In the 9th Circuit case of Garvin vs. Cook, 922 F.3d 1031 (9th Cir. 2019)  the BAP affirmed the bankruptcy court’s order confirming a chapter 11 plan, over the objection of the United States Trustee, who objected because one of the chapter 11 debtors leased property to a tenant who grew marijuana.   The objection was that the chapter 11 debtor planned to use income from that lease to fund the plan.  The United States Trustee argued the lease violated federal drug law – namely, the Controlled Substances Act – therefore the plan was unconfirmable under Section 1129(a)(3) because it was proposed by means forbidden by law.

The Nineth Circuit overruled the objection and confirmed the chapter 11 plan.  It concluded that Section 1129(a)(3) directs bankruptcy courts to police the means of a reorganization plan’s proposal, not its substantive provisions.  The panel specifically found that the payment plan was not proposed was not forbidden by law, despite the alleged violations of federal law by the third party tenant.  In other words, it found the Trustee did not show that the plan “will result in bankruptcy proceedings being used to facilitate legal violations.”

  1. Mediate cases early, e.g. within the first few months of litigation!   It behooves all parties to settle the case BEFORE the attorney’s and clients ascertain the facts or law supporting or detracting from their case.  This sounds heretical, but most lawyers are lazy and do not begin to research their case until before a substantive hearing, mediation or trial.  Most lawyers only learn the facts of a case during a deposition, or mediation, when they are forced to sit and listen to their client (or the opposing party) speak.
  2. You attract more flies with honey than vinegar.  Be nice to the party paying the money. Make the lawyer or insurance adjuster have sympathy for your client.
  3. Ask the opposing side to help you settle the case.  Ask your opposition what does she or he think can be done to resolve the matter.
  4. Politely using the Socratic method (e.g. law school), ask the opposing side to help you understand the law/facts why his client does not want to pay what you proposed or why you should settle.  Maybe add that you want to learn the truth from the opposing lawyer, he’ll probably open up and spill the beans!
  5. If you are defense counsel for an insurance company, explain to the plaintiff’s attorney that there is a reservation of rights with serious coverage issues and if this case goes to trial and the defendant loses, there may not be coverage or an easy payment from the insurer .
  6. Encourage your client to have realistic expectations.  Usually sending a bill, or a written estimate for future attorney’s fees and costs to your client does the trick.
  7. Explain to an insured defendant that the policy has eroding limit provisions, also known as wasting policy limits, defense-within-limits, cannibalizing or self-liquidating limits, which will reduce the insurance coverage limits available to an insured as certain costs and expenses are incurred during the defense of an insured or payment of a judgment.
    1. If representing an insured defendant pursuant to a reservation of rights, explain the insurer may file a declaratory relief action to obtain a court order to withdraw from paying for the defense and may also obtain the right to recover its costs of defense due to lack of coverage.
  8. Blame the insurance adjuster or a third party for your client’s refusal to settle.  Explain to Plaintiff’s counsel that there is barely coverage so the adjuster is limited in what he can authorize to pay to settle.   Sometimes blaming a co-defendant or spouse who is interfering with settlement by encouraging litigation works.
  9. Get a bankruptcy attorney to send a pre-filing or credit counseling letter citing the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) so the plaintiff knows the defendant is serious about filing for bankruptcy relief.
  10. Use depositions where all parties are present to settle the case. I settle 75% of my cases this way.  Once my client brought a Ouija board to a deposition and afterwards the parties settled after  communicating with their deceased loved one who knew something about the dispute. This is a 100% true event.  (I have also had a dead client call me, but that is another story.)

January 1, 2021, the new Civil Code § 2924f Click here for text of AB1079 and Civil Code 2924f prohibits bundled residential foreclosure packages to be sold. Sometimes lenders as part of the foreclosure would at auction bundle several properties together selling them to a single buyer. The new law requires foreclosed homes to be sold individually to give people who want to actually live in the home a fair chance at buying it. Special notices (forms) are now required and after the initial bids at the foreclosure auction are received, tenants, families, local governments, affordable housing nonprofits, and community land trusts have a 45-day window to offer a higher bid in order to buy the property. These provisions of SB 1079 apply to all residential properties with one to four housing units and will sunset in five years.

laciv221 In order to “constructively” serve a person by publication, or by serving the Secretary of State, you need to show due diligence to track down and to serve the defendant by “normal” means.    E.g. personal or substitute service.  The United States Postal Service provides this form and information to obtain a persons or businesses’ forwarding address if the USPS was provided with a forwarding address.  See  U.S. Postal Service FAQ on obtaining a forwarding address.  The same form is also available to fill out online then to print a copy here: Click here for an online form fillable version you can print of the Exhibit 5-2b form

Here is a nice checklist for obtaining your due diligence wanted by the Los Angeles Superior Court for an order to serve a defendant by publication.  Click here: LASC Checklist for Service by Publication – LACIV221

 

The current primary laws affecting residential tenancies are the CDC Agency Order Published September 4, 2020 and California’s AB3088 enacted August 31, 2020 aka The California Tenant, Homeowner, and Small Landlord Relief and Stabilization Act.  Commercial evictions for non-payment of rent may still be limited through Governor Newsom’s September 23, 2020 Executive Order extending the timeframe for the Covid-19 protections through March 31, 2021. The Governor’s Order can be used by local governments to forestall non-payment of rent evictions for commercial tenants suffering adverse financial impacts due to Covid-19.  Further, the new statutes limit local government’s ability to create additional relief for residential tenancies.  AB3088 also requires residential rent repayment to begin by March 1, 2021.

Read Michael Simkin’s detailed explanation of these new laws (and more) in his article published by the Real Property Section of the CLA (California Bar Association).  Click here: Article on AB3088 and other New Covid-19 Rent Laws

Most California commercial leasing transactions use one of the AIR CRE Commercial Leases (“AIR Forms”) or the CAR Commercial Lease form (“CAR Form”).  The AIR Forms are very inclusive at 20+ pages, are balanced for the landlord and tenant, but may not be the right choice for every commercial lease.  The CAR Form is user friendly at 6 pages, but only covers the basics.  The AIR CRE forms have specific leases for office, single, multi-tenant, ground leases and for shopping centers.  AIR also offers addendums for arbitration, options to extend, rent adjustments, right of first refusal, etc.  The primary difference between the AIR and CAR forms are detailed assignment of responsibility.    Read my article published by the CLA (of the California State Bar Association) to answer your questions about the forms.

Click here to read Simkin’s CLA Article comparing the AIR and CAR Commercial Leasing forms

 

Should I use the AIR CRE Commercial Leasing form of the CAR Commercial Leasing form?  The lawyer answer is that they are similar but different!  Most of the time the AIR form should be used, but both have pros and cons for landlords and tenants.  See this attached memo with snippets of the clauses discussed or read below.  Click here: AIR vs. CAR Commercial Leasing Forms  Please let me know what you think of my comments.

Nine AIR Commercial Leasing Forms vs. One CAR Commercial Leasing Agreement?

Most California commercial leasing transactions use one of the AIR CRE Commercial Leases (“AIR Forms”) or the CAR Commercial Lease form (“CAR Form”).  The AIR Forms are very inclusive at 20+ pages, are balanced for the landlord and tenant, but may not be the right choice for every commercial lease.  The CAR Form is user friendly at 6 pages, but only covers the basics.  The AIR CRE forms have specific leases for office, single, multi-tenant, ground leases and for shopping centers.  AIR also offers addendums for arbitration, options to extend, rent adjustments, right of first refusal, etc.  The primary difference between the AIR and CAR forms are detailed assignment of responsibility. Read more below: Continue Reading Comparison of the AIR vs. CAR Commercial Leasing Forms (With Hints!)

Should I use the CAR or AIR Form Agreement to Purchase Commercial Real Estate ?

Here is this article as a pdf with the actual provisions discussed.  Click here: AIR vs. CAR Real Estate Purchase Forms which to use

Most (90%+) of California realtors use either AIR CRE Standard Offer, Agreement And Escrow Instructions For Purchase of Real Estate (Non-Residential) (referred to as “AIR”) and the CAR Commercial Property Purchase Agreement And Joint Escrow Instructions (NON-RESIDENTIAL) (referred to as “CAR”). When it comes to real estate transactions, custom agreements usually are where the malpractice occurs. The AIR forms are designed to keep the transaction moving. The CAR forms allow the buyer more time to inspect, perform, or extend the closing date. Often, it is also more likely the buyer can get the deposit refunded if a CAR form is used.

The primary difference between the AIR and CAR forms are passive vs. active contingency removal.

Most “commercial realtors” will use the AIR form if they represent a seller because it has passive (auto removal) of contingencies. CAR forms are usually used if the realtor does not belong to the AIRCRE organization that licenses those forms. The CAR form is usually more favorable for a buyer. I have membership in both organizations and use AIR and CAR forms. I have also used CAR forms for sellers, as with everything, it just depends. 😊

AIR Agreement has passive or automatic contingency removal of the financing and physical inspection contingency. This means that if the buyer fails to notify the seller that it is not removing its contingencies it is presumed that the contingencies have been waived and the transaction will continue. For example, the AIR form at paragraph 5.2 and paragraph 9.1 provide in part:

Paragraph 5.2 states in part:  “If Buyer shall fail to notify its Broker, Escrow Holder and Seller … in writing… that the New Loan has not been obtained, it shall be conclusively be presumed that Buyer has either obtained said New Loan or has waived this …contingency.”

9.1 states in part: “If Buyer fails to notify Escrow Holder in writing, of the disapproval of any of said contingencies within the time specified therein, it shall be conclusively presumed that buyer has approved such item, matter or document.”

However, the CAR form is more lenient for buyers because the default requires affirmative, or active removal of contingencies in writing, or they are not automatically waived/removed. This is usually better for buyers. This is also why CAR forms require a series of Notice to perform/Notice to Cancel/Notice to Close, etc. before a party can terminate the transaction. The CAR form at paragraph 18 provides:

“Any removal of contingencies or cancellation under this paragraph by either Buyer or Seller must be exercised in good faith and in writing.”

The way the escrow closing date is calculated also differs between the AIR and CAR forms.

The AIR Agreement basis the closing date to the buyer’s removal of contingencies.  Paragraph 1.1 of the AIR Agreement ties the closing date to ____ days after waiver or expiration of Buyer’s Contingencies.  It provides in part:

“… (“Escrow”) … to close 30 or ____ days after the waiver or expiration of Buyer’s Contingencies (“Expected Closing Date”).”

The seller must then be aware that if an extension of the date for inspection or another contingency is made, but the seller does not want to extend the closing date, to make that clear when the contingency extension is provided to the buyer.  This may be a factor when 1031 deferred exchanges are involved.

The CAR Agreement sets the escrow closing date to +__ days after acceptance.  Paragraph 1. D. provides in part that:

“Close of Escrow shall occur on (_____ ) (date) (or ___ Days After Acceptance).”

Because the CAR Agreement is tied to the date of acceptance, extending buyer’s date to remove contingencies will not automatically extend the escrow closing date.  Most realtors forget about this which may create a loophole for the seller to serve a notice to perform and maybe notice to cancel escrow.  This is common in today’s “seller’s market”.

The AIR Agreement liquidated damages clause differs from CAR and only applies to the deposit.  AIR limits its built-in arbitration clause to liquidated damages or deposit disputes.  It also provides that if the deposit is paid as liquidated damages to the seller, then any escrow and title cancellation fees are paid by the seller.  If a broader arbitration clause is desired, then the separate AIR form arbitration addendum should be used.  However, even that addendum has limits on what is covered by arbitration.

CAR is consistently buyer friendly.  I like Paragraph 25 because it makes it clear that a clause added by a realtor (or a seller’s know it all lawyer) trying to change the intent of the CAR form is void.  Also, if the deposit is increased, a separate CAR form is required.  CAR’s liquidated damages clause at paragraph 25B is phrased similarly to the AIR form, but they both fail to comply with Civil Code section 1671 unless modified.

As to liquidated damages being kept by the seller, in my opinion both forms do not protect the seller.  The law abhors forfeiture and Civil Code section 1671 provides for a very high burden for the seller to keep the deposit.  But I have a secret way to help sellers, look for another post, maybe 😉.

Dispute Resolution differs between the AIR and CAR Agreements.  (AIR is limited to the deposit, and CAR is broader as to what disputes are included for arbitration.)

The AIR Agreement does not require mandatory mediation of disputes, and if selected, does not require the arbitrator to be an attorney or retired judge.  However, it requires arbitration of disputes about the buyer’s earnest money deposit if the parties initial that provision.

The AIR agreement paragraph 22.2 benefits the seller if the seller wins.  It provides in part:

“Buyer’s resort to or participation in such arbitration proceedings shall not bar suit in a court of competent jurisdiction by the buyer for damages and/or specific performance unless and until the arbitration results in an award to the seller of liquidated damages, in which event such award shall act as a bar against any action by buyer for damages and/or specific performance.”

Most disputes either concern the return of the deposit, specific performance or failure to disclose known defects.  If the buyer loses the fight over the deposit, then it’s game over.  I don’t understand how an arbitration of the deposit issue is tied to a specific performance action unless the seller wants to keep the deposit and not complete the transaction.  I assume this means that parallel proceedings can occur with one party arbitrating and the other suing in Superior Court until the arbitration award is final which would serve to put litigation expense pressure upon the parties to settle.

The AIR Agreement requires arbitration under the commercial rules of the American Arbitration Association, requires forfeiture of many normal rights in litigation, and requires that each arbitrator shall be an impartial real estate broker with at least 5 years of full time experience in both the area where the property is located, and the type of real estate involved.  Personally, I do not want a non-lawyer (or non-judge) making a final decision that cannot be appealed.  Therefore, I suggest parties not agree to the arbitration provision as written in the AIR agreement.

The AIR Agreement does not require mediation, but the CAR Agreement requires mediation to be awarded attorney’s fees.

Only the CAR Agreement has mandatory mediation in order to be awarded attorney’s fees.  I think the CAR Agreement is better because it requires that buyer and seller agree to mediate disputes before filing a lawsuit even if the arbitration clause is not signed.  The exceptions are if a an eviction or lis pendens needs to be filed.  The CAR form requires mediation through the C.A.R. Consumer Mediation Center which has many brokers and lawyers who will mediate disputes for less money than a retired judge.  However, the parties are free to choose whomever they want as mediator.  Paragraph 26A provides in part “… then that Party shall not be entitled to recover attorney fees, even if they would otherwise be available to that Party in any such action.”  The penalty for not mediating is severe, the party refusing to mediate may lose his or her right to recover attorney fees even if ultimately prevailing in the dispute.

The CAR Agreement requires that the arbitrator be an attorney, unless the parties choose otherwise.  Paragraph 26. B of the CAR Agreement requires the arbitrator be a retired judge, or an attorney with at least 5 years of transactional real estate Law experience, unless the parties mutually agree to a different arbitrator and gives the right to discovery.  This provision is better than the AIR agreement that requires a broker, not a real estate lawyer.  CAR paragraph 26. B. provides in part: “The arbitrator shall be a retired judge, or justice, or an attorney with at least 5 years of transactional real estate Law experience, unless the parties mutually agree to a different arbitrator.”

Assignment of the Agreement (AIR is more Buyer friendly)

The AIR and CAR forms differ about assignment of a signed purchase and sale agreement.  The AIR Agreement does not require the seller’s consent for a buyer to assign its rights under the agreement.  This makes it much easier for escrow to change the buyer to an LLC owned by buyer or a third party so the buyer can make a quick flip.   Paragraph 1.1 of the AIR Agreement provides in the last part of ¶ 1.1 buyer may assign the contract, but requires the seller to expressly release the buyer (which as a practical matter does not mean much).

AIR paragraph 1.1 provides in part: “Buyer shall have the right to assign Buyer’s rights hereunder, but any such assignment shall not relieve Buyer of Buyer’s obligations herein unless Seller expressly releases Buyer.”

The CAR Agreement is more restrictive because it requires seller’s consent for any assignment of buyer’s interest in the agreement.  From a practical point, the buyer can assign because it would probably be unreasonable for the seller to withhold consent.  But this clause may lead to unnecessary litigation if the seller wants to play games.  The CAR provision is at paragraph 30, providing in pertinent part:

“Buyer shall not assign all or any part of Buyer’s interest in this Agreement without first having obtained the written consent of Seller. Such consent shall not be unreasonably withheld unless otherwise agreed in writing.”

AIR requires the seller to provide tenant estoppel certificates, CAR does not.

This difference is mind blowing.  Many commercial transactions involve tenants in possession.  It is broker malpractice not to obtain tenant estoppel certificates.  I had a case that started after major law firm failed to obtain an estoppel certificate regarding the sale of a large hotel because it was a “small lease”.  While the case was a lot of fun, that small lease cost the hotel hundreds of thousands of dollars in unnecessary litigation.

The AIR Agreement requires the seller to provide buyer with estoppel certificates.  Paragraph 9.1(h) of the AIR Agreement provides in pertinent part that:

“Seller shall within 10 or ____ days provide …Buyer and Escrow Holder with legible copies of all leases, … and with a tenancy statement (“Estoppel Certificate”) … executed by Seller and/ or each tenant…Seller shall use its best efforts to have each tenant complete and execute an Estoppel Certificate for that tenancy.”

The CAR Agreement does not have a mandatory estoppel certificate requirement, rather, it requires a box to be checked for the seller’s obligation to provide signed tenant estoppel certificates.

Which form should I use?

As with most things, there are more than one way to do it.  The AIR and CAR Agreements both get the job done.  From my point of view, both are equal once I have modified them.  And if people want to breach the contract or sue, nothing can stop that.  However, a competent attorney can help eliminate some of the variables.  Commercial realtors (especially when representing a seller will probably use the AIR form.  Switch hitters (realtors that sell both residential and commercial) will probably use what they have on their computer – the CAR form.

There are several legal doctrines to examine to determine if a commercial tenant’s lease obligations are excused.  The start is Civil Code §1511 and Civil Code §1514  This post examines  the doctrine of “frustration of purpose” which is close to the related “impossibility of performance” doctrine, but frustration more properly relates to the consideration for performance.  (Autry v. Republic Productions (1947) 30 Cal.2d 144)

Frustration of purpose requires  supervening events, unknown at the time a contract is made, so that without fault, a basic assumption on which the contract is made, cannot be performed.  (FPI Development, Inc. v. Nakashima, 231 Cal. App. 3d 367 (3d Dist. 1991)
If the debtor’s performance is excused by these causes, the debtor may owe part of the consideration according to the benefit which the creditor receives from the actual performance. (Civil Code, § 1514)