Berkeley Balcony Tragedy

Every day since the apartment building balcony in Berkeley collapsed on June 16th, the L.A. Times has run an article about the tragedy without

providing a definitive explanation for the failure. What caused the supporting joists to rot, resulting in the deaths of six students and critical injuries to the seven others? We have learned that the City inspectors did not red flag any problems with the balcony during the construction of the apartment building. This is not a surprise because city inspectors apparently focus on whether a particular phase of construction has been completed, not whether the construction conforms with the plans and industry standards. In fact, under California law, a contractor does not have a defense in a construction defect case based on the approval of construction by a city inspector. A general contractor or developer would be mistaken if he or she assumed that work was done properly if it passed building inspections by the local department of building and safety. In El Escorial Owners’ Association v. DLC Plastering, Inc. (2007) 154 Cal. App. 4th 1337, 1358, the California Court of Appeal found the defendants (including the general contractor, Alderman Construction, Inc.)were liable for negligence. The Court stated: “Alderman notes that the building inspector approved the work. But that does not change the result. [Firemen’s Ins. Co. of Newark, N.J. v. Indermill (1960) 182 Cal. App.2d 339, 342-343 (building inspector’s approval did not insulate contractor from liability for defective work).]” So what went wrong with the balcony? While the experts try to figure this out, some general observations based on a construction defect case I handled come to mind. A cantilevered balcony is designed to include a waterproofing system. This system has several interrelated components. In the case of the balcony in Berkeley, the construction defects may have included: installation deficiencies of the edge flashing along the perimeter of all decks; failure to properly install deck to wall flashings (i.e., where the balcony is attached to the exterior wall; and/or, the failure to waterproof around handrail post penetrations of the deck membrane. The covering installed on top of the deck may mask these defects. Unless the water came down to the deck through the exterior walls of the apartment buidling, the problems with the deck was due to improper installation of the waterproofing system. It would be very difficult for the owner to perform maintenance on an improperly installed waterproofing membrane and flashing under the deck covering if the defects were not visible. In many instances these problems could be avoided if a contractor would hire a waterproofing specialist to instruct the subcontractor and his employees how to make the building envelope (windows, decks, exterior walls covered by stucco, roof parapets, roof, etc.) "watertight." An article in today's L.A. Times revealed that that decks were inspected within the last year or so in connection with the sale of the property and passed the inspection. However, if the inspection was non-invasive -- if the inspector did not remove part of the deck to expose the rotten joists -- he would have no way of knowing the failure was imminent. As the Court of Appeal held in El Escorial Owners’ Association v. DLC Plastering, Inc., 154 Cal. App.4th at p. 1356, “A case from another jurisdiction reminds us that ‘[s]tructural quality ... is nearly impossible to determine by inspection after the house is built, since many of the most important elements ... are hidden from view.”

High Energy -- New CAL Commercial Real Estate Disclosure Law

After several delays, CAL Assembly Bill 1103 Commercial Energy Disclosure went into effect on January 1, 2014. It requires the owners of all commercial buildings over 10,000 square feet which are being leased, sold, or refinanced to comply with the law. The final phase will go into effect on July 1, 2014, requiring the owners of all commercial buildings over 5,000 square feet to comply. The statute can be found at California Resources Code section 25402.10. What is the purpose of AB1103? The California legislature has set aggressive energy efficiency goals. The AB1103 Commercial Energy Disclosure program was created with the goal of making energy efficiency part of the discussion during a real estate transaction: the ultimate goal is to reduce energy waste in commercial buildings throughout California. The idea is also to benchmark buildings with similar features, allowing potential purchasers to easily shop around for more energy efficient buildings. Not only do energy efficient buildings help to reduce greenhouse gases, but they also usually translate into lower than average utility bills.

What does AB1103 require? Property owners who are going to sell, lease, or refinance an entire commercial building must upload one year’s worth of energy use data and space use attributes into the U.S. Environmental Protection Agency ENERGY STAR Portfolio Manager. This tool will process the building’s energy information and allow the property owner to generate a Data Verification Checklist disclosure form. The disclosure must be provided to the purchaser or lessee no later than 24 hours prior to the execution of the sales contract or lease agreement. In the case of a refinance, it must be provided to the lending institution no later than submittal of the loan application.

AB1103 also requires utility companies to provide the most recent 12 months of energy use data to property owners. The utility company will have the discretion to determine how to provide the energy use data information to the building owner. Currently, only the three major California utility companies (SoCal Gas, SCE and SDGE) are set up to provide the information directly through Portfolio Manager. It is anticipated that others will provide the information via a spreadsheet or similar means and the owner will then need to manually enter the information into Portfolio Manager in order to generate the disclosure form. The utility companies will also have the discretion to deal with confidentiality issues related to providing energy use data to owners when the bills are under the tenants’ names. Although AB1103 does not require any action to alter or update building systems on a property, AB1103 may encourage building owners to install energy efficient building systems to make their properties more marketable.

Who is exempt from AB1103? The most significant exemptions from AB1103 are factory, industrial, and residential properties. If the property in question is a mixed use property containing any of these exempt uses, then the entire building is exempt. Commercial buildings under 5,000 square feet are also exempt. It is also important to note that commercial buildings entering a contract before July 1, 2014 that are less than 10,000 square feet are also exempt. After July 1, 2014, all commercial buildings 5,000 square feet and larger will have to comply.

Who is enforcing AB1103? The property owner is required to release the disclosure report to the lessee, new property owner, lender, and the California Energy Commission (CEC). Enforcement for the law will be complaint driven and the hope from the CEC is that enforcement will be primarily market-driven.

California "Contractor Licensing Laws: the Sword and the Shield"

In my last post I discussed that even though a home improvement contract is required to be in writing, a contractor could recover compensation even if it was not. In such a case, the court will consider the equities -- whether the homeowner will be unjustly enriched if the contractor is not paid -- if the contractor provided labor and materials without obtaining a written contract.

The story is very different if the contractor never had a contractor's license before the labor and materials were provided. A landscaping contractor faced such a dilemma last year in Alatriste v. Cesar's Exterior Designs, Inc. (2010) 183 Cal.App.4th 656. There the contractor began the job without a landscaping contractor's license, but obtained a license from the State Contractors Licensing Board during the course of the project. The homeowner paid $57,500 to the landscaping contractor before it left the job because of non-payment. The homeowner then sued to get his money back from the landscaping contractor on the basis that it was not licensed when it began the project. The Court of Appeal held that the California Contractor's License Law is both a sword and a shield in the hands of a homeowner who has hired an unlicensed contractor.

A person who utilizes the services of an unlicensed contractor is shielded from lawsuits by that contractor to collect payment for unlicensed work by Business & Professions Code section 7031(a). The California Legislature complemented the shield in section 7031(a) by adding a sword that allows recovery of all compensation paid to a contractor for performing unlicensed work. Section 7031(b) provides in pertinent part: a person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.

The landscaping contractor in Alatriste v. Cesar's Exterior Designs, Inc. made several arguments that the Court of Appeal rejected: the homeowner knew it was unlicensed when it began the job; the homeowner would be unjustly enriched; and some of the labor and materials were provided after the landscaper was licensed. This was a case where the five letter synonym for justice applied: "tough."

The Court of Appeal followed a line of California cases which have held that section 7031 embodies an “all-or nothing” philosophy aimed at deterring persons from offering or providing unlicensed contractor services for pay. Section 7031 does not permit an unlicensed entity to recover partial compensation by narrowly segmenting the licensed and unlicensed portions of their performance. Where applicable, section 7031 bars a person from recovering or retaining compensation for any work performed in connection with an agreement for services requiring a contractor's license unless proper license was in place at all times during such contractual performance. In Alatriste v. Cesar's Exterior Designs, Inc. , the landscaping contractor even had to refund the money paid for materials retained by the homeowner!

The story might have had a happier ending for the landscaping contractor if it previously had a license which expired and which was being reinstated. But that will have to be the subject of another post.

The Tale of a Home Improvement Contract -- What If It is Not in Writing?

Business and Professions Code section 7159 requires that a home improvement contract be in writing. However, in a series of cases dating back to 1980, the Court of Appeal has judicially created an exception to this statute based on the sophistication of the homeowners and whether they would be unjustly enriched if the contractor is not paid. The most recent example of this is Hinerfeld-Ward, Inc. v. Lipian (2010) 188 Cal.App.4th 86. There the Court of Appeal affirmed a judgment by trial court which enforced an oral agreement between the general contractor and the homeowners. The homeowners failed to show they were the type of persons who came within the protection of section 7159 for three reasons: the project was a complex, high-end remodel on which the design continued to evolve over the years of planning and construction; the owners' architect and designer had extensive involvement in the project as their representative; and the owners would be unjustly enriched if contractor was denied recovery. The contractor recovered approximately $202,000 that the homeowners had failed to pay.

To make matters worse for the homeowners, the homeowners had to pay the contractor's attorney's fees ($200,000) and 2% per month of the progress payments withheld (more than $54,000) because the homeowners violated Civil Code section 3260.1, a statute which governs withholding of progress payments on a construction contract. The violation resulted from the homeowners withholding an amount exceeding 150% of the disputed amount from progress payments to the contractor.

California Real Estate Licensing Cases -- 2010

In California, a person acting as a real estate broker without a license cannot recover for services for which a license is required. For example, if a CPA acts as a property manager without a real estate license and collects rents, he may be required to disgorge his management fees even if his services were impeccable. Likewise, a company that arranges financing for real estate is normally required to have a real estate broker's license. But in two cases reported in 2010, the California Court of Appeal held that a person could recover for property management and services to arrange a credit facility for a "bridge" lender to the extent a license is not required to perform the services for which they sought compensation.

In MKB Management, Inc. v. Melikian (2010) 184 CA 4th 796, the plaintiff entered into a property management agreement with the owner of several apartment buildings. The Court of Appeal held that the trial court erred in finding that a property management agreement that called on plaintiff to perform multiple services, some of which required a broker’s license and some of which did not, could not be severed as a matter of law. Even if entire contract was illegal and unenforceable, plaintiff could still recover the reasonable value of services rendered provided that those particular services were not legally prohibited. Similarly, plaintiff’s lack of a contractor’s license would preclude recovery of compensation for acts that require license but not for those actions for which such a license was not required.

In Greenlake Capital, LLC v. Bingo Investments, LLC (2010) 185 CA 4th 731, the Court of Appeal relied on MKB Management, Inc. v. Melikian in holding that a finance company's lack of a real estate broker's license did not bar the company from recovering compensation for indentifying and procuring a credit facility for a lender under a contract to assist in obtaining financing. The contract did not have as a central purpose the provision of illegal services and the parties do not intend at the outset that the financing would take a form that would necessarily violate the license requirement.

So what is the moral to the story of these cases? Get a real estate broker's license (or another appropriate license) if you will be performing services for which a license may be required. But if you don't have a license, read the two cases cited above and argue that some or all of the services for which compensation is sought do not require a license.

Home Buyer's Deposit in a Rising Market

As the residential real estate market begins to show signs of life, it is worthwhile discussing a recent case about who is entitled to a breaching buyer's deposit in a rising market. Kuish v. Smith (2010) G040743.

In December 2005, the plaintiff/buyer offered to purchase the seller's beach front home in Laguna Beach for the modest sum of $14,000,000. After all contingencies were removed, the buyer unilaterally canceled the lengthy escrow in September 2006 without cause. Two months later, the seller sold the house to another buyer for $15,000,000.

The plaintiff demanded the return of his $620,000 deposit since the seller came out ahead by selling the property for $1 million more. But the seller declined the buyer's request to return the deposit and a lawsuit ensued. The Court of Appeal held that the trial court erred in refusing to return the deposit. The Court held that in a rising market, where the seller could not prove actual damages, the seller's retention of buyer's deposit constituted an invalid forfeiture under Freedman v. The Rector (1951) 37 Cal.2d 16 (Freedman). The Court reached that result despite the agreement by the parties that the deposits were "non-refundable."

The purchase agreement in Kuish v. Smith did not contain a liquidated damages provision. Most purchase agreements in California do contain a liquidated damages provision because of the widespread use of the forms promulgated by the California Association of Realtors, a trade association of real estate agents. The liquidated damages provision in the C.A.R. purchase agreement must be initialed by the parties to become effective. If it is, the buyer may lose his or her deposit up to 3% of the purchase price by breaching the agreement after the waiver or removal of all buyer's contingencies. Civil Code section 1675 governs liquidated damages in the purchase of a dwelling of not more than four units. Under that code section, if the deposit is less than 3% of the purchase price, the breaching buyer has the burden of establishing the amount of the deposit is unreasonable as liquidated damages.

This gets us back to Freedman where the CA Supreme Court held that there are circumstances where a liquidated damages provision will not be enforced: "Since [the seller] resold the property for $2,000 more than [the buyer] had agreed to pay for it, it is clear that [the seller] suffered no damage as a result of [the buyer]'s breach. If [the seller] is allowed to retain the amount of the down payment in excess of its expenses in connection with the contract it will be enriched and plaintiff will suffer a penalty in excess of any damages he caused." (Id. at pp. 19-20). In other words, a rising market may prevent a seller from recovering liquidated damages.

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.