OH, RATS!  MY TENANT MOVED OUT CLAIMING RODENT INFESTATION AND DID NOT GIVE ME A CHANCE TO FIX THE PROBLEM.  WHAT CAN I DO?

            As a recent Court of Appeals case has stated, the landlord in such a situation has no right to keep prepaid rent.  Residential rental property is subject to the Residential Landlord Tenant Act, and the landlord in this case argued that the tenant moved out before giving the landlord a chance to eradicate a rodent infestation, thus losing the legal right to move out and receive a refund of prepaid rent under the Act. 

            The facts were that a construction company needed housing for its workers at a job site in Bothell, and entered into a written short term lease with the landlord of a single family residence there.  The landlord had rented the house out for about eleven years.

            The construction company representative and the landlord did the usual pre tenancy checklist and walk through of the house and then the lease was signed, about one and one half months’ worth of rent was paid and the customary deposits were deposited.  When the construction crew began to move into the house, they noticed a “strong dead animal odor” in the house, and one crew member went out and bought an air freshener to try to mask the smell.  The smell persisted, and the crew found physical evidence of rodents including droppings and food wrappers that had been torn into tiny pieces.  The construction company’s employees immediately moved out and the company notified the landlord of this fact and requested a refund.  The landlord admitted that there had been rats in the house due to a previous tenant’s failure to keep foods secured but the landlord believed she had corrected the problem.  The landlord returned the deposits but refused to refund the rent based on a provision in the lease that stated that the tenant who moved out prematurely was responsible for rent until a replacement tenant moved in.

            The construction company sued for the refund and the superior court ruled for the landlord before trial, dismissing the company’s lawsuit.  The company appealed and the appeals court reversed the superior court on the basis that there is an implied warranty of habitability that applies to residential rental property which is in addition to the protections for tenants in the Residential Landlord Tenant Act.

            What is the implied warranty of habitability and how is it different from the provisions of the Residential Landlord Tenant Act?   The Landlord Tenant Act requires a landlord to maintain premises that are fit for human habitation and provides tenants a way of compelling landlords to remedy unsafe conditions and sets time limits for compliance.  Under the Landlord Tenant Act, only after notice to the landlord of an unsafe condition and failure by the landlord to remedy the condition in the time prescribed by the Act, can the tenant terminate the tenancy. 

The common law, which is judge-made law as distinguished from the law created by the Legislature enacting a statute such as the Residential Landlord Tenant Act, contains an implied warranty of habitability that says that by entering into a contract, which is the lease involved, the landlord warranted or promised that the premises would be liveable and that a breach of this warranty by the landlord is a basis for the tenant to rescind or cancel the contract.

            The landlord argued that this common law warranty was superseded by the Residential Landlord Tenant Act, but the court of appeals disagreed, pointing out that the Act specifically says it is in addition to protections given in the common law.  The court also rejected the landlord’s argument that she should have been given notice and a chance to cure the problem before the tenant moved out.  The court pointed out that the warranty provides a contractual right to rescind based on the facts at the time the lease was signed.  The court also rejected the landlord’s claim that the tenant should have to prove that the house was actually unsafe to live in before invoking the implied warranty of habitability.  The court noted that rodents are a potential safety hazard and that no more needs to be shown by a tenant who invokes the implied warranty of habitability.

            This case is instructive for landlords on the diligence that is required for them to retain rents under a lease where an actual or potentially unsafe condition exists in rental residential property.  Other potential safety hazards can exist in addition to pests in residential property, such as mold. 

            The preceding is intended as instruction and education and should not be construed as legal advice.

WHO CARES ABOUT THE STATUTE OF FRAUDS?

                                          SOMETIMES, NOT CARING CAN BE COSTLY

            A concept that investors rarely discuss is the Statute of Frauds.  What is the Statute of Frauds, and how could it affect my deal?  The Statute of Frauds is legislation, and it comes from early English law.  The statute was created in the seventeenth century, when real estate transactions were relatively infrequent and many people could not read or write.  The purpose of the statute was “the Prevention of Frauds and Prejudices,” and this meant that people should be required to have written proof of their intentions in real estate deals so that frauds on the unwary could be avoided.

            In Washington, the Statute of Frauds applies to brokerage agreements and agreements for the transfer of interests in land.  Such agreements must be signed, in writing and sufficient for the intentions of the parties to be understood.  If a transaction does not meet this requirement it is void. 

            What can this mean for investors?  We know that a purchase and sale agreement is the usual starting point in an investment deal.  In a purchase and sale agreement there needs to be an agreed statement of what the parties are contracting to purchase and sell, namely the specific real estate involved.

            What happens if the parties sign a purchase and sale agreement, and the prospective buyer pays a substantial earnest money deposit, but the parties never really agree at the outset on how much property the seller is selling and the buyer is buying?  The result may surprise you.  This happened in a recent case from Eastern Washington.

            A seller hired a broker to list a large undeveloped parcel near Quincy for sale, but the seller wanted to retain a 3.93 acre portion of the property for his own use.  The listing agreement described the property as “included in Farm Unit 182”, and consisting of 30.12 acres.  The total parcel was 43 acres.  A developer made an offer to purchase the 30.12 acres and included a provision allowing him to purchase the 3.93 acre portion of the remaining area later if the seller decided to develop that property.  That offer was not accepted, but after a period of time another offer by the same purchaser was accepted, again reciting the area to be purchased as 30.12 acres, but omitting any mention of the 3.93 acres and including a $50,000 earnest money on a purchase price of $1.65 million.  The purchase and sale agreement was written with this second description of the sale.

            Some conditions needed to be satisfied before closing could occur, and after about a year closing was scheduled.  The purchaser went to the closing appointment and then refused to close because, among other things, he claimed that the 3.93 acres that had been omitted from the description of the sale should have been included.  Both sides filed lawsuits against each other.  The seller sought to have the sale completed and the purchaser sought rescission of the contract and refund of the earnest money.

            The court decided that the contract did not satisfy the Statute of Frauds because of the ambiguity surrounding whether the missing 3.93 acres was or was not in the deal.  One would think that if the court decided that the agreement was void for failure to meet the Statute of Frauds, then the purchaser should receive back the earnest money, right?  Wrong.  The court said that it was the purchaser’s burden in order to receive back his $50,000 earnest money to prove that the seller was not “ready, willing and able” to proceed to closing of the agreement.  The court further said in order to do that the buyer had to prove that the agreement legally included the 3.93 acres.  The court recognized that the sides held opposing views of what the agreement actually included.  Given that all parties recognized it was impossible for the party with the burden to meet it under the circumstances, practically the case means that the buyer is out his $50,000 earnest money.

            The lesson of this case is that “buyer beware” of a real estate contract that does not adequately describe the real estate that is to be purchased and sold.  This information is provided for education only and may not be construed as legal advice.

Who Cares About the Statute of Frauds?

            A concept that investors rarely discuss is the Statute of Frauds.  What is the Statute of Frauds, and how could it affect my deal?  The Statute of Frauds is legislation, and it comes from early English law.  The statute was created in the seventeenth century, when real estate transactions were relatively infrequent and many people could not read or write.  The purpose of the statute was “the Prevention of Frauds and Prejudices,” and this meant that people should be required to have written proof of their intentions in real estate deals so that frauds on the unwary could be avoided.

            In Washington, the Statute of Frauds applies to brokerage agreements and agreements for the transfer of interests in land.  Such agreements must be signed, in writing and sufficient for the intentions of the parties to be understood.  If a transaction does not meet this requirement it is void. 

            What can this mean for investors?  We know that a purchase and sale agreement is the usual starting point in an investment deal.  In a purchase and sale agreement there needs to be an agreed statement of what the parties are contracting to purchase and sell, namely the specific real estate involved.

            What happens if the parties sign a purchase and sale agreement, and the prospective buyer pays a substantial earnest money deposit, but the parties never really agree at the outset on how much property the seller is selling and the buyer is buying?  The result may surprise you.  This happened in a recent case from Eastern Washington.

            A seller hired a broker to list a large undeveloped parcel near Quincy for sale, but the seller wanted to retain a 3.93 acre portion of the property for his own use.  The listing agreement described the property as “included in Farm Unit 182”, and consisting of 30.12 acres.  The total parcel was 43 acres.  A developer made an offer to purchase the 30.12 acres and included a provision allowing him to purchase the 3.93 acre portion of the remaining area later if the seller decided to develop that property.  That offer was not accepted, but after a period of time another offer by the same purchaser was accepted, again reciting the area to be purchased as 30.12 acres, but omitting any mention of the 3.93 acres and including a $50,000 earnest money on a purchase price of $1.65 million.  The purchase and sale agreement was written with this second description of the sale.

            Some conditions needed to be satisfied before closing could occur, and after about a year closing was scheduled.  The purchaser went to the closing appointment and then refused to close because, among other things, he claimed that the 3.93 acres that had been omitted from the description of the sale should have been included.  Both sides filed lawsuits against each other.  The seller sought to have the sale completed and the purchaser sought rescission of the contract and refund of the earnest money.

            The court decided that the contract did not satisfy the Statute of Frauds because of the ambiguity surrounding whether the missing 3.93 acres was or was not in the deal.  One would think that if the court decided that the agreement was void for failure to meet the Statute of Frauds, then the purchaser should receive back the earnest money, right?  Wrong.  The court said that it was the purchaser’s burden in order to receive back his $50,000 earnest money to prove that the seller was not “ready, willing and able” to proceed to closing of the agreement.  The court further said in order to do that the buyer had to prove that the agreement legally included the 3.93 acres.  The court recognized that the sides held opposing views of what the agreement actually included.  Given that all parties recognized it was impossible for the party with the burden to meet it under the circumstances, practically the case means that the buyer is out his $50,000 earnest money.

            The lesson of this case is that “buyer beware” of a real estate contract that does not adequately describe the real estate that is to be purchased and sold.  This information is provided for education only and may not be construed as legal advice.

THE PROPOSED STATE CAPITAL GAINS TAX: OLD WINE IN NEW WINESKINS?

            It seems that our elected representatives never tire of seeking new or retrying old ways of separating the citizens from their money.  This legislative session, a bill was introduced to establish a state capital gains tax.  This bill, HB 2563, would impose a five percent tax on all gains from sales of property that are reported on federal tax forms 1040 or 1041.  There is an exemption in the proposed tax for profit from the sale of a primary residence, and the first $5,000 of gain for a single taxpayer or $10,000 in gain for joint filers, is exempt from taxation. 

            Clearly capital gains are a form of property, and for investors they are a primary reason for entering into the investment.  Some real estate investments are “buy and hold” investments but ultimately investors expect that they will reap a profit from selling at a price that exceeds their purchase price plus holding costs.

            We have recently lived through a bruising campaign to establish a state income tax by initiative.  That effort failed at the ballot box, and so there was no occasion for the courts to examine whether that proposed income tax would survive the Fourteenth Amendment to the Washington Constitution.  That amendment states: “All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only.  The word 'property' as used herein shall mean and include everything, whether tangible or intangible, subject to ownership. All real estate shall constitute one class.” 

            It is reasonable to ask whether based on the Supreme Court’s precedents, a tax such as that which would be imposed by HB 2563 would meet the constitutional test of uniformity.  The Supreme Court considered two different income tax measures in 1933 and 1936 and held that both of them were unconstitutional in light of the Fourteenth Amendment.  In Jensen v. Henneford, the 1936 case, the court considered a tax that was graduated, and applied to all net income including gains from dealings in properties, but which allowed credits against such net income that differed between single and married taxpayers.

            The court determined that income was property for purposes of the Fourteenth Amendment, because it was capable of being owned.  Having made that determination, over the objection that income was income and property was something else, the court moved on to the uniformity question.  The court easily concluded that the graduated tax, with a base rate of three percent for incomes less than $4,000 and a surtax of an additional one percent for incomes over $4,000, violated the uniformity requirement.  The court decided that income was property and the Fourteenth Amendment required all property of the same class to be taxed uniformly and therefore a tax difference of one percent based on the level of income a person received was not a uniform tax.

            The proposed tax in HB 2563 does not contain a graduated rate based on the amount of capital gains received in one year.  However the bill does exempt gains from the sale of a primary residence and it exempts the first $5,000 of gains for a single filer and $10,000 of gains for joint filers in a single year.  The court in Jensen v. Henneford also considered the effect of exemptions on the constitutionality of the tax in 1936.  Based on that review, the court decided that exemptions of the first $1,000 for a single filer and $2,500 for joint filers also caused the tax to fail the uniformity requirement.  This same structure exists in HB 2563.  There was no exemption similar to the gains from sale of a primary residence exemption in the 1936 law but it seems clear that this exemption in HB 2563 also results in similar property, namely gains, being taxed differently based on the source of the gains, which would appear to violate the uniformity requirement.

            During the recent campaign to adopt the “rich person’s income tax” by initiative, there was speculation that enough time had passed since 1936 and the composition of the Supreme Court had changed sufficiently that such an income tax would be upheld by that court.  We have no recent case law from our court to guide us but we know that the courts are supposed to adhere to their own precedents until a reasonable basis for showing that they were erroneously decided, appears.  Nothing has changed in the wording of the Fourteenth Amendment and it does not appear that HB 2563 would impose a tax that meets the uniformity requirement.

            The preceding is for education only and should not be considered as legal advice.

IS DAMAGE HISTORY COMPENSABLE UNDER YOUR AUTO INSURANCE POLICY?

            A recent Supreme Court decision has taken up the question whether in addition to replacing damaged parts on a car after an accident, an insurance company has the obligation to pay for the loss in the car’s value simply from having been damaged in an accident.  This case, a class action involving State Farm, involves interpretation only of that company’s policies and therefore may not apply to policies of other insurance companies.

            The case is interesting because it explores the nature of the damage a car suffers in an accident in addition to the replaceable parts that are bent or broken.  It appears that our court accepts that even after all of the replaceable parts affected are in fact replaced, there remains an amount of damage that is compensable under a policy that agrees to compensate for “loss” to the vehicle.  The court differentiated between so-called “stigma damages” and what it called “weakened metal” damages.  “Stigma” damages are those that reflect the loss in resale value that exists for a car that has been damaged in an accident, even if it has been fully repaired.  Such “stigma damages” are not compensable under this Supreme Court decision.  One has in mind the recent news article about the winner of a $380,000 Lamborghini who wrecked his new car after only a few hours’ ownership, and the effect on its value of having been in a nationally reported accident, no matter the extent of repairs.  The “weakened metal” type of damages reflects that some parts of a damaged vehicle under today’s technology of unitized body construction for cars cannot be replaced to as new condition. 

            The court decided that it must interpret the insurance policy from the standpoint of the consumer, and that under such circumstances the alternative in the policy for the company to either repair or “total” the vehicle and replace it, did not eliminate the company’s obligation to pay for loss in value if the company elected to repair the vehicle.  The court determined that the insured had the right to expect to be put in the same position he or she was before the accident, and that having a car whose value was diminished by the existence of “weakened metal” damage would not meet that standard unless the insurance company paid the difference in value to the insured in cash.

            Based on this decision, people who are involved in “fender bender” accidents may be entitled to cash in addition to the repair of their vehicles.  It is important to review the language of the policy involved.

            The foregoing is for education and may not be interpreted as legal advice. 

LEASE TO OWN AS AN EXIT STRATEGY: A PARADISE FOR INVESTORS OR SOMETHING ELSE?

            Some investors have asked over the past few years about using the lease to own or lease option as an exit strategy.  There are lecturers who recommend this method and who describe the process in glowing terms.  The lease option as it is described by such people is ideal for investors who want the benefits of owning rental real estate but who do not enjoy the burdens of being a landlord.  According to what some lecturers say, the investor can, through inserting a few simple phrases in the option agreement and using a method to screen the potential tenant buyers to focus on those who have an owner’s outlook, effectively transfer the burden of maintaining the property to the tenant buyer.  Thus the lease option investor is depicted as being in a type of landlord’s paradise—rent is coming in on time each month, the landlord receives tax benefits, the landlord never receives a call about a problem with the property because the tenant buyer does all maintenance and even some upgrades, and the payday is in sight, when the tenant buyer becomes the buyer in fact. 

            Imagine this scenario: you as investor have found a tenant buyer for your single family residence, and using the instructions in a course you took you insert terms in the option agreement such as “tenant buyer agrees to do all maintenance and repairs necessary to keep the property in compliance with applicable codes,” and “any use by tenant buyer of the fact that there is an associated lease to attempt to have the landlord perform maintenance or repairs will be a default under this option, resulting in its immediate termination.”  Your tenant buyer happily signs the option and the associated three year lease “at the kitchen table,” pays the first month’s rent with deposit and takes possession of the house.

            A few months later, you receive a call from the tenant buyer about some maintenance or repair issue at the property.  Let’s say it is a broken furnace, and let’s say it is wintertime when you receive this call.  Let’s say that the tenant buyer had a furnace repairman come out to the house and look at the furnace and the repairman pronounced the last rites over the furnace.  That furnace is history.  You know enough about the cost of furnaces to gently remind the tenant of the language about repairs in the option agreement, and suggest that if the tenant does not want to pay to replace the furnace, then you and your partners (really just you) would be happy to convert the lease option arrangement to a standard lease.  You remember that the lecturer in the course you took predicted that the tenant buyer would buckle under this implied threat to cancel the option and agree to bear the cost of replacing the furnace in your house.  You helpfully offer to advance the cost to put in the new furnace in exchange for an increase in monthly rent such that the higher rent will have paid for the cost of the furnace in three years.

            But this tenant buyer says, “You know, I thought you might say something like that.  I reread that provision in the option agreement and before I called you just now I asked my uncle, who is a lawyer, about it.  He said that in Washington unless specific requirements are met, a landlord cannot make a tenant do repairs such as replacing a furnace or pay the cost of such repairs to residential property, even if the tenant previously signed an agreement to do the repairs.  He also said that again unless those requirements have been met a landlord cannot threaten to terminate an option in order to make a tenant who is also an option buyer do the repairs, once the tenant has asked the landlord to do the repairs.  And according to what my uncle said, you did not do the things necessary to make the option provision about repairs binding on me.”  The tenant buyer then asks when he can expect your installer to arrive at the house with the new furnace, because the weather is cold, and he says that he is not interested in paying any higher rent than the current level.  You determine that your best course under the circumstances is to pay for the new furnace and hope to recover the cost of the furnace from the profit when the tenant buyer exercises his option and you sell the house.  The net effect is a reduction in your expected profit at the time of exercise of the option.  And this tenant buyer decides not to be shy about calling you for other repairs as well during the term of the lease.

            This example illustrates that it is important for investors who use lease options as their exit strategy in Washington to consider various aspects of the lease option before entering into these relationships.  The key point is that a lease option contains a lease that is not exempt from the normal requirements of such a document simply because an option is also involved.  It is doubtless true that many lease option relationships exist with such provisions as are described above and the tenant buyers in fact do minor or sometimes not so minor repairs and even upgrades to the properties without a complaint or adverse outcome and such buyers reap the benefits when they exercise the options and purchase the properties.  Such a scenario as depicted here is still possible, and unpleasant surprises such as these are always unwelcome.  The good news is that there are ways to achieve many of the investor’s desired objectives without disregarding tenants’ rights.

            The foregoing is intended for education only and should not be interpreted as legal advice.

A New Item for the Investor's Pre Buy Checklist

            You may have seen residential neighborhoods with sidewalks that have some portions that look as if they were lifted by tree roots.  Sometimes these lifted sections can be tripping hazards.  But that is the city’s problem, right?  Not necessarily, according to a recent case.

If you invest in residential property in areas in Washington that have sidewalks, then you may want to know about a recent court case that held the property owner liable for injuries suffered by a pedestrian in a tripping accident on the sidewalk.  The facts are that during the Fifties, the owners purchased a residence in West Seattle and lived in the home for fifty years.  Some time before 1990 they planted three birch trees on the property next to the sidewalk.

            Over the years the roots of these trees grew beneath the sidewalk and according to an expert at the trial, lifted a section of the sidewalk about an inch, although the tripping hazard was “not conspicuous.”  In 2003, a pedestrian tripped on the lifted sidewalk section and broke her wrist.  She sued the city and the property owners.  The property owners asked the court to dismiss the case against them on the basis that they did not have any duty to the pedestrian.

            The court discussed the responsibility of the landowner in terms of whether the tree roots were a natural or an artificial condition.  The court concluded that when the owner plants a tree on the property, that tree is an “artificial condition,” and the owner has a duty to “restrain” the tree from injuring a pedestrian.  The city still has the responsibility to maintain the sidewalk but that is not enough to shield the property owner from damages in such a case.  The court refused to dismiss the case against the property owners.

            For the investor in residential property, what does this mean?  First, it means you should have a good first hand inspection of the property you intend to buy if it is in an area where there are sidewalks.  You should look around to see if there are trees on the property.  Trees can be counted on to send their roots out, and they may be under the sidewalk.  Second, if the inspection discloses that there are trees on the property whose roots may be under the sidewalk, it will be important to know whether the trees were there before the sidewalk.  If the trees were planted by the existing homeowner or a predecessor rather than having been in place when the house was built, then there is the likelihood that the property owner will be responsible for “restraining” the roots from lifting the sidewalk and creating a tripping hazard.  If the trees were planted by the homeowner or a successor it will then be necessary to find out before purchasing, what the cost of “restraining” the roots is likely to be.  If you can establish with certainty that the trees were in place before the house was built, then likely you do not need to be concerned about potential liability from tree roots lifting the sidewalk because such trees are classified as a “natural condition.”  The court made it clear that where an artificial condition is involved, the property owner has the duty to restrain the tree roots, and a reasonable assumption is that this duty would extend to subsequent purchasers of the property, even if they were not the ones who created the artificial condition. 

            This is another case of “let the buyer beware.”
This account is for education only and should not be considered legal advice.