We report on two important court cases this month that impact real estate professionals, one on formation of contracts and one on effectiveness of a recorded notice, and we provide a discussion rules for legal and ethical advertising by real estate licensees. We have also added a new feature this month called “Did You Know This?” to pass on interesting miscellaneous information that we think might be of interest to our readers.

NEW COURT DECISIONS

Sterling v. Taylor – Contract Formation/ Statute of Frauds

On March 1, 2007, the California Supreme Court issued a long awaited decision in a case that has been working its way through the courts since February 2004. The case involved the “Statute of Frauds,” which provides that certain contracts “are invalid unless they, or some note or memorandum thereof, are in writing and subscribed by the party to be charged...” (California Civil Code section 1624). The purpose of the statute is to require reliable evidence of the existence and terms of the contract and prevent enforcement through fraud or perjury of contract never in fact made. The memorandum itself must include the essential contractual terms with reasonable certainty, but details or particulars need not be included. What is essential depends on the agreement and its context and also on the subsequent conduct of the parties. “Extrinsic evidence” (information not in the writing) cannot supply those required terms, but may be considered to clarify the terms for purposes of the Statute of Frauds. In this case, the California Supreme Court considered whether extrinsic evidence could be used by a court to resolve ambiguities in the memorandum.

The parties were experienced real estate investors. They were not represented by real estate agents and rather than using a standard form contract, terms were handwritten on a napkin. In January 2000, they discussed the multimillion dollar sale of three Santa Monica apartment buildings owned by Taylor’s partnership (SMC) to Sterling’s family trust. After Sterling was provided with the buildings’ rent rolls, during a meeting in March 13, 2000, they discussed a series of transaction including purchase of the SMC properties. Sterling hand wrote a memo (“Memo”) entitled “Contract for Sale of Real Property” that stated the price as follows:

approx. 10.468 X

gross income

income

estimated 1.600.000, Price $ 16,750.00

escrow 30 days. [The omitted zero in the price was not an issue.]

Sterling dated and initiated the Memo as “Buyer,” but the line he drew for “Seller” was, he said, inadvertently left blank . Taylor asserted he did not sign the Memo because he needed approval from a majority of SMC’s limited partners.

On March 15, 2000, Sterling wrote a letter to Taylor with the Memo attached stating “][t]his letter will confirm our contract of sale of the above buildings.” Sterling claimed Taylor annotated the Memo and signed it in his presence. Taylor claimed the Memo was not attached and he signed it on March 30^, 2000, as an accommodation only to acknowledge the deposits he had received from Sterling.

On April 4, 2000, Taylor sent Sterling a signed formal purchase agreement with escrow instructions stating the price at $16,750,000. Sterling refused to sign and requested a price reduction to $14,404,840, because his review of the rent rolls revealed that the income was only $1,375,404 (not $1,600,000). Taylor refused to reduce price. Sterling returned the uncashed deposit checks on May 23. The parties conducted further negotiations in December 2000 and January 2001, but did not reach an agreement. In March 2001, Sterling sued for breach of written contract (the Memo) to sell for a total price of $14,404,841, and specific performance, among other causes of action.

The trial court agreed with defendant Taylor that the price term was too uncertain to be enforced and the writings did not comply with the Statute of Frauds, and the court granted Taylor’s motion for summary judgment.

The Court of Appeal concluded that the memo (portion quoted above) was ambiguous given the use of the modifier “approx.” and the uncertain meaning of “gross income” and then considered Sterling’s testimony that "approx." modified the purchase price, not the 10.468 multiplier, and that "gross income" meant the actual gross annual income. Taylor argued that the Statute of Frauds prohibited the court from considering the Sterling's testimony or any evidence other than the written contract. The Court of Appeal held that Taylor’s name and signature on the writings satisfied the Statute of Frauds, the identification of the property by street address was sufficient, the ambiguous price terms in the Memo could be clarified by extrinsic evidence, and Taylor’s evidence raised a triable issue as to whether the parties had agreed on a formula for determining the purchase price. The case was sent back to the trial court.

Taylor appealed to the Supreme Court contending that the appeal court improperly considered extrinsic evidence to establish essential contract terms, and that the Statute of Frauds requires a memo that supplies all material elements of the contract. Sterling argued that extrinsic evidence is routinely admitted to determine whether the memo complies with the Statute of Frauds.

The California Association of Realtors® (C.A.R.) filed an amicus curiae (“friend of the court”) brief supporting the Sterling’s position that, to clarify the parties’ agreement, the court should be allowed to consider evidence that is not actually stated in the Memo. C.A.R. argued that ambiguities are not unusual in real estate transactions and resort to extrinsic evidence is required to prevent parties who have second thoughts from escaping their contractual obligations. The Apartment Association of Greater Los Angeles also filed an amicus curiae brief supporting Sterling’s position to discourage “dishonest dealing and sharp real estate practice.”

The Supreme Court reviewed the trial court record to determine whether a triable issue of fact might defeat the Statute of Fraud defense in the case. Taylor did not deny the sufficiency of his signature on the March 15 letter to meet the Statute of Frauds requirements. Both the letter and the Memo could be considered together to satisfy the Statute. The seller and the properties were sufficiently identified and neither party displayed any confusion over these terms. The problem term was the price. The Supreme Court decided that when ambiguous terms in a memorandum are disputed, a court can consider extrinsic evidence to clarify those terms with reasonable certainty. In this particular case, however, the court decided that Sterling's testimony was not enough to establish his interpretation with reasonable certainty. The Memo did not contain the $14,404,840 figure and the price of $16,750,000 was in the Memo and was even underlined. The provision that the price would vary based on Sterling’s review of the rent rolls was not in the Memo, and Sterling’s argument was weakened by the fact that before the Memo was drafted he had the rent rolls and the rental income was not yet to be determined. The court agreed with Sterling that the Statute of Frauds does not preclude the admission of evidence; it does require a writing, but does not require a comprehensive writing. However, the Court also concluded that Taylor was entitled to judgment because the Court of Appeal properly considered the parties’ extrinsic evidence, but erroneously deemed it legally sufficient under the Statue of Frauds to establish the price sought by Sterling.

This case provides a good argument for using standard forms and carefully drafting any handwritten agreements or amendments to agreements. When exchanging proposals, real estate agents should be careful not to inadvertently and unintentionally make an offer which the other party then has an opportunity to accept. As this case so dramatically illustrates, just because it is a $6 million deal does not mean that the contract has to be formally typed and include every detailed term to be legally enforceable. Sometimes, even a cocktail napkin will do!

Dyer v. Martinez -- Lis Pendens May Not Be Constructive Notice To A Purchaser

According to the February 23, 2007 decision of the Court of Appeal, the proper recording of a Notice of Lis Pendens (i.e., constructive notice to buyers, lenders and others that the property is subject to the outcome of a pending lawsuit) may have no legal effect against a subsequent buyer until it is indexed by the recorder's office. In Dyer v. Martinez, the court addressed the issue of when the recording of a Notice of Lis Pendens constitutes constructive notice to a purchaser.

Dyer (Buyer #1) was unable to obtain financing and close on time. The sellers cancelled the escrow. A year later Buyer #1 file a lawsuit for specific performance, and recorded a lis pendens to cloud title and discourage the sale or encumbrance of the property until the lawsuit was resolved. The Notice of Lis Pendens was recorded on September 9, 2004, but due to a delay at the recorder's office, it was not indexed in the seller's name until September 14, 2004. The sellers closed escrow with Martinez (Buyer #2) on September 10, 2004. Dyer added Martinez to the lawsuit, arguing that he was not entitled to the property as a bona fide purchaser because, under California Code of Civil Procedure section 405.24, he had constructive notice of the lawsuit on recording of the Notice of Lis Pendens.

To determine whether Martinez was a bona fide purchaser, the court looked at Code of Civil Procedure section 405.24 in conjunction with California Civil Code section 1213, which provides that constructive notice requires an instrument be recorded "as prescribed by law." The Court relied on the long-standing rule in California that a recorded document does not provide notice unless it can be located by a title search. The court held that the recording was not constructive notice because the recorded document had to be indexed, which took a few days, and it would not be found by a title search until after that process was completed..

It may unwise to rely solely on fact that the Notice of Lis Pendens had been delivered to the clerk at window in the office of the County Recorder and stamped as filed with a document number. Some circumstances may warrant giving actual notice to the appropriate parties (the property owners, the brokers, the buyers, the lenders, the title company) by advising them verbally and in writing and serving a copy of the recorded Notice of Lis Pendens.

This ruling may have ramifications affecting not just recording of Notices of Lis Pendens. We will be watching to see if there is an appeal of this case or future decisions limiting or overturning it.

ADVERTISING – WHAT IS REQUIRED FOR DIFFERENT MEDIA

Most real estate professionals engage in advertising their services and the properties they are selling., and they should be familiar with the legal and ethical restrictions that apply to different subject matter and methods of advertising. Remember that the term REALTOR® is trademark of the National Association of REALTORS® and may be used only by licensees who are members of NAR by being members of a local real estate Association and CAR). The DRE can suspend or revoke the license of someone who willfully uses the term when not a member o NAR. C.A.R. publishes excellent Q&As on advertising. The following is a summary of information from some of those Q&As:

General Legal Obligations and Ethical Obligations

Licensees have both a legal and ethical obligation to be truthful when advertising. Legal liability and DRE discipline may attach for fraud, intentional misrepresentation, or negligent misrepresentation for material false statements or material omissions in any medium of advertising, including listings in a Multiple Listing Service in expectation of compensation. The NAR Code of Ethics establishes an ethical duty that REALTORS® avoid false advertising and be careful to present a true picture in their advertising and representations to the public. The B&P Code provides for suspension or revocation of the real estate license, imprisonment in county jail for up to six months, and/or penalties up to $2,500 per violation.

Advertising in Violation of Law

A licensee may not advertise an illegal real estate lottery or advertise in a way that indicates a preference, limitation or discrimination based on race, color, sex, religion, ancestry, physical handicap, marital status, sexual preference, or national origin.

Advertising in Violation of NAR’s Code of Ethics

REALTORS® are subject to the National Association of REALTORS® Code of Ethics. Article 12 of the Code of Ethics requires that “Realtors^® shall be careful at all times to present a true picture in their advertising and representations to the public. Realtors^® shall also ensure that their professional status (e.g., broker, appraiser, property manager, etc.) or status as Realtors^® is clearly identifiable in any such advertising.” Included in Article 12 are the following “Standards of Practice” of which several are amended or new as of January 1, 2007 (as noted in bold):

• Standard of Practice 12-1

Realtors^® may use the term “free” and similar terms in their advertising and in other representations provided that all terms governing availability of the offered product or service are clearly disclosed at the same time. (Amended 1/97)

• Standard of Practice 12-2

Realtors^® may represent their services as “free” or without cost even if they expect to receive compensation from a source other than their client provided that the potential for the Realtor^® to obtain a benefit from a third party is clearly disclosed at the same time. (Amended 1/97)

• Standard of Practice 12-3

The offering of premiums, prizes, merchandise discounts or other inducements to list, sell, purchase, or lease is not, in itself, unethical even if receipt of the benefit is contingent on listing, selling, purchasing, or leasing through the Realtor^® making the offer. However, Realtors^® must exercise care and candor in any such advertising or other public or private representations so that any party interested in receiving or otherwise benefiting from the Realtor^®’s offer will have clear, thorough, advance understanding of all the terms and conditions of the offer. The offering of any inducements to do business is subject to the limitations and restrictions of state law and the ethical obligations established by any applicable Standard of Practice. (Amended 1/95)

• Standard of Practice 12-4

Realtors^® shall not offer for sale/lease or advertise property without authority. When acting as listing brokers or as subagents, Realtors^® shall not quote a price different from that agreed upon with the seller/landlord. (Amended 1/93)

• Standard of Practice 12-5

Realtors^® shall not advertise nor permit any person employed by or affiliated with them to advertise listed property in any medium (e.g., electronically, print, radio, television, etc.) without disclosing the name of that Realtor^®’s firm in a reasonable and readily apparent manner. (Adopted 11/86, Amended 1/07)

• Standard of Practice 12-6

Realtors^®, when advertising unlisted real property for sale/lease in which they have an ownership interest, shall disclose their status as both owners/landlords and as Realtors^® or real estate licensees. (Amended 1/93)

• Standard of Practice 12-7

Only Realtors^® who participated in the transaction as the listing broker or cooperating broker (selling broker) may claim to have “sold” the property. Prior to closing, a cooperating broker may
post a “sold” sign only with the consent of the listing broker. (Amended 1/96)

• Standard of Practice 12-8

The obligation to present a true picture in representations to the public includes information presented, provided, or displayed on Realtors^®’ websites. Realtors^® shall use reasonable efforts to ensure that information on their websites is current. When it becomes apparent that information on a Realtor^®’s website is no longer current or accurate, Realtors^® shall promptly take corrective action. (Adopted 1/07)

• Standard of Practice 12-9

Realtor^® firm websites shall disclose the firm’s name and state(s) of licensure in a reasonable and readily apparent manner.

Websites of Realtors^® and non-member licensees affiliated with a Realtor^® firm shall disclose the firm’s name and that Realtor^®’s or non-member licensee’s state(s) of licensure in a reasonable and readily apparent manner. (Adopted 1/07)

• Standard of Practice 12-10

Realtors^®’ obligation to present a true picture in their advertising and representations to the public includes the URLs and domain names they use, and prohibits Realtors^® from:

1) engaging in deceptive or unauthorized framing of real estate brokerage websites;

2) manipulating (e.g., presenting content developed by others) listing content in any way that produces a deceptive or misleading result; or

3) deceptively using metatags, keywords or other devices/ methods to direct, drive, or divert Internet traffic, or to otherwise mislead consumers. (Adopted 1/07)

• Standard of Practice 12-11

Realtors^® intending to share or sell consumer information gathered via the Internet shall disclose that possibility in a reasonable and readily apparent manner. (Adopted 1/07)

Advertising Real Estate Services

The California Business and Professions Code (“B&P Code”)provides that when a broker or real estate salesperson advertises services for which real estate license is required, the advertising must reflect that it is from a real estate licensee. This can be done by using terms such as broker, agent, real estate licensee, or, if a REALTOR®, the trademarked term REALTOR® (remember to always use the ®). There is a legal, but not an ethical, exception to this requirement for classified rental advertisements if the a phone number at the property or address of the property is included in the advertisement.

Advertising Listed Property

The NAR Code of Ethics provides that the actual firm name of a REALTOR® (member of an Association) must be included in the advertisement if the property is listed with the firm. Salespersons advertising property listed by REALTORS® must include the firm name in the advertisement. If the firm name does not clearly identify the firm as a licensee, then one of the authorized designations must be included in the advertisement (i.e., broker, agent, real estate licensee, REALTOR®).

Advertising Property You Own

You do not need a license to sell you own property, so the legal advertising rules for advertising services for which a license is required do not apply. However, the NAR Code of Ethics does apply to REALTOR® members and they must disclose their ownership status and their licensee or REALTOR® status whether or not the property is listed with the firm, but may not use the firm name if the property is not listed with the firm.

Advertising with Nicknames

The purpose of the advertising rules is to ensure that a member of the public knows who he/she is dealing with. Use of nicknames is therefore discouraged. There is no specific legal restriction. Brokers, but not salespersons, can obtain a business license for fictitious business name.

Advertising with DRE License Numbers

The B&P Code requires every licensed real estate broker to display his/her DRE license number on all advertisements soliciting borrowers or potential investors, and REALTORS® who do mortgage loan brokerage work must put their license number on business cards and other advertising. There is no such legal requirement for REALTORS® who do real estate sales or property management.

Using MLS Information

The C.A.R. Model MLS Rules provide that MLS participants and subscribers may use truthfully use information from the MLS compilation of current listing information, from the A.O.R.’s “statistical report,” or from any “sold” or “comparable” report of the A.O.R. or MLS for purposes of demonstrating market share, but must clearly show the period of time covered by the claims and include a statement similar to the following:

Based on information from the ______ Association of REALTORS® (or from the __________ MLS) for the period (___date___) through (___date___),

Readers are encouraged to refer to their Association’s specific MLS Rules.

Advertising by Internet

See the Standards of Practice (SOP) from Article 12 of the NAR of Ethics quoted above, specifically SOP 12-5 (electronic ads must disclose the REALTOR®’s firm name); SOP 12-8 (present true picture on websites and keep websites current); SOP 12-9 (disclose of REALTOR® firm website the firm name and state of licensure; disclose on REALTOR®’s and affiliated non-member licensees websites the firm and the licensee’s name and state of licensure; SOP 12-10 (use of URLs and domain names cannot be deceptive or manipulative, or include unauthorized framing, or methods to divert Internet traffic or mislead consumers); SOP 12-11 (intent to gather, share or sell consumer information must be disclosed).

Advertising by Telephone

There are several Do-Not-Call rules that potentially affect California real estate licensees (California law, Federal Trade Commission (FTC) rules, and Federal Communications Commission (FCC) rules.)

California law is unclear due to lawsuits challenging the legality on the California state-wide “do-not-call” list, and REALTORS® are generally exempt from it under the “small business” exception (calls made within a 50 mile radius by individual business persons or business with no more than 5 full time or part time employees or independent contactors, not counting workers pursuant to DRE regulations).

The FTC Do-Not-Call-rules apply only to calls made across state lines. The FCC do-not-call registry for interstate calls was extended to include intrastate calls. Under the FCC regulations, a telephone solicitation call is an advertisement and may not be made to people who have registered their residential telephone numbers on a national do-not-cal registry. Thus, REALTORS® making “cold calls” should check the registry and not call numbers on the list and maintain a company-specific do-not-call list. Certain rules are likely to apply to REALTORS® even if they do not make cold calls.

REALTORS® are not specifically exempt from the federal do-not-call rules. The FCC takes the position that the federal rules set a minimum standard and supersede all less restrictive state rules. Thus, less restrictive California rules that generally exempt REALTORS® are preempted by the FCC’s rules that prohibit any person or entity from initiating a telephone solicitation to a residential or cell phone registered on the national do-no-call registry unless an exemption applies. Calls to businesses are not subject to the do-no-call rules.

Checking the do-not-call registry is not required for certain types of calls, including calls that are made by or made based on:

▪ Written permission (recipient has given prior express invitation or permission to call in a signed written agreement specifying the caller and the telephone number)

▪ Established business relationships (prior or existing relationship formed by voluntary two-way communication without exchange of consideration based on consumer’s purchase or business transaction within 18 month, or consumer’s inquiry or application within last 3 months)

▪ Personal relationships (any family member, friend, or acquaintance of caller)

▪ Tax-exempt non profit organizations

For covered calls, the caller must access the data base at https://telemarketing.donotcall.gov. REALTORS® who maintain a call list of prospects and potential clients must “scrub” (cross check against the registry) the list at least every 31 days and remove numbers of people who have registered. For more than five area codes, there is an annual registry access fee of $56 per area code.

REALTORS® are encouraged to establish a company do-not-call policy and have procedures and forms for use in complying with the law. there is a sample policy in C.A.R.’s January 4, 2007 Q&A titled “Do-Not-Call, Do-Not-Fax, Do-Not-Email Laws Affecting REALTORS®.

Advertising by Fax

Advertising by fax is subject to the FCC rules and generally prohibited absent the recipient’s prior permission. The fax must contain an op-out notice. The FCC public “Fax Advertising: What You Need to Know” is available at http://www.fcc.gov/cgb/consumerfacts/unwantedfaxes.html.

Advertising by E-mail

The federal CAN-SPAM Act of 2003 provides that a commercial email message must contain, among other things, a clear and conspicuous identification that it is an advertisement, an opt-out notice and method for opting out, and a valid physical postal address of the sender.

“DID YOU KNOW THIS?”

Due to the personal experience of some unhappy staff members of our office, we recently learned something about vehicle registration expiration rules. The California Department of Motor Vehicle registration sticker placed on the corner of the vehicle’s license plate shows the month and year of expiration. You may be under the impression (as we were) that you have until the end of the stated month to re-register your vehicle. Wrong! You must re-register your vehicle before the actual specific day in the month that your registration expires according to the DMV’s records. Law enforcement officers have access via computer to the DMV records and can determine the actual day within the month that a vehicle’s registration expires. For example, if your registration expires on the 13th of April, you could be cited on April 14^th for not having a current registration. Therefore, it would be wise check your registration for the expiration date and re-register your vehicle before that date or just re-register during the month before the month printed on your sticker.