28th AnnualReal Property Law Retreat

April 30, 2011

La Jolla, California


THE LAW PROFESSORS’ ROUNDTABLE:

IMPORTANT RECENT DEVELOPMENTS

IN REAL PROPERTY LAW

Roger Bernhardt, Golden Gate University

Daniel B. Bogart, Chapman University Law School

 

Shelley Ross Saxer, Pepperdine University School of Law


The Speakers

Roger Bernhardt is Professor of Law at Golden Gate University in San Francisco. He is the Editor of the California Real Property Law Reporter and author of:  California Mortgage and Deed of Trust Practice, and Bernhardt’s California Real Estate Codes.  He has also written, for law students: Cases and Statutes on Real Property, Real Property in a Nutshell, The Black Letter Law of Real Property, and Cases on California Real Estate Finance. Bernhardt is past chair of the Legal Education Committee of the American Bar Association’s Real Property Probate and Trust Section and former member of the Executive Committee of the Real Property Section of the California State Bar. He is a member of the American Law Institute, the American College of Real Estate Lawyers, and the American College of Mortgage Attorneys.  He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. .

Daniel B. Bogart is Associate Dean for Administration at the Chapman University Law School.  Dean Bogart also holds the Donley and Marjorie Bollinger Chair in Real Estate Law, and serves as the Director of the Law School’s Center for Land Resources.

Dean Bogart’s scholarly, teaching, and national service interests emphasize transactional practice.  His articles have appeared in the UCLA Law Review, the American Bankruptcy Law Journal, and the Pittsburgh Law Review, among others. Dean Bogart is also the co-author of four books, including Commercial Leasing, A Transactional Primer (with Professor Celeste Hammond.)    He is a contributing editor to Friedman on Leases (Randolph Edition), the most widely used treatise on commercial lease law and practice. Dean Bogart speaks regularly at scholarly events, including recent presentations at Renmin University of China School of Law in Beijing and Emory Law School in Atlanta, Georgia.

Dean Bogart began his teaching career in 1990, when he was named to the faculty of the Drake University Law School. Dean Bogart joined the Chapman University Law School faculty in 1998. He is a recipient of Chapman University’s Valerie Scudder Award, recognizing outstanding achievement in teaching, scholarship, advising, and service. Dean Bogart has been named outstanding teacher at both the Drake and Chapman Law Schools.

Dean Bogart has chaired most of the key committees at the Law School, at one time or another. Notably, Dean Bogart chaired the committee devoted to the Law School’s successful membership application to the Association of American Law Schools.

Dean Bogart is past chair of the Real Estate Transactions Section of the Association of American Law Schools. Dean Bogart is an elected member of the American Law Institute, and a Fellow of both the American College of Real Estate Lawyers and the American Bar Foundation.  He received his B.A. (1982), J.D. (1986) and M.A. in Economics (1986) from Duke University.

 

Shelley Ross Saxer, Pepperdine University School of Law

Director, Byrne Judicial Clerkship Institute and Professor of Law This email address is being protected from spambots. You need JavaScript enabled to view it.

Professor Saxer received her B.S. in Business Administration from Pepperdine University, summa cum laude, and her J.D. from University of California, Los Angeles.  While in law school, Professor Saxer served as the chief managing editor of the UCLA Law Review. Upon graduation, she clerked for the Honorable Wm. Matthew Byrne, Jr. of the Federal District Court for the Central District of California and then worked briefly as a corporate associate for the Century City law offices of O'Melveny & Myers.

Professor Saxer enjoys writing articles that address topics where land use issues intersect with constitutional concerns. She has published articles dealing with liquor store overconcentration in urban areas, the use of religious institutions for homeless shelters, conflict between local governmental units over commercial land use decisions that impact surrounding communities, eminent domain, the Religious Land Use and Institutionalized Persons Act, sex offender property disclosures and residency restrictions, water law, and zoning conflicts with First Amendment rights.

Since joining the Pepperdine faculty in 1991, she has taught courses in real property, community property, remedies, environmental law, water law and land use. She has integrated technology into her teaching by using presentation software in the classroom and web-based course materials. Professor Saxer has also spoken at AALS and CALI sessions about the use of technology in the classroom. She enjoys teaching because of the rewarding interaction with law students.

Professor Saxer is a member of the Order of the Coif, the American Bar Association, and the California state bar. She has also been admitted to practice before the U.S. Supreme Court.  Professor Saxer is currently serving as Chair-Elect of the Property Section of the American Association of Law Schools.


1. Culver Ctr. Partnersv. Baja Fresh Westlake Village, 185 Cal. App. 4th 744 (2010)

Parties sentnotices to all the wrong locations and with little regard for what the notice provision in the lease required; what is the proper treatment of notice by email sent to the wrong person but eventually forwarded electronically to Tenant?

Commercial Landlord sent written notice to “pay rent or quit” to address other than the one provided in the notice provision of the lease, and sent an email notice to agent of Tenant rather than to the business email address of Tenant.  This notice was insufficient to pursue an unlawful detainer action because the lease required any such notice to be sent to a certain physical address.  Commercial tenant’s actual receipt of the email message did not cure commercial landlord’s deficiency in service.

Tenant restaurant was in the midst of a five-year commercial lease with landlord Culver Center.  The lease specified the manner in which “[a]ll notices, consents, approvals or demands” shall be served.  The lease stated that service was only complete when either 1) delivered by deposit in the US mail, certified or registered, postage prepaid, 2) transmitted electronically or by fascimile, with proof of service provided, or 3) delivered in person.  Any method of service, pursuant to the terms of the lease, had to be addressed to or delivered to the appropriate party at a specific physical address.  Tenant had properly notified Landlord of a change in address; the official notice address was identified as a location in Anaheim, California. Larson, the leasing agent of Tenant, signed the change of address notice.   Later, Landlord purported to serve Tenant with a five-day notice to pay rent or quit and deliver the premises for failure to pay $14,186.77 in rent and fees. This “notice” was transmitted to Larson, rather than to Tenant at the official notice address, by 1) mail 2) facsimile  or 3) as an email attachment.  Larson forwarded the electronic notice to Tenant.

Despite the deficiencies in notice to Tenant, Tenant sent payment to Landlord to cure the delinquency.  However, Landlord returned the check un-cashed; claiming it was received beyond the five-day cure period provided in the lease.  Tenant conceded that it was aware the notice to quit via the email forwarded to Tenant by Larson, its leasing manager.  Nonetheless, the trial court granted Tenant’s motion for summary judgment because the notice had not been properly served on Tenant.  The Court of Appeal affirms the judgment.

In commercial leases, Landlord and Tenant may lawfully agree to notice procedures that differ from those provided in the statutory provisions governing unlawful detainer.  Notice provisions in the lease agreement control conflicting statutory provisions.  Landlord acknowledged that it did not mail or personally deliver the notice to the proper address.  However, it contended that it served notice to Tenant by “electronic transmission,” as permitted by the lease.  To be effective, however, regardless of the means of transmission, the notice must be delivered to the address provided for in the lease or, according to the lease, to “such other address as [Tenant] may from time to time designate for this purpose.”  Landlord contended that it did not matter to which address the email was sent, so long as it was eventually received at the specified address.

The lease specifically required that, with respect to electronic notice, notice must be “transmitted by telegraphic electronic means, with proof of service provided.” Theoriginal notice provision did not include an email address for either party. In the change of notice sent by Larson, she identified the new location of notice for Tenant as 2000 East Winston Road in Anaheim, CA

. Again, the change of address notice did not include a specific email address. The court acknowledged that its focus on the location of receipt of electronic notice is forced, given the technological nature of email. However, the court stated that “the fault, if there be any, lies in the language of the lease itself,” which did not identify a specific email address for the parties.  Under Cal. R.Ct. 2.260(a)2)(A), electronic service is permitted if the party files a consent form that includes the “electronic notification address at which the party agrees to accept service.”  The email notice from Landlord was not served at the only physical address designated for service of notice (although it is unclear from the lease as amended what email address would be associated with the physical address), it did not comply with the lease and was invalid.

Finally, Landlord contended that Tenant’s actual receipt of the notice cures any deficiency in service and results in a forfeiture of any right to contest service-related deficiencies.  Univ.of S. Cal.v. Wiess (208 Cal.App.2d 759 (1962)), and its progeny, support the proposition that actual notice received by tenant cures defective service.  After all, Tenant acted upon the notice in its attempt to cure the deficiency. The court distinguishes Wiess; in that case notice to Tenant was sent to the correct address.  The lease in Culver Center Partners contained a standard non waiver provision, which stated that “No covenant, term or condition, or breach” of the lease “shall be deemed waived except if expressly waived in a written instrument executed by the waiving party.”  Tenant’s attempt to cure the default was not a waiver.


2. Gomes v Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149 (2011)

Deeds of trust transferred via MERS may be validly foreclosed under California’s statutory procedure.

Gomes deed of trust described KB Home Mortgage as the lender, but also identified Mortgage Electronic Registration Systems (MERS), as "beneficiary … acting solely as nominee for lender and lenders successors and assigns".   The loan was then apparently sold into the secondary market, with MERS electronically tracking the transfers with the note ultimately ending up being held by Countrywide Home Loans.

When Gomes defaulted on his loan payments, Gomes brought action against ReconTrust and Countrywide seeking wrongful foreclosure and declaratory relief that these companies were not authorized to foreclose either as owners of the note or persons authorized by its owner. The trial court sustained demurrers without leave to amend, and the court of appeal affirmed.

Cal. Civ. Code §2924(a)(1) specifically permits initiation of a non-judicial foreclosure process by a “trustee, mortgagee, or beneficiary, or any of their authorized agents.”  There is no statutory provision for the trustor’s bringing an action to determine whether that person is in fact properly authorized, as Gomes’ sought to do here.  Furthermore, on the merits, the deed of trust expressly provided that MERS has “the right to foreclose and sell the property”, and does not require MERS to prove to Gomes that it was authorized to do so.   It was therefore, unnecessary to also decide whether MERS could be considered itself a “beneficiary” of the deed of trust as that term is used in the statute.

3. Greenwich S.F., LLC v Wong, 190 Cal. App. 4th 739 (2010)

Purchaser may recover lost profits from breaching seller, but must specifically plead and prove their existence.

A jury found that the seller had contracted to sell property to the purchasers and then breached her contract but that there was no difference between the contract price and the fair market value of the property on date of breach.  However, the jury did award the plaintiff purchasers lost profits of $600,000, based upon their plans to improve and then resell the property, as well as other damages.  The Court of Appeal reversed that part of the judgment that was based upon the lost profits award.  Cal. Civ. Code§ 3306 provides:

The detriment caused by the breach of an agreement to convey an estate in real property, is deemed to be the price paid, and the expenses properly incurred in examining the title and preparing the necessary papers, the difference between the price agreed to be paid and the value of the estate agreed to be conveyed at the time of the breach, the expenses properly incurred in preparing to enter upon the land, consequential damages according to proof, and interest.

Although commentators have disagreed on the question, the court of appeal concluded that lost profits are included within the provision for consequential damages, and therefore may be awarded in a proper case.

However, special damages must be shown to be the natural and direct consequence of the breach, the amount established with reasonable certainty, and the seller must be shown to have known of the buyer’s intent to use the property for profit.  No such evidence was presented in this case as to any of these essential features, and therefore, that part of the award was improper.


4. Guggenheim v. City of Goleta, 2010 WL 5174984 (9th Cir. 2010)

Mobile home rent control ordinance did not result in facial, regulatory taking because mobile home park owners suffered no interference from adistinct investment-backed expectation. Given the rational basis for ordinance, no due process or equal protection violations occurred.

In a rehearing en banc, the Ninth Circuit vacated its prior decision in Guggenheim v City of Goleta 598 F. 3d 1061(9th Cir. 2010), and affirmed the district court’s grant of summary judgment in favor of City and supporting its mobile home rent control ordinance. The earlier Ninth Circuit decision, which found a regulatory taking, was reported at 582 F. 3d 996 (9th Cir. 2009).

The mobile home park owners, who bought the park in 1997, challenged the City’s mobile home park rent control ordinance on its face as a regulatory taking and as a denial of substantive due process and equal protection. When it incorporated the area in 2002, City adopted by reference a county rent control ordinance that had been in effect since 1987. The ordinance automatically limited annual increases in mobile home rents to 75 percent of the local Consumer Price Index. It also allowed discretionary rent increases through an arbitration process. No controls were placed on the value of the unit when sold. In effect, the ordinance transferred the value of the reduced rental cost from the park owner to the owner of the mobile home. Since 1987, that average, annual transfer of $10,000 raised the sale value of an average, regulated mobile home from $14,000 to $120,000.

The court found mobile home park owners had standing and that the issue was ripe. In light of recent case law (particularly Lingle v Chevron U.S.A. Inc. 544 U.S. 528 (2005),), future claims asserting a regulatory taking by ordinance (even facial claims) may be held to be unripe until the property owner seeks just compensation in state courts. Here, however, the court found that observation of that requirement would be wasteful, given prior litigation and the court’s rejection of park owners’ facial taking claim on its merits.

Mobile home park owners could not satisfy the primary factor necessary to establish a regulatory taking: an interference “with distinct investment-backed expectations.” Fatally, mobile home park owners bought the park years after the county ordinance had been in place and paid a market price that reflected the regulatory burden and transfer premium arising from the county ordinance (and the later, identical City ordinance). Under these facts, no regulatory taking occurred.

The court dismissed the due process claim by finding a rational basis for the ordinance in seeking to “alleviate the hardship” faced by mobile home owners when forced to move their fixed, landscaped mobile home to another park. “Students in Economics 101 have for many decades learned that rent control causes the higher rents and scarcity it is meant to alleviate, but the Due Process Clause does not empower courts to impose sound economic principles on political bodies” (footnote omitted). The court left open whether a viable as-applied takings claim or an equal protection claim, or both, might arise in the future if mobile home park owners seek a discretionary increase through an arbitrator and are unfairly denied that increase.

The Guggenheims will be seeking certiorari from the U.S. Supreme Court based on the Palazzolo issue raised by Judge Bea’s dissent, joined by Judges Kozinski and Ikuta.  The dissent accused the majority of ignoring “the Court’s recent holding in Palazzolo that an investor can validly expect that a land control measure, in place when he invests, is not necessarily eternal and therefore does not disqualify his claim of regulatory taking.” 2010 WL 5174984 at 8 (citing Palazzolo v. Rhode Island, 533 U.S. 606, 627 (2001)).  Indeed, although the majority professes to apply the Penn Central factors, it appears to only focus on the investment-backed expectations strand and finds that this “primary factor” is “fatal to the Guggenheims’ claim.” Id. at 5.  It will be interesting to see whether the Court grants cert on this case.


5. Holmes v. Summer, 188 Cal. App. 4th 1510 (2010)

Do real estate brokers representing a seller of residential real property owe an obligation to the buyers of that property to disclose that it is over encumbered and cannot in fact be sold to them at the agreed upon purchase price unless either the lenders agree to short sales or the seller deposits enough cash in escrow to cover the shortfall?The court answers, resoundingly, yes.

Buyers and sellers agreed to the purchase and sale of a residential real property for the price of $749,000.  The broker in Holmes was a listing broker, and not a selling agent. Broker knew but did not disclose to buyers that the property was subject to a total debt of $1,141,000 resulting from three separate deeds of trust.  The lenders had not agreed to accept less.  Buyers became aware of seller’s inability to convey clear title only after they sold their existing home in order to finance the purchase of seller’s house. Buyers therefore discovered the encumbrances prior to closing and did not take defective title to the property.  However, by entering escrow and more importantly, selling their house in anticipation of closing, buyers were harmed by the seller’s inability to convey title.  According to the court, this was “a failure that should have been perfectly foreseeable to the brokers.” Buyers brought action on the basis of negligence, negligent misrepresentation and deceit.  The trial court held that the brokers owed no duty of disclosure to the buyers.  The trial court sympathized, but suggested to Buyer, in a rather pithy manner, that he was suing the wrong party:

Well, I said this last time, and I repeat it this time. I think you've got a great lawsuit against the seller of the property, but the seller of the property is not a named defendant in this case. I'm guessing that the seller, because the seller is upside down in this, is basically judgment proof. And so you're searching around for a deep pocket. The deep pocket is the brokerage. But the brokerage appears ... under the circumstances to have done nothing that breached any duty to your client, certainly did not engage in fraud that you allege. Basically I think the ruling in sum is that you picked the wrong target here.

Id. at 1517. The appeals court reversed, stating that the brokers were obligated to the buyers given brokers’ knowledge that there was a substantial risk that the seller could not transfer title free and clear of monetary liens and encumbrances.

Despite the absence of privity of contract, a real estate agent has a duty to exercise reasonable care to protect those persons whom the Broker, for the purpose of earning his commission, persuades into entering into a contract for the sale of real estate.  This duty arises because where Broker is aware of facts materially affecting the value or desirability of the property and which are known or accessible only to broker. In such circumstances, Broker is under a duty to disclose these facts to the Buyer.

In Holmes, Broker permitted Buyers to enter escrow despite the fact that Brokers knew the closing was particularlyunlikely due to the magnitude of the loans encumbering the property.   The court acknowledges that Buyer could have discovered the mortgages prior to executing the purchase contract.  However, the California Association of Realtors (CAR) standard form escrow agreement executed by the parties stated that Buyer would be provided a title report (suggesting that Buyer would be entitled to rely on a post execution title search). And in any event, according to the court, buyers do not generally do title searches prior to entering escrow.  The harm to Buyer was therefore foreseeable to experienced real estate agents, and further Broker understood that a potential buyer would have to sell a current residence in order to complete the purchase.  Here, Broker could have prevented the harm to Buyer simply by disclosing the liens and associated loan values on the property was in a position to prevent harm to purchasers by disclosing that existing liens exceeded the sales price.  The court analogized to other scenarios in which brokers must disclose material facts not related to the physical quality of the property (such as the existence of zoning violations).

Attempting to distinguish the fact pattern at issue from prior California case law, notably Lingsch v. Savage 213 Cal.App.2d 729 (1963),Brokers argued that Buyer could have protected itself by conducting a title search before entering escrow; the court responds that even if Buyer had done so, a search would not have revealed the mortgages but not the magnitude of the outstanding debts.  Furthermore, it simply is not standard practice to conduct a search prior to signing the contract.


6. Int’l Church of the Foursquare Gospel v. City of San Leandro, 2011 WL 505028 (9th Cir. 2011)

Summary judgment in favor of City for denying Church’s request for rezoning and conditional use permits, reversed. Under RLUIPA, there exists a triable issue of material fact whether City imposed a substantial burden on Church’s religious exercise and City failed to prove as a matter of law a compelling state interest in support of its actions.

Faith Fellowship Foursquare Church (the Church), an affiliate of International Church of the Foursquare Gospel, sought to operate a church on property located on Catalina street in San Leandro’s Industrial Park zoning district (the Catalina property).  City planning staff advised the Church that in order to operate a church in the area the Church would have to obtain 1) an amendment to the zoning code to make assembly a constitutionally permitted use in the “Industrial Limited” zoning district and 2) an amendment to the zoning map to designate the Catalina property as “Industrial Limited.”  The Church filed an application requesting these amendments in May of 2006.  Before any decision was reached, the Church closed escrow on the property on December 29, 2006 with a final down payment of $53,903.  The Church claimed that it took this action because informal statements by city officials had led them to believe that their application would be approved.  In March of 2007 the City approved an “Assembly Use Overlay District” that approved Assembly Uses (AU) in an industrial zone.  The Catalina property was not included in the new zoning area since it did not meet all of the criteria that were used to determine which properties should be included in the newly zoned district.  The Church filed another application to amend the zoning of the Catalina property to allow Assembly Use, but the City Planning Commission (CPC) denied it, and the Church’s subsequent application for a conditional use permit was also denied.

The Church brought an action against the City claiming that the denial of its application and conditional use permit violated its rights under the Religious Land Use and Institutionalized Persons Act (RLUIPA).  The district court granted summary judgment to the City.  The 9th Circuit reversed, and its decision provides a number of guideposts as to how this court interprets the provisions of the RLUIPA.

RLUIPA prohibits land-use regulations that put a substantial burden on religious exercise unless the government can show that the regulation is in furtherance of a compelling governmental interest and is the least restrictive means of furthering that interest.

The district court concluded that the CPC’s rejections of the Church’s various permit applications could only impose an incidental burden on religious exercise because those actions were taken pursuant to a zoning law, which is a neutral law of general applicability.  This court rejects this approach, stating that the RLUIPA applies when the implementation of land use restrictions involves individualized assessments of the proposed uses of the property at issue.  Where individualized assessments are involved, the proper test is to first examine the particular burden imposed by the implementation of the relevant zoning code on the claimant’s religious exercise and determine whether the burden is substantial.  If the religious institution can show a substantial burden then the burden is on the state to meet a strict scrutiny standard in justifying its regulations.

This court’s discussions of what constitutes a substantial burden are helpful on a number of points.  First, the court flatly rejects the district court’s holding that there could be no substantial burden to the Church, as a matter of law, even if no other property was available for the Church to expand in the matter it requested.  The court quotes Westchester Day School v. Village of Mamaroneck in asserting that, when a religious institution “has no ready alternatives, or where the alternatives require substantial ‘delay, uncertainty, and expense,’ a complete denial of the [religious institution’s] application might be indicative of a substantial burden.” 504 F.3d 338 (2d Cir. 2007).

This court also criticizes the district court for dismissing the testimony of the Church’s realtor, who “presented significant evidence that no other suitable properties existed: he examined each of the 196 parcels rezoned for assembly use, and found them unsuitable for the needs of a large religious congregation.” 2011 WL 505028 at 7. The court determined that the testimony constituted at least some evidence that suitable residential property in the city was not available to the Church.

Furthermore, the 9th Circuit weighed in on the proper criteria for judging what is important to the religion at issue.  The Church claimed that a central component of its belief system was to have the entire congregation come together in one place.  The district court dismissed this characterization of the Church’s belief system in order to say that there was no substantial burden because the church could obtain several separated parcels of land and operate enough churches to provide places of worship for everyone in its congregation.  The 9th Circuit made clear that it is impermissible to inquire into the truth or falsehood of a religious adherent’s belief system, although it is permissible to inquire into the sincerity of those beliefs.  A court can ask whether one really believes in one’s religion, but cannot contradict statements of sincerely held religious beliefs.

It’s worth noting that the 9th Circuit stated that where a county’s actions significantly lessen the chance of obtaining conditional use permits in the future, a substantial burden may be found.The court also concluded that two government interests are not compelling state interests as a matter of law: revenue generation and preservation of industrial land for industrial uses.

Keep in mind that this case was a review of summary judgment, and the court repeatedly said that only a “scintilla of evidence” is required to defeat summary judgment.
7. Mammoth Lakes Land Acquisition v. Town of Mammoth Lakes, 191 Cal.App.4th 435 (2010)

The California Appellate court upheld a jury verdict awarding $30 million in damages to Developer for lost profits against Town for anticipatory breach of a development agreement. Town had refused to move forward with hotel/condominium project unless parties could resolve FAA objections.  Trial court later awarded $2,361,130 in attorney fees to Developer.

This is a story about the importance of remedies and development contracts.  The Town of Mammoth (Town) entered into a development agreement to allow a developer (Developer) to build a hotel or condominium project at the airport.  The Town decided it no longer wanted the project after the Federal Aviation Administration (FAA) informed the Town that it could not have both expanded air service and the project. The FAA threatened to withhold federal funding for the airport and the Town refused to proceed with the development unless the FAA’s objections were addressed.  Subsequently, the Developer successfully sued the Town for anticipatory breach of contract and obtained a jury verdict for $30 million in damages.

The Town appealed based on the Developer’s failure to exhaust administrative remedies; clauses in the development agreement excusing the Town’s performance; failure of the Developer to establish breach; and the lack of evidence supporting damages, making them too speculative to support the verdict. The court found that none of these contentions had merit and upheld the jury verdict and award of attorney fees.

The court’s opinion includes an informative history of development agreements in California and concludes that legislative development agreements give both parties vested contract rights and do not limit the scope of these agreements to just the freezing land use rules and policies.  Thus, the development agreement here can be used by the Developer to force the Town to move forward with a project or face monetary consequences.

One of the contract defenses by the Town was based on a provision stating that neither party would be in default for certain causes beyond their control, including natural disasters and governmental restrictions imposed by a governmental entity other than the Town. The Town asserted that the FAA’s restrictions were beyond its control, but the court disagreed finding that the Town’s own actions, in making assurances to the FAA in exchange for airport funding that the airport property would be preserved for aeronautical purposes, were the cause of the FAA’s reservations about the hotel/condominium project.

Finally, this case illustrates the importance of contract provisions limiting remedies upon breach.  The Town should have limited contract remedies in the development agreement to an action for specific performance.  It is likely that a developer looking to preserve the right to complete a project under currently existing land use regulations would be satisfied by having the ability to compel performance in the face of a breach by the Town.  Such a limitation of remedies would have allowed the Town to proceed with the agreement after judicial pressure, without having to pay $30 million in damages.  Note that Roger Bernhardt has his own take on the remedy of specific performance.  In his CEB comments about the case, Roger states “[t] he developer also artfully avoided having to fend off defenses about exhausting its administrative remedies by suing for anticipatory breach rather than seeking to compel issuance of some permit, and also by dropping its claim for specific performance. Specific performance will also be a difficult remedy to seek against a local government because it seems so incompatible with its democratically vested police powers.”


8. Perlas v. GMAC Mortgage, LLC, 187 Cal. App. 4th 429 (2010)

Do Borrowers in a commercial loan transaction have a claim against lender for fraud or negligence, among other actions, where lender allegedly altered Borrower’s loan application to dramatically inflate Borrowers’ income, where loan ultimately defaulted?  Unfortunately for Borrowers, the court answers in the negative.

Borrowers sought to refinance and borrow $417,000 from Lender, a commercial mortgage lender.  Here are the most pertinent facts, according to the court:

The Application stated [Borrowers] “total income” was $9,466 per month, which was substantially greater than the actual income information appellants provided to [Lender]. This material change in appellants' income information was not disclosed to [Borrowers] prior to December 21, 2007, and appellants were never requested to confirm the accuracy of the information contained in the Application. At closing, [Borrowers] signed the preprinted Application and other documents without being given an opportunity to read or review them.

Id. at 431.

At no time was Borrowers’ income sufficient to make payments called for in the loan documents.  Borrowers defaulted on their loan payments and Lender foreclosed.  Borrowers alleged that they relied on Lender’s “knowingly false” determination that they were qualified for the loans based on Lender’s determination that Borrowers could afford the loans.  The trial court rejected this contention, and the court of appeals affirms.  Borrowers initially brought ten actions, of which only three survived on appeal.  These included actions for damages and rescission based in Truth in Lending, a general negligence claim, and unfair business practice pursuant to Cal. Bus & Prof. Code §17200.  None of these were successful.

In order to win on a fraudulent misrepresentation cause of action, Borrowers must reasonably rely on a knowingly false or recklessly made representation.  Borrowers alleged Lenders knew or should have known Borrowers could not make the payments called for based on the income information actually provided by Borrowers to Lender.  By preparing and tendering the documents to Borrowers, Lender represented to Borrowers that Borrowers could, in fact, make the payments called for in the loans and failed to disclose to appellants that they could not possibly afford such payments.  Borrowers never alleged in their complaint that Lender expressly represented to Borrowers that they had the ability to make the loan payments specified in the loan documents.

The court distinguished between loan qualification and loan affordability, but suggested that Borrowers “conflated” these two concepts.  In order to win their case, Borrowers must show that Lender misrepresented the affordability of the loan.

Absent special circumstances a loan transaction is at arm's length and there is no fiduciary relationship between Borrower and Lender.  A commercial lender pursues its own economic interests in lending money.  Lender owes no duty of care to Borrowers in approving (qualifying) their loan.  Lender’s efforts to determine the creditworthiness and ability to repay by a borrower are for the lender's protection, not the borrower's.  Borrowers must rely on their own judgment and risk assessment in deciding whether to accept the loan. 
9. Stop the Beach Renourishment, Inc. v. Florida Dept.of Envtl.Prot., 130 S.Ct. 2592 (2010)

Beachfront homeowners’ constitutional challenge to the creation of a public beach in front of their properties rejected, and Justices dispute propriety of creating a judicial takings doctrine.

The Florida Department of Environmental Protection granted a permit, pursuant to the state’s Beach and Shore Preservation Act, allowing the city of Destin and Walton County to restore several miles of beach that had been eroded by hurricanes.  Under Florida law, where the beachfront property was privately owned, such restoration resulted in the creation of public beaches extending from the previous high water line to the newly established shoreline.  Stop the Beach Renourishment (“SBR”), a non-profit corporation formed by the owners of affected beachfront property, filed suit in state court to challenge the issuance of the permit.  Eventually, the question reached the Florida Supreme Court as to whether the Act constituted a taking insofar as it deprived the beachfront property owners of littoral property rights without providing just compensation.  The Florida Supreme Court held that it did not and the U.S. Supreme Court granted certiorari to adjudicate the issue of whether Florida’s Supreme Court decision was an uncompensated taking under the Fifth Amendment.

The U.S. Supreme Court was unanimous in deciding that there had been no taking; ruling that state law generally defines property interests, and that the Florida decision did not abrogate those interests.  SBR argued that the Florida decision eliminated two of their property rights by declaring that they did not exist.  The rights SBR claimed were the right of littoral property owners to have their property touch the water, and the right of littoral property owners to take title to accretions.  Under Florida law, littoral property owners take title to all accretions that add land along the water line adjacent to their property, and accretions are defined as additions of land that occur slowly enough to be imperceptible to the human eye.  In contrast, the owner of the seabed, normally the state, takes title to all land that is a result of avulsion.  Avulsion can occur when there is a perceptible addition of land, as would be the case with the beach restoration at issue in this case.

The Court ruled that the burden was on the plaintiff to show that before Florida’s Supreme Court decision, littoral-property owners had rights to future accretions and contact with the water superior to the State’s right to fill in the land.  The Court determined that the Florida decision was consistent with existing state law, and thus the decision did not disturb any of the plaintiff’s property rights as they existed before the decision was handed down.  Since the decision did not affect those rights, it could not constitute a taking.

Another issue before the Court was whether judicial decisions can ever constitute a taking, and here the Court split.  Justice Scalia’s plurality opinion insisted that the Takings Clause prohibits the state from taking private property without just compensation, regardless of what branch of government is doing the taking.  So where would the money come from to pay for a judicial taking?  Justice Scalia answers this question by saying “if we were to hold that the Florida Supreme Court had effected an uncompensated taking in this case, we would not validate the taking by ordering Florida to pay compensation.  We would simply reverse the Florida Supreme Court’s judgment that the Beach and Shore Preservation Act can be applied to the Members’ property.” Id. at 2607. Where an unconstitutional judicial taking is found, Justice Scalia would vacate the objectionable decision and allow the state legislature to decide whether to compensate or consider the state action invalid. However, even if the Just Compensation remedy were denied by invalidating the action, this would not address the question of how a claim for a temporary Taking would be handled.

Justice Kennedy, joined by Justice Sotomayor, argued against considering judicial decisions as a taking, preferring to review such decisions under the Due Process Clause.  Under Kennedy’s approach, the question would be whether a court has eliminated or substantially changed an established property right through an arbitrary or irrational decision.  Justice Breyer, joined by Justice Ginsburg, objected to announcing a rule concerning judicial takings on the basis that the Court should confine itself to what is necessary to decide the case at hand.

Justice Stevens did not participate in this case, but the more liberal justices were all against a judicial takings rule.  Unless Justice Kagan joins the conservatives on this issue we are unlikely to see Scalia’s approach become binding law.  On the other hand, Kennedy only gained the support of one justice, and Scalia expressed adamant resistance to Kennedy’s Due Process approach, so Kennedy’s approach is unlikely to gain any ground either.  It is an open question as to whether a judicial decision that deprives private parties of a property right can ever be overturned on federal constitutional grounds.

Surprisingly, Shelley v. Kraemer, 334 U.S. 1 (1948), the U.S. Supreme Court case which refused to enforce a discriminatory private covenant because such judicial action would constitute state action violating equal protection, was not cited in this case.  The holding in Shelley, that judicial enforcement of a common law right sounding in contract could constitute state action for purposes of constitutional violations, has not generally been extended outside the context of racial discrimination.  It seems to me that allowing a judicial taking would, similar to the Shelley reasoning, blur the line between state and private action such that the distinction would no longer exist and all private rights of action would be subject to constitutional limitations whenever parties seek judicial enforcement of such rights. See Shelley Ross Saxer, Shelley v. Kraemer’s Fiftieth Anniversary: “A Time for Keeping; A Time for Throwing Away”?, 47 U. Kan. L. Rev. 61 (1998).  Such a holding would potentially allow for Taking suits when a court (1) implies an easement from prior use, necessity, or prescription; (2) terminates a restrictive covenant or equitable servitude based on common law rules such as abandonment, changed circumstances, or exceeding the scope; or (3) resolves a property dispute by applying common law principles such as adverse possession or nuisance.


10. Sabi v. Sterling, 183 Cal. App. 4th 916 (2010)

Must Landlord accept payments pursuant to a Section 8 voucher?  Notwithstanding a fact pattern sympathetic to the Tenant, Landlord is under no such duty.

An elderly Tenant obtained a Section 8 voucher from the Santa Monica Housing Authority (the “Authority”) for her apartment in Santa Monica.  (Section 8 of the United States Housing Act appears in 42 U.S.C. § 1437(f) (1999)). Tenant’s husband had died, and Tenant, an immigrant from Iran, suffered from multiple medical issues and received supplemental security income (SSI), which apparently was insufficient to pay her rent.  Tenant relied on her children and the Legal Aid Society to approach Landlord on several occasions; however Landlord refused to participate in the Section 8 program.

Tenant brought action against Landlord, alleging that Landlord’s refusal violated the Fair Employment and Housing Act (FEHA) (specifically Cal. Gov’t Code § 12955) by discriminating against Tenant based on her source of income (the Section 8 payments), and California’s Unruh Civil Rights Act (Cal. Civ. Code § 54 et. seq.) by discriminating against Tenant because of her status as a Section 8 recipient.  Unruh Civil Rights Act protects individual with disabilities and provides such persons with same right as the general public to use streets, highways, public facilities, sidewalks, etc.  The Act requires Landlord to make reasonable accommodations in rules, policies, practices and services to permit disabled individuals to enter and maintain lease relationships. The trial court dismissed the primary Unruh claim and the FEHA claims and the jury found for Landlord on remaining claims.  The Court of Appeals affirms.  There are many issues at play in Sabi, but the more interesting of those involve the nature of Section 8 vouchers and payments.

Section 8 is a voluntary program, allowing Landlord to choose whether to participate.  If Landlord accepts the voucher, the Authority enters into an agreement with Landlord. The Authority then makes payments to directly to Landlord equal to 70% of the Tenant’s rent. This money is never deposited with Tenant.

Plaintiff alleged that defendant must accept the vouchers as payment because declining the housing vouchers 1) violated the prohibition against “source of income” discrimination and 2) violated California’s discrimination laws.  The court rejected the “source of income” theory because among other things, Section 8 vouchers are not income. Payment is made by the Authority to Landlord. Tenant argued that the Authority was a “representative” of Tenant for purposes of the FEHA, and that Landlord’s failure to accept money from the Authority was therefore discriminatory.  The court rejected this contention saying that money would have to be paid to the representative and in this case the money was paid to Landlord.  Landlord’s behavior was not discriminatory under Unruh because the Section 8 voucher program is completely voluntary.  The court noted that Tenant continued to live in the apartment unit.  Therefore there was no connection between plaintiff’s disabilities and her need for financial accommodation.  California’s fair housing laws do not require accommodation for purely financial reasons.  The court acknowledged that the Legislature was aware of landlords refusing to participate in the Section 8 program, but stated that there was no evidence that the Legislature intended to compel landlords to participate in the program.  If the Legislature intended to compel landlords to participate in the program, it would have specifically identified this mandate.


11. Steiner v Thexton, 48 Cal. 4th 411 (2010)

Contract giving purchaser absolute discretion to withdraw constitutes only an option, but was nevertheless supported by consideration.

The parties executed a contract giving the buyer three years to purchase 10 acres of land and to obtain the necessary subdivision approvals to develop it. The contract also provided, “It is expressly understood that the buyer may, at its absolute and sole discretion during this period, elect not to continue in this transaction and this purchase contract will become null and void.” One year into the arrangement, the seller withdrew and the buyer sued for specific performance.

The trial court and court of appeal upheld the seller’s withdrawal, characterizing the transaction as an option not supported by any consideration. The California Supreme Court however, held that the arrangement, while in fact constituting only an option, nevertheless was supported by consideration, and was therefore irrevocable.

The buyer’s reservation of an absolute right to withdraw did make his promises to perform illusory and initially reduced the transaction from an enforceable bilateral contract to an option, from which the seller could withdraw at any time before it had been accepted, rejecting the buyer’s argument that the implied covenant of good faith and fair dealing could trump this explicit termination provision. The court did attempt to distinguish this from the normal withdrawal provision in most standard form real estate contracts, stating that they were not affected by the holding.

On the other hand, the efforts and funds that the buyer had expended on subdivision efforts did constitute sufficient consideration to convert the previously illusory noncontract into an irrevocable option.  Furthermore, the buyer’s deposit of $1,000 into escrow arguably constituted prejudice to him, even if he ultimately got the money back, and therefore might also amount to consideration.


12. Thrifty Payless Inc. v. Mariners Miles Gateway LLC, 185 Cal. App. 4th 1050 (2010)

Shopping center Landlord may terminate lease with Tenant prior to construction despite Tenant’s claims that Landlord breached and that a provision permitting Landlord to terminate agreement was illusory.

Tenant and commercial Landlord entered into a lease agreement on August 4, 2005 for 13,000 square feet of space in undeveloped shopping center. Tenant intended to operate a drug store. The lease was for a 20 year term with option to extend. Tenant’s rental structure did not include percentage rents. The lease required a large up-front investment of time and money by Landlord, while Tenant’s obligations began upon commencement of the term. Landlord was also required to obtain numerous governmental approvals, including a specific approval for a traffic signal.

Article 53 of the lease provided Landlord with an early termination right if Landlord, acting with due diligence, could not obtain the necessary approvals by June 1, 2006. Article 3 of the lease provided both Landlord and Tenant the absolute right to terminate the lease if the lease did not commence by June 30, 2008, upon written notice.  The Landlord was either unable or unwilling to obtain the necessary permits.  The relationship between the parties deteriorated as Landlord twice asked Tenant to execute lease amendments which would have delayed term or raised rent; Tenant refers to this behavior as a “campaign of deception and threats.”Id. at 1057. Landlord sent Tenant a letter on March 21, 2007 pursuant to article 53 of the lease purporting to terminate the lease, and even went so far as to find a replacement tenant. The lease with the replacement tenant was not to begin until after June 30, 2008. The court enjoined that effort (and as a result, Landlord lost its replacement tenant).  On July 1, 2008, Landlord exercised its right to terminate the lease under Article 3.

The trial court granted Landlord’s motion for nonsuit, finding that Landlord had an absolute right to terminate pursuant to Article 3 of the Lease. In addition, the trial court granted Landlord expert witness fees.  The Court of Appeals affirms.

Tenant contended that the contract was illusory due the mutual termination provision in the lease.  The court disagreed, stating “there were explicit promises included in the lease, and the termination provisions were part of freely negotiated contingencies.”Id. at 1063.  Mutuality of obligation existed up until the negotiated for “2-way termination right.”Id. at 1056.  Thus, the provision was enforceable; although Landlord's obligation to complete construction was contingent on obtaining approvals.

Tenant argued that, notwithstanding the language of the lease, the court should have looked to the earlier drafts of the document exchanged between the parties.  The drafts of the lease purportedly demonstrate that the Article 3 termination right was not intended to be mutual but rather was intended to benefit Tenant only.  The court disposes of this argument simply by referring to the Parol Evidence Rule.  Nor can Tenant use the doctrine of good faith and fair dealing to undo the termination right; Landlord does not act in bad faith by exercising rights plainly available on the face of the lease.

The Lease contained a provision requiring Landlord to diligently attempt to obtain the necessary approvals. Landlord did not repudiate lease by reason of its failure to complete construction of store by the date specified in the Lease, so as to render unenforceable Landlord’s right to terminate. Landlord did not cease efforts to complete the store until after the state had denied approval of traffic light.  Furthermore, even if Landlord's earlier actions in ceasing construction were an attempted repudiation, Landlord continued to spend time and money to gain necessary government approvals and proceed with building store until time that state gave a final denial of a traffic light.  Thus, Landlordfulfilled its obligation under the contract and was within its rights to terminate after June 30, 2008.


13. First Amendment Restrictions – Three Examples:  Tattoo parlors, Adult businesses, and Billboards

Anderson v. City of Hermosa Beach, 621 F.3d 1051 (9th Cir. 2010)

As a matter of first impression, the Ninth Circuit held that the tattoo itself is pure First Amendment speech, the tattooing process is purely expressive activity, and the business of tattooing is purely expressive activity, subject to reasonable time, place, or manner restrictions. Therefore, a municipal ban on all tattoo parlors violates the First Amendment.

The City of Hermosa Beach (City) effectively banned tattoo parlors and a tattooist filed a section 1983 action facially challenging the ban as unconstitutional under the First and Fourteenth Amendments. The court observed that several other jurisdictions have upheld municipal bans on tattoo parlors against First Amendment challenges.  However, the court held that such a ban is facially unconstitutional since tattooing is purely expressive activity rather than conduct expressive of an idea, thus entitling this business to full First Amendment protection.  The City’s total ban on tattoo parlors is not a reasonable time, place, or manner restriction and is thus unconstitutional.

The court found that “[t]he tattoo itself, the process of tattooing, and even the business of tattooing are not expressive conduct but purely expressive activity fully protected by the First Amendment.” Id. at 1060 (emphasis in original). In finding tattooing to be purely expressive activity, the court compared a tattoo to a pen-and-ink drawing and noted that the principal difference between the two is that the tattoo is drawn on a person’s skin, rather than on paper.  Similarly, the process of tattooing is like “writing words down or drawing a picture except that it is performed on a person’s skin.” Id. at 1062.  Finally, the court found that since the sale of visual artwork has been held to be expression protected by the First Amendment, the same logic would apply to the business of tattooing.

The court analyzed the ban as a time, place, or manner restriction because the City’s regulation was a content-neutral ban on all tattoo parlors, not just on those conveying a particular message. The court then sought to determine if the restriction was “narrowly tailored to serve a significant governmental interest.”Id. at 1064.  The City justified its ban based on health and safety concerns, but the court found that these concerns could be adequately addressed by regulating tattooing rather than by instituting a total ban on what could be a “safe procedure if performed under appropriate sterilized conditions.” Id. at 1065 (quoting Yurkew v. Sinclair, 495 F. Supp. 1248, 1252 (D. Minn. 1980)).

Even if the ban were considered to be narrowly tailored to serve the health and safety issues, the court noted that the City would still be required to leave open ample alternative channels for communication. Based on City of Ladue, 512 U.S. 43, 56 (1994), the Ninth Circuit found that  similar to the Court’s concern that “[d]isplaying a sign from one’s own residence often carries a message quite distinct from placing the same sign someplace else,” a permanent tattoo carries a distinctive message that suggests the bearer is highly committed to the message displayed.

Alameda Books, Inc. v. City of Los Angeles, 631 F.3d 1031 (9th Cir. 2011)

Summary judgment in favor of adult businesses reversed and remanded. Witness declarations in favor of businesses were mere conclusory assertions, unsupported by any empirical data, and were affected by obvious bias not recognized by the district court as a problem.

Yes, this is the same case that has been around the block a few times since making its way to the U.S. Supreme Court in 2002 where a plurality decision reversed and remanded the case after reaffirming the framework established in City of Renton v. Playtime Theatres, Inc., 475 U.S. 41(1986) to review ordinances aimed at reducing the secondary effects of adult businesses.  Upon remand, the same district judge again granted summary judgment for the businesses and City of Los Angeles (City) appealed for the second time to the Ninth Circuit.  However this time, instead of affirming the district court, this court reversed the grant of summary judgment by applying the new framework established by the Supreme Court in its 2002 decision in this same case.  Litigation began on the City’s ordinance, which prohibited the operation of an adult arcade within an adult bookstore, in 1995 when the businesses sought injunctive relief against enforcement after a city inspector informed them they were in violation.

The Supreme Court’s Alameda Books opinion requires courts to use a burden-shifting framework when applying the Renton analysis and insure that the municipality does not reduce secondary effects by reducing speech.  The first step of the Alameda Books framework requires the municipality to satisfy its burden of supplying evidence to support its rationale for enacting the ordinance. The City satisfied its burden based on inferring from a 1977 study that concentrating adult businesses in a single establishment will lead to an increase of undesirable secondary effects.

The second step allows the plaintiff to “cast doubt” on the municipality’s evidence and rationale for passing the ordinance.  Here, the plaintiff businesses submitted declarations from the vice-president of a corporation which owns Alameda Books and Highland Books and from the president of a company that built and installed adult arcade systems in both of these plaintiff businesses.  These declarations shared the conclusion that a standalone adult arcade business would not be viable.  However, the court found that since a plaintiff must offer “actual and convincing” evidence to “cast doubt” on the City’s evidence or rationale, the declarations submitted by the plaintiff businesses were not supported by any empirical data and were affected by obvious bias.  Therefore, the district court erred in granting summary judgment at this second step.  The third step requires the defendant to rehabilitate its rationale and although the City did not satisfy its burden by showing that the arcades could survive on their own, the plaintiffs did not meet their burden at the second step.  The case now returns to the district court for a third time.

World Wide Rush LLC v. City of Los Angeles, 606 F.3d 676 (9th Cir. 2010)

City’s billboard regulations are not unconstitutionally underinclusive restrictions on commercial speech because content-neutral exceptions to a sign ban did not prevent the city from advancing its substantial interests in safety and aesthetics. Regulations prohibiting supergraphic and off-site signs are not unconstitutional prior restraints on speech.

Cities are allowed to regulate signs, including billboards, in order to promote public safety and welfare by visual aesthetics and traffic safety so long as the restrictions are consistent with First Amendment protections of free expression.  The City of Los Angeles (City) was challenged on First Amendment grounds for its content-neutral ban of freeway-facing billboards, supergraphic (large-format signs projected onto or hung from building walls) billboards and off-site signs advertising a business or product not located on the same premises as the sign.

The central challenge to these restrictions was based on the City’s exceptions to these bans.  Under the Central Hudson test for assessing the constitutionality of a commercial speech restriction, “’a regulation may have exceptions that undermine and counteract the interest the government claims it adopted the law to further; such a regulation cannot directly and materially advance its aim’ and is, therefore, unconstitutionally underinclusive.”  Id. at 685 (citing Metro Lights, L.L.C. v. City of Los Angeles, 551 F.3d 898, 905 (9th Cir. 2009)). The court found that “the City’s exceptions to the Freeway Facing Sign Ban do not undermine the City’s interests in aesthetics and safety” because “the exceptions were made for the express purpose of advancing those very interests.”  Id.  The City’s exceptions allowed some freeway-facing billboards for specific projects to remove blight and dangerous conditions and also reduced the net number of billboards in the City.

The City’s bans on supergraphic and off-site signs were also challenged as unconstitutional prior restraints on speech based on the City’s exceptions to these bans.  The court held that the district court erred in concluding that these bans are unconstitutional prior restraints because the doctrine does not apply to restrict the City Council’s legislative discretion to make regulatory decisions.  “’Unbridled discretion challenges typically arise when discretion is delegated to an administrator, police officer, or other executive official,’ as opposed to a legislative body.” Id. at 688 (quoting Long Beach Area Peach Network, 574 F.3d 1011,1042 (9th Cir. 2009)). Thus, the City acting in its legislative capacity may make exceptions without having its bans invalidated as unconstitutional prior restraints on speech.

(Some of these descriptions have been copied from CEB’s Real Property Law Reporter with the kind permission of the Continuing Education of the Bar)