Can a Letter of Intent be an Enforceable Contract in California?

Can a Letter of Intent be an Enforceable Contract in California?

In commercial real estate transactions, a letter of intent (an “LOI”) establishes the framework to negotiate a formal agreement.  As the quasi-deal before the “real” deal, an LOI can be important in determining the positioning and disposition of the parties, as well as the structure of a proposed transaction. While the parties to an LOI do not typically wish to create a legally binding document, it is not uncommon for one of the parties to attempt to enforce the LOI as the parties’ binding final agreement. California courts may find an LOI to be enforceable where there is mutual consent of the parties as well as the inclusion of essential terms.  This article looks at these two important considerations as well how to minimize the risks in drafting a non-binding LOI. Mutual Consent Under California law, in order for a binding contract to exist, there must be mutual consent between the parties to enter into a contract, which is freely given and communicated by each to the other.  The test for whether such consent exists does not depend on the subjective belief of the parties, but rather on the words and conduct of the parties.  If there is sufficient outward evidence to allow a third party to reasonably infer that that parties intended to enter into a contract, then a court can hold an LOI to be enforceable.  Thus, a court may determine in its reasonable judgment that the words of an LOI evidence mutual consent between the parties to form a contract, even if the parties subjectively had no such intent. To avoid this result, parties must include...
Can I Turn a Tax Deferred 1031 Exchange Investment Property Into My Personal Residence? Recent Tax Court Cases Say “Yes”

Can I Turn a Tax Deferred 1031 Exchange Investment Property Into My Personal Residence? Recent Tax Court Cases Say “Yes”

Many residential real estate investors at some point wonder whether an investment property that was previously the investor’s residence or is later converted into the investor’s residence can qualify for a 1031 exchange. The two recent Tax Court cases of Adams v. Commissioner and Reesink v. Commisioner both indicate that investment properties can include these two residential scenarios. The Internal Revenue Code imposes taxes whenever property is sold or transferred and a gain is realized. However, according to Section 1031 of the tax code, if a taxpayer adheres to strict code guidelines, then all or a portion of the gains from the disposition of business or investment property can be deferred or reinvested into a new replacement property. These deferred gains, as well as the gains from the new property, are not taxed until the new property is transferred and fails to qualify for tax deferral. To qualify for tax deferment, the taxpayer must structure the transaction as an exchange of one property for another of “like kind”. Two components of tax are deferred by a 1031 exchange. Firstly, the tax due on the profit earned on the sale of investment or income property, which is generally at a rate of 15%. The profit earned is the appreciation in value of the property and is determined by gross sales price minus the adjusted basis and the cost of sale. Secondly, the tax due on the recapture of depreciation previously taken by the taxpayer during the time the taxpayer owned the property, which is generally at a rate of 25%. In Adams v. Commissioner (TC Memo 2013-7), the Tax Court...
Security of a Deed of Trust in California Prevents the Legal Doctrine of Merger of Estates

Security of a Deed of Trust in California Prevents the Legal Doctrine of Merger of Estates

 Under the legal doctrine of merger, as codified in California Civil Code section 805 and California Civil Code section 811, the owner of an estate in land cannot also hold an easement in the same land.  The rationale behind the two statutes is that holding an easement in the land is unnecessary to the landowner who already owns the same piece of land. However, there are instances where the doctrine of merger is inapplicable, as was decided recently by the California Appellate Court in Hamilton Court, LLC v. East Olympic, L.P..  This Appellate Court determined that a lender taking a security interest by recording a deed of trust in both California real property and an easement benefiting the same real property does not lose its security interest in the easement because of the borrower’s fee acquisition of  the subject property burdened by the easement. In other words, when the lender forecloses on the deed of trust security, the purchaser at the foreclosure sale would acquire both the real property security and the benefiting easement right and the doctrine of merger would not apply. In referenced case, the deed of trust contained an agreement that prevented the merger of the easement.  The deed of trust provided for a merger of title only “if such transfer is made subject to the Trustor’s promissory note and this Deed of Trust and does not affect the priority of this Deed of Trust in any manner whatsoever.” Here, the Appellate Court determined that whether a merger occurs depends on the actual or presumed intention of the parties and that where there is an agreement...
An Overview for Foreigners Purchasing U.S. Real Estate

An Overview for Foreigners Purchasing U.S. Real Estate

According to a recent survey conducted by the National Association of Realtors, for the 12-month period ending with March 2012, international buyers (“Foreign Nationals”) invested $82.5 billion in U.S. residential real estate, which equates to about 4.8% of total U.S. sales. The top-five international buyers were from the United Kingdom, India, Mexico, China and Canada for purchases in primarily Arizona, California, Florida and Texas. These homes are primarily purchased as vacation homes, for investment, or as temporary professional relocation. This article serves as an overview for Foreign National seeking to purchase property, primarily residential real estate, in the U.S. and the structuring issues which may arise. This article is not a substitute for experienced legal counsel and Foreign Nationals should also seek tax advice both in their country of residence and in the US to address many of the issues highlighted herein. It is important for Foreign Nationals to understand both the process and unintended tax and estate planning considerations which may arise. PURCHASING PROPERTY IN THE U.S. Purchasing property in the U.S. can be a transparent and efficient process. Unlike in many countries where buyers must bounce from agent to agent to find a property, new listing for sale are generally required to be posted on a listing service within 24 hours so that active listings are available to all brokers and agents. Sales commissions are always paid by the seller and are divided equally between the buyer’s and seller’s brokers. While some seller’s brokers may engage in dual representation, that is, representing both the seller and buyer in a transaction, it is always advisable for a buyer...
New Commercial Lease Disclosure Requirements under the California Disability Access Laws

New Commercial Lease Disclosure Requirements under the California Disability Access Laws

Starting July 1, 2013, commercial landlords will have a new duty to disclose to their tenants.  California Senate Bill 1186, which became effective September 19, 2012, was enacted to cut down on frivolous shakedown demands in litigation, in addition to increasing disability access on commercial properties in California.  For all commercial property leases entered on or after July 1, 2013, landlords must disclose the following in the lease: 1.  Whether the leased premises has been inspected by a Certified Access Specialist (CASp) and if so, 2. Whether the leased premises has (or has not) been determined to meet all applicable construction-related access standards under California law. Note that the new disclosure requirement does not create an affirmative duty for commercial property owners to have CASp inspections performed on their properties.  However,  in a commercial lease that has not been CASp inspected, the new disclosure may prompt the tenant to request such an inspection, or the tenant may undertake the inspection on his own. SB 1186 will grant California landlords and tenants added protection against predatory lawsuits based on alleged violations of construction-related disability access law.  This disclosure is relevant to tenants as tenants are often named as plaintiffs in accessibility lawsuits, and such compliance may afford tenants protection granted under SB 1186.  In certain cases, a CASp inspection may be useful in limiting plaintiff’s statutory damages in a disability access case. In addition to the new disclosure duties, as of January 1, 2013, SB 1186 has done the following: 1.  Ban pre-litigation demand letters; 2.  Prevent “stacking” of multiple claims to increase statutory damages; 3.  Require that demand letters...
New Energy Usage Disclosure Requirement for California Commercial Real Estate Owners

New Energy Usage Disclosure Requirement for California Commercial Real Estate Owners

Beginning  July 1, 2013, all owners of non-residential commercial buildings with a total gross floor area of over 50,000 square feet shall be required to disclose the building’s energy usage information in the following circumstances: (1) A prospective buyer of the building, no later than 24 hours prior to execution of the sales contract. (2) A prospective lessee of the entire building, no later than 24 hours prior to execution of the lease. (3) A prospective lender financing the entire building, no later than submittal of the loan application. Under Assembly Bill 1103, a commercial real estate building owner shall disclose the Disclosure Summary Sheet, Statement of Energy Performance, Data Checklist, and the Facility Summary for the building.  At least 30 days before a disclosure is required, an owner will need to register for a “Portfolio Manager” account with the U.S. Environmental Protection Agency’s ENERGY STAR program online, which manages building energy use data.  Once a profile has been created, owners will use the Portfolio Manager to generate the Disclosure Data by providing space use characteristics and requesting that all utilities and energy providers serving the building release energy use data for the entire building for the last 12 months. A building owner should require the counterparty to execute an acknowledgement of receipt of the disclosures once the disclosures have been made.  Owners should consider updating their purchase agreements, lease forms and financing documents to include this express acknowledgement as by next year, the disclosure requirement will apply to buildings with a total gross floor area of less than 50,000 square feet. Beginning January 1, 2014, a building with a total gross floor...