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.

The '08 Wildfires -- A Helping Handbook

Sadly, this is a repeat of a post from November 2007:

The recent wildfires have wreaked havoc on the lives of many families in Southern California. As a public service to those families, the Los Angeles County Bar Association and Morrison & Forester have published a "Helping Handbook" available on line. This handbook contains a compendium of California and Federal real estate and insurance law that will assist wildfire victims in the recovery process.

To read the Helping Handbook, click here.

LOAN MODIFICATION SERVICES & ADVANCE FEES -- Foreclosure Consultants Revisited

Millions of homeowners nationwide want to modify the terms of their loans but do not know how to go about it. This has created growing business opportunity for people who want to provide loan modification services for a fee. Many of these people are new to this business and may not be aware of the law in this area. In California, for example, there are rigorous legal requirements for real estate licensees who want to earn fees by helping homeowners modify their loans.

In an earlier post, I discussed the California statutes (California Civil Code sections 2945, et seq.) that regulate foreclosure consultants; these statutes apply when a real estate license attempts to negotiate a loan modification for a homeowner after he or she has received a Notice of Default recorded under Civil Code section 2945. A foreclosure consultant is prohibited from accepting payment in advance, even if the foreclosure consultant is a licensed California real estate broker. (In contrast, licensed California lawyers are exempt from these statutes.)

But what if a real estate licensee agrees to negotiate a loan modification for a homeowner who has not yet received a Notice of Default and the licensee wants to be paid in advance? The California Department of Real Estate has created a procedure for a real estate licensee to accept advance fees for loan modification services when a notice of default has not yet been recorded. First, the licensee must apply to the DRE for its approval of an advance fee agreement. Once this approval is obtained, the broker must enter into the agreement with a borrower/homeowner who retains the broker and pays a fee in advance for loan modification services. It appears that very few California real estate licensees have obtained approval of an advance fee agreement yet.

In summary, a homeowner who has not received a Notice of Default commencing a foreclosure should only pay fees in advance to a broker who presents an agreement that has been approved by the DRE (the homeowner should call the DRE to confirm the agreement has been approved).

If the homeowner has received a Notice of Default, he or she should not pay any fees in advance. The homeowner should confirm that the foreclosure consultant has the bond required under Civil Code section 2945.11. If these requirements are not met, the homeowner has extensive civil remedies under Civil Code section 2945.6, and the foreclosure consultant may be subject to criminal penalties under Civil Code section 2945.7.

CONTRACTOR'S STATE LICENSE LAW -- When Is Ignorance Bliss?

A few months ago, I was retained to draft a construction contract by a client who is building a house in my area. During this assignment, I checked the website of the California Contractor's State License Board to see if the general contractor selected by my client was licensed. The contractor did not have a license in the name of his corporation and did not have worker's compensation insurance. My client selected another contractor who had a license and insurance.

A recent Court of Appeal case, Great West Contractors, Inc. v. WSS Industrial Construction, Inc. (2008 Cal. App. LEXIS 627) provides a good overview of the circumstances under which a licensed contractor can be denied any payment for its work. In that case a steel subcontractor sued the general contractor for labor and materials it provided for a school. The steel subcontractor ("WSS") was not licensed when it bid the job, did preliminary work under the subcontract (preparing plans and ordering materials), and began to invoice the general contractor. WSS became licensed before the subcontract was signed by both parties and before it did the lion's share of its work under the subcontract.

The Court of Appeal reversed a ruling by the trial court in favor of WSS, holding: "With one exception, the [Contractor's State License Law] forbids a contractor from recovery -- in law or equity -- on an otherwise valid claim for performance of any service for which a license is required if the contractor was unlicensed at any time during performance of the work." (Emphasis added.) This "bright line" test requires contractors to be licensed at the commencement of its services. If the contractor is aware of the problem and fixes it during the project, it is a case of "too little, too late."

But as the Court of Appeal said in that case, there is a statutory exception which is subject to interpretation by California courts. Under Business & Professions Code section 7031(e), a contractor can recover money in a civil action if it proves there has been "substantial compliance" with the licensure requirements: (1) the contractor had been duly licensed in this state prior to the contract or act; (2) it acted reasonably and in good faith to maintain proper licensure, (3) and did not know or reasonably should not have known that it was not licensed. This means that a contractor with an expired license can recover for work done without a license if a court finds that its ignorance of the law and the facts was excusable -- even if the excuse is a weak one. See, e.g., ICF Kaiser Engineers, Inc. v. Superior Court (1999) 75 Cal. App. 4th 226 (the appellate court excused Kaiser from compliance with the licensing law because it was a large company and could not be expected to keep abreast of developments that resulted in the suspension of its license). This is a case where ignorance was bliss.

But the owner who contracts with an unlicensed contractor is unlikely to achieve a state of bliss if a worker is injured on the job. Assuming the unlicensed contractor does not have worker's compensation insurance (a likely state of affairs), the injured worker may be deemed an employee of the owner. Labor Code section 2750.5. A possible consequence is that the unlicensed contractor who is injured on the job will make a worker's compensation or personal injury claim against the owner. This is a case where ignorance will not be bliss -- an owner should determine if a contractor is licensed and has worker's comp insurance before he or she signs a construction contract.

To read a recent Los Angeles Times article about the problems that can be created by hiring an unlicensed contractor, click here.

Duties of A Home Buyer's Agent -- The Recent N.Y. Times Article

A couple of weeks ago I was interviewed by a reporter from the New York Times who was writing a story about an unusual case pending in San Diego. The case concerns a buyer who is suing her agent because he allegedly misled her about the value of a house she and her husband purchased.

I expressed the general view that far more claims concerning the purchase of residential real estate will be asserted in the present declining market than are asserted in an appreciating market. But I opined that there will probably not be a wave of cases alleging that buyers' agents misled buyers as to property values during the recent boom years in the residential market. Value is in the eye of the beholder and information about home sales is publicly available.

The article ran in the New York Times on January 22, 2008 and included one of statements that I made to the author. To read the article, click here.

There are many reasons that a buyer's agent can be sued -- most claims arise from a misrepresentation or non-disclosure about the physical condition of real property. But it is certainly possible that an agent can misrepresent the value of a home, and whether this is actionable will depend on the facts of the case. As the authors of a leading real estate treatise have poetically concluded, “The kind and number of intentional misrepresentations reflected in the reported decisions are as plentiful as grains of sand on the beach.” 1 Miller & Starr, California Real Estate (3d ed. ) p. 436.

The law in this area is well settled but is worth briefly summarizing. A buyer's agent has a fiduciary duty to disclose material facts to the buyer. This includes a duty to disclose reasonably obtainable material information, which may require the agent to investigate facts not yet known to the agent. [See Leko v. Cornerstone Bldg. Inspection Service (2001) 86 Cal. App. 4th 1109, 1115–1116—this includes the obligation to discover and disclose material defects in property.]

The broker's fiduciary duty to disclose material facts about the property arises upon creation of the principal-broker relationship—before the purchase contract is entered into.
Exxess Electronixx v. Heger Realty Corp. (1998) 64 Cal. App. 4th 698, 711.

When transmitting material information from the seller (or others) to the buyer, the buyer's broker must either verify the accuracy of the information or disclose to the buyer that the information has not been verified. Salahutdin v. Valley of Calif., Inc. (1994) 24 Cal. App. 4th 555, 562–563 & fn. 3. A buyer's broker who accepts material information from others as being true and transmits it to the buyer without verification or disclosing to the buyer that it has not been verified breaches his or her duty and may be liable to the buyer for negligent misrepresentation or “constructive fraud.” Id.

On the other hand, the “buyer's agent is not required to verify information received from the seller and passed on to the buyer if the buyer understands the agent is merely passing on unverified information.” Pagano v. Krohn (1997) 60 Cal. App. 4th 1, 11; see Assilzadeh v. California Fed'l Bank (2000) 82 Cal. App. 4th 399, 417.

Knowledge of these rules and a spirit of full disclosure will help keep real estate agents out of trouble.

Agent for Home Equity Purchaser is No Longer Required to be Bonded

Even a well intentioned law may be declared void for vagueness if the reader is left in a fog. A recent case in point involves the bonding requirement in the Cal. Home Equity Sales Contract Act.

According to the Court of Appeal, "The Home Equity Sales Contract Act (Civ. Code, section 1695 et seq . . .) was enacted to protect homeowners faced with mortgage foreclosure proceedings from being victimized by person employing oral and written representations, intimidation, and other unreasonable commercial practices to induce homeowners to sell their homes for a fraction of their fair market value and lose the equity in their homes. (citations omitted)." Schweitzer v. Westminster Investments, Inc. (12/13/2007) 157 Cal. App. 4th 1195.

The Home Equity Sales Contract Act ("HESCA") contains a number of protections for sellers in foreclosure. As discussed in my February 20, 2007 post ["Buyers (and Agents) Beware If the Seller is Upside Down"): "There is another interesting protection for equity sellers. If an equity buyer is represented by an agent, the agent must have a bond from an admitted insurer in an amount equal to twice the fair market value of the property. But no insurer admitted in California offers such a bond, so agents should avoid representing equity buyers." The Court of Appeal has recently eliminated the requirement of a bond. The reason -- that bonding subsection of the law was so vague that a person of ordinary intelligence would have to guess what it requires.

In Schweitzer, the trial court held that a deed transferring the property to an equity purchaser was voidable because the purchaser's representative did not have the bond required by Civil Code section 1695.17. The code section requires proof that the purchaser's agent/representative is "bonded by an admitted surety in an amount equal to twice the fair market value of the real property which is the subject of the contract." The Court of Appeal reversed, holding that the requirement of a bond was void for vagueness and unenforceable.

That language, reasoned the Court of Appeal, ". . . provided no guidance on the amount, the obligee, the beneficiaries, the terms or conditions of the bond, the delivery and acceptance requirements, or the enforcement mechanisms of the required bond." However, the rest of the HESCA is enforceable because the statute had a "severability" provision specifying that if any provision of the Act is declared unconstitutional the remainder shall not be affected (section 1695.11) if it is "grammatically, functionally and volitionally separable." Under the remaining provisions, the equity purchase contract was enforceable.

Schweitzer v. Westminster teaches us 3 lessons: a statute, like a contract, should be complete and written so that a person of ordinary intelligence does not have to guess what it requires; the remainder of the HESCA survives intact, including the requirement that a purchaser's representative be licensed by the Department of Real Estate; and, "Buyers (and Agents) Should Still Beware If the Seller is Upside Down."

Real Estate Appraisers -- Decline in Home Prices Exposes Inflated Appraisals

In a surging real estate market, the "rising tide lifts all boats." The rapid appreciation of home prices makes it less likely that a buyer will complain about problems with his purchase that are discovered after the close of escrow. But for every high tide there is a low tide that exposes rocks below the surface and barnacles on grounded ships.

A down cycle in the real estate market also exposes a variety of reasons for the artificial inflation in prices: lax loan underwriting, fudged loan applications, rampant speculation, "creative" financing, a secondary market for sub prime loans, and inflated appraisals. The last of these problems is the subject of this post.

Since the savings and loan debacle in the 1980's, the federal government has regulated real estate appraisers who prepare appraisals for loans by federally insured institutions. For example, California established an apparatus for licensing real estate appraisers in 1989.

Appraisers can be liable for negligence or negligent misrepresentation to lenders or buyers who rely on inflated appraisals that have not been prepared in accordance with the standard of care. Based on anecdotal evidence in my litigation practice, the licensing of real estate appraisers appeared to result in the decline of lawsuits against appraisers after 1989. I handled a number of such cases for a mortgage company and a S&L before 1989, but none in the 1990's after licensing became mandatory.

Unfortunately, the recent decline in the housing market has again exposed problems caused inflated residential real estate appraisals. So two months ago, the California Legislature made it illegal to pressure an appraiser to reach a inflated opinion of value. And a new California law effective January 1, 2008 has substantially increased the educational requirements for certified appraisers.

How does "the market" pressure appraisers to inflate appraisals? Will the new laws have any effect on the appraisal industry? How widespread is the problem of inflated appraisals? A recent article in the Los Angeles Times tackles these questions. To read the article, click here.

U.S. Mortgage Relief Act

Until yesterday, debt that was forgiven in a foreclosure or as part of a loan workout was classed as income. For example, a homeowner who negotiated a short sale with her lender was required to recognize as income the amount of the loan that was forgiven.
That changed when President George W. Bush signed the Mortgage Forgiveness Debt Relief Act into law.

The measure will eliminate income taxes for many homeowners who must restructure their mortgages as they face foreclosure. The new law relieves a homeowner of the burden of paying additional income taxes if his lender has reduced the original loan amount to make it easier to continue making the mortgage payments. The law is a response to the rising waive of foreclosures and the re-setting of interest rates in 2008 on as many as 1.8 million mortgages.

DISCLOSURES IN THE SALE OF RESIDENTIAL REAL ESTATE -- No Fairytale Endings

Let's imagine that you were interested in purchasing house in Beverly Hills -- just for fun, let's call it the Hansel and Gretel house. Let's also imagine that you found a local broker to represent you in the negotiations with the seller. In our fairytale, the broker had competed unsuccessfully for the listing on the house and in the process learned that it required significant structural repairs. After the house was put on the market, your broker fails to tell you about all of the problems with the house he previously learned about. You do not learn of the structural problems until after the close of escrow. Can this story have a happy ending for the non-disclosing broker?

The Court of Appeal recently answered "no" in Michel v. Moore & Associates, Inc. (2007) 156 Cal. App. 4th 756. In that case a real estate agent, Larry Kirkpatrick of Moore & Associates, conducted a walk through of a house in the hopes of getting a listing. In the process, the agent Kirkpatrick took notes about problems with the house that would have to be disclosed by a listing broker to a buyer, including symptoms of structural problems (cracks in the pool, sliding doors that don't close properly, hardwood floors that are separating and damaged stucco). After another broker got the listing, Kirkpatrick showed the house to the eventual buyer. The buyer learned from the Transfer Disclosure Statement that there were interior cracks, but did not learn the other information contained in Kirkpatrick's notes.

Following the close of escrow and significant rains, further cracking appeared in the interior walls of the house. The buyer conducted an investigation and discovered the floor was out of level and there was a major soil instability problem. The buyer sued Moore & Associates.

At trial the jury returned a verdict in favor of Moore & Associates on the grounds that Kirkpatrick did not fail in his duty under Civil Code section 2079 to conduct reasonably competent inspection and did not fraudulently conceal any facts.

The Court of Appeal reversed, holding that Moore & Associates owed a fiduciary duty to the buyer that is broader than the more limited, non-fiduciary duty under Civil Code section 2079. Under the broker's fiduciary duty, he must inform the buyer of all information in his possession that is material to the buyer's interests, regardless of how the information is obtained. The failure to make such disclosure is actionable as "constructive fraud," which is easier to prove than actual fraud because the latter requires proof of intent to defraud.

The moral to our fairytale -- when in doubt, disclose. Non-disclosure cases are quite common in residential real estate transactions. I have handled a number of them in my law practice, including a six week trial of a case involving a crack in a closet. It is up to the seller to tell the broker everything that it is material about the house, but the buyer's broker also has a duty disclose all material, adverse information about the property.

The '07 Wildfires -- A Helping Handbook

The recent wildfires have wreaked havoc on the lives of many families in Southern California. As a public service to those families, the Los Angeles County Bar Association and Morrison & Forester have published a "Helping Handbook" available on line. This handbook contains a compendium of California and Federal real estate and insurance law that will assist wildfire victims in the recovery process.

To read the Helping Handbook, click here.