Q & A Presentation

FRANK HOWARD ALLEN REALTORS
SAN RAFAEL, CA
JULY 10, 1997

1. Q: if a contingency is due on Saturday or Sunday, does the California Civil Code allow it to roll over to the next business day? See DEFINITIONS on page 1 of the Agreement (attached).

A: It is a question of contract interpretation. As is correctly pointed out, the Agreement specifically defines "Days" as "calendar days unless otherwise specified." Moreover, elsewhere in the DEFINITIONS section, the term "business days" is used. So, it would be a strong argument that the drafters of the document knew the difference between calendar and business days and knew how to provide for one versus the other. The fact that they chose to use "calendar days" in one sentence and "business days" in another indicates that was their specific intent. In addition, the "time is of the essence" clause in the Agreement further supports this argument. However, Civil Code Sections 10 and 11, and cases decided there under (see attached), support a finding that when a deadline falls on a Sunday or Holiday, it should be extended to the next business day.

TIP: When representing a seller, leave the Agreement as is and push for timely performance, even if it falls on a Sunday or Holiday. When representing a buyer, change the word in the definitions from "calendar" to "business" and make sure all parties initial the change or, if you want to keep all your changes in the Addendum, add the language "Notwithstanding anything to the contrary in the Agreement, 'days' means business days unless otherwise specified."

2. Q: Buyer agrees to liquidated damages. Removes all contingencies. Refuses to increase deposit to agreed liquidated damages amount. Backs out of deal. Can seller mediate or arbitrate for liquidated damages agreed amount or is the initial deposit the only risk?

A: Yes. Paragraph 24 of the Agreement (see attached) so provides: "In the event that Buyer defaults and has not made the deposit required under Item 1-B [Additional Cash Deposit] . . . then Seller will have the option of retaining the initial deposit(s) that have been made, or terminating the obligations of the parties under this Item 24 and recovering such damages from Buyer as may be allowed by law."

TIP: In this rising market, if a deal falls out, chances are the seller will get a higher price in the next deal. So, if you represent seller, insist on maximum liquidated damages amount, otherwise, you may have difficulty claiming you have been damaged by buyer's breach. If you represent buyer, try to avoid liquidated damages to minimize your damages in the event of buyer's remorse and subsequent default.

3. Q: If new CC&R's, by-laws and articles of incorporation are now in full force and effect, do all prior documents become null and void or must we disclose them also?

A: Generally, if new CC&R's are created and, by their terms they supersede the old ones, the title company should delete that exception to title. As to new by-laws or articles of incorporation, if they do not, by their terms supersede the previous ones, then arguably the old ones may still be in force or effect.

TIP: The general rule of thumb is "When in doubt, disclose." If you discover such a situation, however, and you are concerned that disclosing the previous documents may jeopardize the deal, first point the problem out to the seller and see if the seller's attorney can amend the new documents to expressly state that they do supersede the prior documents which are of no further force or effect.

4. Q: Discuss effect of recent changes to statutes concerning Real Estate Agent/Broker duty of care.

A: Last year, certain Regulations of the Real Estate Commissioner were changed to eliminate descriptions of 19 instances of unlawful conduct. Some commentators have interpreted that change, along with the recent amendment of Civil Code Section 2079.12 (see attached) as a "loosening up" of the standard of care required to be exercised by real estate licensees. However, Section 2079.12(4)(b) expressly states that, "It is not the intent of the Legislature to modify or restrict existing duties owed by real estate licenses." Moreover, in the Notes accompanying the recent amendment, it characterizes the new language as "a nonsubstantive change." No cases have yet interpreted either of these amendments so it is too soon to tell how a court would view the impact.

TIP: As a practical matter, attorneys representing disgruntled buyers or sellers have one less tool in their arsenal to attack brokers. However, brokers should not operate under the misconception that they can now play "fast and loose" and not be held accountable. The National Association of Realtors Code of Ethics and Standards of Practice provide ample high standards to define the appropriate duty of care and those standards specifically provide that they establish obligations, which may be higher than those mandated by law.

If you, or anybody you know, has an ownership interest in a corporation with another person, or in a partnership, then having a buy/sell agreement is an absolute must.

A buy/sell agreement identifies the procedure for two or more owners or partners to eventually split up the entity. It sets forth the "exit strategy."

The agreement provides for the acquisition of the interest of a withdrawing shareholder or partner by the business entity or its remaining principals. The agreement usually restricts the owners' ability to transfer their shares, and it provides the terms under which the entity or other owners may or must acquire the interest of a shareholder or partner on death or other specified events.

A buy/sell agreement can benefit the entity and its owners by:

  • Preventing outsiders or heirs, whose interests may conflict with those of the remaining owners, from obtaining an ownership interest.
  • Ensuring the continued legal existence of the entity on the death, withdrawal, bankruptcy, or expulsion of a partner.
  • Ensuring continuity of management and control by the remaining owners.
  • Increasing job stability for minority owner and key nonowner-employees.
  • Providing for the orderly liquidation of the owners' interests in the event of death, disability, retirement or other forced or voluntary withdrawal.
  • Providing the continued involvement in the business of retired or inactive shareholders or partners.
  • Providing cash to pay death taxes and estate settlement costs.
  • Fixing the value of the interest, including a minority discount for estate and gift tax purposes; and
  • Preventing the loss of an S corporation election by presenting a transfer of the interest to an unqualified shareholder (e.g., a corporation) or to a shareholder who refuses to elect S corporation status.

If there is anything we can do to assist any of you with preparing a buy/sell agreement, your business transactions, negotiation and drafting of agreements, collections, business disputes, real estate matters or any other legal matter, please do not hesitate to give me a call.