What Real Estate Litigation Looks Like
For those who have never been involved in a lawsuit, you may find the following example of an actual case useful.
THE DEAL: The clients, a mother and daughter in the bail bond business, buy a mixed residential and commercial property for $725,000, 10 percent down plus a 90 percent purchase money note to the seller. They were told that the two residential units were each rented for $800 a month. The commercial part was a small building with a large metal shade canopy. The clients badly wanted the property for their bail bond business because it was located a block from a county jail.
THE REAL ESTATE AGENTS: Neither had any significant experience with income or commercial property. The clients' agent, who sold single family homes in Rancho Cucamonga, was chosen because she was the daughter's mother-in-law.
Shortly after the close of escrow, the clients learned that the tenants were only paying $700 a month. That bad news turned ugly when one of the tenants filed a complaint with the Los Angeles Housing Department, which decided that the maximum permissible rent for each unit was only $583.50 per month. Then a City inspector showed up with a citation requiring the removal of the canopy which had been installed by the seller without a permit.
The clients came to me angry about the $433 a month rental loss and the $26,000 that it was going to cost to replace the canopy. But the deal got even uglier when our appraisal showed that the property was worth far less than $725,000 at the time of the sale. This was the first appraisal the clients had seen. Because the seller carried the financing, there was no commercial lender to insist on an appraisal and the mother-in-law didn't think to recommend it.
After an unsuccessful prelitigation mediation (required in most California Association of Realtors form contracts), the clients decided to sue the seller, the seller's broker, their agent and their agent's broker.
The decision to litigate requires answers to four questions:
Is there liability?
What are the damages?
Are the damages collectible?
How will the attorney's fees and costs be paid?
1. LIABILITY: By lying about the rent, the seller committed fraud. By failing to mention that he had installed the metal canopy without a permit, he breached the contract, which required that he disclose any unpermitted work. The seller's agent was guilty of negligent misrepresentation for failing to disclose that the property was subject to the rent control ordinance and failing to obtain estoppel certificates or any other verification of the monthly rent. The mother-in-law and her broker breached their fiduciary duties by failing to advise that the units were subject to rent control and what the maximum allowable rent was, failing to obtain estoppel certificates, and failing to recommend an appraisal.
2. DAMAGES: The appraisal showed the property to be worth only $430,000 at the time of the purchase, $295,000 less than the sale price. The buyers' measure of damages for fraud in a real estate sale is the difference between the price paid and the value received, which here was $295,000. Unfortunately, there is a case which holds that the damages must have been caused by the fraudulent conduct. Our appraiser concluded that the loss of $433 per month in rental income devalued the property by only $67,500, a nagging legal detail that happily neither the seller's attorney, the trial judge or the court of appeal seem to care about.
3. COLLECTABILITY: Although the seller had moved to Utah, he was receiving monthly payments of over $5,000 on the $652,500 purchase money note. So even if he had no other assets, we had a way to collect the judgment or at least realize its value. Sadly the seller's agent was uninsured and had a good lawyer. The mother-in-law had insurance, but there were family relations to consider.
4. COVERING THE FEES AND COSTS: By the time of the second mediation, with the trial three months away, the clients were struggling to pay their hourly legal fees. During the second mediation, the defendants were all in denial. The seller's highest offer was $50,000 and the agents' offers were in four figures. The case needed to be tried. To help finance the trial, we settled with the mother-in-law and her broker for $12,500. Later we settled with the seller's agent for $17,500 to raise more funds for the trial and get the agent's attorney out of the case.
THE TRIAL: The trial took 3 days before an intelligent and perceptive judge who awarded pretty much everything we asked for, a little over $26,000 for the canopy, $295,000 for the fraud, $56,418 in punitive damages (representing interest paid to date on $295,000 of the purchase money note), plus $63,360 in attorney's fees and $7,596 in costs. The total came to just under $450,000 or $420,000 after crediting the settlements.
THE APPEAL: The judgment was affirmed in full. For the details see a copy of the Opinion. The trial court recently awarded over $20,000 in post judgment attorney's fees and costs.
The net result of the judgment was to effectively reduce the $725,000 price to $430,000 and reimburse the clients for the canopy, the excess interest paid on the note and all of their attorney fees and costs.
Douglas S. Draper, A Law Corporation