The Letter of the Law: February 2015

IN THIS ISSUE:

REAL ESTATE LAW: How to Partition Real Property - The Basics

REAL ESTATE LAW: Are Co-Tenancy Agreements Enforceable

NEVADA LAW: Nevada's Newly Established Intermediate Appellate Court

How to Partition Real Property - The Basics

By: Lance Adair

It is common for two or more individuals or business entities to hold title to real estate as co-owners, also known as "tenants in common." In this type of ownership, each party owns an undivided interest in the whole. This may work well as long as the parties agree on what to do with the property. But what happens when the relationship sours or the parties otherwise reach an impasse?

California law expressly provides that a co-owner of real property is entitled to separate the common interests. The means by which this is done is an action to "partition" the property. Except in the relatively uncommon case of a waiver or some other equitable defense, the right of partition is an absolute right.

A partition action may be used by parties who hold successive estates-such as a life estate and a remainder. Partnership property may also be partitioned.
Some of the basics of a partition action are:

  • Each co-owner has the right to seek a court judgment partitioning the property - no special reason and no special proof is required.
  • There are different methods of partitioning property, each one suited to particular circumstances. Unless the property is reasonably capable of being physically divided in some fair and equitable fashion, the method most likely to be used is a partition by sale. In a partition by sale, the property is sold at the best possible price and the proceeds of sale divided among the parties according to their respective ownership interests. Another method of partition is for one or more of the co-tenants to acquire the property of another co-tenant at its appraised value.
  • Partition actions can be-and typically are-resolved by agreement of the parties. While there are few guarantees in life or in the law, the co-owner who is unreasonable may become more reasonable when he or she realizes that a partition by sale (or by some other method) is inevitable. With a reasonable degree of cooperation, the parties can set the terms and other parameters of the sale in advance. If the parties are unable to agree, the court can appoint a "referee" to sell the property.

Again, these are some of the more basic concepts of a partition action; there is much more complexity in the law. The key is to find a legal advisor who can efficiently guide you through the process.

Are Co-tenancy Agreements Enforceable?

A recent decision by the California Court of Appeal answers this question to a large extent, and the answer is... it depends!

In Grand Prospect Partners LP v. Ross Dress for Less, Inc. (2015) 182 Cal. Rptr. 3d 235, the Court looked at a co-tenancy clause agreed upon by two sophisticated parties to a commercial retail lease, and addressed the issues of whether the clause was unconscionable and/or an unenforceable penalty. It found that despite the relatively equal sophistication of the two parties, under some circumstances, the co-tenancy agreement can constitute an unenforceable penalty and be unenforceable, although it may not be unconscionable.

Ross Dress for Less (Ross) signed a commercial lease with a sophisticated landlord called Grand Prospect Partners LP (landlord) wherein Ross agreed to lease space at a commercial retail shopping center, contingent on the "anchor" tenant, Mervyn's, being a co-tenant. Not long after the lease was signed, Mervyn's filed for bankruptcy and later closed their store at that retail shopping center location. Ross exercised its rights under the lease and did not move into the retail space and did not pay rent. The landlord sued, alleging that Ross was obligated to pay rent for the full 10 year term of the lease because the lease terms authorizing rent abatement and termination were unconscionable or, in the alternative, an unreasonable penalty and thus unenforceable.

The landlord won at the trial level with a jury verdict of roughly $3.8 million, comprised of $672,100 for unpaid rent and approximately $3.1 million in other damages. Both parties appealed and the Court of Appeal affirmed in part and reversed in part, reducing the damages to $672,100. This represented the unpaid rent only.

The Court of Appeal noted that there was no unconscionability because such a finding requires both procedural and substantive unconscionability. Because both parties were sophisticated and experienced in the negotiation of commercial leases, and the terms were reached by way of a free and unpressured choice, there was no procedural unconscionability in the transaction. The agreement was not unenforceable on unconscionability grounds.

The Court also noted that as a general rule, a contractual provision is an unenforceable penalty if the value of the property forfeited under the provision bears no reasonable relationship to the range of harm anticipated to be caused if the provision is not satisfied. In this case, the Court held that there was no reasonable relationship between $0 of anticipated harm due to Mervyn's not being open and the forfeiture of $39,500 per month rent. Ross failed to show what harm would arise in the event that Mervyn's was not a co-tenant. Because Ross did not show what damages they anticipated, the Court concluded that the rent abatement provision was an unenforceable penalty. On that basis, the Court awarded the landlord the amount of the unpaid rent.

The lesson to be learned from this particular case is that if you are the landlord, you should consider whether to allow such a co-tenancy agreement at all. If you are a tenant and want to enter into a lease conditioned on a co-tenancy, make sure that you can prove a reasonable relationship between the value of the property being forfeited and the range of harm to be caused if the provision is not satisfied.

Nevada's Newly Established Intermediate Appellate Court

By: Jon J. Carlston

In November 2014, voters in Nevada voted to amend the Nevada constitution to create an intermediate appellate court. Until the passage of this amendment, Nevada was one of ten states that did not have an intermediate appellate court. The Nevada Supreme Court was the only appellate court in Nevada hearing and deciding appeals from final judgments entered by Nevada's 82 district court judges. As a result, Nevada's Supreme Court was one of the busiest in the nation. Each of its seven justices was averaging approximately 333 cases per year - more than three times the American Bar Association's ("ABA") recommended 100 cases per year.

Historically, the Nevada Supreme Court has had the highest number of filings of all states without an appellate court. This backlog forced the Nevada Supreme Court to resolve most appeals through unpublished written orders that only bound the parties to the appeal. The lack of published opinions has arguably led to the same issues being litigated repeatedly. The new intermediate Court of Appeals is designed to decide the more routine cases, thus allowing the Supreme Court to issue more published opinions affecting or modifying Nevada's existing laws. In the past, the Nevada Supreme Court typically issued precedent-setting published opinions in 3 to 4 percent of all appeals. This Court of Appeals should also provide for speedier resolution of appeals. Currently, it takes approximately 18 months for an appeal filed in Nevada to be decided.

The new Court of Appeals will use the "push-down" model. Appeals filed in Nevada will continue to be filed with the Office of the Nevada Supreme Court Clerk, and will remain assigned to the Supreme Court until they are ready to be decided. The Supreme Court will then decide which matters should be assigned to the Court of Appeals. Approximately 700 cases each year will be assigned to the three judges on the Court of Appeals. The Supreme Court will establish the types of matters to be reviewed by the lower court. It will also be possible to seek review of a decision made by the Court of Appeals to the Nevada Supreme Court. However, the Nevada Supreme Court retains the sole discretion to accept petitions for review, and such review will only be granted in extraordinary cases. This deflective model will allow the Supreme Court to speed up the appeals process by assigning cases to the lower court, while retaining those cases that raise questions of first impression or issues of important public policy. This will result in more published opinions that establish guidance on Nevada law, improved decisions in the district courts, and improved access to the appellate process.

This Court of Appeals will consist of three judges, but the Nevada Legislature law increase the number of judges. The initial three judges were appointed by a selection process and will serve terms of two years. After this initial two year term has concluded, the judges of this court will be elected in the general election to serve a term of 6 years, similar to all judges in Nevada.

The newly established intermediate court began its work in January 2015. Its initial members are the Honorable Justices Abbi Silver, Jerome "Jerry" Tao, and Michael Patrick Gibbons. The Court is based in Las Vegas, Nevada, and is housed inside the Regional Justice Center in downtown Las Vegas.

NEWS AND EVENTS:

Announcing a New Office Location in Temecula, CA

We are pleased to announce the opening of our new Temecula office, located on Old Town Front Street, close to the new Temecula Civic Center. Lance Adair, a seasoned litigator and business advisor, will be heading up the Temecula office. Lance is rated "AV-Preeminent"© by Martindale-Hubbell (their highest peer-review rating). His practice will continue to emphasize real estate, land use and construction, including both transactions and litigation.

Kring & Chung Lawyers Named to 2015 Southern California Super Lawyers List

Kring & Chung, LLP is please to announcement that Kenneth W. Chung has once again been named to the Southern California Super Lawyers list. This is the fifth consecutive year Kenneth Chung has received this honor, and the second consecutive year for Laura Hess. Super Lawyers is a rating service of outstanding lawyers from various practice areas who have attained a high-degree of peer recognition and professional achievement.

A patented multiphased selection process includes independent research, peer nominations and peer evaluations. Each candidate is evaluated on 12 indicators of peer recognition and professional achievement. Selections are made on an annual, state-by-state basis with no more than 5% of the attorneys in California being selected as Super Lawyers.

SCORE Workshop - Avoiding Employment Related Litigation

Partner, Allyson Thompson of our Irvine, CA office will be presenting a workshop on how to avoid employment related litigation from 5:00 p.m. to 8:00 p.m. on March 24, 2015 at Lake Forest City Hall located at 25550 Commercentre Drive, Lake Forest, CA 92630. This workshop covers the potential pitfalls of employment issues and how these mistakes can lead to costly litigation. Topics include the hiring process and avoiding discrimination; employee handbooks; wage and hour issues; overtime and meal/rest breaks; handling internal complaints; discipline and performance reviews; independent contractor vs. employee; and wrongful termination. A question-and-answer session will follow her presentation. There is no cost to attend the workshop.