Archive for May, 2010

Unprecedented Federal Tenant Protections Enacted by Congress

May 26, 2010

On May 20, 2009, President Obama signed Senate Bill 896 (Helping Families Save Their Homes Act of 2009) into law. Title VII of this Act is called “Protecting Tenants at Foreclosure Act of 2009” (“PTFA”) and is designed to protect “bona-fide” tenants from being displaced when their landlord’s property is foreclosed. While the new law protects tenants, it raises significant issues for landlords, property managers, lending institutions and buyers.

The PFTA applies where foreclosure has occurred on a “federally-related” home loan. A winning bidder at the foreclosure sale, often the bank, is termed by the PFTA as the “immediate successor in interest.” Pursuant to the PFTA, immediate successors in interest acquire the property subject to any “bona-fide” leases in place at the time of foreclosure. To qualify as “bona-fide,” (1) the lease must have been executed prior to the issuance of the notice of the foreclosure; (2) the defaulting borrower may not be the tenant under the lease; (3) the lease must be the result of an arms-length transaction; and (4) the lease must require “fair market rent” for the property.

If a “bona-fide” lease exists, the successor in interest is required to honor the balance of the lease term unless the successor in interest sells the property to a buyer “who will occupy the unit as a primary residence.” Additionally, the successor in interest is required to provide the tenant with 90-days notice to vacate. Even in the case of “bona-fide” month-to-month tenancies, a successor in interest must still provide 90-days notice requiring the tenant to vacate.

Significant concerns are raised by the PFTA and, in many instances, clear answers are yet to be determined. Property managers, landlords, agents and prospective buyers should familiarize themselves with the new law, and consult competent legal counsel if necessary. The new law can be found at http://www.combslawgroup.com.

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Must Meet the Pertinent Real Estate Subdivision Laws

May 26, 2010

Four years ago a small homebuilding company purchased ten acres of land in Gila County just outside of Payson. The ten acres were then split into five lots and homes were built on each of the five lots. The last of the five homes has finally closed escrow recently. The small homebuilding company now has the opportunity to buy the adjacent ten acres at a great price, and in the future they may build another five homes. Will the small homebuilding company have to comply with the real estate subdivision laws, e.g., file a public report, if they build and sell five homes on this adjacent ten acres?

Probably not because if a parcel of land is split into no more than five lots, the Arizona Department of Real Estate (“ADRE”) subdivision requirements, including the filing of a public report, do not apply. The ADRE, however, has a “catch all” provision that, even if the subdivision laws technically do not apply, if there was the intent to avoid the subdivision laws, the subdivision laws could be violated. For example, if the original intent was to ultimately buy the entire twenty acres and split the entire twenty acres into ten lots, the ADRE may successfully contend that the homebuilding company violated the subdivision laws by splitting one parcel of land into ten lots. In light of the passage of time, however, the homebuilding company will probably not have a problem with the ADRE. Although the homebuilding company will not have to file a public report, when they do sell any of the five lots located in an unincorporated area of Gila County, they will have to furnish to the buyer, and will have to record, an affidavit of disclosure containing many of the same requirements as a public report, e.g., water supply, legal and physical access, and utilities to the land. See A.R.S. § 33-422.

Note: Municipalities may have more strict requirements than the ADRE for subdivisions. For example, if the ten acres was located in the town of Payson itself, and not in an unincorporated area of Gila County, the town of Payson would permit only three, not five, splits of the ten acres of land.

Generally Buyers Cannot Cancel After Expiration of Inspection Period

May 26, 2010

A California partnership signed a contract to sell forty acres of land in the Rio Verde area of North Scottsdale. The buyer deposited $100,000 earnest money and under the contract had a sixty-day inspection period to conduct all “due diligence” inspections, including environmental inspections, relating to the forty acres of land. The sixty-day inspection period passed, and escrow was scheduled to close. The buyer’s environmental expert now says that the southern portion of the forty acres has environmental problems because of hazardous wastes due to dumping of paint and other building materials by homebuilders in the area. The buyer now demands that the cancellation of the contract and that the $100,000 earnest money be returned. The California partnership refuses to agree to the return of the $100,000 earnest money to the buyer because it is their understanding is a buyer is not entitled to cancel a contract because of environmental problems after the inspection period has passed. They had no knowledge of any environmental problems, and no one in the California partnership group other than one person had even seen the land for several years. Per real estate law, is the California partnership we entitled to the $100,000 earnest money if the buyer won’t close the transaction?

Probably. The general rule is that, if there is an inspection period for a buyer to conduct “due diligence” to determine the feasibility of buying the property, including the existence of any environmental problems, the buyer cannot cancel the contract after the inspection period has passed. Therefore, the California partnership should be entitled to the $100,000 earnest money. However, some courts have ruled that, if there is a mutual mistake of fact between the seller and the buyer relating to a material problem with the property, i.e., neither the seller nor the buyer knew of the material problem, the buyer is entitled to rescind the transaction based on this mutual mistake of fact and receive the return of the earnest money. For example, the Ohio Supreme Court has ruled that, even though the buyer did not discover a flood plain problem until after the inspection period, the buyer was entitled to rescind the transaction and get the earnest money back because both the seller and the buyer were under a mutual mistake of fact regarding the existence of this flood plain problem. 632 N.E.2d 507 (1994).

Overhanging Branches Leads to Homeowner Property Damage

May 25, 2010

At a home in a Chandler subdivision the branches of a neighbor’s large eucalyptus tree have grown over the common wall into another backyard. On a windy day the leaves from this large eucalyptus tree litter the yard, stain the patio, and clog the pool cleaning system of their neighbors. As a result the neighbors have had to replace the pool pump because of overheating due to the leaves clogging the pool cleaning system. Can the neighbors trim the branches of their neighbor’s large eucalyptus tree? And if so, can the neighbors get reimbursed for the cost of the trimming?

As a general rule, a homeowner is entitled to trim up to the property line the branches of a neighbor’s tree that hang over onto the homeowner’s property, provided that this trimming will not kill the neighbor’s tree. Therefore, prior to trimming the overhanging branches of a neighbor’s tree, a homeowner should consult with an arborist or other professional. If trimming is allowed, the neighbor is generally not liable to reimburse the homeowner for the cost of the trimming. However, if the branches of the tree cause “sensible injury” to the homeowner’s property, the neighbor will be liable for any costs, including the homeowner’s trimming costs. 145 Ariz. 115. The homeowner’s property damage to the pool cleaning system, including the replacement of the pool pump, is probably a “sensible injury.” Therefore, the neighbors should be able to get reimbursement from the neighbor for the cost of trimming the branches due to the large eucalyptus tree. Additionally, the cost for the new pool pump should be reimbursed as well.