Articles Posted in Commercial Property

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The recent court case of Scafidi v. Hille No. 2014-CA-01261-SCT offers countless reminders for small business owners both experienced and novice about the importance of planning and documenting no matter what the relationship is between the parties involved. While there may be certain factors that may make it seem unnecessary to plan or develop managerial and operational strategies, this case highlights just how messy things can become no matter what the relationship is between the individuals. The overall message is to always plan ahead, document finances and other important information, and remember that when it comes to business, relationships should be set aside.

A Breakdown of the Case

Scafidi v. Hille centers on issues between a brother and sister who inherited a total of three family businesses. Due to the lack of proper planning, the funds were comingled, at one point one or both individuals were kept out of big decision-making processes, funds were not split properly and in the end this led to a huge upset between siblings and a lengthy court battle. The lack of formality in the operation of the business made the case complex and a battle that could have been completely avoided. In the end, each party was awarded a single business each and the third business was sold and funds were split. However, with some planning, not only could they both have been spared legal expenses and the stress associated with such a process, but they could have had three thriving businesses that each one could have benefited from. This case highlights the exact reasons why any business should hire a knowledgeable business attorney to assist with the process.

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Environmental consciousness is theory that has grown vastly over the years. From the rise in organic product use, to lobbying for full disclosure of products that contain GMOs, to the move of some states to mandate energy disclosures, environmental issues have come to forefront of many legislative sessions. It has been reported that the State of California emits greenhouse gas at an alarming rate every year. Due to the rapid growth in population in recent years, California is the second largest greenhouse gas emitting state in the US. Over 30% of that greenhouse gas release can be attributed to the production of electricity taking place in the state. In response to the harmful nature and after endless lobbying, Assembly Bill 802 was drafted. Assembly Bill 802 focuses on disclosure.

In an effort to closely monitor the problem and resolve the issue, mainly in commercial buildings, Assembly Bill 1103 was enacted in 2009. This bill requires those who own commercial properties to allow public utility companies to regularly collect energy consumption data. Additionally, the public utility companies disclose the data collected to potential purchasers, financial institutions providing loans, and even individuals looking to rent space in particular building. Although the bill was adopted in 2009, it did not go into effect until 2014 due to pushback. Response to the implementation of the new law was not positive, especially because there were no clear and concise guidelines or protocols regarding violations of the law.

Those who had been ordered to comply by disclosing information decided that the fine was worth disclosure. Disclosure of energy use could result in several adverse issues for the owner of the building. Due to the noncompliance of a majority of owners, Governor Brown introduced Assembly 802, a new piece of legislation that replaced AB 1103 and modified the process in which data was collected. Effective January 1, 2016, AB 802 provides that public utility companies will be tasked with maintaining energy consumption data for the last year for all buildings serviced by their company. The goal and purpose behind introduction of this new piece of legislation all lies with disclosure. Those who own buildings that produce energy at a high rate or fail to meet energy efficiency standards are given incentive to make the necessary repairs. By not doing so, they stand to lose potential buyers and tenants. With this new law their insufficiencies are public record and out there for anyone to assess.

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Purchasing commercial real estate for a start-up business is one of the most exciting steps an entrepreneur takes toward achieving his or her goals. While this stage of the process can certainly be a rush of emotion, it is critical that buyers consider potential roadblocks. One of the most critical components to buying real estate, and especially commercial real estate, is ensuring that the property does not have an environmental claim. It is important for buyers to understand what environmental claims are and how they impact the value of a property.

What are Environmental Claims?

There is a broad scope of potential environmental claims that can range in severity. It is important for people to realize that although a building may appear to be in good condition, environmental impacts may not be readily visible and could have occurred many years ago. In fact, sellers may not even be aware that their building is in violation of environmental laws. Some of the most common environmental claims buyers encounter are:

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In the recent ruling of DKN Holdings, LLC v. Wade Faerber (decided on July 13, 2015) the California Supreme Court helped clarify the meaning of joint and several liability holding. Parties that are jointly and severally liable on the same obligation can be sued in separate actions which are not barred by the doctrines of claim preclusion or issue preclusion.

The cause of action for this case arose from Caputo, Faerber, and Neel, three individuals who each signed a ten-year lease to operate a gym in a shopping center. Caputo later sued DKN, the landlord, for damages and rescission of the lease based on fraud, breach of contract, and other claims. DKN cross-complained for rent and other monies due under the lease. DKN won at a bench trial and was awarded over $2.8 million in damages. DKN then sued Faerber and Neel for breach of the lease.

Faerber demurred, arguing that, because the landlord’s rights under the lease was adjudicated in the first action, suit against him was barred by the rule against splitting a cause of action. In opposition, the landlord argued that separate actions are permitted against parties who are jointly and severally liable. The trial court sustained the demurrer without leave to amend and entered judgment for Faerber.

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Sometimes projects fail. Its a reality of real estate. When lenders and borrowers are faced with a failing project and a loan in default, they have options. One is foreclosure. If the borrower and lender are in a contentious relationship, foreclosure may be the only option, and it can be a costly and lengthy process. If the relationship is more cooperative, however, under some circumstances, the parties may be able to negotiate a deed in lieu of foreclosure transaction. This involves a two step process where, first, there is a consensual transfer of the title from the borrower to the lender, which is followed by a non-judicial foreclosure. This can be beneficial to both parties. Unfortunately, during the recession, some title companies refused to insure sales following these transactions. A recent court decision reaffirms that these title companies’ decisions were based on faulty reasoning.

The Case of Deacon Group, Inc. v. Prudential Mortgage Capital Co. LLC

This important case, which the California Court of Appeal decided, is called Decon Group, Inc. V. Prudential Mortgage Capital Co. LLC. In the case, Wellesley owned real property in Los Angeles that was subject to a first deed of trust and a junior mechanic’s lien. Wellesley defaulted on the loan secured by the trust deed. Rather than going through a standard foreclosure, Wellesley and the trust deed beneficiary agreed to a deed in lieu. The beneficiary then foreclosed, eliminating all junior liens, and bought the property at the foreclosure sale and later sold it to a third party.

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A new law important to certain foreign LLCs went into effect in California on September 15, 2014. According to the Imperial Valley News, Governor Brown signed the law that day, and it includes a clause that indicates that the law takes effect immediately. Known as AB 1143, the law applies to taxes that must now be paid by some businesses who were previously exempt, and changes California property tax law.

Change to Property Tax Law

First, the bill changed property tax law. Prior to the enactment of the new law, California property tax laws required that, “when valuing property by comparison with sales of other properties, that the properties be sufficiently near, and be sufficiently alike the property being valued.” The new law changes that definition. Now the definition says:

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What are the consequences of an improperly formed partnership? The case of Utnehmer v. Crull (In re Utnehmer), 2013 WL 5573198 (B.A.P. 9th Cir October 10, 2013), recently decided by the Bankruptcy Appellate Panel of the 9th Circuit here in California, may shed some light on this question.

The Facts

In 2005, real estate developer William Utnehmer, the debtor and defendant in this case, undertook to develop a luxury property in Venice, California. Mary and Patrick Crull, the judgment creditors and plaintiffs in this case, were offered an opportunity to participate in the project, which they accepted. Utnehmer sent the Crulls a packet of documents, which included a cover letter, a loan agreement for $100,000, a promissory note, and a private offering memo. The loan agreement provided that $50,000 of the initial $100,000 was intended to be superseded by execution of a formal operating agreement which would recharacterize the $50,000 of the Crull’s interest as an investor’s equity interest in a limited liability company to be formed, with an annual preferred return, and a percentage participation in profits on a prorated basis. At the time these documents were exchanged, the documents for formation of the limited liability company and the operating agreement were allegedly being drafted. The parties subsequently executed a promissory note, which was consistent with the loan agreement but made no reference to the expected recharacterization of the $50,000 as an equity interest.

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Contracts are agreements, written or oral, which bind people to complete a set of actions. It is expected that when you enter an agreement, you intend to follow through with it and complete what is asked of you. This, however, is not always the case. Breaches of contract happen, but how you deal with it will impact future decisions.

Take for the example of the California case of Whitney Investment Company v. Westview Development Company. In this case Whitney Investment Company (Whitney) is appealing a lawsuit where it previously sued Westview Development Company (Westview) for breach of contract. Whitney and Westview had an agreement where Westview hired Whitney as its broker to sell a parcel of land.

This was supposed to be an exclusive listing, so that regardless of who sold the property during the life of the agreement, Whitney would still receive a commission off of the sale. In return, Whitney agreed to pay monthly rentals on two existing highway advertising signs then leased by Westview, to operate a tract office located on the premises, to pay one hundred dollars a month rental to Westview for the tract office, to pay one-half the cost of bringing electricity to the tract office, to maintain an adequate sales force, and upon Westview’s request to expend at least $2,000 for advertising.

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Contracts are usually governed by the laws of the state that it was created in. Parties to a contract may create a contract that go against some aspects applicable laws but there are limitations. Laws and regulations are created to protect people, therefore, if you plan to create an agreement that goes against a law it is important that it is clear that the party who loses protection from the law understands that they are losing a protection and agree to it. This often means that such a contract needs to be in writing and signed at least by the party waiving his or her rights.

Take for example the case of Phillippe v. Shapell Industries. In this case, David Phillippe (Phillippe) is a real estate broker licensed by the State of California and Shapell Industries, Inc. (Shapell) is a corporation engaged in the construction of residential housing tracts and periodically purchases land for such construction. Shapell is also a licensed California real estate broker. Shapell reached out to Phillippe for his help in finding suitable plots of land. They had an oral agreement that Shapell would pay him a broker’s commission for any land submitted by Phillippe and purchased by Shapell and that this commission would be stated in any written offer made by Shapell to a seller. Phillippe found multiple plots of land that ultimately were not acquired by Shapell because they did not fit Shapell’s needs. One piece of property,known as the Great Lakes property, was of interest to Shapell but due to the zoning restrictions Shapell could not use the property when it was shown to it by Phillippe. Later the property was rezoned and Shapell and the property’s owner entered direct negotiations for the sale of the property. Shapell ultimately purchased the property but refused to pay Phillippe his commission and this led Phillippe to bring this suit against Shapell.

The issue in is case is whether a broker may be paid for services acquired under an unenforceable contract. In California, at the time of this case, most real estate agreement, including broker commission had to be in writing to be a valid, enforceable contract. The agreement between Shapell and Phillippe was orally agreed to and never memorialized in writing, therefore the court found the agreement to be unenforceable. Phillippe tried to argue that because he did work, finding the Great Lakes property, because of the oral agreement he should still be compensated the agreed amount for his services. The court, however, disagreed. The court decided that based on the current laws and past cases, that because Shapell and Phillippe were both brokers, there is an expectation that they are aware of laws that effect their profession. Commission contracts had long been required to be in writing. The court found Phillippe did nothing more than perform services pursuant to an invalid agreement. Phillippe’s reliance on the oral contract was not reasonable, and he therefore suffered no injury or which he should be compensated.

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When starting a business, one thing that you need to think about is the type of business you would like to create. The most commonly known type of business is a called a corporations, but there are also other other types of businesses such as partnerships. And within each type of business, there are subsets, such general partnerships versus limited partnerships. Each title comes with a different set of responsibilities and liabilities. That is why it is important to look at each business options and figure out which options are best for your needs. Once you decide on a business type, you need to register it properly. An improper registration, can cause problems such as making you personally liable for your business transactions when that was not your intent or it can allow clients and vendors to cancel contracts. While there are some mistakes that are minor and fairly easy to fix, it will still be time consuming and often costly.

Take, for example, this California case where an improper registration almost cancelled the partial sale of a company. In this case, Howard and Jane Farnsworth bought John and Velma Dawson’s interests as limited partners in Nevada-Cal Management, Ltd. (“Nevada-Cal”). Nevada-Cal is a limited copartnership made up of bother limited and general partners. The Farnsworthes sued Nevada-Cal because after they purchased the Dawsons’ shares, they learned the limited partnership was not properly formed. Because the partnership was improperly formed, the Farnsworthes believed that the sale of the limited partnership interests were invalid, and therefore wanted their money back.

Under California law, at the time of this case, all companies were required to have a permit before they could sell security, which included partnership interests, without a permit. There were exceptions in place, but specifically for properly formed general and limited partnerships. In deciding this case, the judge not only looked to the relevant laws in place, but also to the intent of the writers of the law. The judge found that the purpose of the law was to protect the general public against scheming companies, not an individual in a private sale. In small sales, individuals have the ability to ask questions directly to the seller, or its representatives. When companies make securities available to the public, the public only has the public filings from the previous year and whatever the company divulges in the investment packet. If someone has a specific question, it is not guaranteed it will be answered. Requiring permits is one more way for the public to find out more information about a company on its own. Because of this, the judge decided in favor of the Dawsons, finding a permit unnecessary and making the sale valid.