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Top 10 Legal Rulings Set Course for Real Estate Activities

January 25, 1987|DAVID W. MYERS

Although the battle over tax reform snared many of last year's headlines, 10 other legal and legislative decisions rendered in 1986 will have an equally large impact on developers and the rest of the real estate industry, a prominent real estate attorney says.

Phillip R. Nicholson, a partner of Los Angeles-based Cox, Castle & Nicholson, says last year's decisions continued three major trends in the real estate industry.

The first trend, he says, is the continued expansion of the concept of good faith and fair dealing. Courts and the Legislature are increasingly "reading in" or "reading out" certain parts of contracts in an effort to be fair to all parties involved, Nicholson says.

The second trend is a continuation of the "deep pockets" concept, through which the damages a well-heeled party has to pay is often disproportionately higher than its degree of fault.

The final trend, perhaps best symbolized by the overwhelming voter approval of Los Angeles' Proposition U, is the greater control government and voters are exercising over property they don't own.

Although some of the "Top 10" 1986 actions the attorney cites as evidence of the three trends dealt with megabuck real estate deals, they may also have a broad impact on homeowners, renters and small real estate investors.

As an example, he says, a case involving a huge pension fund and a large real estate partnership could eventually affect home-mortgage seekers across the nation.

In Teachers Insurance & Annuity Assn. vs. Butler , the pension fund/lender--Teachers Insurance--successfully sued the partnership's general partner, Butler, after Butler refused to accept a $20-million loan that the two parties had agreed to earlier. Butler claimed he refused the loan because of a contractual technicality. But there was a strong indication that Butler wanted out of the deal because interest rates had dropped sharply since the preliminary loan documents had been signed.

Teachers Insurance was awarded more than $3 million in damages. The decision could encourage other lenders to pursue home buyers who try to back out of preliminary loan agreements, Nicholson said.

A tenant's right to sublease an apartment was broadened by the state Supreme Court in Kendall vs. Ernest Pestana Inc . The court ruled that, in some cases, a landlord must have a "commercially reasonable objection" in refusing a subleasing arrangement. The justices emphasized that a landlord can't stop the tenant from subleasing to a third party if the landlord's decision is based on purely economic motives, personal taste, convenience or even sensibility.

Both Teachers and Kendall expand the concept of "good faith and fair dealing," Nicholson said. But while that may be a noble cause, he added, the expansion is making it "much more difficult to know what our obligations are under our contracts.

"We may find ourselves in breach of our contracts by virtue of a court having determined, subjectively, that we breached the covenant of good faith and fair dealing."

Nicholson said a widely publicized case involving a woman who successfully sued the homeowners' association at her condominium complex is evidence of the second trend that emerged from last year's court decisions--a continuance of the "deep pockets" concept.

The case, Frances Troy vs. Village Green Homeowners' Assn. , involved a woman who was raped and robbed shortly after she complied with an order by the association to take down extra security lighting outside her unit. The California Supreme Court ruled that a homeowners association, like a landlord, has control over the common areas of a project and thus could be held to a landlord's standard of care.

"This decision is definitely having a chilling effect on homeowners associations," Nicholson says. Owners are growing more reluctant to run for their association's board of directors, and insurance policies for associations and their directors are growing more difficult and expensive to obtain, he said.

The trend toward greater government and public control over private property was evidenced by the passage of Proposition U, in which Los Angeles voters approved an initiative that reduces by one-half the floor-to-area ratio of new construction in most parts of the city.

Other slow- or no-growth measures passed in cities across the state--as well as the imposition of new fees on developers and tough rent-control ordinances--are "further proof that our private-property rights are being eroded," Nicholson says.

The attorney says most of the court decisions and legislative actions last year concerning those rights were especially bad for developers. However, he added, "a more optimistic trend may be developing in the federal courts"--if you're a builder or landlord, that is.

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