ERNST v. CONDITT

1. No right to assign or sublet without written approval, T to remain liable on the covenants in any event T ERNST v. CONDITT Leased land 1 yr., 7 days [until June 30, 1961] LL T 6/18/60 Enters, constructs and encloses a race track (asphalt track, floodlights, fence) T T to pay $4,200 per annum or $350/month, or 15% gross receipts “whichever is the larger amount” If gross receipts are larger, compiled quarterly, T is to pay them quarterly. Original Lease Lease provides: term, rent, covenant by T to remove “all improvements above the ground.” T promises to remove all improvements at end of lease Enter negotiations for sale of business. Tee wants longer lease. T Tee Donald J. Weidner

2. Amendment to lease with express consent of LL to a particular “subletting.” Condition: original T “will remain personally liable” [new term until 7/31/62 (adding 13 mos.)] LL T 8/4/60 All rent including % is to be paid monthly. + “[I]n consideration of the promise [by Tee] to faithfully perform all conditions of the written lease, as amended, I [T] hereby sublet” [to Tee] “upon the understanding that I will individually remain liable . . . .” T Tee “Sublease” (no rent specified for the “sublease”) Accepts “the foregoing subletting” Tee T Donald J. Weidner

3. Contacts for Nov. 1960 rent LL Tee “I am not liable to you.” Paid rent directly to LL for 3 mos. (Aug., Sept., Oct. 1960) LL Tee Made a payment the following June 1961. Never paid more thereafter and it is unclear whether Tee continued to operate the business after that; yet “remained in possession of the property until the expiration of the leasehold” 13 months after that. LL Tee • Seeks damages • Base rental unpaid on lease [not seeking any %] + • 2. Cost of removing the “improvements” [lessee’s cost under lease] LL Tee Donald J. Weidner

4. Ernst v. Conditt (cont’d) • Before the “sublease,” there are two ways to rationalize the liability of the T to pay rent to the LL • Privity of contract--because lease has a contractual provision, promise or covenant to pay rent • Privity of estate—because the obligation to pay rent “inheres in the estate as a covenant real” • There are two different approaches to distinguishing an assignment from a sublease • what the authors call the “formalistic” approach • the approach allegedly based upon intent Donald J. Weidner

5. When T signs lease, T is in privity of contract and liable on that basis. Second Look: Term of 5 years @ $x/month When T moves in, T comes in to privity of Estate and liable on that basis. FO T Assigns (no assumption agreement) at the end of Year # 1 T Aee Nevertheless pays $x/month for year FO Aee At the end of Year # 2, Aee says: “I want out of this lease, what do I do?” What do you say? “Colorable” transfers to not divest an Aee of privity of estate. --Colorable is defined in terms of retention of an interest --Not in terms of intent to end liability Donald J. Weidner

6. Ernst v. Conditt (cont’d) • Opinion spends its time discussing whether the transferee is an assignee or a sublessee. • The Transferee (Conditt) argues that the arrangement is a sublease because; • that is what the parties called it • T (Rogers) agreed to remain primarily liable • Because T agreed to remain liable, Tee argues, T had an implied right of entry in the event of default by Tee • This right of entry, Tee’s argument runs, was a reversionary interest “sufficient to satisfy the distinction between a sublease and an assignment of a lease.” • Tee never covenanted to pay rent Donald J. Weidner

7. Ernst v. Conditt (cont’d) • Court said the express agreement to remain liable did not create either or a right to re-enter or a reversion. • What if there had been an express reservation by OT of a right to re-enter in the event the Tee defaults? • What are the arguments in favor of an assignment? • Do you distinguish situations on the basis of whether the primary lease and the alleged sublease are at the same rent? Donald J. Weidner

8. Lease Assumption/Mortgage Assumption Lease Assumption Lease LL Tenant Approves assumption by assignee Assigns Assumes original lease obligation LL Tenant Assignee Deals directly LL Assignee Donald J. Weidner

9. Mortgage Assumption Borrower Owner Mortgage Lender Sells Assumes original mortgage Approves assumption by buyer new owner Lender Borrower Owner Buyer New Owner Deals directly Lender Buyer New Owner Donald J. Weidner

10. Original Tenant Original Borrower Original Tenant Original Borrower LL Lender Q: Without more, is relieved of liability to ? Q: What, then is the nature of the continuing liability? Secondary liability as quasi-surety. without first suing their transferee. 1. Means that can’t sue • If Original Tenant must pay LL $100 because assignee fails to, Original Tenant is subrogated to LL’s claim. In effect, by paying LL, OT buys the LL’s right to sue the assignee for $100. 3. But the Original Tenant/Borrower is discharged if there is a “material change in the terms of the tenancy” Donald J. Weidner

11. Two statements are typically made to explain the discharge of the quasi-surety in the event of material change: • The obligations of a surety are strictly construed; and • The surety is discharge when the parties have increased the risk that the surety will be called upon to perform. • Can a LL directly sue the T’s transferee if the transferee assumes the obligations of the original lease? • On what theory? • For rent that accrues after a subsequent reassignment? Donald J. Weidner

12. HYPO • Hypo: You, as a law-student, have a 3 year lease on an apartment. For personal reasons, you move out of the state. You ask your landlord if you can assign your lease to another law student to whose financial integrity you attest. • What would your expectations be in such a situation, and why? • What are the landlord’s expectations in such a situation? • What are your expectations if the landlord permits you to assign your lease? Donald J. Weidner

13. Does the landlord get a windfall if he is allowed a cause of action against both the original lessee and the lessee’s assignee? • Should the burden be on the landlord to make a new contract of liability with the original lessee, in light of the LL’s acquiescence in an assignment? • Do you think a landlord would know of his right to hold the assigning lessee in the future? If so, does the superior knowledge indicate anything about a duty? • If the landlord did not know he could have such a right, but was later so advised by counsel, should he still be able to raise it? Donald J. Weidner

14. Do you think a vendor of real estate who has her vendee “assume and promise to pay” existing financing is aware that she remains personally liable on the mortgage? • Is there a stronger case for an implied release if the lessor takes a new note from the assignee? • In an area the courts say is analogous, that of mortgages, a new note would have been useless if the second purchaser had “assumed” the mortgage from the first purchaser, since the lender could recover on the theory of a third-party beneficiary contract. Donald J. Weidner

15. In short, does the term “privity of estate” seem to be necessary in the case of an assuming assignee? • The idea that there is a “covenant real,” a covenant “running with the land,” is that the convenant to pay rent somehow attaches to the person who holds the estate. • Why? • Because of corresponding benefit? • Is this apparently inconsistent with the idea that a duty to pay rent is “independent” of the landlord’s duty to repair, etc.? Donald J. Weidner

16. Kendall v. Ernest Pestana, Inc. • Lease involves 1,400 square feet of hangar space at a municipal airport. • The lease provided that the lessee may not assign the lease or sublet the premises without the prior written consent of the lessor. • The lease further provided that failure to obtain written consent rendered the lease voidable at the option of the lessor. • The lessee requested consent to an assignment and the corporate lessor refused • The corporate lessor said it had an absolute right to refuse to consent to an assignment • The corporate lessor demanded increased rent “and other more onerous terms” as a condition of granting consent to the assignment • Even though the proposed assignees • had a stronger financial statement and greater net worth than the current lessee and • were willing to be bound by the provisions of the lease. Donald J. Weidner

17. Kendall v. Ernest Pestana, Inc. (cont’d) • The proposed assignees say: • The refusal is unreasonable and, as such, • Is an unlawful restraint on the freedom of alienation. • The law favors free alienability of property. • However, contractual restrictions on alienability are justified, said the court, to protect the reasonable interest of the lessor • in the identity of the possessor of the property • whose performance of the lease affects the rental income and • whose possession affects the value of the lessor’s reversion. • Restraints on alienation are strictly construed • particularly if the restraint is a “forfeiture restraint” • under which the lessor has the option to terminate the lease if an assignment is made without consent. Donald J. Weidner

18. Kendall v. Ernest Pestana, Inc. (cont’d) • Majority rule: the lessor may arbitrarily refuse to approve a proposed assignee • no matter how suitable the assignee appears to be and • no matter how unreasonable the lessor’s objection. • However, the lessor in some cases is found to have waived the right to refuse consent • And in other cases is held to be estopped from asserting the right to refuse consent. • Growing minority rule: when a lease provides for assignment only with prior consent, the consent may be withheld only when the lessor has a commercially reasonable objection to the assignment • even in the absence of a provision that consent will not be unreasonably withheld Donald J. Weidner

19. Kendall v. Ernest Pestana, Inc. (cont’d) • Change is coming from the property side and from the contract side. • From the property side, restraints on alienation are seen as less reasonable because • leasing arrangements are seen as less personal, and • site scarcity suggests the need for freer alienability. • However, under the Second Restatement’s approach to the minority rule: • A clause absolutely prohibiting assignment; and • A clause granting absolute discretion over assignment to the lessor are both valid is if the clause is “a freely negotiated provision.” Donald J. Weidner

20. Kendall v. Ernest Pestana, Inc. (cont’d) • From the contract side, there has been an increased emphasis on the duty of good faith and fair dealing “inherent in every contract.” • See the analogous provisions in the UCC • Here, the lessor retains the discretionary power to approve or disapprove an assignee proposed by the other party to the contract • this discretionary power should be exercised in accordance with commercially reasonable standards. • What if the language says that the lessor may act in an arbitrary manner? Donald J. Weidner

21. Kendall v. Ernest Pestana, Inc. (cont’d) • Note how the court sets aside the four justifications it identifies for the majority rule: • A lease is a conveyance and the landlord need to look to no one but the tenant. • Response: A duty to mitigate damages has changed that. • An approval clause is an unambiguous reservation of absolute discretion in the lessor over assignment. • Response: Others have found it implicit that the lessor be required to state a reason. • Further response: It is recognized today that the implication of a covenant of good faith and fair dealing is not judicial re-writing of a contract. Donald J. Weidner

22. Kendall v. Ernest Pestana, Inc. (cont’d) • Setting aside 4 justifications for the majority rule (cont’d) • Respect the doctrine of stare decisis because people have relied on the rule. • Response: Everyone knew there was not unanimity on this rule and could see the change in the law. • Further response: The change as part of the growing recognition of the contractual nature of leases. • Under these circumstances, the lessor has the right to capture the increased value of the property. • Response: We reject this assertion, which gives the lessor more than the benefit of the lessor’s bargain. Donald J. Weidner

23. Kendall v. Ernest Pestana, Inc. (cont’d) • Note the Pillsbury Madison amicus brief opposing a mandatory rule: • Amicus “requests that we make clear that, ‘whatever principle governs in the absence of express lease provisions, nothing bars the parties to commercial lease transactions from making their own arrangements respecting the allocation of appreciated rentals if there is a transfer of the leasehold.’” • “This principle we affirm.” • Did the court’s opinion sound like it was declaring only a default rule? Donald J. Weidner

24. Subsequent Developments • 1989 California statute provides: “A restriction on transfer of a tenant’s interest in a lease may absolutely prohibit transfer.” • In 1992, Carma upheld a “termination and recapture clause” in a negotiated commercial lease providing: • 1. T was to give LL written notice of any intended assignment or sublease and the proposed terms; • 2. LL could then terminate the lease with the T and, if the LL elected, could enter into a new lease with the intended assignee or sublessee; and • 3. T was not entitled to any profit realized by the LL as a result of the termination and reletting. Donald J. Weidner

25. Preparing for Class/Exam/Responding to Training • Begin with the end in mind • Predominantly or exclusively multi-issue essay questions • Covering a great deal of the course • Under time pressure • Instructor counts points • Generally, weak exams make very few points—raise only a small number of the issues and arguments that could be raised • Steps • Book brief • Brief on paper • Concept outline—with mini outline • Compare after completion with study group • Take back exams under time pressure • Compare after completion with study group Donald J. Weidner

26. Private Land-Use Controls: The Law of Servitudes • Modern servitudes can be broken into four types: • Easements • Covenants • Covenants enforceable at law (“real covenants”) • Covenants enforceable in equity (“equitable servitudes”) • Profits • Licenses Donald J. Weidner

27. Five Types of Land Use Agreements • A is given the right to enter upon B’s land • Text says is an easement • Could also be a “mere” license • A is given the right to enter upon B’s land and remove something attached to the land • Is a profit • A is given the right to enforce a restriction on the use of B’s land (see below) • A’s right usually originates in a promise by B or B’s predecessor. • The promise may be enforceable either • at law as a real covenant or • in equity as an equitable servitude. • Could also be an easement. Donald J. Weidner

28. Five Types of Use Arrangements (cont’d) 4. A is given the right to require B to perform some act on B’s land • A’s right usually originates in a promise by B or B’s predecessor. • The promise may be enforceable either • at law as a real covenant or • in equity as an equitable servitude. 5. A is given the right to require B to pay money for the upkeep of specific facilities • A’s right usually originates in a promise by B or B’s predecessor. • The promise may be enforceable either • at law as a real covenant or • in equity as an equitable servitude. Donald J. Weidner

29. Affirmative and Negative Easements • Affirmative Easements—allow the holder of the easement to do something on the land of another • Ex., an easement to use my neighbor’s boat ramp to launch and pull my boat • Negative Easements—allow the holder of the easement to prevent an owner from doing something on his land • Ex., I can buy the promise of my neighbor that she will not open a beauty parlor on her property. • Some easements are both positive and negative • Ex: the power company’s easement to string power lines over the front edge of my lot • They can do something on my land • I can not build on my land in a way that interferes with the lines Donald J. Weidner

30. Creation of Easements • Easements are interests in land within the meaning of the Statute of Frauds. • They generally require a writing, absent • fraud • part performance • estoppel • Easements may be created • By writing (grant) • By implication • By prescription • By estoppel • By custom • We turn first to creation by a writing. Donald J. Weidner

31. S T. Closing Paid Purchase Price and recorded the escrowed deeds executed by Peterson, which did not mention any easement. Peterson Willard Realtor Willard v. First Church of Christ Church S T R E E T Genevieve owned 2 lots across the street from the church of which she was a member. She permitted church to use the vacant lot (20) for parking during services. (She testified that she bought lot 20 to provide parking for the church.) 19 Bldg. 20 Vacant G sold Lot 19 Agreed to sell both lots to Willard (when he only owned Lot 19). Peterson put into escrow a deed conveying both lots “in fee simple” Willard Realtor Peterson, who used bldg. as an office. Sold lot 20 At some point, Peterson told Willard the church would want to use lot 20 for parking, but not about the deed restriction. Peterson With deed provision (drafted by church’s attorney) Recorded deed from Genevieve Willard Realtor Subsequently learns of clause in Genevieve’s deed to Peterson and sues to quiet title. Donald J. Weidner

32. Willard v. First Church of Christ (cont’d) • The language at issue: • The Lot 2 deed Genevieve gave Vendee contained the provision at p. 786: • “subject to an easement for automobile parking during church hours for the benefit of the church on the property at the southwest corner of the intersection of Hilton Way and Francisco Boulevard . . . such easement to run with the land only so long as the property for whose benefit the easement is given is used for church purposes.” • Is the attempted express creation of an easement in favor of the church good as against Vendee #2? • How can you possibly bind Vendee #2, if Vendee #2 is a BFP without notice? Donald J. Weidner

33. RECORDING ACTS • Different types of acts. Generally, not mandatory to record but, the holder of an unrecorded interest can be cut off by other people. • Who can be cut off by whom depends upon the jurisdiction. • Jurisdictions vary according to: • What type of interest you must record or run the risk of having cut off. • Who can cut you off. • The three most common rules are anyone who: • records first (in a pure “race” jurisdiction) • buys without notice (in a pure “notice” jurisdiction), or • both buys without notice and records first (in a “race-notice” jurisdiction). Donald J. Weidner

34. Different information retrieval systems • Grantor-grantee • Tract • Many of the deeds that are used will contain language drawn from different types of deeds: • Deed of grant • Covenant to stand seised • Deed of bargain and sale • Deed of lease and release • Statutes typically contain a short-form deed. Donald J. Weidner

35. Willard v. First Church of Christ (cont’d) • What is a suit to quiet title? • Consider again the clause in Genevieve’s deed to Peterson: • The conveyance is “subject to an easement for automobile parking during church hours for the benefit of the church [across the street] . . . such easement to run with the land only so long as the property for whose benefit the easement is given is used for church purposes.” • Who drafted this language? • Was there a possibility of malpractice? • Had you been the church’s attorney, what • language would you have drafted? • in what document? Donald J. Weidner

36. Willard v. First Church of Christ (cont’d) • Did the lower court find intent to create an easement? • What was the rule the lower court used to frustrate the intent of the grantors? • At common law, a grantor can not “reserve” an easement for the benefit of a stranger to the conveyance • What is the difference between a reservation and an exception? • An exception prevents some part of the grantor’s estate from passing to the grantee • An exception excludes from the grant some pre-existing servitude or interest. • A reservation allows a grantor’s whole estate to pass to the grantee, but revests a newly created interest in the grantor • That is, a reservation creates a new servitude that did not exist before as an independent interest. Donald J. Weidner

37. Willard v. First Church of Christ (cont’d) • What is the reason behind the common law [mandatory] rule that prohibits reservations in favor of third parties? • According to the court? • According to the authors? • What are the arguments against the common law rule? • argument based on purpose of the rule? • is intent defeated? • does the grantee get a windfall? • is the expectation of the third party defeated? • is the desired outcome against public policy? • is the resulting rule efficient? • analogy to the requirement of a straw to create/sever a joint tenancy? Donald J. Weidner

38. Willard v. First Church of Christ (cont’d) • The rule has not been favored • The highest courts of two states have eliminated the rule completely • Other courts have been “repealing it piecemeal by evasion” • a reservation was treated as an exception • this approach may only leave the interest in the grantor • but one court has found that the grantor held the interest in trust for the benefit of the third party • a reservation was enforced when the third party was the grantor’s spouse • Here, analogize to other intimate relationships? • subsequent grantees in the chain of title have been estopped from relying on the common law rule to challenge the reservation • Here, estoppel because of record notice? Donald J. Weidner

39. Easements Appurtenant • An easement appurtenant benefits the owner of the easement in the use of land belonging to the owner. • EX. A, the owner of Lot A, has the right to use a road over Lot B, owned by B, to get to Lot A. • Lot A is the dominant tenement (the benefited tenement). • Lot B is the servient tenement (the burdened tenement). • An easement appurtenant usually attaches to the dominant tenement and passes with it to successive owners. • (unless it is “personal”). Donald J. Weidner

40. EASEMENTS IN GROSS • An easement in gross does not benefit the owner of the easement in the use of land belonging to the owner; • rather, it benefits its owner without regard to the ownership of land. • Ex. Boat Owner BO has an easement at the coast to use a boatramp on X’s property. BO’s easement is a right that BO has independent of BO’s ownership of land. • Was the easement in Willard appurtenant or in gross? • What would have happened if the congregation had sold the church structure to another congregation? • What would have happened if the congregation had moved to a new facility a half a block away? Donald J. Weidner

41. Easements in Gross (cont’d) • English common law: Easements in gross were non-assignable and non-inheritable: they died with the individual holder. • USA: Some easements in gross are transferable whereas others are not transferable. • Courts are split on which are transferable and which are not. • Most commercial easements in gross are readily assignable; • Non-commercial easements may also be transferred if the grantor has evidenced the necessary intent, e.g., has used such words as “heirs and assigns.” Donald J. Weidner

42. Regrant Theory • Note text at 788: • Early “English courts held that an easement could not be reserved because it was a [new right] that could not be reserved because it did not issue out of the land granted. English courts ultimately found a way around this obstacle by inventing the regrant theory. They held that an easement “reserved” by the grantor was not a reservation at all (which would be void), but a regrant of an easement by the grantee to the grantor.” • But then, would not the Statute of Frauds require the deed to be signed by the grantee? • Deed poll versus deed of indenture. Donald J. Weidner

43. A Final Note on Willard • Can you see any reason why a court might be slower to find the reservation of an easement in a deed than a grant of an easement in a deed? • Hypo: A conveys to B Blackacre in fee simple absolute, “except A reserves an easement in A.” • Note: the reservation can be repugnant to the grant. • What is the duration of A’s easement? Donald J. Weidner

44. Licenses • A license is a permission given by a possessor of land that allows the licensee to do some act on the land that otherwise would be a trespass. • The general rule is that a license is revocable • versus an easement, which is not revocable • There are two exceptions in which a license is not revocable: • A license coupled with an interest (one that is incidental to the ownership of a chattel on the licensor’s land); and • A license that becomes irrevocable by operation of estoppel • This looks very much like an easement Donald J. Weidner

45. DEEDS -- EASEMENTS • Originally, fee estate passed by livery of seisin. • Then, writings developed, deeds came to be used, but it was still the ceremony of livery of seisin that passed title. • Incorporeal interests, such as easements, are non-possessory interests, • no livery of seisin was necessary, • they passed by deed of grant. Donald J. Weidner

46. In 1535, the Statute of Uses brought about widespread alienation that did not require ceremonial delivery of seisin. • Covenant to Stand Seised for benefit of someone related to you by blood or marriage • Contract, or Deed, of Bargain and Sale for pecuniary consideration. • Deed of Lease and Release [of Reversion] was used to avoid the disclosure requirements of the Statute of Enrollments, which applied to the Covenant to Stand Seized and to the Bargain and Sale Deed. • The Statute of Uses “executed” the arrangement in each case, the promisor being held to be a trustee for the [grantee], that is, being seized to the use of the [grantee]. • In other words, the purchaser acquired seisin and possession just as if there had been livery of seisin. Donald J. Weidner

47. DEEDS IN USE TODAY • In 1677, the Statute of Frauds was enacted, requiring a writing to convey an interest in land and abolishing livery of seisin. • Three types of deeds used in U.S.A. today: • General warranty deed, which warrants title against all defects in title, whether they arose • before the grantor took title or • after the grantor took title. • Special warranty deed, which warrants only against the grantor’s acts • not against the acts of others. • Ex., the grantor under a special warranty deed is not liable for a mortgage executed by the grantor’s predecessor in interest. • Quit claim deed, which contains no warranties of any kind. • It simply conveys whatever title the grantor has, if any. Donald J. Weidner

48. Six “Usual” Covenants A. Three “Present” Covenants • phrased in the present tense • broken or not when the deed is delivered • Covenant of Seisin. The grantor warrants the grantor owns the estate the grantor purports to convey. • Covenant of Right to Convey. The grantor warrants that the grantor has the right to convey the estate. • Covenant Against Encumbrances. The grantor warrants that there are no encumbrances on the property, such as • mortgages or other liens • easements • covenants Donald J. Weidner

49. Six “Usual” Covenants (cont’d) • Three “Future” Covenants -- promise the grantor will act in the future -- are not breached until some future harm • Covenant of General Warranty. The Grantor warrants that the grantor will defend against lawful claims and will compensate the grantee for any loss caused by the assertion of superior title. • Covenant of Quiet Enjoyment. The Grantor asserts that the possession of the grantee will not be disturbed by the assertion of superior title. As a practical matter, the same as #1. • Covenant of Further Assurances. The Grantor promises to execute any other documents required to perfect the title conveyed. Donald J. Weidner

50. CERCLA • “The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) imposes strict liability for cleanup costs of a hazardous waste site upon • any current owner or operator of a site containing hazardous waste, • any prior owner or operator of the site at the time it was contaminated, • any generator of hazardous waste, and • transporters of hazardous substances.” Donald J. Weidner