Oral Agreement or Written Agreement

A "hand-shake agreement" or oral contract is rarely advised.

 

While the law does enforce an oral contract, it is hardly ever a prudent decision. Countless probate lawsuits have arisen from situations when an agreement could have been memorialized but instead was agreed to orally. A recent partially published appellate decision involved an oral contract to transfer a cabin's ownership. In particular, the case involved a deceased married couple's interest in a cabin on leased federal land.  

 

Capra v. Capra, (2020) ____ CA4th _____. 

 

"In 1992, Frank Jr. and Thomas attempted to transfer the Forest Service permit to themselves and Lucille as trustees of the trust, but the Forest Service would not allow three names to be on the permit. The Forest Service would allow only an individual or a married couple to be named on the permit.

The three siblings decided it made sense for Thomas to be the trustee listed on the permit because Lucille was not living in California. Plaintiffs allege that Lucille and Frank Jr. "agreed to forego their rights to act as the representative on the Permit and allowed Thomas to be the representative Trustee named on the Permit." In October 1992, the Forest Service placed Thomas's name on the permit. The permit was renewed in 2008 in Thomas's name."

The sharing of the cabin unfortunately did not end well.

"In September 2015, Thomas declared that he owned the cabin and the permit exclusively, and that the plaintiffs had no right or interest in either. He asserted the right to deny anyone access to the cabin. He closed the Bank of America account and withdrew all its money, claiming it belonged to him. He changed the door locks and asserted exclusive control over all personal property at the cabin. He has not provided access to the cabin to plaintiffs, and in some instances, he has banned others from the property."

In an expected move, Thomas was sued by his siblings for taking the position that he owned the cabin exclusively. 

My reading of this case is that a written agreement should have been executed in 1992 which specified that even though only Thomas' name would appear on the lease, the cabin was effectively a tenants-in-common arrangement with each sibling owning a 1/3 interest. A written agreement would not have definitively prevented a lawsuit, but it would have definitely decreased the odds of one. An executed agreement would have (hopefully) specified the rights and obligations of each party. This would avoid the dreaded "he said, she said" scenario which invariably arises when a disagreement happens.   

Landlord-Tenant Law II

In a prior post I discussed helpful tips for a new residential landlord. This week I thought I would write about tactics a landlord should not pursue. The following are 5 no-nos for a residential landlord.

1. Wrongfully turning off the utilities

Many landlords, for foolish reasons, do not like to use the legal process to remove a tenant from the rental unit. Even though eviction proceedings are largely expedient and straight-forward, many landlords nonetheless engage in non-judicial evictions, which is unlawful and potentially criminal. The term for this is "self-help." Even though it sounds harmless and borderline patriotic given the U.S.' self-reliance mentality, it is very much frowned upon by the law.

Assume that Thomas, the tenant, has not paid rent for the month of March. Leonard, the landlord, is irate over this because Thomas has been delinquent in paying rent for the past couple of months and Leonard has warned Thomas about being prompt with rent. Leonard then goes to an attorney who tells him that Thomas can delay eviction proceedings for weeks if he pulls the right legal levers. Incensed that he has to wait weeks to evict Thomas, Leonard decides to cut the power line to Thomas' unit because no rational human can live in a dwelling without electricity. Therefore, Thomas will naturally want to leave the unit immediately. 

The obvious problem with this is two-fold. First, California law says that a landlord is prohibited from tampering with utilities in order to terminate the tenant's occupancy. CC § 789.3. The civil penalties for this include (1) actual damages; (2) up to $100 for each day that the landlord violates CC §789.3, but not less than $250 for each separate cause of action and subsequent or repeated violations being treated as separate causes of action subject to separate awards of damages; (3) attorney fees; or (4) injunctive relief. Second, it may be considered criminal to interfere with utility equipment. Pen C § 591.

2. Improperly entering the unit

A residential landlord may enter the rented premises only during specified situations at certain times and typically only after giving the tenant written notice. CC §1954. Many landlord mistakenly assume that they can just show up to the rental unit without prior notice and demand entry into the unit to inspect the premises. The following are the permissible reasons to request entry into the unit

1. in an emergency;
2. to make necessary or agreed-on repairs, decorations, alterations, or improvements;
3. to supply necessary or agreed-on services;
4. to exhibit the unit to prospective or actual purchasers, mortgagees, tenants, workers, or contractors;
5. to make an inspection under CC §1950.5(f);
6. when the tenant has abandoned or surrendered the premises; or
7. under a court order.

Reason #5 relates to a security deposit inspection in case you were curious what CC §1950.5(f) meant.

Although it should be noted that a landlord may enter without prior notice if done to 

1. to respond to an emergency.
2. if the tenant is present and consents to the entry at the time of entry.
3. after the tenant has abandoned or surrendered the unit.

Two additional key components of the landlord's right of entry is the fact that notice of the entry must be given in writing and the landlord may only enter the unit during business hours.  
CC §1954(d)(1). Unfortunately there is no definition of "business hours" in civil code. Still, the reasonable interpretation of business hours is 8:00 - 5:00pm or 9:00 - 6:00pm Monday - Friday. Although the lease agreement may define what constitutes business hours such that the weekend is included.

If the landlord commits a significant and intentional violation of CC § 1954, the tenant can receive up to $2,000. CC § 1940.2(b). 

3. Appropriating the tenant's valuable belongings

A common scenario is where the tenant breaks the lease early and the landlord is relegated re-renting the unit as required by law. CC § 1951.2. The tenant will often leave behind belongings, e.g. clothes, furniture and/or appliances. The landlord will then decide that since the tenant put them in a bind, the landlord will return the favor by appropriating their possessions left behind. Surprisingly, a landlord is legally able to keep the tenant's property provided the landlord has served them with a notice of abandonment and the value of the property is less than $300. CC § 1988(a). However, if the value of the property is above $300, the landlord is obligated to sell the property at public auction.  CC §1993.07. 

Since the landlord is granted the discretion to appraise the value of the tenant's belongings and is probably disgruntled that the tenant left behind some possessions, it is easy to see that this situation is ripe for abuse. For example, the landlord can easily devalue or deflate the true value of the items because there is no check on their discretion, plus they already view the tenant in a negative light for breaking the lease early. Moreover, many tenants are not prepared to litigate over a $275 couch and $50 mattress that the landlord misappropriated since attorneys charge that for an hour of time typically. Still, a landlord should know that just because the tenant left behind some property, this does not give them a license to appropriate the item for their own personal use. Rather the landlord needs to value the items and then make the appropriate legal determination.

4. Improperly raising rent for a month-to-month tenancy

When a new landlord takes over, he or she often likes to increase rent to put their unique stamp on the situation. In other words, the new landlord wants to show that they are in charge. However, California law is very specific as to when rent increases become effective. If the rent increase is 10% or less of the rent charged during the 12 months preceding the increase, the landlord needs to give 30-day notice before the rent increase becomes effective. CC §827(b)(2). If the rent increase is more than 10% of the rent charged during the 12 months preceding the increase, the landlord needs to give 60-day notice before the rent increase becomes effective. CC §827(b)(2).    

5. Retaliating against the tenant's lawful conduct

Retaliation seldom leads to positive results in life and the landlord-tenant relationship is no different. California law bars a landlord from retaliating against a tenant who invokes his or her tenant rights. CC § 1942.5. 

A common example is where the tenant complains to a city's housing authority about the habitability of the unit and when the landlord learns of this, attempts to evict the tenant. In short, this is prohibited by California law. CC § 1942.5. Moreover, if a tenant engages in protected tenant activities, the landlord is barred for 180 days from terminating the tenancy, increasing rent or decreasing any services, if done in retaliation. CC § 1942.5. This can be particularly frustrating to a landlord because they will have to endure a tenant they clearly dislike for an additional 6 months unless the tenant leaves under their own free will. In light of this, whenever a tenant invokes the right to live in habitable unit, a landlord should not reflexively think "eviction" to eliminate the problem immediately. Instead, the landlord should constructively engage the tenant or else they run the risk of having to deal with the tenant for at least another 6 months.

Landlord-Tenant Law I

It is quite common for a trust beneficiary to inherit residential rental property from the settlor. Once the transfer has been formalized the beneficiary then becomes the new landlord. For example, the trustee transfers the property to the beneficiary's own name from the trust's name. The following are 5 helpful recommendations to consider for new landlords coming from a present landlord, myself.

1. Read the lease/rental agreement

In just about any situation, a person is best served to read the controlling document, e.g. the contract, before embarking on any action. A rental agreement definitely falls within this category. By reading the lease, the new landlord will be able to gather the necessary information about the property: the tenancy's term, the amount of rent, the amount of the security deposit, when rent is due, how many occupants are there, can the tenants assign or sub-lease their interest, etc. Without knowing this pertinent information, the landlord will not be able to make an informed decision about what to do next.

2. Communicate with the tenant

An old adage says that communication is key. When a new landlord takes over, he or she should contact the tenant(s) to arrange a time to meet. At this meeting, the landlord can state that they are the new landlord and any problems should be directed to them. Also, this meeting can provide the tenant with an assurance that the new landlord will not become a slumlord or absentee landlord who just collects rent. Rather, a meeting will indicate to the tenant that the landlord takes this obligation seriously.

3. Inspect the property to ensure habitability

California law requires a landlord, within the context of a residential lease, to provide the tenant with a habitable living environment. Green v. Superior Court (1974) 10 C3d 616 This naturally raises the question of what is a habitable living environment? The Green Court said that "in most cases substantial compliance with those applicable building and housing code standards which materially affect health and safety will suffice to meet the landlord's obligations under the common law implied warranty of habitability."

Also, the California civil code says that a residential dwelling breaches this implied warrant of habitability if it substantially lacks any of the following affirmative standard characteristics (see CC §§1941.1;1941.3;):

1. effective waterproofing and weather protection,
2. proper plumbing or gas facilities,
3. hot or cold running water with connection to sewage disposal system,
4. proper heating facilities,
5. proper lighting or wiring,
6. clean grounds or adequate garbage cans,
7. floors, stairways, or railings in good repair or
8. operable dead bolt locks on the entry doors.

It is particularly important for a landlord to ensure a residence's habitability because a tenant can lawfully withhold rent or sue the landlord for damages when this duty is breached.

4. Follow the correct procedure for disposing of the tenant's security deposit

One of the most common reasons for a small claims action is the dispute over a tenant's security deposit. Many landlords fail to properly follow the correct procedures when returning a tenant's security deposit. The entire body of statutory law is found in Civil Code Section 1950.5. A landlord is best served to read the statute in its entirety. Unfortunately, the law is very poorly written as many clauses are ambiguous. Regardless, a landlord must adhere to this law when returning a security deposit.

A small claims action is very desirable to a disgruntled tenant because the law states that any portion of a security deposit retained in bad faith is grounds for the tenant to recover twice the amount of the security deposit in addition to actual damages. For example, if the landlord in bad faith retains a mere $50 of the tenant's $1,000 security deposit, the tenant can sue the landlord for $2,000 plus actual damages. In light of this financial benefit for the tenant, it is quite clear why so many small claims court cases involve security deposit disputes. 

5. Have the tenant sign a fixed-term lease

This is a personal preference as I have been a landlord for 7 years involving multiple properties. Many landlords let fixed-term leases, for instance a 6-month lease, roll into a month-to-month tenancy at the conclusion of the lease. When this happens, the landlord and tenant are each put in a difficult situation. 

The landlord has to be concerned that the tenant can just provide 30-day notice and leave, and at that point the landlord will have to find a new tenant. This jeopardizes the landlord's cash flow because a vacancy will result in no rental income for that particular period.  Furthermore, screening tenants is not an easy matter. There are numerous fair housing laws that a landlord must be aware of when showing a unit to a prospective tenant. Sadly many people who post on Craigslist list blatantly discriminatory requirements for their unit such as no families, only one sex allowed, etc. There are serious legal consequences for running afoul of fair housing laws.

In contrast, the tenant has to be concerned because the landlord may unilaterally terminate the tenancy by giving 30- or 60-day notice to the tenant. Under California law, a tenant has no inherent right to live at a particular dwelling for an indefinite period of time. Ferry v. McNeil (1963) 214 CA2d 411. A landlord may evict, through lawful non-discriminatory means, a tenant from the unit if he or she so pleases. A notable exception to this rule is municipal ordinances which mandate cause to evict a tenant. These are known as "just cause" eviction laws. A few cities that have just cause evictions include Oakland and San Francisco. Still, the vast majority of California cities do not have just cause eviction laws to allow a tenant to remain at a residence indefinitely. Thus, the landlord is free to remove the tenant if he or she chooses. In light of this certainty, it is my opinion that a tenant should request a fixed term lease to guard against unexpected termination.

Asset Protection Trust

There is nothing illegal, wrongful or unethical about protecting your assets from potential creditors. 

Asset protection is commonly practiced by millions of Americans, including myself in multiple situations. 

The key feature of asset protection is the method used to achieve it. Some methods work in California, while others do not.

For example, a savvy real estate investor will purchase property through a limited liability entity, such as a LLC or a corporation. Thereby the real estate investor's liability, subject to a few exceptions, is limited to the company's assets regardless of whether a judgment, fine or levy against the company exceeds the value of the company's assets. 

Assume that Willis purchased a home in San Francisco’s Sunset District for $400,000 through his company, Winning, LLC. Willis then leased the home to Lionel for 1 year. Sadly, Lionel slipped and fell on a banana peel that Willis had negligently left on the property. Lionel broke his hip, thereby ruining his promising soccer career and successfully sued Willis for $500,000. At this point, if Willis had owned the home personally, Lionel could enforce the judgment against all of Willis’ assets until he collected his $500,000 judgment. However, Willis had prudently decided to own the rental home through a LLC, thereby limiting his liability to the company’s assets. Consequently, Lionel’s recovery would be limited to whatever the company owned, namely $400,000. Even though the LLC did not have the assets to satisfy Lionel’s judgment, California law says that Willis is not personally for the debts of his LLC, specifically $100,000. Corp C § 1710. Thus, Willis would be able to walk away from his lawsuit financially battered and bruised but not ruined.

Now contrast the above example with the case of a person who creates a revocable trust and funds the trust with a rental property and is also the beneficiary of this trust. 

The aforementioned would be an example of a “self-settled” trust. The reason being is that there is a overlapping of positions whereby the settlor, the person who writes the trust, is also the beneficiary. California law is very specific in saying that creditors can reach the assets of a self-settled trust. Prob C § 15304. From the above example, if Willis owned the rental property through his revocable trust, then Willis would have unlimited personally liability for the liabilities arising from the operations of the rental property. Thereby Lionel could enforce his $500,000 judgment against any of Willis’s assets. For instance, if Willis owned another home, Lionel could attach a judgment lien to the home, if Willis had a bank account, Lionel could execute a bank levy on that account, if Willis had a job, Lionel could perform a wage garnishment on Willis’ paycheck.

One of my law books wisely says “if a deal is too good to be true, it is probably not true.” So the next time you hear somebody or some advertisement talk about asset protection, pay attention to how they intend to achieve it. Often times, there is some elaborate procedure discussed involving an exotic location such as the Cayman Islands or the Bahamas, which is usually hype, or worse fraud. There is a correct method to achieve asset protection; the right steps have to be followed however. 

Lease Termination

It is undisputed that millions of Americans rent their place of living. Whether it is a house, condominium, duplex, manufactured home, triplex, townhouse, fourplex, etc., renters make up a large segment of the housing population. Since it is very likely that at least a portion of those renters will pass away while they were renting, the continuity of their lease is a topic for estate planning.

First, it is worth discussing the lease types a renter may sign because California law treats specific leases in unique ways. Although there are a couple of different types of leases, the two main types are a month-to-month lease and a fixed-term lease. Generally speaking, in a month-to-month lease the tenant is only obligated to live in the unit for at most 1 month and they are free to vacate the unit, provided appropriate notice is given to the landlord, at the end of the month. Whereas in a fixed-term lease, the tenant is obligated to live at the dwelling for the duration of the lease even though they might want to vacate the unit beforehand.

California law says that a month-to-month lease is automatically terminated when the landlord receives notice that the tenant has died, whereby the tenant’s beneficiaries have no rights to the lease but may occupy the dwelling until 30 days have passed since the last rent payment was tendered. Miller & Desatnik Mgmt. Co. v Bullock (1990) 221 CA3d Supp 13. Conversely, in a fixed-term lease, California law says such a lease does not terminate due to the death of either the tenant or the landlord. Joost v Castel (1939) 33 CA2d 138; City of Los Angeles v Greines (1930) 107 CA 481.

For illustrative purposes, assume Thierry signed a month-to-month lease on January 1, 2011. Thierry unfortunately died in a tragic car accident on June 10, 2011. Thierry timely paid his monthly rent on June 1, 2011. Thierry wrote a will the previous year and named his friend Cesc as the sole beneficiary of his estate. Cesc is therefore entitled to occupy Thierry’s unit, albeit only until June 30 because Thierry’s death automatically terminated the lease. On the other hand, if Thierry had signed a fixed-term lease, January 1, 2011 to December 31, 2011 for instance, then Cesc would be entitled to occupy Thierry’s apartment because Thierry’s death did not end the lease. However, the lease may provide that upon Thierry’s death, the fixed-term lease would terminate and his beneficiaries would have 30 days to gather his belongings and move out. It is common to see the aforementioned clause placed in a fixed-term lease because landlords want to avoid the hassle of dealing with the tenant’s beneficiaries because the landlord has no prior history with them.

Proposition 13 - People's Initiative to Limit Property Taxation

One of the sacred cows in California politics is Proposition 13. Proposition 13, the “People's Initiative to Limit Property Taxation" was the landmark ballot proposition that was passed overwhelmingly by California voters in 1978 which capped property tax rates and annual assessment increases for realty. 

Simply stated, Prop 13 caps the maximum taxation rate for realty at 1% and the maximum increase for an assessment at 2% annually. 

The tax rate of 1% signifies the multiplier each county uses when calculating property taxes for each piece of real property. The assessed value is the amount multiplied by that 1% tax rate, which in turn provides the amount of property taxes due annually. For example, if Paul purchased a home for $100,000, the maximum amount Paul could be charged for property taxes is $1,000 (100,000 x .01) and the assessed value could not be increased by more than $2,000 for the following year, $102,000.

It should be noted that there are numerous taxes or fees tacked onto your property tax bill each year that are not subject to Prop 13’s jurisdiction, these include schools bonds, public safety bonds, retiree benefits, etc.

The assessed value of realty is, generally speaking, the fair market value of the property as of the last sale date plus annual increases not to exceed 2%. From the example above, Paul purchased a home for $100,000. The amount of property taxes due would probably go as follows

Assessed Value - Year 1                    Property Taxes Owed – Year 1

$100,000                                            $1,000

Assessed Value - Year 2                    Property Taxes Owed – Year 2

$102,000                                            $1,020

Assessed Value - Year 3                    Property Taxes Owed – Year 3

$104,004                                            $1,040.04

Assessed Value - Year 4                    Property Taxes Owed – Year 4

$106,120.8                                         $1,061.208

Assessed Value - Year 5                    Property Taxes Owed – Year 5

$108,243.16                                       $1,082.43

Assume that Paul had a neighbor, Ned, who purchased his home in Year 4 for $200,000. Ned’s property taxes would roughly be double Paul’s because the assessed value of Ned’s home is roughly twice the amount of Paul’s home. Thus, despite the fact that Paul and Ned are neighbors, Paul pays significantly less than Ned in property taxes. This example illustrates how purchasers of realty in California enjoy significant property tax savings if they can retain ownership of the realty for a long duration of time. Although this argument is based off of the assumption that California real estate prices increase over time, you would be hard-pressed to find a dissenting opinion from a reputable source.

The key phrase for property taxes is “change in ownership.” Whenever there is a “change in ownership” then the property’s value will be re-assessed. The assessed value is usually pegged to the fair market value of the home (see sale price) on the date of transfer.

The following are some examples of transfers which present “change in ownership” questions:

Business Entity/Proportional Interest

Henry and Whitney purchased a rental property, Hotel California, as joint tenants in 1988. Upon seeing that a LLC is a superior method of owning Hotel California, Henry and Whitney create a LLC, Acme LLC, in which Henry will have a 50% interest and Whitney will have a 50% interest. Later on, Henry and Whitney each transfer their 50% interest in Hotel California to Acme LLC. Since the proportional interests in the realty remain exactly the same both before and after the transfer, there is no change in ownership. Rev & T C §62(a)(2).

Joint Tenancy

Al purchases a fabulous retirement home in Scotts Valley, a charming community nestled in the Santa Cruz Mountains. Al then decides to gift half of his interest in the home to his neighbor Jefferson. Al prepares and records a deed naming Al and Jefferson as joint tenants for the retirement home. This transfer from Al to Al and Jefferson as joint tenants does not constitute a change in ownership. Rev & T C §62(b),(f).

Divorce

Eldrick and Elin decide to part ways after many years of marriage. One of the marital assets is a home owned in joint tenancy by Eldrick and Elin. The separation agreement provides that Eldrick will transfer to Elin the marital home. The transfer from Eldrick to Elin of the marital home will not result in a change in ownership. Rev & T C §63(c).

Leases

Link, a landlord, owns a piece of farmland in the fertile San Joaquin Valley named Big Gulch Road. Tobias, an entrepreneurial farmer approaches Larry and inquires about leasing Big Gulch Road. Tobias has grand plans for Big Gulch Road and thus needs at least a 50-year lease in order to complete his plans for harvesting pomegranates, the best fruit on earth (author’s opinion). Larry agrees to lease to Tobias Big Gulch Road for a term of 50 years. This lease would constitute a change in ownership because the lease term exceeded 35 years. Rev & T C §61(c). However, if the lease term had been for less than 35 years, then there would not be a change in ownership. Rev & T C §61(c).

Tenants in Common

John, Paul, Ringo and George purchased a home together, Nabbey Road Manor. John later becomes fed up with having to co-own the property with 3 other people and decides to sell his interest, 25%, to his eccentric consultant Yoko. This transfer would result in a change in ownership, albeit a partial one. In that, 25% of the property would be re-assessed for property tax purposes whereas the other 75% would maintain its assessed value. Rev & T C §§61(f), 65.1.

Name Change

Romeo Shakespeare purchased a home in Markleeville, California and took title under said name. Since Romeo’s friends, family and neighbors loved to poke fun at this name, Romeo decided to file a petition with the Alpine County Superior Court to change his name to John Brown. Eventually, Romeo was able to have his name changed. Subsequently, John executed a new deed in which Romeo Shakespeare conveyed to John Brown his interest in the property. Due to the fact that this transfer involved only a name change, no change in ownership occurred. 18 Cal Code Regs §462.001.