Category Archives: california condo law

Fighting Back Against Illegal Arbitration Clauses in Condo Purchase Contracts

Quick Summary: In this post, Greg shows how arbitration provisions in condo purchase agreements violate California law and cannot be enforced.

In my cases representing real estate investors who want their new construction condo and house deposits back, I often encounter arbitration clauses. I have yet to see one that I think would hold up in court under California law.

One such reason is that the arbitration clauses encompasses not only the buyer’s right to a jury trial, but the buyer’s right to a specific form of statutory relief, such as attorneys’ fees or punitive damages. However, in pre-printed form contracts, both state and federal courts usually rule that arbitration agreements which prevent the plaintiffs from seeking a certain form of statutory relief are unconscionable, therefore unenforceable.

In a 1985 case over an arbitration agreement between a car manufacturer and a car dealership, the U.S. Supreme Court ruled “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 628 (1985). This means that if you are entitled to attorneys’ fees under a specific statute in a jury trial, you are equally entitled to attorneys’ fees under the same statute in an alternative forum.

Consequently, the California Supreme Court ruled that an adhesive arbitration agreement abridging an employee’s right to acceptable discovery, judicial review, cost limitations, and punitive damages in a wrongful termination action against her employer is “substantively unconscionable” and thus unenforceable. In the key California Supreme Court case of Armendariz v. Found. Health Psychcare Servs., ruled that California common law “disallows forms of arbitration that in fact compel claimants to forfeit certain substantive statutory rights.” Armendariz v. Found. Health Psychcare Servs., 24 Cal. 4th 83, 99-100 (Cal. 2000). The same rule was cited in three  recent federal cases: Gelow v. Cent. Pac. Mortg. Corp. Circuit City Stores v. Adams. See 279 F.3d 889, 893 (9th Cir. Cal. 2002); Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1179 (9th Cir. Cal. 2003); Gelow v. Cent. Pac. Mortg. Corp., 560 F. Supp. 2d 972 (E.D. Cal. 2008).

Besides these common law rulings against arbitration, California’s statutory law also limits the use of arbitration. First, California Civil Code § 1668 states that “All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.” In other words, a contract cannot give a developer carte blanche to break the law without facing the consequences.

Second, California Civil Code § 3513 says that “Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” Attorneys’ fees, punitive damages, and other statutory remedies often have a public purpose, such as creating a disincentive for committing future wrongdoing. Consequently, the Ninth Circuit Court refused to enforce an arbitration agreement between a petroleum franchiser and a petroleum franchisee that failed to allow for attorneys’ fees and punitive damages, which were available under the Petroleum Marketing Practices Act. In the 1995 case of Graham Oil v. Arco Products Co., the court concluded that these remedies were “important to the effectuation of the PMPA’s policies.” Graham Oil v. ARCO Products Co. (9th Cir. 1995) 43 F.3d 1244.

Finally, the Armendariz court ruled that “[a]rbitration agreements that encompass unwaivable statutory rights must be subject to particular scrutiny.” Armendariz 24 Cal. 4th. This means that if your arbitration agreement limits your right to a specific form of statutory relief, it might not stand up to scrutiny in a court of law.

It is well known that arbitration, while a good alternative to litigation in many contexts, it drastically unfair when the participants are a regular person on one hand, and a giant corporation on the other. If you have a condo deposit and want a refund because you are unable or unwilling to close, do NOT agree to take the case to arbitration. With the assistance of an attorney experienced in condo contract litigation, take the case to court. At that point you can oppose the arbitration clause before a judge, who will hopefully rule in your favor on this issue.

Greg Weston is a graduate of Harvard Law School and experienced business attorney licensed in California and Florida. Mr. Weston’s San Diego-based practice focuses on representing individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com. Comments about the blog via e-mail are welcomed.

Can The Builder Sue Me To Close? California Law on Specific Performance in Residential New Contraction Contracts

If you have signed a contract to purchase new residential construction in California, such as a spec house or condo unit, but now do not want to actually close on the purchase, you might be wondering if there is a way the developer can force you to complete the purchase.

The answer, generally speaking, is no, the developer cannot force you to close. When a contract is breached (e.g., you don’t show up at closing), there are two types of remedies for the aggrieved party: damages (a court award of money) and specific performance (a court order compelling the breaching party to abide by the contract.)

Here is the rule, excerpted from a California State Court of Appeals case, on when specific performance is allowed:

Specific performance of a contract may be decreed whenever: (1) its terms are sufficiently definite; (2) consideration is adequate; (3) there is substantial similarity of the requested performance to the contractual terms; (4) there is mutuality of remedies; and (5) plaintiff’s legal remedy is inadequate.

Blackburn v. Charnley, 117 Cal. App. 4th 758, 766 (Cal. Ct. App. 2004).

In most cases requirements No. 4 and No. 5 cannot be met, making specific performance unavailable. Requirement No. 4 (“mutuality of remedies”) means the purchase agreement needs to give the buyer an equal remedy of specific performance against the seller in order for the seller to have such a right against the buyer. I have never seen a purchase contract that meets this requirement.

Requirement No. 5 (“plaintiff’s legal remedy is inadequate”) is more commonly phrased “no adequate remedy at law.” This means there has to be some reason why an award of money does not adequately compensate the seller for losses from the real estate buyer’s breach before the seller can compel you through specific performance to close.

The five requirements above are not either/or requirements. All five requirements must be met before a builder might be able to force someone who has contracted to purchase a property to close. While it is possible to think up a hypothetical where all five requirements will be met, in the real world such circumstances will rarely occur. And even if all the requirements are met, the buyer still has a number of other defenses. Remember, the rule is that if the five requirements are met, only then the judge may order specific performance. If the judge doesn’t feel doing so is fair, he or she may still decline decreeing specific performance.

Developers, whose lawyers have already explained the law to them, will often threaten a specific performance when a buyer refuses to close on a residential real estate purchase contract, hoping that buyers will be ignorant of this law.

Defaulting buyers should not be scared of this talk. California’s residential real estate law was specifically designed to shift a large part of the risk of a real estate downturn onto developers and off of home buyers and small scale real estate investors. If you have put down a deposit on a real estate deal, but now don’t want to close because of the drop in the real estate market or your own changed circumstances, it is a good idea to talk to a real estate lawyer to figure out what your options are. It is especially important that when you decide not to follow through on the purchase contract, you consult with a lawyer to take the proper steps to notify the developer and mitigate the developers damages.

Just don’t trust the self-serving statements made by your developer.

My fellow real estate law blogger Jared Beck has his own post on the law in Florida governing specific performance in real estate contracts.

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This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Greg Weston is an experienced business litigator licensed to practice law in California and Florida, and is a graduate of Harvard Law School. Mr. Weston’s frequently represents individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com.

Residential Real Estate Purchase Contract Cancellation in California: Several relevant laws apply

California Civil Code 1675 is not the only arrow in the canceling house or condo buyer’s legal quiver, just the surest. As I discussed here and here, C.C. 1675 allows the buyers to get all but 3% of the purchase price back from their deposit, but other rules may allow them to recover their entire deposit.

Under California Civil Code 3275, a plaintiff suing a developer for a return of a purchase deposit can argue that even more of his deposit should be returned than the “all-but-3%” of C.C. 1675. To survive a buyer’s motion for summary judgment, the defendant is burdened with producing evidence that it has been damaged by at least as much of the deposit it wants to keep. For example, in Timney v. Lin, 106 Cal. App. 4th 1121 (1st Dist. 2003) a buyer who was unable to obtain financing and had to cancel his purchase agreement demanded and received his entire deposit of $31,250 returned. Judge Stevens of the California Court of Appeal wrote that because the defendants “produced no evidence in the trial court demonstrating they suffered any cognizable damages” or that “it was impracticable to estimate the amount of any damages” that California law requires judges to “assume there were no such damages.” With no damages shown, the court awarded the buyer his entire $31,250 deposit back.

Had the buyer only relied upon C.C. 1675 he would have been entitled to $20,281.25 of his $31,250 back, with the seller keeping $10,968.75, or 3% of the purchase price of $365,625. Thus two different laws allowed him to recover his deposit back, one a partial refund, one a full refund.

 

Greg Weston is a graduate of Harvard Law School and experienced business attorney licensed in California and Florida. Mr. Weston’s San Diego-based practice focuses on representing individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com. Comments about the blog via e-mail are welcomed.

Allen v. Smith: A San Diego home buyer gets a big deposit refund

In my last post I explained that California has a strict rule that in most circumstances people who have put down a deposit on a house or a condo in the state are entitled to a refund of all but 3% of the purchase price from their deposit. Thus, for a million dollar condo with a 100,000 deposit, in California the buyer presumptively entitled to a refund of $70,000 from his $30,000 deposit.

This general rule has exceptions however. First, the buyer may have cause to rescind the house/condo purchase agreement, and receive a complete refund of his deposit. Or the seller may try to convince a court that it suffered damages in excess of 3% of the purchase price, though this is typically a difficult task. For the most part, however, when a buyer decides not to follow through and close on a condo purchase agreement, the seller may not keep any more deposit money than 3% of the purchase price.

One interesting example of a California buyer successfully suing to get most of her purchase price back involves a mansion right here in San Diego, in the Rancho Santa Fe neighborhood. The case is Allen v. Smith, 94 Cal. App. 4th 1270 (4th Dist. 2002).

In March 1999 Plaintiff Barbara Allen agreed to pay $1.775 million of the house of Defendants Frank and Jeri Smith. Allen put down an initial deposit of $20,000, and about two weeks later paid a second deposit of $80,000, just as the purchase agreement specified.

In May 1999 Ms. Allen told the Smiths that she was backing out of the purchase, and asked for a return of her second deposit of $80,000. The Smiths refused to return any money, so Ms. Allen sued.

So the position of Ms. Allen is that she should get $80,000 of her $100,000 deposit back because the second payment really wasn’t a purchase deposit. The Smiths’ position was that they should get to keep all of the deposit because the plain words of the purchase agreement that Ms. Allen signed said the deposit was “nonrefundable.”

The California Court of Appeals, however, give neither side exactly what it wanted, but instead followed both the spirit and the letter of California law, and let the Smiths keep 3% of the purchase price from the deposit, and ordered them to return the rest of the money to Ms. Allen. Ms. Allen’s $100,000 deposit was 5.6% of the purchase price, so the Smiths had to return 2.6% back, or $46,750.

Greg Weston is a graduate of Harvard Law School and experienced business attorney licensed in California and Florida. Mr. Weston’s San Diego-based practice focuses on representing individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com. Comments about the blog via e-mail are welcomed.

Condo Buyers Need to Hire a Lawyer to Get Refunds of Their Condo Deposits

California Condo Buyers Who Decide Not to Close On Their Units Are Usually Entitled to a Partial Refund of Their Condo Deposit. A Smart Investor Who Wants to Cancel His Condo Contract Should Hire a Lawyer to Protect His Rights, Guide Him Through the Process, and Secure a Favorable Settlement

There was a flurry of litigation between condo buyers and sellers in 2007, and there will much more in 2008. My fellow condo contract lawyer Jared Beck covered many such suits filed in Florida over on his blog.

Most of the litigation boils down to three types of disputes: the developer not opening the building on time, the developer not building the same building that it promised to buyers, and the developer illegally keeping an excessive amount of the deposits in collecting from potential buyers.

The focus of this post is on this last type. Increasingly people who have put down large deposits on pre-construction condominium units are deciding they do not want to close. These defaulting purchasers are in most cases entitled to some of their deposit back, but frequently the developer refuses to follow the law.

Developers have obvious reasons for not following the terms of their own contracts as well as state and federal law, all of which usually require a partial refund of a buyer’s deposit if the buyer decides not to close. First, most buyers don’t know their rights, and won’t even try to get the refund they are entitled to.

Second, the developers themselves may not even realize that state and federal law usually require them to give partial refunds of deposits to buyers.

Third, even if the developers do know that they are supposed to give partial deposit refunds, they often simply make the business decision to refuse to follow the law until the buyer forces them by filing a lawsuit. If only 20% of buyers sue, then the developer has to give 20% of its canceling condo buyers refunds, but keeps the full deposits on the other 80%.

Even when buyers do know their rights and demand a partial refund, sometimes the developer simply ignores their letters and phone calls demanding the partial refund. Every major developer has its own army of lawyers, and until the buyer hires his or her own lawyer, the developer can usually get away with ignoring letters from buyers threatening to sue. The developers know from experience that when a buyer threatens to sue but hasn’t hired a lawyer, it is usually an empty and idle threat that will never be followed up on.

California Condo Contract Cancellation Law

People who purchase condos in California usually put 10% to 20% of the purchase price down as a deposit. However, if they decide not to close, in most circumstances they are entitled to get all but 3% of the purchase price back under California’s laws protecting buyers of new condo units. So someone who puts down a $90,000 deposit (15%) on a $600,000 condo and then decides not to close is probably entitled to get $72,000 of his $90,000 deposit back, while only losing $18,000 (3%) to the developer.

The buyer must be careful, however, that he properly gives notice that he does not intend to close. Usually the buyer should inform the seller and the escrow company as soon as possible of his intention not to close, and make a properly formatted demand for most of his deposit back.

At this point the clock starts ticking for the developer. If the developer follows the proper procedure and proves the buyer’s default is more than 3% it might be able to keep more than the standard 3%, but the developer must first send the defaulting buyer certain financial documents showing why it is entitled to more than 3%. The deadline for the developer to do this is fairly tight.

A smart buyer with a good lawyer will then review these documents if the developer does try to keep more of the deposit, challenge the documents if necessary, and then file a response disputing the developer’s calculations if their are any flaws or questionable assumptions. The buyer’s lawyer will also demand through the litigation discovery process the developer’s internal financial data to dispute/verify the developer’s information, as well as file subpoenas demanding employees of the developer submit to depositions.

The best case for a buyer is if the developer does not file any documents on time, and then right after the deadlines expire file suit against the developer for the deposit refund. You’d surprised at how often a developer will fail to properly respond to a buyer’s demand for a partial refund out of sheer negligence. But again, if you are going to be able to take advantage of the developer’s mistakes, you will need a lawyer who is able to recognize and jump all over them. Being represented by counsel also allows you to negotiate a settlement with the developer from a position of strength, sometimes before even filing suit, getting you most of the deposit refund you’re entitled to sometimes in a matter of weeks.

Greg Weston is a graduate of Harvard Law School and experienced business attorney licensed in California and Florida. Mr. Weston’s San Diego-based practice focuses on representing individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com. Comments about the blog via e-mail are welcomed.

Jingle Mail and California Law: Giving the mortgage back to the bank

If you owe $800,000 on a $550,000 house, and give the bank the $550,000 house, can the bank then try to collect the $250,000 difference? Or to use the legal terminology, can the bank seek a deficiency judgment?

The answer, in California, is probably not. California Code of Civil Procedure §580b states:

No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.

In plain English, this means California is for most homeowners a non-recourse state when it comes to “purchase money mortgages.” These are mortgages, including in some cases second mortgages, that were taken out in order to purchase a house that the buyer actually lived in.

California’s Anti-deficiency Laws: Who’s Protected

Three major groups of California mortgage debtors are thus excluded from the protection of California’s pro-homeowner C.C.P. 580b: (1) Investors who purchased homes in order to flip them without ever intending on living or renting in them (2) investors who purchase a property as a rental (3) homeowners who take on additional mortgage debt after purchasing their house.

California also has a second law protecting mortgage debtors from their banks: C.C.P. 580d. This law covers all housing debt, including HELOCs, home improvement loans, and 2nd mortgages, but the law only applies to non-judicial foreclosures. These creditors can still collect the remaining debt in a judicial foreclosure.

Anti-deficiency Laws in Practice: An Example

Here is a scenario showing how 580b and 580d work together:

Bob purchased a house with $0 down and a 500K interest-only mortgage. After the value of his house went up he took out a 2nd mortgage, on which he owes 100K. Now his house is worth 400K and has 600K in mortgage debt.

Let’s say Bob stops paying and his house is foreclosed and sold for 400K. That leaves 200K in debt unpaid. The first lender gets all of the 400K, but cannot get the 100K remaining that Bob owes.

The second lender now has a choice. It can just eat the entire 100K loss, or it can go the route of a judicial foreclosure. The bank probably won’t do that if Bob has little assets and lots of debt, but if Bob has a high-paying steady job the lender just might try: $100,000 is a lot of money to lose.

In these circumstances, Bob’s best strategy is probably to stop paying the 1st mortgage but to keep paying the 2nd. There are a lot of complicated rules and strict time limits involved with a judicial foreclosure. If Bob keeps paying lender 2 while he stops paying lender 1 and waits for lender 1 to foreclose, the chance of lender 2 noticing and undertaking the complicated judicial foreclosure process on time is lower than if Bob stiffs both lenders at the same time. Further, the amount owed to lender 2 will decrease as payments keep getting made, so the value of seeking a deficiency judgment decreases.

It’s Best to Talk to a Lawyer First

Someone considering walking away from their mortgage but wants to protect his income and his other assets from his banks would best be advised to seek the assistance of a licensed California attorney who could advise them on a number of issues, such as:

– Can the bank use some other legal means of pushing its loss onto the former owner, for example under an equitable or tort theory? Assuming the bank tries, does it have any chance of winning?

– Does 580b protect a homeowner who bought a condo as an investment and rented it out for a year, then moved in himself, and then stopped paying the mortgage?

– What are the state and federal income tax consequences of a foreclosure?

Lawyers are not cheap, but the mortgage companies all have their own army of lawyers and collections personnel. Would you really want to go it alone against them?

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Greg Weston is an experienced business litigator licensed to practice law in California and Florida, and is a graduate of Harvard Law School. Mr. Weston’s frequently represents individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com.