The Buyer's Broker Has Commission Claim Upon Signing of Purchase Agreement

In August 2005, when the residential real estate market in downtown Los Angeles was still hot, Standard Pacific Corporation signed a purchase agreement to buy a condominium project near Union Station from Lincoln Property Co. During escrow, the market deteriorated to the point that Standard Pacific was willing to forfeit a $4 million deposit to cancel the deal. In August 2006, Standard Pacific and Lincoln signed a agreement to settle their differences. Lincoln later changed the name of the project and leased the condos instead of selling them.

Standard Pacific's broker, RC Royal Development and Realty Corporation (RC), was left out of the settlement and sued for a broker's commission under its written brokerage contract with the buyer. The trial court ruled in favor of Standard Pacific on a summary adjudication on the grounds that the close of escrow was a condition precedent to the obligation to pay a commission.

RC appealed and the Court of Appeal recently reversed the trial court in RC Royal Development and Realty Corporation v. Standard Pacific Corporation (2009) 177 Cal.App.4th 1410. It argued that its right to a commission ripened under the brokerage contract when Standard Pacific signed the purchase agreement with Lincoln. The brokerage contract provided that the broker would be entitled to a commission if buyer "purchased" the property and specifically defined "purchase" as "any and all acquisitions of any direct or indirect beneficial interest." The most interesting part of the published opinion is the Court of Appeal's discussion that the buyer acquired a "direct or indirect beneficial interest" in the property upon the signing of an executory contract -- in effect, there was a "purchase" of the property when the parties signed the buy-sell contract even though the escrow never closed. In the words of the Court of Appeal: ". . . [E]quitable title is a 'beneficial interest,' as it is one stick in the bundle of full legal rights to real property. Once Standard Pacific entered into a buy-sell contract containing all of the essential terms of purchase, it obtained equitable title."

If Standard Pacific had conditioned its obligation to pay a commission upon the close of escrow, the result probably would have been different. In that case it would not have been subject to the general rule of law that, "unless the contract provides otherwise, the broker earns his commission upon the principal's entry into a binding contract for a purchase subject to the brokerage contract regardless of whether the sale is consummated." (See, R.J. Kuhl Corp. v. Sullivan (1993) 13 Cal.App.4th 1589,1599-1600.

Sham Agreements -- They Will Not Take You Where You Need to Go

During the 1960's, Sam the Sham and the Pharaohs was a rock band which reached great heights considering that their big hit was "Wooly Bully." In a way, Sam was modest to call himself the Sham because no one could deliver "Wooly Bully" or "Little Red Riding Hood" like he and the Pharoahs.

Fast forward 40 years. The California Court of Appeal has rejected sham agreement prepared "solely for property tax purposes" -- to avoid the reassessment of a 50% interest in a shopping mall transferred several years earlier by the owner, Equitable Life, to a holding company and then to a LLC. The case is of interest to lawyers and accountants who advise clients how to use entities such as limited liability companies to structure the transfer of real estate without triggering a reassessment of the property under Proposition 13.


The Court reasoned that since the agreement that had no economic substance other than to avoid property tax liability, it was a sham document that could not be given effect. For a change in ownership to occur, there must be a transfer of legal title and of that transferor’s beneficial or equitable interests in that property. For purposes of property tax reassessment, a 100 percent change in ownership occurred when record title in property was transferred by Equitable Life to the holding company as its initial capital contribution. Even though Equitable Life was entitled to receive distributions if the holding company made a profit and had a right to participate in certain management decisions, those benefits and rights derived from Equitable Life’s membership interest in the holding company, not from ownership of the transferred property. Thus, the transferor did not retain a beneficial interest in the property itself. See, Fashion Valley Mall, LLC v. County of San Diego - filed August 17, 2009, Fourth District, Div.One, 2009 SOS 4956. To read the case, click here.

Landlord Beware -- Trespass and Forcible Entry and Detainer

The crash last week of the Oscar Meyer Weinermobile into a home in Wisconsin is as good a reason as any to write a post about recent California case concerning trespass and forcible entry. The case is a reminder that a landlord cannot use self-help to evict an occupant of an apartment.

Lori Spinks was an employee of Mobile Medical Staffing, LLC ("Mobile"). Mobile rented an apartment in Sunnyvale for Spinks to occupy while on assignment. Spinks had surgery for an injury to her hand suffered on the job, and Mobile terminated the apartment lease and told the landlord to change the locks on the doors. The case got to the Court of Appeal after the landlord successfully moved for summary judgment on the grounds it did not owe any duty to Spinks because its lease was with Mobile.

The Court of Appeal reversed; its opinion reads like a primer on the rights of third party beneficiaries of contracts, the difference between a lease and a license, and causes of action for breach of the covenant of quiet enjoyment, trespass, forcible entry, invasion of privacy, etc. The Court found that there were a number of triable issues of facts on these claims.
While not breaking new ground, the opinion in Spinks v. Equity Residential Briarwood Apartments (2009) 171 Cal. App. 4th 1004 serves as a timely reminder in these difficult times that a party in peaceful possession of real property is protected by the forcible entry and detainer statutes even if he or she is technically a trespasser.

Cal Foreclosure Consultants Must Now Register & Post $100K Bond

As the mortgage crises began, I received a number of unsolicited inquiries from people who were interested in starting a business to help borrowers in distress by purchasing and leasing back their residence or negotiating a loan modification. I explained to these callers that they would be acting as "foreclosure consultants" and would be subject to statutes in the Civil Code that regulate foreclosure consultants. Invariably, the callers were not aware of these statutes and were not interested in paying a lawyer to advise them how to follow the law. Apparently budding foreclosure consultants fancy the idea of a new business with no start up costs.

As the mortgage crises became worse, there stories in the news about unscrupulous people who would take a fee up-front to negotiate a loan modification (this is illegal unless an exemption applies) and then do nothing for the fee. The California Legislature was apparently moved by these stories to amend Civil Code sections 2945, et seq. effective July 1, 2009 so that "foreclosure consultants" are now require to register with the State and post a $100,000 bond. To learn more about the changes to the laws governing "foreclosure consultants," and the consequences if the laws are violated, click here or here.

LAW ON THE WEB -- A California Law Library Compliments of King Hall School of Law, UC Davis

I graduated from the UC Davis School of Law in 1977. We had one of the first computer terminals in the country that accessed a new service for legal research called Lexis. But for the most part, we did legal research the old fashioned way using law books in our extensive Law Library.

Recently I visited the website for UC Davis School of Law and found a free California law library available on line entitled, "Law on the Web." For lawyers and non-lawyers alike, it is worth a visit by clicking here.

ESCROW EXTENSIONS -- BE REASONABLE!

It has been the law in California for some time that a Landlord must be reasonable in consenting to the assignment of a commercial lease. The California Court of Appeal has recently held that a seller of real property must act in an objectively reasonable manner when asked to extend the close of escrow.

In Peak-Las Positas Partners v. Bollag, the seller told the buyer he did not care how long it took the buyer to entitle a residential development project. But when the close of escrow approached, the seller refused to extend escrow. Imagine the buyers' surprise -- the buyer had already paid 98 percent of purchase price, had invested $5 million in project development costs and had diligently pursued the conditions for closing the sale.

The Court of Appeal held that the seller acted in an objectively unreasonable manner so the buyer would not forfeit the $465,000 it paid for the property and the $5 million in project costs.

A review of the facts demonstrates that the seller invented reasons late in the escrow to refuse the extension. First, the seller claimed he had landslide liability concerns. But the seller had observed soil failures on his property before purchase agreement was signed, and admitted he made no inquiries about insurance costs or availability. Second, the seller claimed the buyer failed to keep him informed about the entitlement processing. To the contrary, the buyer informed the seller about the progress of the land use application and the seller never complained that he lacked information. Even if the buyer had breached its obligation under the purchase agreement to keep the seller informed, the Court of Appeal said it would not constitute reasonable or good faith grounds for the seller to refuse the requested extension.

For guidance about what is objectively reasonable in a commercial real estate transaction, click here to read the opinion in Peak-Las Positas Partners v. Bollag.

LOAN MODIFICATION UPDATE -- Help for Owners Who Are Upside Down?

This Blog began on in late 2006 with the mortgage debacle on the horizon. A number of posts have been devoted to mortgage fraud, foreclosure consultants, home equity purchasers, loan modifications and the like. Recently, the Federal Government has launched new initiatives to promote loan modifications.

Today the Los Angeles Times ran an article on page 1 of the Business Section with a good but very general overview about mortgage modifications. The author advises borrowers to look for free help from federal programs or non-profit legal services. The article is entitled, "IS IT HOPE OR HYPE FOR HOMEOWNERS?"

The advice to look for free loan aid is worth considering. Many "opportunists" have entered the loan modification business as a way to make a quick buck from distressed homeowners. As we have discussed in other posts, it is very difficult to provide mortgage modification assistance for a fee in California under to State laws regulating "foreclosure consultants." In a future post, we will discuss how the laws governing foreclosure consultants will change effective July 1, 2009.

2009 Trends in Environmental Law and Due Diligence

Environmental regulation has come a long way in the last 100 years. But environmental due diligence has been effected by the recent downturn in the commercial real estate market. In addition, there are some new laws that commercial real estate owners, lenders and brokers should be aware of. Joe Derhake is a environmental engineer and a principal at Partner Engineering and Science, Inc. based in El Segundo, California. Mr. Derhake is a friend of this Blog and its author. He was recently interviewed by Jessica Lillian of MortgageOrb.com, a blog for commercial real estate professionals. She asked Mr. Derhake about the effect of the lending slowdown on environmental due diligence on commercial properties, and about the trends in environmental law for commercial property in 2009. The interview is reprinted below.

Q: Have the more stringent lending and underwriting standards these days translated into more attention paid to the environmental component of the due diligence process?

Joe Derhake: The short answer is yes, we are definitely seeing a trend in that direction. Lending decisions are influenced by deal people and credit people, and as of late, the credit side is the more powerful group. For the environmental consultant, that means more thorough due diligence. Lenders are now more likely to order Phase I Environmental Site Assessments instead of limited products.

When contamination is found, however, the enthusiasm among lenders for quantifying the environmental problem and trying to underwrite around the problem is low. Lenders would prefer to pass on the deal.

Q: Vapor intrusion has received a lot of attention lately - though many in the lending community seemed somewhat unaware of it until recently. What emerging environmental issues are you seeing now?

Derhake: While the ASTM 2008 vapor intrusion standard created a lot of discussion in the environmental professional community, clients have been hesitant to use the new standard, instead relying heavily on the Phase I Environmental Site Assessment to address these environmental concerns.

An up-and-coming environmental issue is energy consumption, and California is leading the charge with Assembly Bill 1103, which mandates that all California nonresidential buildings participate in the Federal Energy Star program beginning in January 2009.

Benchmark data showing the building's relative energy consumption performance will be collected throughout 2009. After Jan. 1, 2010, building owners will be required to disclose these data to buyers, lessees and lenders. Energy Star will rate buildings against other buildings within the same class - adjusted for climate, but not age. Buildings within the top quartile are eligible to be recognized as an EPA Energy Star Building and can use the Energy Star label to communicate their energy efficiency to tenants, lenders and other stakeholders.

Not only will highly ranked buildings be more likely to capture a green premium when the property sells or rents, but analysis of these data will yield opportunities of energy savings and, ultimately, improvement of net operating income.

Will green buildings ever receive any sort of preferential treatment from lenders? Bank of America, Wells Fargo Bank and Citibank are among the national lenders that have committed themselves to billions of dollars of green lending.

To date, much of the green lending has focused on building green and LEED construction. However, Energy Star-rated buildings are gaining more and more attention, and with the data required by AB 1103 becoming available in the next year, lenders will have more objective standards to judge their collateral.

Lenders could easily aggregate their portfolio's Energy Star Rating and set goals to improve their portfolio over time. It is possible that other states will follow suit and implement similar building energy disclosure requirements in the future.

Q: What steps can cash-strapped financial institutions take to manage the costs involved with environmental assessments?

Derhake: Environmental policy can be thrifty and smart. To be thrifty, lenders should consider limited environmental products, such as environmental transaction screens and historical environmental reports. Historical environmental reports are inexpensive (typically under $500) and focus solely on the history of the property.

This is a perfect product for an asset that clearly has no issues, due to a benign use such as residential or office, and most reasonable concern is centered on what was there before the current development. If environmental concern is identified during the historic research, further due diligence can be conducted.

Q: What are the most common forms of contamination you are finding these days? Are there any recent technological advancements in remediation strategies?

Derhake: The types of contamination that we find are across the board. However, the type of contamination that is receiving greater scrutiny by regulators is volatile organic compounds, which include chemicals such as benzene (an additive in gasoline and an industrial solvent) and tetrachloroetheylene (PCE, a drycleaning solvent). These volatile chemicals are toxic and represent a vapor intrusion risk.

The concern that these chemicals will migrate up into buildings and create a cancer risk for occupants is driving cleanups. Many state regulators require soil vapor testing for all sites. To achieve closure, a property owner has to show that the levels of soil vapor are below action levels. Generally speaking, soil vapor-based action levels are more stringent than soil matrix-based action levels.

Volatile organic compounds have historically been remediated via soil vapor extraction and dual phase extraction. Each of these technologies involves more or less sucking the contamination out of the ground. We install vapor extraction wells, connect the wells to large blowers and pull. The toxic vapor stream extracted must then be treated.

In-Situ Chemical Oxidation (ISCO) is proving to be a significant alternative technology. ISCO involves injecting a reactive chemical into the ground, and the reactive chemical oxidizes the contaminant upon contact. This technology works very quickly, and for some contamination plumes, it is very cost-effective.

Q: What is the latest on the regulatory front for environmental compliance/liability issues? What might be on the horizon for 2009?

Derhake: California, Oregon and other states have published soil vapor action levels. When professionals are cleaning a site, the question becomes, "How clean is clean?" Environmental professionals compare our testing data to the action levels.

Historically, we collected soil samples and compared these data to soil matrix action levels. Lately, closure sampling must also consider soil vapor analysis, and we must compare these to far more stringent soil vapor action levels.

This shift is profound, as sometimes it means that the remedial system must run another year or more.

The Federal EPA has not yet pushed for any such soil vapor standards. With a new administration coming in 2009, we may see the Federal EPA addressing this issue. Commercial real estate owners do not benefit from stricter standards, as it likely will increase cleanup costs. However, greater uniformity from state to state makes environmental risk management easier.

To learn more about Joe Derhake's firm, Partner Engineering & Science, Inc., click here.

Real Estate Contracts -- What is Expressed is Understood; What is Not Can Be Implied By the CA Supreme Court

The legendary folksinger, Pete Seeger, once offered these words of wisdom about written contracts: "Education is when you read the fine print. Experience is what you get if you don't."

In recent years, many individuals and companies decided to obtain experience instead of education by signing loan documents or issuing mortgage backed securities without reading the fine print.

But what if a written contract is silent on an important deal point? You cannot read what isn't there, whether it is in bold or fine print. In late December 2008, the California Supreme Court told us "it ain't necessarily so" in Patel v. Liebermensch (filed 12/22/08) S156797.

In that case, the parties (apparently acting without lawyers) entered into a written lease of a condo with an option for the tenant to buy. The written option contained the essential terms of the purchase except for the time of payment. It was also silent about using an escrow for the purchase. A dispute arose between the parties after the tenant exercised the option to buy, and they could not agree to the terms of a purchase agreement. The tenant, Patel, brought a specific performance action to enforce the option agreement. Patel won at trial and lost before the Court of Appeal which ruled the option agreement was too uncertain to specifically enforce. (See, August 23, 2007 post about the Court of Appeal opinion in this case.)

The Supreme Court had little trouble filling in the blanks. First the Court reasoned, " . . . while the parties are obviously free to include escrow specifications in the contract of sale, they are not necessary terms." Once you assume the parties implicitly decided to have an escrow, the rest is easy. "In the absence of a specified time of payment, a reasonable period is allowable under Civil Code section 1657." In other words, the Court concluded that it is reasonable to assume the purchase price would be paid when the implied escrow closed.

This opinion offers both education and experience for parties to a real estate contract in California. If you are willing to invest the time and money to take your case to trial, then to the Court of Appeal and finally to the Supreme Court, you can get a definitive opinion about what the parties did (and did not) agree to. This took about 3 years in the Patel case. During that time, the real estate market declined substantially and it became much more difficult to obtain financing.

If you want to save time and money, it is better to hire a lawyer at the outset so that your agreement covers the essential points of agreement and the incidental points as well. In the case of an option to buy real estate, you can agree to the form and content of the purchase agreement itself to avoid problems down the road.