Issue 1
Beware of Open Ended Replacement Home Contingency

Have you ever had a buyer ready to purchase a home only to have the seller refuse to close escrow because he could not find a suitable home? Have you been frustrated because it does not appear that the seller is even trying to find another home? In recent months I have seen this scenario occur several times. Frustrated buyers have talked to me about their frustration because they could not make the seller close escrow or even make the seller look for another home. In one instance, a deal had not closed for almost a year while the sellers "looked" for a new home to buy. As you can imagine, at the rate home prices are rising, the seller who has been "looking" for almost a year is virtually priced out of the market for a comparable or better home if they sell at the agreed upon price. I hope this article will give you a clearer understanding of the issue and help you avoid it in the future.

Giving the seller an open ended contingency allowing him to condition the sale on his finding a new home as a condition of the sale is fraught with danger for your buyer. Unlike many of the contingencies specified in the CAR form, the new home contingency is one which often appears in a counter proposal drafted by the seller's agent. Unlike the CAR form, the new home contingency often does not contain a time deadline by which the contingency must be waived. Because a suitable new home is such a subjective choice for the seller, an unmotivated seller can merely look around casually without the pressure of having to commit to moving even where the buyer has fully performed.

Because the average seller and the buyer are often only concerned with a few terms - the purchase price, the amount of time for closing and who will pay the costs associated with the sale of a house (such as title reports, inspection costs and repair of items within the purchaser's inspection report, etc.), they do not bother to read or understand the remainder of the contract. Thus, when one the seller cannot find a new residence or simply changes his mind about selling the home, the buyer is surprised that she cannot compel the sale. This leads to frustration and anger sometimes directed to the agent for failing to explain the ramifications of such a term.

Normally, in determining whether one party or the other has a claim, it is important to review the entire contract to make sure that each contingency in the contract has been met and that the party attempting to enforce the contract has performed all of the conditions required of her by the contract. If the party attempting to enforce the contract has not complied with all of her conditions or if a contingency of the contract has not been met (as an example, the buyer obtaining financing or the seller finding a new residence), she cannot enforce the contract. The problem with our scenario is even if each party may have complied with all of the necessary conditions or such conditions have been waived, except the new home contingency, the seller simply does not have to complete escrow until he finds a suitable home. A seller who simply decides not to look for a new home may be in breach of the implied duty to act in good faith to comply with the terms of the contract, but this is very difficult to prove because allowing the seller to condition the sale upon his finding a "comparable" or "suitable" house is too subjective and the seller can simply state that he has looked but found nothing suiting his needs.

The problem with such a clause is two fold. First, there is no time period by which the buyer or the seller must find the home or waive the contingency. Second, there is nothing in such clauses which provide any parameters on the search or require them to even look for a new replacement residence. Because of this, the end result of such clauses can be that the buyer, has expended time and money in obtaining financing and has given up an existing residence, but then has nowhere to go and no resources to find a new residence until the deposit in escrow is returned.

To avoid this problem, I would propose that in any clause containing such a contingency, that the contingency be waived within a certain period of time. If there is a time limit within which the seller must find the house or waive the condition, then there is not problem with the clause. The buyer will know within a reasonable time whether the sale will go through. The problem that arises is that with the open ended clause, the buyer not only ties up her resources, by depositing money into escrow and obtaining a loan, but will often give up her present housing in contemplation of the close of escrow.

The reason for this is that allowing a seller to have such an open ended clause gives him all of the power to close or not to close when all of the other conditions are met. Thus, as in several cases that have come to me, loans obtained by buyers have been lost and buyers were not in a position to fund after the previously set closing date. In other words, once the loan documents are signed, closing must occur within a preset number of days, often 5. In order for there to be an extension of the funding date, the buyer then has to pay a penalty which is set by the lender and could equal several thousand dollars.

If seller is not willing to commit to such a time frame, a good buyer should be wary that the seller may not really be motivated to sell but is merely testing the market to see whether he can get a better price for his house.

RECENT CASES

The holder of a deed of trust can bring an inverse condemnation action without involving the mortgagors where the deed of trust specifically assigned to the holder a right to recover an inverse condemnation judgment.

D&M Financial Corp. v. City of Long Beach (2006) 136 Cal. App. 4th 165.

FACTS
In this case, the City of Long Beach did not follow its customary practice of obtaining a title report before sending a 10-day notice of intent to demolish an allegedly substandard apartment building, and the trust deed holder did not receive notice until the day of demolition of the building. The deed of trust assigned to the trust deed holder the right to recover an inverse condemnation judgment.

DECISION
The Court determined that when the City failed to give notice to all interested parties, including the trust deed holder, it violated constitutional due process rights of the trust deed holder. Further, because the trust deed holder was the party who had the right to recover for an inverse condemnation judgment, the Court determined that the trust deed holder could bring a lawsuit for inverse condemnation against the City, even without joining the true owners (mortgagors) of the property.

California Appellate Court decides that a Los Angeles City Municipal Code prohibiting landlords from raising rents 90 days after non-renewal of a Section 8 housing contract is invalid.

Apartment Association of Los Angeles County, Inc., et al, v City of Los Angeles, (2006) 135 Cal.. App. 4th 119.

FACTS
The City of Los Angeles enacted an ordinance, Los Angeles Municipal Code § 151.04B, that prohibited local landlords, after the termination or renewal of a Section 8 housing contract, from charging a tenant more than the tenant's portion of the rent under the former contract, without any restriction as to time. This was more restrictive than California Civil Code §1954.535, which states that landlords in this situation are restricted from charging a tenant more than the tenant's portion of the rent under the former contract for only 90 days.

DECISION

The court determined that the local ordinance was preempted by state statute. When local legislation conflicts with general law, the local legislation will be preempted and considered void. In this case, the ordinance entered a field of law that the California Legislature had already fully occupied. The Legislature, through the statute, had desired to prevent rents from being raised on tenants for 90 days, not indefinitely, after termination of a Section 8 housing contract. The Court thus held that California landlords to raise rents or request other payments from tenants 90 days after their Section 8 housing contract is terminated or not renewed.

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