real-estate-license statute, means using a compiled and published list of properties and their descriptions ―for the purpose of attempting to meet the individual needs of some specifically identified seller, buyer, landlord, or tenant.‖ State v. Beslanowitch, 311 Minn. 56, 248 N.W.2d 286, 288 (1976). Other authorities are in agreement. See Leo Eisenberg & Co. v. Payson, 152 Ariz. 390, 732 P.2d 1128, 1130 (Ct.App.1987) (―A listing agreement is a form of agency agreement and employment in which the agent agrees to expose a property to the market in consideration of payment of his commission if a sale or lease is made.‖ (Citation omitted.)); Jae K. Shim et al., Dictionary of Real Estate 168 (1996) (defining ―list‖ as: ―To secure a listing by a real estate agent for a certain parcel of property‖; defining ―listing‖ as: ―Legal contract with a property owner empowering a real estate agent in selling, leasing, or mortgaging the principal's property. A listing has a legal description of the property, is valid for a specified time and gives the details of the sale.‖). See generally Grempler v. Multiple Listing Bureau of Harford County, Inc., 258 Md. 419, 266 A.2d 1, 3 (1970) (―Multiple listing is a device used by the real estate broker to give wide exposure to properties listed for sale. Each cooperating broker informs all other participating brokers of the properties listed with him, thus an individual home for sale is available to purchasers at several different brokers' offices.‖). These authorities reveal that real estate would not be ―listed‖ when a broker is not permitted to disclose the sale of the property to the general public, but is only permitted to privately disclose the sale to those persons the broker considers to be potential buyers. Applying this principle to this case, we conclude rule 193E-1.23 did not apply to the agreement between Stewart and Sisson. An agreement that provides the property is not to be ―listed‖ is not a ―listing agreement.‖ A listing ―agreement is called a ‗listing‘ agreement because the broker obtains the right to place the seller's property on the broker's list of properties for sale.‖ George Lefcoe, Real Estate Transactions 63 (2d ed.1997). Stewart stated in his affidavit resisting the motion for summary judgment that Sisson did not want to ―list‖ his restaurant because he did not want to detract from his daily business. We must accept this as true for purposes of summary judgment. INNK Land & Cattle Co. v. Kenkel, 493 N.W.2d 818, 819 (Iowa 1992). Viewing the facts in the light most favorable to Stewart, we conclude the district court erred in concluding Stewart and Sisson had a listing agreement. Consequently, rule 193E-1.23 was inapplicable to the case, and the district court erred in concluding that it barred Stewart from recovery. Likewise, this same error reveals the district court erred in dismissing the companion claims.

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As previously observed, rule 193E-1.42 also requires ―brokerage agreements‖ to be in writing. Thus, it is possible to proceed to determine if the oral agreement in this case is a ―brokerage agreement‖ and, if so, to then decide if the failure to reduce the agreement to writing precludes enforcement of the agreement, as with listing agreements. In arguing that the oral agreement was not a listing agreement, Stewart acknowledged it was a brokerage agreement. Notwithstanding, he claimed it was not required to be in writing because the current rule covering brokerage agreements, rule 193E-11.3, did not go into effect until September 4, 2002. Stewart is correct that the effective date of the rule was after the date of the oral agreement, but rule 193E-11.3 was not a new rule in 2002; it was just renumbered. Its predecessor, rule 193E-1.42, was in effect in 1999 when Stewart and Sisson made their agreement. However, in his motion for summary judgment, Sisson did not raise rule 193E-1.42 as a ground to deny enforcement of the agreement, or argue that the oral agreement, if not a listing agreement, should be denied enforcement as a brokerage agreement. In addition, Sisson did not make any argument in his statement of undisputed facts or memorandum of law that rule 193E1.42 barred Stewart's claims. Sisson's claim for summary judgment was based solely on rule 193E-1.23. The district court did not rule on the issue, but rather, based its decision to dismiss all of Stewart's claims on the applicability of rule 193E-1.23. Our limited role as an appellate court acts to constrain our ability to decide issues not presented to the district court. See Estate of Harris v. Papa John's Pizza, 679 N.W.2d 673, 679 (Iowa 2004) (reversing summary judgment because the sole ground raised in the motion was erroneous, declining to consider issue not raised in motion, and remanding for further proceedings); DeVoss v. State, 648 N.W.2d 56, 61 (Iowa 2002) (holding we can affirm on a ground not relied on by the district court, but only if the ground was raised in district court); Conkling v. Standard Oil Co., 138 Iowa 596, 600, 116 N.W. 822, 824 (1908) (―[T]he case must be considered in this court following the line of the theory on which it was tried in the court below; and this we feel constrained to say, although the point is not made by counsel for appellee. In justice to the trial court, if on no other ground, we will not permit a party to mend his hold after coming into this court, and seek to advantage himself on grounds not suggested on the trial below.‖); cf. In re Detention of Hodges, 689 N.W.2d 467, 469 (Iowa 2004) (―The general rule is ‗that an appellate court will not consider grounds for a motion for directed verdict which the movant did not place before the trial court.‘‖ (quoting Podraza v. City of Carter Lake, 524 N.W.2d 198, 202 (Iowa 1994))). This constraint is based on fairness and provides the essential symmetry and balance to our judicial process. The fairness rationale is readily apparent in this case. Stewart alternatively argued that rule 193E-1.23 was unconstitutional. If we proceeded to apply rule 193E-1.42 to resolve the appeal, Stewart would not only be deprived of the opportunity to make arguments specifically directed at rule 193E-1.42 but would be deprived of the opportunity to challenge the application of the rule as unconstitutional. Appellate courts will not address a claim that a statute is unconstitutional when it was not first raised at trial. Fairness dictates that both parties be given an opportunity to reframe their arguments in light of our determination that a listing agreement was not involved in this case.

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It is not for us to decide substantive issues not raised by the parties, but to decide issues first presented to the district court. See Pond v. Anderson, 241 Iowa 1038, 1049, 44 N.W.2d 372, 379 (1950) (―[O]ur duty is merely to pass upon the errors assigned and not to review the evidence de novo nor decide the case as we might think it should be decided.‖). The agreement between Stewart and Sisson was not a ―listing agreement.‖ Rule 193E1.23 did not apply, and the district court erred in dismissing the claims by Stewart on that basis. We reverse the judgment of the district court and remand for further proceedings. Stewart v. Sisson, 711 N.W.2d 713 (Iowa 2006). 12-3b Signature by Owner 1. Must be true owner 2. Need joint owner‘s signature 3. Need party with authority for corporations/partnerships 4. Make sure executor or administrator has authority 5. Antitrust implications of listing agreements a. Price fixing due to uniformity in commission rate b. McClain case opened up jurisdiction in antitrust cases (sufficient interstate commerce) 12-3c Importance of Careful Drafting and Completion of Standard Form Agreements 12-3d Expiration Date 1. Many states require a definite expiration date—unenforceable agreement without 2. Need to define parties‘ rights 3. Some states have ―protected persons‖ statutes; broker provides list of those to whom property has been shown so that after expiration date they do not lose commission for sale to one of these 4. Can put extension clause in—broker still gets commission after expiration if broker introduced buyer to the property 5. No, term listing agreement still subject to good faith performance 12-3e Amount of the Commission 1. Uniformity of commission rates have long raised suspicions about price-fixing 2. In response, industry puts provisions in contracts that are listing agreements

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3. Supreme Court has ruled brokers are subject to antitrust laws (commerce clause applies)

Answer to Consider (12.1) Yes, the President and other guests were indicted and convicted for criminal price-fixing. The President received a three-year prison sentence and a $10,000 fine. Others received sentences ranging from 1 to 3 years and fines from $5,000 to $25,000. Their firms were fined a total of $14,000. They received probation, but still had to face civil actions filed by the Department of Justice and the State attorney general. Revocation of license hearings were held. U.S. v. Foley, 598 F.2d 1323 (C.A. Md. 1979).

12-3f When Commission is Due and Owing 1. Most provide ―ready, willing, and able‖ standard 2. Some states follow ―no deal, no commission‖ 3. Broker produces buyer who is ready, willing, and financially able— commission is due 4. Should make terms of sale clear since broker's commission is tied to meeting those terms 5. Not contingent upon sale of property unless so specified 6. Where parties have not agreed, some courts imply a ―no deal, no commission‖ standard for brokers CASE BRIEF: Reyher v. Finkeldey 189 A.3d 179 (Conn. App. 2018) FACTS:

On September 14, 2015, John A. Finkeldey (defendant) entered into a commercial exclusive agency listing agreement with Mark R. Reyher (plaintiff), a licensed real estate broker, for Finkeldey‘s property for a sale price of $870,000 for a five percent commission for a ―ready, able, and willing‖ buyer. Reyher procured a prospective buyer, Valley Railroad Company (Valley), and on October 14, 2015, presented Finkeldey with a real estate purchase and sales agreement. Under the purchase and sales agreement, Valley counter offered to purchase the defendant's property for the listing price, $870,000, contingent on

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(1) its ability to obtain financing, (2) an inspection, and (3) having ―120 day[s] to have [the] property reviewed for any environmental considerations.‖ Finkeldey subsequently rejected Valley's offer, and a binding agreement to purchase the subject property was never reached. Reyher filed suit against Finkeldey for $43,500, the commission he said was due and owing for procuring a ready, willing, and able buyer for the property. Following a trial, the court found that Reyher had procured a buyer who offered to pay the full price for the property and that the listing agreement did not impose any additional requirements for the sale. Finkeldey appealed. ISSUE:

Is an offer for full asking price but with contingencies presenting a buyer who is ready, willing, and able?

DECISION:

To recover its commission, the brokerage firm ordinarily must show that it has procured a customer who is ready, willing, and able to buy on terms and conditions prescribed or agreed to by the seller. It is well established that until a contingency contained in a sales agreement has been met, a prospective buyer cannot be said to be ready, willing, and able to purchase. In the present case, the evidence demonstrated that the prospective buyer was not ready, willing, or able to purchase the defendant's property unless certain contingencies were fulfilled. In light of the undisputed fact that those contingencies were contained in the counteroffer and rejected by the defendant, the trial court erroneously concluded that the plaintiff had met his burden of proving that he procured a buyer ready, willing and able to purchase the defendant's property in accordance with the terms of the listing agreement. The judgment is reversed

Answers to Case Questions 1. Describe why the agent felt that he had earned the commission. He felt because he got the full purchase price that he was entitled to the commission. 2. What was different about the Valley offer from what was in the listing agreement? The buyer did not meet all the requirements—no contingency was allowed in the contract—the sales price was the only condition—and although that was met—there was baggage with the offer—environmental and financings conditions were added. Because the offer was different and because the buyer was not yet ready, able, or willing—that meant no commission was due. 3. What would be required to earn a commission when the sale itself does not go through? A clean offer for the listing price and no additional terms—the seller can otherwise reject the offer and not be liable for the commission.

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Answer to Consider (12.2) Real estate broker stated cause of action against property owner for breach of brokerage agreement and implied covenant of good faith and fair dealing; broker allegedly performed under agreement by procuring ready, willing, and able buyers within three-month exclusive period, but owner allegedly failed to pay commission that broker earned and reaped benefit of broker's services solely to elicit better deal with third party, while defeating broker's reasonable expectations by refusing to provide needed information to prospective buyers and allowing its principal to be unavailable during relevant period. Coldwell Banker Commercial Hunter Realty v. Rainbow Holding Co. LLC, 990 N.Y.S.2d 21 App. Div. 2014). 12-3g Description of Property and Sale Terms 1. Accurate legal description 2. Full explanation of terms 3. Restrictions on sale

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12-3h Conditions Precedent 1. Court approval 2. Financing 12-3i Liability Limitations 12-3j Other Details—USE FIGURE 12.1 1. Advertising 2. Signs 3. For future of deposit by buyer rights 12-4

Responsibilities of Brokers/Agents—USE POWERPOINT SLIDES 12-17 TO 12-20 12-4a Authority 1. Market property 2. Bring prospective buyers to it and have offers for them 3. No authority to sell unless specifically given 12-4b Antisolicitation Statutes 1. Brokers cannot try to talk folks into selling property 2. Designed to prevent blockbusting 3. Illinois statute in text 4. Some constitutional issues 12-4c Duty of Care 1. Listing details 2. Validity of offers 3. Avoid sales puffery 4. Accurately compute the net 5. Advise to seek legal advice 6. Prequalify prospective buyers 7. Use checklist in text for review 8. Liability limitations are ineffective

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12-4d Fiduciary Duty 1. Act only in principal's best interest 2. Cannot mislead as to status of offer, purchase, financing, etc. 3. Should advise principal of problems in the transaction 4. Trust accounts and separation of funds CASE BRIEF: Queiroz v. Harvey 205 P.3d 1120 (Ariz. 2009) FACTS:

Daniel Harvey listed ten acres of land in Tonopah for sale. Through his agent, Charles Harrison, Ivo Queiroz offered to purchase the land, along with an additional ten acres. The purchase offer called for a $1,000 earnest-money payment and a closing date of February 15, 2005. The proposed purchase price was $150,000, with $68,000 due at closing. Harvey was to finance the balance of $82,000. A counteroffer, faxed the next day and accepted by Queiroz, retained the closing date and the earnest-money requirement, but changed escrow agents. Harrison faxed the contract to the escrow agent on December 10 but sent no earnest money during the following week. Harvey and his agent became concerned about Queiroz's failure to deposit the earnest money. Repeated efforts to reach Harrison were unavailing. Finally, on Friday of that week, Harvey's agent told the escrow agent that the contract was cancelled. Either that night or the next day, Harrison learned that Harvey had cancelled the contract. Nevertheless, on the next Monday morning, Harrison took two money orders amounting to $1,000 to a branch of the escrow company. Several hours later, Harvey's written notice of the cancellation arrived at another branch of the escrow agent's office. Harvey's agent returned Harrison's earnest money, informing him that the contract had been cancelled. Queiroz sued Harvey, seeking specific performance of the contract. The superior court found that Harrison had acted inequitably and thus denied Queiroz specific performance. The court determined that Harrison lied about the source of the earnest money, testifying that it was Queiroz's when in fact it was Harrison's. The court found that in providing the earnest money Harrison either made an undisclosed loan to Queiroz or commingled his own money with Queiroz's funds. The court further found that Harrison's subterfuge went further when he printed his name, rather than signing it, on the purchase offer because he did not have the required earnest-money check, failed to return phone calls, and ―raced to the escrow agent to deposit the funds,‖ knowing that Harvey had cancelled the contract. Finally, the court found that Harrison had not testified truthfully. The court of appeals reversed, and Harvey appealed.

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ISSUE:

Is the fraudulent conduct of the agent attributable to the principal?

DECISION:

Yes—the agent had unclean hands and the buyer cannot be permitted to benefit from such fraudulent conduct. As between the principal who has retained an unscrupulous agent and an innocent third party who relies on the agent's misrepresentation, it is the third party who deserves protection. Queiroz also argues that, notwithstanding Harrison's inequitable conduct, Harvey has suffered no harm and thus he should be forced to perform the sale-andfinancing contract. This claim, of course, is belied by the transaction, which requires Harvey not only to sell the property, but also to carry the mortgage for Queiroz. Thus, ordering specific performance in this case would effectively place Harvey in a continuing relationship with Queiroz. For the foregoing reasons, we vacate the court of appeals' opinion and affirm the judgment of the superior court. Because the contract here requires the prevailing party to be awarded reasonable attorneys' fees, we grant Harvey's request for attorneys' fees.

Answers to Case Questions 1. What did Harrison do that misled the seller? He misrepresented the ability of his buyer to pay and either used his own money for the escrow deposit or intermingled his money in with his buyer‘s money to try and make the deal work. 2. Why is the court reluctant to award Queiroz specific performance under the contract? Because Harvey would have to continue to deal with collecting payments from someone he could not trust. 3. Based on what happened in this case, explain why the fiduciary duty of agents is so important. Agents are in a position to conceal everything from facts about the property to the real source of funds from buyers as well as how the buyer will be able to make payments. Their forthrightness is critical in making long-lasting relationships that do not hurt either buyer or seller. 12-4e Duty of Loyalty 1. May not profit secretly 2. May not buy property without full disclosure 3. Must disclose any related person (business or family) buying the property 4. Dual agency complicates issues a. States have categorized information b. Some information need not be disclosed

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CASE BRIEF: Warren v. Merrill 49 Cal.Rptr.3d 122 (Cal. App. 2006) FACTS:

John Warren (plaintiff and respondent) was afflicted with mental illness, addiction, a failing business, and was in the process of being divorced. He met Hildegard Merrill (defendant and appellant), doing business as Calabasas Realty, who was acting as the selling agent for a condominium project while he was at an open house for the project. Merrill is very experienced in the real estate field, holding a real estate license since 1967 and broker‘s license since 1981. She referred to herself by her professional nickname of the ―condo queen‖ and also held a mortgage broker's license. Warren had credit problems and Merrill arranged to have her own daughter, Charmaine Merrill, act as his co-borrower. Charmaine would be the co-owner and co-borrower on the loan. However, once escrow closed Charmaine would execute a quit claim deed to Warren to remove her name from title in exchange for the $10,000. Merrill knew it was important to make a 20 percent down payment in order to secure a reasonable interest rate. Because Warren did not have the money Merrill offered to defer her commissions of $27,000 and to loan this amount to Warren in order to attain a 20 percent down payment of $77,000. Their arrangement was never put into written form. Merrill wrote up a purchase offer for the condominium with Charmaine and Warren as co-purchasers. Merrill never had Warren fill out a loan application form and Merrill never attempted to secure a loan with Warren as a co-borrower with her daughter, Charmaine. Instead Merrill applied for and secured a loan in Charmaine's name alone. Merrill knew the lender would not fund the loan request with different people proposed to hold legal title than had applied for the loan. Merrill had Warren sign an amendment in escrow to remove his name from title, explaining the document was just a formality required to secure the loan and to close escrow. The amendment stated title would vest solely in Charmaine Merrill. The amendment further stated ―John Warren is no longer a party to this escrow. All monies currently on deposit to this date shall accrue to Charmaine Merrill....‖ Escrow closed in October 2001 and Warren moved into the condominium. Merrill did not have Charmaine execute a quit claim deed to transfer title to Warren after escrow closed. Warren and/or his attorney made the mortgage payments directly to the lender for several months. However, Warren checked into the Betty Ford Center for

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treatment. Merrill learned the homeowners' association was about to foreclose on Warren's unit. A few days before the scheduled foreclosure date Merrill paid the association the approximately $5,000 then claimed as arrearages to prevent the foreclosure. Warren also defaulted on his mortgage payments while in treatment. While Warren was still in the Betty Ford Center receiving treatment, Merrill secured a judgment against Warren, got a writ of possession, and evicted him from the premises. She removed all his belongings and either placed them in a storage facility or in the garage of her home in Woodland Hills. Warren‘s belongings included original artwork, sports memorabilia, the personal papers of his grandfather, the former California Governor and Chief Justice of the United States, Earl Warren, antique furniture, jewelry, medals, and several filing cabinets containing all his business records. Merrill held a lien sale of Warren's personal property and was herself the successful bidder at the sale. After evicting Warren, Merrill rented the condominium to a series of renters. Warren filed suit against Merrill, Charmaine, and others. The trial court found that Merrill had acted outrageously and with reckless disregard in perpetrating the fraud on Warren and made an award of punitive damages of $50,000. The court also entered judgment quieting title in favor of Warren. The court also awarded Warren noneconomic damages in the amount of $15,000 on his causes of action for fraud, breach of fiduciary duty and ejectment. Merrill agreed to return all of Warren's personal property and in exchange Warren agreed to pay the storage fees. The court also awarded Warren costs and attorney‘s fees. ISSUE:

Did Merrill breach her fiduciary duty to Warren?

DECISION:

YES! The judgment was affirmed. Merrill not only breached her fiduciary duty; she committed fraud. She never intended to put Warren on the title to the condo. She perpetrated a fraud against the mortgage company. She was not forthright with Warren on the arrangement and she took his property without fully disclosing what she was doing. Her conduct was so over-the-top that the court stopped proceedings to have her lawyer talk with her about her Fifth Amendment rights.

Answers to Case Questions 1. List all of the actions by Merrill that were a breach of her duty of loyalty, the law, or her ethics as a real estate agent. There are so many that they are listed below as the facts are unfolding in the case. (a) Warren suffered from mental disabilities and was emotionally and financially vulnerable—ethical issue of taking unfair advantage of another.

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(b) Merrill told Warren that the seller was motivated to sell—breach of her duty of loyalty to her seller. (c) Merrill told Warren he needed a co-borrower with a good credit rating in order to secure a mortgage at a reasonable rate. Merrill suggested her own daughter, Charmaine Merrill, for this purpose. Merrill is inserting herself into a transaction with a customer, a conflict with her seller. (d) Merrill told Warren her daughter, Charmaine, would be the co-owner and co-borrower on the loan. However, once escrow closed Charmaine would execute a quit claim deed to him to remove her name from title in exchange for the $10,000. This was giving a false impression to the lender and violated both state and federal laws on mortgage applications and disclosures. (e) As the loan broker, Merrill knew it was important to make a 20 percent down payment in order to secure a reasonable interest rate. Merrill is also acting as the loan broker, a conflict of interest with her seller and with Warren. (f) Because Warren did not have the money Merrill offered to defer her commissions of $27,000 and to loan this amount to Warren in order to attain a 20 percent down payment of $77,000. This arrangement must be disclosed to the lender and was not and the result is a breach of broker duty (both real estate and mortgage) and also violation of the law. (g) Their arrangement was never put into written form. Breach of her duty of care because agents know such transactions must be in writing to be enforceable. (h) Merrill wrote up a purchase offer for the condominium with Charmaine and Warren as co-purchasers. Merrill was not honest with the seller here and violated her code of ethics in not disclosing the true purchasers of the property. (i) Merrill never had Warren fill out a loan application form and Merrill never attempted to secure a loan with Warren as a co-borrower with her daughter, Charmaine. Nondisclosure of relevant information to purchaser and failure to disclose true nature of transaction to her seller/principal. (j) Instead Merrill applied for and secured a loan in Charmaine's name alone. Deceptive to lender and violates the law, as the court indicated in its concern over her testimony. (k) Merrill misrepresented the facts when she filled out Charmaine's loan application. For example, Merrill stated the source of the proposed $77,000 down payment was a combination of savings and gifts. The application stated Charmaine then resided in a condominium at 5800 Kanan Road in Agoura Hills, conducted catering and shuttle businesses out of the residence on Kanan Road, and had been doing so since 2001, earning a monthly income of $7,500 from those businesses. In reality, Charmaine had resided for years in Aspen, Colorado and had never lived at or conducted a business out of the 5800 Kanan Road residence. Also, the businesses Charmaine conducted had shut down sometime in 1990. Charmaine was instead employed as a waitress in Aspen, Colorado, and periodically conducted her shuttle business there. She otherwise relied on her mother for support. Merrill indicated on the loan application that Charmaine intended the condominium to be her primary residence. Merrill later conceded that she would never have gotten the loan had she been truthful in the loan application. The trial court was so alarmed by Merrill's testimony and her apparent lack of concern about

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admitting she had committed a form of fraud on the lender, the court recessed the proceedings to permit Merrill to consult with counsel regarding her Fifth Amendment right not to incriminate herself. This segment speaks for itself—probably constitutes fraud against both seller and lender and violates federal and state laws. (l) How the $77,000 down payment was cobbled together was the subject of conflicting evidence. According to Warren, he paid the entire $77,000 down payment: $50,000 into escrow by writing checks to different persons and entities as directed by Merrill and by repaying the $27,000 Merrill loaned him toward the down payment. Warren testified he and Charmaine each deposited a check for $10,000 into escrow. Then at Merrill's direction, he repaid Charmaine this $10,000 by writing two checks of approximately $5,000 each: one to pay toward Charmaine's Chase Platinum credit card balance and the other to pay toward Charmaine's MBNA credit card balance. Failure to disclose true source of down payment is problematic under the law. Also, there is misrepresentation to Warren about what is really happening with the transaction and his money as well as his property. (m) Warren wrote a check for $30,000 to Merrill's boyfriend, again at Merrill's direction. Merrill then deposited into escrow a check for $30,000 written on her and her boyfriend's Paine Webber investment account. In exchange for her boyfriend's services, Merrill had Warren write her boyfriend another check for $2,000. Again, the buyer is not aware of the agent/broker‘s conflicts and the true nature of the transaction or his real rights in it. (n) Unbeknownst to Warren, the seller had agreed to credit $6,000 in escrow to defray closing costs which should have reduced the amount Warren repaid Merrill. Failure to disclose relevant and material information to buyer and absconding with buyer‘s funds. (o) Merrill knew the lender would not fund the loan request with different people proposed to hold legal title than had applied for the loan. Merrill had Warren sign an amendment in escrow to remove his name from title, explaining the document was just a formality required to secure the loan and to close escrow. The amendment stated title would vest solely in Charmaine Merrill. The amendment further stated ―John Warren is no longer a party to this escrow. All monies currently on deposit to this date shall accrue to Charmaine Merrill....‖ Deceived Warrant as to effect of the transaction and failed to return funds deposited as part of escrow. (p) Escrow closed in October 2001 and Warren moved into the condominium. Merrill did not have Charmaine execute a quit claim deed to transfer title to Warren after escrow closed. Failed to follow oral agreement and defrauded customer of property. (q) Warren and/or his attorney made the mortgage payments directly to the lender for several months. Failure to disclose true owner found him paying for property for which he would never have title. (r) However, Warren developed substance abuse problems. He checked into the Betty Ford Center for treatment. He had not made arrangements for someone to handle his personal and financial affairs in his absence. Merrill learned the homeowners' association was about to foreclose on Warren's unit. A few days before the scheduled foreclosure date Merrill paid the association the approximately $5,000 then claimed as arrearages to prevent the foreclosure. Taking advantage; failure to disclose; using property that was client‘s

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(s) Warren also defaulted on his mortgage payments while in treatment. Merrill filed an unlawful detainer action to have him removed from the unit. While Warren was still in the Betty Ford Center receiving treatment, Merrill secured a judgment against Warren, got a writ of possession, and evicted him from the premises. She removed all his belongings and either placed them in a storage facility or in the garage of her home in Woodland Hills. Warren‘s belongings included original artwork, sports memorabilia, the personal papers of his grandfather, the former California Governor and Chief Justice of the United States, Earl Warren, antique furniture, jewelry, medals, and several filing cabinets containing all his business records. Merrill held a lien sale of Warren's personal property and was herself the successful bidder at the sale. Taking things that don‘t belong to you. (t) After evicting Warren, Merrill rented the condominium to a series of renters. It was not her property to rent and she at least owed Warren back his down payment because she never conveyed the promised title to him. 2. How does the court respond to Merrill's argument that Warren had joined in on the plan to dupe the lender? That Warren was not the one who suggested the plan and that his unclean hands were less unclean than hers because she never intended to give him the property from the get-go. 3. If Warren did indeed remove himself from the escrow, what should Merrill have done? His money should have been returned if the escrow was indeed terminated and it was not because Merrill used it as a means of funding the purchase of the property. AUTHOR'S NOTE:

12-5

Students can go to www.realtor.org and obtain a PDF or Word copy of the code of ethics—there are many violations of Article 2 by Merrill. Article 4 as well on involving family members in transactions. Articles 5, 6 and 7 deal with the conflicts of interest and the failure to disclose her profit and interest to Warren. Article 9 was violated when none of the arrangement with her daughter was reduced to writing.

Legal Duties and Responsibilities to Third Parties—USE POWERPOINT SLIDES 12-21 TO 12-28 12-5a Misrepresentation 1. Recovery by third parties is permitted under the tort of misrepresentation 2. Intentional fraud—broker engages in scheme to defraud 3. Negligent a. Broker provides information without checking b. Broker does not thoroughly investigate c. Ignorance is no excuse

CASE BRIEF: Rabalais v. Gray 167 So.3d 101 (La. App. 2014)

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FACTS:

Denver Gray and Patricia Gray owned residential property located in Metairie, Louisiana. The property had flooded as a result of the 2005 Hurricane Katrina. Mr. and Mrs. Gray were living in North Carolina and remained there following the storm for one year. Upon seeing their home, the Grays, who were respectively 81 and 73 years old, decided not to repair the Hurricane Katrina damage to their home because it was too substantial an undertaking. They decided to sell the property. Mrs. Gray approached a real estate agent recommended by a friend of hers, Ms. Price. The two never met face-to-face; rather, they conducted all of their business over the phone or by fax. Kenneth J. Rabalais, Jr. and Jennifer Ann Vaught Rabalais (Plaintiffs/appellants) eventually agreed to buy the Grays‘ home for $950,000.00 in its ―as is‖ condition. The sale closed on September 20, 2007. On December 13, 2011, the Rabalaises filed suit against Mr. and Mrs. Gray, Ms. Price, as their real estate agent, and her agency, Prudential Gardner, alleging fraud (intentional misrepresentation) and negligent misrepresentation, when they learned that the property was not eligible for Louisiana Road Home Program benefits because it was covered by flood insurance at the time Hurricane Katrina struck. They alleged that Ms. Price had represented to them that the property had no flood insurance coverage when Hurricane Katrina struck. A lack of flood insurance coverage would have allowed them to collect up to $130,000.00 in Road Home benefits for repairs for Hurricane Katrina damage. The Program denied them benefits after a check revealed that the property did have flood insurance coverage when Hurricane Katrina struck. Mr. Gray had made a claim and received flood insurance proceeds. Mrs. Gray testified that she was not aware of any flood insurance coverage on the property and testified that she was unaware of any flood insurance claim and did not know that Mr. Gray had received flood insurance proceeds. The Rabalaises said that they would not have purchased the property had they known that such benefits were not available. They sought monetary damages rather than rescission of the contract of sale because rescission of the contract of sale was impossible and/or impractical. Ms. Price and Prudential Gardner filed a motion for summary judgment arguing that under La. R.S. 9:3894(B), they cannot be held liable for negligent misrepresentation for conveying information to plaintiffs that was given to them by their clients that they did not have actual knowledge was false. The trial court granted summary judgment in favor of Ms. Price and Prudential Gardner, dismissing all claims against them.

ISSUE:

Could Ms. Price and her agency be held liable for misrepresentation of material information to the buyers about the eligibility of the property for the Program?

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DECISION:

No, she could not because the statute provides immunity for agents when they furnish information to buyers unless they had reason to know that there was some problem or that they acted negligently in doing so. Excerpts from the court opinion follow: A purchaser's remedy against a real estate broker is limited to damages for fraud (intentional misrepresentation) under La. C.C. art. 1953, or for negligent misrepresentation under La. C.C. art. 2315. Louisiana Revised Statutes 9:3894 provides: B. A licensee shall not be liable to a customer for providing false information to the customer if the false information was provided to the licensee by the licensee's client or client's agent and the licensee did not have actual knowledge that the information was false. Plaintiffs are correct that a cause of action against a real estate agent for negligent misrepresentation ―survives‖ the adoption of La. R.S. 9:3894 in 1997. However, La. R.S. 9:3894(B) does not eliminate or undermine all causes of action against real estate agents for negligent misrepresentation. It merely provides that a licensee (here, Ms. Price) shall not be liable to a customer (here, plaintiffs) for providing false information to the customer if the false information was provided to the licensee by the licensee's client or the client's agent (here, Mrs. Gray) and the licensee did not have actual knowledge that the information was false. Causes of action for negligent misrepresentation that do not fall into this particular scenario are and will continue to be viable and prosecutable. The evidence in this case, particularly the excerpts from Ms. Price's and Mrs. Gray's depositions, shows that while Mrs. Gray did not specifically remember telling Ms. Price that there was no flood insurance coverage on the property, she acknowledged that she probably did tell this to Ms. Price. Mrs. Gray testified that she did not handle any insurance matters regarding the property, either before or after Hurricane Katrina. Evidence was introduced of a suit that was filed by Mr. Gray individually seeking additional insurance proceeds on the property for Hurricane Katrina flood damage. Mrs. Gray denied any knowledge of this suit or any insurance matters for the property generally. It is further clear from the record that Ms. Price's statement to plaintiffs that they could pursue Road Home benefits on the property was derivative of and entirely contingent upon the ―information‖ told to Ms. Price by Mrs. Gray that there was no flood insurance coverage on the property. This is the precise circumstance to which La. R.S. 9:3894(B) applies. We find that defendants demonstrated that, as per La. R.S. 9:3894(B), Ms. Price did not have ―actual knowledge‖ that the flood insurance information supplied to her by Mrs. Gray and relayed by her to plaintiffs was false.

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Upon review, we find that there is nothing in the record to establish that Ms. Price held herself out as having comprehensive knowledge of the requirements of the Road Home Program and how to successfully secure Road Home benefits. Indeed, plaintiffs admitted that they had experience themselves with the Road Home Program, as they had made such a claim on their prior residence, also damaged by Hurricane Katrina. The fact that Mr. Gray executed documents assigning his Road Home benefits claim ―if any‖ to plaintiffs does not tend to show that Ms. Price was doing anything more than accommodating plaintiffs' request in that regard, in order to aid their application for Road Home benefits.

Answers to Case Questions 1. Explain who knew what and when. Mr. Gray was aware that there was insurance on the property and filed a claim on the New Orleans property. However, he did not tell Mrs. Gray and Mrs. Gray handled the sale of the home through Ms. Price. Ms. Price relied on Mrs. Gray‘s information and even had Mr. Gray sign a form that he was turning over all rights under the Program to the buyers—the Rabalaises. Ms. Price did not know, nor did she have reason to suspect any problems and was not expected to know all the details of the program in terms of qualifying for funds. Mrs. Gray and Ms. Price found out in 2011 when the Rabalaises found out and then filed suit 2. Describe what you would do as a real estate agent in a situation such as this one. Even though the court decided in her favor, Ms. Price probably should have made additional disclaimers about her role and knowledge and urged the Rabalaises to do some checking to determine whether the home qualified for the program since it was a major part of their decision to buy the property. Even though the law protects the agent, it does not hurt to take extra precautions and err on the side of urging buyers to find out more. 12-5b Nondisclosure 1. Failure to reveal material information 2. Constitutes misrepresentation 12-5c Sales Puffing CASE BRIEF:

Capiccioni v. Brennan Naperville, Inc. 791 N.E.2d 553 (Ill. App. 2003)

FACTS:

In 1998, Dean and Majel Capiccioni (Plaintiffs-Appellants) moved from Ohio to Illinois and purchased a home in Bolingbrook. Brennan, a residential real estate brokerage company, and Sharon Clermont, a licensed real estate broker and one of Brennan Naperville's agents (defendants), represented the Bolingbrook property's sellers. The sales brochure for the Bolingbrook property listed as one of the home's features: ―Acclaimed [school] District 204.‖ The Capiccionis moved into the home, and their three children attended school in District 204 for three years. However, the children were unable to attend District

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204 classes during the 2001-2002 academic year after the Capiccionis discovered that their property was actually located in District 365-U. The Capiccionis subsequently sold the property and purchased another home. Their new home was located in District 204. In June 2001, the Capiccionis filed suit against Clermont and Brennan for giving them false, untruthful, and misleading information The trial court dismissed the Capiccionis‘ complaint and they appealed. ISSUE:

Is there broker liability to third parties for advertising claims made by the broker?

DECISION:

Yes. The plaintiffs were able to establish that the district boundaries did not include their house even though they had checked with the district before buying the house. The result was that they overpaid for the house and then had to sell to get into the school that they wanted for their children, and the school that the property listed had promised. Reversed.

Answers to Case Questions 1. Where did the representation on the schools appear? The representation that the school was ―acclaimed‖ appeared in the broker‘s ads for the property. Some might have even perceived it to be puffing. 2. What is the significance of proximate cause in this case? The proximate cause issue is one that the defendants raise as a back-up for their argument, that even if ―acclaimed‖ could be considered a basis for misrepresentation, there were other causes of the problems the plaintiffs experienced, such as the representations of the district employees beyond what the broker said in the ad. 3. How does the court handle the issue that the buyers could have checked on the school district themselves? There is not a public record per se, as with land, tax or zoning records that establish this kind of information that is readily available. The plaintiffs did what was reasonable under the circumstances by checking with the district directly. 12-5d Safety Standards 1. Must disclose code violations 2. Liability in some states for even innocent misrepresentation 12-5e ―As Is‖ Clauses 1. Statutory Duties of Disclosure a. b. c. d.

Statutory regulation on disclosure Consult state statutes on crimes, HIV, sex offenders, disclosures Referring buyers to public records All states have some form of disclosure on residences of sex offenders

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CASE BRIEF:

Milliken v. Jacono 103 A.3d 806 (Pa. 2014)

FACTS:

In February, 2006, Konstantinos Koumboulis shot and killed his wife and himself inside his house. The murder/suicide was highly publicized in the local media and on the internet. The Jaconos purchased the property from the Koumboulis estate at auction in September, 2006, for $450,000. After investing thousands in renovations, the Jaconos listed the property for sale in June, 2007. They informed Re/Max, their listing agents, of the murder/suicide. The Jaconos consulted with their attorney, their agents, and representatives of the Pennsylvania Real Estate Commission, asking whether the murder/suicide was a material defect requiring disclosure pursuant to the Real Estate Seller Disclosure Law (RESDL). Their attorney and Real Estate Commission representatives confirmed the murder/suicide was not a material defect because it would not impact the value of the property. The Jaconos' agents received the same assurance when they called the Pennsylvania Association of Realtors Legal Hotline. The agents researched the matter further on the internet and read an article discussing stigmatized or psychologically-impacted properties and the adverse effect such can have on property values. While the agents still suggested disclosure would be a good idea ―just to get it out there[,]‖ the Jaconos replied that they had investigated the issue and did not wish to disclose the murder/suicide. The Jaconos then signed a Seller's Property Disclosure Statement, which did not disclose the murder/suicide as a known material defect. The Real Estate Seller Disclosure Law (RESDL) (68 P[a.C].S. § 7301 et seq.) requires that a seller of a property must disclose to a buyer all known material defects about the property being sold that are not readily observable. A material defect is a problem with a residential real property that would have a significant adverse impact on the value of the property or that involves an unreasonable risk to people on the property. In June 2007, Janet Milliken (appellant) viewed the property and received a copy of the disclosure statement. Ms. Milliken agreed to buy the home for $610,000. One month prior to closing, Ms. Milliken received a copy of the homeowners' association documents, which listed Koumboulis as the owner, and a title report. Ms. Milliken did not review the homeowners' association documents, but read the title report, which stated the Jaconos purchased the property from the Koumboulis estate; she did not investigate the matter further. Concerned about the difference between the purchase price paid by the Jaconos and the $610,000 price tag, Ms. Milliken consulted her own agent who suggested a possible mortgage foreclosure as an explanation. Although Ms. Milliken ―intuitively [ ] thought there was something more to it,‖ she proceeded with the transaction.

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After moving into the house, Ms. Milliken learned of the murder/suicide from her neighbor. Claiming that had she known about the incident prior to closing, she would have never gone through with the purchase, Ms. Milliken filed suit against the Jaconos and Re/Max, alleging common law fraud, and negligent misrepresentation based on the Jaconos' failure to disclose the murder/suicide. The trial court granted summary judgment, finding as a matter of law the murder/suicide was not a material defect required to be disclosed. The appellate court affirmed, and Ms. Milliken appealed. ISSUE:

Is there a legal obligation to disclose that psychological impactful events have occurred on a property?

DECISION:

The court held that the disclosure statute was meant to address property structural conditions and not psychological factors. The court was unwilling to extend the disclosure requirements on psychological factors even though they might be material to some because it would be so difficult to determine what is and is not material because there would be a slippery slope. Also, after time passes, the stigma disappears, and property is often worth more because of historical events. Excerpts from the court opinion appear below: It is safe to assume all of the above are events a majority of the population would find disturbing, and a certain percentage of the population may not want to live in a house where any such event has occurred. However, this does not make the events defects in the structure itself. The occurrence of a tragic event inside a house does not affect the quality of the real estate, which is what seller disclosure duties are intended to address. We are not prepared to set a standard under which the visceral impact an event has on the populace serves to gauge whether its occurrence constitutes a material defect in property. Such a standard would be impossible to apply with consistency and would place an unmanageable burden on sellers, resulting in disclosures of tangential issues that threaten to bury the pertinent information that disclosures are intended to convey. Moreover, considerations such as the time that has passed since the event, and changes and renovations made to the property, have a significant effect on the impact of the event. Some graphic events, having matured into historical curiosities, may even increase the value of the property. The possible fact patterns are endless and lead down a slippery slope − a slope we are not willing to descend. If there is to be a newly created duty to disclose psychological stigma, it should only be imposed with clear definition by the legislature after careful consideration of all aspects and ramifications of the issue.

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The difficulty in assigning a proper remedy to common law claims premised on the failure to disclose a psychological stigma further cautions this Court against recognizing such as a material defect. The murder/suicide was wellpublicized, with coverage appearing in print and on the internet. Even under caveat emptor, there was no duty to disclose as the murder/suicide was patent. Appellant possessed the tools to discover the murder/suicide and did not do so, even after suspecting some other factor was involved. We hold that purely psychological stigmas are not material defects of property that sellers must disclose to buyers. Accordingly, there were no genuine issues of material fact, and summary judgment was proper. Affirmed.

Answers to Case Questions 1. What is the distinction that the court makes in types of material defects that is critical to precedent going forward? The court holds that the disclosure statement is intended to address structural defects—the kinds of things that a buyer might not be able to see. The psychological defects are more difficult to determine because they are personal and affect people in different ways and what would be the standard for determining which type of events must be disclosed? A slippery slope, as the court notes. 2. What actions could Ms. Milliken have taken prior to closing to glean the information? She saw the different name on the HOA documents as well as the low price and did ask some questions but did not pursue the issue. She had a gut reaction but did not follow through. 3. Why is even a common law remedy difficult in lack-of-disclosure cases such as this one? Because of the problems with determining how much the remedy should be and who might be affected by the information and how much. And where is the line on materiality to different people. Also, the problem, by the testimony of Milliken‘s own expert, wears off after awhile and sometimes increases the value of the property.

Answer to Ethical Issue (12.4) Real estate agents hold themselves out to the public as professionals, and, as such, are required to make reasonable use of their superior knowledge, skills and experience within the area of their expertise. Because such agents are expected to make use of their superior knowledge and skills, which is the reason they are engaged, and because the agents in this case were aware of the issue, the reality of litigation and that some might find the events at the property to be too much to accept in terms of buying the house, that erring on the side of caution could be the best advice they could give the sellers—would have avoided the litigation. Simple test—would you want to have this information if you were the buyer? 12-5f Disclosure, Discrimination, and Silence 1. Follow state statutes 2. Consult NAR code

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3. Topic areas include HIV/AIDS, sex offenders, psychological issues such as suicide 12-5g Insurance Protection 1. Errors and omissions insurance 2. Check coverage to make sure it is adequate 3. Coverage of legal costs

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12-5h Self-Protection 1. Be thorough and accurate 2. Refer to checklist in text—PRACTICAL TIP 12-6

Licensing Requirements for Brokers/Agents—USE POWERPOINT SLIDES 12-29 TO 1233  

All states require a license Licensing handled by an administrative agency in each state—Real Estate Commission, Department of Real Estate, Real Estate Board, etc.

12-6a Requirements for Obtaining Licenses 1. Brokers—operate business (licensing requirements are stringent) 2. Education a. Some states require none b. Some states specify classroom hours 3. Experience a. Usually a requirement for brokers b. Sometimes coupled with education requirements 4. Examination a. Required in all states b. Multiple choice standardized portion c. Additional state sections 5. Sponsorship a. Required in half of states b. Requires salespersons to be sponsored by brokers 6. Minimum age a. Generally, is age of majority for salespersons b. May be higher for brokers 7. Citizenship a. United States b. Has been subject to constitutional standards as a licensing requirement 8. Residency a. 30 to 90-day resident of state prior to application b. Has been subject to challenge 9. Criminal record

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a. Prohibit licensing for those convicted of felonies b. Generally limited in time 10. Application a. On form provided by agency b. Must be completed and filed before examination 11. Payment of fees a. Upon original application b. Yearly renewal fee 12-6b Issuance of Licenses 1. Required to be displayed 2. Some states require broker to have custody 3. Pocket cards must be carried in some states 12-6c Doing Business Without Licenses Conducting business without a license is illegal—commissions cannot be collected

Answer to Consider (12.3) The court held that Dean could not collect the commission because he had to be licensed at the time of the commission agreement. Without that there is little that the court can do. Dean A. Smith Sales, Inc. v. Metal Systems, Inc., 397 S.W.3d 305 (Tex. App. 2013). 12-6d Exemptions from Licensing 1. Attorneys 2. Executors and administrators of estates 12-6e Professional Organizations 1. Realtors (R)—National Association of Realtors (NAR) 2. Appraisers 3. Managers, etc.

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12-7

Broker‟s/Agent‟s Legal Duties and Responsibilities to the State—USE POWERPOINT SLIDES 12-34 TO 12-37 12-7a State 12-7b Suspension or Revocation of Real Estate License 1. Commingling of funds 2. Discriminatory practices 3. Felony conviction 4. Advertising 5. Splitting commission with unlicensed party 6. Failure to deliver document copies 7. Failure to submit all offers 8. Breach of duties to seller and unethical conduct 9. Making false statements to buyers or sellers in a transaction 10. Unauthorized practice of law 11. Failure to comply with statutory duties 12-7c Rights Upon Suspension or Revocation 1. Hearing—advance notice 2. Right to present evidence 3. Right to know charges

CASE BRIEF: Colorado Real Estate Commission v. Vizzi —P.3d —. 2019 WL 1087016 (Colo. App. 2019), cert. denied, 2019 WL 4927036 (Colo. 2019) FACTS:

John Vizzi, a licensed Colorado real estate broker, entered into contracts with three clients in 2013 and 2014 to provide unbundled real estate services in exchange for a flat fee. In one agreement he contracted only to list the client‘s property on the MLS list. With the two other clients, he agreed to provide a yard sign, a lock box, centralized showing services, and an MLS listing. An anonymous informant reported Vizzi‘s activities to the State Real Estate Commission, and the Commission charged Vizzi with his failure to fulfill his statutory duties under Colorado law. An administrative law judge (ALJ) heard the case and concluded that the duties required of brokers under Colorado law were mandatory and that Vizzi had not

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fulfilled them in the three cases. Vizzi was splitting out certain services of real estate agents or unbundling agent services. This type of activity has been seen as a way to open up new markets in the field of real estate services. The ALJ disciplined Vizzi, requiring him to take twelve hours of continuing education and levied a fine of $2,000 plus the statutory surcharge. Although the Commission had sought public censure, the ALJ did not impose it. Vizzi filed exceptions to the ALJ‘s decision with the Commission. After hearing oral argument on the exceptions, the Commission issued a final agency order. The Commission adopted the ALJ‘s findings of fact and conclusions of law. It agreed with the ALJ‘s ruling that Vizzi was required to provide to his clients all of the services listed in section 12-61-807(2), and that he violated the provisions of section 12-61-113(1)(k) and (n) by entering into contracts that essentially disclaimed any responsibility to provide statutorily required services. The Commission modified the discipline imposed on Vizzi to include public censure. The Commission relied a December 2010 position statement that said: ―A broker is not allowed to solely perform ‗additional‘ services which require a real estate broker‘s license ... without providing the minimum duties required by single agency or transaction brokerage.‖ Dep't of Regulatory Agencies, Div. of Real Estate, CP-36 Commission Position on Minimum Service Requirements. Because the position statement was issued before Vizzi entered into the contracts at issue, the Commission concluded that he ―should have known that the listing contracts he prepared in 2013 and 2014 were improper.‖ Vizzi appealed the Commission‘s decision. ISSUE:

Can an agent be disciplined for breaking out the services that an agent performs into separately purchased parts for sellers?

DECISION:

Vizzi maintains that he was permitted by statute to contract out of many of the duties imposed on transaction-brokers, and that the contracts in question successfully accomplished that goal. He appealed three issues: statutory duties did not prohibit unbundling, antitrust violations by not allowing unbundling, and due process by not identifying the complainant.

1. Statutory Duties of Agents Colorado law provides that a licensed real estate broker must act either as a single agent or as a transaction-broker in providing real estate services.

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Though the legislature emphasized the importance of the public‘s ability to engage real estate brokers on terms that both the public and real estate brokers ―find acceptable,‖ it also limited that ability. The statutes do not say that the public can engage a real estate broker to provide unbundled brokerage services, or in any manner that the broker and customer might find mutually acceptable. As the ALJ and the Commission noted, Vizzi‘s interpretation would also lead to absurd results, by, for example, allowing him to contract out of the statutory mandate to comply with ―any applicable federal, state, or local laws, rules, regulations, or ordinances including fair housing.‖ 2. Antitrust Issues In Dental Examiners, the Supreme Court based its decision on a lack of proof indicating that the state legislature intended North Carolina‘s Board of Dental Examiners to have oversight of tooth whitening, 574 U.S. at —, 135 S.Ct. at 1116, and the Court‘s concern that the Board‘s action may have been motivated by anti-competitive animus, id. at —, 135 S.Ct. at 1114 (―When a State empowers a group of active market participants to decide who can participate in its market, and on what terms, the need for supervision is manifest.‖). The considerations that motivated the Supreme Court‘s decision in that case are not present here. First, Vizzi‘s actions fell within the Commission‘s statutory purview. It was uncontested that Vizzi‘s actions, such as posting properties on the MLS, constituted the practice of a real estate broker. It was also uncontested that the Commission‘s statutory purview is the regulation of the practice of real estate brokers. In contrast, in Dental Examiners, it was unclear whether tooth whitening constituted the practice of dentistry and, thus, whether tooth whitening fell within the statutory purview of North Carolina‘s Board of Dental Examiners. Second, unlike in Dental Examiners, there is no support in the record for the notion that the Commission‘s enforcement actions were motivated by anticompetitive animus.

3. Due Process and Anonymous Complainant Vizzi has not shown how the complainant‘s identity was relevant to his ability to defend against the Commission‘s charges. Vizzi was given notice of all of the Commission‘s witnesses and exhibits—the totality of evidence which supported the charges against him.

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Answers to Case Questions 1. Explain what Vizzi was trying to do and why. Vizzi was trying to break apart the role of agents in selling properties to let agents offer portions of agent services as a way of opening up more market components. 2. What is the concern of the court if agent services are unbundled? If agents are permitted to unbundle their duties under the law, the court fears that they could unbundle obligations as simple as compliance with fair housing laws. Their fear is also that consumers would be illserved by not understanding all the implications of these limited services. 3. Explain why there is no antitrust issue in the actions taken against Vizzi. There was no evidence of anticompetitive motivation in cutting off the unbundling—the Commission was concerned about the protection of the public—something that had been built into the statutes by the legislatures for protection of the public in real estate transactions. 4. Why is the anonymity of the complainant not a due process violation? The court held that the Commission did not consider any evidence other than what was in the record. Whatever the complainant offered was not in the case or used in the case. 12-8

Relationships Among Brokers/Agents—USE POWERPOINT SLIDES 12-38 TO 12-42 12-8a Broker-Salesperson Relationship 1. Need contract governing rights 2. See checklist for content in text 12-8b Salesperson-Salesperson Relationship 1. Commission splits 2. Office duties/walk-ins 12-8c Broker-Broker Relationship 1. Procuring cause of sale on open listing 2. Who brought buyer and seller together, not who finalized

CASE BRIEF: Wally & Co., L.C. v. Briarcliff Development Co. 371 S.W.3d 880 (Mo. App. 2012) FACTS:

In 1998, DeBruce Grain, Inc. (―Tenant‖), entered into a ten-year lease for office space with Briarcliff Development Company (―Landlord‖). The lease was scheduled to expire on May 31, 2009. Tenant had an option to renew the lease for an additional ten-year term with rent calculated under a renewal term formula. To exercise the option to renew, Tenant was required to exercise the renewal option by notifying Landlord of Tenant's intention to renew the lease on or before June 5, 2008. Tenant did not, however, exercise the option to renew

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within the option period. Instead, in August 2008, Tenant hired Wally & Co., L.C. (―Broker‖), to represent Tenant as a broker in Tenant's search for rentable commercial premises in the Kansas City area. In September 2008, on behalf of Tenant, Broker sent Landlord a Request for Proposal on renewing Tenant's lease. Simultaneously, Broker also sent Landlord a Broker's Commission Letter Agreement − the terms of which Landlord agreed to on October 6, 2008 − outlining Broker's right to receive a broker's commission from Landlord if Tenant entered into an agreement to continue to lease office space from Landlord in the Briarcliff I Building after the original lease term expiration on May 31, 2009. The Broker's Commission Letter Agreement stated, in pertinent part: In the event that Tenant completes a Lease and/or Lease Amendment for office space in this Building, which has been presented through [Broker] you agree to pay [Broker] a commission equal to three percent (3%) of the aggregate gross rental consideration of the first five (5) years of the lease term and one and one-half percent (1.5%) of the aggregate rental consideration of any additional lease term. Fifty percent (50%) of such Commission will be earned and payable to [Broker] at the time a written agreement is executed between Landlord and Tenant. The remaining fifty percent (50%) of such Commission will be earned and payable upon lease commencement. This agreement shall remain in effect for 240 days or until negotiations cease, whichever is longer. On December 1, 2008 (i.e., within 240-day broker's commission time period), Broker helped negotiate an agreement between Landlord and Tenant whereby the parties to the original lease unconditionally agreed to renew and extend the term of the original lease by an additional ten-year lease term commencing after the original lease term expired in May 2009. After entering into the 12/1/08 Lease Amendment, there was no longer a question if the lease would be renewed or how the base rent of the renewal term would be calculated. The only question remaining was what rental figure the base rent calculation process would produce. The parties executed a written agreement establishing the base rent of the renewal ten-year lease term on July 31, 2009. Broker then sought its commission from Landlord, and Landlord refused to pay the commission, writing to Broker that ―[w]e would never have agreed to this [lease renewal] if a broker had brought it to us.‖ Broker filed a lawsuit against Landlord, alleging breach of contract, quantum meruit, promissory estoppel, and enforcement of a real estate broker's lien. Both parties filed motions for summary judgment. The crux of Landlord's summary judgment argument was that, by its terms, the Broker's Commission Letter Agreement expired on June 3, 2009; the written agreement itemizing the © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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base rent for the renewal term was not signed by the parties to the lease until July 31, 2009; thus, because Broker had not earned the right to a commission until after June 3, 2009, Broker was not entitled to a commission. Conversely, the crux of Broker's summary judgment argument was that Broker had earned its commission when the 12/1/08 Lease Amendment was entered into. The trial court granted summary judgment for Landlord. Landlord then filed a motion to amend the trial court's judgment to include an award of attorney's fees, which the trial court granted, awarding Landlord $80,159.52 in fees and costs. Broker appealed. ISSUE:

What are the rights of brokers to commissions when there is a lease renewal?

DECISION:

The Judicial Opinion of Judge Pfeiffer follows: The dispositive legal issue in this case is when a broker ―earns‖ a commission. This was the issue focused upon and argued about by both parties to the trial court and the issue that the trial court relied upon in granting summary judgment in favor of the Landlord. Ultimately, the trial court based its summary judgment upon its conclusion that Broker had not ―earned‖ the commission before the expiration of the Broker's Commission Letter Agreement between Broker and Landlord. We find several cases instructive on this issue. In Moore v. Prindable, 815 S.W.2d 25, 27 (Mo.App. E.D.1991), the broker's commission agreement stated that the broker was entitled to a commission only if the sale of the subject property occurred within the term of the commission agreement or within ninety days after the agreement expired. In response to the argument that the broker could only earn a commission if the sale closed within that time frame, the court disagreed and found the broker was entitled to a commission, stating: The time requirement in the contract clearly applies to the sale or exchange of the property, not to the closing. We believe the [broker] earned his commission when he produced the purchaser and the purchaser entered into an earnest money agreement with the appellants. When the contract closed, the right to the commission vested. A principal cannot break off negotiations with the broker's potential buyer, ―take the matter into their own hands, and defeat the broker's right to a commission by concluding the transaction without his aid; the principal cannot take advantage of the broker's work and escape payment of a commission by closing the deal himself.‖ The same is true here. Broker and Landlord entered into a Broker's Commission Letter Agreement in which Broker's right to a commission was earned if and when Broker produced Tenant who was ready, willing, and able to enter into a ―Lease

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Amendment for office space in the [Landlord's] building‖ on terms acceptable to Landlord. Broker did so on December 1, 2008, when the 12/1/08 Lease Amendment was, in fact, entered into between Landlord and Tenant. Upon execution of the 12/1/08 Lease Amendment: the Landlord and Tenant were unconditionally obligated to extend the original lease term by an additional tenyear term; the Landlord and Tenant were unconditionally obligated and bound by the results of the base rent calculation process itemized by the 12/1/08 Lease Amendment; and the Landlord and Tenant were unconditionally obligated to ―execute a written agreement establishing the aforesaid Base Rent‖ upon conclusion of the base rent calculation process required by the 12/1/08 Lease Amendment. The execution of the base rent ―written agreement‖ mandated by the 12/1/08 Lease Amendment on July 31, 2009, did not defeat Broker's right to its commission simply because the mandatory base rent agreement was ―closed‖ on a date after the Broker's Commission Letter Agreement expired (i.e., June 3, 2009). The trial court erred in granting summary judgment to Landlord instead of Broker, and we conclude that Broker is entitled to judgment as a matter of law. Thus, this case is reversed and remanded with instructions to the trial court to enter judgment in favor of Broker consistent with our ruling today. Reversed.

Answers to Case Questions 1. Explain the two components to the lease renewal agreement. The first part was the renewal of the lease and then the second part was the determination of the base rental amount, which the parties were required to do under the terms of the agreement. One occurred within the commission period, but the rental amount was not agreed to until after the expiration of the commission period. 2. Discuss the risks to brokers if the court were to permit no recovery of the commission in a situation such as this one. The court was concerned that not allowing recovery would allow parties to walk away from negotiations and then enter into the agreement after the commission period expires. [return to top]

Additional Activities and Assignments Answers to Chapter Problems 1. a. Yes, the length of listing is relevant for price and problem issues. Yes, broker misrepresents status of property. Beard v. Gress, 413 N.E.2d 448 (Ill. 1980). b. Court held that disclosures were sufficient for directed verdict for seller and broker when both were disclosed but buyer later brought suit out of frustration over repairs and costs. Sherman v. Elkowitz, 130 S.W.3d 316 (Tex. App. 2004).

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c. No reasonable reliance on seller‘s statements about the water and the basement. Alires v. McGehee, 85 P.3d 1191 (Kan. 2004). But see slight variation in Isterhaus v. Toth, 249 P.3d 888 (Kan 2011). d. Buyers could not rely on agent‘s representations about structure—requires expertise. Kramer v. Raterman, 830 N.E.2d 416 (Oh. App. 2005). e. Disclosure necessary. Barder v. McClung (1949) 93 Cal.App.2d 692, 695–697, 209 P.2d 808) or in violation of building codes (Curran v. Heslop (1953) 115 Cal.App.2d 476, 481– 483, 252 P.2d 378). 2. The trial court ordered the appellants to vacate the land and to pay Terra Firma back rent from August 2005 through January 2006. The trial court also found that there was no indication that Terra Firma‟s status or use were material parts of the negotiations for the contract. The court refused to reform the contract and the Morgans appealed. Judicial Opinion, Per Curiam: … [A]ppellants argue they are entitled to have the Real Estate Purchase Contract sale price, or the later deed to the property, reformed to reflect that the property was sold to a coal company. … [I]t is an established exception to the general rule that a court may reform a deed to property when either of two conditions occur: there has been a mutual mistake by the parties, or there has been a mistake by one party and fraud or other inequitable conduct by the other. To begin, we find nothing in the record to establish that the appellants‟ mistaken assumption concerning the identity of the appellee or the purpose behind the appellee‟s purchase was material at the time the Real Estate Purchase Agreement was formed, nor do we find evidence of record to establish that the mistake could not have been discovered or rectified through reasonable diligence. The record indicates that the appellants signed an agreement to sell their land to Terra Firma long before they ever met or spoke with Mr. Burton at the closing. Furthermore, the appellants admitted that they agreed to the purchase price of $525,000.00 based upon Ms. Kincaid‟s information that no other property in the vicinity had received this kind of offer, and not upon any inducement by the appellee. And lastly, we find nothing to suggest that the appellants relied on any misrepresentations made by appellee Terra Firma. The record is clear that, prior to the execution of the Real Estate Purchase Agreement, the appellants had no contact with any representatives for the appellee. Taken together, it is clear that the appellants failed to produce evidence sufficient for a reasonable jury to find in their favor on the essential elements in an action for fraud …

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The appellants make one additional argument. The appellants argue that Mr. Burton, as an agent for the appellee, failed to disclose “facts known to the agent materially affecting the value or desirability of the property” as required under the “Notice of Agency Relationship” forms that he provided to the appellants (through their agent Ms. Kincaid). The West Virginia Real Estate License Act requires every licensed real estate broker to disclose who they are representing in every transaction, using a form prescribed by the West Virginia Real Estate Commission. W.Va. Code, 30-4026(d) [2002]. … [T]he “Notice of Agency Relationship” provided by Mr. Burton to the appellants clearly states that he was representing the buyer. However, the Notice also contains the following statement regarding Mr. Burton‟s duties toward the appellants: Regardless of whom they represent, the agent has the following duties to both the buyer and the seller in any transaction: … Must disclose all facts known to the agent materially affecting the value or desirability of the property.… The agent is not obligated to reveal to either party any confidential information obtained from the other party which does not involve the affirmative duties set forth above. The appellants argue that Mr. Burton failed to disclose that he was purchasing the property for a coal company, for use as a coal preparation plant, and that those facts would have affected the value of the property. The Notice, however, only requires disclosure of facts “materially affecting the value or desirability of the property.” As has already been discussed, the appellants never notified Mr. Burton that the identity of his client, nor [sic] his client‟s intended use of the land, was material to their decision to sell the land. Accordingly, we cannot say on this record that any duty was accepted by Mr. Burton that was subsequently, and actionably, breached to the detriment of the appellants. Terra Firma Co. v. Morgan, 674 S.E.2d 190 (W. Va. 2008). 3. This case was decided in a similar manner to the Dearborn case in the chapter. The court held that (1) Commission's determination that there was a nexus between broker's licenses and his felony conviction was supported by substantial evidence, and (2) Commission's determination to revoke broker's licenses was neither arbitrary nor capricious. Pautsch v. Maryland Real Estate Comm'n, 423 Md. 229 (Md. 2011). 4. Real estate broker was procuring cause of sale of property that was subject of broker's exclusive right to sell agreement with vendor, and thus was entitled to commission from vendor; broker brought property to purchaser's attention, introduced purchaser to vendor, and negotiated price with purchaser, which vendor accepted, broker and vendor then

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entered into commission agreement containing vendor's express acknowledgment that broker was ―responsible for the sale of the property‖, and contract of sale also contained acknowledgment that broker was the only one vendor or purchaser dealt with and stated commission ―shall be paid pursuant to [commission agreement]‖. The lack of approval to the amendment did not change the fact that there was an underlying exclusive listing agreement for which a commission was due and owing. Sioni & Partners, LLC v. Vaak Properties, LLC, 939 N.Y.S.2d 57 (A.D.N.Y. 2012). 5.

a. b. c. d.

There is a conflict here because its agents are cannibalizing the firm’s client to make commissions on other properties. Letsos v. Century 21-New West Realty, 675 N.E.2d 217 (Ill. App. 1996). Broker is to act in the best interests of client (fiduciary), not himself. Non-disclosure hurts the client. Foley v. Mathias, 233 N.W. 106 (Iowa 1930). Broker should disclose. The owner should know of the broker’s conflicts in owning adjoining property. Reinhold v. Mallery, 599 A.2d 126 (N.H. 1991). The broker needs to disclose the issue. However, if escrow is in progress, the broker is bound by the agreement. The key is whether the seller was told the broker was buying the property. Baskin v. Dam, 239 A.2d 549 (Conn. Cir. Ct. 1967).

6. Like the case in the chapter, the court held that the broker from Pagel should have at least directed them to seek advice on the need for a mortgage. Broker did not exercise proper fiduciary care. Morley v. J. Pagel Realty & Insurance, 550 P.2d 1104 (Az. 1976). 7. For several reasons, we conclude that the Commission‘s determination to impose a public censure is not sustainable. First, the extent of the ALJ‘s portrayal was that the misconduct reflected only a good faith error, i.e., an unintentional and technical violation of the Commission‘s rules and regulations. In addition, there is no indication in the findings that public censure paralleled a public need. Specifically, the findings disclosed neither that other brokers nor the public at large ―needed‖ notice of respondent‘s error. As to the former, the ALJ found noncompliance with the required course was minimal. As to the latter, the ALJ found the error did not reflect on respondent‘s competence or abilities as a broker. Finally, there were no findings that additional ―public‖ pressure was required to achieve and insure respondent‘s compliance. To the contrary, respondent had no prior disciplinary record, she promptly corrected her error, and, on her initiative, she completed 12 extra hours of continuing education credits for 1994-1996. Because of the absence of any factual findings which would justify, support, or link public censure to respondent‘s misconduct, we conclude there is no reasonable basis for the Commission to extend her sanction beyond the fine recommended by the ALJ. The ―reasonable basis‖ standard does not apply to review of agency imposition of sanctions. The imposition of sanctions is a discretionary function which, if within the statutory authority of an agency, must not be overturned unless that discretion is abused. The issue for the reviewing court is not whether it would reach the same conclusion on the same facts. A court may not substitute its judgment for that of the agency vested with discretion to impose sanctions. Hanegan did fail, albeit unintentionally, to meet the continuing education requirements specified by statute. She failed to keep properly abreast of legal requirements © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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for maintaining her broker's license. Of the three thousand licensees whom the Commission audited, less than ten had failed to meet this requirement. In addition, she erroneously represented to the Commission, under penalty of perjury, that she had completed the required course. Evidence before the ALJ indicated that the Commission had imposed public censure on other individuals who failed to take the course. We are sympathetic to the fact that Hanegan's violation was unintentional and that she had no prior record of discipline. However, we are unable to conclude on these facts that public censure bears no relation to Hanegan's conduct or is manifestly excessive in relation to the needs of the public and is thus an abuse of discretion. See Hickam, 36 Colo.App. at 84, 534 P.2d at 1225-26 (reversing district court's finding of abuse of discretion where Real Estate Commission revoked broker's license even though no party was damaged by broker's actions). Hanegan additionally argues that the Commission's action was not supported by findings in the Final Agency Order linking the sanction to the public need. However, the Commission is not the fact-finder in the agency process, and the Commission is not required to make findings regarding the relationship between the conduct, the public need, and the sanction. Rather, in reviewing agency action, the legislature has directed the court to look at the whole record to determine whether the action is supportable. Where, as here, evidence in the record does support the Commission's imposition of a sanction, it must be upheld absent an abuse of discretion. Our analysis of the facts above indicates that the penalty does bear some relationship to the conduct and is not manifestly excessive. The court's inquiry must end there. The proper standard for review of an agency sanction is whether such sanction is arbitrary, capricious, legally impermissible or an abuse of discretion. The ―reasonable basis in law‖ standard that has evolved in the context of agency findings of ultimate fact is inapplicable to a review of sanctions. Furthermore, an agency is not required to make specific findings that its sanction parallels a public need or is proportionately related to the misconduct. As long as the record as a whole provides sufficient evidence that the penalty is not manifestly excessive in relation to the misconduct and the public need, the penalty will be upheld. Accordingly, we reverse the court of appeals' holding and reinstate the Commission's Final Agency Order. Colorado State Real Estate Commission v. Hanegan, 947 P.2d 933 (Colo. 1997). 8. The evidence indicates that appellant‘s agents had conducted a limited investigation of the property and that they were aware of ―red flags‖ indicating erosion or settlement problems. There was evidence indicating that one or both of the agents knew that the residence was built on fill and that settlement and erosion problems are commonly associated with such soil. It was additionally established that the agents had seen netting on a slope of the property which had been placed there to repair the slide which occurred most recently prior to the sale. Furthermore, one of the agents testified that he had observed that the floor of a guest house on the property was not level, while the other agent testified that uneven floors were ―red flag‖ indications of soils problems. Although the foregoing does not exhaust the

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evidence in the record that appellant‘s agents were on notice of potential soils problems, it is sufficient to establish that there was substantial evidence on the point. Other evidence also established that, despite this notice, the agents did not request that a soils report be prepared, nor take any other significant steps to determine whether there had been slides or other soils problems. The judgment for negligence against appellant was amply supported by the evidence. Easton v. Strassburger, 199 Cal. Rptr. 383 (1984). 9. Here, the basis of the Likenses‘ negligence count against Stump is that he directly communicated with and advised them on the sale of their home, failed to ensure that the bank letter of guarantee of funds was in fact valid, and failed to ascertain the ownership/status of the Gredys‘ alleged properties (which supposedly had to be sold before they could close on the Backwater Road property). Indeed, Stump had a duty to treat the Likenses honestly and not knowingly give them false information. But the negligence count against Stump does not allege any violation of this clearly-articulated statutory duty. Moreover, Section 11 explicitly states that Stump owed no duty to conduct an independent investigation of the Gredys‘ financial ability to perform for the benefit of the Likenses or to verify the accuracy of any statement, written or oral, made by the Gredys or a third party. Stump therefore had no duty to investigate the bank letter of guarantee or the Gredys‘ financial ability to pay for the Backwater Road property. Finally, while Stump‘s actions in directly contacting the Likenses to encourage them to accept the Gredys‘ offer may seem inappropriate, Stump, as the buyers‘ agent, is allowed to provide the Likenses services in the ordinary course of a real estate transaction and any similar services that do not violate the terms of his agency relationship with the Gredys. There is no allegation here that Stump breached his agency relationship with the Gredys. In sum, the Likenses claim that Stump owed them a duty which simply does not exist in Indiana Code. Even if we were to construe the Likenses‘ argument to be that Stump owed them a separate and distinct common law duty, according to Section 15, ―The duties and obligations of a licensee set forth in this chapter supersede any fiduciary duties of a licensee to a party based on common law principles of agency to the extent that those common law fiduciary duties are inconsistent with the duties and obligations set forth in this chapter.‖ Accordingly, the Likenses cannot use common law principles to establish a duty on the part of Stump that does not exist in Indiana Code. Finally, the Likenses argue that Stump represented both them and the Gredys at the same time. A ―limited agent‖ is a licensee who, ―with the written and informed consent of all parties to a real estate transaction, represents both the seller and buyer…and whose duties and responsibilities to a client are only those set forth in this chapter.‖ In addition, Section 12 provides that a licensee ―may act as a limited agent only with the written consent of all parties to a real estate transaction. The written consent is presumed to have been given and all parties are considered informed for any party who signs a writing or writings at the time of entering into an agency relationship with the licensee that contains‖ certain specified

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information. Here, there is simply no evidence of a writing that the Gredys and the Likenses consented to Stump acting as a limited agent for both of them. Because Stump did not owe the Likenses a duty as the Likenses assert in their complaint, the trial court properly entered summary judgment on the Likenses‘ negligence claim against Stump. And because Stump is not liable, Prickett‘s Properties cannot be liable under the doctrine of respondeat superior. Likens v. Prickett’s Properties, Inc., 943 N.E.2d 816 (Ind. App. 2011). 10. Neither Corcoran nor the Glossermans owed a fiduciary duty to Douglas Elliman to advise it of the subsequent negotiations for the two units Nor did any duty arise under a theory of an implied covenant of good faith and fair dealing, as the contract between Corcoran and Douglas Elliman had expired by the time of the purchase, and even at the time of Marc and Kristin Glosserman's purchase agreements, more than 60 days had passed since plaintiff ―registered‖ these potential purchasers with Corcoran. Under the express terms of the cobrokerage agreement, this meant that Douglas Elliman could not be considered a procuring cause. Thus, no contract existed, written or implied, under which any issue of good faith and fair dealing existed, which could give rise to a duty to speak of the later negotiations. Thus, Douglas Elliman's claims sounding in fraudulent concealment/intentional misrepresentation were properly dismissed. Nor was Douglas Elliman entitled to a commission by common law, as it was not the procuring cause of the sale to the ultimate purchaser, whether that be Michael Glosserman, or his corporation, 15 Madison Ave. LLC, due to various factors—the lack of contact by Douglas Elliman or its real estate agent with Michael Glosserman, or any purchaser; the agent did not show Glosserman the units; the lack of any attempted negotiations; and the lapse of approximately twelve months after the initial deal failed Similarly Douglas Elliman may claim no right to a commission because of its actions in relation to Marc and Kristin Glosserman, as it did no more than introduce them to the seller Douglas Elliman has no cause of action against the Glossermans for tortious interference with its co-brokerage agreement with Corcoran since it cannot show, inter alia, damages, as it was not the procuring cause of the ultimate purchase. Douglas Elliman LLC v. Corcoran Group Marketing, 940 N.Y.S.2d 595 (A.D. 2012).

In-Class Exercise Have the students read the following case and answer the case questions: VICKI BAGLEY REALTY, INC. v. LAUFER 482 A.2d 359 (D.C. App. 1984) Steven and Daniella Laufer owned a townhouse on Waterside Drive in Northwest Washington. They decided to sell the property, and Dr. Laufer, described as an educated and experienced businessperson with knowledge of the real estate business, listed the property with D'Amecourt. He asked a price greater than its apparent market value.

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Vicki Bagley Realty, Inc., was a cooperating broker and submitted an offer for John T. Laye for purchase. The contract provided that Laye would buy the property after renting it for three months at $1,000 per month. Laufer added a clause allowing him to provide financing for the purchase in the event Laye did not qualify for financing. Laye would make a $10,000 deposit and on closing a $50,000 down payment. On January 23, 1979, the parties signed the purchase agreement and the lease. The Layes tendered three checks. One check was for $3,000 for rent and was paid to the Laufers. A second check was payable to Bagley for $1,000 and apparently was a security deposit for the lease. The third check was for the deposit of $10,000 and was also made payable to Bagley. The $10,000 check was dated January 22, 1979, but the dates on the other two checks were whited out and February 1 had been typed in. All three checks bounced. Bagley had knowledge that the checks would not clear for 10 days and held on to them but did not tell the Laufers. The Layes had to be evicted. The Laufers filed suit, alleging that Bagley had engaged in misrepresentation and had failed to properly account for the money. The trial court found for the Laufers, and Bagley appealed. TERRY, Associate Judge A real estate broker, like any other agent, owes a fiduciary duty to his principal. The trial court found that both D'Amecourt, as the listing broker, and Bagley, as the cooperating broker, owed a fiduciary duty to the Laufers. Cognizant of our limited scope of review, we conclude that this finding is neither plainly wrong nor without evidentiary support. The record is replete with evidence of the agency relationship that existed between the Laufers and both D'Amecourt and Bagley. For example, Plaintiffs Exhibit 1, which is a ―Listing Contract for Residential Multiple Listing,‖ clearly establishes that D'Amecourt was the Laufers' broker. Bagley also had a responsibility toward the Laufers that was very similar, if not identical, to D'Amecourt's. First, Bagley admitted in its answer to the complaint that, like D'Amecourt, it was authorized to solicit offers for the purchase of the property. In addition, Plaintiffs Exhibit 4A, the contract for the sale of the house, states that D'Amecourt and Bagley were to split the brokerage fee ―50/50.‖ Bagley's acceptance of all three checks, on two of which it was named as payee, further attests to Bagley's role as the Laufers' agent. The fiduciary duty owned by a real estate agent or subagent requires the exercise of the highest fidelity toward the principal. It encompasses an obligation to inform the principal of every development affecting his interest, which would obviously include any facts known to the agent concerning a prospective purchaser's financial difficulties. In the case at bar, D'Amecourt and Bagley had knowledge of Laye's finances that clearly was significant to their principals, the Laufers. The trial court found, for example, that Bagley ―knew or should have known that the $10,000 deposit check [drawn by Laye] could not be cashed until February 1, 1979.‖ This finding is supported by Laye's testimony that he told Deborah Doyle, a Bagley employee, that the check would not clear until February 1, even though it was dated ten days earlier and had been in Bagley's possession since January 23. The Laufers also introduced into evidence a letter from a ―processing officer‖ with the Bagley firm, stating that she had deposited Laye's $10,000 and $1,000 checks, and that she had ―double checked‖ with the bank and ―found these checks to be good.‖ This was not true; Laye's bank dishonored both checks.

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As for D'Amecourt, the court found that it ―had reason to know that there were suspicious circumstances that had not been fully disclosed such as to make a credit report on the Purchaser desirable.‖ These circumstances included D'Amecourt's receipt of the $3,000 check payable to the Laufers, on which the original date was whited out, as well as other indications that the D'Amecourt staff, at least, lacked pertinent information about Laye's finances. Nicole D'Amecourt, the listing agent for the sale and former officer in the D'Amecourt firm, admitted in her testimony that when she presented the contract to Dr. Laufer, she knew nothing about Laye or his creditworthiness. In addition, D'Amecourt breached its duty to the Laufers by failing to make sure that the $10,000 deposit check had cleared before relinquishing Possession of the property. We are satisfied that the evidence was sufficient to support both the finding that appellants owed a fiduciary duty to the Laufers and the finding that each of them breached that duty. Affirmed.

Discussion Questions 1. 2. 3. 4. 5. 6.

Was Bagley the broker hired by the Laufers? Is the duty any different for a ―corresponding‖ broker? What happened with the property purchase? What should Bagley have disclosed? Was the transaction pushed through? What could have been done to prevent the incident?

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Resources Baker, ―Commercial Real Estate Broker Lien Act,‖ 10 Georgia State University L. Rev. 201-206 (1993). Black, ―Proposed Alternatives to Traditional Real Property Agency: Restructuring the Brokerage Relationship,‖ 22 Real Estate L. J. 201-213 (1994). Brady, ―The ‗Brokerage Relations‘ Addition to the Illinois Real Estate License Act: The Case of the Legalized Conflict of Interest,‖ 22 Southern Illinois University Law Journal 725 (1989). Butters, “Consumers' Experiences with Real Estate Brokers: A Report on the Consumer Survey of the Federal Trade Commission's Residential Real Estate Brokerage Investigation,” 2426, in L.A. Reg'l Office, Fed. Trade Comm'n, The Residential Real Estate Brokerage Industry (1983).

Curtis, “Florida Legal Affairs: Licensing and Discipline of Fiscal Professionals in the State of Florida: Attorneys, Certified Public Accountants, and Real Estate Professionals,‖ 29 Nova L. Rev. 339 (2005). Dallon, ―Theories of Real Estate Broker Liability and The Effect of the ―As Is‖ Clause,‖ 54 Fla. L. Rev. 395 (July 2002).

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Dzienkowski, ―Conflicts of Interest in Lawyer Referral Arrangements with Nonlawyer Professionals,‖ 21 Geo. J. Legal Ethics 197 (Spring 2008). Earnest and Painter, ―The New Brokerage Legislation: The Demise of Agency by Surprise,‖ 22 Colorado Lawyer 1919(5) (1993). 50 State Statutory Surveys, Thomson/Reuters West, April 2008. Foninelle, ―First-Time Homebuyer‘s Guide,‖ Investopedia, March 20, 2020. French, et al., Guide to Real Estate Licensing Examinations, pp. 11-36; 167-180. Goldberg, ―Real Estate: Brokers Liable for Open House Mishaps,‖ 79 ABA Journal 101(2) (1993). Hopper, ―The Selling Real Estate Broker and the Purchaser: Assessing the Relationship,‖ 1992 B.Y.U.L. Rev. 1135. Isacco, ―A Massachusetts Real Estate Broker's Duty to Disclose: The Quandary Presented by AIDS Stigmatized Property,‖ 27 New England L. Rev. 1211-1233 (1993). Jennings, ―Agent Liability and Seller‘s Representations,‖ 27 Real Est. L.J. 308 (Winter 1999). Jennings, ―Buying Property From the Addams Family,‖ 22 Real Estate L.J. 43 (1993). Jennings, ―From the Courts,‖ 36 Real Est. L. J. 39 (Summer 2007). Jennings, ―From the Courts,‖ 37 Real Est. L. J. 200 (Fall 2008). Jennings, ―Real Estate Commissions: Of Writings, Fraud, and the Continual Desire for Exceptions,‖ 35 Real Est. L. J. 145 (2006). King and Salter, ―In My Humble Opinion: The Current and Future Environment of Real Estate Agent Blogging,‖ 37 Real Est. L. J. 157 (Winter 2008). Lande and Marvel, ―The Three Types of Collusion: Fixing Prices, Rivals, and Rules,‖ 2000 Wis. L. R. 941. Larsen and Park, ―Non-Uniform Percentage Brokerage Commissions and Real Estate Market Performance,‖ AREUEA Journal, Volume 17, No. 4 (1989), pp. 422-438. Lehmann, ―The 6% Solution,‖ In Lehmann's Terms, May 10, 2005. Lereah, ―As Competitive As It Gets,‖ Realtor Magazine Online, September 1, 2005. Leviven, Realtors' Liability. Luther, ―This Business of 'Procuring Cause' in Virginia,‖ 3 Wm. & Mary Bus. L. Rev. 181 (February 2012). Miceli, Pancal, and Sirmans, ―Evolving Property Condition Disclosures Duties: Caveat Procurator?‖, 39 Real Estate L.J. 464 (2011).

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Miller, ―You Can‘t Serve Two Masters, Unless You‘re a Realtor,‖ 76 APR Bench & Bar Minnesota 26 (2019). ―More of the Same,‖ 142 New Law Journal 1565(1) (1992). Muller, ―Encouraging Price Competition Among New Jersey's Residential Real Estate Brokers: Reforms to Promote the Growth of Alternative Brokerages and Reduce Transaction Costs,‖ 39 Seton Hall L. Rev. 665 (2009). Murray, ―Brokers Fiddle as Real Estate Burns,‖ Wall Street Journal, September 28, 2005, p. A2. Murray, ―What Constitutes a Defect in Real Property?‖, 22 Real Estate L. J. 61-65 (1993). Nagalski, “Ending the Uniformity of Residential Real Estate Brokerage Services,” 73 Brook. L. Rev. 771 (Winter 2008). Newman, “Antitrust in Digital Markets,” 77 Vanderbilt Law Review 1407 (2019). Olazabal, “Redefining Realtor Relationships and Responsibilities: The Failure of State

Regulatory Responses,‖ 40 Harv. J. On Legis. 65, 100-10 (2003). Pargar, LLC v. Jackson, 670 S.E.2d 547 (Ga. Ct. App. 2008). Powell, Real Property, Vol. 7 Section 938.13. Randolph, ―Thinking of Becoming a Lawyer/Broker?: Think Again,‖ 6 Probate & Property 33(3) (1992). Raper, ―Real Estate Broker Liability,‖ 36 N. Ky. L. Rev. 409 (2009). REAL Trends, Inc., ―Analysis of the 2004 REAL Trends 500,‖ REAL Trends Monthly Newsletter, April 2004. Szto, ―Dual Real Estate Agents and Double Duty of Loyalty,‖ 41 Real Estate L.J. 22 (2012). Vorotnikov, ―License to Profit: An Analysis of Entry Regulations in the Legal and Real Estate Professions,‖ 5 U. St. Thomas J. L. & Pub. Pol'y 52 (Spring 2011). Weicher, ―The Price of Residential Real Estate Brokerage Services: A Review of the Evidence, Such As It Is,‖ 35 Real Est. L. J. 119 (2006). White, ―The Residential Real Estate Brokerage Industry: What Would More Vigorous Competition Look Like?,‖ 35 Real Est. L. J. 11 (2006). Wolf and Jennings, ―Seller/Broker Liability in Multiple Listing Service Real Estate Sales: A Case for Uniform Disclosures,‖ 20 Real Estate L.J. 22 (1991). Young, ―The Real Estate Agent's Role in the Housing Crisis: A Proposal for Ethical Reform,‖ 24 Geo. J. Legal Ethics 973 (Summer 2011). Zumpano and Johnson, “Real Estate Broker Liability and Property Condition Disclosure,‖ 31 Real Est. L. JJ. 285, 290 (2003).

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Instructor Manual Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 13: The Purchase Contract

Table of Contents Chapter Objectives .................................................................................................................................................... 394 Key Terms ...................................................................................................................................................................... 394 What's New in This Chapter ................................................................................................................................... 395 Chapter Outline .......................................................................................................................................................... 396 Answer to Consider (13.1).............................................................................................................................. 396 Answers to Case Questions ........................................................................................................................... 397 Answer to Consider (13.2).............................................................................................................................. 398 Answer to Consider (13.3).............................................................................................................................. 399 Answer to Consider (13.4).............................................................................................................................. 399 Answers to Case Questions ........................................................................................................................... 402 Answer to Consider (13.5).............................................................................................................................. 402 Answers to Case Questions ........................................................................................................................... 403 Answers to Case Questions ........................................................................................................................... 406 Answer to Ethical Issue (13.1) ....................................................................................................................... 407 Answer to Consider (13.6).............................................................................................................................. 407 Answers to Case Questions ........................................................................................................................... 410 Answer to Consider (13.7).............................................................................................................................. 410 Answers to Case Questions ........................................................................................................................... 411 Answer to Consider (13.8).............................................................................................................................. 411 Answer to Consider (13.9).............................................................................................................................. 411 Answer to Ethical Issue (13.2) ....................................................................................................................... 412 Answer to Consider (13.10) ........................................................................................................................... 413 Answers to Case Questions ........................................................................................................................... 415 Answer to Consider (13.11) ........................................................................................................................... 415 Answer to Consider (13.12) ........................................................................................................................... 417 Answers to Case Questions ........................................................................................................................... 419

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Additional Activities and Assignments............................................................................................................... 420 Answers to Chapter Problems ............................................................................................................... 420 In-Class Exercises ................................................................................................................................... 426 Discussion Questions ................................................................................................................................................ 431 Resources .............................................................................................................................................. 431

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Chapter Objectives The following learning outcomes are addressed in this chapter (see PowerPoint Slide 13-1): 13.01

Discuss the requirements of formation of a contract.

13.02

Discuss the contents of the real estate purchase contract.

13.03

Discuss advisable provisions for the real estate contracts.

13.04

Discuss the federal statutes affecting real estate contracts.

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Key Terms acceptance: action of offeree in agreeing to terms of an offer that results in a binding contract consideration: the detriment given by each party to the contract; e.g., the land conveyed by the seller and the money paid by the buyer counteroffer: offer made in response to offeror by the offeree; can occur by a change in the offeror‘s terms Department of Housing and Urban Development (HUD): federal agency responsible for regulation of interstate land sales and other federal acts affecting real property earnest money: deposit given by buyer on signing a contract for the purchase of property environmental contingency clause: provisions in contracts that provide buyers with the right to rescind the contract if environmental hazards that cannot be cleared arise during the course of a due diligence search implied warranty of habitability: implied warranty given by contractors of new homes to buyers; between landlord and tenant, the landlord‘s guaranty that the premises are fit for habitation and, if not, will be put into that condition Interstate Land Sales Full Disclosure Act (ILSFDA): federal law regulating the sale of property across state lines; requires advance filing of sales materials, mandatory disclosure of certain information, and prohibitions on promises about the land‘s future development liquidated damage: damages that are specified in formula or in amount in the written and signed agreement of the parties; must be reasonable marketable title: form of title generally required to be delivered in the sale of property; property is free from liens and there are no defects in title other than those noted or agreed to misrepresentation: giving incorrect or misleading information to a party in contract negotiations or failing to disclose relevant information; inaccurate information that would affect the buying or selling decision

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offer: initial communication in contract formation that, if accepted, results in the formation of a contract option: right (which has been paid for) to purchase property during a certain period of time property report: summary of facts about undeveloped land required to be given to purchasers (part of ILSFDA) rescission: right to treat a contract as if it never existed; rescinds contract rights; generally appropriate in cases of fraud and misrepresentation specific performance: equitable remedy that requires a party to a contract to perform the contract promise or promises statement of record: under ILSFDA, the disclosure document filed with HUD before any sales of underdeveloped land can occur transfer disclosure statement (TDS): in some states, a form that provides information about the residential property being transferred: length of ownership, date of construction, construction, and improvements, etc. Truth-in-Lending Act: name given to federal statutes and regulations concerning credit terms and their disclosure Uniform Land Transactions Act (ULTA): uniform act with provisions governing land contracts Uniform Marketable Title Act: former law on what is required to deliver marketable title in sale [return to top]

What's New in This Chapter The following elements are improvements in this chapter from the previous edition: 

   

Restructured the chapter. First A heading is ―Formation Requirements for Real Estate Contracts,‖ covering Offer, Acceptance, and Consideration. Second and new A heading is ―Defenses to Formation of Real Estate Contracts‖—under this heading ―The Statute of Frauds Defense‖ is moved up and has an intro—it was difficult to understand the exceptions to the statute of frauds without covering its purpose and putting it into one place. Also, ―Misrepresentation‖ is now moved up to be under defenses instead of being covered at the end of ―terms.‖ The importance of this issue is now not lost in the sea of terms coverage that follows. New Figure 13.1 in Section 13-1b on timing of acceptance so that the wordy explanation can be visualized. Removed the Anzalaco v. Graber case brief and replaced it with the Al Dente, LLC v. Consiglio case brief in Section 13-1b. In Section 13-2a, removed Dhillon v. Zions First National Bank case brief and added new case brief, Stonewall of Woodstock Corp. v. Stardust 11TS, LLC. New Ethical Issue 13.1 in Section 13-2a added on the conduct of parties during ongoing contract negotiations.

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 

In Section 13-2b, updates on disclosure and nondisclosure requirements; added discussion and example of sex-offender neighbors and non-disclosure. New subsection in Section 13-2b that discusses the possible fraud exception to nondisclosure statutes and a new Ethical Issue 13.2 on dual agency in a case involving nondisclosure/possible fraud in sale of home to a young family that was next door to the residence of a Level One sex offender. Added new part to Consider 13.11 on the implied warranty of habitability recovery from the developer and not the builder. New chapter problem #10 on the Reardon v. Lautner case.

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Chapter Outline In the outline below, each element includes references (in parentheses) to related content. "CH.##‖ refers to the chapter objective; ―PPT Slide #‖ refers to the slide number in the PowerPoint deck for this chapter (provided in the PowerPoints section of the Instructor Resource Center); and, as applicable for each discipline, accreditation or certification standards (―BL 1.3.3‖). Introduce the chapter and use the Ice Breaker in the PPT if desired, and if one is provided for this chapter. Review learning objectives for Chapter 4. (PPT Slides 1-3). 13-1 Formation Requirements for Real Estate Contracts—USE POWERPOINT SLIDES 13-2 TO 13-32 13-1a Offer 1. Elements a. Present intent to contract i. Indicated by language ii. Must not be future promise iii. Not "I might" or "I'm thinking" b. Sufficient details on transaction i. Description of property ii. Price iii. Terms c. Must communicate offer to offeree

Answer to Consider (13.1) This problem presents a fine line question. However, there really is no definite statement of intent to contract. There is a presentation of acceptable terms along with an expression of interest, but not definite intent to contract. On the other hand, the closing line indicating start of construction does show definite intent.

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Termination a. Termination by Lapse of Time i. Limited in time and time expires ii. Expiration of reasonable time b. Termination by Death c. Termination by Rejection i.

Acceptance with different terms—counteroffer

3. Options a. Why an Option? i. Offeror paid money to hold offer open ii. Cannot be revoked during option period iii. Not earnest money—earnest money is a deposit after contract is entered into b. Requirements for Creating an Option CASE BRIEF: Board of Control of Eastern Michigan University v. Burgess 206 N.W.2d 256 (Mich. 1973) FACTS:

Burgess and EMU had a 60-day written option agreement that recited $1.00 as the price paid. The $1.00 was never paid. EMU sought to exercise the option and Burgess refused to convey the property. EMU filed suit for specific performance. The trial court found for EMU and Burgess appealed.

ISSUE:

Did a valid option exist?

DECISION:

No, because (1) money was never paid; and (2) there was only an offer.

Answers to Case Questions 1. How much was the consideration? Was the consideration paid? The consideration was $1.00. No, consideration was not paid. 2. If the option is valid, what issue remains to be determined? Whether Burgess revoked the offer before EMU sought to accept on April 14, 1966. 3. What advice would you give, based on this case, to those who want to have an option agreement? Get it in writing; make sure language that it is an option is clear; put a time limit on the option; and make sure the consideration passes at the time you enter into the option agreement.

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Answer to Consider (13.2) The court held that there was an option, but because the liens were never paid, it never ripened into a performance issue. The requirement for purchase was the pay-off of the liens. Payoff of the liens was the consideration—without that action there is no enforceable agreement. An excerpt appears below: An option contract is an agreement to hold an offer open; it confers upon the optionee, for consideration paid, the right to purchase at a later date. Here, the plaintiff and Groisman entered into an option contract, whereby Groisman's obligation to sell the properties and the plaintiff's obligation to buy the properties would arise if the plaintiff satisfied the liens on the properties. However, the option contract never ―ripen[ed] into an enforceable bilateral contract‖, as the plaintiff did not satisfy the liens on the properties. Therefore, the plaintiff failed to state a cause of action for specific performance of the contract. Pfeifer v. Groisman, 997 N.Y.S.2d 706 (N.Y.A.D. 2014). a. Termination of an Option i. Does not terminate with death of offeror or offeree ii. Premature rejection—one view is termination; another view says option continues unless refund iii. Should draft provision in option to control (see list in text) b. Content of an Option i. Legal description of the property ii. Proper names of the parties iii. Signatures of the parties iv. Length of the option v. Beginning and ending dates of the option period vi. Amount of consideration to be paid vii. Consideration options viii. Recording of the option in the public records ix. Procedures and notifications required x. All terms of the provisions of the sales contract xi. Assignability or transfer 13-1b Acceptance 1. Power of Acceptance a. Offers not transferable b. Options can be transferred 2. Absolute, Unequivocal, and Unconditional Acceptance a. No conditional acceptance b. No changes in terms

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Answer to Consider (13.3) No, there is no contract. The addition of the clause on the ceiling fan made the Jennings' communication a counteroffer. The couple was free to accept or reject that counteroffer. The result of the fan clause was that the entire contract for the house was lost. Sometimes buyer‘s remorse sets in and it gave the buyers the right to back out because it was a counteroffer even though it was immaterial in terms of the full transaction. 3. Communication of Acceptance to Offeror a. To offeror b. To agent c. Effective upon communication 4. The Timing of Acceptance: When a Contract is Formed (see Figure 13.1)

Answer to Consider (13.4) The BLM regulation was validly promulgated following notice and comment. It gave fair notice to all applicants that failure to comply would result in denial of their applications. Such is the case here. The telefaxed application submitted by appellant was not holographic, and it was created by a machine—both violations of the plain language of the regulation. It was within the discretion of the Secretary not to depart from the regulation in this case. While in this instance, denial produces a harsh result, a telefaxed signature is a machine produced signature. It is the exact situation the amended regulations sought to address.

Because appellant had ample notice that only a holographic signature would suffice, his estoppel argument fails as well. Appellant has alleged only that BLM did not tell him that it planned to deny his non-conforming application. For BLM to be estopped from enforcing its own regulations, however, appellant must demonstrate affirmative misconduct on the part of the government which goes beyond a mere failure to inform or assist. Gilmore has made no such showing here. The decision we reach here is compelled by the narrow scope of the court‘s review of agency decisions. Obviously the equities favor Gilmore, as he is guilty of no omission but use of the United States mails. Eight days for delivery of mail from Nebraska to Nevada far exceeds the time it should take. Indeed, the Pony Express could have covered the distance with time to spare. Justice Holmes observed that citizens dealing with their government must turn square corners. Louisiana Railway Co. v. United States, 254 U.S. 141, 143, 41 S.Ct. 55, 56, 65 L.Ed. 188 (1920). Gilmore turned all but the last millimeter, but that millimeter, whose traverse is jealously guarded by the BLM, was his undoing. Relief to Gilmore in this narrow case would expose BLM to no fraud or risk of fraud, as his bona fides are beyond question. If Gilmore and those other few luckless applicants whose documents are stored rather than delivered by the Postal Service are to get any relief, it must come at the hands of the BLM. As shown by this case, those hands are more iron than velvet. We can only suggest to BLM that the body politic would not be put at

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risk by the granting of relief in these narrow and rare situations. Gilmore v. Lujan, 947 F.2d 1409 (9th Cir. 1991). 5. The Acceptance Timing Rules and the Problem of Multiple Offers a. Multiple offers b. Could have acceptance communicated before revocation of alternate offers PRACTICAL TIP: Discuss e-mail communications and the dangers of multiple offers and acceptances. CASE BRIEF: Al Dente, LLC v. Consiglio 157 A.3d 743 (Conn. App. 2016) FACTS:

Richard Consiglio and other family members (defendants) are the owners of Sally's Apizza (Sally's), a culinary landmark in New Haven. In 2013, Consiglio entertained offers to purchase Sally's and its underlying property. Robert Lynch served as Consiglio‘s and the family‘s lawyer. Through a bidding process, the Consiglios agreed to accept the highest bid offer, which was Al Dente, LLC (plaintiffs). Al Dente‘s proposed agreement that it submitted with its bid concluded by prescribing an exclusive method of acceptance, stating: ―If you are in agreement with the terms of this agreement, please so indicate by countersigning this letter in the appropriate space below, whereupon this agreement shall become a binding agreement among the signatories hereto.‖ After being notified of being the highest bidder, Carmine Capasso, the lead manager for Al Dente, met with Consiglio and Lynch on March 27, 2014, and discussed some of the terms of their proposal such as the condition of expansion of the pizza oven. Capasso followed up on April 14, 2014, with a modified proposal agreeing to delete the oven condition. On May 9, 2014, Lynch sent an e-mail to Capasso and his law firm that had a onepage document attached with nine comments from Consiglio. In response, on May 14, 2014, Capasso sent Lynch a letter, ―Enclosed please find our signed counter offer [sic] with our deposit check for Sally‘s. Please get back to us with a closing date.‖ Attached to the letter was a cashier‘s check for $333,000 and an addendum confirming acceptance of the nine comments. The letter and addendum were signed and notarized. Consiglio instructed Lynch to return the check and Lynch then wrote to the lawyers for Al Dente stating, ―We don‘t have a binding agreement with any potential purchaser.‖ Al Dente filed suit for breach of contract. The lower court entered summary judgment for the defendants. Al Dente appealed.

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ISSUE:

Did the parties reach the point of a binding contractual agreement?

DECISION:

The record before us indicates that the defendants agreed to engage in negotiations following Capasso's submission of the highest bid. The record further indicates that those negotiations transpired. We conclude, from the pleadings, affidavits, and other proof submitted, that a binding agreement to purchase Sally's was never reached by the parties. Under Connecticut law, ―[a] bid is a binding offer to make a contract. A bid ... submitted in response to an invitation for bids is only an offer which, until accepted ... does not give rise to a contract between the parties.‖ On April 14, 2014, the plaintiffs submitted a final bid to purchase Sally's and the real property on which it is situated, which was accompanied by a written proposal delineating the terms and conditions thereof (which was the offer). The plaintiffs submit that a genuine issue of material fact exists as to whether the defendants, in circulating the comment sheet, intended to surrender their power of acceptance and bind themselves to a purchase agreement with the plaintiffs. In the plaintiffs' view, the comment sheet, when ―read within [context of] the email and document chain,‖ constituted a counteroffer that incorporated the terms of the April 14, 2014, proposed agreement in all material respects, as augmented by the nine specific comments detailed in the comment sheet. We disagree. The April 14, 2014, proposed agreement, the terms of which the defendants allegedly incorporated into that counteroffer, required the signatures of all interested parties. That requirement certainly was understandable, as the agreement, because it involved the conveyance of real property, implicated the statute of frauds and, thus, required it to be signed. The comment sheet, however, was not signed by any of the defendants in this case. Beyond that glaring, and perhaps fatal, deficiency, the record reveals no basis on which the finder of fact objectively could conclude that the defendants intended the comment sheet to constitute a counteroffer that terminated their power of acceptance. As the Restatement (Second) of Contracts explains, ―[a] mere inquiry regarding the possibility of different terms ... or a comment upon the terms of the offer, is ordinarily not a counter-offer. Such responses to an offer may be too tentative or indefinite to be offers of any kind.‖ Restatement (Second), Contracts § 39, comment (b). Several of the concerns raised in the comment sheet are highly tentative and indefinite in nature. For example, ―Ruth Consiglio would like a license‖ to access a grapevine on the property being conveyed. Such generalized concerns do not resemble the sort of definitive contractual terminology commonplace in million-dollar purchase agreements.

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A counteroffer serves to terminate an offeree's power of acceptance. The issue, then, is whether a triable issue of material fact exists as to whether the defendants, in circulating the comment sheet, so intended. It is well established that ―general averments will not suffice to show a triable issue of fact.‖ Although Capasso claims to have understood the comment sheet to be a counteroffer that terminated the defendants' power of acceptance, there simply is no objective evidence in the record to indicate that the defendants shared that understanding. The judgment is affirmed.

Answers to Case Questions 1. Explain the communications between the parties, i.e., what went back and forth. The bid submitted by Al Dente was an invitation for an offer. When Al Dente was the highest bidder, it submitted a proposal, which was an offer and which Consiglio was free to accept or reject. Consiglio came back with some ideas and thoughts—it was not a counteroffer that terminated the original offer from Al Dente. There can be no breach or other issues if everything stopped mid-negotiations. NOTE: There were other allegations in the suit not addressed in this focus on offer and acceptance. 2. How does the court perceive the nine-comment sheet and its role in the case? The court sees it as possible ideas, but it is in no way either an acceptance or a rejection—the parties had not reached that point. 3. What lessons should businesses learn about contract formation from this case? It is clear from so many cases in the book that businesspeople go back and forth believing that they have a contract when they are not truly following in the ping-pong of communications where the ball is in terms of formation. Formal communication helps. Waiting for responses helps. Asking questions and clarifying helps.

Answer to Consider (13.5) a. Cynthia has a contract with Buyer A and has effectively revoked the offer to Buyer B before Buyer B's acceptance, so she is safe. b. Cynthia has encountered the dangers of multiple offers. She has valid contracts with both A and B. She will have to convey the land and pay damages to the remaining party. c. Cynthia would then be unable to revoke the offer to B and B would have the power of acceptance until March 4, 2016 at 6:00 p.m. 13-1c Consideration 1. Something of value given by both sides 2. Title to land and money

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3. Earnest money not required 4. Amount of consideration not important so long as paid CASE BRIEF: Trengen v. Mongeon 206 N.W.2d 284 (N.D. 1973) FACTS:

Louis and Margaret conveyed 960 acres of land to their son, Ernest, and his wife, Pearl. The value of the land was $38,400, and Ernest and Pearl agreed to pay $1,800 annual to Louis and Margaret or one of them, as long as they both lived. At the time, Louis was 87 and Margaret was 83. Ernest's sister brought suit to have the conveyance set aside for lack of consideration. The trial court found for Ernest and Pearl and Ernest's sister appealed.

ISSUE:

Was there sufficient consideration?

DECISION:

Yes, because (1) there was love and affection involved; and (2) some consideration was present, the amount is irrelevant.

Answers to Case Questions 1. What are the relationships between Louis and Margaret and Ernest and Pearl? Louis and Margaret were Ernest's parents. Pearl was Ernest's wife. 2. How much land was conveyed? What was the total price? How was the price to be paid? 960 acres for $38,400. 3. Of what relevance were Louis's and Margaret's ages at the time of the conveyance? Ernest and Pearl were paying $1,800 annually as long as either Louis and/or Margaret were alive, but they were 87 and 83, respectively, so consideration was nominal. 4. Was there consideration? Yes, amount is within discretion of the parties. 13-2

Defenses to Formation of Real Estate Contracts—USE POWERPOINT SLIDES 13-33 TO 13-46 13-2a The Statute of Frauds Defense 1. What Meets the Requirements for the Statute of Frauds a. Must be in writing (electronic forms acceptable now) i. Contain necessary terms ii. Need not be formal document iii. E-mail—will need to meet state requirements for proof of authority and authenticity

CASE BRIEF: Stonewall of Woodstock Corp. v. Stardust 11TS, LLC and Oliver Block, LLC

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195 A.3d 1111 (Vermont 2018) FACTS:

Stonewall is a Vermont Corporation whose shareholders include John RuggieriLam and Maria Freddura. Oliver Block is a Vermont limited liability corporation whose sole member is Richard Coburn. The negotiations in 2015 were largely carried out between Ruggieri-Lam on behalf of Stonewall and Coburn, Coburn's lawyer Frank Urso, and Coburn's personal assistant, Richard Sbeglia, on behalf of Oliver Block. On May 28, 2015, Sbeglia sent an unsigned contract of sale by email to RuggieriLam, who returned it with proposed modifications. On June 2, Urso sent RuggieriLam an updated unsigned version of the contract, incorporating the modifications that Ruggieri-Lam had requested, with instructions to execute and return it with a deposit of $25,000. Later the same day, Ruggieri-Lam and Freddura returned the document, which they had signed, to Urso along with the deposit check. In an email reply on June 3, Urso acknowledged receipt. On Coburn's instructions, Urso deposited the check in his law firm's trust account. But neither Coburn nor anyone else acting on behalf of Oliver Block signed the contract. In the days immediately following his return of the contract document and check, Ruggieri-Lam made several inquiries to Urso about whether Coburn had signed the contract. No representation was ever made to Ruggieri-Lam that Coburn had signed the document. Finally, on June 11, Coburn informed Stonewall that he could not go through with the negotiations as laid out in the June 2 document. During this same time, Coburn had been negotiating with another potential purchaser, Stardust. Those negotiations resulted in Coburn signing a contract of sale with Stardust on June 10. Urso returned Stonewall's deposit money on June 26. Shortly after learning of the deal with Stardust, Ruggieri-Lam and Freddura filed suit against Oliver Block in the Federal District Court of Vermont, seeking specific performance on their own contract with Oliver Block. Ruggieri-Lam v. Oliver Block, LLC, 120 F.Supp.3d 400 (D. Vt. 2015). They asserted that the emails sent by Urso on June 2 and 3 (instructing Ruggieri-Lam and Freddura to sign and return the contract with a deposit and then acknowledging receipt) satisfied the Statute of Frauds. They also sought an attachment on the Oliver Block property. As part of Oliver Block's response, Coburn prepared an affidavit denying that he had ever made a contract with Stonewall or authorized Urso or anyone else to make one. In July, the court denied Ruggieri-Lam and Freddura's petition for a writ of attachment on the Oliver Block property, concluding that they had no reasonable chance of success on the merits under Vermont contract law. In February 2016, the federal suit was dismissed without prejudice on plaintiff's petition.

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Stonewall then filed this suit against Oliver Block and Stardust, alleging breach of contract and fraud, and again seeking specific performance. In September 2017, the court granted summary judgment for Oliver Block with respect to Stonewall's contract claims, holding that the June 2 purchase agreement was not an enforceable contract under the Statute of Frauds. Stonewall appealed. ISSUE:

Did all the communications between the parties, when pulled together, satisfy the statute of frauds requirement for a record?

DECISION:

The court held that the Statute of Frauds is demanding in terms of a signature by the right party on a document that acknowledges formation of the contract. As many pieces of correspondence that we had, as well as the affidavit, there was still not a sufficient amount to satisfy the requirements for both parties‘ signature with words that indicate the contract was formed. What looks like certain proof of agreement is not if we do not have a match of signature with acceptance. Select quotes from the court: The central requirements of the Statute are (1) a signature, affixed to (2) a writing. The requirement of a signature by the party to be charged is strict. As for what is signed, the Statute's requirements are not rigid. The signed writing does not need to be the contract itself, just ―a sufficient memorandum‖ of it. What is required under our cases is an additional, signed writing indicating that the agreement was in fact made. We consider the candidates presented by Stonewall to satisfy this requirement in turn: first the affidavit by Coburn, followed by the two emails from Urso. A signed affidavit can, in general, provide the indication of a contract's existence required by the Statute. Courts have also held that signed documents repudiating a contract can satisfy the Statute. Coburn by contrast states directly that he ―did not accept ... the [Stonewall] Offer‖ or ―authorize anybody else to do so.‖ His affidavit is not a repudiation of a contract (i.e., a refusal to perform), but rather an explicit denial that any agreement was ever made; this was the purpose for which it was filed with the federal court. Coburn's affidavit is not a repudiation of an existing contract, or an ―assertion that it is not binding because not in writing,‖ but rather a denial that a contract was ever formed. In addition to the affidavit, Stonewall relies on the two emails from Coburn's attorney Urso to Ruggieri-Lam of Stonewall. We conclude that these emails also cannot supply the signed writing required by the Statute of Frauds because Urso was not authorized in writing to conclude the sale on behalf of Coburn or Oliver Block.

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The text of the email sent on June 2 reads, in its entirety: ―Attached you will find: 1. A revised Agreement with changes shown; and 2. A revised Agreement (clean copy) for execution along with Exhibit A. Please execute and get copies back to me while mailing me the deposit check. Frank.‖ The two versions of the agreement were attached. The second email from Urso, sent on June 3, reads, again in its entirety: ―I have received the signed agreement and the deposit check for $25000.‖ Coburn and Sbeglia were copied on both emails. Ruggieri-Lam responded to this second email on the same day, stating in part: ―Great. Thanks for the confirmation. If you would kindly have [Coburn's] signature affixed to the P & S and circulate same, that would be great.‖ Stonewall argues that the June 2 email signed ―Frank‖ constitutes a sufficient memorandum of the agreement, when taken together with the attached unsigned contract supplying the essential terms. The Statute allows for the signature to be made by ―some person ... lawfully authorized‖ to do so by the party to be charged; Stonewall claims that Urso was so authorized on behalf of Coburn and Oliver Block. The federal court held that the typed word ―Frank‖ in the first email counted as a signature for the purposes of the Statute under the Uniform Electronic Transactions Act. The parties dispute whether this latter application of Vermont's law is correct. But even acknowledging the general prevalence and acceptance of the practice of electronic signatures, we do not need to decide the question because we conclude that there is no signed writing establishing that Urso was ―lawfully authorized‖ to conclude the contract on behalf of Coburn or Oliver Block. Stonewall presented no document recognizing a contract and signed by Coburn or anyone else authorized by him in writing to act on behalf of Oliver Block. As such, summary judgment was properly granted for Oliver Block. Affirmed.

Answers to Case Questions What documents are being used to piece together compliance with the Statute of Frauds? There are the initial documents of back-and-forth proposals for terms. There are the e-mails back and forth on where the parties were on the receipt of documents and offers and possible acceptances. There was the check that was deposited. There was the affidavit that Coburn gave for the litigation that was pursued in federal court. Why is the affidavit of Coburn not sufficient proof of the contract and his authorization? The affidavit did not acknowledge the contract—the affidavit gave backdrop for what was going on with respect to the authority to close the deal and accept the offer. How does Coburn explain the cashing of the check? He said that his lawyer was instructed to run it through in order to see if it bounced.

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Answer to Ethical Issue (13.1) The delays in responding to the questions about whether there was a signature raised an eyebrow. And, as the documents are reviewed, the intent is there, the check was sent, the check was deposited, but the court went on the technical requirements of the Statute of Frauds—that a signature with authority must be on one of the documents somewhere that also acknowledges acceptance of the deal. It looks suspiciously like one party was kept hanging as other negotiations were pursued. And they had the float of the $25,000 for a few days as well. 2. Exceptions to the Statute of Frauds a. b. c. d

Part performance exception Valuable improvements or full or partial payment and possession Some states require all three Some states need only one

Answer to Consider (13.6) The appellate court held that the document did not satisfy the statute of frauds. It could not be understood without oral testimony. The court also held that there was neither payment nor partial performance because the engineering firm had already been retained by William to do work on the land. The terms written were too vague and the circumstances easily explained away what was being called partial performance. T & M Building Co. v. Hastings, 221 A.3d 587 (Conn. App. 2019). CASE BRIEF: Bouton v. Byers 321 P.3rd 780 (Kan. App. 2014) FACTS:

Walter Byers (Walter or Byers) owned substantial tracts of ranchland in Kansas through several closely held corporations. The family ranch, as it was called, had been managed by Walter‘s son, but, in 2003, Byers concluded that his son was not to be trusted. Byers turned to his daughter, Ellen Byers Bouton (Ellen or Bouton) for her help in sorting through the son‘s activities. At the time, Ellen was a member of the faculty at Washburn University School of Law and was paid about $100,000 per year as a tenure-track professor. In 2003, after Ellen completed her review of the finances of the ranch and various corporations, she concluded that her brother had not only mismanaged the properties, but also embezzled. Ellen had criminal charges brought against her brother and filed suit against him to recoup the losses. During 2003, Ellen continued to handle the management of the ranch as well as her teaching duties. She traveled to the ranch two to three times per week. The clean-up of her brother‘s mismanagement involved refinancing neglected loans,

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paying delinquent taxes and penalties, and caring for her father, who had suffered a stroke and lived alone on the ranch. The ranch had two additional unoccupied homes that Ellen also took care of during her visits. By 2004-2005, Ellen, exhausted from the commute and all of her work, began talking with her father about long-term plans because she felt her work at the law school was suffering. Her father asked her to come and live there with him to take care of the ranch and promised that he could teach her about making the operation successful. Ellen was nervous about leaving a good-paying job for this effort, and her father said that she need not worry because he would be bequeathing her land that was worth over one million dollars. As a result, Ellen resigned her job at the law school, and she and one of her sons moved in with her father straight away. Ellen‘s husband and other son moved to the ranch after they had sold their home in Osage County, Kansas. Once Ellen had moved in, Walter began selling off parcels of the property. When Ellen expressed concern, Walter said that the proceeds from the sale would be used to pay down the debt the various family corporations had. Also, at this time, Ellen and Walter entered into a series of contracts that required that Ellen be compensated at an hourly rate and be given free housing in exchange for providing him with medical care and transportation. The contracts did not mention the inheritance Ellen says she was promised. In December 2008, when the water system at the ranch froze, Ellen and Walter had a what-to (disagreed) over how to get water to the animals. One week after the great freeze, Walter fired Ellen. Ellen quit working on ranch business upon being fired by her father but stayed on the ranch for a month. Walter then began charging her rent. By mid-2009, Ellen and her family left the ranch. In late 2009, Walter sold more ranchland and paid Ellen $32,000 from the proceeds. The $32,000 was what Walter described as Ellen‘s share as a 10 percent shareholder in the corporation. Ellen refused the payment and filed suit in 2010 against Walter and several of the closely held corporations alleging selfdealing, breach of fiduciary duty, and conversion. The two settled the suit with Walter paying Ellen $50,000. Ellen returned to the Washburn Law School as a part-time faculty member but had lost her tenure-track position and was not able to begin again in the position she had held prior to the ranch sabbatical. About 14 months later, Walter told Ellen that he was selling the remaining ranch property for $1.2 million. The proceeds would go into a charitable foundation and be distributed upon his death as a college scholarship fund. In December 2011, Ellen sued her father for recovery of the orally promised $1 million on the grounds of promissory estoppel. The court granted Byers summary judgment and Bouton appealed.

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ISSUE:

Did Bouton have any rights of recovery because of the promises her father made?

DECISION:

The court held that Bouton was at least entitled to have the case heard for the facts because the issue of promissory estoppels and her relief could not be determined by summary judgment. There was reliance and the jury needs to determine whether that reliance was reasonable. Key excerpts from the opinion: Promissory estoppel and contract law are closely related and serve the same fundamental purposes by providing means to enforce one party's legitimate expectations based on the representations of another party. A contract typically depends upon mutual promises that entail an exchange of bargained consideration. For example, A agrees to pay B $500 if B overhauls the engine of A's car. If B does the work and A refuses to pay, B may sue for breach of contract, thus enforcing his legitimate expectation. B's promise to work on the engine is consideration for A's promise to pay and vice versa. Promissory estoppel commonly applies when a promise reasonably induces a predictable sort of action but without the more formal mutual consideration found in contracts. Thus, A says he or she will not foreclose the mortgage on B's land for a specified period. So, B makes significant improvements to the land. A may not then foreclose during that time. Kansas courts have explained that a party's reasonable reliance on a promise prompting a reasonable change in position effectively replaces the bargained for consideration of a formal contract, thereby creating what amounts to a contractual relationship. To the extent the promisee relies on equity to specifically enforce the promise or recover damages equivalent to the promised performance, the promise itself must define with sufficient particularity what the promisor was to do In that context, a factfinder could fairly conclude Byers not only might have expected Bouton to act on the promise but intended her to do so. We think that conclusion takes on additional heft in precluding summary judgment because Byers could have changed his estate plan as he wished. Absent the categorical assurance of financial security Byers expressed in March 2005, Bouton would have been walking away from her professorship based on nothing more than a bequest that could have vanished without warning − leaving her jobless and without recourse. On that score, the district court materially misconstrued Bouton's theory of the case and the evidence supporting her theory. Bouton is not attempting to invoke promissory estoppel to enforce some particular provision of one or more of the employment contracts she had with Byers. Nor can we conclude those contracts superseded Byers' March 2005 promise to bequeath land to Bouton. The promise and Bouton's resignation from the law school shortly afterward cannot be construed as representations or negotiations undertaken as part of the formation of the

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employment contracts more than a year later − something that would have to be accepted as true to support the district court's rationale for granting summary judgment. A reasonable factfinder could determine the promise and the resignation to be independent of the later contracts, making summary judgment inappropriate on that basis. Reversed.

Answers to Case Questions 1. Explain why the court is troubled by the lower court noting that Bouton is a lawyer. The court says that the law does not allow exclusion of a lawyer from possible remedies simply because a plaintiff is a member of that class. The court also notes that sharp legal skills are not always part of an arrangement negotiated by a father and daughter. 2. What is the relationship between the employment agreements and the promise of inheritance? The court notes that they were separate and that they would not have induced her to give up her job at the law school. There are factual issues about the timing as well as about the inducement that preclude summary judgment. 3. What lessons does this case teach about promises between family members? Family or not— these types of arrangements need to be memorialized because there can be misunderstandings and changes of heart. Indeed, because of the family relationships, a writing is necessary. 13-2b Misrepresentation  

Defense to Contract Types  Innocent  Fraudulent  Silent—failure to disclose



Elements  Statement of material fact or omission of such  Reliance  Damage

Answer to Consider (13.7) a. Yes, buyers do make buying decisions on basis of quality of schools and the statements is factual about the schools, not puffing. b. Yes, this is a factual statement that would be material to a buyer. c. Yes, this is a promise or at least a representation on water levels. Water is material in buying property. d. Yes, this is a factual statement on a material issue on an easement and possibly access.

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e. May not be a basis for misrepresentation because relying on an 11-year old termite report is not reasonable. f. Yes, level of crime is important, and this is a factual statement. g. May not be able to rely on this statement since buyer could check with the city. h. Perhaps puffing—it would be a close call. i. Puffing—would need more specifics for misrepresentation. CASE BRIEF: Reed v. King 193 Cal. Rptr. 130 (1983) FACTS:

Reed purchased a home from King. No one informed Reed that a woman and her four children had been killed in the home 10 years ago. King and his agent knew of the murders but did not tell Reed. Reed found out from a neighbor after she moved into the home. Reed brought suit for rescission of contract. The trial court dismissed the suit and Reed appealed.

ISSUE:

Should the contract be rescinded?

DECISION:

Rescission is appropriate. There was misrepresentation; the stigma attached to the house and the difficulty in selling it made the murder information material.

Answers to Case Questions 1. What happened in the house? How did Reed discover it? A woman and her four children were killed. A neighbor told her after she moved in. 2. What effect did it have on the value? Loss of $10,000 in value and difficult to sell. 3. Is concealment fraud? When? When action is taken to ensure concealment and when the information concealed is compelling. 4. Give examples of other types of disclosures that would be necessary? Criminal activity; AIDS.

Answer to Consider (13.8) In the case, the court, "moved by the spirit of equity" returned the earnest money deposit to the buyers. The seller had held the home out as being haunted and should have disclosed that information before the contract was signed. Stambovsky v. Ackley, 572 N.Y.S.2d 672 (1991). 1. Disclosures, Home Warranty Policies, and "As Is"

Answer to Consider (13.9) The court held that the contract was clear on misrepresentation of square footage and that the buyer had some responsibility for verification and could not rely on advertising for recovery. The contract clause was, in effect, an ―AS IS‖ clause and the seller was protected. The case was dismissed. ELM Retirement Center, LP v. Callaway, 246 P.3d 938 (Ariz. App. 2010). 2. Disclosure in Commercial Property Sales

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3. Remedies for Misrepresentation a. b. c. d.

Rescission Actual damages Punitive damages for fraud Collusion on misrepresentation can result in loss of license

4. Disclosure Statutes a. Many states have statutes exempting the disclosure of a murder or AIDS victims as previous owners or residents—however, if there is an inquiry by the potential buyer, the information cannot be withheld b. Disclose known problems c. Transfer disclosure statements—required by law in some states Cover PRACTICAL TIP: Have students check on laws in your state and discuss Fair Housing Act issues. d. Psychological Disclosure Statutes i.

New form of disclosure statute is that of disclosing information that could have a psychological impact ii. E.g., murder, suicide, felonies—See Chapter 12 e. Fraud in Transactions and Nondisclosure Statutes

Answer to Ethical Issue (13.2) The dilemma presented gives the agent full legal protection because of the contract provision in her agreement that both buyers and sellers signed. However, she may have had knowledge about the issue with the sex-offender neighbor and there is the element of conscience in selling a home to one young couple to allow another young couple to leave the problem. In ethics, one of the questions to ask is, ―If I were on the other side, how would I feel about my conduct? Would I want to know?‖ There is a difference between what we are allowed to do by law and what we should do. Lerner v. DMB Realty, LLC, 322 P.3d 909 (Ariz. 2014). 13-3

Specific Requirements for Real Estate Contracts—USE FIGURE 13.2 AND POWERPOINT SLIDES 13-47 TO 13-65 13-3a Signature of Parties (authentication for fax and electronic) 1. Obtain all necessary signatures—electronic signatures are now acceptable 2. Verify authority of those signing 13-3b Adequate Description of Property 1. Should include legal description 2. In most states, street address is acceptable

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PRACTICAL TIP: Identification of the parties—go over list in text. 13-3c Property Identification 1. Description 2. Personal property—need for bill of sale 13-3d Earnest Money—Amount at Time of Contract 13-3e Financing 1. Assumption of an Existing Mortgage 2. Purchase Money Mortgage by the Seller—seller finances buyer‘s purchase 3. New Financing—need for condition precedent to protect buyer 4. Combinations of Financing Methods—assumption plus purchase money mortgage PRACTICAL TIP: Use caution in drafting financing condition precedent—make sure both sides are protected.

Answer to Consider (13.10) The lower court found for the Shimraks. On appeal, the court held that the contingency clause required more of the Shimraks than just walking away. There were only two options available if the financing was not approved. The court noted: Contrary to the court's conclusion, there is no option that simply allows the buyer to walk away from the purchase agreement with impunity, nor could that option be inferred under the circumstances. Having offered to purchase the property, the buyers ―cannot defeat the contract by their own fault‖ and ―must make a bona fide effort‖ to obtain financing. Graham–Chrysler Plymouth, Inc. v. Warren, 9th Dist. Summit No. 9222, 1979 Ohio App. LEXIS 9939 (Aug. 15, 1979). While the parties agree that the Shimraks acted in good faith to obtain financing, the fact remains that the Shimraks had performance obligations under the terms of the agreement and could not unilaterally withdraw from the purchase agreement. Shimrak v. Goodsir, 2014 WL 4244313 (Ohio App. 2014). 13-3f Property Reports 1. Property Condition Reports a. Conditions precedent to performance by buyer b. Termite and soil reports c. Environmental reports—faults, flood plains and hazardous waste 13-3g Federal Disclosure Requirements 1. Interstate Land Sales Full Disclosure Act (ILSFDA) © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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2. Who is Covered Under ILSFDA? a. Sales of fifty or more lots included b. Exemptions are government agency sales, cemetery lots, REITs, courtordered sales 3. Content of Filing Reports for Nonexempt Developers a. Must file statement of record with OILSR of HUD—see text for list of information required b. Must furnish buyers with a property report of information to be provided in question/answer format; need to furnish: i.

Name of developer and their interests

ii. Legal description plus climate, subdivision map iii. Names and populations of surrounding communities iv. Provisions for refunds 4. Penalties for Violation of ILSFDA a. Criminal penalties—$10,000 and/or 5 years b. Civil suits by harmed parties—damages plus all costs recoverable; civil penalties range from $1,000 to $1,000,000 13-3h Condition of Premises 1. Implied Warranty of Habitability a. Some states have statutes b. Does not apply to second sales—only first sales by builder/developers c. Can buy warranties for second homes d. New theory of liability for emotional harm—recovery for stress of flawed construction e. Warranty clauses can be written into contracts f.

The ―As Is‖ clause—used by sellers to eliminate buyer demands for repair

CASE BRIEF: ARC Const. Management, LLC v. Zelenak 962 N.E.2d 692 (Ind. App. 2012) FACTS:

John and Cecilia Zelenak entered into a purchase agreement for a newlyconstructed home from ARC Construction Management, LLC in March 2004.

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In 2008, the Zelenaks filed suit for breach of the warranty of habitability alleging that the home‘s windows and doors were not properly installed or were defective when supplied, the lintels remained unpainted, one rafter was missing, there were exposed electrical wires, and the home experienced water intrusion because of the leaking windows and doors that also resulted in mold and mildew damage to the home. The Zelenaks‘ son, John, age 8, experienced medical difficulties because of his allergies to the mold and mildew. In 2010, the Zelenaks' home was taken in foreclosure proceedings. ARC filed a motion to dismiss the Zelenaks' suit because they lacked standing and also because there was a failure to state a claim on the basis of a breach of warranty. The trial court treated the motion to dismiss as a motion for summary judgment and determined that the Zelenaks‘ case could go forward for them to claim damages from breach of warranty for the time that they lived in the home. ARC appealed. ISSUE:

Are the Zelenaks covered under the warranty of habitability?

DECISION:

(1) Purchasers' complaint was sufficient to put vendor on notice that they were suing for breach of the implied warranty of habitability; (2) Purchasers' claim for loss of use and enjoyment of the property during the period they inhabited the property was valid against builder-vendor; and (3) Purchasers had standing to pursue their claim against builder-vendor for breach of the implied warranty of habitability. Affirmed and remanded.

Answers to Case Questions 1. Explain why the Zelenaks can still recover for breach of warranty even though they have lost their home to foreclosure. The Zelenaks can recover because even though the home is no longer theirs, they had damages during the time they had to live in the home with the water, mold, and mildew problems. 2. How long does the implied warranty of habitability run and to whom? The warranty is something that protects those who buy the house (and in some states subsequent purchasers). There is usually a statute of limitations, but the Zelenaks filed within that time and even though they are not in the home, damages for breach of warranty do not require, according to this case, that the plaintiff actually be living in the house.

Answer to Consider (13.11) a. The court held that Funding Partners was not liable under the implied warranty of habitability. It did not build the home and would not have peculiar knowledge about defects.

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The court even awarded Funding Partners attorneys‘ fees. An excerpt from the court‘s opinion appears below: The Texas Supreme Court adopted the implied warranty of habitability in Humber v. Morton, stating that where ―it is undisputed that [the appellee] built the house and then sold it as a new house,‖ he thereby impliedly warranted that the house ―was suitable for human habitation.‖ 426 S.W.2d 554, 555 (Tex.1968). In reaching its conclusion, the court noted that the appellee ―was in the business of building or assembling houses.‖ Id. The court justified its rejection of the rule of caveat emptor in this context by observing that ―[t]o apply the rule of caveat emptor to an inexperienced buyer, and in favor of a builder who is daily engaged in the business of building and selling houses, is manifestly a denial of justice.‖ Id. at 561 (quoting Bethlahmy v. Bechtel, 91 Idaho 55, 415 P.2d 698, 710 (Idaho 1966)). The supreme court has since described the warranty of habitability as requiring ―the builder to provide a house that is safe, sanitary, and otherwise fit for human habitation.‖ Centex Homes v. Buecher, 95 S.W.3d 266, 273 (Tex.2002). The warranty of habitability has been incorporated into the property code. See Tex. Prop. Code Ann. § 430.002 (West 2008) (―The construction of each new home or home improvement shall include the warranty of habitability.‖). In describing the policy reasons for the implied warranty of habitability, the Texas Supreme Court emphasized that: (1) a builder should be in business to construct buildings free of latent defects; (2) the buyer cannot, by reasonable inspection or examination, discern such defects; (3) the buyer cannot normally rely on his own judgment in such matters; (4) in view of the circumstances and the relations of the parties, the buyer is deemed to have relied on the builder; and (5) the builder is the only one who has or could have had knowledge of the manner in which the building was built. Gupta v. Ritter Homes, Inc., 646 S.W.2d 168, 169 (Tex.1983), overruled on other grounds by Amstadt v. United States Brass Corp., 919 S.W.2d 644, 649-50 (Tex.1996). Many of these policy reasons for the implied warranty of habitability are clearly inapplicable to the transaction between Podder and Funding Part Partners. Funding Partners is not in business to construct buildings, and therefore has no obligation to construct buildings free of defects. There is no indication that Funding Partners, a finance company with no particular expertise in home construction, was in any better position than Podder to discern latent construction defects by reasonable inspection or examination. Finally, Funding Partners does not occupy a special position as the

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sole party with knowledge of the manner in which the home was built. Podder v. Funding Partners, L.P., 2010 WL 850175 (Tex. App. 2010). b. The court held that the home buyer could not recover from the developer because privity is a requirement for contract warranty types of protection. However, the court raised an interesting point when it wrote that the home buyer should have alleged that it was a thirdparty beneficiary of the contract between the developer and the builder. That may have been a possible theory. Forest City Stapleton v. Rogers, 393 P.3d 487 (Colorado 2017). Use the PRACTICAL TIP from Professor Rhoads. 13-3i Risk of Loss 1. Passes to buyer at time of contract 2. Can have contractual provision controlling who will provide insurance 13-3j Recording the Contract 1. Not required 2. Generally, not done—cloud on title 13-3k Closing Date and Escrow Instructions 1. Date and time is of the essence 2. Escrow instruction execution 13-3l Apportionments 1. What is to be apportioned—taxes, rent, insurance 2. Date for apportionment 13-3m Marketable Title 1. Prudent man would pay reasonable value 2. Will not result in suits or adverse claims USE FIGURE 13.3 AND POWERPOINT SLIDE 13-62 TO DISCUSS THE FACTORS THAT AFFECT MARKETABLE TITLE AND THOSE THAT DON’T. 3. Many states have adopted the Marketable Title Act to provide a statute of limitations on claims

Answer to Consider (13.12) Easement affects title, but the sidewalk does not. However, the exception for an easement is not unusual and could be considered good title for the buyer so long as it did not limit use or prevent use of land. 13-3n Remedies © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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1. Liquidated Damages a. Valid if reasonable b. Valid if not recovered on top of actual damages c. Some states (Cal) have language and separate signature requirements d. Some states follow the ―second look‖ doctrine: examine amount of liquidated damages after the breach occurs CASE BRIEF:

Perroncello v. Donahue 859 N.E.2d 827 (Mass. 2007)

FACTS:

On April 3, 1998, Joseph F. Perroncello (buyer/plaintiff), and Paul J. Donahue, Sr. (as trustee) (seller/ defendant), signed a purchase and sale contract for property at 198 Beacon Street in Boston for $2,250,000. The contract contained a clause that provided that "acceptance of deed by the BUYER, shall be deemed to be a full performance and discharge of every agreement and obligation herein contained or expressed." It also contained a liquidated damages clause providing that, if "the BUYER shall fail to fulfill the BUYER's agreements herein, all deposits made hereunder by the BUYER shall be retained by the SELLER and this shall be SELLER's sole remedy at law or in equity." The buyer paid a deposit of $150,000. The sale was to close by May 6, 1998, but the agreement provided that the buyer could seek one thirty-day extension (until June 5), which he did, during which time he would be obligated to pay the seller's carrying costs of up to $500 per day. Carrying costs included "seller's financing costs, taxes, insurance and the like." The contract did not include a mortgage contingency clause, and recited that time was of the essence. As of June 4, 1998, Perroncello had not finalized the mortgage financing he needed to purchase the property. His attorney sent a request to the Donahue's attorney seeking an extension of the closing to June 16. Donahue's attorney responded on June 5 with a letter stating that Donahue was ready to deliver the deed on June 5. Perroncello asserts that Donahue told him to continue working with his bank to secure the mortgage and that any correspondence sent by the attorney stating that June 5 was the deadline should be disregarded. On June 12, Donahue's attorney sent written notice to the Perroncello's attorney that, no closing having occurred, the contract was breached, and the deposit forfeited. Perroncello and Donahue had further discussions and meetings about the real estate through the month of June. On June 23, 1998, the bank approved Perroncello's mortgage, and he notified Donahue. Thereafter, Donahue did not return Perroncello's telephone calls, and put a "For Sale" sign on the property. On June 30, 1998, Perroncello filed a complaint in the Superior Court for breach of contract, specific performance, deceit, and conversion and also sought both a

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restraining order preventing the seller from marketing the property, his $150,000 deposit returned, and a lis pendens. Donahue counterclaimed for abuse of process, breach of contract, and unfair and deceptive trade practice. A trial court granted summary judgment against the seller and the Appeals Court reversed. The buyer appealed. ISSUE:

Is a party entitled to recover liquidated damages when there has been specific performance?

DECISION:

No. When seeking specific performance of a contract, the seller offers to surrender title to the property and collect the purchase price. In bringing an action for damages on the breach of the contract, the seller proposes to retain the property and have his compensation in damages. While these remedies may not be inconsistent in the sense that they are both premised on the validity of the contract, ordinarily a seller is not entitled to seek both remedies; the retention of a deposit as liquidated damages is an alternative to specific performance, not an additional remedy. The law of contracts is intended to give an injured party the benefit of the bargain, not the benefit of the bargain and a windfall. To award liquidated damages against the buyer for his failure to close and also specific performance to the seller requiring the buyer to acquire the property by a date certain at the contracted price, would violate the fundamental principles of contract law. The order granting summary judgment to the buyer on the issue of liquidated damages is affirmed.

Answers to Case Questions 1. List the mistakes the parties made in their purchase contract as well as in their conduct between the time of the contract and the litigation. The mistakes were as follows: a. They did not close on time, with time being of the essence. b. The lawyer was trying to enforce the contract and time provisions even as the parties were negotiating and extending deadlines separately. c. The parties had oral discussions about the extensions, and nothing was confirmed in writing. d. The parties did not communicate after there had been some reliance. e. The contract did not spell out all possible damage circumstances. 2. Does the court distinguish between and among actual damages, specific performance, and liquidated damages? Yes. The court indicates that liquidated damages clauses are subject to review for their reasonableness and not for a second look. The award of specific performance is the damage and you cannot recover the liquidated damages, only actual damages such as the carrying costs until the specific performance is carried out because specific performance means that the contract is completed and so no liquidated damages.

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3. What is the rule on "second looks" on damage clauses in real estate purchase contracts in Massachusetts? There are no second looks because it introduces uncertainty in contract negotiation. However, the liquidated damages are still subject to examination for reasonableness. 2. Actual Damages a. Costs of reselling b. Lost rents c. Loan origination fees, etc. d. Uniform Land Transaction Act—has formulas 3. Specific Performance a. Usually given to buyers b. Requires sellers to convey title 4. Rescission a. Usually given in cases of misrepresentation b. Puts parties back in positions they were in before the contract [return to top]

Additional Activities and Assignments Answers to Chapter Problems 1.

Letters of intent have led to much misunderstanding, litigation, and commercial chaos.

Courts have expressed reservation concerning the binding nature of “letters of intent” because traditionally, the purpose and function of a preliminary letter of intent has been to merely provide the initial framework from which the parties might later negotiate a final binding agreement. Calling a document a “letter of intent” implies, unless circumstances suggest otherwise, that the parties intended it to be a nonbinding expression in contemplation of a future contract. As is commonly the case with contract disputes, prime significance attaches to the intentions of the parties and to their manifestations of intent. Labels such as “letter of intent” or “commitment letter” are not necessarily controlling, although they may be helpful indicators of the parties’ intentions.

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The buyers in this case contend that the letter of intent signed by Ms. Norkunas falls into that first category of enforceable agreement, and that it therefore required no further formalization. When we analyze the language of the letter of intent, however, we find that the parties merely agreed that the buyers would submit a more detailed formal offer. The buyers argue that a reasonable person in the position of Ms. Norkunas should have known when she signed the letter of intent that she had already sold her home to these buyers, and that there would be no further negotiations and no opportunity for her to further consider whether she wanted to sell her property upon the terms set forth in the letter. The plain language of the letter, however, simply does not say that. In the first paragraph, the letter of intent states that the buyers “offer to buy” the property, but there is no statement anywhere in the letter that could be construed as a statement that Ms. Norkunas agrees to accept the offer or agrees to sell the property upon the terms set forth. The letter states that a “standard form Maryland Realtors® contract will be delivered to Seller.” The letter further states that “[t]he contract will contain …” certain language, and that other language “will” be deleted from the contract. In our view, a reasonable person in the position of a seller who was approached by buyers indicating they wanted to purchase her home would have understood the letter of intent to mean that a formal contract offer would soon follow. The reasonable person in Ms. Norkunas‟s position would have understood that these buyers wanted her to know the terms they were prepared to offer and that they were very seriously interested in purchasing the property. The terms of this letter would not communicate to such a seller, however, that if she signed this document she was irrevocably locked into a contract of sale. The delivery of the referenced check for $5,000 does not elevate the letter beyond the status of an offer. It is customary for most real estate offers to be accompanied by a check tendered as a good faith deposit or “earnest money.” Mrs. Norkunas never negotiated the $5,000 check that accompanied the letter of intent. Her signature did nothing more than acknowledge that she was aware of the letter of intent. The buyers argue, in the alternative, that even if the letter of intent was not an enforceable contract, the buyers‟ formal offer as expressed in the subsequent package of documents became a binding enforceable contract when Ms. Norkunas placed her signature on the documents. We do not agree that there has been irrevocable acceptance when an offeree privately signs an offer, but then decides not to communicate her acceptance to the offeror. It is apparent that Ms. Norkunas had second thoughts about the advisability of this transaction, and she never communicated to the buyers or their agent that she had signed the buyers‟ offer. We do not agree, however, that the buyers‟ offer was transformed into a contract the instant that the offeree privately signed the offer.

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[T]he Court of Appeals noted that Maryland has long followed the rule known as the “postal acceptance rule” or “The Rule in Adams v. Lindsell [1, Barn. & Ald. 681, 106 Eng. Rep. 250 (1818, King‟s Bench)]” for determining when an offer received via mail has been accepted. Professor Corbin, after reviewing the logical difficulties which the rule presents and the considerations of policy for and against the continuation of the rule, concludes that it is probably wiser to continue it. He aptly stated in 1 Corbin, §78, page 337: One of the parties must carry the risk of loss and inconvenience. We need a definite and uniform rule as to this. We can choose either rule; but we must choose one. We can put the risk on either party; but we must not leave it in doubt. The party not carrying the risk can then act promptly and with confidence in reliance on the contract; the party carrying the risk can insure against it if he so desires. The business community could no doubt adjust itself to either rule; but the rule throwing the risk on the offeror has the merit of closing the deal more quickly and enabling performance more promptly. It must be remembered that in the vast majority of cases the acceptance is neither lost nor delayed; and promptness of action is of importance in all of them. Also, it is the offeror who has invited the acceptance. The analogous rule for when acceptance takes effect appears in the RESTATEMENT (SECOND) OF CONTRACTS (1981) in Section 63, which states: Unless the offer provides otherwise, (a) an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offeree‘s possession, without regard to whether it ever reaches the offeror; but (b) an acceptance under an option contract is not operative until received by the offeror. Applying these rules to the undisputed facts of this case, it is clear that, even if Ms. Norkunas‟s signature on the buyers‟ offer was intended to be an acceptance (as opposed to a counteroffer), acceptance would not have taken effect until the signed documents were either mailed by her, or until they were otherwise put out of her possession, for example by fax or transmittal to the buyers‟ agent. The evidence was undisputed that she did neither, but rather, retained possession of the documents until being forced by the rules of discovery to permit her opponents to inspect and copy the papers. Here, the buyers urge us to adopt a rule that considers the offeree‟s acceptance binding and irrevocable as soon as the offeree affixes her signature to the offer. We observe that such a rule could create more controversies than it resolved. In this case, Ms. Norkunas communicated nothing to the buyers until she advised them that she was taking her property off the market. Consequently, we need not determine

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whether the changes made by her to the documents would have required further assent from the buyers to complete formation of the alleged contract. The buyers did not allege in the complaint or in their cross motion for summary judgment that Ms. Norkunas negotiated the $5,000 check, but if the deposit check was negotiated, the position asserted by Ms. Norkunas in this case provides no basis for her to refuse to return any funds she received from the buyers. Norkunas v. Cochran, 895 A.2d 1101 (Ct. Md. App. 2006). 2. The Johnsons. The condition was for Ahrens' protection—it did not impose requirements on the Johnsons. 3. After concluding that the right of first refusal was personal in nature, the trial court stated, ―Therefore, when [the Stahrs'] June 29, 2005, offer to purchase included the provision for assignment, this constituted a material deviation from the offer by Jones and it is not binding upon Dorenbach.‖ Given my conclusion that the trial court did not err in finding that the right or option granted to the Stahrs by Dorenbach was personal in nature and not assignable, it follows that by virtue of the Stahrs' inserting language into the purchase agreement reserving their right to assign their interest in the agreement prior to closing, the Stahrs' exercise of that right of first refusal became invalid because it was a material deviation from the offer made by Jones. Acceptance of an offer to buy or sell real estate must be an unconditional acceptance of the offer as made; otherwise, no contract is formed; and there must be no substantial variation between the offer and the acceptance, since if such acceptance differs from the offer or is coupled with any condition that varies or adds to it, it is not an acceptance, but a counterproposition. Jones v. Stahr, 746 N.W.2d 394 (Neb. App. 2008). 4. In Pennsylvania, the courts have held that there is only a warranty from the original builder to the original buyer—the warranty does not extend to buyers after that. The reasoning is the direct knowledge of defects when the builder sells to the buyer and the issue of latency. Conway v. Cutler Group. Inc., 99 A.3d 67 (Pa. 2014) 5. The court held that the leases were a condition for closure, but the buyer waived them when they were not demanded prior to closing. The occupancy rate and income were based on that information in the leases. It cannot be a basis for misrepresentation when the buyer failed to demand the information that the contract required and that would have given an idea of income and occupancy. Virginia Oak Venture, LLC v. Fought, 448 S.W.2d 179 (Tex.

App. 2014). 6. The parties have created a grant of real property to Dr. Black that includes an option for the hospital to repurchase the land (with arbitrators determining the value of the building). There is also a one-year notice provision for the hospital to exercise the option. The consideration of $1.00 for this option is valid, despite the fact that it lasts until 2081, as long as it is actually paid. Black v. St. Joseph Hosp. of Buckhannon, Inc., 764 S.E.2d 335 (W. Va. 2014).

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7. The Rosens won because the exact terms of the financing condition were not met. Luttinger v. Rosen, 316 A.2d 757 (Conn. 1972). 8. ―Sale is a contract whereby a person transfers ownership of a thing to another for a price in money. The thing, the price, and the consent of the parties are requirements for perfection of a sale.‖ La.Civ.Code art. 2439. A simulated contract is one which has no substance whatsoever. Such a contract may be declared null at any time at the demand of any person in interest. A presumption of simulation may arise when the plaintiff produces facts casting serious doubts on the validity of the transaction. Once the presumption arises the burden shifts to the defendants to prove the validity of the transaction. Richard v. Thompson, 411 So.2d 699, 701 (La.App. 4 Cir.1982) (citing Williams v. Smith, 340 So.2d 401, 403 (La.App. 2 Cir.1976) (citations omitted)). However, as the supreme court made clear more than 150 years ago, ―[t]he payment of a price for a thing sold, less than that stated in the act of sale, does not make a simulated sale.‖ Keller v. Blanchard, 19 La.Ann. 53, 54 (La.1867) (emphasis added). Furthermore, ―[s]ervices rendered, such as cooking meals, cleaning house, washing clothes, etc....may constitute consideration for a transfer of property.‖ Succession of Viola, 138 So.2d 613, 616 (La.App. 4 Cir.1962); see also Robinson v. Guedry, 181 So. 882 (La.App.Orleans 1938). Thus, unless Ms. Davis clearly failed to pay such price or perform such services as needed to compel the trial court to deem the transaction at issue here to be a simulation, we must not overturn its decision as manifestly in error or clearly wrong. Ms. Davis argues that the monetary assistance and personal services which she rendered to the decedent prior to his death constitute consideration sufficient to defeat Plaintiffs' assertion that the transfer of immovable property was clearly a simulated sale. We agree. Here, Ms. Davis testified that, over the course of the ten years prior to the death of the decedent, she habitually provided the decedent with personal services in that she bought him cigarettes, allowed him to live in her home, and occasionally paid his bills. Furthermore, the record indicates that on at least one occasion Ms. Davis provided the decedent with $400.00, which he then deposited into his account with Sabine State Bank. Ms. Davis testified that that monetary transfer was only one of several between her and the decedent, but she went on to explain that her lack of documentation evidencing such additional transfers is due to her records being destroyed in a fire. Taking the record in its entirety, it is clear that Ms. Davis not only paid the decedent a price in money of at least $400.00, but also rendered personal services to the decedent in the form of buying him cigarettes, allowing him to live in her home, and occasionally paying his bills. In light of such evidence, we are loathe to disturb as clearly wrong the trial court's determination that the property transfer at issue here was not a simulation. Thus, we find this assignment of error to be without merit. Plaintiffs next contend that the trial court committed error in failing to require Ms. Davis to bear the burden of proof to establish the validity of the simulation. We disagree. As discussed above, such burden shifting is only called for once the presumption of a simulation is established by the plaintiff. Richard, 411 So.2d 699. Because we have already

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held that the trial court was justified in holding that Plaintiffs did not establish the transfer of property at issue here to be a simulation, this argument is moot and need not be addressed. As such, this assignment of error is without merit. For the above stated reasons, we affirm the decision of the trial court in its entirety. Costs are taxed to Plaintiffs. Hutsen v. Davis, 983 So.2d 266 (La. App. 2008). 9. This question has created confusion in our courts, and originates from ambiguous language in the leading, most recent case of this court on liquidated damages in the context of the purchase and sale of real property. A-Z Servicenter, Inc., v. Segall, 334 Mass. 672, 675, 138 N.E.2d 266 (1956). Many decisions, following A-Z Servicenter, have concluded that liquidated damages should be measured, first, by assessing the reasonableness of the liquidated damages in light of the parties‟ ability to anticipate damages at contract formation, and, second, against the actual damages resulting from the breach.

A judge, in determining the enforceability of a liquidated damages clause, should examine only the circumstances at contract formation. Our position is that ―where actual damages are difficult to ascertain and where the sum agreed upon by the parties at the time of the execution of the contract represents a reasonable estimate of the actual damages, such a contract will be enforced.‖ Liquidated damages will not be enforced if the sum is ―grossly disproportionate to a reasonable estimate of actual damages‖ made at the time of contract formation. This approach most accurately matches the expectations of the parties, who negotiated a liquidated damage amount that was fair to each side based on their unique concerns and circumstances surrounding the agreement, and their individual estimate of damages in event of a breach. We agree with the reasoning of the dissenting Justice (at the court of appeals), who pointed out that the ―second look reveals nothing that the parties had not contemplated‖ when they entered their contract. In addition to meeting the parties‘ expectations, the ―single look‖ approach helps resolve disputes efficiently by making it unnecessary to wait until actual damages from a breach are provided. By reducing challenges to a liquidated damages clause, the ―single look‖ approach eliminates uncertainty and tends to prevent costly future litigation. The ―second look,‖ by contrast, undermines the ―peace of mind and certainty of result,‖ the parties sought when they contracted for liquidated damages. It increases the potential for litigation by inviting the aggrieved party to attempt to show evidence of damage when the contract is breached, or, more accurately, evidence of damage flowing from the breach but occurring sometime afterward. In other words, ―the ‗parties must fully litigate (at great expense and delay) that which they sought not to litigate.‘‖ Turning to the present case, we conclude the plaintiffs are not entitled to the return of the deposit they paid to the defendants. The potential damages were difficult to predict when the agreement was made. As another court has correctly noted: ―The parties could not know what delays might ensue, what might occur in the real estate market, or how a failed sale might affect the seller‘s plans. Real estate purchase and sale agreements are precisely the type of contracts that are amenable to liquidated damages provision.‖

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Viewing the facts at the time of contract formation, the liquidated damages were a reasonable estimate of the damage to the defendants. The deposit, five per cent of the purchase price, was a reasonable forecast of the defendants‘ losses that would result if the buyers were to breach the agreement. These costs could arise from a host of issues relating to finding another buyer and waiting for an uncertain period of time before selling their property, and in light of the risk of an undeterminable loss that is dependent on many factors (primarily the shape of the real estate market at the time of the breach). The sum is not grossly disproportionate to the expected damages arising from a breach of the sale agreement, nor is it ―unconscionably excessive‖ so as to be defeated as a matter of public policy. As the Appeals Court conceded, ―Were our inquiry limited to the circumstances obtaining at the time the parties entered into their agreement, we would permit the sellers to retain the deposit, amounting to five percent of the purchase price.‖ The summary judgment of the superior court in favor of the defendants is affirmed. Kelly v. Marx, 705 N.E.2d 1114 (Mass. App. 1999). 10. It was unclear whether the $500 had been paid, so the court sent the case back for further factual determinations. The court did not, however, decide that the parties had created an option and the question was whether there was consideration. The court also noted that the partnership giving up the right to litigate on the payments and forfeiture issues on the original contract was sufficient consideration to support the option. Reardon v. Lautner, 1997 WL 33343924 (Ct. App. Mich. 1997) (Unpublished opinion).

In-Class Exercises 1. Have students role play either the buyer or the seller of their home, apartment building or dorm. Have them list the issues and topics they would want covered in the sales contract based on their knowledge about the condition and use of the property. 2. Read the following case and answer the discussion questions: WARD v. MATTUSCHEK 330 P.2d 971 (Mont. 1958) Otto and Frank Mattuschek (defendant/appellees) owned a ranch in Montana consisting of 3,540 acres. Carnell, a real estate broker, discovered their interest in selling the ranch, and the following instrument was executed:

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PLAINTIFF‘S EXHIBIT ―A‖ APPOINTMENT OF AGENT I hereby appoint E. F. Carnell of Lewistown, Montana whose office is located in said City and State, my agent with the exclusive right to sell the following property: Our ranch property 3540 acres, T.23 & 22-R-19 & 20-Fergus County Mont. For the Sum of $30,000. Conditions and terms of the sale are as follows: Cash to seller. Possession Dec. 1, 1953, seller retain 5% landowner Royalty. Seller pay 1953 taxes, seller transfers all lease land to buyer. And I agree to furnish a title outlined in the following paragraph: A. An abstract of title showing a good merchantable title to said property together with a warranty deed properly executed.

Said sale may be made for a less amount if hereafter authorized by me; you are further authorized to receive a deposit on the sale price. I agree to pay a commission of $1000 on the sale price and the commission shall be payable as soon as the sale is made and a down payment has been made, or sale price paid in full at the time of sale, and, or as soon as a binder fee has been collected on the sale, whichever be first. This authorization is to remain in effect and full force for 30 days and thereafter until revoked by me in writing. Dated at Lewistown, Montana this 14th day of May 1953. x Otto Mattuschek x Frank Mattuschek

Carnell then met Ward (plaintiff/appellant), a prospective buyer, and accepted from him a check for $2,500 as a binder. The check looked as follows:

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PLAINTIFF‘S EXHIBIT ―B‖ 1st Bank Stock Corporation

93-73 921

First National Bank of Lewistown

Lewistown, Montana, May 20, 1953 No. Pay To The Order of

Red Carnell

$2500xx

twenty five hundred and no/100 Dollars /s/ E.E. Ward For down Payment on land Mattuschek (Endorsement E.F. Carnell) At the same time Carnell executed the following: PLAINTIFF‘S EXHIBIT ―C‖ (Defendant‘s Exhibit no. 1) Real Estate

Fergus Realty City

Property

Insurance

213 Main St. Phone 598

Farms

Rentals

Lewistown, Montana

Ranches

May 20, 1953 I hereby agree to buy the Mattuschek place in accordance with the terms of the agreement between E. F. Carnell and the Mattuscheks. Dated

May 14, 1953 /s/ E. E. Ward To Buy or Sell—See ―Red‖ Carnell

Carnell drove to the ranch and advised the Mattuscheks of the sale. They asked if Ward would be willing to lease back the property. When the closing was attempted, the

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Mattuscheks refused to convey the property, and the Wards filed suit seeking specific performance and damages. The trial court held the writings did not meet the Statute of Frauds requirements. Ward appealed. FALL, District Judge One of the questions presented is whether the writings (Plaintiffs Exhibits "A," "B" and "C") are sufficient to take the case out of the Statute of Frauds. Few more fruitful sources of litigation can be found than that arising out of brokerage contracts relating to the sale of real estate. Much of the briefs and a great part of oral argument was directed toward the question of the right of a real estate broker to enter into a contract for the sale of the seller's land. As we view it, for reasons hereinafter stated, that is not before this court on this appeal. The note or memorandum must name the parties. It may consist of several writings. The note or memorandum must contain all the essentials of the contract but may be stated in general terms. With the foregoing principles of law in mind, an examination of Plaintiffs Exhibits "A,‖ ―B" and "C" shows the following: The respondents Mattuscheks unqualifiedly and exclusively agreed in writing to permit Carnell for a period of thirty days to sell their ranch for $30,000 for which they agreed to pay Carnell a commission of $1,000. The terms of sale were succinctly but adequately stated in these words: "Cash to seller. possession Dec. 1-1953, seller retain 5% landowner, Royalty. seller pay 1953 taxes, seller transfers all lease land to buyer." The acceptance of Ward was in writing (Plaintiffs Exhibit "C") and accompanied by a check (Plaintiffs Exhibit "B") as a down payment. It was unqualified. It is difficult to conceive of a more clear-cut offer and acceptance in writing than is evidenced in the exhibits above set forth. This is not a situation of a broker making a contract for the seller at all—it is simply a situation of a buyer executing, in writing, an unqualified acceptance of a seller's offer to sell. It is well established that a court, in interpreting a written instrument, will not isolate certain phrases of that instrument in order to garner the intent of the parties, but will grasp the instrument by its four corners and in the light of the entire instrument, ascertain the paramount and guiding intention of the parties. Mere isolated tracts, clauses and words will not be allowed to prevail over the general language utilized in the instrument. The further question has been presented that the offer executed by the Mattuscheks fails insofar as this plaintiff is concerned because of lack of mutuality, i.e., that Ward did not sign the contract executed by the Mattuscheks. Ordinarily, both parties to a written agreement execute it, but that is not always necessary. "While an agreement signed by one party only, without other evidence of obligation on, or acceptance by, the other party, will ordinarily be

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regarded as unilateral, mutuality does not require that both parties sign the contract, and if a contract signed by one party is acted upon by the other a binding agreement may result." This court has said: ―...plaintiff contends that the letter, Defendant's Exhibit 1, is not a contract because it is signed by only one party, and hence lacking in mutuality. It is signed, however, by the only party affected and bound by it, and it constituted a written offer by plaintiff." The two general rules as to the party or parties who must sign the memorandum are that a party not signing the memorandum cannot be charged on the contract, and that the only signature made necessary by the statute [of frauds] is that of the party to be charged, or, in other words, defendant in the action or the party against whom the contract is to be enforced. Mutuality of obligation is not essential to the validity of a contract, insofar as its compliance with the statute of frauds is concerned, and the fact that the contract may not be enforceable against one party, because not subscribed by him, is no defense to the other, by whom it is signed. The rule was established soon after the enactment of the statute of frauds, that a contract, the memorandum of which was signed by the defendant, may be specifically enforced by a plaintiff who has not signed, notwithstanding because of the lack of such signature this contract could not be enforced against plaintiff, either in law or in equity, up to the time of the commencement of the suit, since the requisite mutuality is supplied by complainant's filing of this bill. Nor can objection be made on the part of the defendants that their offer was not intended for this particular plaintiff and hence, fails for lack of mutuality. It is the rule that if the memorandum is otherwise sufficient it is binding for the purpose of satisfying the statute of frauds, "even though it is not intended for, or addressed, delivered, or known to, the other contracting party." However, all this is somewhat beside the point for the reason that the plaintiff, as pointed out above, accepted the offer of defendants, in writing and without qualification. Reversed. ADAIR, Justice I dissent. The instrument designated "Appointment of Agent" between the real estate agent, E. F. Carnell, and signed by Otto and Frank Mattuschek is simply a thirty day listing agreement. It does not constitute a power of attorney. It does not authorize the real estate agent to execute or deliver in the name of the Mattuscheks any deed of conveyance or any Contract for sale and purchase. It is purely and simply an agreement between the real estate agent and the owners of the 3,540 acre ranch. Should the Mattuscheks wrongfully fail to perform their part of the agreement, the only loss to the real estate agent would be his commission of $1,000 to become due him upon a sale by the Mattuscheks of their property. Such would

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be the extent of the real estate agent's damage and it could be fully satisfied by the payment of money. [return to top]

Discussion Questions 1. 2. 3. 4. 5. 6. 7.

Who owns the property at issue? Who is the broker? Who is the buyer? What three writings are submitted as evidence to satisfy the Statute of Frauds? Is there an issue of Carnell‘s authority to enter into the agreement? Is there sufficient writing to satisfy the Statute of Frauds? Why does the dissenting justice disagree?

[return to top]

Resources Anderson, "The 1988 Fair Housing Act Amendments," 35 The Practical Lawyer 79 (1990). Barondes and Slawson, ―Examining Compliance with Fiduciary Duties: A Study of Real Estate Agents,‖ 84 Or. L. Rev. 681, 724 (2005). Bicks, Contracts for the Sale of Realty. Brousseau, "Real Property: Purchase, Sale, Title, and Ownership," 40 Southwestern L. J. 301 (1986). Brown, “The Doctrine of Caveat Emptor and the Duty to Disclose Material Defects and Other Conditions in the Sale of Single Family Residential Real Estate: Defining the Home Buyer's Legal Rights,” 61 Ala. Law. 122, 122 (2000).

Cahill, "Courts Balk at Homeowners' Entitlement Talk: The Substantive Effects of Making Home Affordable," 40 Cap. U. L. Rev. 1053 (Fall 2012). Churchill, ―Controlled Substances: Provide for the Distribution of Forfeited Real Property; Authorize the Acquisition of Forfeited Real Property by Land Bank Authorities,‖ 19 Ga. St. U. L. Rev. 92 (Fall 2002). Cocks, "Vendors' Statements Revisited," 67 Law Institute Journal 157-159 (1993). Coleman, Comment: “After the Bust: Landowner's Liability When the Property is Used for the Manufacture of Methamphetamine,” 1 S.J. Agri. L. Rev. 109 (2003). Dalley, ―The Use and Misuse of Disclosure as a Regulatory System,‖ 34 Fla. St. U. L. Rev. 1089, 1131 (2007). Friedman, Contract and Conveyances of Real Property. Gamerman, ―Agents Recall Ghostly Sales,‖ Wall Street Journal, April 5, 2019, p. M5.

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Garrison and Reitzel, ―Zoning Restrictions and Marketability of Title,‖ 35 Real Est. L. J. 257 (2006). Goldberg, Sales of Real Property. Hartzell-Baird, ―When Sex Doesn't Sell: Mitigating the Damaging Effect of Megan's Law on Property Values,‖ 35 Real Est. L. J. 353 (Winter, 2006). Hathaway, "Plain English in Real Estate Papers," 72 Michigan Bar Journal 1308(3) (1993). Holtzschue and Connery, ―Drafting and Negotiating of Contract for the Sale of a Single Family Home and Closing,‖ 481 PLI/Real 81 (April 17, 2002). Institute of Continuing Legal Education, Manual for Lawyers and Legal Assistants: Real Estate. Jennings, ―Damages: Liquidated Levels and Second Looks,‖ 27 Real Est. L.J. 232 (Spring 1999). Jennings and Gass, ―Property Damage is an Emotional Experience,‖ 23 Real Est. L.J. 123 (Fall 1994). Lefcoe, ―Property Condition Disclosure Forms: How the Real Estate Industry Eased the Transition From Caveat Emptor to ‗Seller Tell All‘,‖ 39 Real Prop. Prob. & Tr. J. 193 (Summer, 2004). Levine, “Other Recent Developments in Minnesota Law: Note: Poison in Our Own Backyards: What Minnesota Legislators are Doing to Warn Property Purchasers of the Dangers of Former Clandestine Methamphetamine Labs,” 31 Wm. Mitchell L. Rev. 1601 (2005). Lilligren, “Real Estate: When in Doubt Point it Out: Chapter 66 Attempts to Clarify California's Residential Real Estate Disclosure Obligations,” 36 McGeorge L. Rev. 941 (2005). Martin, "New Policies of the Office of Interstate Land Sales Registration," 11 Prob. & Prop. 3 (Aug. 1982). Matthews, ―This Old House Has Ghosts, ―New York Times, October 13, 2006, pp. D1, D4. McConnell, "Protecting the Real Estate Consumer: Traditional Theories of Liability Revisited," 65 Neb. L. Rev. 188 (1986). Minerbrook, "Blacks Locked Out of the American Dream," Business and Society Review 23-28 (1993). Murray, "What Constitutes a Defect in Real Property?", 22 Real Estate L.J. 43 (1993). Orth, ―Sale of Defective Houses,‖ 6 Green Bag 2d 163 (Winter 2003). Posner, "Deconstructing the Economic Loss Doctrine: Why the ELD is Unnecessary in Arizona Construction Defect Law in Light of the Statute of Repose," 44 Ariz. St. L.J. 961 (Summer 2012).

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Powell, "Relief for Innocent Misrepresentation: A Retreat From the Traditional Doctrine of Caveat Emptor," 19 Real Estate L.J. 13 (1990). Prum and Del Percio, ―Green Building Claims: What Theories Will a Plaintiff Pursue, Who Has Exposure, and a Proposal for Risk Mitigation,‖ 37 Real Est. L. J. 243, 267 (2009). Rempell, ―For Sale: Scene of a Crime,‖ USA Today, August 7, 2006, pp. 1A, 2A. Rhoads, ―Caveat Venditor: Seller Disclosure in California Residential Real Estate Transactions,‖ 2 Journal of the Pacific Southwest Academy of Legal Studies in Business 45 (1996). Roberts, “Disclosure Duties in Real Estate Sales and Attempts to Reallocate the Risk,‖ 34 Conn. L. Rev. 1, 40 (2001). Sheppard, ―Assurances of Titles to Real Property Available in the United States: Is a Person Who Assures a Quality of Title to Real Property Liable for a Defect in the Title Caused By Conduct of the Assured?,‖ 79 N.D. L. Rev. 311 (2003). Shepherd, "Drafting Radon Contingency Clauses," The Practical Real Estate Lawyer, January 1990 at 43. Steinberg and Gray, Real Estate Sales Contracts. ―The Duped Daughter: Promissory Estoppel and the Cattle Ranch,‖ 43(3) Real Estate L. J. 323-329 (2014). ―The Scandal Effect,‖ Wall Street Journal, August 4, 2006, pp. W1, W6. Vogt, Comment: “The Mess Left Behind: Regulating the Cleanup of Former Methamphetamine Laboratories,” 38 Idaho L. Rev. 251, 265 (2001).

Worsham, ―Must Information in the Public Record Be Disclosed to Buyers of Residential Real Property and May it Be Misrepresented?,‖ 80 Fla. Bar J. 33 (2006). [return to top]

Cases Anzalaco v. Graber, 970 N.E.2d 1143 (Ohio. App. 2012). Chambers v. Pruitt, 241 S.W.3d 679 (Tex. App. Dallas 2007). Clardy v. Bodolosky, 2009 WL 1313229 (S.C. App. 2009). Clay v. Bradley, 246 N.W.2d 142 (Wis. 1976). Dhillon v. Zions First National Bank, 462 Fed. Appx. 880, 2012 WL 715273 (11th Cir., 2012). Edlebeck v. Barnes, 216 N.W.2d 551 (Wis. 1977). Edwards v. Sewell, 656 S.E.2d 246 (Ga. App. 2008). Ferguson v. Cussins, 713 S.W.2d 5 (1986).

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Halder v. Haskett, 321 S.E.2d 192 (S.C. 1984). Hammond v. Matthes, 311 N.W.2d 357 (Mich. 1981). Johnson v. Davis, 480 So.2d 625 (Fla. 1985). Kirkwood v. FSD Dev. Corp., 2012 WL 2458557, 2012-Ohio-2922 (Ohio App. 8 Dist. 2012). Lane v. Trenholm Building Co., 229 S.E.2d 728 (S.C. 1976). Lyons v. Christ Episcopal Church, 389 N.E.2d 623 (Ill. 1979). Merritt v. Davis, 265 So.2d 69 (Fla. 1972). Obremskey v. Anderson, 2009 WL 1507327 (Mich. App. 2009). Parker v. Glosson, 641 S.E.2d 735 (N.C. App. 2007). Peterson v. Hartell, 219 Cal. Rptr. 170 (Cal. 1985). Ryder v. Wescoat, 535 S.W.2d 269 (Mo. 1976). Sharma v. Edina Realty, Inc., 2009 WL 910864 (2009). Shell Oil Co. v. Estate of Kert, 411 N.W.2d 770 (Mich. 1987).

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Answers to Case Questions ........................................................................................................................... 452 Answer to Consider (14.6).............................................................................................................................. 452 Answer to Consider (14.7).............................................................................................................................. 453 Answers to Case Questions ........................................................................................................................... 455 Answer to Consider (14.8).............................................................................................................................. 456 Answer to consider (14.9) .............................................................................................................................. 457 Answers to Case Questions ........................................................................................................................... 459 Answer to Ethical Issue (14.2) ....................................................................................................................... 460 Additional Activities and Assignments............................................................................................................... 460 In-Class Exercises ................................................................................................................................... 463 Discussion Questions................................................................................................................................................ 465 Resources .............................................................................................................................................. 465

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Chapter Objectives The following objectives are addressed in this chapter (see PowerPoint Slide 14-1): 14.01

Discuss the methods of transferring title to property.

14.02

Describe the types of and requirements for deeds.

14.03

Discuss methods of title protection.

[return to top]

Key Terms abstract of title: a concise statement of the substance of documents or facts appearing on the public land records that affect the title to a particular tract abstractor‟s certificate: a summary by the abstractors of what was and was not examined in the title review acknowledgment clause: language that precedes notary verification of signatures and identification of signatories adverse possession: method of acquiring title to land by openly taking possession of and using another‘s property for a certain period of time bona fide purchaser (BFP): good faith purchaser caption: the legal description in an abstract constructive delivery: delivery other than direct delivery to the person; delivering by precluding access by all others deed: instrument used to convey title to real property deed of bargain and sale: a deed with warranty protection limited to the time of the grantor‘s ownership; see also special warranty deed delivery: requirement for gifts and transfers of property by deed that mandates some form of actual or constructive possession by the grantee donee: recipient of a gift donor: one who makes a gift good-faith purchaser: buyer who buys property with no knowledge (constructive or actual) of any title defects, liens, or other problems other than those specifically disclosed by the seller; also called BFP or bona fide purchaser grantor/grantee index system: method of record keeping for land transactions; all transactions are recorded under the name of both the grantor and grantee to permit title to be traced according to the transfers among parties

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habendum clause: clause in deed indicating the type of land interest being conveyed; in a mineral lease, a clause that establishes the length of the lease, the grounds for termination, and drilling delay penalties head: the legal description of the property with which the abstract begins inter vivos gift: gift made while the donor is still alive judicial deed: deed given by court after litigation of rights in the subject property lis pendens: ―suit or action pending‖; document recorded with the land records to indicate a suit involving the land is pending; filed in mortgage foreclosures and quiet title actions livery of seisin: English ceremony for passage of title; involved a physical transfer of a clod of earth between grantor and grantee marketable title: form of title generally required to be delivered in the sale of property; property is free from liens and there are no defects in title other than those noted or agreed to notice statutes: form of recording statute that gives later bona fide purchasers priority in the case of multiple purchases if the previous purchasers fail to give notice by recording their transactions premises: the words of conveyance in a deed; e.g., ―do hereby grant and convey‖ pure race statute: recording priority statute that awards title (in the event of multiple conveyances) to the first purchaser to record quiet title action: court action brought to determine the true owner of a piece of land quitclaim deed: deed that serves to transfer title if the grantor has any such title; there are no guarantees that the grantor has any title or good title race/notice system: state recording statutes that award title to the first bona fide purchaser to record his/her title when there are conflicting claims of ownership in the property recording: process of placing a deed or other document on the public records to give notice of a transaction or interest in the land sheriffs‟ deed: form of title given to a buyer at a mortgage foreclosure sale; carries no warranties special warranty deed: deed that provides warranty of title only for the period during which the grantor owned the property; see deed of bargain and sale squatter‟s rights: a lay term for adverse possession or prescription title insurance: insurance that pays damages to the buyer of property in the event certain title defects arise Torrens system: system for recording land titles designed to prevent the selling of the same parcel of land to more than one person

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tract index system: form of land record that keeps history of title through identification of transactions with the particular tract undue influence: the use of a confidential relationship to gain benefits under a will or contract warranty deed: deed that conveys title and carries warranties that the title is good, the transfer is proper, and there are no liens and encumbrances other than the ones noted [return to top]

What's New in This Chapter The following elements are improvements in this chapter from the previous edition:  

New case brief in Section 14-1a, Wells v. Coleman. New Ethical Issue 14.1 in Section 14-1a regarding the Wells case on the role of attorneys and advisers when folks come looking to change titles, re-write wills, give powers of attorney, etc.



New Consider 14.1 in Section 14-1a on an unincorporated association and validity of deed, Institute of Range and the American Mustang v. Nature Conservancy. In Section 14-1a, new Consider 14.2 on mistake in the name of a corporate entity, Cheese Depot, Inc. v. Sirob Imports, Inc. New case brief in Section 14-3e, Anderson v. Fisher, this is an easier to understand adverse possession case. Updated recording statutes discussion in Section 14-7a because of changes in the statutes. Updated title insurance discussion in Section 14-7d because of changes related to title theft as well as mortgage mess clean-up post-2009. Removed Howe v. Palmer case brief and reworked it into chapter problem #2. Removed Consider 14.1, Christian v. Johnson, and reworked it into chapter problem #3.

     

[return to top]

History  England—livery of seisin

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 Transfer of stick, clod of earth  Statute of frauds—required written evidence 14-1a Requirements for Valid Deed 1. Grantor with Legal Capacity: Age and Mental Capacity a. Age b. Mental i. Understand legal significance of conveyance ii. Understand nature and value of property iii. Understand to whom property is being conveyed iv. Problem of undue influence a) Confidential relationship—trust, dependency b) Mental weakness and confidential relationship together create presumption of undue influence CASE BRIEF: Wells v. Coleman 2017 WL 2257633 (Mass. Land Ct.) FACTS:

In 2005, after a twenty-six-year marriage, Dr. Richard Coleman initiated proceedings to divorce Melanie Wells. As part of their eventual divorce settlement, Coleman paid Wells for her interest in their Martha's Vineyard property and she deeded her interest in the property to him. Coleman soon after married a woman thirty-seven years his junior, causing a rift with his two daughters. In 2013, Coleman learned that his estranged older daughter was getting married, and he feared he would not be invited to the wedding. About this time, he contacted Wells and, despite his having recently remarried, stated his desire to rekindle their relationship, reunite their family, divorce his new wife, and ―spend the rest of my life with you.‖ While his new wife was away visiting relatives in Europe, he began divorce proceedings against her, he and Wells began living together again at the Martha's Vineyard property that Wells had deeded to him as part of the divorce, and they both participated in planning their daughter's wedding. After a number of weeks together, Coleman reconveyed to Wells an undivided half-interest in the Martha's Vineyard property, and a few weeks later they together attended their daughter's wedding at the property. However, their rekindled relationship was short-lived; approximately four months after their reunion, and less than three months after their daughter's wedding, Coleman decided to leave Wells for a second time, and returned to his current wife. Following Wells' refusal of Coleman's request to again deed her interest in the Martha's Vineyard property back to him, Coleman unsuccessfully sought relief from the California court that had overseen their divorce. Coleman filed an action in California to enforce the divorce property agreement and Wells filed suit in Massachusetts seeking a declaratory judgment on title to

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the Chilmark property. Coleman counterclaimed on several grounds (which were all dismissed) and undue influence. ISSUE:

Was there undue influence used by Melanie Wells in order to gain title to the Martha‘s Vineyard property?

DECISION:

Use the chart below in the questions to cover the key points in the opinion along with a few of the quotes below from the opinion. A claim of undue influence requires the plaintiff to prove that (1) an unnatural disposition was made (2) by a person susceptible to undue influence to the advantage of someone (3) with an opportunity to exercise undue influence and (4) who in fact has used that opportunity to procure the contested disposition through improper means. Howe v. Palmer, 80 Mass. App. Ct. 736, 740–741 (2011). Here, Coleman's conveyance of a joint interest in the property to Wells was not an unnatural disposition. A gift between individuals formerly married for twentysix years, who have had two children together, and who are renewing their relationship and planning to make their renewed relationship permanent, with or without a remarriage, is little different from a disposition between affectionate family members or friends with a close and affectionate relationship. At the time of the conveyance, Wells and Coleman each expected that they would be permanently back together, taking significant steps towards planning for a longterm future together, such as searching for potential residences. Coleman claims that he was susceptible to undue influence at the time of the conveyance because a number of mental conditions, to some extent the result of physical pain from his operation and delusions exacerbated or caused by the medications he was taking, reduced his cognitive capacity and decision making ability. I do not credit that Coleman was afflicted with anxiety, depression, or fear of being alone to such a degree that he became susceptible to the undue influence of Wells. Nor do I credit that Coleman's stated desire to reunite with Wells was a delusion impairing his cognitive ability. Stated another way, I did not believe Coleman's facile testimony that he was helpless to resist Wells' urgings. [H]e otherwise exhibited an ability to function at a high level socially and in his profession; continued to demonstrate an interest and an ability to make sophisticated financial and legal decisions, including the decision as to the form of title for the deed and a consideration of how to avoid the land tax for the transaction; continued to provide sophisticated statistical analyses to the Chicago Blackhawks, assisting them in their run to the Stanley Cup championship; continued to function socially, attending dinners, traveling and maintaining contact with others, including his friend and massage therapist, as well as his sister and brother, from whom he makes no claim that Wells attempted to isolate him; and continued to show an ability, despite his professed fear, to be alone on many occasions.

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A yearning to be romantically linked to another, even if fervently held, is an elemental attribute of the human condition. The accompanying fear that one's love may go unrequited is not per se a symptom of an unsound mind or an incapacitating weakness of character but is rather an entirely ordinary and rational apprehension. Emotional reliance on another's love cannot (absent extraordinary circumstances) be equated to the utter dependence of the physically infirm or mentally incapable, as it does not truly deprive one of freedom of action. While Wells and Coleman spent a significant amount of time together for a number of weeks prior to the conveyance, Wells did not isolate Coleman from friends, family, his lawyer, his treating psychiatrist, or anyone else during that period. They attended occasional social engagements with friends. When they attended the Stanley Cup finals, Wells willingly sat separately from Coleman so that Coleman could watch from the press level. Coleman's massage therapist and friend, Samantha Burns, frequently visited Coleman, and Coleman spoke freely with her about the progress of his relationship with Wells. During Wells and Coleman's visit to Connecticut, Wells herself proposed that she and Coleman move in with Coleman's sister and Chuchinsky in an apartment in Stamford. [T]he evidence demonstrates that Coleman continued to exercise independent judgment free from the interference of Wells, and that he had free access to others with whom he might wish to consult. Coleman did in fact consult with Attorney Coogan for the purpose of discussing and determining the manner of the very conveyance that is the subject of this action. Wells was not involved in these consultations. The deed was likewise not signed in isolation, but in Coogan's office. Similarly, just days before signing the deed, Coleman signed a new will at Coogan's office without the presence of Wells. There is no question that Wells sat in a position of some degree of influence over Coleman. This is the natural result of a relationship of mutual affection. The evidence is clear that Wells asked Coleman on at least two occasions to ―put her back‖ on the deed. However, I do not credit that the evidence demonstrates that Wells employed unfair persuasion in exercising this influence. I credit instead Wells' contrary testimony that while she asked him to reconvey to her an interest in the property, she made no threats to leave him if her demands were not met. She stated that she asked him to put her back on the deed because she was afraid that he would leave her, and she wanted him to assure her that he was sincerely committed to their relationship. This was not an improper means of exercising her influence. It was at most solicitation or persuasion that was well within the grounds of propriety, particularly given their past history, their plans to reunite on a permanent basis, and that this conveyance would have returned the parties to the ownership positions that they had possessed during their prior marriage. She testified that she was emotionally ―crushed‖ by his departure (following their divorce). She expressed her concern in an e-mail to Coleman that ―I wouldn't recover if I lost you again.‖ In a separate e-mail, she told Coleman that

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she was afraid that he was using her as a ―sacrificial lamb so that you could keep your life and promote yourself at [their daughter's] wedding.‖ In sum, while a failure to prove a single element of the test for undue influence would be fatal to Coleman's claim, he has failed to carry his burden on any of the necessary elements. Accordingly, Coleman's claim for undue influence fails. This is the final adverse claim advanced by Coleman challenging Wells' title to the Chilmark property. Wells is entitled to a declaratory judgment that the June 27, 2013 deed is valid and is superior to any claim to advance by Coleman.

Answers to Case Questions 1. List the factors that mitigated against and those that worked to establish the claim of undue influence. FACTORS AGAINST COLEMAN

FACTORS FOR COLEMAN

His general behavior with women—the judge seemed genuinely irritated with his life choices

The surgery, the pain, and the effects of the drugs

He continued to work and do his business with the NHL

Wells asked him several times to give her back the property

Socialized, traveled, and had contact with family members

Estrangement of his daughter

No threats from Wells to leave—fear of his leaving was the greater likelihood

Second marriage and age of his wife (generally it is the second wife seeking the property, not the first)

Abandoned Wells when his wife called saying she would take him back

Under psychiatric care

Had independent third parties doing the transactions for him and Wells was not involved in those transactions

The wedding of his daughter and social pressures

2. Why is access to third parties an important part of undue influence determinations? This access shows that they have the opportunity to consult outsiders about what they are being asked to do; they are not isolated; and third parties have some sway over stopping the decisions or sometimes contacting the family. 3. How do the activities of the individual during the time of the conveyance affect decisions on undue influence? The court takes great care to outline all that Coleman was doing © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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during this time to show that he was making rational decisions, that he had access to others, and that the actions were consistent with his expressed feelings for those involved.

Answer to Ethical Issue (14.1) The interesting thing about these interactions is that no two of these professionals were together in one office so that the reality of what was being done would be more vivid. In this case, the client was making a change that benefited his ex-wife. Most cases of undue influence work the other way—that is—the person under undue influence is abandoning family to give property to a third party not the natural objects of affection and of giving. However, any time there are changes in these fundamental ownership and testamentary documents, lawyers and advisers should ask questions to ensure competency and also to explain consequences. Because of the privilege, the attorney and some advisers cannot bring others into the loop, but it is important to discern capacity and to question before doing. Questions about capacity can be pursued in other ways. Wells v. Coleman, 2017 WL 2257633 (Mass. Land Ct.). 2. Grantor with Legal Capacity: Identification of Grantor a. Grantor must be specifically identified i. Spelling should be accurate ii. Aliases should be noted iii. Critical for tracing chain of title iv. Some states require identification—single, married, widowed, etc. b. Grantors acting on behalf of others must so indicate c. Business organizations i. Corporation a) Signed by officer with authority b) Some states require corporate seal ii. Partnership a) Some states permit title to be held in partnership name b) Can be transferred by partner with authority iii. Associations with no legal existence a) Some states permit them to hold and transfer title b) Other states do not, and in those states cannot be legal grantors—must be an officer who holds and transfers title iv. Governmental bodies—need statutory authority to hold and convey title v. Nonprofits and HUD Regulation—prohibitions on speculation using government funds d. Court-appointed agents—can transfer, but may require court approval 3. Grantor's Signature a. Signature of both spouses may be required

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b. If signing in representative capacity, must indicate

Answer to Consider (14.1) The court held that the broad resolution was sufficient ratification by the board to validate the deed. There were other problems raised with the deed but there was a statute of limitations issue as well as the fact that Hyde did not read the documents carefully enough to understand what he was giving up, Much of it was negotiated on the hood of his truck, and some of the board members were really not clear at the time what was really being done. One even said he did not pay that much attention to what was being explained. There were several documents going back and forth and some changes that may have resulted in confusion, but the court found no fraud. Lessons learned: nonprofits may be operating on a shoe-string budget with volunteer directors, but the obligations and duties to pay attention, monitor transactions, and have documents, especially deeds, executed carefully do not change. Institute of Range and the American Mustang v. Nature Conservancy, 922 N.W.2d 1 (S.D. 2018) SEE CHART IN TEXT—FIGURE 14.1 AND USE POWERPOINT SLIDE 14-8. 4. Grantee Named with Reasonable Certainty a. Chain of title dependent on this b. Status of grantee—single, etc. c. Specify form of ownership and interest grantees will take—"as joint tenants", etc. CASE BRIEF: Buckeye Retirement Co., LLC, LTD v. Walter 404 S.W.3d 173 (Ark. App. 2012) FACTS:

On September 26, 2002, a judgment in the amount of $290,359.05 plus interest was entered in favor of Bank of America against Sammie Jackson and Independent Investment Management Group, Inc. (IIMG). The judgment was assigned to Buckeye on November 19, 2002, and on July 15, 2009, Buckeye filed a complaint, seeking to foreclose its judgment lien on a tract of real estate located at Lot 13, Normanwood Subdivision in Little Rock. The foreclosure complaint named Sammie Jackson, d/b/a Independent Investment Management, Inc. (IIM), and IIMG as defendants (IIMG was not a registered Arkansas entity). Shannell Walter was also named as a defendant in the foreclosure action because she was the current owner of the property. The chain of title relating to the property is as follows:  November 22, 1999—Warranty Deed from Anita Ziegler to IIM (IIM was not and had never been a registered Arkansas corporation)  January 6, 2005—Quitclaim Deed from Anita Ziegler to Angela Jackson  February 7, 2005—Quitclaim Deed from IIM to Sherkeyer Rena Whittington (this deed was signed by Sammie Jackson as president and secretary of IIM)

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 February 7, 2005—Warranty Deed from Angela Jackson (no relation to Sammie) to Sherkeyer Rena Whittington  April 4, 2007—Warranty Deed from Sherkeyer Rena Whittington to Shannell Walter The trial court granted a directed verdict against Buckeye, and Buckeye appealed. ISSUE:

Was the judgment lien valid? To determine that question the court had to determine who had title to the property.

DECISION:

The court held that because both IIM and IIMG never existed, they could not have title. Therefore, the judgment lien was not valid—there cannot be a lien against property when the debtor does not own the property. Buckeye's witness, Whitehead, testified that in Arkansas a judgment is a lien on land only if the land is owned by the judgment debtor. In this case, there is no evidence that the judgment debtors, IIMG and/or Sammie Jackson, owned the property. IIMG and Sammie Jackson did not own the property, and as a matter of law, Buckeye's judgment lien did not attach to the property that is now owned by Walter. Affirmed.

Answers to Case Questions 1. What happened in the chain of title that meant there could be no judgment lien? The entity to which the property was transferred never existed as a registered company under Arkansas law. Therefore, there was no transfer. That entity and any persons or other entities associated with it had no interest in the lien. There could not be a judgment lien. Any transfers from the LLC to anyone else were also invalid. 2. What would you suggest grantees do before closing on the sale of property from an LLC? Verify that the LLC is a registered entity because otherwise it cannot pass title. 3. Who owns the property? Anita Ziegler‘s quit claim deed in 2005 starts the correct chain of title, which puts Walters as the current owner, with no judgment lien.

Answer to Consider (14.2) The court held that there was a question of fact as to which company was intended because there was underlying confusion about which entity actually owned the property. The sloppiness in corporate names had created difficulties in the chain of title. Also, the court held that the suit needed all the real parties in interest present in order to get things resolved. Cheese Depot, Inc. v. Sirob Imports, Inc., 2018 WL 1801792 (N.D. Ill. 2018). 5. Recital of Consideration a. Need not put price in

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b. Gifts valid—really no consideration c. General consideration recital acceptable d. "For ten dollars and other good and valuable consideration" 6. Words of Conveyance a. Must express clear intent to convey b. Some words by statute afford warranties—"do quitclaim" 7. Habendum: The Type of Interest Conveyed a. See Chapter 2 b. Fee simple, defeasible, life estate, etc. 8. Description of Land Conveyed a. Must reasonably identify the property b. See Chapter 7 9. Acknowledgment a. Appear before notary or other officer b. Grantor is properly identified c. Date required d. Corporate seal required in some states CASE BRIEF: Diversified Internatl. Properties, Inc. v. Lukacs 2008 WL 5159900 (Ohio App. 5 Dist.) FACTS:

In 1987, Tracy Lukacs married David Fillmore. Together they purchased a property located on Kilbannan Court in Dublin, Ohio. In 1991, the parties dissolved their marriage. On February 17, 2005, Ms. Lukacs signed a quit claim deed on the Kilbannan property. A notary or witness was not present. Thereafter, Mr. Filmore had his friend notarize the deed outside of Ms. Lukacs's presence. On February 28, 2005, Mr. Fillmore recorded the deed at the Delaware County Recorder's Office. On April 27, 2005, the parties entered into a separation agreement wherein Mr. Fillmore received the Kilbannan property through his corporation Diversified International Properties (appellee). On August 9, 2005, Ms. Lukacs retained the services of Kemp, Schaeffer, Rowe & Lardiere Co., L.P.A. (appellant), to represent her on domestic relations issues. On August 9, 2005, Ms. Lukacs executed a mortgage in the amount of $25,000 in favor of KSR&L for attorney fees. On the same day, KSR&L filed an affidavit attacking the legality of the quit claim deed to Diversified. The mortgage was recorded on August 11, 2005. On August 20, 2007, Diversified filed an amended complaint for declaratory judgment regarding the quit claim deed. KSR&L filed a motion to dismiss on November 7, 2007. The trial court found the quit claim deed was voidable, but not void. Because Ms. Lukacs had conveyed her title in the property to Diversified, the trial court found she had no interest in the property and declared the mortgage to appellant a legal nullity.

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ISSUE:

Did the flawed deed with the invalid notary signature serve to convey title or does the mortgage take priority?

DECISION: The court held that as long as there was intent to convey that the company at least held an equitable interest in the property that could not be defeated by a technicality being used by someone who was trying to make money from the knowledge of the defect. “The „clean hands doctrine‟ of equity requires that whenever a party takes the initiative to set in motion the judicial machinery to obtain some remedy but has violated good faith by his prior-related conduct, the court will deny the remedy. The maxim, „he who comes into equity must come with clean hands,‟ requires only that the plaintiff must not be guilty of reprehensible conduct with respect to the subject matter of his suit.” Appellant is not a bona fide mortgagee and does not have an interest in the property. This court enters judgment, declaring appellee has an equitable interest in the property which is enforceable in contract, and appellant's mortgage is indeed a legal nullity.

Answers to Case Questions 1. What type of interest is created when the acknowledgement is flawed? The court holds that it is an equitable interest that is held when the parties fail to comply with technical requirements but do intend to convey property. 2. Why does the law firm have unclean hands? The law firm was aware of the flaw in the acknowledgement but was attempting to take advantage of the situation in order to obtain funds for its fee. 3. What do you think Ms. Lukacs was trying to accomplish? Ms. Lukacs obviously had regrets about signing over the property and was attempting to get it back by raising the technical defense. 10. Delivery a. Intent of grantor is critical b. Must relinquish all control c. If delivered to agent—must not have control over agent d. Presumption of delivery in some states if there is execution, acknowledgment, and recording e. Once delivered, deed transaction cannot be revoked

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Answer to Consider (14.3) The niece will win if she can establish that Holstein relinquished all control in turning over the document to the attorney. One difficulty is that the attorney is Holstein's agent, and Holstein may have still had control. 11. Acceptance 14-2

Types of Deeds—USE POWERPOINT SLIDES 14-13 TO 14-15

14-2a Quitclaim Deed 1. No warranties 2. No purporting to transfer 3. Transfer interest if any existed 14-2b Warranty Deed 1. Common law warranties a. Warranty of seisin—grantor has title to convey b. Warranty of the right to convey—grantor has authority to convey c. Warranty of freedom from encumbrances—no liens or physical debts in title (easements, restrictions) d. Warranty guarantee—grantor will compensate the grantee for losses experienced because of title defects e. Warranty of quiet enjoyment—grantor will reimburse for costs and expenses f. Warranty of further assurances—grantor will do all that is necessary to defend or protect title 14-2c Special Warranty Deed 1. Same warranties as under warranty deed 2. Limited to time grantor was in possession 14-2d Deed of Bargain and Sale 1. Transfers title 2. No warranties 14-2e Judicial Deed (Sheriff‘s Deed) 1. Executed pursuant to court orders 2. Convey good title if proceedings were proper

Answer to Consider (14.4) The court held that the lack of the consideration clause did not mean the deed was not valid. The court noted that quitclaim deeds are generally used to clean up title issues and the standard is more lenient. The court also noted that the deed was accepted for recording, so there was some affirmation of its validity. Newport Yacht Basin Ass'n of Condominium Owners v. Supreme Northwest, Inc., 277 P.3d 18 (Wash. App. 2012). 14-3 Transfer of Property by Adverse Possession—USE POWERPOINT SLIDES 14-16 TO 14-20

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

Origin  No good land record keeping system  Documents lost  Used as a method of establishing title  Used to establish boundary lines  Often referred to as "squatter's rights"

14-3a Actual and Exclusive Possession 1. Sole physical occupancy 2. Nature of occupancy dependent upon nature of land 3. Residential—reside Farm—cultivate Ranch—fencing and grazing 14-3b Open, Visible, and Notorious Possession 1. Cannot be secret 2. "Flying the flag of possession over the property" 3. Visible so that neighbors recognize possession 4. Enough to put owner on notice—actual notice is not required 14-3c Continuous and Peaceable Possession 1. Must be in possession of the property for the statutory period 2. Must not be interrupted by court orders or injunctions for removal 3. Tacking can be used a. Privity between parties b. Add years of prior possessor to your period of possession—Example: A possesses tract X for five years and dies, leaving all to B. B has possession for five years. If 10 years is the adverse period, B has title. 14-3d Hostile and Adverse Possession 1. Against the rights of the property's true owner 2. Conduct inconsistent with another's title 3. Not ill-will 4. Most states permit mistake in boundary to be basis for adverse possession 5. Permission by owner for use prevents adverse possession 6. Co-owners can make adverse claims against each other by one party possessing the entire interest adversely

Answer to Consider (14.5) The court held that building a fire pit and mowing the grass was not enough to put the Pistons on notice that their land was being adversely possessed. With woodlands there would have to

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be more done than an occasional use of the property. When they saw the shed, they took action and that was their first notice. Piston v. Hughes, 62 A.3d 440 (Pa. Super. 2013). 14-3e Possession for Required Statutory Period—SEE FIGURE 14.2 1. 10 to 20 years in most states CASE BRIEF: Anderson v. Fisher 296 So.3d 124 (Miss. App. 2019) FACTS:

On February 22, 2008, Bobby Anderson purchased four lots of land (Lots 27, 28, 29, and 30) in Carroll County, Mississippi. Directly to the south of Lots 29 and 30, the Fisher family (Jerry, Edsel, Woodley, and Raymond) owned Lots 1 and 2. There is a disputed tract of land at the southern boundary of Lots 29 and 30 and the northern boundary of Lots 1 and 2. The survey that Anderson received before purchasing the land indicated that the disputed tract of land was included within the boundary of Lots 29 and 30. The Fisher family also had a survey that indicated the disputed land was within the bounds of Lot 1 and Lot 2. For decades, the Fishers had used the disputed tract of land to farm, hunt, and cut timber. Edsel Fisher testified that the family had also put a road down through the disputed property long before Anderson owned it. Based on their belief that the disputed land was included in their property, the Fishers used flags to indicate their property line. Edsel testified that these flags were replaced every winter for the last ten years. Three separate surveys were done that involved the disputed land. The surveys had obvious discrepancies on who owned what and did not reach the same conclusion for various reasons, including changes in survey methodology. Without clarity on boundaries and surveys, the lower court relied on adverse possession and found that the Fishers owned the property through adverse possession. Anderson appealed.

ISSUE:

Was there adverse possession of the disputed area of land by the Fishers?

DECISION:

I. Under the Claim of Ownership The Fishers had leased land to Mark Berryhill for hunting. Edsel Fisher testified that the family had leased the disputed tract of land to Berryhill beginning in the 1980s. Berryhill testified that he was aware of the boundaries because of the flagging and that the Fishers had ―always showed [him] where the line was on every part of the land.‖ Berryhill recalled that the property had been flagged ―at least [fifteen] to [twenty] years.‖ The record indicates that the Fishers identified their land to Berryhill by using flags or ribbons. This was indicative of ownership. Edsel testified that the property

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was always kept flagged and that ―every winter they would reflag the line and that they had been doing this for ten years or so.‖ This was confirmed by Sutherland, who said he did find old flags along the property line claimed by the Fishers. Sutherland (one of the surveyors) noticed the flags ―fifteen to twenty years ago.‖ Anderson, however, argues that the flags the Fishers set out were not prevalent enough to indicate ownership. Anderson voiced opposition to the Fishers‘ claim of ownership because there were no photographs or ―tangible proof‖ offered about the flags and markings on the property. The chancellor took this argument under consideration but ultimately found the testimony of Edsel Fisher and Berryhill as credible evidence of the flags‘ placement and the Fishers‘ assertion of ownership over the land. The evidence supported that the Fishers had proved ownership by clear and convincing evidence. II. Actual or Hostile The land was farmed by the Fisher family in the 1950s and the 1960s. The land was also leased out as hunting land for the last thirty-three years. The chancellor relied on Edsel's testimony that, based on the belief that his property line was more north, he began to flag the line about ten to fifteen years prior to Anderson's claim. Edsel based this line off of an earlier survey. This satisfied the element of hostile possession. III. Open, Notorious, and Visible The Fishers, quite literally, ―unfurl[ed] [their] flags on the land‖ by planting flags on what they thought to be their property line. As the chancellor noted, ―the flags were visible as verified by Berryhill,‖ and the farming and hunting done on the property over the decades was also visible. The Fishers‘ brief indicates that Anderson does not live on the property or even in the county, but Anderson could have easily discovered the flags or the visible deer stands that were installed for hunting ―by merely walking [his] property and observing its state.‖ [There was] significant evidence to conclude the adverse possession was open, notorious, and visible. IV. Continuous and Uninterrupted for a Period of Ten Years Berryhill testified that he had leased the property from the Fishers for the last thirty-three years—well over the statutory requirement of ten years. Berryhill made it clear that there was never a gap in his lease from the Fishers. The Fishers proved the necessary element of continuous possession by clear and convincing evidence.

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V. Exclusive As the chancellor noted in his bench opinion, ―it does not mean that no one else can use the property.‖ Berryhill was there with permission.

The Fishers were unaware of anyone else who used the property unless the Fishers gave them permission. The chancellor noted that Edsel testified that the previous owners of Lot 29 and Lot 30 had cut timber on the property in the 1970s but had stopped short of the disputed property. VI. Peaceful The evidence presented at trial indicates that the Fishers proved by clear and convincing evidence each of the elements required to prove title through adverse possession. While Anderson argues that the chancellor should have relied on the expert testimony presented in this case, the testimony of the witnesses provided more than enough credible proof to apply the facts to the existing law and find that the Fishers owned title to the disputed land. Affirmed.

Answers to Case Questions 1. What were the key actions by the Fishers that sealed their adverse possession case? They had used the land in the 1950s and 1960s. They had leased the land for hunting for 33 years. They had planted their flag on the land by planting their flags to show boundaries (the boundaries they believed existed). 2. What key points worked against Anderson? He did not live there, had not walked the land, and had not observed what was happening. The lesson here is that when you own land in another state or country, it is important to observe the land in person to see what is being done on the land. 3. What lessons did you learn about surveys? Surveys have differing methodologies and the starting points that they use may not be accurate. Reasonable surveyors can disagree and when they do, we rely on adverse possession.

Answer to Consider (14.6) No. The court held that the use was seasonal and was by different individuals and not a single use. Although Weinstein could tack on the previous owners‘ use, the use was not year-round, and others used the property as well for general purposes. There was not enough to put the

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owner on notice of a problem with adverse possession. Weinstein v. Hurlbert, 45 A.3d 743 (Me. 2012). 14-3f Observations About Adverse Possession 1. Payment of taxes is not necessarily controlling, although required in some states— California 2. To hold adverse possession—bring action in trespass or ejectment and obtain order and/or injunction for removal 3. Quiet title action can establish parties' rights PRACTICAL TIP: Clarify rights of those in possession of property. 14-4 Transfer of Property by Gifts—USE POWERPOINT SLIDES 14-21 AND 14-22 14-4a Donative Intent 1. Intent to pass title absolutely 2. Intent to relinquish all rights in the property 3. Generally written document is required 14-4b Delivery 1. Establishes intent to part with possession and control 2. Delivery of deed to grantee is sufficient 3. Delivery of deed to grantee's agent is sufficient 4. Delivery to third party must be unconditional with complete relinquishment of control 5. Delivery can be actual or constructive (delivery to third party or to safe deposit box) 6. Safe deposit box—cannot be jointly held by grantor or solely held by grantor 14-4c Acceptance 1. Presumed unless donee refuses as by tearing up deed 2. Setting aside gift a. Duress b. Undue Influence

Answer to Consider (14.7) The court held that there was enough evidence for the case to survive summary judgment and for a jury to determine whether there was enough surrender of control of the deeds to Lynda to constitute delivery. The court needed to know if she had exclusive control and whether Johnnie ever spoke of changing the conveyances and other factors dealing with whether the actions were permanent or temporary. Fortner v. Hornbuckle, 761 S.E.2d 683 (N.C. App. 2014).

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14-5 Transfer of Property by Will or Intestate Succession—USE POWERPOINT SLIDES 14-23 AND 14-24 See Chapter 17

14-6 Transfer of Property by Eminent Domain—USE POWERPOINT SLIDES 14-25 AND 14-26 See Chapter 19 14-7 Protection of Title—USE POWERPOINT SLIDES 14-27 TO 14-44 14-7a Recording  Originally required handwritten copies to be filed 1. Documents Required to Be Recorded a. All instruments affecting title b. Mortgages, deeds, deeds of trust, liens, Article IX security interests 2. Mechanics of Recording a. Done at some statutorily designated office b. Agency retains a copy of the document c. Fee required to be paid d. Document stamped with date, time, fee number e. Indicates where copy of document can be found 3. System for Maintaining and Organizing Records a. Grantor/grantee index—SEE FIGURES 14.3 AND 14.4 i. Alphabetical order ii. Indexes under both names iii. Enables tracing of chain of title iv. Can have gaps in tracing chain of title b. Tract indexes i. Every tract in a country traced to its origin—government patent ii. Trace title by tract 4. Method for Determining Priorities of Interests a. Race—first to record wins b. Notice—last BFP to whom property was conveyed c. Race/notice—first BFP to record interest CASE BRIEF: In Re Rivera 513 B.R. 742 (D. Colo. 2014) FACTS:

In 2006, Anthony E. Rivera (the bankruptcy debtor) executed a promissory note payable to Norman K. Cygan and Carol S. Cygan. The promissory note was secured by a deed of trust dated June 29, 2006, on a condominium unit located

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in Denver. The deed includes the complete street address, including the condominium unit number. The deed of trust does not contain the legal description of the property, but instead describes the encumbered property as: ―SEE EXHIBIT A—LEGAL ATTACHED.‖ On July 11, 2006, the deed was recorded in the real property records of the Clerk and Recorder of Denver County, Colorado, and was properly indexed in the grantor-grantee index for the City and County of Denver. However, when the deed was recorded, ―Exhibit A‖ containing the legal description was not attached. In July 2009, Rivera filed for bankruptcy under Chapter 7 of the Bankruptcy Code. Rivera listed the real property at issue here as an asset. In August 2009, the Cygans filed a motion for relief, seeking to enforce their security interest in the property. The bankruptcy court granted the motion for relief from the automatic stay in September 2009, and the Cygans began judicial foreclosure proceedings on the property. The parties dispute whether the recorded deed of trust provided sufficient notice of the Cygans‘ security interest in Rivera‘s condominium unit. The Colorado Supreme Court issued a declaratory opinion at the bankruptcy trustees‘ request that the lien was invalid because of a lack of a legal description. The Colorado Supreme Court declared the lien invalid. Meanwhile, the Colorado legislature passed clarifying legislation that held a street address was sufficient for inquiry notice and the Colorado Supreme Court vacated its opinion. The Cygans and the bankruptcy trustee asked the court to clarify their priority positions given the legal back-and-forth on the issue of the recorded lien with a street description and an attached legal description. ISSUE:

Was the lien valid or was there a faulty recording thus making the bankruptcy trustee a BFP?

DECISION:

The Cygans are entitled to their lien and priority status. The court held that the Colorado Supreme Court‘s declaratory opinion had been corrected by the state legislature and that the lien of the Cygans was valid because the trustee was point on inquiry notice that there was an issue with the property—something that prevented the trustee from being a BFP—the bankruptcy estate was subject to the lien on the property.

Answers to Case Questions 1. What happened between the legislature and the Colorado Supreme Court on whether a street address was a legal description for purposes of recording? The Colorado Supreme Court said the lien was not valid in interpreting the recording statute, but then the legislature passed clarifying legislation that said it was. 2. Do the Cygans get their lienor priority position? Yes, they get their lien because the court held there was inquiry notice with their filing and the trustee was not a BFP. 3. What advice would you give to sellers and creditors based on this case? Check and

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recheck even if the deed is not complete so that you don‘t end up with almost six years of litigation to clarify whether you are a BFP or a bankruptcy trustee with priority over a secured creditor.

Answer to Consider (14.8) Race—A Notice—B Race/notice—A USE ADDITIONAL EXAMPLES ON POWERPOINT SLIDES 14-33, 14-34, 14-35, AND 14-36. 14-7b Torrens System 1. Invented by Sir Robert Torrens for Australia 2. Title registered in one owner's name 3. Can only transfer title by having registration changed—requires certificate and deed to do so 14-7c Title Abstracts 1. Trace title—summary of findings 2. Opinion as to validity of title 3. Abstract structure a. Caption or head b. Copies of documents affecting title c. Abstractor's certificate d. Attorney's opinion 14-7d Title Insurance 1. Process of Issuing a Policy a. Abstract prepared b. Preliminary binder issued c. Payment or fee based on property value 2. Coverage Afforded by the Title Policy 3. The Title Policy a. Insuring clauses (coverage) b. Exclusions c. Schedules A and B (added endorsements) d. Conditions e. Stipulations (what is included in "public records") 4. Exclusions in Title Insurance Coverage a. Zoning restrictions b. Eminent domain c. Facts not recorded but discoverable d. Unpatented mining claims e. Violations of environmental laws f. No payment for litigation expenses for excluded items

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g. Insured property owner must be a BFP h. Public records are more narrowly defined i. Usury issues not covered j. Mechanic's liens 5. The Enhanced Title Policy: Special Protection Through Endorsements a. Restrictive covenant endorsement b. Zoning law endorsement c. Location/boundary endorsement d. Tax endorsement e. Successor and assignor endorsement f. Inflation endorsement 6. Who Is Protected Under the Title Policy? a. Buyer b. Lender c. Seller not protected—title insurer can sue seller on basis of breach of warranty; insurer must pay buyer

Answer to consider (14.9) The court held that while the Gebhardts had an interest in the LLC (which was a personal property interest), they no longer had an interest in the real property as the result of their conveyance of the property to the LLC. The court also rejected the Gebhardts claim that there was no ―real‖ conveyance because the LLC in fact paid no consideration, ruling that the conveyance to the LLC provided the Gebhardts with actual and substantial benefits, including limited liability and estate planning benefits. The court found that the Gebhardts‘ argument was ―circular,‖ i.e., a valid conveyance had occurred because a transfer tax is imposed on the transferring of property and if there had not been a conveyance, no transfer tax would have become due. The court also noted that as the result of conveying by special warranty deed, the Gebhardts covenanted to protect the LLC only against claims made ―by, through, or under‖ the Gebhardts, as grantors, and did not warrant title against someone else. Therefore, the court held, the Gebhardts had transferred to the LLC the unresolved title claim, and the LLC became the proper party to defend any action by another party to quiet title (with no recourse against the Gebhardts as grantors). Finally, the appellate court rejected the Gebhardts‘ assertion that they had suffered a loss under the policy, and reported it to the title insurer before the conveyance to the LLC. The court noted that the Gebhardts had admitted in their appellate court brief that no actual loss had yet occurred. The court held that because of the conveyance to the LLC, which was a legally distinct entity, any subsequent loss would be the LLC‘s loss, which entity was not the insured party under the title policy either before or after the conveyance. Gebhardt Family Restaurant, LLC v. Nation's Title Ins. Co. of New York, 752 A.2d 1222 (2000).

7. Damages

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a. Will pay loss—lessor of pay off, value or policy amount b. Will pay costs, expenses, attorneys' fees for litigation CASE BRIEF: Witkowski v. Richard W. Endlar Ins. Agency, Inc. 968 N.E.2d 922 (Mass. App. 2012) FACTS: Brian T. Witkowski (plaintiff) purchased a condominium at the Balmoral Condominium, a property converted in 1984 to residential condominium from a building originally constructed in 1920. The condominium included eighty-six residential units; four of those, including unit 4 (Witkowski's unit), were located in the basement of the building. The condominium is located in a floodplain area designated by the Federal Emergency Management Agency (FEMA) as an AE flood zone, an area of special flood hazard. Under applicable Federal law, federally regulated lending institutions are forbidden to make any loan secured by improved real estate located in an area of special flood hazard, unless the property is covered for the term of the loan by flood insurance in specified amounts. Elizabeth Kelley, a paralegal employed by the attorney representing Witkowski's mortgage lender, contacted the management company for the condominium to request proof of flood insurance; she in turn was referred to Richard Endlar Insurance Agency. Kelley transmitted to Endlar a facsimile request for proof of flood insurance on the unit. Endlar responded to Kelley with a request for additional information, including the names and addresses of the prospective purchaser and mortgage lender. Kelley furnished the requested information, and on June 29, 2005, Endlar issued a one-page statement regarding insurance on the condominium. At the top of the page, the statement begins with the words ―THIS IS TO CERTIFY THAT‖; it then proceeds to identify Witkowski as the unit owner and GMAC Mortgage Corporation as his ―[b]ank.‖ Continuing, the document states that the ―[a]bove unit owner is insured under the Master Policy issued to: Balmoral Condominium Trust, Its Trustees and All Unit Owners, A.T.I.M.A.as follows‖ … The document then lists flood insurance issued by ―Clarendon National Ins.‖ in the amount of ―2500000,‖ and flood insurance issued by ―The Hartford‖ covering the ―Building‖ in the amount of ―9800000.‖ A signature appears at the bottom of the page, apparently for the purpose of confirming the information contained therein. Immediately above the signature line, the following legend appears: ―The Insured's Name, for the purpose of this insurance, shall be as insurance Trustee for all Unit-Owners collectively. This memorandum is for information only; it is not a contract of insurance but attests that policies as numbered herein, and as they stand at the date of this certificate, have been issued by the Companies. Said policies are subject to change by endorsement, and to assignment and cancellation in accordance with their terms.‖

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Satisfied with the certificate as proof of the existence of flood insurance on the unit, the attorney for Witkowski's mortgage lender authorized the advance of mortgage funds, and Witkowski closed on his purchase of the unit on July 25, 2005. Witkowski also purchased a policy of title insurance from First American. Among the risks insured against by the policy is the risk that (as of the date of issuance of the policy) ―[y]our Title is unmarketable, which allows someone else to refuse to perform a contract to purchase the Land, lease it or make a Mortgage loan on it.‖ Among the exclusions from coverage under the policy are losses resulting from ―1. Governmental police power, and the existence or violation of any law or government regulation. ... 2. The failure of Your existing structures, or any part of them, to be constructed in accordance with applicable building codes. This Exclusion does not apply to violations of building codes if notice of the violation appears in the Public Records at the Policy Date.‖ The condominium sustained substantial damage as the result of a flood of the Shawsheen River on May 15, 2006. Witkowski's unit was completely destroyed. Approximately one week after the flood, a trustee of the condominium association told the four basement unit owners that their units were excluded from coverage under the association's master policy. Under applicable building codes, because of its location at basement level in a special flood hazard zone, the plaintiff's unit cannot be rebuilt for the purpose of human occupancy. Witkowski filed suit against both Endlar and First American. The trial court granted the insurers summary judgment and Witkowski appealed. ISSUES:

Does the title insurance cover the loss? Is the insurer liable for failure to disclose the four lower units were not covered?

DECISION: The court held that there was a possible claim against the insurer for withholding information. However, title insurance does not cover a problem with laws and regulation that did not exist until after a flood, something not in existence at the time of the transaction.

Answers to Case Questions 1. What happens with the claim against the insurance agency? The court allows that claim to go forward because there was a withholding of information and likely that outsiders would be misled. 2. What happens with the claim against title insurer? The claim is dismissed because there was not a governmental issue that resulted in the title problem—it was the flood that caused it. 3. Why does the argument that laws and regulation prevent the reconstruction of the condo not convince the court that the title insurer should cover the loss? The court indicated that the flood happened after the fact and could not be anticipatorily covered by the insurer.

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Answer to Ethical Issue (14.2) The court granted summary judgment to the client and the attorney and law firm appealed. The Supreme Court held that: (1) expert testimony was not required to establish attorney's negligence; (2) attorney's failure to disclose subdivision violation constituted legal malpractice; and (3) award of prejudgment interest was proper. In terms of an ethical obligation, it was also a slam dunk because this was withholding material information that resulted in harm. As court noted, it was not an expert situation, but a simply ethical obligation. Estate of Fleming v. Nicholson, 724 A.2d 1026 (Vt. 1998). [return to top]

Additional Activities and Assignments Answers to Chapter Problems 1.

The Court of Appeals held that the marketability problem landowner faced related to a condition of the property, rather than a defect in title covered by its title policy. MGD Partners Ltd. Liability Corp. v. First American Title Ins. Co., 440 Fed.Appx. 368, 2011 WL 3962568 (5th Cir. 2011). The court found the conduct to be outrageous and a classic case of undue influence. There was a simpleminded man who was bullied and pressured even as he was isolated from his family, church, and wife. He gets his farm back as well as damages and costs of the litigation.

An (1) unnatural disposition [is] made, (2) by a person susceptible to undue influence to the advantage of someone, (3) with an opportunity to exercise undue influence, and (4) who in fact has used that opportunity to procure the contested disposition through improper means. The ministers were ministers by correspondence course, they alienated their victim from his family and church, they mocked him, they made him beholden to them without really having any agreements. They convinced him to leave his farm and sign over half of it to them. Howe v. Palmer, 956 N.E.2d 249 (Mass. App. 2011). 3. In Christian v. Johnson, 556 S.W.2d 172 (Ky. 1977), the court found that the conveyance to Christian was ineffective for several reasons: a. Corporation was not identified as grantor; b.Signature clause was improper; and c. There was no corporate seal. 4. Yes, adverse possession of property. All elements present. Bearden v. Ellison, 560 So.2d 1042 (Ala. 1990). 5. Grantors—For ten dollars and other good and valuable consideration, Paul S. Smith and Helen Smith, his wife, do hereby specially warrant and convey the property located at 4141 Waverly Street, Phoenix, Arizona 85003, and more particularly described as (students will have to use a metes and bounds description): Beginning at a point 100 feet from the intersection of the easterly side of Kimberly Drive and southerly side of Waverly Street on the southerly side of Waverly Street and

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proceeding 60 feet south parallel to the easterly side of Kimberly Drive and from there proceeding 50 feet east parallel to the southerly side of Waverly Street and from there 60 feet north parallel to the easterly side of Kimberly Drive and from there 40 feet west along the southerly side of Waverly Street back to the beginning point. To Samuel P. Polk and Janice Polk, his wife, residing at 3232 Holly Drive, Phoenix, Arizona 85204, not as tenants in common nor as community property, but as joint tenants with right of survivorship, subject to all easements, encumbrances, taxes and liens of record. Said grantors warrant title only for the time of their possession. ____________________________________ ______________________________________ Grantor

Grantor

(Notary) Subscribed, sworn to, and acknowledged before me this ______ day of ____________, 20__, by Paul S. Smith and Helen Smith.

____________________________________ Notary

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If your state requires the grantees to sign, use:

____________________________________ Grantee

______________________________________ Grantee

Subscribed, sworn to, and acknowledged before me this ______ day of ____________, 20 __, by Samuel P. Polk and Janice Polk. ____________________________________ Notary (If your state requires witnesses, a witness clause should be installed) The price need not appear in the deed.

6. Race—B Notice—C Race/notice—A 7. Adjacent property owners met common-law and statutory requirements for adverse possession by demonstrating by clear and convincing evidence that, for period of ten years, they and their predecessors in interest actually possessed disputed parcel, that such possession was hostile and under claim of right, open and notorious, and exclusive and continuous for statutory period, and that property had been usually cultivated or improved. Common-law elements of adverse possession of actual, open, exclusive, hostile and uninterrupted possession were established by adjacent property owners in quiet title action; adjacent owners and their predecessors occupied disputed area by mowing lawn, planning vegetable garden, raking leaves, cleaning debris, planting trees and bushes, harvesting fruit trees, building or removing structures which partially encroached upon parcel, and constructing and maintaining elaborate drainage and septic system along entire length of parcel, and there was no indication that disputed parcel was entered by nominal title holder's predecessors or that predecessors even objected, consented or acquiesced to adjacent owner's possession. Franzen v. Cassarino, 552 N.Y.S.2d 789 (1990). 8. Evidence that landowner claimed, by way of posted sign, that parking lot was for use by its motel customers only, and that it employed a security guard to insure that all trucks in lot were properly registered at motel was sufficient to create question of fact as to whether

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landowner acquired title to disputed parking lot by adverse possession, precluding summary judgment. Marathon Petroleum Co. v. Colonial Motel Properties, Inc., 550 N.E.2d 778 (Ind. 1990). 9. Bryant lost the case for adverse possession because he was not the exclusive user. With other pilots, it was a public license, revocable at any time, not an adverse possession relationship. Bryant v. Palmer Coking Coal Co., 936 P.2d 1163 (Wash. App. 1997). 10. The court held that the Princeton folks were on notice about the taxes. The sale was subject to the possibility that there might be taxes. The title insurance policy only covers existing defects in the title that could have been discovered. A title company does not search court or city documents for possibilities of defects in title. The title insurance policy does not cover possibilities. Princeton South Investors, LLC v. First American Title Ins. Co., 97 A.3d 1190 (N.J. A.D. 2014).

In-Class Exercises 1. Have students complete chapter problem 5. 2. Have the students develop a checklist for verifying boundaries on property they are considering purchasing. 3. Have the students read the following case and answer the discussion questions: PENCE v. RAWLINGS 453 N.W.2d 249 (Iowa 1990) Vivian Meissner, 93, is a widow without children or close relatives who resided in her own home in Marshalltown, Iowa. She occasionally has rented out a small apartment in her home on the second story. In the fall of 1985, Brian Rawlings's father, Dale, learned of the vacant apartment. Although she was initially reluctant, Meissner agreed to rent the apartment to Rawlings and his two-year old son just before Thanksgiving. Rawlings had three convictions for breaking and entering and had just finished a 10½-month prison sentence when he moved into the Meissner apartment. He was on probation at the time. Rawlings began helping Meissner by performing a variety of household chores and by helping her with her finances. In the fall of 1986, Meissner had a will prepared and left her house and $5,000 to Rawlings. Also, during this period she purchased a $19,000 Cadillac and had the car placed in Rawlings' name as well as hers. On April 12, 1987, Meissner sold her homestead to Rawlings by contract reserving a life estate for herself. In addition, she sold her 1985 Cadillac and 1970 Oldsmobile to Rawlings and transferred certificates of deposit, jewelry, and savings accounts to him. These latter transfers were allegedly in "trust" for Meissner and the consideration was $1. On April 13, 1987, Harvey Pence was appointed the conservator of the property of Vivian Meissner, pursuant to a voluntary petition filed by Meissner. © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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In August 1988, Pence filed a petition for the replevin of the automobiles and other items of personal property and another petition to quiet title in the homestead that had been transferred to Rawlings. The trial court found that there was a confidential relationship and that these transfers were the product of undue influence and set them aside. Rawlings appealed. HAYDEN, Judge Rawlings maintains the conservator failed to carry his burden of establishing by clear proof a confidential relationship existed between himself and Meissner. He further contends Pence failed to prove all the elements necessary for a finding of undue influence in the transfer of her real property. The trial court found there was clear, satisfactory, and convincing evidence a confidential and fiduciary relationship existed between Meissner and Brian Rawlings. Because defendant did not meet his burden of showing the advantage he procured was without undue influence, the trial court voided the conveyance of real estate. We concur. A confidential relationship arises whenever a continuous trust is reposed by one person in the skill and integrity of another. It has been said that all the variety of relations in which dominion may be exercised by one person fall within the general term confidential relation. The evidence clearly points to a confidential relationship. Brian Rawlings was integrally involved in the daily conduct of Meissner's life. The defendant's own evidence established a very close, almost parent-child relationship. Rawlings was also involved in Meissner's daily financial affairs. This confidential relationship even extended to the preparation of the documents of transfer in this case. Where a confidential relationship exists, a transaction by which the one having the advantage profits at the expense of the other will be held presumptively fraudulent and voidable. The burden then shifts to the claimant to negate the charge of undue influence by clear and convincing proof. The evidence produced by defendant does not rise to the level of clear and convincing proof the transfer was made without undue influence, Contrary to defendant's contention, all of the elements of undue influence are proven. The four elements necessary to establish undue influence are: (1) the testator must have been susceptible to undue influence; (2) the person alleged to have exercised undue influence must have had the opportunity to exercise it; (3) the person must have had the disposition to influence the person unduly for the purpose of procuring an improper favor; and (4) the result must clearly appear to be the effect of undue influence. There is ample evidence in the record of Meissner's confusion and forgetfulness. She would often have to contact bank personnel several times in one day because she was unable to recall completing transactions or receiving answers to her questions. She was highly susceptible to the defendant's influence because she was extremely dependent upon him.

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The opportunity to exercise undue influence is obvious. Rawlings lived with Meissner and, at some point, monitored her telephone calls and visitors. Evidence of defendant's disposition to influence is found in the will dated July 7, 1987, which was prepared by Brian Rawlings and which left most of Meissner's property to him. Additionally, the documents drawn up which transferred Meissner's property were prepared by Rawlings, as well. The results clearly indicate defendant's undue influence. All of Meissner's real and personal property, valued in excess of $100,000, was transferred to Rawlings and his father. We conclude there is substantial evidence in the record to establish all of the elements of undue influence. Affirmed. [return to top]

Discussion Questions 8. Give Rawlings's background. 9. How long did Rawlings reside in the apartment before the transfers began? 10. What type of control did Rawlings exercise over Meissner? 11. What property was transferred? How much was it worth? 12. Was there a confidential relationship? 13. Will the transfer of real property be set aside? [return to top]

Resources Beasley, "Federal Tax Liens and the Unrecorded Divorce Decree," 91 Neb. L. Rev. 214 (2012). Burney, "The Regrettable Rebirth of the Two-Grant Doctrine in Texas Deed Construction," 34 South Texas L. Rev. 73-108 (1993). Charron, ―Stop Gap: Michigan‘s Recording Laws Conformed to Practice,‖ 36 Mich. Real Prop. Rev. 71 (Summer 2009). Closen, ―The Case That There is a Common Law Duty of Notaries Public to Create and Preserve Detailed Journal Records of Their Official Acts,‖ 42 J. Marshall L. Rev. 231 (Winter 2009). Facey, ―‘Top Ten‘ Pitfalls in Preparing Lady Bird Johnson Deeds,‖ 34-WTR Vt. B.J. 42 (Winter 2008/2009). Institute for Paralegal Training, Introduction to Real Estate Law, Chapters 3 and 4. Peterson, "Losing Our Homes, Losing Our Way, or Both? Foreclosure, County Property Records, and the Mortgage Electronic Registration System," 40 Cap. U. L. Rev. 821 (Fall 2012).

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Powell, Real Property, Volumes 2 and 7. Pristin, ―Despite Inquiry into Fraud, Buyers Still Seek Harlem Homes,‖ New York Times, January 15, 2001, A16. "Recording of Forged Deed After Death of Decedent Does Not Affect Alternative Valuation of Property," 35 Tax Management Memorandum 66(1) (1994). Shepherd, "Drafting Radon Contingency Clauses," The Practical Real Estate Lawyer, Jan. 1990 at 43. Sheppard, ―Assurances of Titles to Real Property Available in the United States: Is a Person Who Assures a Quality of Title to Real Property Liable for a Defect in the Title Caused By Conduct of the Assured?,‖ 79 N.D. L. Rev. 311 (2003). Smith, "On the Economy of Concepts in Property," 160 U. Pa. L. Rev. 2097 (June 2012). Smith and Boyer, Survey of the Law of Property, Chapters, 7, 15, 16, 17, 18, 19, 20, 21. Teeple, "Ambiguities in Deeds, Leases and Assignments," 12 Eastern Min. L. Foundation 17 (1991). Thompson, Real Property, Volumes 5A-9. Tiffany, Real Property, Sections 966-1066. ―Title Fraud—Those Recording Statutes . . . Again,‖ 43(1) Real Estate L. J. 47-55 (2014). Witte, ―Avoiding the Un-Real Estate Deal: Has the Uniform Electronic Transactions Act Gone Too Far?,‖ 35 J. Marshall L. Rev. 311 (Winter 2002). Woolley, "MERS: The Unreported Effects of Lost Chain of Title on Real Property Owners," Hastings Bus. L.J. 365 (Summer 2012). [return to top]

Cases Bernal v. Roncallo, 269 S.2d 766 (Fla. 1972). Fees-Krey, Inc. v. Page, 591 P.2d 1339 (Jan. 1979). Hartman v. Shambaugh, 630 P.2d 758 (N.M. 1981). Harvey v. Furrow, 107 A.3d 604 (Me. 2014). Hood v. Hood, 384 A.2d 706 (Maine 1978). In Re Estate of Kennedy, 318 N.Y.S.2d 759 (1971). Lumpkins v. CSL Locksmith, LLC, 911 A.2d 418 (D.C. 2006). Montgomery County v. Wildwood Medical Center, LLC, 2007 WL 686966 (Md. App. 2007).

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Morris v. Humphrey, 496 N.E.2d 1209 (Ill. 1986). Patterson v. Seavoy, 2005 WL 293670 (Ind. App.). Paulsen v. Harold Tippett Oil Co., 593 S.W.2d 615 (Mo. 1980). Porter v. Posey, 592 S.W.2d 844 (Mo. 1979). Somon v. Murphy Fabrication & Erection, 232 S.E.2d 524 (W.Va. 1977).

Instructor Manual Marianne M. Jennings, Real Estate Law, 2022, 9780357518649; Chapter 15: Financing in The Transfer of Real Estate

Table of Contents Chapter Objectives .................................................................................................................................................... 469 Key Terms ...................................................................................................................................................................... 469 What's New in This Chapter ................................................................................................................................... 474 Chapter Outline .......................................................................................................................................................... 475 Answers to Case Questions ........................................................................................................................... 478 Answer to Consider (15.1).............................................................................................................................. 478 Answer to Ethical Issue (15.1) ....................................................................................................................... 479 Answers to Case Questions ........................................................................................................................... 481 Answer to Consider (15.2).............................................................................................................................. 482 Answer to Ethical Issue (15.2) ....................................................................................................................... 484 Answer to Case Questions ............................................................................................................................. 490 Answer to Ethical Issue (15.3) ....................................................................................................................... 490 Answer to Consider (15.3).............................................................................................................................. 494 Answer to Consider (15.4).............................................................................................................................. 495 Answer to Consider (15.5).............................................................................................................................. 495 Answers to Case Questions ........................................................................................................................... 497 Answer to Ethical Issue (15.4) ....................................................................................................................... 497 Answer to Consider (15.6).............................................................................................................................. 498 Cautions and Conclusions ............................................................................................................................. 500 Additional Activities and Assignments............................................................................................................... 501 In-Class Exercises ................................................................................................................................... 502

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Discussion Questions................................................................................................................................................ 506 Resources .............................................................................................................................................. 506

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Chapter Objectives The following learning outcomes are addressed in this chapter (see PowerPoint Slide 15-1) 15.01

Discuss the methods of financing the purchase of property and the requirements for using them.

15.02

Discuss the rights and responsibilities of the parties under the various methods of financing.

[return to top]

Key Terms ability to repay rule (ATR): imposes requirements on lenders for calculating the debtor‘s ability to pay acceleration clause: provision in note, mortgage, or deed of trust that provides for the acceleration of the due date of the loan; generally, results in the full amount of the loan being due upon default such as nonpayment adjustable rate mortgage (ARM): a type of mortgage with a rate that changes according to some interest-rate index advertisement: under Regulation Z, public disclosure of credit terms after-acquired property clause: mortgage, note, or security interest provision that provides that the security for the loan includes the existing property and any property added after the note; mortgage security interest is attached to newly acquired property anaconda mortgage or dragnet mortgage: mortgage covering all debt owed by the mortgagor to the mortgagee anti-deficiency statutes: these laws preclude deficiency actions by lenders against mortgagors assumption: process whereby a buyer of real property agrees to assume responsibility for payments on an existing mortgage on the property balloon payment: provision in a mortgage or mortgage note that calls for the payment of a large lump sum at the end of the mortgage period balloon payment clause: clause in mortgage that requires a large payment at one time to satisfy the debt obligation Brundage clause: provision in a mortgage that calls for the mortgagor to pay all taxes on the property cash-to-mortgage sale: sale of real property in which the buyer pays the difference between the sales price and the mortgage balance and then takes over the mortgage (assumption)

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Closing Disclosure: must be given three business days before closing; includes the information regarding interest rate, monthly payments, and the total closing costs; the costs of taxes and insurance and how the interest rate and payments may change in the future; warnings about features; reliable estimates of how much will be required to close a mortgage loan Community Reinvestment Act (CRA): federal law establishing record-keeping requirements for lenders‘ investments in inner-city areas Consumer Credit Protection Act: federal statutes and regulations require certain specific disclosures in consumer credit contracts, from terms to cancellation, called Truth-in-Lending laws. These disclosures were mandated by the Truth in Lending Act (TILA), which is actually part of the Consumer Credit Protection Act, passed by Congress in 1968 contract for deed: another name for an installment contract; financing transaction in which seller carries the buyer and holds onto title until the buyer has paid in full conventional mortgage: mortgage not insured by a government agency deed in lieu of foreclosure: process of borrower‘s/property owner‘s/mortgagor‘s surrendering title to property to prevent lender‘s foreclosure deed of trust: security interest in real property in which title is held by a trustee until the borrower and occupant of the land repays the beneficiary (lender) the amount of the loan default: failure to comply with mortgage or promissory note requirements; generally, a failure to pay or obtain insurance deficiency judgment: judgment against the mortgagor or borrower after foreclosure sale, requiring payment of the amount due on the loan that was not obtained through sale of the mortgaged property Dodd-Frank Wall Street Reform and Consumer Protection Act (DFCPA): also known as the Wall Street Reform and Consumer Financial Protection Act or the Consumer Financial Protection Act (CFPA); the new Consumer Financial Protection Bureau (CFPB) comes under this Act due-on-sale clause: clause in mortgage or mortgage note that requires full payment of the loan when the property is sold; in effect, a prohibition on assumptions Equal Credit Opportunity Act (ECOA): federal law prohibiting discrimination in credit decisions equity-participation financing: creative financing technique in which the lender will share in the appreciation of the property and will be entitled to a portion of the equity on sale of the mortgaged property Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac): federal/quasi-private corporation that provides secondary mortgage market support Federal Housing Administration (FHA): agency of government responsible for guarantee of residential mortgage loans

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Federal Housing Finance Agency (FHFA): federal oversight agency for government housing and subsidies Federal National Mortgage Association (FNMA or Fannie Mae): government corporation that purchases mortgages on the market flipper: housing investors who sell one property and use the proceeds as the down payment on another property closing at the same time foreclosure: process of selling mortgaged property to satisfy the debt owed by the defaulting mortgagor foreclosure by advertisement: creditor‘s remedy of sale by providing public notice; used in deeds of trust forfeiture: loss of rights; in a contract for deed, the loss of all interest in the property for nonpayment government-sponsored entities (GSEs): through these entities or quasi-public entities, the federal government provides a secondary market for VA and FHA mortgages Home Mortgage Disclosure Act: federal law mandating disclosure on consumer loans for second mortgages on residential property Hope for Homeowners Act of 2008: established the authority for FHFA to help homeowners restructure, refinance, and modify their loans Housing Economic Recovery Act of 2008 (HERA): federal law that provides assistance for homeowners in the renegotiation of their mortgage loans hybrid adjustable rate mortgage: a mortgage that begins with a fixed rate but that can change in the future to an adjustable rate through a reset provision in the note installment land contract: a contract for deed; method of selling property in which the seller serves as the financier for the buyer and the purchase; seller holds onto title until there has been payment in full under an installment payment plan interest acceleration clause: clauses in notes that increase interest in the event of default interest-only mortgage: mortgage that requires initial payments that cover only the interest on the mortgage with no payments to principal judicial deed: deed given by court after litigation of rights in the subject property judicial foreclosure: foreclosure accomplished by filing a petition with the proper court; not a power of sale lease-purchase mortgage: financing method that permits potential buyers to lease property for a period with an option to buy

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lien theory: one theory of mortgages that gives the mortgagor title to the property and the mortgagee a lien on the property as security for debt repayment lis pendens: ―suit or action pending‖; document recorded with the land records to indicate a suit involving the land is pending; filed in mortgage foreclosures and quiet title actions Loan Estimate: must be given three business days after the mortgage application. It includes information of interest rate, monthly payments, and the total closing costs; the costs of taxes and insurance; warnings about features; reliable estimates of how much will be required to close a mortgage loan long-term land contract: another name for an installment contract; financing transaction in which seller carries the buyer and holds onto title until the buyer has paid in full mortgage: pledge of property as security for a loan mortgage broker: agents who match borrowers with mortgage companies Mortgage Disclosure Improvement Act (MDIA): federal law that imposes additional requirements on the nature of mortgage payments, the interest rates, and any changes over the course of the mortgage loan mortgagee: lender or party who holds the mortgage lien mortgagor: borrower or party occupying land that is mortgaged negative amortization mortgage (NAM): allows the lender to lower monthly payments for mortgagors in the initial years by adding on the interest accumulated but unpaid to the amount of principal owed piggyback mortgage: a mortgage on top of another existing mortgage that incorporates both payments power of sale: in a deed-of-trust financing arrangement, the right of the trustee to sell the property on default by the trustor/borrower prepayment penalty clause: clause in mortgage or promissory note that requires the mortgagor to pay an additional charge for paying off the loan early promissory note: two-party debt instrument that, in real estate, is generally secured by a mortgage or deed of trust or some other interest in real estate purchase money mortgage: a mortgage used to secure a debt for the funds used to buy the mortgaged property Qualified Mortgage Rule (QMR): a CFPB rule that applies to mortgage originators, which would include creditors, lenders, loan officers, and brokers refinancing: negotiating a new loan for real estate; generally done to obtain a lower rate or, in the case of a sale, to allow a buyer to be able to purchase a property

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Regulation Z: the Federal Reserve Board‘s regulations on disclosures in all types of credit transactions reverse mortgage: the mortgage company agrees to loan the homeowners a sum that will be distributed to them in monthly payments over a specified term or until their death satisfaction of mortgage: payment of full loan amount by mortgagor Secure and Fair Enforcement of the Mortgage Licensing Act of 2008 (SAFE Mortgage Licensing Act): federal law that imposes additional requirements on mortgage brokers shared-appreciation mortgage: method of creative financing in which the lender charges a lower interest rate in exchange for the right to a return of a portion of the equity, including the increased value, of the home sheriffs deed: form of title given to a buyer at a mortgage foreclosure sale; carries no warranties Soldiers and Sailors Civil Relief Act (SSCRA): federal law that provides time restrictions on foreclosures involving those in active military service statutory right of redemption: specified period of time after foreclosure sale for buyer to redeem property by paying full amount of debt, interest, and costs associated with foreclosure straight term mortgage: mortgage with fixed interest rate for a set number of years subdivision trust: form of financing in which seller and buyer are trust beneficiaries, and a third party acts as trustee. Seller and buyer will share in the profits of land development after the seller has paid for the property subject-to sale: a transfer of real property in which the buyer takes the property subject to an existing mortgage but does not agree to assume responsibility for the mortgage payments subordinate mortgage: mortgage with a lower priority than a preexisting mortgage TILA-RESPA Integrated Disclosure Process: the MDIA has resulted in new regulations that combine the requirements of Regulation Z and Regulation X (which are the regulations for the Real Estate Settlement Procedures Act [RESPA] title theory: theory of mortgage law that puts title in the mortgagee and possession in the mortgagor triggering language: in credit advertisements, language describing credit terms that will require full and complete disclosure of all credit terms under Regulation Z Troubled Asset Relief Program (TARP): federal program that purchases underwater properties to provide relief to real estate markets Truth in Lending Act (TILA): name given to federal statutes and regulations concerning credit terms and their disclosure

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Truth-in-Lending laws: general term applied to series of federal laws and regulations that require disclosures and procedures in consumer credit transactions underwater mortgage: a situation where, facing foreclosure, mortgagors simply leave the property because they have so little to lose; they have loans that exceed their property value usury: charging interest rates in excess of the statutorily allowed maximums VA: Veteran‘s Administration workout: in commercial real estate loans, the process of adjusting loan repayment because of borrower‘s financial difficulties wrap-around mortgage: mortgage in which seller carries the buyer with a second mortgage that encompasses the first mortgage and requires a payment that covers both mortgages

[return to top]

What's New in This Chapter The following elements are improvements in this chapter from the previous edition:      

     

Added new terms to the opening quiz from federal regulations on qualifying for a mortgage. In Section 15-1b, new lien v. title case brief, Jordan v. Nationstar Mortgage LLC. Added new Ethical Issue 15.1 in Section 15-1c on behavior of mortgage companies in possessing properties without foreclosure. Updated MERS discussion in Section 15-1c. Revised and updated federal consumer credit laws and disclosures in Section 15-1d. In Section 15-1d, removed In Re Lowenstein case and added Lakeview Loan Servicing, LLC v. Pendleton case brief on behavior of a daughter taking advantage of her mother and the ability to escape loans for failure to give notice. Restructured mortgage terms section to group topics in a more logical way in Section 15-1. In Section 15-1b, updated subprime discussion and added the new nonprime loans discussion. Restructured and updated FHA, VA and the GSEs that oversee them in Section 15-1l. In Section 15-1v, new case brief, Helvetica Servicing, Inc. v. Pasquan, on one court‘s resolution of anti-deficiency questions. New chapter problem #5, Financial Freedom Acquisition, LLC v. Standard Bank and Trust. Removed McEwan v. EiA Properties, LLC case, lien v. title case, and reworked it into chapter problem #9.

HAVE THE STUDENTS TAKE THE QUIZ NOTED IN THE CHAPTER INTRODUCTION TO SEE HOW MUCH THEY KNOW OR REVIEW TERMS AS A PRETEST.

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[return to top]

History of Mortgage Lending   

15-1a

Used in Egypt and Babylonia Term came to England with Normany invasion Origin of term  "Mort"—dead or frozen  "Gage"—pledge Parties to the Mortgage 1. Mortgagor—borrower—one who pledges the property 2. Mortgagee—lender who advances the funds 3. Subsequent Parties to the Mortgage

15-1b

Title Theory Versus Lien Theory 1. Title states a. Mortgage gives mortgagee a type of legal title in the property b. Mortgagee has right to possession and rents 2. Lien theory states a. Mortgagee does not hold title b. Mortgagee has lien in subject property c. Followed west of Mississippi—more modern of the two 3. Intermediate states a. Combine lien and title b. Mortgagee gets rents and possession upon default rather than having to wait for foreclosure as under lien theory

CASE BRIEF: Jordan v. Nationstar Mortgage LLC

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374 P.3d 1195 (Wash. 2018) FACTS:

After defaulting on her home mortgage payment, plaintiff Laura Jordan returned home from work one evening to discover she could not enter her own house: the locks had been changed without warning. A notice informed her that in order to gain access to her home, she must call defendant Nationstar Mortgage LLC to obtain the lockbox code and retrieve the new key inside. Although she eventually reentered her home, she removed her belongings the next day and has not returned since. Jordan‘s home loan was secured by a deed of trust, a commonly used security instrument that was created as an alternative to traditional mortgages to provide for a simpler method of foreclosure. The deed of trust contained provisions that allowed Nationstar to enter her home upon default without providing any notice to the homeowners.

ISSUE:

Jordan represents a class action of 3,600 Washington homeowners who were locked out of their homes. The federal court handling the case certified two questions to the Washington state supreme court (only one is covered in this excerpt of the case. Under Washington‘s lien theory of mortgages and RCW 7.28.230(1), can a borrower and lender enter into a contractual agreement prior to default that allows the lender to enter, maintain, and secure the encumbered property prior to foreclosure?

DECISION:

There were two relevant portions of the deed of trust: 9. Protection of Lender’s Interest in the Property and Rights Under this Security Instrument. If (a) Borrower fails to perform the covenants and agreements contained in this Security Instrument, ... or (c) Borrower has abandoned the Property, then Lender may do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property and rights under this Security Instrument, including protecting and/or assessing the value of the Property, and securing and/or repairing the Property.... Securing the Property includes, but is not limited to, entering the Property to make repairs, change locks, replace or board up doors and windows, drain water from pipes, eliminate building or other code violations or dangerous conditions, and have utilities turned on or off. Although Lender may take action under this Section 9, Lender does not have to do so and is not under any duty or obligation to do so. The Washington statute ¶ 17 RCW 7.28.230 provides that: (1) A mortgage of any interest in real property shall not be deemed a conveyance so as to enable the owner of the mortgage to recover

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possession of the real property, without a foreclosure and sale according to law. This statute essentially codified Washington‘s lien theory of mortgages. The mortgage lien theory prevails in Washington, meaning that the mortgage is seen as ―nothing more than a lien upon the property to secure payment of the mortgage debt, and in no sense a conveyance entitling the mortgagee to possession or enjoyment of the property as owner,…‖ The Restatement (Third) of Property takes the approach that mortgagee possession agreements conflict with lien theory statutes. Several lien theory jurisdictions hold that provisions that allow the lender to take possession of the property contravene public policy that is inherent to the lien theory; indeed, some states have even codified statutes that specifically invalidate such agreements. Washington‘s legislature, however, did not specifically invalidate such contrary agreements in its codification of lien theory prohibiting the lender from taking possession of property before foreclosure. That the legislature did not specifically invalidate such contract provisions, as did other states, does not mean the provisions do not conflict with our laws. Nationstar‘s vendor‘s actions constituted possession because its actions are representative of control. The vendor drilled out Jordan‘s existing locks and replaced the lock with its own. The action left Jordan with no method of entering her own property. Nationstar relies on the fact that it did not change the locks to exclude Jordan (because it provided her a lockbox and phone number to call) to provide proof that it did not possess the premises. However, although she was able to obtain a key by calling, the process made Nationstar the ―middle man.‖ She could no longer access her home without going through Nationstar. This action of changing the locks and allowing her a key only after contacting Nationstar for the lockbox code is a clear expression of control. Although Nationstar did not exclude Jordan from the premises (as she was able to gain a key and enter), she left the next day and did not return. In its amicus brief, the Northwest Consumer Law Center advised us anecdotally that many similarly situated Washington homeowners felt that when the lender changed the locks to their homes, they no longer had a right to continue to possess the property. Washington law prohibits lenders from taking possession of property prior to foreclosure. These entry provisions enable the lender to take possession after default, and the lender‘s action here constitutes taking possession. Therefore, the entry provisions are in direct conflict with state law and are unenforceable.

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Answers to Case Questions Explain what is in conflict between the Washington statute and the clause in Jordan’s deed. The deed of trust permits the lender to enter the property for various reasons, including changing locks. However, the Washington statute prohibits mortgage holders from taking possession without a foreclosure and sale. What constitutes possession and why is that important in the court’s decision? The definition is the heart of the case and the court walks through the drilling, the changing of the keys, the lock box, and the inability of Jordan to enter her home without talking with the lender. The court holds that by any definition of possession, she was locked out and would not want to live in a home to which an entity had keys. What does this decision mean for mortgage lenders going forward? When they are in a lien state, they are not permitted to take possession under lien theory. Some states have specifically invalidated provisions such as the clause here that permit entry. Others allow the lenders to take possession prior to sale. However, absent any such statutory clarity the common law in Washington (and other states) is that changing the locks or entering upon default is possession and in a lien state cannot be done prior to foreclosure.

Answer to Consider (15.1) Despite the fact that the parties had allowed strict foreclosure in their agreement, the court found that the remedy was too harsh and that there needed to be a court hearing before the rents could be taken. Hawaii would thus be operating as a lien theory state and not a title state in that the lender cannot take possession of the property without foreclosure via proper judicial proceedings. Hawaii Nat. Bank v. Cook, 58 P.3d 60 (Haw. 2002). 15-1c

Creation of Mortgage Relationship 1. Requirement of a Record a. Land interest and statute of frauds applies b. Recording of document necessary for full protection of rights c. Complex relationship with rights clearly set forth necessary 2. MERS and Mortgages a. Mortgage Electronic Registry System (MERS)—a system for recording mortgages where MERS becomes the nominal mortgagee so that transfers of the mortgage interest are easier b. Private system that is paid for by users of the system c. Problem is that MERS is not consistent with the public land records and is run separately from the note itself and who has the note—the result has been a great deal of confusion in terms of foreclosure; with so many foreclosures post-2008, MERS has created a bit of a mess

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d. Some courts have required MERS to be able to trace their rights back to the original note and mortgagee—has allowed some mortgagors to escape out from under their mortgages.

Answer to Ethical Issue (15.1) The robo-signing foreclosures not only represented ethical issues (false names, false documents, false signatures), but they also represented violations of the laws in all 50 states. The result was a settlement with the 50 attorneys general of the state for the fraudulent documentation that was submitted in order to conduct foreclosures. Many courts refused to allow the foreclosure documentation generated in these mills for foreclosure proceedings. Homeowners were able to retain counsel that allowed them to avoid foreclosure because of the faulty documentation. As will be covered later in the chapter, the mortgagor has the right to have the lender establish default and one Linda Greene would not do that without knowledge of the actual loan and the mortgagors‘ payment history. Fundamentally, it was fraud and misrepresentation and the MERS folks certified documents for the court without the authority to do so. It was a risky scheme to use because it would only be natural that either the mortgagors or their lawyers would want to talk with someone at the mortgage company and going to the only name on the documents was a logical choice. The conversation in calling the mortgage company would have involved asking for Linda Greene only to be met with, ―There is no Linda Greene here.‖ Followed by, ―There has never been a Linda Greene here.‖ The worst would have been trying to call the mortgage company and discovering that it did not exist. 3. Underlying Debt Requirement a. Debt instrument i. Usually promissory note—SEE FIGURE 15.1 ii. Must be an actual debt between the parties for mortgage to be valid 15-1d

Federal Regulation of Mortgage Debt Instruments 1. Federal Disclosure Requirements in Mortgage Debt a. Part of the Truth-in-Lending laws, which are part of the Consumer Credit Protection Act (Regulation Z) b. Dodd-Frank Wall Street Reform and Consumer Protection Act (DFCPA) c. Bureau of Consumer Financial Protection (BCFP), which is housed within the Federal Reserve Board, is now responsible for enforcement of all consumer credit laws, including mortgages d. Mortgage Disclosure Improvement Act of 2008 i. Amendments to the Truth-in-Lending Act ii. Require more complete disclosures on mortgages iii. Requires more of a plain-English approach to disclosures iv. Information must be furnished at least three days prior to the date of the mortgage closing

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e. Lenders to whom Truth-in-Lending regulation is applicable i. Those offering or extending credit to consumers ii. Those offering it on a regular basis iii. Those offering credit that is either subject to a finance charge or must be paid in more than four installments f. Special disclosures required for variable rate mortgages g. On graduated payment plans—must give disclosures on how much payments will be and when they will be level h. Additional information required on disclosure statement i. Demand feature of note, if any ii. Prepayment penalties, if any iii. Whether the loan is assignable or transferable iv. Separate identification of credit insurance premiums

2. Federal Debt Rescission Regulations a. Does not apply to purchase money mortgages of residences b. Does apply to second mortgages on residences c. Must give borrower right of cancellation notice CASE BRIEF: Lakeview Loan Servicing, LLC v. Pendleton 47 N.E.3d 349 (Ill. App. 2015) FACTS:

Mary Pendleton owned her home free and clear after her divorce. When her daughter moved in, she proposed taking a loan out on the property with a mortgage in order to make improvements and that she could pay the loan instead of paying rent. Somehow in all the borrowing transactions, Mary lost half title to her house. When Deborah wanted to refinance the mortgages on the property she had Mary sign the new mortgage papers but did not have her sign the note. As a result, Mary was not given the required statutory disclosures under Reg Z and she used it as an affirmative defense in foreclosure. The trial court dismissed Mary‘s affirmative defense because she was not a party to the note.

ISSUE:

When all of the Regulation Z disclosures have not been made to a homeowner in a refinancing mortgage, are the note and mortgage valid?

DECISION:

The court held that Mary was entitled to all of the Reg Z disclosures because she was a consumer and because property that she owned was being affected by the mortgage. In between the lower court‘s decision and this appeal, the Illinois

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Supreme Court issued a decision in a similar case in which it said that all parties affected by a transaction must be given all Reg Z rights and disclosures. Without them, the mortgage or note is void. Some key provisions in the court‘s opinion: While this appeal was pending, the Illinois Supreme Court decided Financial Freedom, 43 N.E.3d 911, which reversed the appellate court's decision in Financial Freedom, 13 N.E.3d 776, on which the trial court had relied. The TILA right to rescission at issue in this case provides, in relevant part: ―[I]n the case of any consumer credit transaction * * * in which a security interest * * * is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended, the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section together with a statement containing the material disclosures required under this subchapter, whichever is later * * *.‖ (Emphasis added.) 15 U.S.C. § 1635(a) (2006). The statute, alone, may not clearly answer the question presented here. The Regulation Z and the Staff Commentary support Pendleton's position that she was entitled to TILA disclosures, because she was a consumer whose ownership interest in her home was subject to the mortgage. It makes no difference whether she was liable on the note, as long as her principal dwelling was used as security for the loan, which it unquestionably was. Applying our supreme court's holding in Financial Freedom to this case, Pendleton was clearly entitled to TILA disclosures. Her home was subject to a mortgage that served as security for a consumer credit transaction. As shown by Financial Freedom, the fact that she did not have any personal obligations on the underlying promissory note is immaterial.

Answers to Case Questions 1. Explain what Mary Pendleton had signed and what she had not signed, and discuss why. Mary had mortgaged her home (although the signatures were not notarized), but she had not signed the note. She was, in effect, not treated as a borrower. She was not given the notices that are required under federal law for a credit transaction that affects home ownership. It was sloppy paperwork in the way it was handled informally and not notarized and the lenders not realizing everything that needed to be done in terms of signatures ad disclosures. 2. What type of information under Regulation Z was Mary entitled to receive? That her home could be lost because of the mortgage. What could happen if she did not pay. What the costs would be for repayment and then for foreclosure. What the interest rate was, her rights of rescission.

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3. Discuss where this decision leaves the lenders in their attempts to collect the loan. They must provide all the disclosures to anyone who is a consumer and involved with the loan—they must have full disclosures and they must sign all documents pertaining to the transaction. 4. Given your knowledge of co-ownership rights, discuss what happens now to the property and Mary’s rights. Since the mortgage is invalid, it does not affect Mary‘s ½ interest in the property. The loan itself is no longer valid, so Mary owes nothing on the note. Deborah, however, is still liable for the loan and the foreclosure may still happen with Deborah being entitled to perhaps bid on the sale of half the property. Or perhaps Deborah could work out a deal with the lenders to clear title to her property. 3. Federal Debt Credit Advertising Regulation a. Use of "triggering" terms requires further disclosures about financing b. Classifications of "triggering" terms i. Amount or % of down payment ii. Number of payments or period of repayment iii. Amount of any payment iv. Amount of any finance charge c. If "triggering" terms are used, then following additional information must be disclosed i. Terms of repayment ii. Annual percentage rate iii. Disclosures of any increase in payments or rates

Answer to Consider (15.2) a. No—puffing and general terms. b. Yes—down and rate. 4. Federal Regulation of Home Equity Loans a. Must disclose that there is security b. Must disclose possibility of foreclosure c. Must make all financial disclosures d. Must disclose need to see a tax adviser e. Section 32 mortgages now covered under new Federal Reserve regulations i. Interest rates that are more than 8 to 10% above Treasury rates require special disclosures ii. Also requires more detailed disclosures on the nature of balloon payments and other clauses in the mortgage loan agreement 15-1e

Federal Regulation of the Decision to Extend Credit for Real Property Financing 1. Qualifying Borrowers and Verifying Appraisals a. New regulations and laws designed to prevent fraud in granting mortgages as well as fraud in appraisals b. Specific factors the lender must review before making a loan, such as verifying income and source of down payment

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2. Equal Credit Opportunity Act—cannot refuse to lend on the basis of race, sex, marital status, religion, or national origin NOTE: In some states signature of spouse may be necessary for valid mortgage or security interest even though spouse is not the borrower

15-1f

Debtor‘s Rights in Mortgage Credit Transactions: Bad Faith 1. Lenders must be candid with borrowers 2. Lender liability imposed for failure to act in good faith

15-1g

Debtor‘s Rights on Interest Rates: Usury 1. Charging of interest rate in excess of the statutory rate 2. Will vary from state to state 3. Types of charge that can affect usury a. Charges for actual costs—survey, appraisal, credit report fees, etc.—not usurious b. Charges for commissions by loan brokers—all right so long as paid to third party and not to lender c. Standby commitment charges—all right d. Late charges—all right e. Government loan charges—all right f. Construction loans—additional charges all right g. Life insurance premiums—all right h. Prepayment penalties—not usurious i. Brundage clause—clause for mortgagor to pay any taxes—all right in some states 4. Exemptions from usury laws exist in all states a. Some business loans exempt b. Some federal loans exempt c. Subprime reforms d. Protections for LMI borrowers 5. Penalties a. Forfeit interest b. Forfeit interest above maximum c. Forfeit interest and principal 6. Some states have specific usury statutes on second mortgages

15-1h

Debtor‘s Rights: Subprime Loans and Predatory Lending 1. Background on Subprime Lending a. Many homebuyers have bad credit ratings b. Rise of the subprime market—borrowers with a FICO score below 570 c. High interest costs

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d. High foreclosure rates 2. Subprime Loan Bundling and Financial and Economic Impacts a. Caused collapse in many lenders‘ portfolios in 2007 when real estate market turned down b. Role of speculators 3. Fair Housing Act, Community Reinvestment Act, and Home Mortgage Disclosure Act: The Three Well-Intentioned Laws That Resulted in Subprime Mortgages a. Home Mortgage Disclosure Act requires lenders to furnish information to the federal government about loans and approval rates b. Designed to prevent "redlining" of high-risk areas c. Community Reinvestment Act requires lenders to invest in multi-unit housing, small businesses and rehabilitation of neighborhoods (shareholders often ask for information) d. Increase in LMI loans e. Discuss Fannie Mae policies on reduced standards f. American Recovery and Reinvestment Act (ARRA) i. Incentives to upgrade public housing ii. Tax benefits for LMI homeowner 4. The Subprime Role of Mortgage Brokers, Mortgage Lenders, Flippers, and Speculators a. Role of mortgage brokers and commissions in fueling unqualified buyer mortgages b. Role of appraisers in valuing properties

Answer to Ethical Issue (15.2) Discuss with the students the following key concepts: 1. The subprime lenders do provide a service that allows those who would not otherwise qualify to get a mortgage. 2. However, lenders may not be looking at the debtors realistically. 3. Tendency is to let them overbuy—more than they can afford. 4. Fast/high foreclosure consequences must be made clear. 5. Business Practices in the Subprime Market a. Interest only loans b. Flipping c. Steering buyers into subprime loans for higher rates d. ―Pick-a-pay‖ loans with deferred interest and real payments e. One-half of states now regulate the loans f. SAFE (Secure and Fair Enforcement of the Mortgage Licensing Act) i. Background checks of brokers ii. Annual filings iii. HUD enforcement g. Mortgage Disclosure Improvement Act

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i. Seven days advance disclosure ii. Increased TILA penalties h. State laws on high-cost home loans 6. Nonprime Lending 15-1i Debtor‘s Rights with Recording 1. Mortgage need not be recorded to be valid 2. If not recorded, no protection afforded as against other parties 3. Recorded in office where other land interests are recorded 15-1j

Terms of the Mortgage 1. Acceleration Clause a. Takes effect upon default b. Makes the full amount of the note due upon default c. Without the clause, suit and foreclosure would be limited to partial, small amounts and enforcement would not be as effective and would be more costly d. Issue of ongoing late payment and acceleration—cover PRACTICAL TIP on forbearance clause 2. Interest Acceleration Clause a. Takes effect upon default b. Accelerates the interest on the underlying note c. Usually an increase to the maximum amount permitted by law 3. Balloon Payment Clause a. Loan is not amortized over years or only partially amortized b. Large payment is due at the end of the loan c. Prohibited in certain types of government loans 4. Prepayment Penalty Clause a. Mortgagee has right to expect payment over time b. Prepayment has costs of reinvestment c. Can charge certain figure or percentage of loan as prepayment penalty d. Prohibited in some types of government loans 5. Late Payment Clauses a. Bookkeeping costs associated with posting late payments b. Lender can charge fee for late monthly payment 6. Due-on-Sale Clause a. Type of acceleration clause b. Makes full amount of loan due if mortgagor attempts to transfer the property and the rights under the mortgage c. Helpful to lender in that old loans can be called, and funds reinvested at higher rates d. Detriment to sellers trying to sell property in high interest era if low interest rates cannot be assumed e. Federal institutions—valid

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15-1k

f. Issue of whether they are a restraint on alienation g. Garn-St. Germain allowed non-federal financial institutions to enforce clauses with state-determined windows of protection Mortgage Insurance Requirements

15-1l

Types of Mortgages 1. The Acronyms of Government Mortgages: FHA, VA, FNME, FHLMC, and FHFA a. The Retail Level: FHA and VA Mortgages and Insurance i. FHA—Federal Housing Administration ii. VA—Veterans Administration iii. Government provides insurance for loans iv. Government dictates terms and provisions of loans and determines who qualifies v. Points must be paid on loans and insurance premium paid by mortgagor, which brings interest up some percentage b. The Secondary Market Level: Government-Sponsored Entities i. Mortgages can be sold on the secondary market ii. FNMA—Fannie Mae—Federal National Mortgage Association iii. FHLMC—Freddie Mac—Federal National Mortgage Association iv. Federal regulatory agencies for mortgage lending a) Financial Institutions Reform, Recovery and Enforcement Act of 1989 i) Passed in response to S & L crisis ii) Dissolved FHLBB and FSLIC and had FDIC take over iii) Created Resolution Trust Corporation to manage S & Ls in receivership—now defunct iv) Regulates appraisals and appraisers—recent cases hold appraisers liable to third parties for their opinions b) Response to 2008 subprime melt-down i) Housing Economic Recovery Act of 2008 ii) Liquidation of Fannie & Freddie iii) Creates Federal Housing Finance Agency (FHFA) iv) Modernization of FHA 2. Conventional Mortgages a. Private lender—not government-insured b. May include different terms 3. Purchase Money Mortgages a. Money is used to purchase the property, which is the security b. Typical for residential purchases 4. Straight Term Mortgages or Interest-Only Mortgages a. Loan is not amortized b. Usually a balloon payment at the end 5. Subordinate or Wrap-Around Mortgages a. Mortgage recorded after already-existing mortgage on the property has been recorded

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b. Will have second priority 6. Piggyback Mortgages a. Linked to subprime market b. Second mortgage after closing to cover the 20% down payment to original mortgage c. Result is that property is fully mortgaged; no equity 7. Anaconda or Dragnet Mortgages a. Covers all debt owed mortgagee by mortgagor b. Legality will vary from state to state c. Enables mortgagee to buy up cheap debt and have full amount secured by mortgage 8. Adjustable or Variable Rate Mortgages a. Adjustable rate mortgages b. Must use index independent of lender c. Must have maximum cap d. State adjustment period e. Hybrid adjustable mortgage—begins with a fixed rate and changes later— reset provision in the loan; additional disclosures required 9. Negative Amortization Mortgages (NAM) a. Lower monthly payments in the initial years of the mortgage b. Interest that should have been paid is added onto the principle c. Mortgage balance is higher after five years than at the start 10. Reverse Mortgages a. Allow retired individuals to use equity in home b. Repaid upon death and sale of home 11. Commercial Mortgages a. Additional issues must be covered b. Rights of lessees c. Current and prior use of building and environmental liability 15-1m

Rights and Responsibilities of Mortgagor and Mortgagee 1. Rents and Leases a. Rights to rents will vary according to whether state is a lien or title theory one b. Title—mortgagee has rights to rent upon mortgage execution c. Lien theory—mortgagee has rights only upon foreclosure i. Some lien theory states permit parties to agree otherwise ii. Other states—a clause giving such rights is void d. In all states—mortgagee must furnish accounting when collecting rents i. Must furnish statement of receipts ii. In some states—rents must be applied for e. Tenant's rights i. Leases antedating mortgage

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a) Mortgagee must honor tenant's rights b) Cannot terminate lease because of mortgagor's default c) Can put clause in mortgage with different result ii. Postmortgage leases a) Mortgagee has no obligation to honor lease b) Can extinguish tenant's rights upon default and foreclosure f. Both parties should screen leases in advance g. Tenant should verify status before entering into long-term lease 15-1n

Property Covered by the Mortgage 1. Unless otherwise specified—mortgage includes a. Land b. Buildings c. Fixtures 2. After-acquired property clause a. Covers buildings, fixtures or other attachments made after the mortgage is executed b. Protects mortgagee in the event of substantial changes in the structure 3. See sample clause in text for inclusion of after-acquired property 4. Persons Covered by the Mortgage a. Can the lender foreclose if only one spouse has signed the mortgage? b. State statutes and litigation have focused on this issue

CASE BRIEF: Citimortgage, Inc. v. Danielson

771 N.W.2d 653 (Iowa App. 2009) FACTS:

Matthew and Jamie Danielson were beneficiaries of the housing boom, he as a contractor and she as a mortgage broker. When the market slowed, they decided to downsize from their lifestyle of a $600,000 home on Saylorville Lake, a car lot, and several cars to go with it all. Well, ―decided‖ may be charitable. The couple lost the Saylorville home to foreclosure and the lender (her employer), First Horizon, had to sell the lake home for $339,500. Following the forced downsizing was the Danielsons‘ 2007 purchase of an 1800square-foot, 3-bedroom, 2 ½-bathroom home in Ankeny, Iowa. However, Mrs. Danielson‘s credit was shot because she was the mortgagor on the lake house and approaching her employer for another loan after the embarrassing default was not an option. So, Mr. Danielson applied for the mortgage for the Ankeny home, an amount of $320,228, which was 100 percent of the value of the home plus $50,000 the couple borrowed to remodel the basement. But the best part of the story is to come—the closing was completed at a food court in the local mall. Mr. Danielson, with his son in tow, met his mortgage broker, Jason Larson, at the food court on May 24, 2007.

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Mr. Danielson had asked Larson when he called 45 to 50 minutes before the food-court meeting if his wife needed to be present. Larson indicated that she did not need to be there. Matthew attempted to call Jamie anyway because she handled the couple's finances and was employed as a loan originator for a mortgage banker. He was unable to reach Mrs. Danielson and attended the closing alone with Larson. At the closing, described as ―rushed,‖ Larson had Mr. Danielson sign a large packet of documents that included two uniform residential loan applications. One application appears to have been generated by One Source Mortgage while the other was generated by Citimortgage. Both loan applications identify Larson as the interviewer and indicate the application was taken by telephone. Mr. Danielson and Larson signed both applications at the mall closing. The applications refer to Mr. Danielson as ―unmarried‖ and as a ―[s]ingle man.‖ Mr. Danielson also signed a promissory note in the amount of $320,228 at the May 24 closing. The note is payable to Citimortgage and secured by a purchase money mortgage on the Danielsons‘ home. The mortgage, which contains a homestead exemption waiver clause, identifies the borrower as ―Matthew D. Danielson, a single man.‖ Because Mr. Danielson‘s business went south after just one payment on the home, CitiMortgage initiated foreclosure proceedings in December 2007 against Mr. Danielson who consulted an attorney. The attorney raised the scepter of Iowa‘s statute that renders a mortgage signed by only one spouse on jointly owned marital property as void. The Danielsons then filed a counterclaim to quiet title to the property, seeking an order from the court that Matthew's mortgage with Citimortgage is void under Iowa Code § 561.13, which required the signature of both spouses in order to have any kind of attachment to the couple‘s marital property. The trial court held that the mortgage was void and Citimortgage appealed. ISSUE:

Does a mortgage apply to the marital property when both spouses have not signed it?

DECISION:

No—the court said the statute was clear and as a result, because there was no misrepresentation by Mr. Danielson, the Danielsons own their home without a mortgage after just one payment. Nothing that can be done except personal liability against Mr. Danielson, but they cannot make a mortgage payment, so not having money makes him fairly judgment proof. Affirmed.

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Answers to Case Questions 1. Can a Danielson case ever happen again in Iowa? See ―Aftermath‖ below. 2. Why is the mortgage void? Because the statute requires the signature of both spouses before homestead property can be affected by a lien or mortgage. The result is that they own their home free and clear. The bank could go after Mr. Danielson personally for the debt, but not Mrs. Danielson and, with their financial problems, collecting from him would be a problem. The house was the bank‘s security and now the Danielsons own it free and clear even as it is protected by the homestead exemption. 3. What kinds of actions do you anticipate married couples would take as well as lenders because of this decision? There is a potential for a loophole here if the couples are able to work it, so the lender allows the sign-off without both signatures and if they do not engage in misrepresentation. AFTERMATH: Shortly after the decision, the Iowa legislature passed a law that indicated the signature of both spouses was not required when there was a purchase money mortgage involved, the property was the couple‘s homestead and the nonsigning spouse lived there. In addition, in JP Morgan Chase Bank National Association v. Hawkins, 798 N.W.2d 349 (Iowa App. 2011), a court held that the homestead protection was never intended to apply to purchase money mortgages. Can a Danielson case ever happen again in Iowa? No, both the decision and the statute now make it clear that you cannot get away with one signature and the property.

Answer to Ethical Issue (15.3) They agreed to pay the mortgage and she lived in the home with that understanding. To own a home that the bank paid for and on which you only made one payment means that you took advantage of the bank. The bank made a mistake, but it does not change their intent to borrow the money and buy the home. 15-1o

Transfers and Assignments by Mortgagor 1. The Assumption a. As consideration for purchase, buyer takes over payments on existing mortgage b. Assumes liability c. Probably gets benefit of rate lower than existing one d. Frequently called a cash-to-mortgage sale e. Original mortgagor is still liable—secondarily f. Right of foreclosure still exists

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g. Release of original mortgagor only by lender i. All three parties must agree ii. Some states require release iii. Some permit increase in rate in exchange for release 2. Subject-to Sale a. Mortgagor remains personally liable b. Buyer has no personal liability or responsibility for repayment of the loan c. Property remains subject to foreclosure by mortgagee d. Used in creative financing—wrap-around (below) 3. Refinancing a. Buyer obtains a new loan b. Original mortgagee is paid, and original mortgage released c. All parties are released on original loan 15-1p

Transfers and Assignments of Mortgages by Mortgagees 1. Mortgage companies regularly sell and transfer mortgages 2. Simply transferring the right to receive payment 3. Mortgagor's rights do not change 4. Must notify mortgagor of change in payee

15-1q

Satisfaction of Mortgage 1. Agreement that is recorded evidencing satisfaction of debt 2. Removes lien or clears title 3. Recorded where mortgage and other land interests are recorded 4. Penalties for failure to record a. Some states afford protection for debtor b. Upon debtor's repayment and demand—mortgagee must record satisfaction of mortgage c. Statutory penalty for failure to do so

15-1r

Foreclosure 1. Default of the Mortgagor a. Occurs when mortgagor fails to comply with some provision in the mortgage agreement b. Examples i. Nontimely payment ii. Failure to insure iii. Waste on property c. Acts constituting default must be defined in agreement, for state laws do not define default 2. Avoiding Foreclosure: Refinancing, Restructuring and Modifying

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a. Workout b. Lenders renegotiate to avoid lender liability (very rare) c. The upside-down market makes it difficult for borrower or lender to sell d. Lender programs to reduce payments temporarily e. Hope for Homeowners Act of 2008 i. Relief on payments ii. Must be single family iii. Must be primary residence iv. Upper limit of $729,750 f. Troubled Asset Relief Program (TARP) i. Treasury secretary can buy troubled assets ii. Reduces or avoids foreclosure g. Federal Loan Assistance i. For Fannie and Freddie loans ii. Current on payments iii. Loan renegotiated h. Emergency Economic Stabilization Act i. Bailout bill ii. $700 billion iii. Created Troubled Asset Relief Program (TARP) iv. Federal government purchased mortgages 3. Avoiding Foreclosure: Just Walking Away, Sometimes with Stuff from the House a. Upside down market—easy to leave property because there is ―nothing to lose‖ b. Credit rating is affected c. Some who default also strip the property—state statutes now passed to make this a specialized crime d. Resulting in foreclosure ghettos 4. Avoiding Foreclosure: Deed in Lieu of Foreclosure a. Mortgagor surrenders deed b. Sometimes lender works with them c. Some states require a payment 15-1s

Processes of Foreclosure 1. Judicial Foreclosure a. Mortgagee must bring suit in the appropriate court b. Must strictly comply with all procedural requirements or the title is void i. Must file petition a) Usually filed in county where property is located b) Must establish the basis for foreclosure—how has default occurred

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c) Must establish exact amount due on debt ii. Required parties a) Mortgagor b) Tenants c) First mortgagees, second mortgagees and other lienors d) Should search title to determine all necessary parties iii. Lis pendens a) File or record notice of foreclosure b) Protects against any subsequently-acquired interests in the property c) Filed in land records office where mortgage was recorded iv. Foreclosure trial or hearing a) Must establish default b) Must establish mortgage authorizes foreclosure c) Generally, a default procedure where mortgagor is not present v. Foreclosure by power of dale of strict foreclosure a) Judge finds foreclosure is appropriate b) Incorporates time for mortgagor to redeem within order c) If mortgagor has not paid in that time (usually 3-4 months), then sale is held d) Once sale occurs, mortgagor has lost all rights vi. The judicial sale a) Usually a public sale for which notice has been published b) Conducted by officer of court—sheriff c) Goes to highest bidder d) Certificate of sale—redemption states e) Sheriff's or judicial deed in strict foreclosure states, and after redemption period in redemption states f) Most challenges to foreclosure come in the way the sale was conducted vii. Soldiers and Sailors Relief Act a) Federal Act protecting those in military b) Requires that special notice be given c) Foreclosure can be postponed for those in active service d) Period of redemption does not run during active service e) Recently used in Afghanistan and Iraq War by reservists called to active duty whose income was reduced f) Expanded to cover other types of loans 2. Challenges to Foreclosure a. Used to be based on procedure violations b. Foreclosure period from 2008-2012 focus was on whether the party bringing the foreclosure action had the authority and rights to foreclose

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Answer to Consider (15.3) So long as the sale was adequately advertised, the sale for that amount was reasonable. 3. Mortgage Workout Firms a. Number of foreclosures and issues have resulted in firms that assist in foreclosure b. Because of a number of frauds, these firms are now regulated by the FTC and their ad content is now controlled 4. Strict Foreclosure or Foreclosure by Power of Sale a. Permits foreclosure without court proceedings b. Rapid and characteristic of deeds of trust (infra) c. Procedures i. Notice given to all parties affected ii. Must be public notice or advertisement of sale—some states call it "foreclosure by advertisement" iii. All states have lag time between notice of sale and sale—90 days is typical iv. Most challenges to this type of foreclosure are on adequacy of notice and conduct of sale d. Right of redemption i. Debtor does not have under power of sale ii. Full title conveyed at sale iii. Sale can be postponed under Soldiers and Sailors Relief Act 15-1t

Proceeds and Priorities Upon Foreclosure 1. Priority of parties determines how proceeds will be distributed upon default 2. Recorded Interests a. Unrecorded interests are lower in priority than recorded interests b. For recorded interest—rule is first in time, first in right i. Exceptions are PMSI ii. Mechanics lien exception if work began before mortgage recorded iii. Future advances—mortgage recorded before money given to mortgagor a) Have priority from time of recording if obligated to make advances b) If advances are optional—have priority according to time advances are made iv. Multiple debt mortgages a) More than one note per single mortgage b) Some states—notes have priority according to dates of maturity c) Other states—all have equal standing according to recording of mortgage

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15-1u

Applications of Proceeds from Foreclosure 1. Usually only a minimal amount is available 2. Order of distribution a. Payment of costs of sale b. Payment of mortgage debt having first priority c. Payment of junior liens, claims, mortgages d. Any surplus is distributed to the mortgagor 3. Tax liens are often exception to order of distribution

Answer to Consider (15.4) C1 was the first to record and will have priority. The courts will permit fractions of days to be used in determining priorities.

Answer to Consider (15.5) USE POWERPOINT SLIDE 15-44 Order of distribution: 1. First Federal costs

$5,000

2. American Finance

$3,000

3. Judgment lien

$10,000

4. Taxes

$22,000

5. First Federal

$232,000

6. Great Western $8,000 15-1v

Postforeclosure Remedies: The Deficiency Judgment 1. In some states, mortgagee is permitted to collect from personal assets of mortgagor if sale of property does not satisfy the debt 2. In other states, automatic at time of foreclosure 3. Other states, separate action must be brought 4. Usually required to sell property before deficiency action is proper 5. Statistically, not done often on residential property

CASE BRIEF: Helvetica Servicing, Inc. v. Pasquan

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439 P.3d 131 (App. Ariz. 2020)2 FACTS:

In May 2003, Michael and Kelly Pasquan (the ―Pasquans‖) purchased a 4,000 square-foot home in Paradise Valley (the ―Property‖) with a $600,000 loan from Hamilton Bank (―Hamilton loan‖) and a cash payment. Over the next several years, the Pasquans renovated the Property, expanding the home by 7,000 square feet. In 2004-2005, the Pasquans borrowed approximately $2.1 million from Desert Hills Bank. The Pasquans used a portion of the Desert Hills loan to refinance the Hamilton loan, then applied the remainder of the proceeds toward the renovation/expansion project. They also borrowed $225,000 from Pasquan‘s father and put that money toward the expansion and charged another $140,000 on credit cards for the project. In September 2006, the Pasquans borrowed $3.4 million from Helvetica, secured by a deed of trust on the Property. The Pasquans used the proceeds of the Helvetica loan to pay off the Desert Hills loan, the loan from Pasquan‘s father, the credit card debt, loan fees, and interest. They were left with $357,172.72 in cash from the loan proceeds, from which they made interest payments to Helvetica and paid for landscaping, maintenance, taxes, utilities, and marketing. The Pasquans defaulted on the Helvetica loan, and Helvetica sued to judicially foreclose. On April 9, 2009, Helvetica obtained a judgment against the Pasquans for the amount due on the loan plus attorneys‘ fees and a foreclosure judgment on the Property. After a sheriff‘s sale, the superior court entered a deficiency judgment against the Pasquans for $1,936,825.53. On remand from an appeal on that deficiency amount, the trial court held that all of the money the Pasquans borrowed from Desert Hills, all of the money they borrowed from Pasquan‘s father, and all of the credit card purchases were ―used for construction of the residence‖ on the Property with the exception of the $600,000 used to pay off the Hamilton loan and that Helvetica was entitled to a deficiency judgment against Pasquan of $341,188.35.

ISSUE:

Is there protection for the Pasquans under the anti-deficiency statute? For which loans?

DECISION:

Here, the evidence in the record shows that, aside from the $600,000 original purchase money loan that was later refinanced as part of a loan from Helvetica, Pasquan used the bulk of the loan proceeds for the purpose of home improvement, not home construction. Therefore, the antideficiency protections of

This is a case that resulted in four appeals from the 2009 foreclosure on the Pasquan’s home. Helvetica I, 229 Ariz. at 495, 277 P.3d at 200; Gold v. Helvetica Servicing, Inc., 229 Ariz. 328, 275 P.3d 627 (App. 2012); Helvetica Servicing, Inc. v. Giraudo, 241 Ariz. 498, 389 P.3d 867 (App. 2017).

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A.R.S. § 33-729(A) do not extend to the funds Pasquan borrowed beyond the refinancing of the original purchase money obligation. Remanded for recomputation of the deficiency amount.

Answers to Case Questions 1. When does Arizona’s anti-deficiency judgment apply to mortgagor’s when the property sale does not bring enough to satisfy all debts? When the funds are used for construction, not home improvements. 2. How much deficiency will the Pasquans be required to pay? $1,936,825.53 (the original deficiency)—$600,000 for the original property loan or $1,336,825.53. 3. Why is there a distinction between mortgage loans for construction of homes and mortgage loans for home improvements? The public policy purpose behind the protection was not to allow recovery from people who had lost their homes—afford them some protection and a way back—the protection was not intended to allow no liability for home improvements and going under because of those home improvements. 6. Can the Sale Be Set Aside? Low Prices 15-1w

The Uniform Nonjudicial Foreclosure Act 1. Would have mortgage foreclosures handled through brokers, not through court 2. Benefit to debtor if no public auction 3. Uniform redemption periods

Answer to Ethical Issue (15.4) Discuss with the students the various levels of responsibility and accountability in the subprime lending market. Discuss the moral hazard of no risk. NOTE: Federal laws supersede consideration rules and standards at the state level. Loans are renegotiated for the benefit of the mortgagors, with little or nothing in exchange for the mortgagees. PRACTICAL TIP: Buyers and sellers should check state deficiency judgments. 15-2

Deeds of Trust—USE POWERPOINT SLIDES 15-47 TO 15-49  Three-Party Arrangement  Property buyer—settlor of trust  Lender—beneficiary of trust  Independent third party—trustee who holds title  Advantages

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 Power of sale—obtain property more quickly  Lender's involvement can be kept secret through the trust  Larger sums can be borrowed with one trustee to hold property—corporate bonds 15-2a

Relationship to Mortgages 1. Mortgagor must still make timely payments, etc. 2. Language must set up trust carefully or it will be treated as a mortgage 3. Usually no period of redemption with power of sale 4. Right of reinstatement prior to sale

15-2b

Duties and Responsibilities of the Trustee 1. Duty to administer trust impartially 2. Must follow terms of the trust agreement 3. Who can serve as trustee is usually authorized by statute 4. Advantages of the Deed of Trust Upon Default

Answer to Consider (15.6) NUMBER OF PARTIES MORTGAGES

DEEDS OF TRUST

15-3

REMEDIES UPON DEFAULT

RIGHT OF REDEMPTION

JUDICIAL OR PRIVATE FORECLOSURE PRIVATE POWER OF SALE

BEFORE FORECLOSURE AND FOR LIMITED TIME AFTERWARD RIGHT OF REINSTATEMENT PRIOR TO SALE

Installment Land Contracts—USE POWERPOINT SLIDES 15-50 AND 15-51

 Substitute for Mortgage or Deed of Trust  Used when buyer cannot obtain financing  Used when cost of financing from outside lender is too high  Called Also "Contract for Deed" or "Long-Term Contract"  Seller Acts as Financier 15-3a

The Forfeiture Aspect

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1. If buyer defaults—forfeits interest 2. Forfeiture period can be tied to amount paid; the more paid, the longer the period before forfeiture occurs 3. Some states require foreclosure 4. Others permit automatic exercise of rights 5. Notice required to be given 15-3b

Title Problems 1. Seller holds title until payment in full 2. Should check title for defects 3. Recording of contract is some protection—cloud on title for seller in the event of a default

15-3c

Tax Consequences Certain tax benefits are available

15-3d

Regulation Z Application 1. Many second or resort homes purchased on installment contracts 2. Buyer must be notified of rescission period 3. Buyer must be given full disclosure as to APR, amount of payments and number of payments

15-4

Subdivision Trusts—USE POWERPOINT SLIDES 15-52 TO 15-54 A. Method of Financing Where 1. Buyer has little money down 2. Buyer has good idea for development 3. Will take some time to develop land but profit potential is great B. Parties 1. Trustee—holds title to property and makes payments to party entitled to them 2. Buyer and seller are both beneficiaries C. Seller can be Permitted to Enjoy Share of Profits When Land is Developed D. Law of Trusts Rather Than Mortgage Law Applicable in Many of the States Recognizing the Subdivision Trust

15-5

Alternative Financing Methods—USE POWERPOINT SLIDES 15-55 AND 15-56

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15-5a Shared-Appreciation or Equity-Participation Financing Mortgages 1. Lender gives lower interest rate 2. Lender shares in a percentage of the profits when the property is sold 15-5b Wrap-Around Mortgages 1. Can't use when there is an enforceable due-on-sale clause 2. Used also when cash-to-mortgage is too high for buyer to come up with 3. Seller takes mortgage on entire amount buyer is financing 4. Seller pays existing mortgage and also collects interest on remaining amount financed 5. Seller can collect 12% on existing 9% mortgage 6. Buyer takes subject to the existing mortgage, but does not become personally liable 15-5c Exchange or Trades (a 1031 exchange) 1. Two persons wishing to sell their property swap equities 2. If equities are not even, one comes up with cash difference 15-5d Lease-Purchase Agreements 1. Buyer leases until conditions for financing improve and loan can be obligated 2. Parties agree to purchase price at time lease is executed 3. Closing date is also agreed upon 4. Buyer is able to lock in purchase price and wait for better terms 5. Under lease with option to buy, price is negotiated later 15-5e The Broker and Alternative Financing 1. Broker arranging such transactions may be classified as lender under Regulation Z and be required to disclose certain amounts 2. Arranges for 5 dwelling financings per year or 25 other financings in a year

Cautions and Conclusions Check title and security; make sure agreement sets forth all rights; check application of Regulation Z. [return to top]

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Additional Activities and Assignments Answers to Chapter Problems 1. B remains liable on the note. The property can be foreclosed upon and A has assumed liability on the mortgage. A deficiency judgment is possible against both A and B unless the state has a statute prohibiting deficiencies on residential loans. Deeds of trust would yield the same results. 2. In Nevada Wholesale Lumber Co. v. Myers Realty, 544 P.2d 1204 (Nev. 1976), the court held that the following order of priority existed: a. $7,767.44 note to Lumber Co. b. $12,126.99 note to Lumber Co. c. Myers Realty 3. The court held that Shanahan was not responsible for accrued fees that existed before he came into possession of the units. Woodview Condominium Ass'n, Inc. v. Shanahan, 917 A.2d 790 (N.J. App. 2007). 4. In Sears, Roebuck & Co. v. Seven Palms Motor Inn, Inc., 530 S.W.2d 695 (Mo. 1975), the court held the rods and drapes were fixtures and subject to Commerce's after-acquired property clause in the mortgage. The bedspreads were held to be personal property, and Sears was given priority in time. 5. The failure to give any party to a mortgage transaction, whether original borrower or obligor or a party whose title is affected by the mortgage lien, is a violation of Reg Z. If the disclosures on the right to rescind under Reg Z are not given, then the 3-day right of rescission becomes a three-year right of rescission. Standard was only one year into the statute of limitations and so it can rescind the loan. Financial Freedom is out of luck. Financial Freedom Acquisition, LLC v. Standard Bank and Trust, 43 N.E.3d 911 (Ill. 2015).

6. $ 212,000 -

7,000 Selling expenses

- 189,000 First Mortgage—Western - 10,000 Valley National Bank $

6,000 to Crabtrees

7. The court held that the forged power of attorney made the mortgage void. If a mortgage is entered into without the knowledge of the spouse and through fraud, then the mortgage is void and the spouse could have it set aside. CitiMortgage, Inc. v. Akers, 858 N.W.2d 788 (Minn. App. 2014). 8. No. He does not qualify. His loan amount is too high. The jumbo mortgages were not always covered. He does not have an FHA/VA loan. His lender may be willing to do a

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workout. Nick Timiraos, ―Homeowners Size Up Housing-Aid Plan,‖ Wall Street Journal, March 5, 2009, p. A4. NOTE: Some modifications in different programs have expanded the mortgage relief available to those with larger mortgage balances. 9. The general rule is that the first to record a mortgage has priority. The priority continues as long as the mortgage is not released. There is nothing in the statutes or case law which indicates that an assignment of a mortgage or the failure to record that assignment somehow affects the priority of the mortgage. An assignment of a mortgage is merely a formal transfer of title to the instrument.

The lease was executed between McEwan and Lavery on October 15, 2008, and was not recorded. As the August 11, 1997, mortgage was recorded before the October 15, 2008, lease was executed, the October 15, 2008, lease is subordinate and taken subject to the August 11, 1997, mortgage. The September 1, 2009, assignment of the mortgage did not affect the mortgage‘s priority in relation to the October 15, 2008, lease. Since the lease was not recorded and EiA was without notice of the same, we conclude that the foreclosure upon the August 11, 1997, mortgage and subsequent sale terminated Lavery‘s right of possession under the October 15, 2008, lease. The court rendered summary judgment in favor of EiA Properties. McEwan v. EiA Properties, LLC, 428 S.W.3d 633 (Ky. App. 2014). 10. The court held that Dynamic could be held liable for the deficiency. While the lots are residential, a developer does not reside there, and anti-deficiency statutes apply to protect residential property owners. Mid Kansas Federal Savings and Loan Association of Wichita v. Dynamic Development Corporation, 804 P.2d 1310 (Az. 1991).

In-Class Exercises 1. Have the students develop a list of questions they would ask if they were purchasing property with an existing mortgage. 2. Have the students read the following case and analyze it using the discussion questions: SMITH v. CAPITAL ROOFING CO. OF JACKSON, INC. 622 F.Supp. 191 (D. Miss 1985)

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Curtis and Arthria Smith (plaintiffs) entered into a contract with Capital Roofing (defendant) for the sale and installation of aluminum siding on the Smiths' home for a contract price of $7,800.00. The Smiths executed an installment sales contract, note and disclosure statement, and a notice of right to rescind. According to the Smiths, although these papers were signed by them on October 23, 1983, the Capital representatives who negotiated the contract dated them October 24, 1983. On October 24, 1983, Capital began installing the siding on their home. After Mrs. Smith asked one of the Capital employees whether a verification of their credit had been obtained, the work stopped, and the crew left. Approximately 3 weeks later, on November 14, 1983, the Smiths stated that Capital resumed performance of the contract, which was completed November 17, 1983. On November 16, 1983, Capital notified the Smiths that the lender would not approve a loan to them that was in excess of the equity in their house of $5,500.00. Capital agreed to reduce the contract price of $7,800.00 to $6,800.00, leaving a balance of $1,300.00, which the Smiths would have to finance through other means. Mr. Smith was unable to borrow the remaining $1,300.00. Consequently, Capital finally agreed to accept $600.00 in cash which Mr. Smith paid on November 18, 1983. As a result of the negotiations, the Smiths were required to execute a new set of documents and Capital destroyed the October 24, 1983 documents. On November 17, 1983, the Smiths again executed an installment sales contract, note and disclosure statement, and a notice of right to rescind. The Smiths testified that they never executed a deed of trust in favor of Capital on their home as collateral for the transaction, although two deeds of trust were recorded by Capital. In fact, they testified that they were unaware of the existence of a deed of trust against their home in favor of Capital until they were notified of foreclosure proceedings, which Capital instituted against them on the deed of trust. Mr. Smith also stated that it was not his understanding that Capital was to receive a security interest in their home. Two deeds of trust, allegedly signed by the Smiths, were introduced into evidence, Capital is the grantee and the Smiths' property is the collateral. The Smiths testified that their signatures on the deeds of trust, one recorded December 5, 1983, and another recorded March 9, 1984, were forged. To corroborate their testimony, the Smiths used an overhead projector to compare their authentic signatures with the alleged forgeries appearing on the deeds of trust. On December 7, 1983, the Smiths notified Capital that the contract was rescinded because of irregularities they believed existed in the transaction. The Smiths claim that they are entitled to rescission of the deeds of trust, forfeiture of the loan proceeds, actual damages, attorneys' fees, and punitive damages because of Capital's violations of the provisions of the TILA and Regulation Z. Specifically, the Smiths claim Capital violated the TILA by:

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1. failing to disclose the existence of a deed of trust as a security interest in their home, 2. commencing work under the contract prior to the expiration of the three-day rescission period; and 3. failing to obtain the Smiths' signatures on the deeds of trust prior to recording them and failing to deliver a copy of the deed of trust to them. BARBOUR, District Judge The Smiths seek rescission of the consumer credit transaction and forfeiture of the loan proceeds on the basis that Capital's failure to disclose the existence of a deed of trust as a security interest on their home was a material nondisclosure. The Smiths also seek damages as a result of Capital's commencement of work under the contract prior to the expiration of the three-day rescission. With regard to the Smiths' claim for damages for Capital's commencement of performance prior to the three-day rescission, the Court finds that Capital's performance prior to expiration of the three day rescission constitutes a technical violation of Regulation Z §226.15(c) which provides: [u]nless a consumer waives the right to rescind ..., no money shall be disbursed other than in escrow, no services shall be performed, and no materials delivered until after the rescission period has expired. [emphasis added]. This technical violation would subject Capital to damages under §1640 of the TILA. However, § 1640(e) requires that actions for damages be commenced "one year from the date of the occurrence of the violation." The violation by Capital occurred on October 24, 1983, when it commenced performance prior to the three-day rescission period. The Smiths filed suit on March 5, 1985. Accordingly, the Smiths' claim for damages is barred by the one-year statute of limitations. With regard to the Smiths' claim for rescission, §226-23(a)(3) provides that the consumer's right to rescind may be exercised until midnight of the third business day following consummation, delivery of the notice of the right to rescind, or the delivery of all material disclosures, whichever occurs last. Section 226.23(a)(3) further provides that if the required notice or material disclosures are not delivered the right to rescind expires three years after consummation. Consequently, if this Court finds that the failure to disclose the existence of a deed of trust as a security interest in the Smiths' home was a material nondisclosure, then the Smiths' notice of rescission on December 7, 1983, was timely. The Fifth Circuit has yet to decide whether §226.18(m) of Regulation Z requires a creditor to disclose the existence of a deed of trust as a security interest. In Williamson v. Lafferty, 698 F.2d 767 (5th Cir. 1983), the Fifth Circuit concluded that the creditor had failed to disclose the extent of the consumer's property subject to a security interest. The disclosure form indicated that the creditor received a "deed of trust security interest in property where improvements will be located." In holding that the consumer's property in which the security was taken was not sufficiently identified, the court stated:

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[t]he granting of a deed of trust in one's home as security is a critical factor in a consumer credit transaction. The court reasoned that the inquiry regarding the materiality of the disclosure is not what an individual plaintiff thinks but what a reasonable consumer thinks. To be a material nondisclosure, the court stated that the information must be of some significance to a reasonable consumer under the circumstances in his "comparison shopping" for credit. In this case, the disclosure statement did not specify the type of security interest being taken in the Smiths' home. Moreover, they denied that they ever signed a deed of trust although they failed to prove, by clear and convincing evidence, that the deeds were forged. Mr. Smith did state that he was not aware that a security interest was being taken in his home. The Court, after examining the deeds of trust, believes that irregularities existed. The Court also concludes that Capital's failure to disclose the existence of a deed of trust as security on the Smiths' home was a material non-disclosure. Now, the Court must determine whether the Smiths are entitled to forfeiture of the loan proceeds as a penalty. According to §1635(b), when a consumer exercises his right to rescind, ...he is not liable for any finance or other charge, and any security interest given by the obligor, including any interest arising by operation of low, becomes void upon such a rescission. Within twenty days after receipt of notice of rescission, the creditor shall return to the obligor any money or property given as earnest money, down payment or otherwise, and shall take any action necessary or appropriate to reflect the termination of a security interest created by the transaction. If the creditor has delivered any property to the obligor, the obligor must return possession of it. If the creditor performs its obligations under § 1635(b) by returning the down payment or earnest money and by terminating the security interest created by the transaction, the consumer is obligated to return to the creditor the property or its reasonable value. If the creditor does not take possession of the property within twenty days after tender by the consumer, § 1635(b) provides that ownership of the property vests in the consumer with no obligation on his part to pay for it. Capital's failure to cancel the deed of trust upon receipt of notice of rescission would expose it to damages under §1640(a) had the Smiths filed suit within the one-year statute of limitations. Yet, they failed to do so. Moreover, the Smiths failed to tender to Capital the reasonable value of the work performed by Capital. In fact, the Smiths admit that they owe Capital and are willing to pay Capital a fair price for the siding for which they have paid nothing. Accordingly, the Court is of the opinion that, although the Smiths are entitled to rescission of the deed of trust, the Smiths are required to pay, in reasonable monthly installments, the principal amount of the loan to Capital. With regard to punitive damages, the Court is of the opinion that, although irregularities existed with regard to the transaction, punitive damages will not lie. There was no proof that

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Capital acted in a wanton, malicious, or oppressive manner or in reckless disregard of the requirements of the law. In summary, the Smiths are entitled to a rescission of the deeds of trust against their property; the Smiths are not entitled to statutory damages or actual damages; the Smiths are required to pay, in reasonable monthly installments, the principal amount of the loan to Capital; the Smiths are entitled to attorneys' fees in an amount to be determined; and the Smiths are not entitled to punitive damages. [return to top]

Discussion Questions 14. Describe the nature of the contract. 15. Why is there a problem with work commending during the three-day period? 16. What does the court find with regard to the deeds of trust? 17. What are the Smiths required to pay? 18. What statute of limitations was missed? 19. Will there be punitive damages? [return to top]

Resources Adams, ―Homeownership: American Dream or Illusion of Empowerment?,‖ 60 S.C. L. Rev. 573 (Spring 2009). Atteberry, Modern Real Estate Finance. Bar-Gill, ―The Law, Economics and Psychology of Subprime Mortgage Contracts,‖ 94 Cornell L. Rev. 1073 (July 2009). Boneparth, "Taking a Deed in Lieu of Foreclosure: Pitfalls for the Lender," 19 Real Estate L.J. 338 (1991). Brescia, ―Part of the Disease or Part of the Cure: The Financial Crisis and the Community Reinvestment Act,‖ 60 S.C. L. Rev. 617 (Spring 2009). Buehler, ―Chapter 278: Protecting Californians From Predatory Rescue,‖ 40 McGeorge L. Rev. 320 (2009). Cambray, ―A Litigator‘s View of Real Estate Loan Documents: Where the Alligators Wait,‖ 478 PLI/Real 13 (February 2002). Cavell, "Ghetto Loans: Discrimination Against African American Borrowers in Mortgage Markets and the Impact of the Ibanez Decision," 25 Geo. J. Legal Ethics 449 (Summer 2012). Cox, ―Foreclosure Reform Amid Mortgage Lending Turmoil: A Public Purpose Approach,‖ 45 Hous. L. Rev. 683 (Summer 2008).

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Creswell and Bajas, ―A Mortgage Crisis Begins to Spiral, and the Casualties Mount,‖ New York Times, March 5, 2007, pp. C1, C4. Dennis, Fundamentals of Mortgage Lending. Dickerson, ―Over-Indebtedness, the Subprime Mortgage Crisis, and the Effect on U.S. Cities,‖ 36 Fordham Urb. L. J. 395 (April 2009). Durham, "Avoiding a Lawyers' Race to the Foreclosure Bottom: Some Advice to Lawyers for Lenders and Borrowers on Their Roles in Foreclosure Litigation," 32 N. Ill. U. L. Rev. 419 (Summer 2012). ―Foreclosure, Anti-Deficiency Statutes, and Confusion,‖ 42(4) Real Estate L. J. 493-502 (2014). Forrester, ―Still Crazy After All These Years: The Absolute Assignment of Rents in Mortgage Loan Transactions,― 59 Fla. L. Rev. 487 (2007). Franzen and Howell, ―Predatory Lending Legislation in 1005,‖ 61 Business Lawyer 855 (2006). Hammond, ―Predatory Lending—A Legal Definition and Update,” 34 Real Est. L. J. 176 (Fall, 2005). Heitner and Hagerott, "Junior Trust Deeds: A Primer for Senior and Junior Lenders," 11 California Real Property Journal 1-19 (1993). Hirschfeld, "Antacid for the Real Estate Industry: Newly Enacted Debt Discharge Relief," 79 The Journal of Taxation 268-272 (1993). Jennings, "From the Courts," 39 Real Est. L. J. 173 (Fall 2010). Jennings, ―MERS, Split Notes, and Foreclosure,‖ 40 Real Estate Law Journal 469 (2012). Kennedy, ―The Consumer Financial Protection Bureau: Financial Regulation for the TwentyFirst Century," 97 Cornell L. Rev. 1141 (July 2012). Kogan, "Infinite Loop: Robo-Signers and Ethics in Bankruptcy Mortgage Cases," 25 Geo. J. Legal Ethics 645 (Summer 2012). Korngold, ―Legal and Policy Choices in the Aftermath of the Subprime and Mortgage Financing Crisis,‖ 60 S.C. L. Rev. 727 (Spring 2009). Kratovil, Modern Mortgage Law and Practice. Levitin, ―Hydraulic Regulation: Regulating Credit Markets Upstream,‖ 26 Yale J. on Reg. 143 (Summer 2009). Lieberman, "The Refinancing Trap: The Hidden Peril of Refinancing Home Mortgage Debt," 24 AZ Attorney 10 (1993). Lind, "Collateral Matters: Housing Code Compliance in the Mortgage Crisis," 32 N. Ill. U. L. Rev. 445 (Summer 2012).

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Martinez, ―Subprime Loans: Turning the American Dream into a Nightmare,‖ 21 St. Thomas L. Rev. 514 (Spring 2009). Murray, ―Mortgage Workouts: Deeds in Escrow,‖ 41 Real Prop. Prob. & Tr. J. 185 (2006). Nelson and Whitman, "The Installment Land Contract—A National Viewpoint," 1977 BYU L. R. 541. Olick, ―Subprime Mortgages Make a Comeback—With a New Name and Soaring Demand,‖ CNBC, April 12, 2018. Olvera, "Why the CFPB Should Reconsider Dodd-Frank's Prohibition on Yield Spread Premiums," 16 N.C. Banking Inst. 323 (March 2012). Payne, "Mortgage Contingency Clauses," 19 Real Estate L.J. 249 (1991). Peterson, "Losing Our Homes, Losing Our Way, or Both? Foreclosure, County Property Records, and the Mortgage Electronic Registration System," 40 Cap. U. L. Rev. 821 (Fall 2012). Phillips, ―Reducing Home Mortgage Foreclosures in a Predatory Lending Environment: A Case Study of a Mid-Sized City in Central New York,‖ 36 Fordham Urb. L. J. 489 (April 2009). Plitt, ―Prohibiting De Facto Insurance Redlining: Will Hurricane Katrina Draw a Discriminatory Redline in the Gulf Coast Sands Prohibiting Access to Home Ownership?,‖ 14 Wash. & Lee J. Civil Rts. & Soc. Just. 199 (Spring 2008). Practicing Law Institute, Real Estate Financing. "The Future of Foreclosure Law in the Wake of the Great Housing Crisis of 2007-2014," 54 Washburn L.J. 489 (2015). Tomkowiak, ―Using Testing Evidence in Mortgage Lending Discrimination Cases,‖ 41 Urb. Law. 319 (Spring 2009). "What Happened to the American Dream? An Analysis of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Its Effect on Home Ownership," 17 Scholar: St. Mary's L. Rev. & Soc. Just. 95 (2015). Whitman, "Mortgage Prepayment Clauses: An Economic and Legal Analysis," 40 UCLA L. Rev. 851 (1993). "Who Can Enforce? The Murky World of Robo-Signed Mortgages," 67 Rutgers U. L. Rev. 1061 (2015). Woolley and Herzog, ―MERS: The Unreported Effects of Lost Chain of Title on Real Property Owners,‖ 8 Hastings Bus. L.J. 365 (378 (2012). [return to top]

CASES: Ball v. Wells Fargo & Co., 2011 WL 4963791 (Nev. 2011). © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Bryant v. Branch, 235 S.E.2d 688 (Ga. 1977). Futch v. BAC Home Loans Servicing, LP, 2011 WL 4544006 (Nev. 2011). Herold v. One West Bank, 2011 WL 4543998 (Nev. 2011). Martin v. Empire Banking Co., 251 S.E.2d 24 (Ga. 1978). Mauer v. American Home Mortg. Acceptance, Inc., 2011 WL 6752631 (Nev. 2011). McKinnon v. IndyMac Bank F.S.B., 2012 WL 194426 (Nev. 2012). Parker v. GreenPoint Mortg. Funding Inc., 2011 WL 5248171 (Nev. 2011). Peshek v. Litton Loan Servicing, 2011 WL 4479700 (Nev. 2011). Pettit v. Pulte Mortg. LLC, 2011 WL 5245455 (Nev. 2011). Rupe v. First Franklin Financial Corp., 2011 WL 2559623 (Nev. 2011). Schoonover v. Arizona Title Ins. Co., 616 P.2d 989 (Az. 1980). State National Bank of El Paso v. Farah Manufacturing Company, Inc., 678 S.W.2d 661 (Tex. 1984). Tobler v. Yoder & Frey Auctioneers, 462 F.Supp. 788 (S.D. Ga. 1978). U.S. v. First Federal Savings and Loan Association of St. Petersburg, 155 So.2d 192 (Fla. 1963). Willis v. Federal Nat. Mortg. Ass'n, 2011 WL 5854686 (Nev. 2011). Wong v. Beneficial Savings and Loan Assoc., 128 Cal. Rptr. 338 (1976). Woodson v. Bank of America, N.A., 2011 WL 5546956 (Nev. 2011).

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Answers to Case Questions ........................................................................................................................... 517 Answer to Consider (16.2).............................................................................................................................. 518 Answers to case questions: ........................................................................................................................... 522 Answer to consider (16.3) .............................................................................................................................. 525 Answers to case questions ............................................................................................................................ 528 Answer to consider (16.4) .............................................................................................................................. 528 Answer to consider (16.5) .............................................................................................................................. 529 Answer to Ethical Issue (16.1) ....................................................................................................................... 529 Answer to Consider (16.6).............................................................................................................................. 530 Answers to Case questions............................................................................................................................ 532 Answer to Ethical Issue (16.2) ....................................................................................................................... 532 Answers to Case Questions ........................................................................................................................... 533 Discussion Questions................................................................................................................................................ 534 Additional Activities and Assignments............................................................................................................... 538 Answers to Chapter Problems ...................................................................................................................... 538 In-Class Exercises ................................................................................................................................... 542 Resources .............................................................................................................................................. 543 Cases ..................................................................................................................................................... 545

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Chapter Objectives The following learning outcomes are addressed in this chapter (see PowerPoint Slide 16-1): 16.01

Discuss the purposes and requirements for setting up closing.

16.02

Discuss the duties and liabilities of the parties involved in closing.

[return to top]

Key Terms Department of Housing and Urban Development (HUD): federal agency responsible for regulation of interstate land sales and other federal acts affecting real property escrow: process whereby details of property transfer, payments, and deed conveyance are handled by a third party escrow instructions: contract among buyer, seller, and escrow agent for the closing of escrow on a property transfer POC (paid outside closing): costs not paid through escrow or closing Real Estate Settlement Procedures Act (RESPA): federal statute regulating disclosure of closing costs in advance and prohibiting kickbacks for referring customers to title companies Uniform Settlement Statement (USS): under RESPA, the required form for showing how money was paid and distributed at close of escrow [return to top]

What's New in This Chapter The following elements are improvements in this chapter from the previous edition: 

In Section 16-2a, added discussion of issue that has developed in the past few years of too many cooks in the closing process. Confusion sets in on who is to pay what and to whom.

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New case brief in Section 16-2a on the new area of third parties involved with escrow, Brassell v. Harbourview. In Section 16-2b, new Practical Tip on escrow precautions on the setup and parties. New Consider 16.2 in Section 16-2e on escrow instructions v. contracts. New cases added to Practical Tip in Section 16-2e on canceling and changing contracts. In Section 16-2e, removed Regal Realty Services, LLC v. 259O Frisby, LLC case brief and replaced it with a new case on contingencies, Dalcourt v. Myer. New case in Section 16-4a, Carter Development of Massachusetts LLC v. Howard, on escrow agent following instructions. In Section 16-3f, new Consider 16.4 listing examples to determine whether conduct is a RESPA violation. Added new Ethical Issue 16.2 in Section 16-4a on funds disbursement by escrow agents without checking contract terms for consistency. Deleted Boatright v. Texas American Title Company case brief. Removed East Hills Condominiums Ltd. v. Tri-Lakes Escrow case brief and reworked it into chapter problem #10.

         

[return to top]

Varies Significantly from State to State

16-1a

Where? 1. Government office 2. Title company 3. Attorney's office 4. Escrow companies

16-1b

What? 1. Formal—all parties together in a room with a record 2. Informal—documents together in one place

16-1c

Who?

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1. Buyer 2. Seller 3. Lender—if one is involved 4. Third party to handle closing a. Title insurance or escrow company b. Should screen for honesty to make sure agent is reliable 16-2 The Closing Setup—USE POWERPOINT SLIDES 16-5 TO 16-18 16-2a

Requirements for Setting up the Escrow or Closing 1. Valid and Enforceable Contract for Purchase and Sale of Real Estate a. Establishes relationship between the parties b. Binding contract that sells the property 2. Deposit of Deed with an Agent a. Seller relinquishes control b. Must be executed so that title can be transferred 3. Valid Escrow Instructions a. Third party's contractual obligations established in this agreement b. Provides third party with the authority necessary

CASE BRIEF: Brassell v. Harbourview Abstract 82 N.Y.S.3d 483 (2018) FACTS:

Len Mario Brassell (plaintiff) and Robert James Brassell, Jr. inherited a parcel of land from their parents. In 2005, they sold that parcel to Clifton D. Smith. At closing, Harbourview Abstract, the escrow agent, and according to written instructions, agreed to hold $62,000 from the Brassell brothers until they could provide satisfaction of a mortgage in that amount. A few months after closing, Robert found the proof of mortgage satisfaction and took the mortgage satisfaction document to Abraham & Abraham, LLC, asking the firm to handle this final step in the closing. Abraham sent a letter to Harbourview requesting a check for $62,000.

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Harbourview sent a copy of the title abstract for the property along with a check for $62,000. Without reviewing the title report, Abraham paid the entire $62,000 to Robert. Len Mario filed suit against Harbourview and Abraham for breach of the escrow agreement because he did not receive his one-half of the $62,000. The lower court denied Abraham‘s motion for summary judgment, and Len Mario appealed. ISSUE:

To whom were the escrow funds properly payable? Did Abraham have obligations under the escrow agreement?

DECISION:

There was no set-up of an escrow arrangement with Abraham. To prove the existence of an escrow agreement, it must be shown that there is ―(a) an agreement regarding the subject matter and delivery of the [funds], (b) a thirdparty depositary, (c) delivery of the [funds] to a third party conditioned upon the performance of some act or the occurrence of some event, and (d) relinquishment by [the grantor or depositor].‖ Abraham established, prima facie, that the funds which were delivered to it by Harbourview were not conditioned upon its payment of half of those funds to the plaintiff and that Abraham did not agree to undertake any obligations on behalf of the plaintiff. Summary judgment for Abraham.

Answers to Case Questions 1. Explain who had an escrow relationship. Harbourview Abstract had an escrow relationship with the Brassell Brothers. However, Abraham was Robert‘s attorney but not an escrow agent. 2. What issue did Abraham fail to resolve prior to disbursing the fund? Whether the funds went entirely to Robert and what the escrow instructions were. Harbourview also should have exercised caution in dispersing funds to one party on jointly owned land. Would looking at the title abstract have helped? It would have shown by the filing of the death certificate of the last person to die that the title was held jointly by the Brassell brothers. Refer to Chapter 14 for a review of title. 3. What could Harbourview Abstract had done differently to avoid the brother-to-brother dispute? Should have checked before dispersing all funds to one party in a closing on a jointly owned piece of property.

16-2b

Contents of Escrow or Closing Instructions 1. Mandatory Matters a. Name of agent, third party, depository b. Name of buyer and seller

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c. Legal description of property to be transferred d. Purchase price of property e. Conditions of transfer and payment f. Allocation of expenses, costs, insurance, taxes g. Signature of buyer and seller 2. Recommended Provisions a. Allocating Costs i. Escrow fee ii. Fees for title search, abstract, insurance iii. Recording fees for mortgage, deed, deed of trust iv. Mortgage transfer or release fees v. Loan origination fees vi. Inspection reports vii. Appraisal or survey fee viii. Credit report fees ix. Loan discount points x. Attorney's fees for drafting documents b. Prorating Prepaids i. Can be done by custom ii. Should be provided for in escrow instructions iii. 365-day year basis—divide yearly costs by 365, multiply by number of days left for giving seller the credit for prepaids iv. 360-day year basis—30-day months v. See examples in text

Answer to Consider (16.1) 360-day year/30 days per month: Taxes—

$6,000 = $500/month $16.67/day ($500 ÷ 30) 2 months x $500 = $1,000 15 days x $16.67 = $250.05 $1,250.05—paid and used by seller $4,749.95—owed to seller by buyer ($6,000 – $1,250.05)

Insurance—

$1,200 = $100/month $3.33/day ($100 ÷ 30) 2 months x $100 = $200 15 days x $3.33 = $49.95

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$249.95—paid and used by seller $950.05—owed to seller by buyer ($1,200 – $249.95) 365-day year: Taxes—

$16.43/day x (31 + 28 + 15) = $1,216.43—paid by seller $4,783.56—owed to seller

Insurance—

$3.28/day x (31 + 28 + 15) = $243.28—paid by seller $756.71—owed to seller c. Sale of Personal Property i. Should be specified ii. Bill of sale should be furnished by seller

16-2c

Documents to Be Delivered by Each Party 1. Seller a. Title documents b. Most recent tax bill c. Insurance policies d. Plans and specifications and modification for structure e. Warranties on appliances, heating system f. UCC bulk sale affidavit g. Soil, termite reports h. Keys i. Notes, mortgages, deeds of trust, Article IX security interests j. List of tenants and copies of leases k. Building code inspection and compliance report 2. Buyer a. Earnest money check b. Loan commitment c. List of defects to be remedied prior to closing d. Corporate authorization 3. Lender a. Mortgage, deed of trust, promissory note b. Truth-in-lending statements c. RESPA statement d. Required forms for FHA and VA e. Required inspections for FHA and VA f. Required appraisals

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16-2d

Cancellation of Escrow 1. Cancellation provisions a. Provide direction for agent b. Grounds for cancellation c. Method of cancellation d. Time specifications for cancellation

16-2e

Cancellations, Contingencies, and Contract Performance 1. Relationship Between Purchase Contract and Escrow Instructions a. Sales contract will control b. Parties can specify otherwise

CASE BRIEF: Allan v. Martin 574 P.2d 457 (Az. 1978) FACTS:

The Allans contracted to purchase the Martins' property by July 4, 1974. The deadline was extended to August 15, and when the Allans still did not produce the funds, the Martins telegrammed a cancellation. The escrow instructions provided for a 13-day letter and period of compliance. The Allans were able to comply within the 13 days, but the Martins refused to sell. The Martins brought suit to cancel the contract. The trial court found for the Martins and Allan appealed.

ISSUE:

Is the escrow instructions' cancellation provision controlling over the purchase contract?

DECISION:

Purchase contract is controlling: 1. Cannot have escrow instructions without an underlying contract; and 2. Once contract is terminated, the escrow is void.

Answers to Case Questions 1. What was the original closing date as provided in the purchase contract? Why was a timely closing important to the Martins? July 31, 1974. They needed the funds and time to complete their mountain home before the cold weather. 2. What happened when closing did not occur on the original closing or second closing date? The Martins extended closing until August 15. The Martins telegrammed the Allans of their intent to cancel. Things kept spinning in space with no closing imminent. 3. What is the significance of the "13-day letter" in the escrow instructions? Is the 13-day provision controlling? The 13-day letter was required, under the escrow instructions, to cancel the contract. The contract—escrow instructions are void without it.

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AUTHOR'S NOTE:

This case makes it necessary for buyers to specify which will control—the terms of the purchase contract or the terms of the escrow.

Answer to Consider (16.2) The court held that the difference between Allan v. Martin and this case was that there was a separate contract and escrow instructions. In this case, the escrow instructions were the contract and required the 13-day notice in order to terminate the contract. FROM the COURT‘s opinion: THE THIRTEEN–DAY LETTER Horizon relies on the case of Allan v. Martin, 117 Ariz. 591, 574 P.2d 457 (1978) for the proposition that the thirteen-day letter requirement was not necessary in order to cancel the agreement of the parties. We do not agree. In Allan v. Martin, supra, there were two separate and distinct documents, a contract to sell real estate and escrow instructions. The thirteen-day letter provision was in the escrow instructions. The contract itself contained its own time for performance of the contract. The court held that the contract and escrow were two different documents and that the time for performance was governed by the contract itself and after the time passed in the contract the escrow instructions became unenforceable because there was no longer a binding contract to sell the property which was the subject of escrow. That is not the case here. The escrow instructions here were the contract. Without the escrow instructions there would have been no contract. The provisions here are similar to those that were contained in the case of O'Hare v. Griesmer, 132 Ariz. 30, 643 P.2d 733 (1982). There the language read: ―If either party elects to cancel this agreement because of the failure of the other party to comply with all the terms and conditions of this agreement, the party so electing shall, after the expiration of the time periods as provided in A.R.S. § 33–741, from date provided herein for closing, instruct escrow agent to cause to be delivered to the other party a written demand for compliance within ten days after the date said demand was deposited in the United States mail ... However, this agreement may be enforced by specific performance or other appropriate remedy.‖ 132 Ariz. at 33, 643 P.2d 733. In O'Hare we held that if the sellers desired to cancel the agreement they were required to give the ten day notice. In Secan v. Dunbar, et al., 139 Ariz. 503, 679 P.2d 526 (1983) we had under consideration the same provision that we had in the O'Hare case. We set forth the entire language of the provision in Secan which was omitted in O'Hare. The omitted language was: ― * * * If the addressed party then fails to comply within the stated period, the escrow shall pay to the party electing to cancel any earnest money deposited. Costs already incurred in closing and/or any obligation for brokerage fee may be deducted from the earnest money if the purchaser is the party in default ....‖

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We again held that the provision required that notice of cancellation be given in order to cancel the contract. We also rejected the argument made by appellees and similar to the conclusions of the trial court here, that the ten-day notice was required only if the party wishing to cancel wanted the earnest money. It is clear that the thirteen-day letter requirement is not merely for the benefit of the escrow but is the only way in which the parties here could cancel the contract. The uncontradicted evidence is that the parties construed the contract in such a manner. Since the contract was in full force and effect when Westcor tendered performance, Horizon is entitled to specific performance. The judgment of the trial court is reversed with directions to enter a judgment in favor of Westcor and against Horizon on Horizon's complaint and enter a decree of specific performance in favor of Westcor and against Horizon. Westcor has requested attorney's fees on appeal. This matter arises out of a contract and Westcor is entitled to fees as the successful party on appeal. Wenk v. Horizon Moving & Storage Co., 131 Ariz. 131, 639 P.2d 321 (1982). The amount will be determined upon the submission of Westcor's statement of costs pursuant to Rule 21(c), Arizona Rules of Civil Appellate Procedure, and Schweiger v. China Doll Restaurant, Inc., 138 Ariz. 183, 673 P.2d 927 (1983). Discuss with the students how national corporations get into legal tussles such as this. Point out that the parties were not careful about the extensions and the status of their agreement. Also point out the ethics of Horizon in selling the property to someone else without first notifying Westcor. Horizon Corp. v. Westcor, Inc., 688 P.2d 1021 (Ariz. App. 1984). 2. Mutual Cancellation Provisions a. Parties agree to release each other b. Should sign agreement

3. Contingencies for Closing a. Will vary with each transaction b. Delivery of marketable title is one CASE BRIEF: Dalcourt v. Moyer 286 So.3d 619 (La. App. 2019) FACTS:

In 2014, Norton Dalcourt decided to sell his house situated on 4.1 acres in St. Martinville, Louisiana. Sherry and Thomas Moyer worked with Dennis Jones who served as dual agent for both parties at the Moyers' request.

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On June 1, 2015, the parties agreed that the Moyers would purchase the property for $455,000.00. An addendum provided that Mr. Dalcourt would give the Moyers $35,000.00 as an allowance for repairs which would be withheld from the proceeds at closing. Mr. Dalcourt also agreed to leave the pool table upstairs, the workout equipment, and the theater room seating. The closing date was set for June 30, 2015. A due diligence period of fourteen days, commencing the first day after the agreement was accepted, was set for the Moyers to have an expert inspect the property and investigate other concerns that the buyers may have. The Moyers paid a $4,000 deposit and escrow was opened. An inspection of the house was performed on the last day of the due diligence period, June 15, 2015. The inspector found a leaking air conditioner, clogged gutters, and wood damage. The parties signed an addendum to the purchase agreement on June 16, 2015, reducing the purchase price to $416,000.00, with Mr. Dalcourt paying $12,000.00 in closing costs. The repair allowance of $35,000.00 was voided because the lender would not approve of withholding $35,000.00 from the proceeds at closing. A few days after the inspection, Mr. Moyer used some software to lay out the property with measurements he had taken of the home and property with a tape measure. He concluded that the property line would split the driveway in half. Mr. Moyer then called Mr. Jones and requested a survey. Three days before the closing set for June 30, Mr. Jones called Mr. Dalcourt and asked if Mr. Moyer could send someone out to perform a survey that day. Mr. Dalcourt was not at home that day but that any other day would be acceptable. On June 27, 2015, the Moyers signed an addendum to the purchase agreement stating they wished to void the contract and sought the return of $4,000.00 deposit. Mr. Dalcourt attempted to salvage the sale and submitted another signed addendum on July 15, extending the closing date to on/or before August 15, to allow time to survey the property. This addendum listed the sales price at $416,000.00, with Mr. Dalcourt paying $12,000.00 in closing costs and prepaid items. The addendum also provided for additional conditions concerning the survey. Other than closing date, no other deadlines were extended. The Moyers never signed this addendum. On July 19, 2015, Nancy Marcotte, the listing broker, sent a letter to the Moyers explaining why she was giving the $4,000 deposit to Mr. Dalcourt. The house was later foreclosed on by Mr. Dalcourt's bank and sold.

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Mr. Dalcourt filed suit against the Moyers claiming that they were in default of the purchase agreement and seeking termination of the agreement and stipulated damages of 10% of the sales price. Additionally, Mr. Dalcourt sought compensation for the rent he paid to live in another residence when he had to lease other property in anticipation of the sale of the house. The Moyers said Mr. Dalcourt misrepresented the size of the property and that Mr. Dalcourt failed to allow them to inspect the property or to have it surveyed. The trial court ruled in favor of the Moyers, ordering the return of their $4,000.00. The trial court also awarded attorney fees and costs to the Moyers. Mr. Dalcourt appealed. ISSUES:

Had all the conditions for performance been met? Was there a breach of contract for the failure to close?

DECISION:

The contract provided a fourteen-day due diligence period, commencing the day after the purchase agreement was signed. The Moyers were never denied access during this period, and the property was inspected on the last day of the duediligence period. An addendum to the purchase agreement was signed by all parties on June 16, 2015, reducing the purchase price to $416,000.00 and removing the repair allowance of $35,000.00 from the contract. At this point, the sale continued to move forward. No other deficiencies were mentioned during the inspection period. The survey request was not made until well after the due diligence period passed and just three days before the closing. The trial court found that the lender halted the sale because it required the survey. However, the lender did not require the survey until it was notified by Mr. Moyer that there may be a boundary issue which was based on his personal observations after the due diligence period. Mr. Dalcourt tried to save the deal by offering an addendum that provided for a survey to be performed and how the sale would be handled, depending on the findings of the survey. As of trial, there was no evidence that there were boundary issues with the property, other than Mr. Moyer's personal observations based on his measurements. Mr. Dalcourt did offer to allow an inspection for a survey and extend the closing date. He did not violate the terms of the contract by refusing to allow someone at the house on the day requested after the due diligence period, when no one was home. We reverse the judgment of December 13, 2017, awarding them the return of the $4,000 deposit. We also reverse the judgment awarding attorney fees and costs in the amount of $13,981.96. Mr. Dalcourt has only asked this court to reverse the

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judgment of the trial court. He has not requested any type of damages. Therefore, we make no award of any damages to Mr. Dalcourt. Costs of this appeal are assessed to Sherry and Thomas Moyer.

Answers to case questions: How significant was the 14-day due diligence period and its timing? It was controlling in the contract—unless the parties changed it, there was no more due diligence permitted. Did the subsequent amendment to the first inspection change the due diligence clause? What do you believe the parties were thinking when the encroachment issue on the boundary lines arose? No, the subsequent amendment took care of the problems found during the inspection and that was done within the 14 days. The buyers were just thinking that they could keep studying the property and finding more things to be fixed and keep postponing and negotiating. The significance of the14 days was lost on them. Was the survey significant for the lender? Yes, the lender was concerned, but it was the failure of the buyers to conduct due diligence that resulted in the problem with the lender. What did Mr. Jones do in his dual agency that caused the court to comment on his conduct? He told the buyers that there was a survey and there was not a survey. That was not true, and an example of how dual agents often say things to bring about closure that prove costly to buyers and sellers. 16-3 Responsibilities of the Lender in Closing: The Real Estate Settlement Procedures Act—USE POWERPOINT SLIDES 16-19 TO 16-36 16-3a

Purpose of RESPA 1. Real Estate Settlement Procedures Act 12 U.S.C. Section 2601; passed in 1974; amended in 1992 (Regulation X) 2. To provide more effective advance disclosure of closing costs 3. To eliminate kickback or referral fees for closing services 4. To reduce amounts buyers are required to pay for insurance, taxes, etc. 5. Reform of local record keeping 6. Regulation X a. CFPB details in regulation form on RESPA b. Updated through Dodd-Frank and the reassignment of enforcement to the CFPB c. RESPA and TILA have been combined under CFPB so that the disclosure requirements (which took effect August 1, 2015) are now combined for borrowers

16-3b

Application of RESPA 1. Federally-Related Mortgages a. Those secured by first or second lien on residential property

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b. Those made by lenders with federally-insured deposits c. Those loans insured by federal government d. Those loans to be sold on secondary market to government corporations e. Those loans by lenders investing $1,000,000 or more in real estate 2. Exemptions a. Does not apply to commercial mortgages b. Does not apply to property purchases of 100 acres or more c. RESPA applies only to loans for property that will be used for residential purposes. 16-3c

Disclosures Under RESPA 1. Buyer's Information Handbook a. Developed by CFPB b. Can be purchased from CFPB c. Lender can print own booklets with CFPB contents d. Contains explanation of charges and Uniform Settlement Statement (USS) 2. Good Faith Estimate (GFE) of Settlement Costs a. The form must:

i. Be clear and concise ii. Include the lender‘s name iii. Disclose that not all items are covered iv. Use same names for charges as in USS v. Estimate need only include applicable charges vi. Estimate must be made in dollar figures vii. No precise formula of how close viii. Must be reasonably close ix. Must be delivered within 3 days of application regardless of whether loan is approved b. Categories of costs that must be disclosed: i. ii. iii. iv. v. vi. vii. viii. ix.

Sales/broker's commissions Loan origination fees Loan discount Appraisal fee Credit report Lender's inspection fee Mortgage insurance application Assumption fee Interest (from date of closing to first payment)

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x. Mortgage insurance premium xi. Settlement or closing fees xii. Abstract or title search xiii. Title examination xiv. Title insurance binder xv. Document preparation xvi. Notary fees xvii. Attorney's fees xviii. Title insurance xix. Recording fees xx. City/county taxes; stamp fees xxi. State taxes xxii. Survey fees xxiii. Pest inspection xxiv. Application or commitment fee 3. How Much Can the GFE Be off Under RESPA? a. Reforms are grouped by categories—the 10% category; zero tolerance category when the loan is locked; no restrictions on variation when borrower selects his own escrow agent or title insurance b. The first category is zero tolerance, which means that there can be no variation between the estimates and the closing. The fees in the zerotolerance category include: i. Loan origination charge ii. Credit or charge for the interest rate chosen by the borrower (the yield spread premium or discount points) iii. Adjusted loan origination charge when the rate is locked iv. State and local property transfer taxes c. The second category allows for a ten percent margin for error and includes the following: i.

Loan originator required settlement services if the lender selects the service providers ii. Title services and title insurance policies if the borrower selects a service provider identified by the lender iii. Government recording services d. The third category in the no tolerance category where there is no restriction at all. The fees can change substantially. i.

Loan originator services when the borrower selects his own third-party provider ii. Title services and insurance when the borrower selects his or her own © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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provider iii. Initial escrow deposit iv. Daily interest charge and homeowner‘s insurance

Answer to consider (16.3) The students should note that the Johnsons did not receive their GFE within the 3-day time limit, so there is a violation there. GFE Estimate