Top 10 Legal Rulings Set Course for Real Estate Activities
Although the battle over tax reform snared many of last year’s headlines, 10 other legal and legislative decisions rendered in 1986 will have an equally large impact on developers and the rest of the real estate industry, a prominent real estate attorney says.
Phillip R. Nicholson, a partner of Los Angeles-based Cox, Castle & Nicholson, says last year’s decisions continued three major trends in the real estate industry.
The first trend, he says, is the continued expansion of the concept of good faith and fair dealing. Courts and the Legislature are increasingly “reading in” or “reading out” certain parts of contracts in an effort to be fair to all parties involved, Nicholson says.
The second trend is a continuation of the “deep pockets” concept, through which the damages a well-heeled party has to pay is often disproportionately higher than its degree of fault.
The final trend, perhaps best symbolized by the overwhelming voter approval of Los Angeles’ Proposition U, is the greater control government and voters are exercising over property they don’t own.
Although some of the “Top 10” 1986 actions the attorney cites as evidence of the three trends dealt with megabuck real estate deals, they may also have a broad impact on homeowners, renters and small real estate investors.
As an example, he says, a case involving a huge pension fund and a large real estate partnership could eventually affect home-mortgage seekers across the nation.
In Teachers Insurance & Annuity Assn. vs. Butler , the pension fund/lender--Teachers Insurance--successfully sued the partnership’s general partner, Butler, after Butler refused to accept a $20-million loan that the two parties had agreed to earlier. Butler claimed he refused the loan because of a contractual technicality. But there was a strong indication that Butler wanted out of the deal because interest rates had dropped sharply since the preliminary loan documents had been signed.
Teachers Insurance was awarded more than $3 million in damages. The decision could encourage other lenders to pursue home buyers who try to back out of preliminary loan agreements, Nicholson said.
A tenant’s right to sublease an apartment was broadened by the state Supreme Court in Kendall vs. Ernest Pestana Inc . The court ruled that, in some cases, a landlord must have a “commercially reasonable objection” in refusing a subleasing arrangement. The justices emphasized that a landlord can’t stop the tenant from subleasing to a third party if the landlord’s decision is based on purely economic motives, personal taste, convenience or even sensibility.
Both Teachers and Kendall expand the concept of “good faith and fair dealing,” Nicholson said. But while that may be a noble cause, he added, the expansion is making it “much more difficult to know what our obligations are under our contracts.
“We may find ourselves in breach of our contracts by virtue of a court having determined, subjectively, that we breached the covenant of good faith and fair dealing.”
Nicholson said a widely publicized case involving a woman who successfully sued the homeowners’ association at her condominium complex is evidence of the second trend that emerged from last year’s court decisions--a continuance of the “deep pockets” concept.
The case, Frances Troy vs. Village Green Homeowners’ Assn. , involved a woman who was raped and robbed shortly after she complied with an order by the association to take down extra security lighting outside her unit. The California Supreme Court ruled that a homeowners association, like a landlord, has control over the common areas of a project and thus could be held to a landlord’s standard of care.
“This decision is definitely having a chilling effect on homeowners associations,” Nicholson says. Owners are growing more reluctant to run for their association’s board of directors, and insurance policies for associations and their directors are growing more difficult and expensive to obtain, he said.
The trend toward greater government and public control over private property was evidenced by the passage of Proposition U, in which Los Angeles voters approved an initiative that reduces by one-half the floor-to-area ratio of new construction in most parts of the city.
Other slow- or no-growth measures passed in cities across the state--as well as the imposition of new fees on developers and tough rent-control ordinances--are “further proof that our private-property rights are being eroded,” Nicholson says.
The attorney says most of the court decisions and legislative actions last year concerning those rights were especially bad for developers. However, he added, “a more optimistic trend may be developing in the federal courts”--if you’re a builder or landlord, that is.
In a case that Nicholson says could eventually impact future rent-control laws, the 9th District Court of Appeals held that a city’s rent-control ordinance could constitute a taking of an owner’s property--an action that requires the state to pay the owner just compensation under the Fifth Amendment.
Below-Market Leases
The case, Hall vs. City of Santa Barbara , involves a local rent-control ordinance that requires owners of mobile-home parks to offer tenants below-market leases of unlimited duration. Future rent increases are strictly limited.
The appeals court ruled that if a property owner can prove that an ordinance transfers to the tenants an interest that has a market value, the ordinance would constitute a taking of the owner’s property and would require that the owner be compensated.
The case is working its way toward a possible date with the U.S. Supreme Court, Nicholson said. If higher courts rule in Hall’s favor, he added, future rent-control measures may not be as strict as many are today.
Toxic Waste Site
Other important cases decided last year, according to Nicholson, were:
-- United States vs. Maryland Bank & Trust Co. , in which the federal government sought to recover its expenses from the removal of hazardous waste from contaminated property that Maryland Bank had purchased at a foreclosure sale.
In what Nicholson calls “a major toxic waste decision,” the court held that an owner doesn’t have to be the operator of the property to be held liable under a federal law enacted in 1980.
-- Muro vs. Superior Court , which challenged a 1985 California Supreme Court ruling that held a landlord liable for hidden defects in an apartment complex. In Muro , the court ruled that the earlier ruling by the state Supreme Court was applicable only to residential leases, and not to commercial property.
-- Midlantic National Bank vs. New Jersey Department of Environmental Protection . Midlantic was a creditor of Quanta Resources Corp., which operated facilities that handled toxic substances. Quanta filed for bankruptcy before cleaning up its sites, and the trustee notified the creditors and bankruptcy court that it intended to abandon the sites under a section of the Bankruptcy Code.
Disclosure Expansion
But the U.S Supreme Court held that a trustee can’t abandon property in violation of state laws or regulations that are reasonably designed to protect the public’s health or safety. The court also said the bankruptcy court can’t authorize an abandonment without giving conditions that would adequately safeguard the public’s health and safety.
Also making Nicholson’s “Top 10” list is the passage of a new state law expanding what type of information sellers must disclose to buyers in most residential transactions.
The final entry in the list is a change in the state’s financial codes that will enable a state or nationally chartered bank to recover damages from a borrower who defaults on a fraudulently obtained real estate loan. The new law may also limit the amount of protection a bankrupt borrower has from his creditors, Nicholson said.
