Tucson Real Estate Attorneys

The Arizona case of Next Gen Capital v Consumer Lending Associates (“CLA”) explored the interesting theory of ‘frustration of purpose’.  In discussing the legal theory of frustration of purpose, it is helpful to simultaneously discuss the closely related legal theory of ‘impossibility of performance’.  Both of these related theories are defenses to one’s obligation to continue performance under a contractual obligation.  Do understand when reading about these theories that the parties can always make either or both of these defenses irrelevant and not applicable if they put a provision in the contract precluding either or both parties from being able to raise such a defense.  Now on to understanding these defenses.

Impossibility of performance deals with a situation where the nonperformance by one of the contracting parties arises out of its inability to actually perform one of the material specified obligations in the contract due to no fault of its own.  On the other hand, frustration of purpose deals with a situation where an unforeseen event undermines a party’s principal purpose for entering into a contract and both of the contracting parties knew of this principal purpose for entering into the contract.  That may seem like a fine line distinction but it will become clearer.

Let’s explore an example of each.  Assume you lease a commercial building for the sole purpose of operating an ethanol refinery.  If the property and area are destroyed by a flood and, as a result, the local municipality decides to rezone the area for only residential use then you would be excused from further performance of the agreement.  It is impossible to perform the function of manufacturing ethanol at the facility.   The change in circumstances altered your ability to operate the very business you entered into the agreement to perform.  The change in circumstances made it impossible to continue the principal purpose for which the lease was entered into.  You would be excused from further performance of your contract based on the defense of impossibility of performance.

However, what if, due to a shortage in the supply of corn from which ethanol is made the government suddenly mandated diversion of all corn products to be used in the food chain?  Isn’t the effect the same? Sure, you are now unable to obtain a supply of raw material you need to produce your product.  But if you had the supply of corn you could still produce ethanol.  However, ethanol was the primary purpose for which you leased the property and that purpose has now been frustrated due to unforeseen circumstances.  In this scenario you technically could produce ethanol at the facility but that purpose has become ‘frustrated’ due to a lack of supply of product through no fault on your part.

The Restatement of Contracts, Second § 265 defines frustration of purpose as follows;

               Where, after a contract is made, a party’s principal purpose is
               substantially frustrated without his fault by the occurrence of
               an event, the non-occurrence of which is a basic assumption
               on which the contract was made, his remaining duties to
               render performance are discharged, unless the language or
              circumstances [of the contract] indicate the contrary.

Let’s look at another hypothetical situation.  You have reservations for a very expensive Broadway show to be paid for and picked up at the will-call window. Due to illness of the star, the show is cancelled indefinitely.  The cancellation of the show was unforeseeable by the parties and therefore voids the contract.  You should not have to pay for the tickets since the purpose for your purchase of the tickets was frustrated due to an unforeseen event.  The defense of  ‘impossibility’ is not applicable since technically you could have gone to the theater and sat in the seat you ‘rented’ and sat in front of an empty stage where the show was to have taken place.  Thus the appropriate defense to an attempt to make you pay for the tickets would be frustration of purpose.

So now to the Arizona case; in the CLA case Consumer Lending Associates was a payday lender.  It rented a retail business location from the plaintiff, Next Gen Capital.  In 2010 the payday lending statutes expired in Arizona and the defendant, Consumer Lending Associates could no longer make the loans it was in business to make.  So, in 2010 Consumer Lending Associates stopped paying rent and claimed it no longer was obligated to pay rent based on the defense of frustration of purpose.  The landlord, Next Gen Capital sued, won in the trial court and the case was appealed.

On appeal the Arizona Court of Appeals had no trouble disposing of the case in favor of the landlord. The court indicated that at the time Consumer Lending Associates entered into the subject lease the payday loan statutes were already subject to a sunset provision which meant the right to make such loans expired in 2010, unless legislative action was taken to save the statutes from expiration.  The Court of Appeals indicated that the defendant, a consumer loan lender, was charged with knowledge of the fact it would be prevented from making such loans after 2010 unless the legislature intervened to extend the law.  Thus the court held that since the defendant had such knowledge it could not claim that the expiration of the payday loan statutes somehow caught it unawares in 2010.

The net result was the Court of Appeals affirmed the judgment of the trial court against the defendant, Consumer Lending Associates, and charged the defendant with over $140,000.00 in unpaid rent.

This article is written by request since it was pointed out that many people are unaware of the change in the approach HUD has mandated, effective February 8, 2013, concerning enforcement of the discrimination laws.  The change is commonly referred to as the ‘Disparate Impact Rule’.

The new rule allegedly ‘clarifies’ circumstances under which certain housing practices may violate the 1968 Fair Housing Act (“FHA”).  The protected classes under FHA are race, color, religion, sex, handicap, family status, or national origin.

In the past the way the discrimination laws affecting housing were enforced required a showing of a discriminatory intent on the part of the party charged with the alleged discrimination.  Under the newly released final rule the disparate impact Rule will utilize statistical analysis to ascertain whether there has been discrimination under the Fair Housing Act.

Under the new rule the person claiming discrimination can prove his/her case without proof of any actual intent to discriminate or even the existence of a violation.  Under the disparate impact rule an analysis is provided and relied upon to indicate whether a particular minority group received the same treatment as others.

Under the new rule there is a three part test for determining when a policy or practice results in a discriminatory effect thereby violating the Fair Housing Act:

1. The plaintiff (claimant) bears the initial burden of demonstrating that a particular policy or practice results in, or would predictably result in a discriminatory effect on persons of a particular protected class.

2. If the plaintiff (claimant) proves the burden described in #1 above, then the burden shifts to the defending party to provide a “legally sufficient justification” proving that the action in question was necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests.

3. If the defendant upholds its burden as stated in #2 above, then the plaintiff (claimant) can still be entitled to recover if he/she can prove that the substantial, legitimate, nondiscriminatory interest could be served by a practice that has a less discriminatory effect.

This is of particular concern to not only individuals or companies providing housing but also to cities and municipalities that provide housing.  They may be sued because of an action or policy which appears to be reasonable and nondiscriminatory on the surface but when applied may have an inadvertent or possibly accidental effect or negatively impact a protected class.

So what might be an example of such an action that could have a disparate impact?  What if a developer of an upscale development tends to market only to people of a higher economic status?  Such an activity could run contrary to the law since it could result in a discriminatory impact.

Now HUD is proposing a new housing regulation requiring government entities to reduce segregation and promote integration.  HUD has proposed a rule that would zero in on trying to implement social change in areas it classifies as ‘segregated’.  It identifies various cities to be aggressively targeted initially.

It claims there has been exclusionary zoning which it defines as any local zoning code that limits development of affordable housing since it claims such laws create barriers to urban minorities.

Ultimately HUD plans on mapping every U.S. neighborhood as being white, Asian, Black or African American or Latino/Hispanic pointing out racial imbalances.  Geographic areas with less than 50% white will be classified as segregated areas.  HUDs goal is to reduce disparities in access to key community assets such as quality schools, jobs, transportation, parks and recreation and even fresh air and groceries.

To accomplish its goals HUD would, under the latest proposal, require any cities taking HUD housing development grants to prepare a disparities analysis every five years.  The analysis would include comparing the employment number for African Americans and white households.  It suggests that lower employment for blacks would indicate that this group might be impeded by insufficient access to important job centers.  Then, to rectify these problems HUD suggests modifying local regulations and codes, constructing new developments, creating new amenities and facilitating the movement of people.

Needless to say there are many vocal advocates for this sweeping change and many who are opposed to it.  There is insufficient room to list many of the pros and cons of the latest changes starting with the disparate impact rule followed by the latest proposed rules piggy backing on the disparate impact rule.

It will be some time before there are bright lines on what is legitimate action in many areas.  For instance, will the new law require lenders to loan money to unqualified borrowers?  Do lenders risk expensive litigation if they are perceived as declining applicants from geographic areas labeled as ‘segregated areas’?  Only time will tell.  If lenders decline to loan to persons with a felony(ies) in their background, is that discriminatory since certain protected classes may have a higher concentration of their class with a felony(ies) in their background?  Those in favor of the new law and newly proposed rules say they will decrease the number of lawsuits since the laws ‘clarify’ what actions are permissible and impermissible.  The advocates claim that the new law and rules clarify the issues so it will reduce litigation.  I suspect you know my opinion on that!

I hope this information is helpful to you.

A quiet title action seeks a judicial determination regarding the validity of adverse claims to title over a disputed real property. A.R.S. §12-1101 et seq. A quiet title action is generally brought when a person, entity or governmental body claims an interest in real property which is adverse to the interest of another. Typically, rather than seek purely monetary damages, a plaintiff in a quiet title action asks the court to enter a ruling which forever bars the defendant from having or claiming any right, title or interest in the disputed property which is adverse to the rights, title or interest of the plaintiff. Id. The concept behind a quiet title action is for a plaintiff to clear title – to remove a cloud on the title to his property.

The statute of limitations is an affirmative defense. If a claim is not brought within the required period of time after the claim arises, the statute of limitations defense can be implemented to forever bar that claim. However, the general rule pertaining to quiet title actions is that the statute of limitations does not run against a plaintiff who has undisturbed possession of the disputed property. Cook v. Town of Pinetop-Lakeside, 232 Ariz. 173, 303 P.3d 67 (2013). Therefore, in general, the statute of limitations can never be used to bar a quiet title action.

However, there may be an exception to the general rule where the plaintiff does not have undisturbed possession of the disputed property. In Rogers v. Board of Regents of University of Arizona, 233 Ariz. 262, 311 P.3d 1075 (2013), the Arizona Court of Appeals upheld a ruling in which the trial court found that a quiet title action was barred by the applicable statute of limitations.

In Rogers, the plaintiff brought a quiet title action which sought affirmation from the trial court that he had an easement across the University’s property. The trial court ruled that the plaintiff’s claim was barred by the statute of limitations and thus dismissed the claim. The trial court went on to rule that the plaintiff was forever barred from asserting any claim, right, title or interest in the disputed property which was adverse to that of the University.

The Rogers court distinguished its dismissal from the general rule because the plaintiff did not have undisturbed possession of the disputed property. The Rogers plaintiff was not in actual possession of the property at all, but rather used the disputed strip of land to access his property. Ultimately, the University installed a gate and thereby blocked the plaintiff’s use of the disputed property. The court’s ruling hinged on the fact that it was the University, not the plaintiff, who had actual possession of the disputed property. As such, the court found that the moment the University blocked the plaintiff’s use of the claimed easement (and plaintiff demanded the gate be removed), the statute of limitations began to accrue and the plaintiff had a limited period of time (one year) to bring his claim or be forever barred.

As a result of the Rogers ruling, plaintiffs and their legal counsel will need to be more vigilant when deciding how quickly to file quiet title actions. If you are involved in a title dispute, you should consult with legal counsel as soon as practical to ensure your claim is preserved and not barred by the applicable statute of limitations.

Generally, as real estate attorneys, we try to stay away from the financial aspects of transactions and focus on document review and the overall legal aspects of the transaction.  However, it has been difficult to ignore some of the analysis and predictions that are permeating trade publications recently.  As a real estate attorney, I am concerned about the state of the market as are real estate agents and brokers.

Mike Orr, a housing analyst at Arizona State University in Tempe stated

“Certain areas have already become a buyers’ market, and the entire market will be there by early next year.”

Why is this so?  There are several factors at work that may cause this prediction to become reality.

There is a growing concern about the impact of a provision of the Dodd-Frank Act which goes into effect in January.  The Dodd-Frank Act will, while well intentioned, inadvertently guarantees that many fewer home buyers will qualify for home mortgages.  Effective January 10, 2014, the Dodd-Frank Act will require borrowers in a typical mortgage situation (such as through Fannie Mae, Freddie Mac, FHA and VA) to provide documentary proof from third parties of the sources of their income and the ratio of the borrower’s debt to income ratio will not be allowed to exceed 43%. 

The burden of proof will be on the lender to demonstrate to the regulatory authorities that it made a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling.  On the surface that is a good thing.  For certain it is better than what lead up to the housing bubble where “stated income” loans allowed the borrower to simply state what his or income was with little or no verification required.  But, will it have unintended consequences? Many banks are already starting to impose new and stringent requirements to be able to demonstrate their compliance with these requirements in advance of January 10, 2014.  It sounds simple on its face but banks are taking these regulations very seriously.  Borrowers are already finding it very burdensome and time consuming to comply with the banks demands for verification.  Many applicants are turned away due to lack of qualification.

The sparks are already beginning to fly and the train is close to coming off the tracks.  Banks have been reporting now, for months, that they are starting to lay off large numbers of loan department employees because of the high operating costs and increased litigation caused by the Dodd-Frank Act, not to mention the impact of increasing interest rates and fewer foreclosure homes available for bargain prices.  Prices have risen significantly in general.  Increasing home prices combined with increased interest rates is not necessarily a good formula for increasing home sales.

Let’s hope Mr. Orr’s prediction is not accurate for Tucson.   However, it is time for everyone in the real estate industry to pay closer attention to statistics such as the days on market and the amount of home inventory in the multiple listing service. 

Those of us with some gray hair remember the outrageous interest rates that predominated in the early 1980s.  Agents and brokers managed to continue to make home sales by utilizing what was dubbed “creative financing”.  That was a fancy name for seller carryback financing.  We may soon see more creative financing surfacing during 2014.

So, my bottom line is this, while the market may get cinched up some due to some regulatory and economic forces, my faith remains with agents and brokers to be creative in finding solutions to counter those obstacles.

There are different types of deeds for real property in Arizona.  They can serve different objectives depending on the circumstances.  The beneficiary deed is the newest member of the family of deeds in Arizona.

The Purpose of the Beneficiary Deed

What purpose does such a deed serve?  It is used as a means to convey real estate to a person or persons intended to receive the property upon the death of the owner(s), without the necessity of probate and without the limitations of using a joint tenancy deed.  It permits the owner(s) to retain all of the benefits of the property during the owner’s lifetime.  That includes the right to dispose of the property without limitation.  However, upon the death of the owner the title to the property is vested in the named beneficiary(ies) in the beneficiary deed.  The beneficiary deed is not impacted in any way by anything contained in the last will and testament of the owner.

Most Common Questions About a Beneficiary Deed

The most common question asked concerns what is the difference between a joint tenancy deed and a beneficiary deed?  With a beneficiary deed the named beneficiary(ies) have absolutely no interest in the real property during the lifetime of the owner.  That is why the owner is able to freely convey title to the property during his/her/their lifetime.  The transfer of title or any interest in the property only occurs upon the death of the owner.  However, with a joint tenancy deed the owner cannot convey the title to the property without the written consent of the joint tenant(s).  That is because upon the creation of a joint tenancy title the new party brought in as a joint tenant acquires an immediate interest in the title to the property.   Thus, once a joint tenancy is created, there is a limitation on the ability of the original owner to alienate (convey) or sell the property without obtaining the written permission of the other joint tenant(s).  However, once the original owner dies both the beneficiary deed and the joint tenancy deed operate in the same manner.  However, upon the death of the original owner the public record needs to be clarified as to who the new owner(s) is or are.

After the death of the original owner the public record is clarified and memorialized in the same manner for both the beneficiary deed and the joint tenancy deed.  It is necessary to prepare and record with the county recorder’s office an affidavit clarifying that the original owner died and disclosing the contents of the deed and attaching it together with a copy of a certified copy of the death certificate of the original owner.

A Joint Tenancy Deed

A joint tenancy deed has often been labeled a ‘poor man’s will’ since the disposition of the title interest of the deceased joint tenant occurs instantly upon death of the other joint tenant and does so without regard to what a will of the decedent may say.  For example a joint tenant’s Will may leave everything to his/her children.  However, if the decedent has his or her home in joint tenancy with a friend then the friend will take the interest of the deceased joint tenant despite what the decedent’s will says.  A person can be made a joint tenant without their knowledge or consent.  Both the joint tenancy deed and the beneficiary deed avoid the necessity of a probate at least as to the title to the property so held.

There is some risk with a joint tenancy deed concerning liability.  If an owner places a joint tenant on title and the new joint tenant is sued and has a judgment lien placed on their property it can affect the title to the original owner’s property.  With a beneficiary deed the beneficiary has no interest in the title until the original owner dies.

Likewise, a beneficiary can be named in a beneficiary deed without their knowledge and upon death of the owner the title will go to the beneficiary without regard to the decedent’s will.  The difference is that with a beneficiary deed the owner can change their mind and terminate the beneficiary deed without the consent of the beneficiary. 

Like most things in the law it is wise to understand and plan the use of such titles as a joint tenancy or a beneficiary deed.  There are effective tools under the right circumstances.  It is important to review estate plans periodically.  Experts differ but that process should occur at least every three to five years since people’s circumstances change.  There is a necessity of coordinating property held in joint tenancy and/or by a beneficiary deed with one’s will and/ or their trust.  Sometimes people change their mind and consequently change their will but forget their real estate is held in joint tenancy or under a beneficiary deed.  In such a situation the change in the will or trust won’t impact the legal effect of a property held in joint tenancy or under a beneficiary deed.

If you have any questions it is prudent not to utilize such deeds unless you understand completely the legal impact of such instruments.  Although they can be extremely effective legal tools for estate planning purposes, they could create unintended consequences in the future.

In Grady v. Barth, the Gradys purchased a home but could not keep up the payments. Their home was lost in a trustee’s sale held by Tri-City National Bank. Tri-City brought an eviction proceeding and the Superior Court ruled in favor of Tri-City. The Gradys filed a timely appeal and asked the Superior Court to set the amount of a bond and stop the issuance of the writ of restitution (a document which would authorize the Sheriff to put the Gradys out on the street) pending the appeal. The Superior Court trial judge, erroneously, concluded that he had the discretion to issue the stay or deny it and decided to deny the stay, effectively evicting the Gradys.
 
However, the Court of Appeals, in its opinion, ruled that the Gradys were entitled to remain in their home upon the filing of a satisfactory bond. The bond has been posted and the appeal is pending.