“Buyer/Tenant” Beware: Purchase Contract May Include Lease Agreement

The case of Taylor v. Nu Digital Marketing, Inc. involved an unusual purchase contract for residential property.  The contract set forth payment of the “purchase price,” and also included a provision that Buyer would pay monthly “probationary installments” for 60 months, which would not count toward the purchase price.  Only payments in excess of the monthly probationary amount went toward the purchase price.  The contract also provided that the probationary payments would increase by any increase in the mortgage payments.  Finally, the contract gave Buyer the right to possession only while making the monthly probationary payments, and gave Seller the right to evict Buyer for failure to do so if not cured.


The monthly mortgage increased but Buyer failed to pay the corresponding increase in the monthly probationary amount.  Seller served a five-day Notice to Quit, and Buyer failed to cure.  Seller filed an unlawful detainer action, and the court ruled in favor of Seller, finding that the “purchase contract” also included a lease agreement, with the “probationary installments” as rent.  Seller appealed, arguing that the contract was for purchase and sale, and thus Buyer could not state a claim for unlawful detainer.


The appellate court affirmed.  While unlawful detainer actions are typically not available to a seller to regain possession of property when the buyer defaults on an installment payment on the purchase price, they are available to a landlord when a tenant fails to pay rent or otherwise breaches a lease.  The court recognized that an agreement can be for both a purchase/sale and lease, where possession is achieved through a landlord-tenant relationship.   In determining whether the contract at issue is for purchase and sale, a lease, or a combination thereof, the court looked to the rights and obligations of the parties.


In this case, the contract did not require a down payment and subsequent installment payments to pay off the purchase price.  Rather, it required a down payment plus monthly probationary installment payments for 60 months.  Possession was conditioned on the continued payment of the probationary amounts.  Importantly, only payments in excess of the probationary payments went toward the purchase price.  The court therefore concluded that the probationary installment payment provisions created a 60-month lease, with the monthly payments constituting rent.  This was bolstered by the fact that both parties routinely referred to such payments as “rent.”  As such, an unlawful detainer action for non-payment of rent was appropriate.


Buyers, sellers and brokers should pay careful attention to purchase contract language that may raise lease issues.

Taylor v. Nu Marketing, Inc. (2016) 16 C.D.O.S. 2284


Courts May Not Consider Prejudice to Liable Party in Granting Rescission of Purchase Contract

After the Wongs bought a $2.35 million home, they discovered that they and 12 of their neighbors were connected to a private sewer system rather than the city of San Carlos’s public system.  The Wongs had remodeled the home, expending about $300,000.  They sued the sellers (Wong v. Stoler) for non-disclosure, seeking, among other things, rescission.  They also sued the real estate agents involved, and settled with them for $200,000.  The trial court found the sellers recklessly misrepresented that the house was connected to a public sewer system, but it declined to effectuate the rescission, which would have returned the home to sellers and refunded the purchase amount to the Wongs.  The court reasoned that doing so would place an undue burden on the sellers, who had already used the sales proceeds to purchase a new home and finance improvements, and that it would be too complicated to unwind the deal.  Instead, the court ordered the sellers to pay the Wongs for sewer maintenance and repair costs beyond the $200,000 settlement until 10 years had passed or the Wongs sold the house, whichever came first.


Rescission extinguishes the contract and restores the parties to their former positions, or as near as possible to their positions before entering into the contract.  If the court agrees there are grounds for rescission, the rescinding party is entitled to recover “complete relief,” including damages and the return of benefits provided.  In real estate cases, this means the seller must refund the purchase price to the buyer in exchange for return of the property.  If the court finds the contract has not been rescinded, it may grant other relief appropriate under the circumstances.


Here, the Court of Appeal, First Appellate District, reversed the San Mateo County Superior Court, finding that the contract was rescinded and the court improperly considered prejudice to the sellers. In refusing to effectuate rescission, the remedy fashioned by the trial court was not “complete.”  The trial court also improperly relied upon the hardship rescission would cause to the sellers, who had just been found liable for negligent misrepresentation, a species of fraud.  The need for rescission was effectively the fault of sellers, who as a result of their failure to disclose “must sustain the necessary inconveniences thereby entailed.”  Moreover, although untangling the sale might not be easy, there were not insurmountable obstacles to doing so.  Thus, the case was remanded to effectuate the rescission and award any other consequential damages (such as real estate commissions, escrow payments, interest on sums paid to the other party, and costs of improvements) needed to return the Wongs to the status quo. The court was also directed to determine whether the Wongs were entitled to attorney’s fees as part of their complete relief.


Wong v. Stoler (2015) 14 C.D.O.S. 6633


Whether an Issue Is Arbitrable Is Determined Solely by Language in Arbitration Agreement

The Bunker Hill v. U.S. Bank case involved a rather dry, but nonetheless important issue which may have an impact on real-world situations: when arbitration may be compelled pursuant to an arbitration agreement between two parties, and more specifically, what kinds of issues may be arbitrated.


Landlord Bunker Hill owned land in Los Angeles County.  It leased the land to U.S. Bank, who owns five low-rise buildings on the parcel.  The parties are governed by a 99-year ground lease, which expires in 2077.  When the lease is terminated (either in 2077 or at some point before then), the buildings and other improvements on the property become the property of Bunker Hill.  The lease also allows U.S. Bank to sublet the property, which it did.


A dispute arose between the parties over the amount of rent, which was adjusted in April of 2013.  They went to arbitration pursuant to an arbitration provision in the lease.  During the arbitration, a related issue arose: whether, upon termination of the lease, the subleases would terminate or whether Bunker Hill would take title to them.  That issue was not resolved during the arbitration, but the parties continued to correspond about it.  After a while, U.S. Bank invoked the arbitration provision again and demanded arbitration to resolve the issue.


After a few months of conferring, U.S. Bank made several acknowledgements which, in its view, made arbitration on the sublease issue unnecessary.  Bunker Hill pressed its position that arbitration was necessary to eliminate uncertainty which may arise when the lease ends.  U.S. Bank responded that the issue was “purely hypothetical.”


Bunker Hill filed a petition to compel arbitration with the court, stating that there was presently a dispute between the parties regarding their respective rights and obligations under the ground lease.  U.S. Bank opposed on the grounds that there was no justiciable controversy, and therefore, in essence, there was nothing to arbitrate.  The trial court agreed with U.S. Bank and denied the motion.  Bunker Hill appealed.


The appellate court held that the usual requirements of justifiability and ripeness, which are required before a court can hear a case, do not necessarily apply in arbitration.  The language in the arbitration agreement or provision is what governs what can and cannot be arbitrated.  Contracting parties are free to negotiate and restrict the powers of an arbitrator and the “universe of issues that he or she may resolve,” as the powers of the arbitrator are derived from and limited by the arbitration agreement.  In this case, the provision broadly obligated the parties to arbitrate “any and all disputes, controversies or claims arising under or relating to the Ground Lease.”  As the lease did not define these terms, the court interpreted them in their “ordinary and popular sense,” and concluded that the sublease issue was plainly included, as it was an “unresolved dispute which both arises under and relates to the ground lease.”


Bunker Hill Park Ltd. v. U.S. Bank, N.A. (2014) 231 Cal.App.4th 1315