May 2008 |
Bernardt's Take on Other Recent Issues Roger Bernhardt |
Lease agreement disclaimers do not insulate landlord from liability for fraud.
McClain v
McClain’s lease with Octagon contained disclaimers that any statement of size was an approximation and that the lessee should satisfy itself with respect to the premises. Later, McClain claimed that Octagon had, among other misdeeds, negligently or intentionally misrepresented the size of the premises in order to induce her to pay excessive rent. The trial court sustained Octagon’s demurrer to claims relating to size of the premises on the ground that they were barred by the lease disclaimers. Following a bench trial, the trial court also ruled against McClain’s remaining claims. McClain appealed.
The court of appeal reversed in part and remanded for further proceedings. The disclaimer in McClain’s lease that asserted that McClain had an adequate opportunity to examine the leased unit did not insulate Octagon from liability for fraud or prevent McClain from demonstrating justified reliance on Octagon’s representations. Likewise, the purported disclaimer regarding the estimates of size was not exculpatory. The fact that Octagon claimed that the representations as to the size of the premises and the shopping center were approximations did not preclude McClain from showing that they were in fact, materially and unreasonably inaccurate. Moreover, the court held that McClain also stated a claim for declaratory relief because she had adequately alleged a fraud claim based on misrepresentations about the proper base rent and share of common expenses under the lease. She could not, however, state a claim for breach of the covenant of good faith and fair dealing based on precontract negotiations. Nor was she entitled to an accounting of Octagon’s expenses. Rather, McClain was entitled only to disclosure of the documents supporting the “reasonably detailed statement” of common expenses, specified by the lease, for the limited purpose of verifying that the expenses were incurred and the amounts accurate. McClain was not entitled to dispute the need for expenses or to audit the landlord’s records.
THE EDITOR’S TAKE: It is unclear to me what the trial judge is supposed to do on remand. The demurrer initially sustained was to a complaint that included two counts alleging that the landlord had (1) intentionally and/or (2) negligently misstated the size of the tenant’s unit in its shopping center. Insofar as the misrepresentation was alleged to have been intentional, it seems clear that a statement in the lease that the measurements were approximate would have no greater protective effect than would an “as is” clause in a sales contract. Exculpatory clauses just do not protect against fraud. So, the intentional misrepresentation count should get to trial notwithstanding the lease provision. (Although the tenant is going to have to prove not only that there were misrepresentations, but that they were intentional. The fact that different numbers appeared in an insurance application may show that there was a discrepancy, but I do not think that it also proves the discrepancy was intended.)
The other count in the complaint alleged a negligent misrepresentation as to size, and the appellate opinion overturned the demurrer to that claim as well, seeming to say that the lease clause did not protect against it, either. That should be much more worrisome because, unless the landlord can show that the lease footage was right and the insurance footage was wrong, it looks like the landlord might be per se guilty of negligent misrepresentation. How else can one explain the 2600 square feet on one form and 2400 on another, except that somebody was probably careless? People often make errors when measuring things and try to deal with that by saying “more or less” or “approximately.” Now, it appears that if that number turns out later on to be incorrect, the error may be actionable despite those admonitory phrases and despite the absence of any intent to deceive. If this landlord cannot successfully explain away the overage, it may find that not only could it not hide behind a demurrer to the negligent misrepresentation cause of action against it, it may indeed be at risk of exposure to a summary judgment.
Although the opinion says nothing about the matter, I would have been interested in knowing who profited from the miscalculation. The tenant was allegedly charged 23 percent of common area expenses rather than 19 percent. Does that mean that the other tenants paid 4 percent less than they should have paid? Or did the landlord collect 104 percent of common area charges from the tenants (or possibly even more if it was doing the same to all of them)? If the error amounted to a windfall to the other tenants rather than to the landlord, can this landlord now correct its other leases? Or will those other tenants be able to hide behind the same approximation clause in their leases? After all, they have the additional argument that they were not the ones who came up with the number in the first place.—Roger Bernhardt
City’s prior decision not to list building in historical register means that building does not fall within CEQA’s mandatory historical resource category, and it may not fall within presumptive historical resource category. However, City must still determine whether building falls within discretionary historical resources category.
Valley Advocates v City of
The City of
The court of appeal reversed and remanded, concluding that the City had cut short its inquiry into the historic significance of the Flats and relied too heavily on its earlier decision not to list the building in the historical register. The court performed an extensive review of the treatment of historic resources under CEQA. Citing Practice Under the California Environmental Quality Act (2d ed Cal CEB 2008), the court noted that there are three analytical CEQA historic resource categories:
· Mandatory historical resources;
· Presumptive historical resources; and
· Discretionary historical resources.
After analyzing the facts of the case, the court determined that, although it did not fit within the first two categories, the City should have addressed, at a minimum, whether the Flats fit within the discretionary historical resources category. This review is required notwithstanding previous decisions not to list the building on the local historical register. Since it did not perform the review, the City “prejudicially abused its discretion by failing to proceed in a manner required by law.”
The court rejected Valley Advocates’ argument that the City was required to apply the “fair argument standard” (i.e., that there is substantial evidence in the record supporting a fair argument in favor of or against a CEQA exemption) when considering whether the Flats qualified as a historical resource. This ruling was modified and expanded a month later at 160 CA4th ___, with the court reaching the same conclusion—that the fair argument standard does not apply to the City’s initial determination. If, however, the City determines that the Flats is a historical resource, then the fair argument standard will apply to the question of whether the proposed project would cause a substantial adverse change in the significance of the historical resource and thereby have a significant effect on the environment.
COMMENT: Since I’m not a CEQA specialist, I thought I would find someone who is: Matt Adams, of Sonnenschein Nath & Rosenthal LLP, focuses on CEQA, NEPA, and historic preservation issues. Here’s what he had to say about the case.—RB
RB: Matt—I’ll be honest: This opinion runs long ... very long. Do I really need to read the whole thing?
MA: Well, I suppose that depends on whether you have a project involving an old building! If you do, the length of the opinion is probably a good thing. This is now the roadmap for identifying “historic resources” under CEQA, and the court went out of its way to provide a step-by-step guide for doing so. If your CEQA project may involve impacts to a building that’s been listed in a national, state, or local historic register, a building that’s been labeled “historic” by project opponents, or even a building that’s just plain old, this opinion makes a really useful starting point for your analysis.
RB: You say this case is now the roadmap for identifying historic resources. So, is this a whole new set of requirements? Or is this just a particularly comprehensive overview of existing law?
MA: Actually, it’s a bit of both. On one hand, the panel’s approach to identifying and categorizing historic resources should be pretty familiar to most CEQA practitioners. The panel divides historic resources into three categories—mandatory historic resources, presumptive historic resources, and discretionary historic resources—and reviews the attributes of and requirements for each category. I suspect that this approach is quite consistent with the way most practitioners read CEQA and its implementing Guidelines. It is also the very same analytical path recommended by Practice Under the California Environmental Quality Act (2d ed Cal CEB 2008).
To extent website owner required use of its questionnaire, it was creator or developer of content and not immune under §230 of the Communications Decency Act.
Fair Hous. Council of
This case is the en banc rehearing of Fair Hous.
Council of
The case began when the Fair Housing Councils of the San Fernando Valley and San Diego sued Roommates.com, LLC (Roommates) for violations of California discriminatory laws and the Fair Housing Act (FHA) (42 USC §§3601–3631). The Councils alleged that because Roommates required its users to state preferences for things like children versus no children or for a potential cohabitant’s sexual orientation, Roommates was using discriminatory criteria to filter customers. The district court, without examining the merits, declined jurisdiction over the state law claims and dismissed the FHA claims on the ground that the Communications Decency Act (CDA) provided immunity from liability.
On rehearing, the Ninth Circuit Court of Appeal reversed and remanded to the trial court. The CDA immunizes providers of interactive computer services against liability arising from content created by third parties, as long as the provider is not responsible, even in part, for the creation or development of the offending content. 47 USC §230(f)(3). After reviewing whether Roommates merely displayed content wholly created by third parties or was also a content creator, the Ninth Circuit concluded that Roommates lost its immunity by encouraging illegal responses and designing its website to require users to input illegal content. Roommates was the content creator of its registration process and thus could claim no immunity for postings or for requiring subscribers to answer questions in order to use its services. With respect to profiles based on users’ responses, Roommates assisted in developing the content by drawing from the registration process and a drop-down menu, thereby permitting users to discriminate based on illegal specifications. In providing questions and suggested answers, Roommates did more than display others’ information; it was, in part, the developer of that information. In addition, Roommates was responsible for operation of its search and e-mail notification systems, which filtered data based on discriminatory criteria. Only the website’s “Additional Comments” section, which merely displayed the user’s text, was a passive display of third-party information entitled to immunity from liability.
The Ninth Circuit remanded to the district court to determine whether Roommates’ unprotected conduct violated the FHA. The court also vacated the dismissal of the state law claims and remanded so that the district court could reconsider whether to exercise supplemental jurisdiction.
THE EDITOR’S TAKE: I daresay that Roommates.com will survive this decision and that people searching for housing to share, or for others to share their housing, will still be able to use this and similar search engines. It probably will not be any harder for any of those persons to ultimately discriminate in their preferences, although the process will change slightly in this Circuit. Instead of the search engine asking the subscriber what his or her sex, family status, or sexual orientation is (and thereby “forcing” him or her to respond), the subscriber who cares, or who thinks that a reader will care, will have to include that information without prompting, by inserting it into the blank box on the form for “additional comments.” I am not sure that this new structure will reduce discriminatory preferences or make anyone better or worse off, but it clearly mattered significantly to the majority and minority judges in this case. Their contrary and fiery opinions show the depth of their concern.
From the perspective of a nonrenter and nonrentee outsider, I much prefer the no less recent Seventh Circuit decision in Chicago Lawyers’ Committee For Civil Rights v Craigslist Inc. (2008) 519 F3d 666, which simply held that the Communications Decency Act protected these search engines from any discriminatory sentiments imputed into them by their subscribers. That decision, taking up less than 3000 words, puts to shame the 17,000 words that the Ninth Circuit needed to explain its thinking.
What I even more regret in the Ninth Circuit decision is the
embarrassing lack of judiciousness or statesmanship (statespersonship?)
that was shown by the two judicial factions toward one another. The majority
charged the dissent with “tilt[ing] at windmills” and
making “coy suggestions,” while the dissenters accused the majority of
“bluster[ing]” in its arguments. Those fighting
styles make it hard for outsiders—who would like to respect their judges—to
hold on to any belief that neutral principles and respect for differences play
any role in their decision making.—Roger
Bernhardt
To satisfy statute of
frauds, business owner/managing partner required written authority of co-owners
to sell building in which owners’ clothing business was housed. Elias Real Estate, LLC v Tseng (2007) 156 CA4th 425, 67 CR3d 360
The Tsengs, four brothers who worked in the family textile business, owned commercial real property as tenants in common. The property was the site of the family’s clothing import and distribution company, which leased the property from the Tsengs. Arthur, one of the brothers and president of the company, entered into a written listing agreement with Fox Realty to sell the property. Elias Real Estate (Elias) signed a counteroffer submitted by Arthur, which became the purchase agreement. Both Fox Realty and Elias knew that Arthur was not the sole owner of the property but did not request or obtain written authorization permitting Arthur to act on behalf of the other Tseng brothers, relying instead on Arthur’s assurances that he was authorized by his brothers to sell the property.
When Arthur informed Fox Realty that the Tsengs had decided not to sell the property, Elias sued the Tsengs for specific performance. The Tsengs’ principal defense was that, because they had not signed a purchase agreement or given written authorization for Arthur to act as their agent, their agreement to sell the property was unenforceable because it was not in writing as required by the statute of frauds. After a bench trial, the trial court found that Arthur was in fact authorized to sell the property and that the authorization was in writing, satisfying the statute of frauds. The court also found that the property was held in partnership by the brothers, that Arthur was the managing partner, and sale of the property was in the ordinary course of the partnership’s business, obviating the need for written authorization.
The court of appeal reversed. The statute of frauds (CC §1624(a)(3)) requires written authorization to sell by the party to be charged if an agreement for the sale of real property is made by an agent. Although Arthur represented orally and in writing that he was authorized to sell the property, there was no evidence that the Tsengs executed a written authorization to sell.
Elias could not rely on Corp C §16301 to override the statute of frauds. Under §16301(1), a partner who limits his or her conduct to matters apparently within the partnership business can bind the other partners without their written consent. However, under §16301(2), there must be express authority for the acts of a partner that do not appear to be in the usual course of the business. Acts of a partner falling under §16301(1) are not subject to the statute of frauds, while acts falling under §16301(2) are. Ellis v Mihelis (1963) 60 C2d 206, 32 CR 415.
The sale of real property was an act outside the ordinary course of the Tseng partnership’s clothing business. Consequently, under §16301, Arthur’s authority to sell the property on behalf of his brothers was required to be in writing. The purchase agreement was not enforceable against the nonsignatory Tseng brothers because it did not comport with the statute of frauds.
THE EDITOR’S TAKE: From the meager facts presented in this opinion, it looks to me like all of the wrong issues were tried. Of course, a tenant in common who is not authorized as a partner to sell real estate for his partner-brothers cannot commit them to a sales contract of that real estate. But as long as he himself has signed a contract, it should be still be enforceable as to him. Specific performance might not lie against the other brothers, but a damage action should certainly lie against the one who signed a contract to sell the entire fee and then could not perform it. Did the plaintiff purchaser seek nothing other than specific performance, without any fallback?
Furthermore, the broker in the deal was in the litigation, but apparently only as a cross-defendant being sued (unsuccessfully) by the sellers. I would like to know why the broker wasn’t suing the brother (who signed the listing agreement with the representation that he had the authority to sell) for causing him to lose a commission.—Roger Bernhardt
In adopting resolution accepting gift of real property, county
was bound by donors’ use restrictions under public trust doctrine.
Rose and Harry Handlery executed two
deeds conveying real property to the
In 2004, many years after the grantors’ deaths, the County sued to quiet title to the property against their son, Paul Handlery (Handlery), in his capacity both as an individual and as trustee of his parents’ trusts. Handlery cross-complained against the County for declaratory relief. The trial court granted the County summary judgment, concluding that:
· The right of reverter, now referred to as the power of termination, had extinguished either by surrender on recordation of the 1947 quitclaim deed or by expiration due to the passage of time under CC §§885.030 and 885.060(a), (b); and
· The use restrictions in the deeds were personal covenants that had become legally unenforceable once the grantors died and the power of termination extinguished.
The court of appeal reversed. The deeds contained clear language restricting the use of the property. The County specifically agreed to the use restrictions when it adopted a resolution accepting and consenting to recordation of the 1947 quitclaim deed. Thus, the County accepted the grantors’ dedication of the property as a gift for the public to be used exclusively as a county fair or exposition site.
The use restrictions on the property continued to be enforceable under the public trust doctrine. When property has been donated to a public entity for public use, some courts have concluded that the property is held as a public trust, and any attempt to divert the use of the property from its dedicated purposes or incidental uses is an ultra vires act. The public policy concerns supporting such protective treatment of restrictive covenants and donations of property for public use were implicated here. Allowing the County to avoid the use restrictions in the quitclaim deed, despite having agreed to those restrictions on accepting the gift, would discourage future gifts from other donors. In addition, it would permit the County to accept a benefit without a corresponding burden, in clear violation of its duty as a public entity to exemplify equitable conduct.
The absence of language in the quitclaim deed restricting use of the property in perpetuity was not dispositive. The quitclaim deed did not provide for expiration of the use and transfer restrictions. By limiting the County’s use of the property and precluding it from transferring the property, terms without expiration that were expressly agreed to by the County, the grantors intended the use restrictions to permanently continue for the benefit of the public. As the grantors’ successor in interest, Handlery had standing to enforce the restrictions.
The County argued that it was conveyed a fee simple absolute in the quitclaim deed and that the use restrictions were mere personal covenants unenforceable by anyone other than the grantors. However, even if the County owned the property as a fee simple absolute, a triable issue remained whether the County, in accepting the terms of the quitclaim deed, assumed a trust-like obligation not to divert use of the property from its dedicated purpose. A public entity does not have the right or power to apply property dedicated for public purposes to other uses; whatever estate it holds is in trust for the public use.
THE EDITOR’S TAKE: On the one hand, I think it has been made pretty clear to the trial judge that the outcome of this case is to be in favor of upholding the restriction. But on the other hand, I think it is equally unclear how the judge is supposed to get there. The owner’s son can probably win this case on some kind of issue of fact foundation if he can locate some respectable evidence that his parents wanted the public use restrictions kept there in perpetuity and arguing that the “law of the case” takes care of the rest, even if that doesn’t make too much sense legally.
I say that because I do not know how one can get to the conclusion that a power of termination still exists after a grant has been made by a deed (the 1947 quitclaim) that does not include a condition subsequent—even more so when that deed apparently supersedes an earlier version that did include such a clause and seems, therefore, to have been consciously intended to eliminate it.
Furthermore, I do not know how one can fill in the gap of a missing reversionary clause by pointing to the grantee’s acceptance of the deed, which also included no such provision, or by observing that the provisions included restrictions on both use and transfer, neither of which includes reversionary consequences. Finally, I do not know how one can escape the consequences of the 30-year terminating provision of our marketable title act (CC §885.030) for this 60-plus-year-old restriction.
In general, apart from the curious reasoning of this case, I think that lawyers involved in conveyancing should be careful to have their clients remember that deeds have long-term effects on titles and when something unusual is done—as when a second deed with different language replaces an earlier deed to the same property—that some collateral record of what was going on should be made and preserved so that later parties affected by it can avoid a lot of unnecessary litigation. —Roger Bernhardt