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.

After the Fall -- What Now?

On December 26, 2006, I wrote a post entitled "'Creative' Financing -- The Slippery Slope in 2007."

On December 28, 2007, I wrote a post entitled "Non-Traditional Mortgage Products -- The Slippery Slope Became an Avalanche."

Now it is time for my third year end post. I read an insightful column in today's the Wall Street Journal about the global economic reversal. It is entitled, "The Economic News Isn't All Bleak" by Zachary Karabell. In the last paragraph of his column, Mr. Karabell observes:

"The rush to declare the future bleak has obscured the fact
that no one knows the outcome of an unprecedented event.
No one. The worst course in the face of uncertainty is blind
faith in conventional wisdom and past patterns. The best is
to stay humble in the face of the unknown, creative and
unideological about solutions, and open to the possibility
that as quickly as things turned sour they can reverse."

To the loyal readers of CalRealEstateLawBlog.com, watch out for wolves in sheeps' clothing and have a productive and healthy 2009!

New Foreclosure Hurdles in California Helping Distressed Homeowners

Section 2923.5 of the California Civil Code went into effect on September 6, 2008. This statute, which applies only to owner-occupied, residential real property, was enacted to help distressed California homeowners. Section 2923.5 requires a lender seeking to foreclose to contact the borrower "in order to assess the borrower's financial situation and explore options for the borrower to avoid foreclosure." The statute applies to all loans made from January 1, 2003 through December 31, 2007.

Section 2923.5 is complicated and sets up a number of requirements that must be satisfied by the foreclosing party or its authorized agent. The contact requirements of section 2923.5 are very specific. The foreclosing party must contact the borrower, in person or by telephone, to assess the borrower's financial situation and explore options to avoid foreclosure. If contact is not made by phone or in person with the borrower, the foreclosing party must send a certified letter to the borrower with a return receipt requested. If the foreclosing party is unable to contact the borrower, it must fulfill certain due-diligence requirements outlined in section 2923.5. In addition, the statute imposes a 30‑day waiting period after the foreclosing party fulfills the contact or due-diligence requirements.

After the foreclosing party has met the requirements of section 2923.5, in order to ensure compliance, the foreclosing party must submit a declaration along with the recording of any notice of default or its notice of sale, if the foreclosure proceedings were initiated prior to September 6, 2008.

The foreclosing party does not have to meet the statutory requirements in certain limited situations: (1) if the borrower surrendered the property; (2) the borrower contracted with an organization, person or entity whose primary business is to advise people who have decided to leave their home and seek to extend the foreclosure process and avoid their contractual obligations; or (3) the borrower filed for bankruptcy and the proceeding has "not been finalized."

A foreclosing party must be well versed in the detailed requirements of section 2923.5 and follow them to the letter to avoid further delays in the foreclosure process. A distressed homeowner should also study the new statute to gain the benefits of its protection. In addition, a distressed homeowner should consult with a CPA about the tax consequences of a foreclosure or loan modification.

More changes in California's foreclosure laws are in the offing. Governor Schwarzenegger has proposed a 90 day foreclosure moratorium to pressure banks to modify loans. The California Legislature has not yet acted on the Governor's new proposals.

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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.

HOME SWEET HOME --The Price of a Great Love Affair

On June 13, 2005, TIME magazine reminded us that Americans were at the height of a great love affair with residential real estate. On October 3, 2008, we learned that every American taxpayer, now and in the future, would share in the cost of mortgage defaults and the rescue plan through the Troubled Assets Relief Program (TARP). The recent federal "rescue" legislation and the government's takeover of Fannie Mae and Freddie Mac make the United States the largest mortgage company in the world.

Two maxims of California jurisprudence provide food for thought in assessing the fallout from the messy aftermath of the latest residential real estate binge: "He [or she] who takes the benefit must bear the burden"; and, "He [or she] who consents to an act is not wronged by it." California Civil Code sections 3521 & 3515.

With that said, let us acknowledge the participants who benefited from and consented to the questionable transactions in the United States that have resulted in extraordinary actions by governments around the developed world:

Buyers who used "creative financing" while they were in denial about the consequences of a variable interest rate loan readjusting and the inevitable decline in housing prices;

Mortgage brokers and real estate brokers who did not adequately warn buyers about the credit risk of buying a home without a down payment or a fixed rate loan;

Appraisers who, in some cases, participated in the validation of inflated prices or worse; i.e., mortgage fraud;

Mortgage companies and banks who defied reality by making loans without following reasonable underwriting standards;

Investment bankers who "securitized" pools of loans ("mortgage backed securities") that were not properly underwritten or backed by capital in the event of widespread defaults;

Rating companies that bestowed their pedigrees on the mortgaged backed securities at they same time they were compensated by the investment bankers;

Hedge funds, insurance companies and investment bankers who wrote contracts ("credit default swaps") to pick up the losses on the mortgage backed securities without the financial ability to do so in the event of widespread defaults;

And the United States government which failed to warn, regulate and control the participants before it became the world's biggest mortgage company.

PROTECTION FOR BUYERS' BROKERS AS THE BUBBLE BURSTS

Four years ago, during the week of 2004 Democratic Convention, I vacationed with my family in San Diego, California. One day I read a local newspaper and learned that the number of licensed real estate salespersons in San Diego County had skyrocketed to an all time high. The article was like the ringing of a bell, warning that the real estate market had reach a top.

A recently published California case arises from speculation during 2002 in the downtown San Diego condominium market and the slowing of that market. More importantly, it affirms that a buyer's broker will be protected under under an exclusive buyer-broker commission agreement when the buyer defaults. In Schaffter v. Creative Capital Leasing Group, LLC (2008) D047364, the Fourth Appellate District held that a buyer's broker is owed a commission if the buyer defaults after the broker locates residential property and the buyer signs a purchase agreement.

If Schaffter, the buyer tied up two new condominiums in lengthy escrows with the hope that they would significantly appreciate in value before the closing. (One of the buildings is pictured above.) When the condos did not appreciate enough to satisfy the buyer, it refused to close the escrows. The Court of Appeal found that the principal of the buyer, ". . . never intended to finalize the purchases if the market did not perform as he expected, or to pay commissions on units that did not close escrow."

The buyer's primary defense -- that it was not in default under the commission agreement because the developers decided not to sue for breach of contract -- was disingenuous. The buyer's principal apparently was successful in threatening and bullying the developers into accepting the buyer's cancellations. The Court of Appeal rejected this "defense" and affirmed the ruling of the trial court that: "'there are consequences when people cancel contracts' without valid reason. Here the consequence is CCLG's payment of commissions."

Buyer's brokers will be heartened by the holding in the Schaffter case and the Court's recognition that a commission agreement should be honored when a purchase is cancelled without justification.

ARBITRATION -- Revisited and Reviewed

This Blog recently criticized non- judicial arbitration because, among other problems, the arbitrator can render a binding award without following the applicable law. The California Supreme Court has ruled that the parties may agree by contract to avoid this pitfall.

In the recent case of Cable Connection Inc. v. DIRECTV, 2008 DJAR 13491, the Supreme Court held that parties to an arbitration agreement can agree in advance to judicial review of legal mistakes by the arbitrator. This is significant because many people sign arbitration provisions in this State unaware that arbitrators are not required to follow the law. For example, an arbitration provision is standard in the commonly used California Association of Realtor's form Purchase Agreement for residential real estate. If both parties initial the arbitration provision, they have agreed to binding arbitration without judicial review for legal mistakes.

Justice Carol Corrigan writing for the majority in Cable Connection Inc. v. DIRECTV explained that judicial review of an arbitrator's decision will still ease the pressure on California's trial courts. "The judicial system reaps little benefit from forcing parties to choose between the risk of an erroneous arbitration award and the burden of litigating their dispute entirely in court. Enforcing contract provisions for review of awards on the merits relieves pressure on congested trial court dockets."

What can you do to preserve the right to judicial review of an arbitrator's award. First, you must have appropriate language in the agreement to arbitrate. The provision in Cable Connection Inc. v. DIRECTV read: "The arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for such error."

Second, there must be a record made in the arbitration that is reviewable by a court. Often times awards in arbitrations merely something like, "Claimant is awarded $________ against respondent, plus costs." At the very least, a party should request a "reasoned decision" by the arbitrator in a form similar to a Statement of Decision that is issued by the Judge in a Superior Court trial. Because without a "reasoned decision" there may be nothing to review.