Commercial Property Issues: 2018 Yearly Update

Of the commercial property cases over the last twelve months represent a theme noted in last year’s Legal Pulse—that the buyers’ intended use of the property is often significant with respect to the real estate professional’s duties and disclosures. Blended in this theme, several cases discussed below involve claims that the real estate professional breached a fiduciary duty by failing to disclose facts considered material to the buyer’s use of the property, such as liens against property title, property boundaries, or the vacation of tenant leases.

1. High Country Lumber & Mulch, LLC v. Theiman Enterprises, LLC, No. 2:14CV00059, 2017 WL 5714571 (E.D. Tenn. Feb. 23, 2017)

A lumber company paid the defendant property owner for timber rights. The lumber company incurred expense to improve access to the property and set up its logging operations. The property owner covenanted that it owned the property and that the property was free and clear of all liens and encumbrances. However, before the lumber company was able to remove any significant timber from the property, the property was foreclosed upon by a bank lien holder because the property owner defaulted on an undisclosed loan.

The lumber company filed suit against the property owner and the broker who assisted in the transaction for breach of contract, fraudulent misrepresentation, negligent misrepresentation, detrimental reliance, promissory estoppel, fraud in the inducement, unjust enrichment, breach of fiduciary duty and professional negligence. The lumber company claimed that the property owner knew or should have known that the property was encumbered at the time the contract was signed and that the property owner had wrongfully failed to disclose that information. Prior to trial, the parties agreed to a settlement with the broker for $3,500 and the entire matter was dismissed.

Seller’s representative not liable for alleged misrepresentation regarding property boundaries.

2. Grace Chinese Alliance Church of the Christian v. Lin Ma DDS, Inc., et al, No. B272415, 2018 WL 549836 (Cal. Ct. App. Jan. 25, 2018)

Sellers of a commercial property sold property that was adjacent to property owned by the church. The purchaser’s fence, along the parties’ property line, was actually located 3 feet over onto the church’s property. The church asked the purchaser to remove the fence to allow the church to rebuild its parking lot. After initially agreeing to do so, the purchaser then asserted that the fence was in its current location when the seller purchased the property, and he had spent more than $50,000 improving the property in dispute. He argued that his possession and improvement of the property had been open and continuous, and that the disputed property therefore was his property. The church sought an injunction against the purchaser, and purchaser filed a cross-complaint against the church. The purchaser filed a second cross-complaint against the seller and the brokers, alleging that the seller, through the brokers, showed the property to the purchaser and represented that the fence between the properties was the true property line.

Seller and seller’s representative not liable for failure to inform purchaser that tenant was vacating the property at the end of the lease term.

The trial court found for the church, the sellers, and the brokers. The court determined that the church had clear title to the land in question. With respect to the claim against the brokers, the court held that the purchaser’s claims were barred under the purchase agreement because the purchaser waited over two years after notice of the dispute to bring the claim. The judgment was affirmed by the appellate court.

3. SM Investments v. Erickson, No. 14-CV-2014-003557, 2017 WL 136669 (Minn. Dist. Ct. Feb. 16, 2017)

The purchasing company contracted with the seller to purchase two commercial real properties. The agreement included a requirement that if the seller learned any information suggesting that any of the current four long-term tenants were potentially vacating, the seller was to immediately inform the purchaser. The cash flow obtained from the tenants’ rents were critical to the purchaser’s financing plans. Shortly after the deal closed, one of the long-term tenants informed the purchaser that it would be vacating its leased unit when its lease ended the following month. Further, this tenant informed the purchaser that it had informed the seller of its plans to vacate the properties two months prior to the closing.

Real estate transaction was not effectuated based on the plain terms of the agreement and was not due to any fault on behalf of real estate representative.

The purchaser sued the seller for breach of contract and misrepresentation. The seller brought a third-party claim against the seller’s long-time real estate representative and broker. The seller alleged that the representative acted as his agent during the transaction and the seller relied on the representative to inform the purchaser about the tenant’s notice to vacate. The representative argued that the seller never informed him that a tenant had planned to vacate the properties and asserted that he did not represent the seller in the subject purchase transaction. After trial, the jury found that the seller did not conceal or suppress material facts and had not caused any damages.

4. Maljanian v. Big Black Dog, LLC, No. B277922, 2018 WL 3154590 (Cal. Ct. App. June 28, 2018)

The buyer and seller executed an agreement for the sale of commercial property. The agreement contained several contingencies. After the contract was executed, the buyer sent a list of deficiencies to the seller. The buyer’s contingency period expired and the buyer did not waive contingencies. After the seller refused attempts to renegotiate, he nullified the agreement and the transaction did not close. The purchaser brought suit against the seller, seller’s representative, and the licensee’s employer, alleging breach of the written real estate agreement and breach of fiduciary duty.

The trial court granted summary judgment for the seller and real estate defendants. The court held that the claims were foreclosed as a matter of law because the seller refused to satisfy, waive, or release the buyer’s contingencies as set forth in the Agreement. On appeal, the court noted that the agreement was plain and the failure to close the transaction was the result of the buyer’s disapproval, not any breach of duty on behalf of the real estate parties. The Court of Appeal affirmed the trial court’s ruling on summary judgment.

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