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    Robert Spitzer is an experienced real estate, finance, and business problem solver. He has practiced in these areas for over 30 years, and has also personally developed real estate properties, overseen manufacturing and real ...

When a borrower defaults on his or her commercial real estate loan in Washington, the bank has a number of options for collecting the debt.  Lenders usually secure their real estate loans with deeds of trust, which gives the lender the option to foreclose on the collateral either non-judicially through a Trustee’s Sale, or non-judicially through a judicial foreclosure and subsequent Sheriff’s Sale.  In each of those situations the rules governing the borrower’s and guarantor’s continuing liability on the loan after the sale differ.

Man cutting treeWhat are the most common sources of disputes between neighbors?  Children?  Noise?  Fences? Dogs?  Trees?  That’s the top five according to that important American sociological barometer, TV’s “Family Feud”.  Topic number five recently made it to the docket of Division I of the Washington State Court of Appeals.

High rise buildings_US flagThe House Judiciary Committee held a hearing earlier this month to review the performance of the EB-5 Immigrant Investor Program. Congress created the EB-5 visa program in 1990 as a tool to stimulate the U.S. economy by encouraging foreign capital investments and job creation. The EB-5 program makes immigrant visas and subsequent “green cards” available to foreign nationals who invest at least $1 million in a new commercial enterprise that will create or preserve at least 10 full-time jobs in the U. S. A foreign national may invest only $500,000 if the investment is in a targeted employment area (“TEA”), defined to include certain rural areas and areas of high unemployment. A considerable amount of foreign capital invested through the EB-5 program has been invested in domestic real estate development projects.

Chinese family in a gardenMost of us in the United States are philosophical descendants of a Middle Eastern pioneer who left his parents’ home and ventured to a new land.  He was inspired by his firm belief in monotheism, and his descendants founded the Jewish, Christian and Moslem faiths.  Aside from the stories about his destruction of idols in his father’s shop, Abraham was well known for his hospitality towards strangers.  The bible describes how he washed the feet of travelers who came to his tent after crossing the desert.  In the realm of human behavior, this progenitor of three great world religions is best known for welcoming the stranger.

During this time of tumult over refugees coming to our shores, you might think I’m writing about the influx of Syrian’s fleeing war in their homeland. No, I’m a real estate and business lawyer, not a politician. This message is about welcoming the participation of foreigners in our real estate markets, especially our Pacific neighbors – the Chinese.

Seattle condosThe Supreme Court of the State of Washington recently decided a case in which the advancing forces of the sharing economy intersect with the real estate world, in Fillmore LLLP the Unit Owners Association of Centre Pointe Condominium, Washington Supreme Court No. 0879-6 (September 3, 2015). In this case, the court analyzed whether a homeowners’ association condominium declaration amendment required a 67% percent vote, or if the higher threshold of 90% percent of affirmative votes was required to pass a resolution restricting the right of a condominium owner to rent the condominium.

Mature couple painting fence

Adverse possession and prescriptive easements are scary concepts to landowners. Valuable property rights can be lost to neighbors and strangers, seemingly rewarding longtime bad behavior. The Washington Supreme Court has recently struck a chord to promote harmony in our state, and make prescriptive easements tougher to establish in the case of Gamboa v. Clark, 183 Wn.2nd 38, 348 P.3d 1214 (2015).

The Gamboas and Clarks owned adjoining parcels of enclosed agricultural land which had originally been part of one larger parcel separated by a gravel road, largely crossing the Clarks’ property. The road was used by the Gamboas to access their home and by the Clarks for farming grapes on their parcel. The road had been used by both parties and their predecessors for these purposes for decades. Each was aware of the other’s use of the road, and neither party gave the other permission, objected or interfered with the other’s use. After an unrelated dispute arose between the parties in 2008, the Gamboas brought an action seeking a prescriptive easement to use the gravel road to the extent on the Clarks’ property.

The Court found that the elements of a prescriptive easement were all present in this case, with the possible exception of “adversity”. The Gamboas’ use of the road was “open, notorious, continuous, hostile and uninterrupted over the prescriptive period of ten years” and the Clarks had “knowledge of such use at the time when [they] would be able at law to assert and enforce his or her rights.” Incidentally, it’s not clear to me how the use can be found to be “hostile” without also being “adverse”.

In certain circumstances, Washington courts have found that a use of someone’s property will be presumed to be with the owner’s permission and therefore not “adverse”. For example, in the case of unenclosed lands, the regular crossing of another’s property is presumed to with permission.  Roediger v. Cullen, 26 Wn.2d 690. A presumption of permissive use also applies to enclosed or developed land cases when it is “reasonable to infer that the use was permitted by neighborly sufferance or acquiescence.” The third situation recognized was when the owner created the road and the claimant’s use did not interfere with the owner’s use.  Cuillier v. Coffin, 57 Wn.2d 624, 627 (1961).

In this case, the trial court ruled that because the land was enclosed, there was no presumption of permission from the Clarks, and in effect, accepted a presumption of adverse use. In this close case, that shift from a presumption of permissive use, to placing on the Clarks the burden of establishing permissive use, led to the ruling that the Gamboas were entitled to a prescriptive easement to use the gravel road over the Clarks’ property.

Division III of the Court of Appeals disagreed, and found that the trial court erred in not recognizing that the Clarks should enjoy a presumption of permissive use, placing on the Gamboas the burden of rebutting that presumption to show their use was “adverse”.  Gamboa v. Clark, 180 Wn. App. 256, 321 P.3d 1236 (2014). This can be done by presenting evidence that the claimant’s use was “adverse and hostile to the rights of the owner” such as by showing he “interfered with the owner’s use of the land in some manner” or that the owner’s acts or statements acknowledged the claimant’s right to an easement.

Interestingly, Division I of the Washington Court of Appeals (Drake v. Smersh, 122 Wn. App. 147, 153-54, 89 P.3d 726 (2004)) as well the Oregon Court of Appeals (Wels v. Hippe, 269 Or. App 785, 787 (2015)) have recently taken positions more closely aligned with the trial court approach to the presumption of adversity. However, the Washington’s Supreme Court held that even in cases of enclosed land, “an initial presumption of permissive use applies to enclosed or developed land cases in which there is a reasonable inference of neighborly sufferance or acquiescence.”   Id. at 1220. “Showing a reasonable inference of neighborly sufferance or acquiescence is a fairly low bar.”  Id. at 1221. In this case the fact that both parties knew the other used the road and didn’t object, and the use did not interfere with the owner’s use of its land, was enough to create this inference.  Bingo. No prescriptive easement.

I like this decision, and it fits the traditional Scandinavian silent but friendly culture of the Northwest. Why put the burden on the neighbor who allows a neighbor to use his or her road to be nasty to make sure he or she doesn’t lose property rights?  Why encourage more fence building when a policy which assumes that neighbors will be generous with each other creates a more pleasant atmosphere?  Here’s to a neighborly Washington!

iStock Country RoadThe law recognizes that under certain circumstances, continued unauthorized crossing of another’s land for a long time can lead to the right to do so indefinitely, notwithstanding that there is no agreement from the landowner.  The right so gained is called a prescriptive easement.  When the law allows one landowner to lose property rights in favor of another, without compensation, disputes often occur.  No surprise.  If it were my land, I’d be upset, too.

The Oregon Court of Appeals, in Wels v. Hippe, 269 Or App 785, 787 (2015), recently dealt with such a dispute, and provided the litigants and practitioners of the law with an in-depth analysis of one element of a prescriptive easement case – “adversity”.

In order to obtain a prescriptive easement to cross over or use the property of another under Oregon (as well as Washington) law, a plaintiff claiming a prescriptive easement is required to show, “by clear and convincing evidence, that his use (or use by former owners of his property) of the road on defendants’ property was ‘open and notorious,’ ‘adverse to the rights of defendants,’ and ‘continuous and uninterrupted’ for 10 years.”  Id, at 787.

Concept of penalty. Wooden cravel and dollars with coins.As a longtime fan of Motown music and former Washington Supreme Court law clerk and now practicing lawyer, it’s hard to resist a mischievous overlap in nomenclature between our highest legal panel and Diana Ross and the Supremes.  Once in a while our Court also inspires litigants and court watchers to burst out in song.  Perhaps this is such a moment.

The Washington Supreme Court is made up of nine justices with a wide range of legal experience, most of whom have been trial lawyers and judges before being elevated to the state's highest court.  They are individually and collectively respected as smart and hardworking.  However, it appears that notwithstanding their varied backgrounds, none of the justices has much experience with the Washington Deed of Trust Act.

I reach this conclusion after reading the recent 9-0 decision of the Court in Washington Federal v. Harvey, No. 90078-7(January 8, 2015).  In that case, the Court sided with the unified legions of banks against commercial loan guarantors seeking to avoid liability for loan deficiency judgments after non-judicial foreclosures.  In the wake of the "Great Recession," during which more real estate loans went into default than at any time since the Depression, it became tragically commonplace that foreclosure sales did not yield proceeds sufficient to pay what were once well-secured loans.  That resulted in large loan deficiencies, and banks looked to whatever source was available to help them repay loan losses, including to loan guarantors.

In Washington, the Deed of Trust Act bars deficiency judgments except in certain narrow circumstances involving commercial loans.  While deficiency actions after trustee’s sales are generally prohibited, RCW 61.24.100(10) provides that a,

"trustee's sale under a deed of trust securing a commercial loan does not preclude an action to collect or enforce any obligations of a borrower or guarantor if that obligation, or the substantial equivalent of that obligation, was not secured by the deed of trust."  (emphasis added)

In the cases before the Court, the banks used loan documents which said that the foreclosed deeds of trust secured not only the borrowers’ original notes, but also the loan guaranties.  It's not clear if the inclusion of the guaranties in the documents secured was intentional, or if the banks did not contemplate that the Washington Deed of Trust Act seemed to prevent actions against guarantors after a non-judicial foreclosure of the deed of trust, as the language quoted above suggests.

But with the ease of a footnote, the Court dismissed the language quoted above, or added its own additional qualification on the exception, in footnote (2) of that opinion:

". . .  Subsection (10) is clear; it provides clarity about when a deficiency judgment may be brought, but does not protect a guarantor of a commercial loan from deficiency judgments solely because the guarantor's guaranty is secured by a deed of trust regardless of who granted such deed of trust.  Accordingly, here, even if the borrowers' deeds of trust secured the guarantors' guaranties, subsection (10) would not preclude deficiency judgments against the guarantors because the guarantors did not grant such deeds of trust."

Notwithstanding that footnote, there is no such limitation in the language of RCW 61.24.100(10).  It refers to a guarantor whose guaranty "was not secured by the deed of trust (foreclosed)".   The Court, in effect, re-writes RCW 61.24.100(10) to read that a,

 "trustee's sale under a deed of trust securing a commercial loan does not preclude an action to collect or enforce any obligations of a borrower or guarantor if that obligation, or the substantial equivalent of that obligation, was not secured by the deed of trust granted by such borrower or guarantor against whom a deficiency action is sought."  (the author’s additional language is in bold)

Without the additional language, the statute would apply to both deeds of trust granted by the borrowers, as in the cases decided by the Court, and deeds of trust granted by the guarantors.  Without that language, there is no basis for making the critical distinction made by the unanimous Court!

The Court pointed to no evidence in other portions of RCW 61.24 or the legislative history to suggest that it is only when the guarantor is the “grantor” under the deed of trust foreclosed that the guarantor is then protected against a deficiency judgment.  In effect, the Court decided the entire case on a limitation to the prohibition on deficiency actions which is not mentioned in the statute.

After reading the opinion, I'm sure bankers across Washington started singing that old Supremes hit, "I Hear a Symphony," while those unfortunate guarantors were shaking their heads and humming, "You Keep Me Hanging On".

HUD housing and urban developmentRecent editions of the The Seattle Times (Sunday, November 16, 2014) and the Puget Sound Business Journal (November 13, 2014) discussed a new local "disruptive" company on the residential real estate brokerage scene, Surefield.com.  The Pacific Northwest, home to Zillow.com as well as Redfin.com, is known as an innovation hub in this industry.  Surefield is an online residential real estate brokerage, which plans on dramatically undercutting the traditional 6-5% real estate commission paid by sellers (usually divided 3 or 2.5% for the listing agent and 3 or 2.5% for buyer's agent), charging only 1.5% to sellers.

As quoted in the piece by Ben Miller, Contributing Editor of the PSBJ, David Eraker, Surefield CEO said:  "The U.S. real estate industry has been operating as a quasi-cartel for far too many years, just look at the high commission rates as proof of tacit collusion."   While commissions have been negotiable in theory, in practice, it has been challenging to find a good broker to vary greatly from the general price range and format.

Zillow primarily provides online property information rather than brokerage services, like Redfin, which allows property listings and has its own stable of agents to work on a seller's or buyer's behalf.  Redfin charges 1.5% for a listing (as opposed to the traditional 3 to 2.5%) and provides full service brokerage services accompanied by its online tools.  The commissions charged buyers are less than the traditional model, and based on the price of the property.  Redfin, like some other new firms in the space, pays its agents a salary rather than a share of the broker commission.

Other entrants into the tech brokerage market include UpNest.com, which allows residential real estate brokers to bid for a listing, competing by marketing proposal and commission rates.  There are also on line brokers like Shopprop.com, which have a set discounted listing fee, less than the traditional 2.5 to 3%, and a graduated buying commission based on the number of services provided and the price.  Seattle-based Findwell.com is another entrant into the growing online brokerage field.

What's the future of these and other online services, and how do you compare them to the traditional brokers?

In the past, one of the most important roles of the real estate agent was as gatekeeper to information about the market.  That is the most significant change.  Instead of asking your agent to locate and screen properties in the your price range and which otherwise meet your requirements, online tools now allow a buyer to view listings, filtered by price, bedrooms, location and amenities, often with interactive virtual home tours available.  The new portals, such as zillow.com, as well as sites from traditional brokerage firms, like windermere.com or johnlscott.com, have made the property search and identification process much more efficient.

Technology can also help foster competition and efficiency in selecting the agent who can assist you in the sale/purchase process.   One aspect of technology that I appreciate when I go out to dinner, stay in hotels or hire a contractor is the customer feedback/rating process.   Companies like Redfin and UpNest have internal ratings based on customer feedback.  I understand Redfin financially compensates agents who get great customer feedback.   I like that.  This screening function is helpful, but is not entirely new.   Brokers at good traditional agencies also screen agents working for them, a process I know takes place at Windermere and John L Scott.  Those that don't perform well aren't retained.  And as a real estate lawyer, I often get asked for and check with my colleagues about agent referrals.  It may be that with the right tools, quality will rise to the top even faster than in the past.

Is it good that there is a wider range of commissions offered?  Yes, unless you're on the receiving side of the equation.  There are times when a property will sell itself. In those situations, having the option of selling through a low cost brokerage with minimal agent involvement makes sense. More commonly, however, the process of properly pricing, staging and marketing/showing are as important as ever for a seller.  From the buyer's perspective, a skilled agent’s advice about the nuances of value, building issues, neighborhoods, negotiation and the buying process is also critical.   Working with smart, hard-working agents is as important as ever.   But from an agent's perspective, commissions are coming down.   The best agents will learn to use the technological tools to become more efficient, and will find platforms which cost less from which to deliver their services.  In residential real estate, as in most of the economy, the ground rules are rapidly changing, and for the most part, consumers benefit.   Here's to the future!

 

Some people say that once you get outside the Puget Sound metropolis, you find friendlier people.  I’ve heard of the “Seattle freeze,” where people move here and have a hard time making friends.  It’s not hard to meet people in Manson, Wenatchee or Yakima, Washington, three cities I know and have spent time in.  Overall, they seem like friendlier places to me than the big city on Elliot Bay.

A recent decision by Division III of the Washington Court of Appeals may reflect that warmer culture.  Its decision in Gamboa v. Clark (No. 30826-0-III, March 25, 2014) discussed “presumptions” and “inferences” in the context of prescriptive easements.  The Court ruled that among otherwise friendly neighbors, the use of a roadway on a neighbor’s property is presumed to be permissive.  As a result, in the absence of other evidence, a neighbor who openly, notoriously, uninterruptedly travels on a neighbor’s road does not acquire a prescriptive easement.  The element of “adversity” is missing.  The neighbors are presumed to be acting generously with one another.

Contrast the Eastern Washington appellate decision with the ruling of the Court of Appeals based in Seattle.  Division I of the Court of Appeals ruled in Drake v. Smersh, 122 Wn. App. 147 (2004) that while the presumption of permission may apply in “vacant land cases,” in “developed land cases” evidence of “neighborly sufferance or accommodation” may be the basis for avoiding a presumption of adverse use, but may not in each case.

The Gamboas and the Clarks were neighbors, each of them farmers raising crops and living on their adjoining parcels.  They got along well, and the Gamboas used a road put in by the Clarks which ran across the Clarks’ property to access the Gamboa home.  The Clarks also used that road for their own farming purposes.  Each believed the road was their own and that they were letting the other family use the road out of neighborly accommodation.  However there was no evidence of express permission to use the road coming from either party.

A dispute arose at some point, and they decided to have the road surveyed to determine ownership.  The survey showed it was largely located on the Clarks’ property, and the Gamboas brought a lawsuit to establish their right to a prescriptive easement over the roadway.  The trial court ruled that the Gamboas had demonstrated all the elements required to prove a prescriptive easement.  They’d used the road openly and notoriously for an uninterrupted period of 16 years, believing they were the owners.  They’d also done some maintenance on the road during that period.  While they never openly claimed ownership of the road, conversely, the Clarks never gave them express or implied permission to use it.  The trial court found that “a claimant’s use is adverse unless the property owner can show that the use was permissive.”  Because the Clarks didn’t present evidence of express or implied permission, the Gamboas were granted a prescriptive easement over the Clarks’ land.

The Court of Appeals, sitting in Spokane, by a 2-1 majority, overturned the trial court and ruled, instead, that in cases where there’s a history of neighborliness, or where the claimant is using a road which was established by the property owner along with the property owner, the is no presumption that use by a neighbor of another’s land in such case is adverse.  Instead, in those cases, as in cases where the land is vacant, open and unimproved, the law won’t apply the presumption of adversity necessary to establish prescriptive rights.  In effect, it’s a recognition of a characteristic I’ve observed first hand on the dry side of the Cascades.  It’s just friendlier there.

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We regularly update clients about changes in real estate law and on industry trends. This includes briefing clients on legislative proposals in the federal tax, housing and other legal areas affecting their businesses. Staying current enables you to anticipate and prevent legal problems as well as capitalize on new developments.
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