Keeping Current—Property

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

CASES

Keeping Current—Property Editor: Prof. Shelby D. Green, Elisabeth Haub School of Law at Pace University, White Plains, NY 10603. Contributor: Prof. Darryl C. Wilson.

EMINENT DOMAIN:

Just compensation clause of state constitution waives sovereign immunity for inverse-condemnation claim that seeks injunctive relief. The government’s road-widening project caused flooding “within and around” Mixon’s real property. Mixon sued the government for inverse condemnation under the just compensation clause of the state constitution, seeking both damages and injunctive relief to prevent recurrent flooding. The trial court denied the government’s defense of sovereign immunity. The appellate court affirmed, and the supreme court agreed, with some narrowing language with respect to the claim for injunctive relief. The court began by noting a long line of cases and constitutional amendments regarding just compensation and sovereign immunity, explaining that just compensation must be paid prior to a taking and that this principle carries over to inverse condemnations. This right necessarily waives sovereign immunity. Otherwise, the state’s obligation to pay just compensation before damaging property would ring hollow. When the government invokes eminent domain and has not prepaid compensation for the taking, the just compensation clause waives sovereign immunity. Likewise, when the government takes or damages private property without invoking eminent domain, the just compensation clause also waives sovereign immunity. With respect to Mixon’s claim for injunctive relief, the court held that sovereign immunity is waived to the extent that her claim seeks to stop the taking or damaging until the government fulfills its legal obligations that are conditions precedent to eminent domain. Dep’t. of Transp. v. Mixon, 864 S.E.2d 67 (Ga. 2021).

FORECLOSURE:

Title to property bought at homeowners’ association foreclosure sale is subject to additional attorney’s fees imposed under prior deed of trust. At a foreclosure sale of a homeowners’ association lien, Oella Ridge Trust paid $4,700 for the property, subject to a first deed of trust held by Silver State. Oella Ridge Trust brought an action to quiet title against Silver State, claiming that the homeowners’ association was entitled to superpriority and therefore the foreclosure sale extinguished the deed of trust. Although Oella Ridge Trust prevailed in trial court, the state supreme court reversed, ruling that Silver State’s deed of trust still had first priority. Oella Ridge Trust then sought to pay off the debt, which had a remaining principal balance of $138,000. Silver State demanded an additional amount of $96,500 for attorneys’ fees incurred in defending the quiet title action. Oella Ridge filed a complaint for declaratory relief, alleging that the attorneys’ fees were unreasonable, and that Silver State had waived any request for attorneys’ fees by failing to seek them during the litigation to affirm the deed of trust, as required by Nev. Rules of Civil Proc. 54(d)(2). The trial court granted partial summary judgment to Silver State, concluding the deed of trust allowed it to add the fees to the debt, without moving for those fees in court. The supreme court affirmed. As an initial matter, the court concluded that the provision of the deed of trust applied to Oella Ridge. Because Oella Ridge purchased the property at an HOA foreclosure sale, it took title subject to all the terms of Silver State’s prior deed of trust, which was not extinguished by the sale. Although Oella Ridge was not personally liable for the attorneys’ fees, if it wishes to pay off the note, then it must to pay any costs Silver State properly added to the secured debt pursuant to the deed of trust. Since the fees did not arise from a judgment, Silver State’s claim was not subject to the time requirements of Rule 54(d)(2). Oella Ridge Trust v. Silver State Schs. Credit Union, 500 P.3d 1253 (Nev. 2021).

FORECLOSURE:

Lender who immediately assigns rights after sale is still purchaser for purpose of calculating deficiency based on fair market value of property. Rockwell Homes defaulted on a loan from Jackson Lumber with a balance due of $1.041 million. Appraisals showed the property had an “as is” value of $1.1 million. At the foreclosure sale, Jackson Lumber was the highest bidder at $550,000. It executed a purchase and sale agreement naming itself as both seller and “purchaser” of the property. Jackson Lumber then assigned rights under the purchase and sale agreement and gave a deed to the eventual purchaser. Jackson Lumber then brought suit against Rockwell Homes for a deficiency judgment. The trial court entered judgment for Rockwell Homes on the ground that as mortgagee who purchased the property at the sale, the deficiency judgment is determined by comparing the amount owed with the fair market value of the property at

the time of the sale, as established by an independent appraisal. 14 Me. Rev. Stat. § 6203-E. Using that measure, there was no deficiency. The supreme judicial court affirmed. This measure for a deficiency judgment under the statute stands in opposition to the ordinary rule that compares the sale price with the sum owed to the mortgagee. The issue here was whether Jackson Lumber was the “purchaser at the public sale” even though it did not ultimately acquire title to the property because it later assigned away its rights under the purchase and sale agreement. The court explained that while the term “purchaser,” viewed in isolation, means “someone who obtains property for money or other valuable consideration; a buyer,” the meaning under the foreclosure statute is different based on its usage in the statutory scheme. Particularly, because a “purchaser” is authorized to assign the agreement suggests that the “successful bidder” is the “purchaser at the public sale.” This interpretation was buttressed by the statutory language that the calculation of the deficiency is determined “at the time of the sale,” not the fair market value at the time that money or the deed changes hands. Because the mortgagee was the purchaser at the time of the sale, it was not entitled to a deficiency judgment. Jackson Lumber & Millwork Co. v. Rockwell Homes, LLC, 266 A.3d 288 (Me. 2022).

LANDLORD-TENANT:

Landlord’s loud music on weekends and shooting firecrackers does not interfere with tenant’s right to quiet enjoyment. A landlord initiated eviction proceedings against a residential tenant. While the proceedings were pending, the tenant brought an action against the landlord, alleging that, in retaliation for the eviction proceedings, the landlord, who lived in a house next door, played “loud” rock music on an outdoor stereo system early in the morning and during the day from early morning Friday through Monday; yelled “GET OUT OF MY HOME!” loudly from her property; and either shot a gun or ignited firecrackers on two evenings. The trial court entered judgment for the landlord. The supreme court affirmed. Under N.H. Rev. Stat. § 540-A:2, a landlord may not willfully violate a tenant’s right to quiet enjoyment. The statute codifies the common-law right that obligates the landlord to refrain from interfering with a tenant’s beneficial use or enjoyment of the property. To establish a violation, the evidence must show that the landlord acted willfully, that is, voluntarily and intentionally, not by mistake or accident. Here, the trial court found that the music did not interfere with the tenant’s quiet enjoyment because it was played during a summer weekend when people generally listen to music outside and it did not appear to overpower regular conversation. The tenant also had not demonstrated that the alleged gun shots and firecrackers were in retaliation against the tenant. As the landlord controverted much of what the tenant claimed, the trial court was free to believe the landlord. Magee v. Cooper, 2021 N.H. LEXIS 174 (N.H. Dec. 3, 2021).

MORTGAGES:

Owner loses statutory redemption right by mistakenly paying less than full redemption amount after foreclosure sale. Clement defaulted on a loan secured by a mortgage on 208 acres of farmland, and the bank instituted foreclosure proceedings. The promissory notes bore an initial rate of 4.25 percent and a default rate of 21 percent. The notes did not contain a cure provision allowing a post-default reversion back to the nondefault rate. At a foreclosure sale on May 22, 2017, Mlady purchased the farmland and obtained a certificate noting the redemption expiration date of May 22, 2018. The notice of sheriff’s sale and the underlying default judgment both indicated the default interest rate of 21 percent and per diem interest of $933.34. Shortly thereafter, Clement assigned his redemption rights to Dougan, who then deposited $1,690,000 with the county clerk and filed a petition asking the court to set the rate at 4.25 percent, instead of 21 percent. While this challenge was ongoing, Dougan deposited additional funds based on the default interest rate, as a protective payment. However, Dougan’s counsel miscalculated the amounts due. Based on the applicable 21 percent interest rate, Dougan had to pay $1,938,799.79; but she actually paid $1,937,001—$1,798.79 below the required amount. After Mlady received a deed to the property on May 24, 2018, Dougan deposited additional money and asked the court to recall the deed. The trial court later determined that Dougan should be allowed, as a matter of equity, to pay the additional money due, despite the expiration of the redemption period. After additional motions and review, the appellate court held that the redemption effort was untimely. The supreme court agreed, first affirming that the higher default interest rate applied at all times after Clement’s default and that Dougan’s early partial payment did not reduce the daily accrual of interest. Based on this, the redemption effort was untimely because the necessary amounts to redeem were not deposited with the clerk prior to the redemption expiration date. The court stated that post-deadline payments are not allowed. Showing little concern for the hardship to the property owner, but great concern for disruptions in the market, the court noted that knowing the precise amount and deadlines are important for the marketability of foreclosed properties and related financing. Dismissing the claim off-handedly, the court stated: “Close only counts in horseshoes and hand grenades, not our redemption statute.” Mlady v. Dougan, 967 N.W.2d 328 (Iowa 2021).

REAL COVENANTS:

Termination of covenants for changed conditions requires changes within neighborhood that neutralize benefits of covenants and defeat their objects and purposes. Covenants recorded in 1982 required a minimum lot size of five acres for single-family dwellings. In 2003, Delongchamp purchased property subject to the restrictions. In 2015, Capitol Farmers Market (CFM) acquired nearby land in the restricted neighborhood and later announced plans to subdivide its property into a high-density residential subdivision with small lots. DeLongchamp sued CFM, and the trial court, based on the findings and report of a special master, held that the terms of the covenants were not ambiguous, there was no waiver of the restrictions, and the covenants were not extinguished by changed conditions. After an appeal and remand, the supreme court agreed with the lower courts. On the changed conditions claim, the court noted that CFM’s only evidence was the development of 910 single-family residential lots and other commercial development within a one-mile radius of the property since the covenants were imposed in 1982. But this was not enough. Instead, what mattered was that the properties to the west, south, and east of the land in question had not changed nor did use of the properties within the restricted neighborhood. The proof failed to show a change in character so great as to neutralize the benefits of the covenants and render them unenforceable. Capitol Farmers Mkt., Inc. v. Ingram, 2021 Ala. LEXIS 128 (Ala. Dec. 3, 2021).

REAL COVENANTS:

Promise to arbitrate disputes arising from construction defects touches and con- cerns the land. In 2007, a builder sold a new home, conveying title by special warranty deed that included extensive provisions regarding mediation and arbitration as well as other covenants, conditions, and restrictions. The deed stated that the restrictions were binding on both the original buyers and subsequent purchasers of the property. The Hayslips bought the property in 2010, taking title by a deed stating the property was “subject to easements, restrictions, reservations, and limitations if any.” In 2017, the Hayslips sued the builder over allegedly defective stucco and the builder filed a motion to stay the lawsuit and compel arbitration. The trial court granted the motion, and the supreme court affirmed, holding that a valid arbitration agreement existed and ran with the land, binding the Hayslips. A real covenant runs with the land if it touches and concerns the land involved, there is intent for the covenant to run, and there is notice of the restriction to the party against whom enforcement is sought. The element at issue was “touch and concern.” The court found that because the alleged construction defect physically affected the dwelling and the resolution of it depended on the arbitration outcome, the covenant touched and concerned the land. The court declined the Hayslips’ argument that the promise to arbitrate lacked privity because they were not party to the original deed. Instead, the court relied on the relaxed privity rules traditionally applied to equitable servitudes. Hayslip v. U.S. Home Corp., 2022 Fla. LEXIS 176 (Fla. Jan. 27, 2022).

RIGHT OF FIRST REFUSAL:

A 125-year lease does not trigger right of first refusal. In 1982, the Luckinbill Living Trust leased a portion of a huge parcel to Nielson for a three-year term, to continue from year to year unless terminated by either party. The lease contained a right of first refusal under which Nielson had a “first right to purchase the property upon the same terms and conditions and for the same purchase price as … [offered by] any other bona fide purchaser of the property.” Nielson assigned the lease to Holding, including Nielson’s right of first refusal. Years later, Luckinbill subdivided the land into smaller parcels. On more than one occasion, Luckinbill honored Holding’s right of first refusal. In 2019, the Lennons sought to purchase two parcels. Luckinbill notified Holding, and each time Holding exercised the right of first refusal to pre-empt them. Then, without first notifying Holding, Luckinbill entered into a 125-year lease with the Lennons for a 6.6-acre parcel, with a lease payment of $1,200 annually, to end in the year 2144. Holdings brought suit alleging a violation of the right of first refusal. The trial court rejected the claim, and the supreme court affirmed. The lease was clear: the right of first refusal was triggered by potential sale. A lease is not a sale. The court went on to reject Holding’s argument that the recording act’s definition of a conveyance that includes leases of terms greater than three years should control because the lease did not refer to the recording act. The court also rejected Holding’s claim based on the essential differences between a sale, by which the purchaser gains substantive ownership and control over the subject property, and a lease, which does not change ownership and relinquish full control over the property. Luckinbill retained ownership, allowable uses were specifically limited, and any improvements or changes required Luckinbill’s approval. Holding v. Luckinbill, 503 P.3d 12 (Wyo. 2022).

SALES CONTRACTS:

City dealing at arm’s length in sale of shopping mall has no duty to disclose environmental contamination to buyer. A shopping mall in Fairbanks, Alaska, operated under a lease from the City of Fairbanks. In 1974, Gavora, Inc., acquired the leasehold and, in 2002, bought the property from the city pursuant to a purchase option. Before purchase, Gavora did not order an environmental inspection and the property appraisal stated that it did not address environmental contamination. For many years, beginning before Gavora acquired the leasehold, a mall dry-cleaning tenant contaminated the groundwater with hazardous drycleaning chemicals. In 2009, the state environmental agency notified the city and Gavora that they were potentially liable for remediation of the groundwater contamination. Gavora sued the city in federal district court, which held the city and Gavora jointly and severally liable and apportioned remediation costs 55 percent to the city and 45 percent to Gavora. Then Gavora sued the city in state court, claiming misrepresentation, fraud, breach of contract, and breach of an implied covenant of good faith and fair dealing. Gavora also claimed that the city, in selling the property, breached a duty under the Restatement of Torts “to exercise reasonable care to disclose” the environmental contamination “because of a fiduciary or similar relation of trust and confidence between” the parties. Restatement of Torts (Second) § 551(2) (a) (1977). The trial court ruled for the city on all the major claims. The supreme court affirmed. In particular, it rejected the § 551 claim, which imposes a duty to disclose between co-venturers. The court determined that the city and Gavora did not enter into a joint venture but were engaged in an arm’s length purchase and sale transaction. That relationship did not change on account of the city being a government entity because the city participated as a commercial real estate vendor. The court declared that a duty to disclose is rarely imposed when the parties deal at arm’s length and when the information is the type that a buyer is expected to discover by ordinary inspection. As an experienced real estate investor, Gavora had reason to know about environmental concerns, yet it took no action to investigate the condition of the property. The court went on to reject a “free-floating disclosure duty arising solely under an implied covenant.” Gavora, Inc. v. City of Fairbanks, 502 P.3d 410 (Alaska 2021).

STATUTE OF LIMITATIONS:

Sales agreement with letter “s” printed next to signature line is not contract under seal with 20-year statute of limitations. In 2005, Sweetwater Point bought two parcels of land from Kee for $8 million. Before closing, Sweetwater learned that the state had a claim to a de minimis portion of one of the parcels, although the claim did now show up in the seller’s chain of title. After consulting with counsel and a survey, Sweetwater concluded that the sellers had superior title to the parcel and went forward with closing, accepting title by special warranty deed. In 2009, the state brought a quiet-title action against Sweetwater, claiming title to the entire parcel. That litigation lasted until 2017, when the court of chancery declared that the state held superior title. One year later, Sweetwater filed suit against the sellers, seeking rescission, alleging mutual mistake, failure of consideration, and unjust enrichment. The court dismissed all the actions as time-barred under the state’s three-year statute of limitations. 10 Del. Code § 8106. The supreme court affirmed, rejecting arguments for extending the statute of limitations, either based on contract under seal or tolling under a discovery rule. Ordinarily, the cause of action on the claims accrues at closing and is time-barred three years thereafter. The statute of limitations for a contract under seal, however, is 20 years. Although a wax or impressed seal is no longer required to create an instrument under seal, there is yet a bright-line rule that there must be both a testimonium clause and the word “SEAL” printed next to the signature line. Here, the form contract referred to a seal in the testimonium clause and next to each signature there appeared an “(s).” These did not clearly indicate that the parties intended to affix a seal, and the “(s)” could have stood for something innocuous like signature or sign here. The court stated that given the high cost of extending the statute of limitations, it was not unreasonable to require parties to use the word “seal” next to the individual signatures to create a contract under seal. The court also rejected tolling because that theory applies only when the injury is inherently unknowable, and the claimant is blamelessly ignorant of the wrongful act and the injury. Here, Sweetwater was put on inquiry notice as early as 2007, when the state interfered with Sweetwater’s land clearing activities, stating that it intended to build a highway over one of the parcels because it owned the land. A reasonable person would have inferred at that time that there were serious reasons to doubt whether the sellers had conveyed good title. Lehman Bros. Holdings, Inc. v. Kee, 268 A.3d 178 (Del. 2021).

LITERATURE

MORTGAGES: In Can a Pledge of Equity Interests Be a Prohibited Clog on the Equity of Redemption?, 56 Real Prop. Tr. & Estate L.J. 301 (2021), Brian D. Hulse explores this question. He explains that it is common for a lender to take a security interest in all the equity interests in an entity that owns real estate (such a security interest is often called a “pledge”). In many cases, the entity has no material assets other than a single piece of real estate. The entity may or may not grant a mortgage on the real estate. If there is a mortgage, the mortgagee may or may not be the same lender that holds the equity pledge. The pledge of the equity interests is taken pursuant to Article 9 of the Uniform Commercial Code, which has remedies provisions that can be enforced in many cases much more quickly than foreclosure of a mortgage and often without other disadvantages of a mortgage foreclosure. In recent New York litigation, the debtors argued that such a pledge violates centuriesold principles of real estate law holding that any device that allows a creditor with real property as collateral to realize on the property without going through the statutory real property foreclosure procedures is a “clog” on the property owner’s equity of redemption and is invalid. The New York court dismissed this litigation without making a substantive ruling on the clogging argument and, to date, there is no reported decision on the issue. This article reviews the relevant law, the arguments on each side of the issue, and how those arguments might play out in various factual settings. The definitive resolution remains to be seen.

PROPERTY TAX:

The phenomenon known as “tax privateering” is the exploitation of purchased tax debt, which affects thousands of property owners every year. Wildly profitable to the privateers, it is inordinately devastating to the property owners, particularly to vulnerable populations—the elderly and cash-poor property owners who experience unanticipated economic shocks in their lives. In Property Tax Privateers, 41 Va. Tax. Rev. 89 (2021), Cameron M. Baskett and Christopher G. Bradley reveal the true evils of this regime, which the local property tax system has created and now supports. If a property owner is unable to pay property taxes, along with exorbitant interest, penalties, and fees, the local government sells the debt to third-party collectors, who can foreclose on that debt, and, soon after, the privateer resells the property at a sizable profit. The authors show that property tax system is remarkably unfair—although progressive in that the amount of tax increases with the property value, it is yet regressive in the sense of disparate impacts on property owners. Property taxes represent 4.2 percent of the total income for the poorest twenty percent of homeowners, compared to only 1.7 percent for the wealthiest one percent. By using privateers, local governments avoid the burden of foreclosure and the blame for resultant hardships. To control some of the abuses, while at the same time protecting the government’s right to enforce tax obligations, the authors call for a suspension of the privateers’ right to foreclose. They should have to wait until the property owner dies, sells the home, or vacates. The authors also offer useful ideas for improving the property tax system, including tax exemptions, credits, and other forms of tax relief to help preserve the property rights of distressed property owners.

ZONING:

Ira K. Lindsay is against abolishing statutory protection for nonconforming uses. In In Praise of Nonconformity, 61 Santa Clara L. Rev. 745 (2021), he offers a range of reasons. The protection of existing uses adheres to the original logic of zoning regulation as a planning instrument. Existinguse protection vindicates values that are central to the normative function of property rights by allowing uses without outside interference. Losing protection for existing uses would upset the existing relations between neighbors as to how they use their respective property and unsettle the mechanisms that are better suited for resolving land use disputes between neighbors, such as private bargaining and nuisance litigation. Also, existing-use protection reflects appropriate skepticism about the value of strict separation of uses for those uses that are not so harmful or that they cannot plausibly be considered nuisances. Lindsay thinks that protecting existing uses fits well in the context of comprehensive planning and our evolving notion of ownership and that, rather than viewing the concept as a “grubby concession in the law,” it should be preserved as a vital tool for wise land use regulation.

In Standing in Land Use Litigation, 56 Real Prop. Tr. & Estate L. J. 237 (2021), Prof. Daniel R. Mandelker explores the merits and problems of third-party standing to sue in land use litigation. He believes that questionable land use decisions will not be taken to court unless a third-party can sue, but notes that third-party standing is limited. Standing law is fragmented, obstinate, excessively restrictive, and split between judicial and statutory requirements. Reform is necessary so that third parties can have access to court to protect public values. The article explains why third-party standing should be expanded and proposes a conceptual model to guide reform. Prof. Mandelker discusses conflicting third-party standing rules in the US Supreme Court, including the dominant restrictive rule that requires injury, and similar rules in the states. He also discusses nuisance-driven and statutory rules for third-party standing in zoning cases. He recommends reform that gives standing in court in land use cases to all participants in public hearings and a gatekeeper function that blocks standing when bias is present.

LEGISLATION

NEW JERSEY amends landlordtenant law to require covers on steam radiators. Tenants have a right to request steam-radiator covers. Landlords must give tenants notice of the right as a rider to leases and by posting in common areas. 2021 N.J. Laws 259.

NEW YORK amends real property law to require education by brokers on fair housing laws. The amendments specify that courses should include instruction on the legacy of segregation, unequal treatment, and the history of lack of access to housing on the basis of race, disability, and other protected characteristics. 2021 N.Y. Laws 697.

NEW YORK amends real property law to require cultural competence of real estate brokers. Licensees and applicants for renewals must complete at least two hours of training. 2021 N.Y. Laws 688.

NEW YORK amends housing law to require that agencies affirmatively further fair housing. The required measures include identifying and overcoming patterns of segregation, reducing disparities, and eliminating disproportionate housing opportunities. 2021 N.Y. Laws 690.n

Published in Probate & Property, Volume 36, No 3 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.