California Court of Appeal strikes down
a “free look” contract

In a case that may have some scratching their heads, the California Court of Appeal refused to enforce a real estate purchase agreement because the buyer had the right to terminate the agreement at any time, without penalty. Steiner v. Thexton, 163 Cal. App. 4th 359 (2008). The purchase agreement was of a similar type that is often used by parties where entitlements or other closing conditions are at issue. Seller agreed to convey the property to buyer, and buyer was given a specific period of time to obtain land use approvals and entitlements. Buyer could also terminate at any time prior to the closing deadline. A $1,000 deposit was made, but it was fully refundable to buyer. Buyer proceeded to obtain land use entitlements and subdivision approvals. Before buyer could close the transaction, the seller terminated the contract and refused to convey the property. Buyer then sued for specific performance and monetary damages. The trial court found that the contract was not enforceable, and this ruling was appealed to the California Court of Appeal.

Even though the buyer spent about $50,000 obtaining land use entitlements over a period of several years, the Court of Appeal found that the contract was unenforceable for lack of consideration. The court’s holdings include:
• The contract to purchase was actually an option to purchase the property;
• Because buyer did not provide seller any separate consideration for the option, seller was not required to sell the property to buyer; and
• Buyer had no right to damages.
The court focused on the fact that buyer was not obligated to do anything with respect to seller, and that buyer could terminate the contract at any time, without penalty. Even though buyer did have some obligations (for example, buyer was obligated to assign any entitlement applications to seller, and provide seller with due diligence reports that buyer may have obtained), the court found that this did not constitute adequate consideration, because buyer could have terminated at any time, before these obligations were due. Therefore, the purchase agreement was actually an option to purchase, and because buyer did not pay consideration for the option, the agreement was not enforceable.

It is also interesting to note that the court would not enforce the doctrine of promissory estoppel – in other words, seller’s promise should be enforced as a matter of fairness. Even though buyer argued that it performed substantial work to its detriment, the court again found that buyer was without risk during the entire period of time prior to closing. So, according to the court, it would be unfair to enforce the contract against seller. As a result, buyer was out over $50,000, lost the property, and the court required buyer to pay seller’s attorneys fees – over $85,000.

The lesson to be taken from this case is two fold. First, the parties to a real estate contract need to be sure that there is adequate, legal consideration at the time the contract is signed. Second, a contract can provide too much protection. If a party has a “bullet proof” right to terminate, then it should also be aware that there may be a chance that the contract is not enforceable from its side.

Unfortunately, the case may raise more questions than it answers. For example, the court did not provide any guidance as to how much consideration buyer needed to provide in order to create an enforceable option or purchase contract. Parties to purchase agreements and option agreements should carefully consider these issues when making the decision to enter into an agreement.

If you have any questions about this article, or would like to talk to a Reuben & Junius attorney regarding transactional work , please call Kevin Rose at 415.567.9000. Reuben & Junius, LLP provides a wide range of transactional services, including leases, purchase and sale agreements, formation of limited liability companies and other entities, and lending/workout assistance, as well as subdivision and condominium work.

 

San Francisco’s Acting Permit Services Manager and former Chief Building Inspection Officer, Laurence Kornfield, recently announced creation of a “sustainability plan” as one of every building owner and manager’s “must do’s” in 2009. Kornfield is right: whatever the market may bring in 2009, it is surely just the beginning of increased environmental regulation for buildings. While the exact requirements of coming regulations are not clear now, the types of regulations that will follow are increasingly foreseeable, and can be planned for in advance.

Why now?

Energy use and related activities by buildings are the second largest contributor to California’s greenhouse gas emissions. Almost one-quarter of California’s greenhouse gas emissions can be attributed to buildings. In response, the building sector is increasingly subject to state and local mandates to operate more efficiently, reduce its carbon footprint, and disclose energy use. For instance, on and after January 1, 2010, California’s newly passed AB 1103 will require that a nonresidential building owner or operator disclose Energy Star Portfolio Manager benchmarking data and ratings, for the most recent 12-month period, to a prospective buyer, lessee, or lender. Building owners should begin preparing for this now.

Similarly, twenty-seven cities and counties in California, including San Francisco, have now enacted green building standards, typically by incorporating the LEED and Build It Green rating systems. In addition, the California Air Resources Board passed its Scoping Plan in December, 2008, which lays out the state’s long-term policies for reducing greenhouse gas emissions. A few of the policy recommendations affecting buildings in the Scoping Plan that will guide future lawmaking include: making the state’s voluntary Green Building Standard Code mandatory in 2011; requiring 25 percent of all new buildings to reduce energy and water consumption by at least 25 percent beyond code by 2011; and establishing a state environmental performance rating system for homes and commercial buildings to replace third-party rating systems, as well as creating retrofit regulations. Such policies will set the trend for future rulemaking in the building sector.

The existing green building mandates, as well as the anticipated future regulations, can be economically friendly, if planned for effectively. Statistics show that a 30 percent reduction in energy consumption can lower operating costs by $25,000/yr for every 50,000 square feet of office space. For every $1 invested in energy efficiency, asset value increases by an estimated $3. And though costs can vary widely, the United States General Services Administration recently noted it has been able to consistently build LEED Silver buildings within a budgeted 2.5 percent cost premium, and often cost-neutrally. Sustainability planning is about easing this burden and taking advantage of these efficiencies.

What is a sustainability plan?

A sustainability plan is a long-term road map of actions items and policies for how the buildings you own, manage, or are building will keep pace with increasing climate-change regulation, as well as market pressures for “green buildings.” This may include:
• Familiarize staff with the LEED, Build It Green, and other rating systems.
• Determine how green building is changing your market, both in terms of market expectations and how you will structure rental rates.
• Determine how to respond to a tenant’s claim that its build out adds LEED points to the building, and the rent should be reduced to reflect this.
• Establish procedures to track regulations and incentives.

Legal aspects of a sustainability plan may include:
• Revise standard leases to be consistent with your sustainability plan: This could include (i) modifying the operating expense provisions to allow for recovery of specified green building costs; (ii) confirm tenant’s obligation to construct improvements and alterations in compliance with your green building standards; (iii) provide for specified maintenance procedures; (iv) require tenants to comply with other green building policies and regulations; and (v) impose penalties for violation of these provisions.
• Update contracts, RFPs, and RFQs to reflect that green building experience is required.
• Strategize for addressing experimental or innovative systems, such as extended warranties or performance guarantees.
• Satisfy any lender requirements for existing loans or refinances.

Getting Started

Now is the time to start planning for what will surely become a more complex regulatory environment. Contact Reuben & Junius LLP to discuss sustainability planning for your operation or development, and how to make the transition to the new green building world as smooth as possible.

There are a number of excellent resources on sustainability planning and incentives available for free. Here are some of the best:

Best Practices Guide: Commercial Office Buildings
(http://www.fypower.org/bpg/index.html?b=offices)
Green California: Resources Library
(http://www.green.ca.gov/ResourcesLibrary/default.htm)

Flex Your Power Rebates & Incentives Finder
(http://fypower.org/com/tools/rgl.html)

California Air Resources Board Scoping Plan (http://www.arb.ca.gov/cc/scopingplan/document/psp.pdf)

San Francisco Green Building Initiatives (http://www.sfenvironment.org/our_programs/topics.html?ssi=8&ti=19#LegislationInitiatives)

San Francisco Solar Power Initiatives (http://sfwater.org/detail.cfm/MC_ID/12/MSC_ID/139/MTO_ID/361/C_ID/3910)

Today the Board of Supervisors passed on second reading the Eastern Neighborhood Plan (the “Plan”); it is now official. Barring a veto, this action brings to an end a long and complex process and rezones a broad area of eastern San Francisco (East SoMa, Central Waterfront, Showplace Square, Potrero and Mission neighborhoods). The Plan is a major milestone in the San Francisco planning process.

Reuben & Junius, LLP will be making presentations on the Plan to clients, consultants and friends starting next week. If you are interested in attending a future presentation or would like to schedule a presentation for your group, please contact Tuija Catalano. Some of the highlights of the Plan include:

New Zoning: The Plan creates new zoning districts and changes others: new PDR districts (residential prohibited; office severely restricted); new NCT districts geared towards harmonizing high- and moderate-density housing and commercial uses close to transit services; and the new UMU district (Urban Mixed Use, affectionately pronounced “OO-Moo,”), to act as a buffer zone between residential and PDR districts. There are others.

Heights: A potpourri of changes over the entire Plan area. About 60% of lots received a small increase (5 to 20 feet), while about 30% actually lost height. Specific areas near AT&T park and in upper SOMA received 45 to 95 foot increases.

Density Limits – Gone: In most new districts residential density limits are eliminated.

Larger Units – Required: The Plan requires a certain percentage of units to have 2 or more bedrooms in an effort to create more family housing. The developer can choose to provide (1) 40% 2-bedroom units; (2) 30% 3-bedroom units, or (3) in EN Mixed Use districts, a required number of on-site inclusionary affordable housing units as 2-bedroom units.

Less Parking: For most properties, the potential amount of parking will be less than before due to the elimination of minimum parking requirements and introduction of parking maximums.

More Fees: Includes a new Community Improvement Fee intended to fund infrastructure improvements. Fee ranges are as follows:

Fee “Tier” / Residential / Non-residential:
TIER 1 (no height increases, 100% affordable housing projects, and housing projects within UMU): $8/gsf (Res) $6/gsf (Non-Res)
TIER 2 (1-2 story ht. increases): $12/gsf (Res) $10/gsf (Non-Res)
TIER 3 (3+ story ht. increases + MUR zoning) $16/gsf (Res) $14/gsf (Non-Res)

Increased Affordability: UMU projects will be subject to higher requirements, but will have more compliance options. New on-site requirements range from 18% to 22%, and off-site requirements range from 23% to 27% depending on if the site received a height increase under the Plan. Other new alternatives: middle-income affordability and land dedication (in lieu fee still available).

Entitlement Processing (Faster?): The Plan attempts to provide greater certainty by permitting more uses as-of-right, and by eliminating many conditional use authorizations. Planning Commission approval will be required for “Large Projects” that (1) add more than 25,000 sf of floor area, (2) add or construct above 75-foot height, or (3) contain more than 200 linear feet of street frontage.

CEQA Streamlining: The anticipated use of Community Plan Exemptions (“CPE”) for projects in the Plan area could result in a more streamlined CEQA process, which in turn could reduce total entitlement processing time. A CPE is available for projects that are consistent with the Plan. While the exact process has yet to be worked out, we are hopeful that it will allow entitlement applications to move faster.

The Plan becomes effective 30 days after the Mayor signs the legislation, which means the effective date could fall anywhere between January 8th and January 19th, 2009. Note that this email only scratches the surface of this major piece of legislation: the package is large and complex. Please call Andrew Junius, Joel Yodowitz or Tuija Catalano on specific questions.

 

 

 

 

 

San Francisco’s new green building ordinance went into effect on November 3, 2008. Almost every new building in the City—from the single-family home to the high-rise tower—is affected by this legislation. Projects required to comply include:

1. New construction, Group R (residential) occupancy buildings;
2. New construction, commercial buildings of Group B (business) or M (mercantile) occupancies that are 5,000 gross square feet or more;
3. New first-time build-outs of commercial interiors that are 25,000 gross square feet or more in buildings of Group B or M occupancies; and
4. Major alterations that are 25,000 gross square feet or more in existing buildings of Group B, M or R occupancies where “interior finishes are removed and significant upgrades to structural and mechanical, electrical and/or plumbing systems are proposed.”

The method of compliance with the new ordinance depends on the project:

• Non-high-rise residential projects will have to be certified in accordance with the Build It Green “GreenPoint” system or meet an equivalent standard.
• All commercial buildings will have to be certified in accordance with the U.S. Green Building Council’s Leadership in Energy and Environmental Design (“LEED”) system or meet an equivalent standard.
• High-rise residential projects can choose whether to use the LEED system, or a combination of GreenPoint system and LEED prerequisites.

Compliance requirements are phased in gradually through 2012. All projects must also meet other requirements in addition to those of the GreenPoint and LEED systems. The ordinance will bring new challenges to all projects.