5 Real Estate Cases to Watch in 2015

Housing, inclusionary housing, Wendel Rosen Black & Dean, California Building Industry Association, CBIA, San Jose, Supreme Court Case No. S212072
Bill Shiber Miller Starr Regalia
Shiber

By Bill Shiber

As the new year has gotten underway, there are several cases currently under review that may result in significant and precedent-setting legal opinions in 2015. These are the cases real estate practitioners will want to track during 2015.

  1. California Building Association v. City of San Jose and Levin v. City and County of San Francisco: How far can cities go in leveraging land use approvals to keep housing affordable?

In the past few years, courts have grappled with the extent of a city’s right to encourage and subsidize low income housing, and to mitigate the loss of rent controlled housing, by imposing exactions associated with land use approvals. Ever increasing housing costs have only served to more sharply focus the issue. Under current United States Supreme Court precedent, an individualized condition to a land use permit must meet “nexus” and “rough proportionality” standards. That is, the condition must relate to the impact caused by the permitted land use, and it must be roughly proportional to the impact caused. (See, Nollan v. California Coastal Commission, 483 U.S. 825 (1987) and Dolan v. City of Tigard, 512 U.S. 374 (1994).)

California Building Industry Association v. City of San Jose (2013) 216 Cal.App.4th 1373 (review granted September 11, 2013, Cal. S. Ct. Case No. S212072) addresses an inclusionary housing ordinance enacted by the City of San Jose, requiring builders of new construction to set aside a certain percentage of houses in a development for affordable housing, pay an in-lieu fee, or dedicate land of equivalent value. The Court of Appeal found that the “nexus” and “rough proportionality” tests which are generally applicable in the context of land use exactions did not apply at all to the San Jose ordinance, because the ordinance exercised the City’s police powers to regulate land use, rather than imposing an individualized exaction. Accordingly, the appropriate test was whether the ordinance bears some reasonable relationship to a legitimate governmental interest—which as we all know from our law school days, is an easy test to meet. The California Supreme Court has granted review of the Court of Appeal’s decision and will decide which standard of review should apply to the ordinance: the deferential “reasonable relationship” standard applicable to exercise of a police power, or the heightened “nexus” and “rough proportionality” standards generally applicable to individualized exactions in the land use context. The larger question is: In imposing conditions of approval on new development which are designed to increase the availability of affordable housing, how close of a cause-and-effect relationship must a city establish between the new development and the lack of affordable housing?

Levin v. City and County of San Francisco, _____ F.Supp.3d _____, 2014 WL 5355088 (N.D. Cal. 2014), addresses a similar issue in the rent control context. In that case, Judge Breyer of the Northern District of California struck down a San Francisco ordinance that compels landlords to pay specified compensation to tenants if rental units are taken off the market. Specifically, landlords are required to pay displaced tenants a lump sum equal to 24 times the difference between (a) the unit’s current monthly rent and (b) an amount purporting to be the fair market rental value of a comparable unit in the City, based on a schedule developed by the Controller’s Office. Judge Breyer found, first, that the “nexus” and “rough proportionality” standards applied to the ordinance because it regulates land use, and second, the ordinance fails to meet the standard because there was no demonstrated connection between the very small group of landlords taking rent controlled units off the market, and the actual impacts on the relocated tenant caused by the unit’s withdrawal. In Judge Breyer’s words, the ordinance “seeks to force the property owner (withdrawing the rental unit) to pay for a broad public problem not of the owner’s making.” San Francisco has appealed the decision to the Ninth Circuit Court of Appeal, which will render a decision.

Both of these cases raise the following fundamental question: to what extent can local government leverage land use approvals to ameliorate the larger societal problems of housing insecurity? And how close of a connection must be drawn between the exactions imposed and the conditions the exactions are intended to address? Stay tuned as the Ninth Circuit Court of Appeal and the California Supreme Court consider these issues in the coming year.

  1. Property Reserve v. Superior Court: Is precondemnation testing and inspection by the government a taking, subject to constitutional limitations?

In Property Reserve v. Superior Court, 224 Cal.App.4th 828 (2014) (review granted on specified issues June 25, 2014, Case No. S217738), the Court of Appeal held that statutory provisions allowing for entry by the government onto property for inspection and testing before condemnation were unconstitutional, to the extent that the testing and inspection itself constitutes a taking. In the Property Reserve case, the testing and inspection included physical surveying and inspection of the property by multiple people, and physical borings to a depth of 200 feet, which were later filled with concrete.

The Court of Appeal held that these activities constituted a per se “taking” of real property within the meaning of the Fifth Amendment to the United States Constitution, and Article 1, Section 19(a) of the California Constitution, since they involve a physical intrusion onto private property. The court noted that any physical intrusion, however slight, by the government on private property is generally considered a taking. Thus, the government was required to comply with all constitutional requirements in connection with these activities, including initiating a condemnation suit that provides for trial by jury and payment of just compensation. Since the entry statutes did not include these provisions and protections, they are unconstitutional.

The California Supreme Court has granted review on the issues of whether the activities involved in the precondemnation entry constitute a taking, and if so, whether the precondemnation entry statutes provide a constitutionally valid eminent domain proceeding for the taking. Practitioners in the area of eminent domain will want to follow this case, given its potential impact on the condemnation process.

  1. California Building Industry Association v. City of San Jose: Does CEQA operate “in reverse”?

The question of whether CEQA operates “in reverse”—that is, whether CEQA requires analysis of the impact of the existing environment on the project’s workers and future residents, as well as the project’s impact on the existing environment—has to date eluded definitive resolution by the Court of Appeal. In an opinion ordered published at the very end of 2013, Parker Shattuck Neighbors, et al. v. Berkeley City Council, et al., 222 Cal.App.4th 768 (2013), the First District Court of Appeal expressed skepticism that CEQA operates in this way. It expressed similar skepticism in a prior decision, California Building Industry Association v. City of San Jose (2013) 216 Cal.App.4th 1373 (rev. granted September 11, 2013, Cal. S. Ct. Case No. S212072.

The California Supreme Court has granted review of that latter decision to decide the following issue: “Under what circumstances, if any, does the California Environmental Quality Act…require an analysis of how existing environmental conditions will impact future residents or users (receptors) of a proposed project?” This will be a significant decision since it goes to the scope and operation of CEQA, which many developers view as an unreasonable burden on development in its existing form.

  1. Keshtgar v. U.S. Bank/Yvanova v. New Century Mortgage: To what extent can a borrower challenge a trustee’s sale?

Efforts by borrowers to enjoin non-judicial foreclosure sales on the basis that lenders do not hold the original note, are not properly authorized to conduct the foreclosure, or are otherwise disabled from authorizing or conducting a sale have been largely unsuccessful in California. Typically, the claims have been asserted by borrowers who are admittedly in default under their loans, and the subtext to the decisions has been that borrowers should not be permitted to delay the inevitable. Moreover, courts are mindful of the “quid pro quo” associated with the non-judicial foreclosure process: a trustee’s sale occurs more quickly and more cheaply than a judicial foreclosure, and in return for this speed and efficiency, the lender gives up its right to seek a deficiency judgment against the borrower—i.e., the lender must be content with extracting whatever value it can from the property. The courts have viewed efforts by borrowers to enjoin non-judicial foreclosure sales as injecting the courts into this expressly non-judicial process, thus undermining the very benefits intended by the legislative scheme.

The first major case addressing these issues was Gomes v. Countrywide Home Loans, Inc., 192 Cal.App.4th 1149 (2011), which rejected a borrower’s challenge to the right of Mortgage Electronic Registration Systems, Inc. (“MERS”), a lender owned mortgage registration system, to conduct non-judicial foreclosures based on its status as nominee of the beneficiary (lender) under the deed of trust. In the more recent case of Keshtgar v. U.S. Bank, N.A., 226 Cal.App.4th 1201 (2014) (rev. granted October 1, 2014, Cal. S. Ct. Case No. S220012), the Court held that under California’s non-judicial foreclosure statutes, a defaulting borrower cannot enjoin the lender’s initiation of the trustee’s sale process by asserting that the lender lacks standing to foreclose because of an ineffective assignment. In effect, a defaulting borrower could not preemptively enjoin a trustee’s sale even if the wrong entity was foreclosing on the property.

The California Supreme Court has granted review of the Keshtgar decision and deferred briefing until resolution of another case under review, Yvanova v. New Century Mortgage Corp., 226 Cal.App.4th 495 (2014) (review granted on specified issues, Cal. S. Ct. Case No. S219873), which involved a post-trustee’s sale claim by a borrower for wrongful foreclosure and quiet title. One of the distinctions which has emerged in the cases is between pre-foreclosure efforts to enjoin a sale, and post-foreclosure claims for damages. The latter have generally failed, while in some cases the former have been permitted to proceed. (See, e.g., Glasky v. Bank of America, 218 Cal.App.4th 1079 (2013).) Whether this distinction will be significant to the California Supreme Court’s ultimate analysis remains to be seen, but in any event, the California Supreme Court will provide more guidance in this area soon, and the decision will be important to those representing borrowers or lenders in the residential context.

Basil “Bill” Shiber is a shareholder in the Walnut Creek, CA office of Miller Starr Regalia. He may be reached at basil.shiber /at/ msrlegal.com.

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