USP 150 Quiz 5

Breach of Purchase and Sale Agreement

- Anticipatory breach of PSA (breach before the time of performance, one party indicates they will not fulfill their contract)
- Pursuing rights and remedies for breach of PSA

Remedies for breach of PSA

- Specific performance
- Rescission
- Damages
- Foreclosure

Specific Performance

Making the breaching party fulfill their obligation
-- in case of PSA, may force seller to convey deed

Rescission

Undue contract (can benefit buyer or seller)

Damages

Recover monetary damages (make payments)
-- for PSA: loss of bargain is market value - contract price
-- if buyer is the breacher, seller keeps deposit

Foreclosure

ability to foreclose on property (if it has been conveyed or not)

Breach of Lease

- anticipatory breach of lease
- pursing rights and remedies for breach of lease (informally resolve or litigation)

What is different about a breach of lease versus breach of PSA?

- Parties have an on-going relationship while the lease exists
- Tenant has exclusive use right during lease term & landlord has reversion claim after lease ends
- For a PSA, the relationship between parties ends with transaction is finished

Landlord Options Upon a Tenant Breach

- Terminate lease ad pursue damages
- maintain lease in effect, and sue for rental amounts as they come due
- bring ejectment action to regain possession and past due rent (long process)
- bring unlawful detainer to action to regain possession and past due rent (usually takes 30-45 days)

The Unlawful Detainer Process

- landlords are provided a summary eviction remedy through "unlawful detainer" actions
- the processes is governed by the California Code of civil procedure
- These actions are given priority for trial over other civil actions

Forcible Entry and Detainer Statutes

- Unlawful detainer proceedings are creatures of statute
- They replaced the old common law "self-help" remedy
- Forcible entry and detainer is now expressly proscribed

What is an unlawful detainer?

a legal term used primarily in landlord-tenant law. It refers to a situation where a tenant remains in possession of a rental property without the legal right to do so

Punitive damages

Monetary damages that may be awarded to a plaintiff to punish the defendant and deter similar conduct in the future.

Compare abandonment by Tenant

- Separate statute deals with abandonment - different process than unlawful detainers
- Landlords can regain possession without court judgement for possession
- Landlords must carefully read and follow all the procedural requirements of statute

Lawful grounds for unlawful detainer

- tenant's wrongful holding over past expiration of the lease term
- tenant's breach of lease by failing to pay rent or by failing to perform other obligations under the lease
--- in either event, possession of the subject real property must be in issue

Three Day Notice

- "pay or quit" or "perform or quit"
- forfeiture declaration
- failure to pay rent as basis for notice
- breach of lease covenants as basis for notice
- Holdover tenants

The Judicial Process

- jurisdiction and venue
-- state superior courts
-- proper venue
- Summons and complaint
- tenant's response
--- 5 days to respond

Eviction Trial

- Trial date is set by the court after the case is "at issues": all defendants have been served & answered / or not
- trial scheduling requirement: within 20 days of filing
- Jury
- Burdens of proof

Judgement in an unlawful detainer action may adjudicate the following

- which party is entitled to possession
- whether any past-due rent or other damages should be awarded
- the amount of costs, including attorney's fees (if provided for in the lease), to award the prevailing party

Post-judgement Eviction process

- writ of possession
- eviction by sheriff or marshal
or
- no post-judgment activity if tenant prevails at trial

writ of possession

a court order that gives law enforcement (usually the sheriff or marshal) the authority to physically remove a tenant from a property after an eviction judgment has been made in favor of the landlord

Real Estate Finance Players

- Borrowers (people, entities)
- Lenders
- Investors
- Regulators (federal or state)

Real Estate Finance Building Blocks

- Capital: money used to acquire assets
- Debt: borrowing money
- debt financing: using borrowed money to finance project
- Equity (investment or funds): cash used to finance
- Equity (in the property): full value of property - debt in property = equity

The Capital Stack

Details the sources of capital used to acquire and finance a real estate transaction

Common equity

An investors money in a transaction that reflects basic ownership
- highest upside potential
- can receive cash flow distributions
- basic ownership interest with with potential tax benefits
- no collateral
- last to be repaid
- higher risk

Preferred Equity

An investors money that has certain benefits above basic ownership
- less upside than common equity
- higher yield than debt
- receives payments before common equity
- higher risk

Mezzanine Debt

A secondary loan against the ownership of a property
- Higher returns than senior debt
- secured by ownership shares of the property
- Repaid after senior debt but before equity
- Medium risk

Senior Debt

The primary mortgage on a property
- No gains from appreciation
- fixed interest payments
- collateralized by the property
- first to receive repayment
- lower risk

Use of leverage (using loaned funds to increase personal value)

Pros: less risk since you are using another person's money
Cons: increase risk of losing property, reduces flexibility & control for borrower
-- because of risks, debt is cheaper than equity

Why is it important to know who owns real estate?

To know where and who is getting the value of the property

Unsecured debt

a loan in which repayment is promised without any collateral being pledged to back up the promise

secured debt

a loan in which repayment is promised, and collateral is pledged to back up the promise

Types of secured debt

- Promissory note: must be signed by the person obligated to pay
- collateral pledge or security agreement: written agreement describing the collateral
--- real estate collateral recorded with county recorder
--- personal collateral is filed with secretary of state

Need both to create a secured debt with collateral

California Deed of Trust

Three Party arrangement
- trustor
- beneficiary
- trustee

-- Identified secured obligation
-- power of sale clause
-- recordation establishes priority of lien created

Power of sale clause

a provision in a mortgage or deed of trust that gives the lender the right to foreclose on a property without having to go to court, if the borrower defaults on the loan.

Recordation established priority of lien created

the order in which liens are recorded in public records determines their legal priority—that is, who gets paid first if the property is sold or foreclosed.

Recourse loan

a loan for which the debtor is personally liable

Nonrecourse loan

the debtor is not personally liable

Whether debt is recourse or nonrecourse can be decided by agreement, but

- certain loan types are nonrecourse debt as a matter of law
- refinancing or modification can change a debt from nonrecourse to recourse
- a nonjudicial foreclosure changes the debt from recourse to nonrecourse

Three Pillars of CA Real Estate Secured Debt

- Anti-deficiency protection for "purchase money" loans
- Anti-deficiency protection for nonjudical foreclosures
- One-action rule promoting "collateral-first" policy

Anti-deficiecy protection for "purchase money" loans

a legal safeguard that prevents lenders from suing a borrower for any remaining balance (the “deficiency”) if the property is foreclosed and sold for less than the loan amount.

- when you refinance you lose your anti-deficiency protections

Anti-deficiency protection for nonjudicial foreclosures

if a lender forecloses on your property without going through the court system (i.e., via a nonjudicial foreclosure), the lender is barred from pursuing you for any remaining loan balance after the foreclosure sale

- if it is a recourse loan & you do this it would essentially make it a nonrecourse loan

One-action rule promoting "collateral-first" policy

Shield aspect - the borrower can compel the lender to look to the collateral first

Sword/sanction aspect - the borrower can obtain a lien release if the rule is violated

Guaranties

- secured or unsecured debt can be guaranteed by a third party
- terms of the guaranty govern the rights of the lender and the guarantor
- guaranties may be unsecured promises or secured promises

Does the guarantor have the right to pursue the obligor to recover a loss?

Yes, it is the right of subregation

Why does a lender charge interest?

Time value of money
When a lender loans money they would be losing money

There are different types of interest

- fixed
- variable or ajustable
- convertible

Usury laws

laws that set maximum interest rates that lenders can charge on loans. These laws are designed to protect borrowers from excessively high or predatory interest rates and ensure that lending practices are fair and reasonable

Loan considerations impacting loan terms

- loan to value comparison
- debt service coverage ratio
- net worth of property/borrower/guarantor
- release prices for subdivisions

Due Diligence

- Helping clients to analyze possible project sites and navigate local regulations that might limit land use
- Analyze a property's history, applicable regulations, and other factors might affect a client's business plan

Entitlements

- the legal approvals and rights needed to develop or use a property for a specific purpose.

Regulatory Lawerying

- advising clients on their business practices
- interpret and apply federal, state, & local law
- compliance & creative solutions
- strongly worded letters

Three Pillars of Land Use

- Regulatory lawyering
- Due diligence
- entitlements

Traditional Zoning

- Separates land uses into different zones, such as residential, commercial, and industrial "Euclidian" zoning
- Identifies use and development standards

Form Based Code

way to regulate development that focuses on the physical form of buildings rather than land uses

Form Districts

determine how large buildings can be

Frontage Districts

influence how buildings appear from the street level, from their proximity to the street to their ground floor height requirements

Development Standards Districts

regulate certain designs around the building, including those relating to access parking, and signs

Use Districts

determine what kinds of activities are allowed on a property-- ranging from residential to commercial and, in some instances, a mix of uses

Density Districts

determine the number of housing units permitted on any site zoned for residential units

Overlay

provide additional development controls. They function as tailored zoning districts, each with their own special set of regulations

Ministerial approval

administrative decision by staff
- application of fixed standards or objective measurements
- building permit, site plan review / approval

Discretionary approval

Approval or denial by decision-maker
- city staff, hearing officer, planning commission, city council
- exercise of judgement / deliberation
- Public notice and findings required;; appeal available; planning group recommendation required

Real Estate Collateral foreclosure

- foreclosure allows the lender to sell the real estate collateral and use the profits to pay down/off the secured debt
- Two methods for real property foreclosure
- Very different processes and consequences
- The lender makes the choice of which method to use

Senior and Junior Liens

- Senior liens have priority over subject lien
- Senior liens transfer with foreclosure
- junior liens are wiped with transfer
- Junior liens can be paid if there is a surplus of money after sale

-- If there is no third loan (junior lien) any extra cashflow goes back to original owner

Most common type of foreclosure in California

Nonjudicial (does not involve court)
- faster
- less expensive

California Foreclosure Process

1. Notice of Default
2. Notice of Trustee Sale
3. Trustee's Deed

- Buyer can stop this/cure default up to 5 days before sale

Notice of Default

Start of the foreclosure process. Initial notice recorded after borrower fails to meet the terms of their loan.

- by statute lender must try to work something out with buyer. For example a deed in lieu of foreclosure

Notice of Trustee Sale

Trustee is escrow company

Sets auction date. Can be recorded 3 months after Notice of default

Trustee's Deed

Transfers property to winning bidder. By default, this will be the lender, if no bid higher than the lender's opening bid is received.
- Need to serve eviction notice (follow unlawful detainer statute)

Nonjudicial Foreclosure

- Timing to Sale: 3 months and 21 days from notice to sale
- Reinstatement: debt can be paid off up to 5 days prior to sale
- Bids: lender can credit bid some or all of the debt, while other bidders must have cash bids
- Market value: relevant only as an influence on bidding
- Deficiency: none; loan becomes non-recourse as to borrower
- Trustee Sale Guarantee = title insurance for foreclosure sale
- Trustee's deed = form of title document given to winning bidder

Judicial foreclosure

- requires court hearing
- Timing: court process with attendant delays
- Deficiency: determined by the court based on the market value of the subject property
- Judgment collection: by traditional judgment collection methods
- Redemption: borrower has a right of redemption for up to one year after the foreclosure sale (new owner would have to sell it back)

Why do lenders choose to judicially foreclose?

- disputed default
- non-monetary default or unliquidated debt
- no power-of-sale clause in deed of trust
- want court to appoint a receiver (professional appointed by court to take care of property)
- must resolve disputed lien priorities
- want to pursue guarantor in singular proceeding
- deficiency judgment considerations

Guest lecturer's land use hierarchy

General Plan and Area plans (top)
Master Plans and Specific Plans (middle)
County codes and zoning ordinance (bottom)

California Environmental Quality Act

- requires public agencies to consider environmental effects of a project
- applies to discretionary actions