Real estate transactions are governed by federal statutes, as well as state statutory and common law. Real estate law encompasses these state statutes and laws, as well as property law matters. Real estate law covers a wide variety of legal issues relating to acquiring, financing, developing, managing, constructing, leasing and selling commercial and residential real property of all kinds.

This section provides a brief overview of real estate issues commonly encountered by real estate owners, buyers, sellers and lessors. Please review the list of Real Estate articles below.

Apple Tree Owner? Beware!
Beware of Environmental Cleanup Contamination
Beware of Incorporation Clauses
Building or Remodeling? Check Out Your Contractor
Declared Homesteads: Why Declare?
Homeowners Can Be Liable for Injured Workers
Homeowner's Insurance: Is There More?
How Binding is Arbitration?
In Contract Situations, Consult an Attorney
Insurance is Alright. But Title Insurance?
It's Best to Read the Contract
Land Erosion and Growth
Lead Based Paint: It's Time to Get the Lead Out
Let the Buyer Beware?
Mechanic's Lien Protection is Available
A Mechanic's Lien -- What's That?
Permission to Build?
Plan in Advance When Disputes May Exist
Prescriptive Easements -- Getting Something for Nothing
Retain Legal Counsel in the Event of a Dispute
Sometimes Banks Make Mistakes -- And It Costs Them
There is Still a Free Lunch -- Through Adverse Possession
What Are Liquidated Damages?
What's in a Name? Broker vs. Agent
What is a Homestead?
What is a Transfer Disclosure Statement?
When a Problem Develops, Take Immediate Action
When Leasing Property, Record the Condition

 

Apple Tree Owner? Beware!

Everybody knows that landowners can be responsible for injuries that happen on their property. But injuries from apples?

A recent California Court case put a whole new spin on the age old apple. Apparently two school boys shared the better part of an apple at lunch time. When the apple was half eaten, one of the boys threw it at an outdoor school wall. He said he wanted to see it hit the wall and splatter. Good clean fun? Harmless prank? Hardly. The half-eaten apple sailed through a door that was closing but not yet closed, and accidentally struck a teacher in the head. The teacher was holding tryouts for a school choir when the apple hit her.

Believe it or not, the District Attorney got involved, and charged the boy with assault by "means of force likely to cause great bodily injury, or with a deadly weapon." The juvenile court found that the boy didn't intend to hit the teacher. It was an accident. But the court wanted to "send a message" to the boys' classmates. So it found him guilty of intentional assault with a deadly weapon or with force likely to cause great bodily injury, which is a felony crime. People v. Gavin T. (1998) 98 C.D.O.S. 6601.

An "assault" by definition must be intentional. There is no such thing as an "accidental" or "unintentional" assault. It just doesn't exist except in this lone case. This means the judge found the boy guilty of a crime that doesn't exist.

Thankfully, the case was appealed. The Court of Appeal recognized the problem with an "unintentional" intentional assault and threw out the conviction. The Court reasoned that if the boy were guilty of an intentional assault, then what about the owner of the tree which held the apple that fell on the head of Sir Isaac Newton? The Court was unwilling to extend criminal liability to all such "apple crimes."

It makes one wonder how the District Attorney and the Juvenile Court found an apple to be an inherently dangerous object. If this were true, then William Tell placed his son in double jeopardy once from the arrow hurtling towards his son, and once from the apple on his head. And Sir Isaac Newton took it straight on the head and lived to tell about it. What about the Scarecrow in the Wizard of Oz? Perhaps Dorothy's adventures were nothing compared to the apples thrown at the scarecrow by the trees.

Are apples a "Deadly Weapon?" If so, they give a whole new meaning to "an apple a day." Thank heavens for appeals.

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Beware of Environmental Cleanup Contamination

Last week I met a person who told me a story no homeowner wants to hear.

Several years ago, this woman bought a condominium in the East Bay. The land under all of the condominiums was owned by a Homeowner's Association. This Association owned and maintained all of the common areas, and she knew she would pay monthly homeowner dues that would be used to maintain the landscaping, roofs, parking, and other common areas.

The land surrounding the condominium complex was owned by several different neighboring landowners.

A few years after she bought the condominium, one of the neighboring landowners discovered hazardous wastes on his property. After investigation, the neighboring landowner found that the hazardous waste was being carried onto his land by rainwater. During storms, rainwater fell on the land owned by the condominium Homeowner's Association. The rainwater drained onto the neighbor's lot. While the rainwater drained, it became contaminated with hazardous and toxic wastes and carried them onto the neighbor's land.

The Homeowner's Association was surprised to learn that the soil under the condominiums was contaminated. After investigation, the Homeowner's Association learned that before the condominiums were built, the land had been used for industrial purposes. The land had been contaminated with hazardous industrial waste during that time, and the hazardous waste had never been fully cleaned up.

Once the contamination was discovered, the Homeowner's Association realized that a proper cleanup was necessary. By this time, an environmental government agency had been notified of the problem, and demanded that the problem be cleaned up. Unfortunately, the prior industrial user was no longer in business, so the cleanup costs couldn't be assessed against the business that actually contaminated the soil. In addition, the developer who built the condominiums was no longer in business. Because the Homeowner's Association owned the land, the governmental agency demanded that the Association foot the bill for the cleanup.

Environmental statutes are broad, and often any owner of contaminated property can be liable for cleanup costs, even if that owner had nothing to do with the contamination. In this case, the Homeowner's Association ended up paying the cleanup costs, even though they had nothing to do with the contamination. This meant that each condominium owner had to contribute towards the costs of the cleanup.

What's the moral to the story? It's "Buyer Beware." As the East Bay and the Bay Area continue to be developed, old industrial land will be converted into housing. Instead of buying a comfortable home, unsuspecting buyers may instead be purchasing a substantial liability. Buyers would be wise to find out how land was used before they buy it. Where industrial or toxic wastes may have been used, then buyers should use a great deal of caution, and should retain the appropriate professionals to assist them.

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Beware of Incorporation Clauses

John Doe home buyer has found the perfect house at the perfect price. And what luck -- he didn't use a broker, and neither did the seller, so the seller is willing to discount the purchase price by the amount of the commission that the seller would have paid to a broker.

The seller gives John a document that indicates it's a "Standard Form of Real Estate Contract." John takes a quick look at it. He feels comfortable with most of it, but certain portions don't seem to make much sense. One paragraph in particular gives John some pause. The paragraph says that the written contract is the entire agreement between the parties, and that neither party is relying on any verbal promises that are not described in the contract.

The contract says that the seller is to remove all personal property. But the seller has an expensive table saw in his garage that he says he'll leave behind. Also, the chimney is cracked, and the seller has agreed to fix it, but he doesn't want the repairs to be paid out of escrow before the sale closes. The seller says for tax reasons he wants the deal to close first, and that he'll pay for the chimney to be fixed afterwards.

Does John have cause for concern? Yes. The clause that John has read is called an "Incorporation Clause." Contracts include these clauses to prevent the parties from later claiming that they relied on some verbal promise by the other side when they signed the contract. These clauses are used in an effort to make the contract, and the deal, as final as possible.

What should John do? Get the other agreements in writing. If the seller is being honest, then the seller should be willing to put the terms into writing. Of course, John has another potential problem, because once the seller has the money from the escrow, then the seller can refuse to fix the chimney, and John may have to file a lawsuit. If at all possible, John should have the repairs paid out of escrow. At a minimum, all his agreements with the seller should be in writing and preferably all of them should be described in one single document.

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Building or Remodeling? Check Out Your Contractor

Barry and Sandra Ehrlich hired a contractor to custom build their "dream-come-true house." Their home was to be built on the coast, and was to have clear ocean views. The Ehrlichs hire a contractor who promised to build them "a beautiful home," and after seven months of construction the Ehrlichs moved in.

Unfortunately, the home was poorly built. As a result, the house leaked badly when the rainy season started. Water leaked in almost every location, and nearly every window leaked. Walls became saturated, and the sheetrock in the garage became so wet that the plaster melted and fell from the ceiling. The living room filled with three inches of standing water. Three decks were at risk of collapsing and part of the concrete foundation began to crack. Erlich v. Menezes (1998) 60 Cal. App. 4th 1357.

The Erlichs filed a lawsuit against the contractor for the costs of repair and won. However, they filed the lawsuit seven months after moving in, but the lawsuit process required several years before it was complete.

Had the Erlichs known what kind of house they were to get, they would have undoubtedly used a different contractor. The Court's opinion doesn't say what steps the Erlichs took, if any, to check out their contractor before they hired him. However, in addition to getting references from previous customers, a number of steps can be taken to check out a contractor before signing a contract.

Contractors with poor construction practices may have been in trouble before you meet them. If you know the counties where the Contractor has worked, you can check the records at the County Courthouse. If he's been sued in that county before, the Court will have a record of the lawsuit.

Contractors receive their licenses from the California State Contractors License Board. This Board receives and investigates complaints about contractors. In appropriate cases, the Board may issue citations to contractors who violate the laws regulating contractors. Contractors may be cited for such things as abandoning a job, not paying subcontractors, poor workmanship or other contract violations. In severe cases, the board may suspend or revoke a contractor's license.

Complaints which the Board receives about specific contractors are not generally available to the public. However, information is available from the Board about any citations the Board has issued to a contractor, or any license suspension or revocation. The Board will also confirm whether or not a contractors' license is active or expired.

Several free publications are available from the Board. Two of the publications relating to contractors are "What You Should Know Before You Hire a Contractor" and "Home Improvement Contracts: Putting the Pieces Together." These publications can be ordered by calling the Board's toll free message line at (800) 321-2752. They can also be ordered directly from the Board at (510) 622-2744 or by writing to the Board at the following address: Contractors State License Board, 1515 Clay Street, Suite 1105, Oakland, California 94612.

Legal Footnote: After the Erlich case was decided, the California Supreme Court agreed to hear the case on further appeal. Until the Supreme Court finally determines this case, it cannot be used as precedent in other matters.

Robert B. Jacobs is a Real Estate, Construction and Business Law Attorney in Pleasanton, California. Note: Legal situations differ, and each one is unique. The foregoing information is not intended to be a complete or an exclusive treatment of the subject, and a legal professional should be consulted before deciding if or how the information above may apply to any specific situation.

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Declared Homesteads: Why Declare?

The Homestead Exemption is a California law which applies to every persons' primary residence. No action is required to receive a Homestead Exemption. The Exemption is automatically created by statute. It provides that if a home is sold to pay a judgment against a homeowner, then at the sale the homeowner will receive their equity up to a maximum of $50,000 and in some cases up to $125,000. Without a Homestead Exemption, the creditor would receive all of the homeowner's equity at the sale up to the amount of the debt.

In addition to a Homestead Exemption, California law allows homeowners to record a Declared Homestead. A Declared Homestead differs from a Homestead Exemption in that a Declared Homestead protects the homeowner's equity if the homeowner sells their home. A Declared Homestead is created when a Debtor prepares and signs an appropriate form of Declared Homestead and records the document in the County Recorder's Office. Once the document is recorded, it creates a Declared Homestead in the property described in the document.

A Homestead Exemption is useful only if the Debtor's home is sold by the creditor at auction to pay a judgment. If this happens, the Debtor retains between $50,000 and $125,000 of the equity at the sale. The judgment creditor receives the rest. However, if the Debtor voluntarily sells the home, the Homestead Exemption is of no use. The judgment creditor receives all of the Debtor's equity from the sale up to the amount of the debt.

A Declared Homestead is different from a Homestead Exemption. If the debtor has previously recorded a Declaration of Homestead, the debtor can sell the home. The debtor's equity up to $50,000, and in some cases up to $125,000, is protected from the creditor. If the debtor buys a new home within 6 months, the debtor can record a new Declaration of Homestead. If the equity from the first home is used to buy the second home, then the funds remain protected from the creditor.

The bottom line is that everybody receives a Homestead Exemption by law, but that the Exemption won't help them if a judgment is entered against them and they then want to sell their house. If they had previously created a Declared Homestead, they would be able to sell their home after judgment, protect their equity, and then invest it in a new home without having it be taken by a judgment creditor.

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Homeowners Can Be Liable For Injured Workers

As the new homeowner surveys the front yard, an old worn pickup with substantial body damage pulls up to the curb. The faded lettering on the side says "First Class Landscaping and Tree Service." The driver gets out and says to the homeowner "Hey there, you've got a big elm tree here that really needs to be trimmed. I'll have my crew take down those dead limbs, clear out the top, and make it look first rate. The going rate is $800, but I'll do it for $550." Does the homeowner have any cause for concern?

Yes. The homeowner may be able to call references to confirm whether the contractor does good work. But the homeowner also needs to ensure that the contractor is properly insured. If not, the homeowner might be liable for any employee injuries on the job.

A recent California court case underscored the need for proper insurance. Andreini v. Superior Court (1998) 60 Cal. App. 4th 1415. In that case, the homeowner hired a contractor to do touch-up painting on their home. The contractor had an employee. Even though the law required the contractor to carry worker's compensation insurance, he didn't have any.

The contractor's employee climbed onto the roof and began painting the chimney. While painting, the employee lost his balance, fell from the roof and was injured.

If the contractor had purchased worker's compensation insurance, that insurance would have paid the employee everything the employee was entitled to. The employee couldn't also sue the homeowner unless the homeowner had somehow caused the injury. In this situation, the homeowner did nothing to cause the injury. But because the contractor carried no worker's compensation insurance, the law allowed the employee to sue the homeowner so that the employee would have a source of money to pay for his injuries. The homeowner is liable to the employee along with the contractor because the homeowner could have made sure that the contractor had worker's compensation insurance.

This result may seem unfair to the homeowner. After all, most homeowners don't usually ask contractors whether they have workers' compensation insurance, and this homeowner probably had no idea whether or not the contractor was insured. However, the homeowner had the ability to control the situation by requiring proper insurance. In this situation, the homeowner has a valid claim against the contractor for anything the homeowner pays to the employee, but if the contractor has little or no money the homeowner may never recover any amounts paid.

The bottom line? Homeowners who hire contractors are at risk for injuries to the contractors' employees. Homeowners can reduce their risk by asking to see a certificate of insurance showing that the workers' compensation policy is currently in force. And what about the contractor who drops a limb on your neighbor's car? Or on your neighbor? Homeowners should also ask to see a certificate of insurance showing that the contractor has an appropriate liability policy in force with an appropriate level of coverage.

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Homeowners Insurance: Is There More?

In the Bay Area, Homeowner's Insurance is a way of life. It's not whether you get Homeowner's Insurance but rather how much you get. Any buyer who has closed a loan knows that the lender absolutely won't lend until the borrower gets Homeowner's Insurance. And with good cause. Lenders want to protect themselves. If that late night kettle of deep-fried won ton turns in to a four-alarm fire, the house may not survive. Proper Homeowner's Insurance should pay for most of the cost of reconstruction. Nobody would be surprised to see the lender require the house to be rebuilt with the insurance money. Without the lender's insistence, the homeowners might otherwise find themselves in Acapulco.

But besides covering the cost to rebuild the house and replace its contents, most Homeowner Policies provide a general liability coverage. This is coverage for injuries, damages, or losses caused by the Homeowner. What kinds of losses are covered? With a proper policy, a homeowner would typically be covered for sudden accidents, or occurrences, that were neither expected nor intended by the homeowner. In other words, if the homeowner's new second story deck falls onto the neighbor's new sports car, the policy should pay for the damage. If a tomato from one of the homeowner's prize tomato plants falls onto a walkway and a guest trips or slips and falls, the policy should pay for the injuries. If the fourth of July sparklers get just a little out of hand, the policy may pay for the cleanup.

But what about damage, injuries, or losses off the premises? Many homeowner policies are general liability policies, which means they will cover damages caused by the homeowners even when they aren't home. Homeowners policies typically won't cover losses or injuries from boats or other water craft. These are the subjects of other kinds of policies. And Homeowners' policies usually won't cover accidents involving vehicles. These are usually the subject of automobile insurance. But the general liablity portion of many homeowner policies is designed to cover the homeowners for damages or injuries negligently caused by the Homeowner wherever they are. There are a wide range of situations where a Homeowners' Policy has covered a claim for damages that didn't relate to the homeowner's house or real property. In one case, a schoolgirl negligently caused a fellow student to break her teeth, and the Homeowners' policy paid for the injuries. In another case, a Homeowner's policy paid for injuries when a tree trimmer fell out the homeowner's tree. In another case, a Homeowner's policy paid for injuries when a homeowner invited a friend to dance on a glass table top and the glass shattered.

Because many Homeowner's Insurance policies will provide coverage for injuries caused by the Homeowner off the premises, homeowners should consider the possibility of such injuries in deciding their limits of coverage. Questions about the specific coverages under a specific insurance policy, or about the proper limits of liability, should be directed to an appropriate insurance agent or competent counsel.

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How Binding is Arbitration?

Nobody wants to buy a lawsuit. But most people want to buy a house. So what happens when home buyers discover they bought the house of their dreams but one of the dreams is a nightmare?

The first step is often to call the seller. If the home is new, the seller is usually a developer, and most developers provide a warranty with their homes. In these cases, a buyer can often have the problems fixed at the expense of the seller.

But what happens when the seller is another homeowner instead of a developer? Homeowners often don't have the resources to repair major problems with a home. In some cases, sellers claim they didn't know of problems (when they actually may have). In other situations, even a developer may be unwilling to acknowledge a problem or repair it.

If buyers and sellers can't agree about repairing problems with a house, they usually involve lawyers. The lawyers may exchange several phone calls and letters. If agreement can't be reached, the lawyers file a lawsuit.

Are lawsuits effective? They can be. Every lawsuit is eventually resolved, either by agreement between the parties, or by a judge or jury at trial. Are lawsuits expensive? They can be, and they typically are. The expense depends on how the lawsuit is handled and the length of time before it is resolved. Most trials are held approximately one year after the lawsuit is started. The cost of a lawsuit through trial can be surprisingly high. Is there any way to reduce the costs of a lawsuit? Yes through binding arbitration.

"Binding Arbitration" is dispute resolution without a lawsuit. In "Arbitration", a dispute is submitted to an "Arbitrator" who is often an attorney or a retired judge. Both sides present their case at an "Arbitration" which is similar to a trial. "Binding" means the result is final with no right to appeal.

"Arbitration" is similar to a trial in that both processes use a hearing, or trial, before a decision maker. At Arbitration, the decision maker is an "Arbitrator." At trial, the decision maker is a judge (or jury). In both processes, the decision is final and legally binding between the parties.

Arbitration is different from trial in several ways. Arbitration is less intrusive. In many arbitrations, neither side has the right to ask the other side any questions before arbitration. This can make the process less expensive than a lawsuit, where both sides have the right to ask the other side many questions. Arbitration is often concluded in a matter of months instead of nearly a year. Arbitration is usually thought of as faster and less expensive than trial.

One of the prime differences between trial and Arbitration is the right to appeal. Because Arbitration is designed to be final, there is no right of appeal. Because Arbitration has no right of appeal, the process can be much shorter. But if an arbitrator makes an error, the parties have no recourse. As a result, an Arbitrator is not required to follow the law. His or her decision is final and binding, even if it is legally incorrect. This means that Arbitration may be faster and less expensive than trial, but it may also be less predictable.

There is no correct answer whether trial or arbitration is better in any given situation. Each situation must be evaluated separately.

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In Contract Situations, Consult an Attorney

I sometimes counsel with people in a legal dispute who advise me that they used a "standard contract" from a book they bought. Because they used a form contract from a published book, they expect the contract to be authoritative and adequate. If the contract is inadequate for their purposes, they sometimes seem surprised, and always disappointed, that the form contract they used has not served them well.

I have seen contracts for leases - or sales - of real property from published books that were ambiguous and vague. The problem with an ambiguous contract is that nobody is sure what it means. If you want to enforce an ambiguous contract, you may have a problem, because at trial, you'll be asking the judge to compel the other side to perform according to the contract. Problem is, if the contract isn't clear, then nobody's quite sure what the other side should do, or exactly what the other side agreed to. It may then be possible for the other side to "break" the contract, meaning that they may succeed in convincing the judge that they shouldn't be forced to do anything.

It's impossible to evaluate whether all of the contracts from all printed sources are adequate. Prepared contracts are available from bookstores, some stationary stores, and even off the internet. Because each contract must be separately evaluated, nobody can say whether prepared contracts are adequate or not. But I can say this much: some of the poorest contracts I have seen have come from prepared sources that people purchased and then used on their own.

Some prepared sources claim to follow California law. But others do not. The problem is that the California state Legislature regularly passes new laws. If a prepared contract does not consult California Law, then it is possible that portions of the contract may be void or unenforceable because they may violate California state Law. If a prepared contract does follow California law, then it is important to know whether the contract followed the legal updates. A contract prepared three years ago may include provisions that have been recently banned or prohibited.

In addition, many people have an inadequate understanding of the legal foundation of contract principles. Unless they have devoted themselves to a serious study of the law, they may change the contract, or use it in such a way that it has unintended consequences.

The best course of action? Enter contracts with care. And if it's a contract you are concerned about, give serious consideration to having it prepared or reviewed by competent counsel. The information in this article is not a complete treatment of the subject discussed and is not intended to be legal advice. Readers with a specific matter or question should consult an attorney.

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Insurance is Alright. But Title Insurance?

Every home buyer has the same experience. The perfect house has been found, the right price has been reached, the contract has been signed, and an escrow has been opened. Now, the buyer receives a statement of estimated closing costs with a substantial charge for "Title Insurance." The buyer wonders "What's there to insure against? Either I get title or I don't. If I don't get title, I don't buy the house. If I get title, I'll buy it. Why all the excitement about 'Title Insurance?'"

Geologist tell us the earth has been here for millions of years. California has been a state for more than a hundred. Properties are bought and sold every day, and some properties are bought and sold several times in a short period of time. But every time these properties are bought, the lenders seem to want to have a brand new Title Insurance policy issued on the same old property. Why are they so insistent that a new policy be issued when several recent policies already exist? Isn't the condition of the title known from all the previous policies?

The answer is "yes" and "no." Legal descriptions of property don't typically change unless somebody actively and intentionally changes them. A good example of changing a legal description is a situation where somebody sells on a portion of a plot of land. Because the size and dimensions change, the legal description is affected, and the remaining unsold property is identified differently than before.

But title insurance isn't so much concerned with legal descriptions as it is with events that can negatively affect the title to the property. A number of things can happen to affect title to property. For example, contractors and suppliers can make improvements to the property. If they aren't paid, they can record a mechanic's lien. If a contractor records a mechanic's lien and then the owner of the property sells it, the contractor call still sell the property even if the new owner had nothing to do with the contractor.

Title can also be affected by the seller. If an owner sells property to a buyer, an escrow is typically opened and several weeks or months pass before the buyer receives title. But what about the unscrupulous seller who opens an escrow and then gets a second mortgage on his home? The lender who made the loan will record the mortgage in the county records. If the seller doesn't tell the buyer about the loan, then the buyer's new home can be sold through foreclosure if the seller doesn't pay off the loan.

These and other actions by sellers or others can affect the title to property. Before lending money, a bank wants to know that no other claims or mortgages have been made on the title. For this reason, they won't lend money on a property unless they receive a policy of insurance protecting them from other claims against their property.

A recent case shows the benefits one buyer received from a title insurance policy. Diediker v. Peelle Financial Corporation (1997) 60 Cal. App. 4th 288. In this case, property owners failed to pay substantial taxes due to the IRS. The IRS recorded a lien against real property they owned. The owners defaulted on their loan to their bank, and the bank foreclosed on the property. After the foreclosure, the bank sold the property to a company. The company later sold the property to a new Owner for $225,000.

When the Owner bought the property, he purchased a policy of title insurance. The company who wrote the policy of insurance knew about the IRS tax lien but didn't list it in the policy as a lien against the property. After the Owner bought the property, the IRS tried to seize the property to pay the taxes owed by the original owners. The new Owner demanded that the title company pay the lien for the back taxes, and the Title company paid over $200,000 to satisfy the lien for back taxes. As a result, the new Owner cleared the IRS tax lien without any cost to himself. Had he not purchased the title insurance policy, the Owner would have either lost the property to the IRS or would have been required to pay over $200,000 in back taxes from the original property owners. In that situation, the Owner would have had a valid claim against the original property owners for the $200,000, but if the prior owners had little or no money, then the Owner would be unable to collect any judgment.

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It's Best to Read the Contract

John Doe home buyer is ready to buy his first home. He is presented with an agreement that seems to have more fine print than Webster's Dictionary. John looks at his broker and says "Do I really need to read all this?" What does it all mean, anyway. Why don't you just sum it up for me?

John's broker tells him "Look -- if you just pay the money as promised, there's nothing in here that will hurt you." John feels that only lawyers understand these contracts anyway, and everything in this contract is probably "standard boilerplate." So John signs it.

Is John right? Probably not. Most people probably feel contracts are written by lawyers for lawyer. And they are probably right. But is the innocent home buyer bound by all those ancient phrases and verbose provisions? Probably yes.

What's a home buyer to do? Read the contract. If he doesn't understand it, then he has two choices: Hold his breath and sign it anyway, or get legal help. Fortunately, many contracts are performed without any kind of a legal hitch, but when there are problems, they can be expensive.

What do many prudent, conservative home buyers do? They take steps to find out what they're signing. Once they understand the contract, they can then evaluate the risks they are taking. Sometimes these risks translate into an adjusted purchase price. And sometimes these risks may kill a deal. But unless the parties understand the risks they are taking, these contractual terms lie in the bottom of a dark file cabinet until a problem arises, and when the problem arises, its outcome may be determined in large part by the very contract that seemed so hard to read.

I recently signed a contract to lease storage space. The manager presented me with a lengthy printed contract, at least fourteen inches long, and gave me a quick explanation of the several paragraphs. When I looked closely at it, she asked "You're going to read the whole thing?" My response was "If I don't do it now, I may not do it later. I'd sooner know what I'm signing before I do it, instead of after." The manager waited patiently while I read the contract. But it was clear from her quick presentation that she had done this before, that she probably gave this brief summary to every new lessee, and that she didn't expect me to read the contract. After I read it, I told her that she had a good contract, and that her company had adequately protected themselves. What I didn't add was that by reading the contract, and understanding it, I had protected myself.

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Land Erosion and Growth

This may not be common knowledge, but when land was laid out years ago, it was often organized into parcels of 160 acres. If those parcels were subdivided into four parts, then each owner received 40 acres. That's why the sunburned farmer in the old westerns always says he's "heading for the back 40."

When land was surveyed years ago, the surveyors used the landmarks that were readily available. A land boundary might be marked by a tree, a boulder, or a stream. Such a boundary might work well for a few years, but problems arise when the tree burns down, or the stream changes course. Once the landmark is gone, surveys become more difficult -- and more expensive. Fortunately, modern survey techniques include the use of permanent monuments embedded into the ground.

Some land boundaries remain subject to change. For example, land that is bordered by streams or rivers can either grow larger or smaller as a stream changes course over time. Land bounded by a lake or the ocean can also get larger or smaller.

What happens to a boundary line when a stream naturally changes course over time?

A considerable part of California law was created with the passage of the code of 1872. Many of the statutes haven't been amended since that time. One of the 1872 statutes concerns the problems that arise when streams naturally erode a bank. Civil Code section 1014 provides that when a stream "imperceptibly" adds land to a river bank, the new land belongs to the owner of the bank. This means one landowner can gradually lose a portion of his land over time to his neighbor across the stream or river. However, if a substantial amount of a riverbank is suddenly lost in a single event, then the original owner can reclaim it -- so long as he does so within a year after his neighbor takes possession of the moved land.

The 1872 code even provides for ownership of new islands in streams and rivers. If the river is navigable, then Civil Code section 1016 provides that the State owns the island. If an island appears in a river that isn't navigable, then it belongs to the landowner on the side of the river where it appeared. If the island appears in the middle of the stream, then both neighbors own it - and the island is divided by "an imaginary line drawn through the middle of the river."

If it looks like land might start moving, it's best not to risk it. Land movement can be expensive -- in engineering fees, construction repair costs, and legal fees. If land starts moving, or if it threatens to move, get professional help fast. Otherwise, the back 40 may soon turn out to be the back 39.

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Lead Based Paint: It's Time to Get the Lead Out

Lead-Based Paint. Nobody gave it much thought until a few years ago. It was a part of doing business.

But now with all of the concern about the potential health effects from exposure to lead, government agencies have started requiring disclosures of lead-based paint in real estate transactions.

Beginning in 1996, sellers of most residential housing that was built before 1978 have been required to make disclosures about in-home lead-based paint. The source of this legal disclosure is the Residential Lead-Based Paint Hazard Reduction Act of 1992 which was passed by Congress in 1992. Because it's a Federal law, the disclosure requirement is not limited to California.

Before a contract can be completed for the sale of residential housing built before 1978, the seller (or the seller's agent) must take a number of actions. The seller must give the buyer a pamphlet titled "Protect Your Family From Lead in Your Home." The seller must give the buyer a 10 day opportunity to test for the presence of lead in the home. The seller must disclose all known lead-based paint in the home and give the buyer copies of any available reports. The seller must include warning language in the contract. The seller must sign statements certifying the completion of these requirements. And, the seller must keep the signed documents for three full years.

The law does not apply to several types of housing, most notably housing built after 1977. The law also doesn't apply to units that have no bedrooms, such as a loft or a dormitory room. It doesn't apply to housing for elderly or disabled occupants unless children live there. It doesn't apply if a certified inspector has inspected the property and found it to be free of lead based paint. It also doesn't apply to leases for less than 100 days, such as vacation rentals, where the rental won't be extended past the 100 days.

The penalties for non-compliance can be significant. Sellers who knowingly violate the law can be liable for three times the amount of any actual damages suffered due to non-compliance. The law provides for civil money penalties to the United States Government. If a lawsuit is filed, a losing seller may be required to pay the other sides' attorneys fees, costs, and expert fees. And, the law provides for criminal penalties of up to $10,000 for failing to comply with the law.

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Let the Buyer Beware?

Darwin isn't the only one who noticed things changing over time. Besides the prehistoric fish, bugs and protozoa that may have eventually changed over time, the Law continues to change and evolve as the views and values of society change.

In the old days, the rule in commercial transactions was typically caveat emptor, which is a Latin legal phrase from the old Roman law meaning "Let the Buyer Beware." In the old days, the buyer assumed the risk in a transaction. He or she was under a duty to carefully inspect or examine property before purchasing it, but once the deal was struck, the buyer was stuck with any problems that came with the property. This rule relieved sellers of liability for defects they didn't know about, and maybe also for some they did know about but didn't disclose.

The old rule of caveat emptor in real property transactions is now widely considered to be outdated, outmoded, and of little or no good. The new rule is one of full disclosure. The rule generally requires a seller to disclose to a buyer all facts or conditions which may negatively affect the value or desirability of a property which are not reasonably observable to a buyer's inspection. See Lingsch v. Savage (1963) 213 Cal. App. 2d 729. Careful sellers often take the added step of disclosing in writing negative features of the property which are reasonably observable to a buyer's inspection.

What does the rule mean in practice? Sometimes a seller wants to sell a property without disclosing defects that might scare a buyer off. These sellers sometimes try to get around the disclosure requirement by writing into the contract that the buyer takes the property "As-is." The Buyer, unaware of a past history of problems, has often inspected the property and satisfied himself or herself that the property appears to be in good working order.

But a disclosure of this kind does the seller no good. The seller wants the buyer to take the property with all faults. If the seller knows of faults or defects and doesn't disclose them, the buyer doesn't have all the necessary information to make a fully informed decision. The buyer takes the property with the defects, and only finds out about them after the escrow has closed. If the buyer sues the seller, most judges will have little or no problem in disregarding the "as-is" language. The judge will be considerably more interested in the actual disclosures made by the seller to the buyer. If the judge finds that the seller knew of problems but didn't disclose them, the judge will most likely find the seller liable to the buyer for the cost of repair or the diminution in value in the property. The judge may also find the seller liable for the buyers' attorneys fees and costs if the contract has an attorneys fees clause.

Honesty truly is the best policy, and sellers are well-advised to always fully disclose problems up front. If a buyer likes the property, the problems may be less of a problem than down the road after a sale. Sellers with property problems can often save themselves a considerable amount of aggravation, time and expense through careful, thoughtful, and well-prepared written disclosures.

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Mechanic's Lien Protection is Available

Q. What is a Mechanic's Lien?
A. If a homeowner hires a contractor, that contractor has a right to be paid for the work performed. If the homeowner doesn't pay the Contractor, the Contractor records a Mechanic's Lien in the public records at the County Recorder's office. The homeowner's home then has a "lien" against it.

Q. Is it possible to protect myself from Mechanic's Liens? If so, how?
A. Protection is available against potential Mechanic's Liens. Before a contractor or supplier can claim a lien on your property, they must notify you that they are doing work on your property. You always know who the general contractor is, because the general contractor signs the contract to do the work. Subcontractors and suppliers must send you a notice within 20 days of working on your property or they lose any right to a Mechanic's Lien. Such a notice is often referred to as a "20 day notice."

Q. What is a 20 day notice?
A. A 20 day notice is not a lien. The notice only means a subcontractor or supplier is working on your property. The notice advises you that the subcontractor is involved. If your contractor doesn't pay the subcontractor, then the subcontractor might claim a lien against your property.

Q. What should I do if I receive a 20 day notice?
A. There are two common ways to protect yourself. First, you can require your general contractor to provide you with releases signed by all of the subcontractors who have sent you a 20 day notice. These releases will release any claim for a mechanic's lien by the subcontractors up through the date of payment. The release is effective once the subcontractor is paid for the work he or she has done through that date. By getting the signed release, you will know that your general contractor is paying the subcontractors, and your risk of a Mechanic's Lien will be substantially reduced. Second, you can write joint checks. If you sense your general contractor is not paying subcontractors, or if you want to make sure the subcontractors get paid, you can make your checks jointly payable to the general contractor and to any subcontractors who have given you a 20 day notice.

Q. Can my general contractor claim a Mechanic's Lien against my Property?
A. Yes. If you want to protect yourself, then require your general contractor to provide you with a lien release when you pay him. The release should state that once your general contractor is paid, he or she releases any Mechanic's Lien claim on the amount of work done up to the time of payment.

Q. Must a lien release follow a specific format?
A. Yes. California law provides that a lien release must contain specific language. Proper forms of release may be available from the State Contractor's License Board, from a Construction Law Attorney, or at a Law Library.

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A Mechanic's Lien - What's That?

A mechanic's lien. Isn't that something done by a car shop? Not really. A Mechanic's Lien is used by a contractor, a subcontractor, or a company that supplies building materials. If a contractor isn't paid for work he's done on your home, California law allows him (or her) to place a "lien" against your property. The "lien" allows the contractor to sell your home at an auction. However, the contractor must first file a lawsuit, and win a judgment against you.

Following are some common questions about Mechanic's Liens.

Why are they called "Mechanic's Liens?"
"Mechanic" is an old fashioned word for contractor. It has nothing to do with a car mechanic. The term could just as well be "Contractor's Lien.

" What is a "Lien?"
A lien is a claim against property. A "Lien" means a person other than the legal owner has a claim to an interest in the property. A "Mechanic's Lien" can only be claimed on land, houses or buildings. What is a Mechanic's Lien? If a homeowner hires a contractor, that contractor has a right to be paid for the work performed. If the homeowner doesn't pay the Contractor, the Contractor records a Mechanic's Lien in the public records at the County Recorder's office. The homeowner's home then has a "lien" against it.

Can a lumber yard get a lien against my house?
Yes. The Contractor gets his (or her) materials from suppliers like lumber yards. These suppliers sell to the Contractor on credit. If the Contractor doesn't pay the supplier, then the supplier can record a lien against your home.

You mean I might have to pay for the same thing twice?
Yes. You might pay the contractor for the work performed, but if he doesn't pay his suppliers or subcontractors for the work they did, you might have to pay them again for the same work.

That doesn't seem fair.
Well, it isn't for the homeowner. But if the homeowner pays twice, he or she has a valid claim against the Contractor for a refund.

What if the Contractor can't refund my money?
Then the homeowner pays twice and gets no refund. However, the Contractor's State License Board may revoke or suspend the license of a contractor who doesn't pay his subcontractors. But even if the Contractor loses his license, the homeowner may still pay twice.

That still doesn't seem fair.
It isn't. The best thing you can do is to take steps to protect yourself. And there are steps you can take to protect yourself.

See next week's column for suggestions on how to protect yourself against Mechanic's Liens.

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Permission to Build?

It's a safe bet that a close inspection of the pyramid tomb of Raamses II or King Tut won't turn up any permission slips in Egyptian hieroglyphics allowing the great pyramids to be built. No grading inspections. No framing inspections. No final inspection. Perhaps that's one of the perks of being an Egyptian pharaoh: No red tape from the building department.

For the rest of humanity, at least in this country, nothing gets done without a nod from city hall. And when it comes to building, the nod comes from the building department.

Many homeowners are not aware that a building permit must be obtained for repairs or improvements that may seem minor. Chances are good that a permit is required if an expected improvement affects the plumbing, electrical, framing, structural, heating, or air conditioning systems of a home. A building permit can even be required for something that appears to be as mundane as replacing a water heater or other appliance. One of the simplest ways to determine whether or not a permit is required for any specific repairs or improvement is to contact the building department prior to construction.

A major purpose of the permit process is to safeguard against improper construction practices that may make improvements unsafe or defective. Building inspectors typically review construction in progress to determine compliance with applicable building codes and procedures. If the construction does not comply with relevant codes, the construction may not pass inspection. The inspector may require the construction to be changed so that it satisfies the requirements of the building code.

Even though building departments charge fees for building permits and inspections, the services relating to a permit can be valuable even though they may seem routine. Several years ago I handled a case where a homeowner purchased a new water heater. He paid for installation, and the installer removed the old water heater and replaced it with a new one. The installer didn't change the location of the water heater. The original water heater was installed directly on the concrete garage floor, and the new one was also placed on the floor. After the home was built, the building codes changed so that water heaters were required to be raised several inches off the floor. The building codes recognized that gasoline or other explosive fumes can accumulate in garages. If the water heater is raised off the floor, then any fumes may be able to disperse through garage vents before they are ignited by the water heater. In this case, the new gas water heater had a pilot light. A can of gasoline was accidentally knocked over on to the floor of the garage. Explosive gasoline fumes accumulated, and the pilot light ignited the fumes. The vapors burned quickly and caused a fire that leveled the house. If the homeowner had called the building department before installing the water heater, he might have found that the new codes required the water heater to be placed on a stand so that the water heater is off the ground.

Obtaining the proper permits can help promote safe construction. Also, the proper permits can make it easier to sell a home. When a homeowner sells a home in California, he or she is required to disclose to the buyer whether any improvements have been made without necessary permits. If the proper permits have been obtained, then no negative disclosure about permits will need to be made.

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Plan in Advance When Disputes May Exist

An ounce of prevention can be worth a pound of cure - or even several pounds.

I occasionally counsel with clients who have sensed a legal problem was developing long before any lawsuits were filed. These clients may have sensed that the personalities involved would likely lead to litigation, or that at some point a negotiation has started having problems. Some of these clients have taken no preventive action and have hoped the problem would resolve itself without the need for attorneys to get involved. And some of these matters have eventually resolved themselves, but others only seem to get resolved after litigation is filed and thousands of dollars of attorneys fees and costs are spent.

A simple legal motto goes like this: people look most closely at documents the second time they read them. The meaning is this: When contracts or deals are being made, read, and signed, people are often anxious for the contract to be completed, and they may gloss over terms, conditions, disclosures and provisions. But when problems arise as they sometimes do, these same people look at their contracts and their documents a second time, but this time they are looking for assistance for their case. At this stage, the language in the contract or the document can be very important, because frequently the language in the written agreement will control the rights of the parties involved in any dispute. The bottom line? It's a good idea to have the most written protection possible in any contract situation. The problem? Many people who sign contracts have little or no legal expertise in contract law. This means that in order to get the best protection, the parties need to hire an attorney.

It's a difficult problem. Many contracts are drafted, signed, and executed without any kind of significant dispute. California real estate practices rely to a significant extent on this proposition, because California law does not require an attorney to be involved in a house transaction, whereas several other states require an attorney to be involved in such transactions. If the parties knew when a dispute would develop, they could hire attorneys to help them draft contracts for those situations, and could do the others themselves. In a situation where it appears likely a dispute may develop, parties are certainly well-advised to retain legal counsel. But what about situations where all of the parties appear to get along well, and no dispute appears likely?

In such situations, the parties must evaluate their degree of comfort with the risk of a potential dispute or lawsuit. If the parties are comfortable with the transaction, then they may decide to save the cost of retaining an attorney, and recognize that if a lawsuit develops, they will then hire an attorney. On the other hand, if the parties want to maximize their protection in the event of a dispute, they may decide to spend the money up front to have legal counsel review their documents or help them prepare revisions. Competent, thorough legal counsel can frequently make recommendations on contracts that can provide invaluable assistance in the event of a dispute. But there is no easy answer, because of the up-front costs involved. Each person must ultimately decide whether or not they will incur the costs to acquire the contractual protections that competent counsel can provide.

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Prescriptive Easements - Getting Something for Nothing

When I was a youngster, my mother always told me "You can't get something for nothing." Mother, bless her heart, obviously didn't own much real estate, and she didn't spend much time thinking about real estate except as it might affect the old family homestead. If she had spent much time around real estate, she might have changed her teaching to "You can't get something for nothing -- unless you persist long enough."

What mother didn't know is that almost all real estate -- even the old family homestead -- is at risk from what is known as a "Prescriptive Easement."

The policy of the law is to favor the beneficial use of real estate. The law, in proper situations, also favors certainty in the use of real estate. What all this means is that in real estate -- like in other fields -- owners must either "use it or lose it." And for non-owners, the policy can be "use it -- and get it."

An owner who doesn't use real estate for five years may lose it if a stranger occupies the property for those five years and pays the taxes on it. If the owner pays the taxes each year, then he or she can't lose their ownership of the property. However, if someone else uses the property, that person may gain a "prescriptive easement." This "easement" is an actual ownership interest in the property. It doesn't exclude the owner, which means the owner can continue using the property. But if the occupant gets an easement, then the occupant has a legal right to continue using the property. The owner can't exclude the occupant or stop him or her from using the property.

The process for obtaining a prescriptive easement is similar to the process for obtaining title to property through adverse possession. However, an occupant need not pay taxes to get an easement unless the easement has taxes separately assessed. In order to get an easement, an occupant must occupy the property "openly", "notoriously" and "continually" for a period of 5 years. The occupant doesn't have to live on the property or stay on it. Even driving over a road when needed is sufficient as long as the owner doesn't give permission and as long as the use is sufficiently open that the owner can observe it. After five years of such use, the occupant, or user, holds an "easement by prescription." This easement isn't an ownership of the property, but it is a right to use the property. Easements can be granted for such things as use of an irrigation ditch, driving over a road, or walking or driving over a portion of property. Other uses could also become an easement as long as the use continues for five years without interference from the owner.

To protect themselves from potential claims of easement, owners sometimes post signs at each entrance to their property and at certain intervals along the boundary. These signs say "Right to pass by permission, and subject to control, of owner: Section 1008, Civil Code." When done properly, these signs prevent users or occupants from gaining an easement in the property.

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Retain Legal Counsel In the Event of a Dispute

At a party several years ago, someone asked me what it was like to be a lawyer. I responded "It's just like L.A. Law. People come into my office each day with the most astounding problems. We resolve everything in an hour, and we handle eight matters a day.

"After the laughter died down, I explained that people who go to law school based on what they see on television or in theatres are likely to be sorely disappointed. In over 10 years of practice, I can count on the fingers of one hand the number of times I've seen a witness break down, or 'fess up, or produce the 'smoking gun,' and admit that he or she was either guilty or wrong. But Perry Mason managed to do it every episode.

My clients are sometimes surprised, and always disappointed, when they learn that people in litigation don't always follow "truth, justice, and the American way." At trial or deposition, attorneys are often civil to each other and to the opposing sides, and may even smile at each other. While litigation may sometimes appear to be civil, in many ways it is a hard-fought contest, with both sides struggling to win, often at a very high cost. Clients are sometimes surprised at the substantial costs involved. But building a case in many respects is like building a house and in significant cases even the costs can be similar.

Because such a conflict often consumes such a significant amount of time and resources, I generally counsel clients to prepare themselves as best they can prior to such an event. By the time a matter gets to litigation, the time for some of the preparations has passed. When clients are concerned about possible litigation, I advise them to have the best contracts they can. How do they have such contracts prepared? By competent counsel. People who aren't lawyers often look at lengthy contracts and think "that's just boilerplate" or it's "just a standard contract." There really is no such thing. At trial, the judge may decide significant portions of your case in your favor - or against you - based on that very contract that at one time appeared so mundane. The best protection? If you're signing a contract that you're concerned about, have it reviewed by competent counsel.

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Sometimes Banks Make Mistakes - And It Costs Them

With all the recent news about mergers and takeovers, it sometimes seems that the corporate giants of the world just continue to get larger. At times they appear to be firm and unmovable, and the thought of an error on their part seems unlikely.

But that's not always true. Banks -- even big banks -- sometimes just make mistakes. And the opportunistic borrower sometimes may try to profit from such mistakes.

The ability of Banks to make mistakes was underscored in a recent case involving two lenders. A Thrift and Loan Association made a loan to a borrower. The loan was secured by a mortgage on the borrower's home and a commercial property. The borrower and the Association agreed that the borrower would make a substantial payment on the loan in the future. When the borrower made the large payment, the Association would release the mortgage on the borrower's home, and would keep a mortgage only on the commercial property. First Fidelity Thrift & Loan Association v. Alliance Bank (1998) 60 Cal. App. 4th 1433.

The borrower made the payment as agreed. However, the Association made an error. Instead of releasing the mortgage on the borrower's home as agreed, it released the mortgage on the commercial property and kept the mortgage on the borrower's home.

After the borrower received the release of the commercial property, the borrower went out and applied for another loan from a different Bank. The borrower submitted financial records that showed the commercial property had a mortgage. The second Bank searched title records but found no mortgage on the commercial property. When the second Bank asked the borrower about it, the Borrower saw an opportunity, and said the financial statement was wrong. The Borrower said the financial statement should not have shown a mortgage on the commercial property. The second Bank made the loan to the borrower.

Two years later, the Thrift and Loan Association discovered its mistake. It sued the borrower, and received a mortgage back on the commercial property. But it received the mortgage after the other Bank had already given the borrower another loan and after the other Bank had received a mortgage on the same property.

The borrower defaulted on both loans. Both the Association and the Bank foreclosed on the same commercial property. At the foreclosure sale, there wasn't enough money to pay off the loans of both the Bank and the Thrift and Loan Association. Who wins?

The Thrift and Loan Association had the first mortgage on the property. But it mistakenly released its mortgage. The law provides that the first person to receive a mortgage on a property is the first one to be paid. When the Association mistakenly released its mortgage, the Bank was able to make a loan and move to the front of the line with its mortgage. When it came time to sell, the Association was left out in the cold because it was in second position behind the Bank. Releasing the wrong property was a simple error -- but a costly one. Not only did the Association not get paid back on its loan, it also went through two lawsuits: one against the borrower, and one against the other Bank.

The moral of the story? If you're a lender, be sure to look at your documents before you sign them. If you're a borrower? Remember that bank employees (and others) are people too.

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There is Still a Free Lunch -- Through Adverse Possession

One of the first principles taught in many college Freshman economics courses is "TANSTAAFL" (There ain't no such thing as a free lunch). The principle, so the argument goes, is that nothing is free. Everything has its price, and unless price is paid, nothing of value is received.

This may be a true principal in general. But anybody who plays the lottery believes that it's possible for somebody to get a lunch -- and a big one -- that's mostly paid for by other people. And anybody who appears on a television game show knows that somebody will win a proverbial free lunch -- it's just a question of who.

No doubt the economics student can explain the dynamics of the lottery and of television game shows with a discussion of market forces and a discourse about American advertising. The net result would be that there isn't really a free lunch -- its just paid for by other people.

Well, the same is true of real estate. Because all real estate that's worth anything is owned by someone, there really is no free lunch when it comes to real estate. But there are lunches occasionally served that are mostly paid for by other people.

Perhaps the most dramatic example of the "real estate free lunch" occurs in conjunction with the legal principle of Adverse Possession. This legal principle can be used to transfer a perfectly good title from an unwitting owner to a complete stranger. The principle applies in situations where land isn't being put to good use -- or to active use -- or to any use at all by the owner. The policy of the law favors putting land to good or productive use. So, if an owner doesn't use the land at all for five years, but somebody else does, the law will award the user, or the occupant, with a full and complete title to the property. This legal principle is known as "Adverse Possession" because the occupant must actually possess or occupy the land, and the possession must be adverse to the true owner.

To get title to real estate through Adverse Possession, a person must do several things: 1) They must occupy the land openly and continuously for at least five years, 2) They must occupy the land without permission from the owner, 3) They must act as though they own the property or have a right to be there, and 4) They must pay all of the property and other taxes assessed against the property. If an occupant can prove these four things, they can file an action to confirm their title in the property. If a court finds that an occupant has proved all four things, then the court will enter a judgment confirming that the occupant has acquired a new title to the property through adverse possession. This new title will supercede the title of the prior owner, even though the occupant paid nothing for the property except for payment of taxes. The occupant will be the new owner of the property.

Because property can literally be lost through adverse possession by non-use and non-payment of taxes, an absentee owner who wants to protect their property should always pay all of the taxes due on the property. Unless an adverse occupant pays unpaid taxes, the occupant cannot get title to the property. However, the owner should also be sure that nobody is using or occupying the property without permission. Even though a hostile occupant can't get title without paying the taxes, they may still get an easement, which could also cause problems for the owner.

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What Are Liquidated Damages?

It happens to every new home buyer. After finding the perfect house at the perfect price, the real estate broker walks in and lays down a contract. Seven pages of single spaced boilerplate in double-talk legalese from the seventeenth century.

"What'll it be? You have the option of selecting 'Liquidated Damages.' As the homebuyer, it's up to you. Do you want 'Liquidated Damages' in this contract, or not?"

The new homebuyer has never heard of 'Liquidated Damages' but it sounds ominous. The real estate broker isn't quite sure what it means, but since it's in the contract, the buyer goes ahead and chooses the 'Liquidated Damages' option. Has the buyer done the right thing?

"Liquidated Damages" can apply to any contract. Most printed real estate contracts contain a "Liquidated Damages" clause. If the buyer and seller agree, then the "Liquidated Damages" clause is included in the contract. So what are "Liquidated Damages?"

"Liquidated Damages" only apply if the buyer or seller breaks a contract. Any time a party to a contract breaks it without justification, the other party is entitled to recover any money they lost because the other party broke the contract. The amount of money they are entitled to is called "Damages." It literally means the amount of damage the party suffered, or the amount of money they lost, when the other party broke the contract.

Before a party can recover any "Damages," they must prove the amount of their damages, which is the amount of money they lost. Sometimes it's hard to prove the amount of money that's lost. If a buyer breaks a contract, how much has the seller lost?

What if the seller loses nothing because the property gets sold to another buyer for more money? The seller has lost nothing, and has no damage. What if a seller refuses to complete the sale? The buyer can buy another property. But how much money has the buyer lost in the first transaction? It's not always clear.

To get around these problems, the buyer and seller can agree to "Liquidate" any damages. This means that the buyer and seller agree up front on the amount of money either side will get if the contract is broken. By agreeing on the precise amount of damages, the parties "Liquidate" the damages, meaning that the amount of damages is certain.

Many printed real estate contracts contain a "Liquidated Damages" clause that limits the amount of "Liquidated Damages" to the amount of the down payment, up to a maximum of 3% of the price of the house. Sellers often don't understand that their buyer can walk away from the contract at any time and pay no more in "Liquidated Damages" than the down payment. If sellers understood this, they might ask for larger down payments.

There are no consistently right or wrong answers with "Liquidated Damages." The decision on whether to agree to "Liquidated Damages" is just one of the many items to be considered when a house is sold.

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What's in a Name? Broker vs. Agent

Not every home buyer appreciates the distinction between a real estate Broker and a real estate Agent. Brokers are authorized to independently conduct real estate transactions and advise on real estate. Agents are only authorized to work under the supervision and direction of a broker. The activities of a real estate agent are restricted. For example, an Agent cannot accept employment directly from a purchaser of real estate. Only a Broker can directly accept employment from a purchaser.

Two homebuyers learned one of the distinctions between a broker and an agent the hard way. Mr. and Mrs. Davis agreed to have a realtor, Mr. Harris, represent them in their purchase of a home. Mr. Davis falsely represented himself to Mr. and Mrs. Davis as a real estate broker when in fact he was only a real estate agent. He provided them with a false business card which indicated he was a broker. He accepted from Mr. and Mrs. Davis a $3,000 deposit and a $25,000 down payment towards the purchase of the home. He kept the money for himself and never returned any of it to the Davises. Davis v. Harris (1998) 61 Cal. App. 4th 507.

The Davises filed suit against Mr. Harris and won. They then made a claim on the Real Estate Recovery Account for compensation. This special Account is maintained by the California Department of Real Estate to compensate victims who have been defrauded by real estate brokers or agents. The maximum compensation for any single transaction is $20,000. The Court of Appeal found that the Davises were not entitled to compensation because Mr. Harris' wrongful actions were done in the capacity of a broker, but he only held the license of an agent.

If the Davises had checked, they would have learned that Mr. Harris was in fact a real estate agent and not a real estate broker as represented. The California Department of Real Estate maintains records on the license of every real estate agent or broker in California. This information is available to the public.

Cautious sellers or purchasers in a real estate transaction can take a number of steps to protect themselves from an unscrupulous real estate broker or agent. If a broker or agent has been in trouble before, they may have been named as a defendant in a lawsuit. If the buyers know the counties where the broker or agent does business, they can check the court records for those counties. The Court will have a record of any lawsuit by or against the broker or agent.

Buyers or sellers can also check with the California Department of Real Estate ("DRE"). The DRE will inform buyers or sellers over the phone whether a broker or agent's license is active, whether it has ever been suspended or revoked, whether a public reproval has ever been issued, or whether other disciplinary action has been taken. Such license information is available by calling the DRE "Flag" section at (916) 227-0906 or by mailing a request to the California Department of Real Estate, 2201 Broadway, Sacramento, California 95818. The DRE will mail copies of documents showing any action taken against licenses, but will charge a fee to do so. Information over the phone is provided at no charge.

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What is a Homestead?

When most people hear the word "Homestead" they think of Doc Holliday and Wyatt Earp out homesteading a cattle ranch on the Wild Frontier. There was certainly a time when the U.S. Government had "more land than it needed." To settle new or outlying areas, the federal government gave substantial tracts of land to persons willing to live on it for extended periods of time. These settlers received title to their land through "Homesteading" it.

The modern use of the word means something quite different in California. A Homestead is an "exemption" provided by California law to every person who lives in a "dwelling." Such a dwelling may be a conventional single family home, but it may also be a temporary or movable home such as a trailer, a mobile home or a boat. No action is required to create a "Homestead Exemption." It automatically exists for every property which qualifies for the exemption.

A Homestead Exemption has only one use. The exemption applies when the home where the debtor lives is sold to pay a debt. If a homeowner is sued through a lawsuit and loses, then the other party (the "judgment creditor") is entitled to satisfy the amount of the judgment through selling certain assets belonging to the debtor. One of the assets which can be sold is the debtor's home. California law provides for the Homestead Exemption so that every person with equity in a home can know that such equity is protected up to the amount of the exemption, even if their home is sold.

After the sale of the home, the judgment creditor is entitled to receive a portion of the equity the debtor had in the home. The judgment creditor gets the debtor's equity by having the house sold at auction. After the house is sold, the first persons to be paid are the lenders who had mortgages on the home. The lenders are paid the full amount remaining on their loans. The second persons to be paid are the homeowners. The homeowners are paid the amount of the Homestead Exemption. The third person to be paid is the judgment creditor. If nothing is left over after the lenders and homeowners are paid, then the judgment creditor gets nothing from the sale.

The amount of the homestead exemption depends upon several circumstances. If the homeowner is a single person, the exemption is $50,000. If the debtor is married and both spouses live in the home, the amount is $75,000. If the debtor lives with and cares for a minor child or grandchild, the amount is $75,000. If the debtor or their spouse is 65 years or older, the exemption is $125,000. The exemption may also be $125,000 is the debtor is physically unable to work, or if the debtor is over 55 years old and makes less than $15,000 per year. Other factors may also qualify a debtor for an exemption of $125,000.

The net result of a Homestead Exemption is that even if a debtor's home is sold, the debtor will receive at least the first $50,000, and in some case up to the first $125,000, of equity from the sale. Of course, if the debtor has less than $50,000 equity in the property the debtor will not receive more than the value of his or her equity.

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What is a Transfer Disclosure Statement?

In case somebody feels like they don't have enough to read, they can buy a house. Real estate brokers and escrow agents will ask them to sign voluminous, small print, legalistic, single spaced boilerplate documents at the drop of a hat. And they'll bring them all at once. The next comment will be "Just sign here, here and here. Just initial there, there and there."

If the homebuyers react like most people, their eyes will glaze over, they'll grip a pen with sweaty hands, place their other hand over their eyes and say "Just let me know when it's over." The signing party begins, and before they know it they've signed a sheaf of documents they've never seen before, and will probably never look at again. And when they're done, Viola! They own a house.

So what are all those volumes and reams of papers they sign? Heaven help the poor homebuyer who asks what they are, or actually tries to read anything. "You do want this transaction to close today, don't you?" Many of the documents may be inspection reports. Others may be loan documents. Still others may be escrow instructions. Are the buyers obligated by all of those papers they sign? In most cases, yes.

One set of very important papers that must accompany the sale of every home is the Transfer Disclosure Statement. The seller must provide this statement in every transaction involving one to four housing units (single family home, duplex, triplex, four plex). The precise wording of the statement is provided by law. The language can be found in the California Civil Code at section 1102.6.

What is a Transfer Disclosure Statement? It's usually a two page pre-printed form on legal-sized paper that describes the features of the home. The first part contains a number of boxes to check telling the buyer whether the house has a range, a dishwasher, a hot tub a water heater, a sump pump and other items. The second part directly asks the sellers whether they know of any defects in such things as floors, windows, electrical systems, roofs, foundations and other systems in the home. If the sellers check any of the boxes "yes", they are required to provide an explanation of the problem. The third part directly asks the sellers if they are aware of any problems in a number of areas, such as room additions made without necessary permits, settlement or slipping of the property from any cause, flooding or drainage problems, zoning violations, or damage from fire, earthquake, floods or landslides. Again, if the sellers check any box yes, they must provide a written explanation.

The form also contains space for the buyers' and sellers' agents to list any problems, or any potential problems, that either agent discovers from their inspections. The form then advises the buyer that the transaction may be canceled for a period of three days after the buyer receives the completed form.

In some transactions, the seller may wonder whether or not the seller is obligated to disclose information about problems with the property that aren't listed or asked about on the Transfer Disclosure Form. The answer in most cases is yes. The Transfer Disclosure Statement is not exclusive. Even though the seller truthfully completes all of the question asked in the statement, the seller remains obligated to disclose all known facts which affect the value or desirability of the property. Sale of a property "as-is" doesn't affect the sellers' duty to provide the Transfer Disclosure Statement or to disclose other known facts which negatively affect the value or desirability of the property.

Robert B. Jacobs is a Real Estate, Construction and Business Law Attorney in Pleasanton, California. Note: Legal situations differ, and each one is unique. The foregoing information is not intended to be a complete or an exclusive treatment of the subject discussed, and a legal professional should be consulted before deciding if or how the information above may apply to any specific situation.

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When a Problem Develops, Take Immediate Action

The parties have signed a contract, and now it's time for performance. One side begins to sense that important facts in the transaction may not have been disclosed before the contract was signed? What should both parties do?

A contract is an agreement between two or more persons where both sides agree to provide goods, services, or something of value to the other side. What happens when one side fails or refuses to perform? Or what happens when one side begins to feel that the contract was not fairly negotiated, such as a situation where defects in goods or services were not disclosed?

The parties, having entered a contract, now find themselves in a situation where performance is not what was expected. At this point, the party that doesn't receive full performance has a problem, and that party actually has two problems. The first problem is how to get the other side to perform, and the second problem is the potential cost of getting the other side to perform.

When contract disputes arise, many people have a natural tendency to try to informally resolve the problem with the other party. This approach can sometimes be successful, and if successful both parties can save attorneys fees in attempting to resolve the dispute. But what about situations where the other party absolutely refuses to perform, or where the party lacks the necessary resources to perform?

At this point, one or both of the parties frequently seek legal counsel. In some situations, an attorney is consulted early in the process, but in others an attorney is consulted after extensive efforts by the parties to informally resolve the dispute.

What should the parties consider in deciding whether to retain counsel? Cost is often an issue, and in very small matters an attorneys fee may not but justified. But when dealing with matters of any significance, in almost every situation people's rights are better preserved when they consult competent counsel. An attorney is trained to spot legal issues, legal rights, and to counsel clients on how best to preserve their rights. On a practical level, many attorneys deal with disputes, confrontation, and problems on a daily basis, and over a period of time they develop a sense of dispute resolution, and like a river guide, they can sometimes help clients know what to expect. They can often use their experience to help clients see what may be around the next bend. Because such attorneys are experienced in dispute resolution, they can sometimes provide invaluable assistance in helping clients decide which steps are necessary or best for resolving a particular dispute.

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When Leasing Property, Record the Condition

A picture is worth a thousand words -- or in some cases ten thousand words.

I serve as a small claims court Judge twice each year. By law, small claims actions are limited to claims of $5,000 or less. But even though the amount of the claims are smaller, the drama can sometimes be as great as cases filed in Superior Court, where claims have no dollar limit.

One of the most common cases I see as a Judge involves claims between landlords and tenants. The case is often filed by a tenant against the landlord who has withheld part of the security deposit to repair damages. In these cases, the tenant often claims that the damages were present when they moved into the property. The landlord usually claims that the property was in first-rate condition, and that the tenant has either failed to maintain the property or has damaged it.

As a judge, I have the responsibility to decide whether the landlord or the tenant is presenting the more accurate story. It's not always an easy task. Landlords usually have more money, so the tenant may receive more sympathy initially, but Landlords can also appear to have received poor treatment at the hands of the tenant.

Frequently, one side or the other will present pictures of the condition of the house or apartment that shows the damaged conditions. But in almost every case, neither side has taken photographs that show both the "Before" and "After" conditions. Because the photographs only show the conditions after the damage is present, a judge must decided whether or not the damage was present when the tenant moved into the property. The judge must rely on oral testimony -- but this testimony is often uncertain, and is usually contradicted by the other side.

A landlord or tenant who is thinking ahead will sometimes take photographs - or a videotape - of the condition of the property both before and after the tenancy. By using dated photographs, the parties can preserve powerful evidence of the condition of the property in the event a later dispute occurs. Landlords frequently use a written description of damage when a tenant takes possession. When used properly, this process can protect both sides, but a written description does not always accurately describe the extent of the damage. In those cases where a landlord doesn't use a written checklist, a picture can document the extent of damage. A letter to the other side that encloses copies of the photographs, sent by certified mail or federal express, can provide further evidence of the date the damage was present.

Certainly most people don't lease property expecting a dispute. However, a few precautionary steps can help resolve problems later on if both sides will keep accurate records of the condition of the property.

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