CALIFORNIA PURCHASE AND SALE ISSUES FOR BUYERS UPDATED

CALIFORNIA PURCHASE AND SALE ISSUES FOR BUYERS

UPDATED

STEVENS A. CAREY is a partner with Pircher, Nichols &Meeks LLP, a real estate law firm locatedin Los Angeles, California. A prior version of this Article was published in The Practical Real Estate

Lawyer in 2016.That version acknowledges the assistance of several people.The author renews his

thanks for their help. The author also thanks Will Swanson for his assistance in updating this Arti-

cle, Rob Krapf (Delaware), Amy Rifkind (District of Columbia), Marty Schwartz (Florida), Josh Kamin

(Georgia), Gene Leone (Illinois), Kevin Shepherd (Maryland), John Sullivan (Massachusetts), Joshua

Stein (New York), and John Nolan (Texas) for their input regarding their respective jurisdictions (as

indicated parenthetically), Jeff Brown for his input regarding litigation matters, Michael Caplinger for his input regarding

sales tax matters, Michelle Hickey for her input regarding statutory seller disclosure requirements, Michael Soejoto for

his input regarding tax matters, John Cauble and Richard MacCracken for providing comments on a prior draft of this

Article, and Will Swanson and Tim Durkin for cite checking.This Article is not intended to provide legal advice.The views

expressed (which may vary depending on the context) are not necessarily those of the individuals mentioned above,

Pircher, Nichols &Meeks LLP or the publication. It is important to remember that every transaction is different and what

is appropriate for one transaction may not be appropriate for another. Any errors are those of the author.

Sales of California real estate are typically governed by

California law and customs. While there are exceptions

to this rule, a buyer may find it difficult to deviate from

the norm and, in the author's experience, most buyers

do not even try. So what does this mean for the pru-

dent commercial buyer? Aren't the laws and customs

for commercial real estate purchases basically the

same throughout the United States? The answer is no,

and sometimes the variance can be significant, espe-

cially in anoutlier state like California. As noted by one

author, "California sometimes operates like its own

country, with laws that aren't like anyone else's:' Zim-

mermann, Three Things To Know About Doing Busi-

ness in California, Xconomy.com (Jan. 28, 2016), avail-

able at http://tinyurl.com/z9tu8nw. Consequently, it is

important to understand the local rules and to seek

the advice of local experts to make an informed pur-

chase. While not intended to be exhaustive, this Arti-

cle will highlight some of the local matters a buyer

should keep in mind before entering into a California

commercial real property purchase agreement.

CAPSULE SUMMARY

1. Recitals. In California, recitals are conclusively pre-

sumed to be accurate so the buyer should be careful

about what is recited in the purchase agreement.. 35

2. Due Diligence Termination Right. Seemingly

broad due diligence termination rights may yield

unexpected results based on California case law: the

buyer's discretion to terminate during the due dili-

gence period may not be as unlimited as the buyer

thinks; and if it is unlimited, there is a risk that the

purchase agreement may be subject to challenge as

an illusory contract if it is not supported by consid-

eration ......................................... 36

3. Title Insurance and Escrow. California title

insurance forms and rates are more flexible than

some states (e.g., Texas, Florida and New York) but

less flexible than others (e.g., Illinois). Unlike some

states (e.g., Florida), the buyer should not expect any

recourse against the title insurance company in Cali-

fornia if the title report it obtains is inaccurate, even

if the title insurance company has been negligent in

preparing the report. Also, attorneys do not act as

title agents in California as they do in some states

(e.g., Florida and Georgia) and, although allowed by

California law, generally do not act as escrow agents

in the author's experience (other than informal

arrangements between counsel to hold signature

pages while counterparts are collected pending

delivery) .......................................36

34 ~ THE PRACTICAL REAL ESTATE LAWYER JANUARY X020

4. Closing Procedure. The customary forms of sev-eral closing documents in California may be differ-ent from the forms in other states (e.g., the form ofdeed, state tax withholding certificate, preliminarychange of ownership report, and local transfer taxstatements). The customary closing cost allocationsin California may vary not only from the customs inother states but may also vary depending on thelocation in California ............................38

5. Certain Remedies and Defenses. Californiahas a statute governing liquidated damage clausesin real property purchase agreements, and statutesindicating that a liquidated damage provision doesnot eliminate the possibility of specific performanceby the seller. California also has: (i) some conflict-ing case law regarding survival limits; (ii) numerousstatutory seller disclosure requirements; (iii) a broadconcept of fraud; (iv) limitations on waivers of fraud;(v) conflicting case law regarding the survival offraud if a buyer closes the purchase with knowledgeof the fraud (and the contract is silent as to this cir-cumstance);and (vi) special rules regarding jury trialwaivers, arbitration, judicial reference and attor-neys'feesclauses ...............................39

6. Special Qualifiers (Good Faith, Best Efforts,and Knowledge). In California, the terms "goodfaith" and "best efforts" and the various "knowl-edge"qualifiers that are frequently used in purchaseagreements may not always mean what the buyer

expects........................................47

7. Supplementing and Modifying the WrittenAgreement. It may be easier in California than insome other states for courts to expand upon andsometimes even change what is set forth within thefour corners of the written purchase agreement. 48

8. Timing. "Time is of the essence" clauses aresometimes enforced in California, but sometimesthey are not. Also, California has statutes addressingbusiness days and time zones, some of which maybe surprising . .................................49

9. Entity, Property, Transfer, and Sales Taxes.California taxes may be relevant in determining the

form of the buyer, the price, and the structure of thetransaction . ................................... 50

10. Property and Transaction Specific Matters.Numerous other California laws and customs maybe relevant depending on the nature of the prop-ertyand the structure of the transaction......... 57

A more detailed discussion follows.

1. RECITALS

Most purchase agreements begin with recitals,which may tell the story behind the deal (to estab-lish the background and create a framework for theagreement). In California, buyers may prefer to keepthis story short. According to the California EvidenceCode:

The facts recited in a written instrument areconclusively presumed to be true as betweenthe parties....Cal. Evid. Code § 622.

With the exception of a recital of consideration(which may be questioned), this statute estops theparties to deny the truth of the recitals. See, e.g.,13 Witkin, Summary of California Law § 215(1)(c) at568 (11th ed. 2017). Many California legal practition-ers were surprised in 2000 when a California court,relying on this statute, found that a tenant wasbound by an inaccurate termination date set forthin its estoppel certificate. Plaza Freeway Ltd. Part-nership v. First Mountain Bank (Cal. App. 4th Dist.2000) 81 Cal.App.4th 616. (Compare Miner v. TustinAve. Investors, LLC (Cal. App. 4th Dist. 2004) 116 Cal.App.4th 264, which reversed a summary judgmentin favor of a landlord to the effect that an option ina lease was eliminated by an estoppel that failed toidentify the option; the option in Miner was "clearlystated" in the lease (Miner, supra, at 272), whereasthe termination date in Plaza Freeway was not deter-minablefrom the terms of the lease.) In the author'sexperience, it is typically the buyer who wants toadd, and the seller who wants to delete, informa-tion about the property (e.g., square footage) in therecitals. But query whether the buyer would be pre-cludedfrom complaining if the information it addedturns out to be wrong (e.g., the stated number of

CALIFORNIA PURCHASE AND SALE ISSUES fOR BUYERS — UPDATED 135

square feet overstated the actual number)? "An

open question is whether placing contractual terms

in a recital will safeguard the parties against claims

of promissory fraud...:' CEB, California Real Prop-

erty Remedies and Damages § 3.80 at 3-100.1-3-101

(2d ed. 2019). (But see Bruni v. Didion (Cal. App. 4th

Dist. 2008) 160 Cal.App.4th 1272, 1291, which states

that "section 622, however, does not bar an asser-

tion of fraud or other grounds for rescission:')

2. DUE DILIGENCE TERMINATION RIGHT

Buyers often, if not usually, want the right to decide

during the due diligence period whether or not to

proceed with the purchase without being second-

guessed. The level of discretion given to the buyer

to make this decision, namely whether to terminate

the purchase agreement during this period, is key

to determining whether the buyer's decision may

be challenged. For example, some commentators

have suggested that sole discretion merely indicates

whose discretion is being exercised and may not

preclude the imposition of the implied covenant of

good faith and fair dealing. And even absolute dis-

cretion might not be entirely free from doubt in Cali-

fornia. But if this termination right (sometimes called

a "free look") is crystal clear, it may come at a cost if it

is not supported by independent consideration: the

purchase agreement may be subject to attack as an

illusory contract. Thus, to have an ironclad termina-

tion right during the due diligence period, the buyer

will want to make sure: (1) it has unfettered discretion

to exercise the termination right; and (2) there is con-

sideration to avoid an illusory contract. To address

these two points, many California purchase agree-

ments (1) provide that the buyer may decide whether

to proceed for any or no reason, and (2) require the

buyer to pay the seller some amount (often $100) of

independent consideration that may be part of the

deposit that is deposited in escrow, but ultimately

goes to the seller under any and all circumstances,

and is nonrefundable (and that obligation survives

any termination of the purchase agreement). For

more background (including a discussion of some of

the relevant California case law), see Carey, Cauble &

MacCracken, The "Free Look" in California—You Get

What You Pay For, 33 Real Prop. L. Rep. 89 (July 2010).

3. TITLE INSURANCE AND ESCROW

3.1. Regulation of Forms and Rates

In California, "[t]he types of forms and the rates

the industry may charge are largely unregulated.

The Insurance Code, however, does set forth gen-

eral rate guidelines and requires that all rates

be filed with the Department of Insurance. Ins C

§§ 12401.1-12401.8. California also requires that

each title insurer file with the Insurance Commis-

sioner any policy form it intends to use on a regu-

lar basis...:' CEB, California Title Insurance Practice

§ 6.8 at 6-14.1 (2d ed. 2019). In the author's experi-

ence, title insurance companies in California seem

to have considerably more flexibility regarding the

forms of and rates for endorsements than they have

for the basic policy.

3.2. Customary forms of Policyand Endorsements

"There are essentially two types of title insurance

policies available in California for owners of real

property interests—CLTA policies and ALTA poli-

cies. CLTA policies insure primarily against defects

in title that are discoverable through an examina-

tion of the public record. ALTA policies [may] pro-

videgreater coverage in that they [may] also insure

against [certain] off-record defects...:' Id. § 6.10 at

6-14.5. Although a CLTA form is available, and its

cost may be relevant for the allocation of closing

costs, in the author's experience, buyers in com-

mercial real estate purchases typically obtain a 2006

ALTA extended coverage owner's policy. A 2006

ALTA standard coverage owner's policy in California

includes the so-called "Western Regional Excep-

tions" and provides coverage comparable to a CLTA

owner's policy. Id. § 7.21 at 7-19. In California, as in

many states, the CLTA endorsement forms are used

along with the ALTA endorsement forms and cus-

tomized forms that may be negotiated with the title

insurance company.

3.3. Preliminary Reports and Title Commitments

It is common in California, as in many states, for the

buyer to obtain a preliminary report. This report is

36 ~ THE PRACTICAL REAL ESTATE LAWYER JANUARY 2020

sometimes referred to in purchase agreements asa "preliminary title report," although the name waschanged in California by statute effective January 1,1982. Cal. Ins. Code § 12340.11. The deletion of theword "title" was intended to distinguish a prelimi-nary report from a title abstract, because (unlike atitle abstract) a preliminary report is not intendedto create any duty or liability for the title insurancecompany. Although the preliminary report appearsto be a report of the status of title, it is loaded withdisclaimers (including a statement that there maybe other title exceptions) to make clear that a buyerrelies upon it at its own risk. By statute, it is not tobe construed as a title representation. Cal. Ins. Code§ 12340.11. And case law has made clear that "[a]party that seeks to hold an insurer liable for negli-gently providing title information upon which theparty relied must obtain an abstract of title....lnshort, there are two ways in which an interested partycan obtain title information upon which reliance maybe placed: an abstract of title or a policy of title insur-ance:' Soifer v. Chicago Title Company (Cal. App. 2dDist. 2010) 187 Cal.App.4th 365, 374. Sometimes, thebuyer will obtain a commitment rather than a prelim-inary report, but commitments may fare little betterbecause the statute refers to both preliminary reportsand commitments. Cal. Ins. Code § 12340.11. "Until acontract to issue a policy is created..., the commit-ment carries with it the same statutory protectionsas the preliminary report:' CEB, California Title Insur-ance Practice, supra, § 5.31 at 5-29. Commitments cancreate a binding obligation to issue a policy, but theyoften do not reach that stage because, for example,they may not include the name of the buyer or theliability amount or the commitment fee has not beenpaid. See id. § 5.33 at 5-30.

3.4. Property Tax Liens

Generally, the tax lien for each fiscal year (July 1-June 30) in California arises on the immediatelypreceding January 1. Cal. Rev. &Tax. Code § 2192;Cal. Gov. Code § 29001. The lien for governmentimprovement special assessments (for assessmentdistricts or community facilities districts) ariseswhen a notice of assessment or notice of special taxlien is recorded. Cal. Sts. & Hy. Code §§ 3114-3115.

The 2006 ALTA form owner's policy generally cov-ers any liens for taxes or assessments that are dueor payable and are unpaid and are not specified onSchedule B. See paragraph 2(b) of the Covered Risks.But what if the voters approve a local special assess-mentfor public improvements and the governmentrecorded a notice of assessment or notice of specialtax lien after the deed to the buyer is recorded? Thisspecial assessment is not likely to be covered by the2006 ALTA title insurance policy because of para-graph 3 of the Exclusions From Coverage: "Defects,liens, encumbrances, adverse claims, or other mat-ters...(d) attaching or created subsequent to Dateof Policy." And what happens if the purchase is notexpected to result in a reassessment? See infra part9.2. Might there be some assessments specific to theproperty that have not been processed and couldincrease the property taxes for the period after clos-ing? See Cal. Rev. &Tax. Code § 75.54(c) for prorationof supplemental assessments between seller andbuyer and Cal. Rev. &Tax. Code § 531.2 for poten-tial proration between seller and buyer of escapeassessments.

3.5. Escrows

California real estate purchases often, if not usually,involve an escrow, both to hold the deposit and toconsummate the closing. The historical closing alter-native, namely a "table" closing (in which the partiesmeet face to face to close the transaction), is rarelyused to close a California purchase agreement. See3 Friedman and Smith on Contracts and Conveyancesof Real Property § 38.5 at 38-30-38-34 (8th ed. 2019)for a description of a table closing. See also CEB, Cal-ifornia Title Insurance Practice, supra, §§ 10.3-10.4at 10-3-10-4. (Sometimes a table closing is referredto as a "New York style closing," but the words "NewYork style closing" are used by some to refer to a "gapclosing," which is a relatively common arrangementunder which the funds are disbursed before thedeed is recorded and the title insurance companyinsures the gap, usually based on a gap indemnityfrom the seller. Even in New York, the table closinghas largely become a part of history. Most real estatepurchase closings occur through escrow, althoughthey are often gap closings.) Although independent

CALIFORNIA PURCHASE AND SALE ISSUES FOR BUYERS — UPDATED ~ 37

escrow companies are occasionally used in Southern

California, many, if not most, practitioners in Califor-

nia prefer to use an escrow agent that is affiliated

with the title insurance company (and better yet, the

title insurance company itself). See id. § 10.3 at 10-3.

3.6. Role of Attorneys

In California, unlike some states (e.g., Florida and

Georgia), attorneys are not used as title agents and,

although allowed, typically do not function as escrow

agents (although informal arrangements between

counsel to hold executed signature pages or counter-

parts pending closing or further instruction are com-

mon). See, e.g., NAIC Title Insurance Task Force, Sur-

vey of State Insurance Laws Regarding Title Data and

Title Matters (March 2019), available at http://tinyurl.

com/gqs8lav; Bernhardt, Attorneys as Escrow Agents,

29 Real Prop. L. Rep. 342, 344 (Sept. 2006) ("California

not only allows attorneys to serve as escrow agents,

it makes it easy to do so by waiving [certain] license

requirements... The best thing we might do for our-

selves is to get that exemption repealed:').

4. CLOSING PROCEDURE

4.1 Closing Documents

4.1.1. Form of Deed

In California, the custom is to use grant deeds. A per-

missivestatutory form (of a grant of an interest in real

property) is set forth in Cal. Civ. Code § 1092. Unless

otherwise provided, the following are implied cove-

nants under a grant deed in California:

1. That previous to the time of the execution of

such conveyance, the grantor has not conveyed

the same estate, or any right, title, or interest

therein, to any person other than the grantee;

2. That such estate is at the time of the execution

of such conveyance free from encumbrances

done, made, or suffered by the grantor, or any

person claiming under him.

Cal. Civ. Code § 1113. For more information regarding

California deed requirements, see 1 CEB, California

Real Property Sales Transactions Ch. 10 (4th ed. 2019).

4.1.2. Tenant Notices

A buyer may wonder why a seller in California cares

about how tenant notices are delivered. The reason

is to ensure that the seller is released from further

liability with respect to the security deposits. Under

Cal. Civ. Code § 1950.7(d), the seller (landlord) is

relieved of further liability with respect to a security

deposit under a commercial lease upon transferring

the deposit to the buyer (successor landlord) and

thereafter notifying the tenant "by personal deliv-

ery or certified mail of the transfer, of any claims

made against the...deposit, and of the transferee's

name and address. If the notice is made by personal

delivery, the tenant shall acknowledge receipt of the

notice and sign his or her name on the landlord's

copy of the notice:' See Cal. Civ. Code § 1950.5(h) for

the corresponding requirements that apply to a res-

idential lease.

4.1.3. State Tax Withholding Certificate

The purchase agreement should require the seller to

deliver any required state tax withholding or non-

foreign status certificate. Although not necessary,

for clarity, consider specifying the applicable Cali-

fornia form of tax withholding certificate (currently,

California State Form 593-C).

4.1.4. Preliminary Change of Ownership Report

In California, the buyer typically prepares and files a

preliminary change of ownership report (PCOR) to

put the county assessor on notice of the change in

ownership resulting from the buyer's purchase. The

PCOR is a brief questionnaire requesting information

on the property, principals involved in the transfer,

type of transfer, purchase price and terms of sale,

if applicable, and other pertinent data. The county

recorder may charge an additional $20 recording

fee if the PCOR is not filed with the deed. The buyer

is obligated to file a Change in Ownership State-

ment (COS) with the county assessor within the time

limits set forth in Cal. Rev. &Tax. Code § 480 (typi-

cally 90 days of the date of transfer for commercial

transactions). Many California purchase agreements

do not address the PCOR.

38 I THE PRACTICAL REAL ESTATE LAWYER JANUARY 2020

4.1.5. Transfer Tax Statements

Many buyers and sellers would prefer not to disclosethe price in the public record. So, for many years inCalifornia, a separate statement of documentarytransfer tax was delivered (rather than indicating theamount of the transfer tax on the deed). This practicewas once permitted by Cal. Rev. &Tax. Code § 11932.However, the law was changed as of January 1, 2015to require disclosure of the amount of the transfertax on the face of the deed. Cal. Rev. &Tax. Code§§ 11932-11933. Many counties also require a sepa-rate transfer tax affidavit. Check with the title insur-ance company to determine whether one is requiredby the county where the property is located.

4.2. Closing Cost Allocation

The custom for allocating closing costs variesbetween Southern and Northern California and, insome cases, among counties. In Southern Califor-nia, (1) the seller pays (a) transfer taxes (which arediscussed in part 9.3 below), except that the customfor allocating municipal transfer taxes varies (i.e.,some sellers argue that city transfer taxes should besplit equally or at least that the allocation is nego-tiable in larger transactions), (b) the premium for ahypothetical CLTA (or ALTA standard coverage) titleinsurance policy, and (c) 50 percent of any escrowfees; and (2) the buyer pays (a) possibly some por-tion of the municipal transfer taxes as noted above,(b) the additional costs to obtain an ALTA extendedcoverage title insurance policy and any endorse-ments,and (c) 50 percent of any escrow fees. UnlikeSouthern California, Northern California does nothave a single custom for allocating closing costs.For example, it is often stated that, in several North-ern California counties, including San Francisco,the buyer pays the entire title insurance premium.In other Northern California counties, the base titleinsurance premium may be split between the sellerand the buyer 100/0, 75/25 or 50/50, depending onthe county. The allocation of escrow charges mayalso vary from county to county in Northern Califor-nia. The customary allocation (arguably other thanfor municipal transfer taxes) is often determinedby visiting national title insurance company web-sites. See, e.g., Commonwealth Land Title National

Commercial Services, Real Estate Laws &Customsby State (information current as of 06/16), availableat http://tinyurl.com/jsk22gs; First American TitleNational Commercial Services, Your Guide to RealEstate Customs by State, available at http://tinyurl.com/zpsv9c2. But since dollars are fungible, it ispossible to use different allocations, which happensfrom time to time (particularly in large deals involy-ing one or more out-of-state parties). This practicehas added to the lack of uniformity in Northern Cal-ifornia (especially in San Francisco). To add to theconfusion, the author has encountered purchaseagreements (prepared by or for Southern Californiaprofessionals) that use Southern California customsto sell Northern California real estate (especially inSan Francisco). Indeed, real estate professionals maybe able to point to past transactions that have con-sistently used an allocation (e.g., having the sellerpay all or a portion of the base premium in San Fran-cisco) that is contrary to the custom published onthe title insurance company websites.

4.3. Property Tax Prorations

Unlike some states (e.g., Illinois and Florida), propertytaxes in California are generally not paid more thansix months in arrears. See Carey, Prorations: WatchOut for Real Estate Taxes Paid in Arrears, Real Est. Fin.J., Spring 1993, at 11. With the exception of a few cit-ies, property taxes in California for each half of thetax year are paid partially in advance and partially inarrears: property taxes for each July 1—June 30 taxyear are assessed as of the preceding January 1 andare due in two equal installments; the first is payableon November 1 (becoming delinquent if not paid byDecember 10) and the second is payable on Febru-ary 1 (becoming delinquent if not paid by April 10).See, e.g., Whitney, Ed., 2019 Guidebook to CaliforniaTaxes 11 1708 at 828 (2018).

5. CERTAIN REMEDIES AND DEFENSES

5.1. Liquidated Damages

Many, if not most, California real property purchaseagreements provide that, if the buyer breaches itsobligation to close, then the deposit is forfeited tothe seller as liquidated damages.


5.1.1. General Rule

With some exceptions, liquidated damage clauses

are generally valid in California "unless the party

seeking to invalidate the provision establishes that

the provision was unreasonable under the circum-

stances existing at the time the contract was made:'

Cal. Civ. Code § 1671(b). Consequently, it is relatively

common in California to see statements intended to

support the reasonableness of the manner in which

the liquidated damages were determined.

5.1.2. Real Property Purchase Agreement

With the exception of certain residential purchase

agreements (i.e., involving not more than four resi-

dential units, at least one of which the buyer intends

to occupy), the general rule stated in part 5.1.1 above

applies to a California real property purchase agree-

ment (that liquidates damages if the buyer breaches

its obligation to close) subject to the following addi-

tional requirements (Cal. Civ. Code § 1676):

A provision in a California real property pur-

chase agreement liquidating damages if the

buyer fails to close is invalid unless "[t]he pro-

vision is separately signed or initialed by each

party...:' Cal. Civ. Code § 1677(a).

• "If the provision is included in a printed contract,

it [must be] set out either in at least 10-point

bold type or in contrasting red print in at least

eight-point bold type." Cal. Civ. Code § 1677(b).

The latter statutory requirement is probably

intended to apply to so-called "preprinted" con-

tracts rather than a contract prepared through word

processing and then printed on an office printer.

To be safe, many buyers (and sellers) in California

always use at least 10-point bold type.

5.2. Specific Performance by Seller

Most sophisticated buyers in California also insist

that the seller's right to liquidated damages is the

sole and exclusive remedy (and not merely the sole

and exclusive right to damages) if the buyer breaches

its obligation to close (without limiting, however,

certain obligations that survive termination). Their

concern is that otherwise the seller may be able to

bring an action for specific performance despite

the existence of a liquidated damages clause. See,

e.g., Cal. Civ. Code §§ 1680 ("Nothing in this chapter

affects any right a party to a contract for the pur-

chase and sale of real property may have to obtain

specific performance.") and 3389 ("A contract oth-

erwise proper to be specifically enforced, may be

thus enforced, though a penalty is imposed, or the

damages are liquidated for its breach, and the party

in default is willing to pay the same."); CE6, Califor-

nia Real Property Sales Transactions, supra, § 4.143

at 4-132-4-134; Schaefer, A Seller's Specific Perfor-

mance Remedy in a Residential Real Estate Transac-

tion, 40 Marin Law. 3 (Feb. 2009).

5.3. Survival Limits

In California, as in other states, the amount of time, if

any, a buyer may have after closing to make a claim

for the seller's breach of a real property purchase

agreement may depend on a number of factors

including (1) the doctrine of merger, (2) the applica-

ble statute of limitations, and (3) contractual limits.

5.3.1. Merger

"Absent fraud, mistake, agreement or other special

circumstances, the buyer's acceptance of the deed

at closing results in a merger of prior negotiations

and agreements....However, matters collateral to

the conveyance (i.e., those that ordinarily do not

become part of the deed) are not merged...:' CEB,

California Real Property Sales Transactions, supra,

§ 4.109 at 4-106. See also 1 Miller &Starr, California

Real Estate § 8:4 at 8-23-8-24 (4th ed. 2019) (empha-

sizing that the application of the merger doctrine

depends upon the intent of the parties); Powell on

Real Property §§ 81.01[3][a] at 81-15; 81.03[6][h] at

81-153-81-155; 81.05[11][d] at 81-247; 81A.07[1][d] at

81A-135-81A-137 (2019). Exactly what obligations

are encompassed by the concept of merger may not

always seem clear.

• Some practitioners believe that, without a sur-

vival provision, representations and warranties

do not survive closing because they merge with

the deed. Ostensible support for this view may


be found in some cases and secondary refer-ence materials both in California and elsewhere.See, e.g., Herring v. Teradyne Inc. (S.D. Cal. 2002)256 F.Supp.2d 1118, 1126, reversed by the NinthCircuit as to a related but different issue andreference material it cites ("[W]hen a contractdoes not provide that the representations andwarranties survive the closing of a transaction...,the representations and warranties made in theagreement are treated as extinguished as of theclosing date, and cannot thereafter give rise toliability."); Western Filter Corp. v. Argan, Inc. (9thCir. 2008) 540 F.3d 947, 952 ("Unless the partiesagree to a survival clause—extending the rep-resentations and warranties past the closingdate—the breaching party cannot be sued fordamages post-closing for their later discoveredbreach:'); Greenwald &Bank, California Prac-tice Guide: Real Property Transactions 11 11:92.1at 11-33 (2019) ("Absent a 'survival clause'...rep-resentations and warranties in a purchase andsale agreement merge into the deed and arethereby extinguished by the closing; after theconveyance, they have no independent exist-ence:' [citations omitted]).

But "[t]he rule that prior expressions are mergedinto the deed is not as broad and absoluteas some abbreviated statements of the doc-trine might indicate:' Szabo v. Superior Court(Cal. App. 2d Dist. 1978) 84 Cal.App.3d 839, 843(delivery of deed did not necessarily precludeenforcement of a representation and warranty inthe purchase agreement that the property com-plied with zoning laws). Indeed, many descrip-tions of California's merger doctrine are subjectto qualifications that may easily be overlooked.Consider the impression that would have beencreated had the quote at the beginning of thispart 5.3.1 been limited to the first sentence.Similarly, the language quoted above from theGreenwald & Bank California Practice Guide isqualified with an admonition to see Ram's GateWinery, LLC v. Roche (Cal. App. 1st Dist. 2015)235 Cal.App.4th 1071, 1079-1081, which statesa much narrower rule: "[W]e agree with thosecourts which have limited application of the

merger doctrine to circumstances where thecontractual terms are inconsistenrwith the deed,or where the parties clearly intend to have allcontractual obligations subsumed by the recit-als of the recorded deed:' Id. at 1081. Moreover,the Greenwald &Bank California Practice Guideidentifies only two cases to support the quotedstatement in the prior paragraph, both of whichinvolved survival clauses so merger was notan issue. One of them, Linden Partners v. Wil-shire Linden Associates (Cal. App. 2d Dist. 1998)62 Cal.App.4th 508, 524, does not mention themerger doctrine at all. The other one, the West-ern Filter case identified above, may not begiven great weight because its statement of themerger doctrine was not only dicta, it was alsostipulated by the parties ("Both parties agreethat without the Survival Clause the representa-tions and warranties would have terminated atthe time of closing:'). Both Western Filter andHerring involved corporate agreements that didnot involve a deed; the legal basis for their state-ments (aside from the agreement of the parties)regarding survival is questionable.

But most buyers try to avoid any doubt that rep-resentations and warranties (and sometimes otherobligations) are intended to survive closing (anddelivery of the deed) for some survival period. Whilemany, if not most, covenants in the purchase agree-ment may be "collateral" agreements that are notsubject to the doctrine of merger, sellers sometimeswant to provide that nothing survives the closingunless expressly provided to the contrary. The buyermay want to take the position (and provide) that allobligations survive for some period after closing.

5.3.2. Statute of Limitations

The statute of limitations for breach of a written con-tractvaries from state to state. See, e.g., Twomey, Jen-nings &Greene, Business Law: Principles for Today'sCommercial Environment § 18-4d at 328 (5th ed.2017) ("The time limitation provided by state statutesof limitations varies widely."). In California, the gen-eral rule for a written contract is four years. Cal. CodeCiv. Proc. § 337. See also 3 Witkin, California Procedure


§§ 508-514 at 650-59 (5th ed. 2015). By contrast, the

corresponding general rule (for a written contract) is,

for example:

• Three years in Delaware, 10 Del. Code § 8106(a),

the District of Columbia, D.C. Code § 12-301(7),

and Maryland, Md. Cts. & Jud. Proc. Code § 5-101;

Six years in Georgia, Ga. Code § 9-3-24, Massa-

chusetts, Mass. Gen. Laws ch. 260, § 2, and New

York, N.Y. Civ. Prac. Laws &Rules § 213(2); and

• Ten years in Illinois, 735 III. Comp. Stat. 5/13-206.

As in other parts of the country, this time limit may

not be relevant in commercial real property purchase

agreements because of contractual time limitations

that are typically included in the purchase agree-

ment,which are discussed in part 5.3.3 below. But the

author has encountered purchase agreements with

provisions (e.g., a reciprocal brokerage indemnity)

that are not the subject of any contractual modifica-

tion ofthe statute of limitations. In such instances, the

buyer may want to know not only the length of the

limitation period but also when it begins. "A cause of

action for breach of contract ordinarily accrues at the

time of breach, and the statute begins to run at that

time regardless whether any damage is apparent or

whetherthe injured party is aware of his or her right to

sue:' Witkin, California Procedure, supra, § 520 at 664;

see also CEB, California Law of Contracts §§ 9.2-9.5

at 9-3-9-9 (2019). See also CEB, California Real Prop-

erty Remedies and Damages, supra, § 4.60 at 4-88-4-

89. For example, the cutoff may be longer than four

years from closing (e.g., the breach of apost-closing

brokerage indemnity where a broker makes a claim

for indemnification after closing and the obligation

to indemnify is not breached until that time). And, in

some circumstances, the time period may not begin

to run until some time after the breach. See, e.g., Cal.

Code Civ. Proc. § 337(c) (if a rescission action is based

on fraud or mistake "the time shall not begin to run

until the discovery...of the...fraud or mistake"); Wit-

kin, California Procedure, supra, §§ 520-21 at 664-67,

§ 529 at 678-80.

5.3.3. Shortening the Period

As in other states, sellers in California typically try

to limit the survival of any claims against the seller

to a period that is much shorter than the applicable

statute of limitations. And, as in many other states,

such limitations have been permitted when tested

by the courts if they are not unreasonable. See, e.g.,

CEB, California Law of Contracts, supra, § 9.5 at 9-7-

9-8; Capehart v. Heady (Cal. App. 1st Dist. 1962) 206

Cal.App.2d 386 (three-month period in real prop-

erty lease); see also 15 Corbin on Contracts § 83.8 at

287 (rev. ed. 2003) (shortening the statutory period

"assists the public policy behind statutes of limita-

tions: preventing stale claims"). However, the law

in California is not entirely consistent regarding the

relevant public policy and some California courts

have looked upon contracts that shorten the statu-

tory period with disfavor and have strictly construed

them. Compare, e.g., Lewis v. Hopper (Cal. App. 1st

Dist. 1956) 140 Cal.App.2d 365, 367 ("'[C]ontractual

stipulations which limit the right to sue to a period

shorter than that granted by statute, are not looked

upon with favor because they are in derogation of

the statutory limitation. Hence, they should be con-

strued with strictness against the party invoking

them."' [citations omitted]), which was followed by

the 9th Circuit (applying California law) in Western

Filter Corp., supra, at 952, with (y) Zalkind v. Cera-

dyne (Cal. App. 4th Dist. 2011) 194 Cal.App.4th 1010,

1030, which declined to follow Lewis.

5.3.4. Extending the Period

In some states, the statute of limitations for a breach

of contract may be extended by opting into a longer

statute of limitations for contracts under seal. For

example, a contract under seal is subject to a statute

of limitations of:

• Twelve years in the District of Columbia, D.C.

Code § 12-301(6), and Maryland, Md. Cts. & Jud.

Proc. Code § 5102(a)(5); and

• Twenty years in Georgia, Ga. Code § 9-3-23, and

Massachusetts, Mass. Gen. Laws ch. 260, § 1.

This option is not available in California, which has

no separate statute of limitations for contracts under


seal. But what if the parties simply agree to a longer

statute of limitations? Corbin suggests that a contrac-

tual extension of the statute of limitations for breach

of a written contract may be of dubious value:

Because the purpose of a statute of limitations

is "to prevent the bringing and enforcement of

stale claims, involving extra danger of fraud and

mistake," courts do not enforce parties' agree-

ments to lengthen the limitations period.

Corbin on Contracts, supra, § 83.8 at 289-90 [citations

omitted]. On the other hand, according to Witkin:

In some jurisdictions...a waiver or contractual

extension [of the statute of limitations] is void;

in others it is valid if the duration is reasonable.

Witkin, California Procedure, supra, § 468 at 593

[citations omitted]. For example, prior to enactment

of Cal. Code Civ. Proc. § 360.5 in 1951, "California

courts, stressing the theory of 'personal privilege'...

took the extreme position [subject to potential

public policy exceptions] that a permanent waiver

(or its practical equivalent, a waiver for 99 years)

[of the statute of limitations] was valid:' Id. Some

state legislatures have also taken a more permissive

approach. For example, in Delaware (a case cited to

support the above quote from Corbin), the legisla-

ture has recently taken action: Delaware previously

allowed the parties to opt into a 20-year statute of

limitations by using a contract under seal, Whit-

tington v. Dragon Group, L.L.C. (Del. 2009) 991 A.2d

1, 10; and in late 2014, Delaware enacted a statute

allowing for contractual extensions for most con-

tracts (involving at least $100,000) of up to 20 years

without requiring a seal. 10 Del. Code § 8106(c). By

contrast, California's statute appears to be less per-

missivethan the California case law that preceded it,

and unlike the Delaware statute (which refers to "a

period specified" in the contract), the California stat-

ute refers to a "waiver" of the statute of limitations.

While California does not allow unlimited waivers,

it does appear to allow certain more limited exten-

sions, including an initial extension for four years.

Cal. Code Civ. Proc. § 360.5. As stated by Witkin:

Although the section is somewhat complicated,it seems clear that (a) it abolishes perpetual andlongtime waivers in the original instrument; but(b) it permits a provision extending the period(up to 4 years for written contract) by an addi-tional 4 years; and (c) it allows any number of suc-cessive but separately executed renewal agree-mentsfor additional periods of up to 4 years.

Witkin, California Procedure, supra, § 468 at 594. Seealso California First Bank v. Braden (Cal. App. 2d Dist.1989) 216 Cal.App.3d 672, 676 ("We conclude thatthe plain language of the statute provides that awritten waiver executed prior to the running of theapplicable statute of limitations shall be effectivefor a period of four years from the commencementof the running of the statute of limitations:'). Con-sequently, abuyer should not assume that a provi-sion in a California purchase agreement stating thata particular representation or covenant "survivesindefinitely" will operate to extend the statutory

period for more than four years.

5.4. Requirements and Limits forSeller Disclosures; Fraud

5.4.1. Seller Disclosures

There are numerous statutory disclosure require-ments imposed upon sellers in California depend-ing on the type of transaction, including disclosuresregarding: (a) releases of hazardous substances

under Cal. Health & Saf. Code § 25359.7; (b) natural

hazards (e.g., seismic hazard zones under Cal. Pub.Resources Code § 2694, delineated earthquake fault

zones under Cal. Pub. Resources Code § 2621.9,

earthquake safety for certain buildings under Cal.

Gov. Code §§ 8875.6 & 8893.2, special flood hazard

areas under Cal. Gov. Code § 8589.3, areas of poten-

tial flooding under Cal. Gov. Code § 8589.4, very

high fire hazard severity zones under Cal. Gov. Code

§ 51183.5, and certain wildland areas that may con-

tain substantial forest fire risks and hazards under

Cal. Pub. Resources Code § 4136); (c) non-compliant

plumbing fixtures under Cal. Civ. Code § 1101.5(e);

and (d) meth lab cleanup orders under Cal. Health &

Saf. Code § 25400.28. See, e.g., California Association


of Realtors, Sales Disclosure Chart (Nov. 13, 2019),

available at https://www.car.org/en/riskmanage-

ment/disclosure-charts/sales-disclosure-chart.

Additional statutory disclosure requirements that

may take effect in the future include the presence of

mold in certain buildings (to take effect on the first

January 1 or July 1 that is at least six months after

the California State Department of Public Health

adopts the relevant standards), Cal. Health & Saf.

Code § 26140; however, it is not clear whether or

when the mold standards will be established. See,

e.g., CEB, California Real Property Sales Transactions,

supra, § 4.82 at 4-82 (referencing a 2005 report,

updated 2009, in which the Department of Public

Health advised that permissible exposure limits for

indoor molds could not be established). There may

also be local (e.g., municipal) and federal disclosure

requirements. Many, if not most, sellers try to turn

the statutory disclosure requirements on their head

to make them the buyer's problem. The key here

for most buyers in California is to be on the look-

outfor disclosures of actual problems relating to the

property and to make sure that the disclosure lan-

guage does not inadvertently undercut any express

representations or impose anything more than an

acknowledgement of the absence of seller liability.

5.4.2. As-Is Provisions and OtherDisclaimers: Fraud

In California, "[a]II contracts which have for their

object, directly or indirectly, to exempt anyone

from responsibility for his own fraud" are unlawful.

Cal. Civ. Code § 1668. (See Cal. Civ. Code § 1667 for

definition of unlawfulness.) In a purchase agree-

ment, "an 'as-is' clause does not relieve the seller

of the common law and statutory duties of disclo-sure or liability for fraud:' CEB, California Real Prop-erty Sales Transactions, supra, § 6.9 at 6-13. Fraud

is broadly defined in California. For example, Cali-

fornia "case law has long held that negligent mis-

representation is included within the definition of

fraud:' Blankenheim v. E. F. Hutton & Co. (Cal. App.6th Dist. 1990) 217 Cal.App.3d 1463, 1472-73. Seealso Cal. Civ. Code §§ 1572(2), 1572(5), 1573 and1710(2). However, the seller's common law disclo-sure obligations may not extend to matters that are

apparent upon inspection, and (although the law inCalifornia is not completely clear) the buyer's fail-

ure to conduct a reasonable, permitted inspection

might even hamper its ability to rely on the express

representations of the seller. See, e.g., Miller &Starr,

California Real Estate, supra, § 1:156 at 1-656 (dutyto disclose material facts known only to the seller

and not reasonably accessible to the buyer), § 1:160

at 1-677 (there is "no...lesser duty...when the prop-

erty...is...commercial...rather than residential...."),

§ 1:168 at 1-723 ("An express right of investigation

may limit the buyer's right to rely [on the seller's

representations], but the law is uncertain on this

issue:'); CEB, California Real Property Sales Transac-

tions, supra, § 4.49 at 4-46 (The seller is obligated to

disclose material facts "that would not be apparent

to the buyer on inspection:'), § 4.70 at 4-68.1 ("The

buyer is charged with constructive notice of matters

discoverable by inspection of the property."). So the

buyer should take steps to discover whatever is rea-

sonablydiscoverable.

5.4.3. Releases

If a California purchase agreement contains a

release, there is often a reference to Civil Code sec-tion 1542. This statute provides:

A general release does not extend to claims that

the creditor or releasing party does not know or

suspect to exist in his or her favor at the time of

executing the release and that, if known by him

or her, would have materially affected his or her

settlement with the debtor or released party.

The seller's counsel usually tries to have the buyer

waive the benefits of this statute with a so-called

"1542 waiver." There is no statutory form for this

waiver. "Furthermore, mere recital, as in the release

signed by plaintiffs, that the protection of Civil Code

section 1542 is waived, or that the release covers

unknown claims or unknown parties is not con-

trolling. Whether the releaser intended to discharge

such claims or parties is ultimately a question of

fact:' Leaf v. City of San Mateo (Cal. App. 1st Dist.

1980) 104 Cal.App3d 398, 411. To make it clear that

the parties intend to waive this statute, a 1542 waiver


typically quotes the statute and states the waiverwith all capital letters and bold type. Sometimes it isseparately initialed too. (Note that the above-quotedstatutory language reflects some minor wordingchanges resulting from an amendment to Civil CodeSection 1542 effective January 1, 2019, which maybe missing from older forms.) A 1542 waiver is rela-tivelystandard in California. Consequently, the buyershould carefully consider the scope of claims beingreleased and what, if any, claims should be preserved.See, e.g., Belasco v. Wells (Cal. App. 2d Dist. 2015) 234Cal.App.4th 409, 421-23 (waiver of Civ. Code § 1542was effective to release the builder from claims forlatent defects discovered in the future); San DiegoHospice v. County of San Diego (Cal. App. 4th Dist.1995) 31 Cal.App.4th 1048, 1053-54 (waiver of Civ.Code § 1542 was effective to release the seller fromclaims for environmental contamination discoveredin the future).

5.4.4. Defense Based on BuyerKnowledge (Anti-Sandbag)

What if a buyer learns of a seller's fraud or breach of

a representation before the closing and proceeds toclosing? Does the closing waive the buyer's claim?There are California cases holding that seller frauddiscovered after the contract and prior to closing iswaived by closing, e.g., Kazerouni v. De Satnick (Cal.App. 2d Dist. 1991) 228 Cal.App.3d 871, and otherCalifornia cases holding the opposite, e.g., Jue v.Smiler (Cal. App. 1st Dist. 1994) 23 Cal.App.4th 312.One commentator has stated that "[t]he decisions

are divided [in California]....The tyeight of California

case law supports the rule that a party to an exec-utory contract does not waive his or her right torecover damages caused by the fraud of the other

party by completing the transaction after the fraudhas been discovered....However, there is contraryauthority...:' Miller &Starr, California Real Estate,supra, § 1:171 at 1-749-1-750. Corporate merger andacquisition agreements often provide contractualsupport for, and seldom provide contractual sup-port to negate, this rule (i.e., which allows a buyer'sfraud claim to survive closing despite the buyer'sknowledge) in the context of representations andwarranties. Whitehead, Sandbagging: Default Rules

and Acquisition Agreements, 36 Del. J. Corp. L. 1081(2011); see also West &Shah, Debunking the Myth ofthe Sandbagging Buyer: When Sellers Ask Buyers toAgree to Anti-Sandbagging Clauses, Who is Sand-bagging Whom?, 11 M&A Law. 3 (Jan. 2007). By con-trast, sellers in real property purchase agreementsoften include a so-called "anti-sandbag" provision(underwhich claims known tothe buyer priorto clos-ingare waived by closing). Whether it is appropriateto resist or accept such a provision may depend onthe facts and the relative bargaining power of theparties. Whether it will change the ultimate resultunder California law in the absence of such a pro-vision will also depend on the facts and perhapsthe relevant court. For example, in Jue v. Smiser, thecourt based its holding on the fact that reliance wasestablished at the time the purchase agreement wassigned, noting that "reliance must be established atthe time the initial contract is struck [and it] is notnecessary that a claimant establish continuing reli-ance until the contract is fully executed in order tomaintain an action for damages"; but the court alsoseemed influenced by the fact that "no evidencewas presented...that further investigation of thevalidity of the representations...was contemplatedby anyone:' Jue v. Smiler, supra, 317 and 318 at n.6.Indeed, the court stated: "When [a due diligence]examination is contemplated by the parties at thetime the original purchase agreement is struck, abuyer will face a difficult burden of establishing thathe, in fact, relied on a seller's representations whenthe original agreement was struck:' Jue v. Smiler,supra, 318 at n.6. See Miller &Starr, California RealEstate, supra, § 1:168 at 1-723 ("[T]here is a conflictin the authorities as to whether [a due diligenceinspection] provision precludes the buyer's relianceon the representations ofthe seller...:').

5.5. Dispute Resolution(Jury Trial, Arbitration, JudicialReference and Attorneys' Fees)

5.5.1. Jury Trial Waiver

In California, pre-dispute jury trial waivers are unen-forceable, but the parties may agree to arbitration(Cal. Code Civ. Proc. § 1281) or judicial reference


(Cal. Code Civ. Proc. § 638) to avoid going to trial

with a jury. See Grafton Partners v. Superior Court

(Cal. 2005) 36 Cal.4th 944, 964; Block & Paal, Trial

by Jury in Real Property Cases, 32 Cal. Real Prop.

J. 3, 15(2014); but see Miller &Starr, California Real

Estate, supra, § 45:5 at 45-13 ("In some cases, courts

have declined to enforce a judicial reference agree-

ment due to concerns about the efficacy of a jury

trial waiver." [citations omitted]). Choosing the law

of another jurisdiction that permits jury trial waiv-

ers may not be effective to circumvent the Califor-

nia rule. See, e.g., Rincon EV Realty LLC v. CP III Rin-

con Towers, Inc. (2017) 8 Cal.App.Sth 1, 18 (jury trial

waiver in loan agreement governed by New York

law for $110 million secured real estate loan was

unenforceable because "California, as the forum

state, has a materially greater interest than New York

in determining the enforceability of thejury waivers

at issue here...:').

5.5.2. Arbitration

If an arbitration clause is included in a California real

property purchase agreement, it must be clearly

titled "ARBITRATION OF DISPUTES" and the arbitra-

tion provision must be set out in capital letters if

the contract is typed (and there are special rules for

printed contracts requiring eight-point type in bold

or contrasting red). Cal. Code Civ. Proc. § 1298(a). It

must also contain a statutory all-cap form of notice

that is initialed by the parties, which must also be in

capital letters if the contract is typed (and there are

special rules for printed contracts requiring 10-point

bold type or eight-point contrasting red type). Cal.

Code Civ. Proc. § 1298(c). Another point to consider

when there is an arbitration clause in a California

purchase agreement is the interplay between the

arbitration clause and the recording of a lis pen-

dens. See, e.g., Cart & Lanphear, The Lis Pendens:

Strategies and Pitfalls, 33 Cal. Real Prop. J. 28 (2015).

5.5.3. Arbitration vs. Judicial Reference

In deciding whether to use an arbitration clause or

a judicial reference clause in California, the buyer

should consider the following points.

Privacy: arbitration may be more private, espe-

cially if the participants agree to confidential-

ity restrictions; see, e.g., Cal. Evid. Code § 703.5

imposing restrictions on the arbitrator's testify-

ing regarding the arbitration; judicial reference

hearings are open to the public, Chernick, Halde-

man & Bettinelli, California Practice Guide, Alter-

native Dispute Resolution § 6:213 at 6-66 (2018).

Predictability: arbitrators may be less predict-

able, CEB, A Litigator's Guide to Effective Use of

ADR in California § 9.20 at 374 (2008); Mercury

Ins. Group v. Superior Court (Cal. 1998) 19 Cal.4th

332, 345 ("contractual arbitration generally frees

the arbitrator from making a decision strictly

in accordance with the law"), and some liti-

gants complain that arbitrators simply "split the

baby"; a judicial referee must follow the law; see

Miller &Starr, California Real Estate, supra, § 45:6

at 45-14 (referencing Cal. Code Civ. Proc. § 645);

Chernick, Haldeman & Bettinelli, California Prac-

tice Guide, supra, § 6:254 at 6-76.

Finality: arbitration awards are generally not

subject to appellate review, CEB, A Litigator's

Guide to Effective Use of ADR in California,

supra, § 9.9 at 370; a judicial reference is subject

to appeal, Cal. Code Civ. Proc. §§ 644(a), 904.1.

• Rules of Evidence: the California rules of evi-

dence do not apply to an arbitration, unless

the parties so agree, CEB, A Litigator's Guide to

Effective Use of ADR in California, supra, § 9.18 at

373; the California rules of evidence do apply to

a judicial reference, Cal. Evid. Code § 300.

Discovery: arbitration provides a potential

method to limit the amount of discovery for a

dispute, which can greatly reduce the time and

expense of dispute resolution. On the other

hand, the parties can expand the extent of dis-

covery to that provided under the Code of Civil

Procedure (see Cal. Code Civ. Proc. § 1283.05).

Enforceability: as noted in part 5.5.1 above,

some California courts have expressed reserva-

tions about enforcing agreements providing for

a judicial reference under certain circumstances.

See, e.g., Tarrant Bell Properties v. Superior Court


(Cal. 2011) 51 Cal.4th 538 (Cal. Code Civ. Proc.§ 638 gives the court discretion to refuse toallow a judicial reference; case involved numer-

ous mobile homeowners); Treo @ Kettner Home-

owners Association v. Superior Court (Cal. App.

4th Dist. 2008) 166 Cal.App.4th 1055 (CC&Rs are

not a "contract" within the meaning of Cal. Code

Civ. Proc. § 638; case involved homeownersassociation); see also Pinnacle Museum Tower

Assn. v. Pinnacle Market Development (US), LLC

(2012) 55 Cal.4th 223, 245 in which the California

Supreme Court distinguished Treo and upheldan arbitration clause governed by the FederalArbitration Act (FAA) ("whether or not a refer-

ence agreement must be evaluated differently

from other types of agreements, state laws that

discriminate against arbitration are preempted

where, as here, the FAA applies"). However, in

the context of a commercial real property pur-

chase agreement between two sophisticated

parties, it seems unlikely that there will be

enforceability issues with either an arbitration or

judicial reference provision.

In the author's experience, some parties favor arbi-

tration simply because they desire more privacy,

whereas a number of litigators prefer judicial refer-

encebecause it may make the outcome more predict-

able. As observed by the California Supreme Court,

"'[p]rivate arbitration is a process in which parties vol-

untarilytrade the safeguards and formalities of court

litigation for an expeditious, sometimes roughshod

means of resolving their dispute'...The parties accept

the bad with the good:' Brennan v. Tremco (Cal. 2001)

25 Cal.4th 310, 315-17 [citation omitted].

5.5.4. Attorneys' Fees Clause

California generally makes unilateral attorneys' fees

clauses reciprocal in favor of the prevailing party. Cal.

Civ. Code § 1717; Hoffman, Attorney Fee Clauses in

California Contracts, 21 Cal. Bus. L. Prac. 82 at 84-85

(Summer 2006). See also Bright, Unilateral Attorney's

Fees Clauses: A Proposal to Shift to the Golden Rule,61 Drake L. Rev. 85 (2012), for a discussion of the var-

yingapproaches taken by different states.

6. SPECIAL QUALIFIERS (GOOD FAITH,BEST EFFORTS, AND KNOWLEDGE)

6.1. Good Faith

The meaning of the term "good faith" is not alwaysclear in California. It may vary depending on the con-text and the court interpreting its usage (and couldinvolve, for example, a subjective test, an objectivetest, or both). See Carey, Cauble & MacCracken, supra,at 99. If a California purchase agreement uses theterm "good faith," the buyer may want to define it.

6.2. Best Efforts

Many practitioners prefer not to use the term "bestefforts" because of the varying interpretations in dif-ferent states over the years ranging from an illusoryobligation to an extremely onerous one. See, e.g.,Fisher, The Dangers of a "Best Efforts" Clause in aReal Estate Agreement, 1 Prac. Real Est. Law. 43 (Mar.1985); Adams, Understanding "Best Efforts" and ItsVariants (Including Drafting Recommendations),50 Prac. Law. 11, 15 (Aug. 2004) ("Best Efforts andits variants are vague."). An intermediate Califor-nia court has stated that "California courts have...not defined the term 'best efforts"' and held that,when a contract does not define the term, a "bestefforts" obligation "is different than a promise to actin 'good faith'...but the obligation is framed withinthe bounds of reasonableness:' California PinesProperty Owners Association v. Pedotti (Cal. App. 3dDist. 2012) 206 Cal.App.4th 384, 392 and 395 [cita-tion omitted]. Many buyers avoid using the term"best efforts" in a California purchase agreement.

6.3. Knowledge

Some of the seller's representations and warrantiesmay be subject to knowledge qualifiers, the mostcommon of which refer to "knowledge;' "actualknowledge" or "best knowledge:' The author is notaware of any California law that establishes the mean-ing of these terms in a real property purchase agree-ment when they are not defined. Indeed, there is notan immense amount of law (in California or elsewherein the country) interpreting these quoted terms, and

what there is may be irrelevant (because the context

CALIFORNIA PURCHASE AND SALE ISSUES FOR BUYERS — UPDATED 147

is, more often than not, so different) and sometimes

may be surprising. See, e.g., Levin, "Best" Is Not Always

Best When It Comes to Knowledge?, 30 Prob. &Prop.

44 at 45, 47 (Jan./Feb. 2016) ("Many commercial law-

yers believe that...'best knowledge'...impliesthat the

knowledge...is based on...investigation....But most

reported cases...have reached the opposite conclu-

sion...:' And quoting from the Maryland Revised Uni-

form PartnershipAct,"Aperson hasnoticeofafactifthe

person...(2) Has received a notification of it; or (3) Has

reason to know it exists from all of the facts known to

the person at the time in question:' Md. Corp. & Ass'ns

§ 9A-102(b)); Hexter v. Pratt (Tex. Comm'n App. 1928)

10 S.W.2d 692, 693 (which stated, in a different con-

text,that "actual knowledge embraces those things of

which the one sought to be charged has express infor-

mation and likewise those things which a reasonably

diligent inquiry and exercise of the means of informa-

tion at hand would have disclosed"); Peterson, The

Effective Use of Representations and Warranties and

Selected Provisions Relating to Income Properties in

Commercial Real Estate Contracts, ACREL Papers, Fall

1999, at 103; ABA Model Rules of Professional Respon-

sibility, Comment on Rule 4.211 [8], available at https://

www.americanbar.org/groups/professional_respon-

sibility/publications/model_rules_of_professional_

conduct/rule_4_2_communication_with_person_

represented_by_counsel/comment_on_rule_4_2.

html ("[A]ctual knowledge may be inferred from the

circumstances. See Rule 1.0(f). Thus, the lawyer can-

not evade the requirement...by closing eyes to the

obvious"); Notaro, Sales Contract Tug of War—Rep-

resentations and Warranties, Notaro Law, available at

http://tinyurl.com/jdybzn8 (stating, without citation,

that "[s]ome courts will construe actual knowledge

to include a duty to inquire where '..with no duty of

inquiry' is missing:'); see also Kuney, To the Best of

Whose Knowledge, 22 Cal. Bus. L. Prac. 58 (Spring

2007); Adams, To the Best of Its Knowledge, Adams

on Contract Drafting (posted Apr. 22, 2007), available

at http://tinyurl.com/zcw7wdb. A buyer should not

assume that a knowledge qualifier imposes any duty

upon the seller to investigate unless the duty to inves-

tigate is expressly set forth. To avoid misunderstand-

ings and defeated expectations, it is generally good

practice for both buyers and sellers to include a defi-

nition of knowledge that specifies the agreed-upon

level of diligence required (e.g., by adding, if and to

the extent it reflects the understanding of the parties,

"after reasonable inquiry" or "without any obligation

to investigate").

7. SUPPLEMENTING AND MODIFYINGTHE WRITTEN AGREEMENT

7.1. Integration Clause

California takes a liberal approach under its parol

evidence rule: it may be easier in California (than in

some other states) to allow evidence that is extrinsic

to the purchase agreement to be admitted even if

the contract contains an integration clause (stating

that the entire agreement of the parties is set forth in

the purchase agreement). See Riverisland Cold Stor-

age,Inc. v. Fresno-Madera Production Credit Associa-

tion (Cal. 2013) 55 Cal.4th 1169, 1174 (which held that

extrinsic evidence could be admitted under certain

circumstances even though there was "no dispute

in this case that the parties' agreement was inte-

grated"); see also Carey, Cauble & MacCracken, supra,

at 91. Some commentators have suggested that inte-

gration clauses in California should be made more

conspicuous (e.g., "in all caps, bolded, and/or sepa-

rately initialed"). See, e.g., Di Geronimo, Not Worth

the Paper It's Printed On?, 25 Miller 8i Starr Real Est.

NewsAlert 193, 197 (Jan. 2015); but see Hot Rods, LLC

v. Northrop Grumman Sys. Corp. (Cal. App. 4th Dist.

2015) 242 Cal.App.4th 1166 (upholding integration

clause with express prohibition of extrinsic evidence

in a judicial reference). However, the ineffectiveness

of an integration clause could be a benefit to a buyer

who feels it has been misled in a purchase transaction.

7.2. Implied Covenant of GoodFaith and Fair Dealing

A California court may imply provisions under the

implied covenant of good faith and fair dealing to

effectuate the presumed intent of the parties as to

matters that are not expressly addressed. For example:

• Consents and Approvals. Absent an express

standard for granting or withholding a required

approval, a California court might impose

a standard requiring subjective good faith,


objective reasonableness or otherwise. See dis-cussion of approvals in Carey, Cauble & Mac-Cracken, supra, at 97-99.

Closing Conditions. A closing condition may

be subject to a good faith obligation to takesteps to allow the condition to be satisfied. See,e.g., Jacobs v. Tenneco West, Inc. (Cal. App. 5thDist. 1986) 186 Cal.App.3d 1413 (agreement sub-ject to board of director's approval is subject toa good faith obligation to have the board con-siderthe agreement).

Consequently, many California buyers try to beexplicit about any rights or obligations which areimportant (especially when the implied covenant ofgood faith and fair dealing might otherwise lead toan undesirable result).

7.3. Oral Modifications

An oral modification of a California purchase agree-mentmay beenforceable absent a provision prohib-iting oral modifications. See Cal. Civ. Code § 1698.However, it would be unusual if such a provision didnot appear in a California purchase agreement.

8. TIMING

8.1. Time of the Essence

California courts "may...decide not to strictly enforcea'time is of the essence' clause because money dam-ages usually compensate the parties for any harmresulting from delayed performance. However, a'time is of the essence' provision is sometimes giveneffect:' CEB, California Real Property Sales Transac-tions, supra, § 4.152 at 4-141. See also Cal. Civ. Code§ 3275 ("Whenever, by the terms of an obligation, aparty thereto incurs a forfeiture...by reason of hisfailure to comply..., he may be relieved therefrom,upon making full compensation to the other party,except in case of a grossly negligent, willful, or fraud-ulent breach of duty."). It may be difficult to predictwhether a California court would strictly enforce atime is of the essence clause or grant relief (underthis statute or otherwise). The California case lawis not clear. See, e.g., Miller &Starr, California RealEstate, supra, § 1:108 at 1-441-1-450.

8.2. Business Days

Purchase agreements often include a provisionto address the possibility that a deadline lands ona nonbusiness day. In California, failure to includesuch a provision (and define "business day") can beparticularly treacherous. California does have a stat-ute to address deadlines that occur on nonbusinessdays. In fact, it has two.

• One is in the California Civil Code (the "Civil CodeStatute"): Cal. Civ. Code § 11 ("Whenever any act[with some exceptions] is appointed by law orcontract to be performed on a...holiday, it maybe performed upon the next business day....").

• The other is in the California Code of Civil Pro-cedure (the "CCP Statute"): Cal. Code Civ. Proc.§ 12a(a) ("If the last day for the performance ofany act provided or required by law to be per-formed...is aholiday, then that period is herebyextended to...the next day that is not a holiday.").

But somewhat surprisingly, holidays do not includeSaturdays in the Civil Code Statute, as they do in theCCP Statute.

• Cal. Civ. Code § 7 ("Holidays within the meaningof this code are every Sunday and such otherdays as are specified or provided for as holidaysin the Government Code of the State of Cali-fornia"); Cal. Civ. Code § 9 ("All other days thanthose mentioned in Section 7 are business daysfor all purposes...:').

Cal. Code Civ. Proc. § 12a(a) ("For purposes ofthis section, 'holiday' means all day on Satur-days, all holidays specified in Section 135 [whichincorporates Cal. Gov. Code § 6700, which, inturn includes'(a)(1) Every Sunday']...:').

In other words, contrary to common usage, Satur-day is not a holiday and is therefore a business dayin California under the Civil Code Statute. Gans v.Smull (Cal. App. 2d Dist. 2003) 111 Cal.App.4th 985,989-90 indicates that the Civil Code Statute is therelevant statute for (and the CCP Statute does notapply to) acts governed solely by contractual pro-visions. Consequently, many buyers in Californiadefine "business day" to exclude Saturdays.


8.3. Time Zones

8.3.1. Standard Time

In a California purchase agreement, the words

"standard time" (lower case) mean the time then

in effect, whether "Standard Pacific Time" or "Day-

light Saving Time:' Miracle Auto Ctr. v. Superior

Court (Cal. App. 1st Dist. 1998) 68 Cal.App.4th 818,

822 (case involving a general commercial liability

insurance policy but noting the more general rule

provided for under the Government Code); Cal. Gov.

Code §§ 6807-2-6807-4.

8.3.2. Notices

If one of the parties is east of the Pacific time zone, it

may want to provide that notices must be received

before 5:00 p.m. "local time where received:' How-

ever, the buyer usually has local people involved

in the purchase and may want to be able to utilize

the full local business day (i.e., until 5:00 p.m. Pacific

Time) to meet certain deadlines (e.g., a deadline for

delivering a termination notice).

9. ENTITY, PROPERTY, TRANSFER,AND SALES TAXES

A buyer may want to consider how local taxes in

California will add to the costs of the transaction

and the buyer's future operations and whether the

structure of the transaction and the form of the

buyer entity (or the entity that will take title to the

property) can be tailored to reduce these costs.

Three key taxes typically worth checking are entity,

property and transfer taxes. Sales taxes may also be

relevant depending on the facts.

9.1. Entity Taxes

In most purchases of California real estate in which

the author is involved, a special purpose entity (SPE)

buyer is formed as a limited liability company or a

limited partnership. In the author's experience, the

buyer entity is formed in Delaware rather than Cal-

ifornia, despite the additional Delaware costs, due

to uniformity, predictability and flexibility concerns,

and to facilitate any anticipated institutional financ-

ing. See, e.g., CEB, Forming and Operating California

Limited Liability Companies § 14.3 at 14-3-14-4 (3d

ed. 2018). The buyer entity is then qualified to do

business in California. The buyer should be informed

about California entity taxes that may apply to this

form of ownership:

9.1.1. Minimum Franchise Tax

The California corporate annual minimum franchise

tax of $800 is imposed on limited partnerships and

limited liability companies. Cal. Rev. & Tax. Code

§§ 23153 (corporations), 17935 (limited partner-

ships),and 17941 (limited liability companies).

9.1.2. LLC Gross Receipts Tax

There is also a California annual gross receipts tax

imposed on limited liability companies (ranging

from $0 to approximately $12K per annum depend-

ing on the amount of annual gross revenues).

Cal. Rev. &Tax. Code § 17942(a). If annual income is

expected to be sufficiently high (and the asset will

be owned for a significant time), some buyers may

want to own the property through a limited partner-

ship (which may be structured to be a disregarded

entity for federal income tax purposes) to avoid or

minimize the gross receipts tax.

9.2. Property Taxes

In 1978, Proposition 13 changed California's prop-

erty tax regime so that generally property taxes in

California do not exceed one percent of acquisition

value, with annual increases capped at two percent

per year. Among other exceptions to the general rule,

there may be additional tax rates to pay for voter-

approved indebtedness (including "bonded indebt-

edness for the acquisition or improvement of real

property approved...by two-thirds (55%, if related

to school bonds) of those voting in a local election")

and direct and special assessments (including fees

for sewer, water and refuse collection services). Whit-

ney, Ed., 2019 Guidebook to California Taxes, supra,

111706 at 816. See also id. 11 1702 at 808; https://

www.californiataxdata.com/A_Free_Resources/

faq.asp; and https://lao.ca.gov/reports/2012/tax/

property-tax-primer-112912.aspx. Moreover, reassess-

ment is generally required as of the first day of the


month following the "completion of new construc-tion" (for the new construction) or a "change in own-ership" (for the property as to which ownership haschanged). See Cal. Rev. &Tax. Code §§ 75, 75.41(b).

9.2.1. Reassessments—Changes in Ownership

The buyer should understand that a purchase willgenerally constitute a "change in ownership" of theproperty, and cause the property to be reassessedat its full fair market value. However, there may beexceptions to this general rule depending on thenature of the property and the structure of thetransaction. For example:

• The transfer of property subject to a groundleasehold estate with a remaining term (includ-ing renewal options) of 35 years or more is not achange in ownership. Cal. Rev. &Tax. Code § 62(g).

• Similarly, the transfer of a leasehold estate witha remaining term (including renewal options)of less than 35 years may not be a change inownership. See Pacific Southwest Realty Co. v.County of Los Angeles (Cal. 1991) 1 Cal.4th 155.

A direct or indirect transfer of ownership inter-ests (in an entity that owns real estate) does notresult in a change in ownership, subject to threeexceptions. Cal. Rev. &Tax. Code § 64; Cal. CodeRegs. (C.C.R.), tit. 18, § 462.180(c)—(d). First, thereis a change in ownership of the real propertyowned by an entity when a change in control ofthat entity occurs (e.g., in the case of a partner-ship or limited liability company, when a personor entity acquires a majority interest, which mayoccur through a transfer of less than a majorityinterest to a preexisting owner). Cal. Rev. &Tax.Code § 64(c)(1). Second, if there is an exempttransfer after March 1, 1975 under Cal. Rev. &Tax. Code § 62(a)(2) (the mere change in formexemption), then an additional exceptionsprings into effect with respect to subsequenttransfers of interests in the title-holding entity.When this exception applies, the owners (of thetitle-holding entity) immediately after the trans-ferare called the "original co-owners," and thereis a change in ownership if and when more than

50 percent of the ownership interests are trans-ferred by the original co-owners in one or moretransactions. Cal. Rev. &Tax. Code § 64(d). Third,there is an exception involving certain transfersof stock in a cooperative housing corporation.Cal. Rev. &Tax. Code § 61(i). The rules for entityownership interest transfers become more com-plex in multitiered ownership structures.

9.2.2. Structure—Changes in Ownership

Although most purchases of California real estateresult in a full reassessment, it is possible on occa-sion to take steps to avoid or reduce the reassess-ment. Some illustrations follow.

If one is buying land subject to a ground lease,and the closing is scheduled for the first day thatthe remaining term (including renewal options)is less than 35 years, then by accelerating theclosing date of such land purchase by only oneday, a reassessment may be avoided.

However, conditioning the closing of the pur-chase of a ground lessor's interest on an exten-sion of the ground lease so that the remainingterm is then 35 years or more would be danger-ous. More generally, a series of steps, none ofwhich alone may trigger a reassessment, may becollapsed under the so-called step transactiondoctrine, and result in a taxable event (if therewould have been a taxable event had the endresult been reached directly from the begin-ning). Compare, e.g., Shuwa Investment Corp. v.County of Los Angeles (Cal. App. 2d Dist. 1991)1 Cal.App.4th 1635 (the parties unsuccessfullyattempted to have only half the Arco Plaza indowntown Los Angeles reassessed when theentire property was sold using the followingthree steps: (i) a 50 percent interest in the ownerwas sold to the purchaser; (ii) the owner wasthen liquidated so that the purchaser acquireda 50 percent undivided interest in the property;and (iii) the remaining 50 percent undividedinterest in the property was then sold, so thatonly the 50 percent of the property sold underthe final step would be reassessed), with Dyan-lyn Two v. County of Orange (Cal. App. 4th Dist.


2015) 234 Cal.App.4th 800 (the step transaction

was held inapplicable to a sale by the ground

lessor of property improved with a shopping

center when, less than a month before the sale,

the remaining ground lease term was extended

from less than 35 years to more than 35 years,

because there was no evidence that all the par-

ties knew the sale would take place when the

ground lease was extended).

Perhaps the most talked about structuring tech-

nique to avoid a change in ownership involves

the purchase of ownership interests in an

entity rather than real estate when the original

co-owner rules do not apply, by making sure

that no one acquires more than 50 percent. This

structure might be utilized, for example, by a

JV buyer that has no owners with more than 50

percent by having each owner buy an equal per-

centage of the ownership interests in the seller

(assuming the seller is not subject to the original

co-owner rules). "In 2002, for example, wine bar-

ons E&J Gallo purchased 1,765 acres of vineyards

in Napa and Sonoma from Louis M. Martini.

But the deal avoided a reassessment, because

12 Gallo family members individually obtained

minority interests:' Eskenazi, Prop 13: The Build-

ing-Sized Loopholes Corporations Exploit, SF

Weekly (Jan. 4, 2012), available at http://tinyurl.

com/zedvk9k.

The most publicized example of this technique

was the purchase by Michael Dell, the founder

of the Dell computer company, of the Fairmont

Hotel in Santa Monica in 2006. According to the

Los Angeles Daily News, Dell used this technique

by splitting ownership among his wife and

investment advisers, and paid $200 million for

the property, but the property taxes continued

to be based on the old valuation of $86 million,

saving Dell and his co-owners more than $1 mil-

lion of property taxes per year. Editorial, Anti-

Prop. 13 Resolution Must Be Rejected by L.A.

City Council, Los Angeles Daily News (Aug. 25,

2014), available at http://tinyurl.com/j7gnesz.

• The Dell transaction led to a public outcry that

homeowners were bearing a disproportionate

share of California property taxes. Legislation

has been introduced from time to time to close

this perceived tax loophole. For example, a bill

(A.B. 2372) was introduced in the California leg-

islature in 2014 that would have required reas-

sessment any time 90 percent or more of the

ownership was sold, but it failed to pass. See

California Legislative Information, AB-2372 Prop-

erty Taxation: Change in Ownership, available

at http://tinyurl.com/ggzswlg. S.B. 259 fared no

better in 2016.

9.3. Transfer Taxes

The buyer may want to know whether the purchase

will trigger transfer taxes and what they will be,

especially if (as discussed in part 4.2 above) it will be

expected to pay any of them.

9.3.1. Amount

Transfer taxes in California vary depending on the

location of the property and, unless an exemption

applies, may range from 0.11 percent in a county

where there is no additional local tax to (up to) three

percent in the City and County of San Francisco.

Transfer taxes in California are often expressed as an

amount per $500 or $1,000 of the value of the land

(e.g., $0.55/$500 or $1.10/$1,000). See Cal. Rev. &Tax.

Code § 11911. The relevant amount may be found

on the same websites mentioned in part 4.2 above

for closing cost allocations and on city and county

websites. Additionally, most local jurisdictions (but

not Oakland, San Francisco, San Jose and San Rafael)

subtract any mortgage debt assumed by the buyer

from the value of the property when determining

the applicable transfer taxes. See, e.g., Cal. Rev. &

Tax. Code § 11911; S.F. Bus. &Tax Regs. Code, art.

12-C, § 1102; Cruz, 2015 Update: Transfer Taxes in

California, 33 Cal. Real Prop. J. 5, 7 (2015).

9.3.2. Application to Real Estate Sales

The sale of California real estate generally results in

a transfer tax imposed by the applicable county and

city. See Cal. Rev. &Tax. Code § 11911. But there are

exceptions to the general rule. For example:


Although local ordinances might differ, for pur-poses of the state statute, the transfer of prop-erty subject to a ground leasehold estate witha remaining term (including renewal options) of35 years or more may not trigger a transfer tax.Cruz, supra, at 17 & n.127.

• Similarly, although local ordinances might dif-fer, for purposes of the state statute, case lawhas established that the "transfer of a leaseholdinterest in real property for a period of less thanthirty-five years is not subject to transfer tax.The thirty-five year period is determined at anypoint in time by including the remaining pri-mary term of the lease and all renewal options:'Cruz, supra, at 16 [citation omitted].

9.3.3. Application to Ownership Interest Sales

Transfers of direct or indirect interests in the ownerof California real estate may also be subject to trans-fer tax if the transfer results in (1) a "termination" ofan owner (that is taxed as a partnership) "within themeaning of Section 708 of the Internal Revenue Codeof 1986;' Cal. Rev. &Tax. Code § 11925 (a "tax termina-tion"), or (2) a change in ownership under the prop-erty tax rules (as discussed in 9.2 above), 926 NorthArdmore Avenue, LLC v. County of Los Angeles (2017)3 Cal.Sth 319. However, often, if not usually, the saleof a minority interest in the owner of real estate (to aparty who does not acquire control of the owner) willnot trigger a transfer tax in California.

Prior to Ardmore, except in some Californiacounties and cities (as described below), mostreal estate practitioners were focused only ontax terminations as a trigger for transfer taxes: atransfer of direct or indirect ownership interestsin a partnership (or other entity treated as a part-nershipfor federal income tax purposes) will betreated as a sale of all realty held by the partner-ship (or such other entity) if the transfer resultsin a "termination" of the partnership "within themeaning of Section 708 of the Internal RevenueCode of 1986...:' Cal. Rev. &Tax. Code § 11925(b).

• Prior to the Tax Cut and Jobs Act of 2017, a ter-mination under Section 708 would occur under

I.R.C. § 708(b)(1) when either: "(A) no part of anybusiness, financial operation, or venture of thepartnership continues to be carried on by anyof its partners in a partnership, or (B) within a12-month period, there is a sale or exchange of50 percent or more of the total interest in thepartnership capital and profits:' Effective for taxyears beginning with 2019, the "technical termi-nation rules" of clause (B) were eliminated.

Query whether the amended test is incorpo-rated into Cal. Rev. &Tax. Code Section 11925or whether the former termination test con-tinues to apply? Compare Palermo v. StocktonTheatres, Inc. (1948) 32 Cal.2d 53, 58-59 ("It is awell established principle of statutory law that,where a statute adopts by specific referencethe provisions of another statute, regulation, orordinance, such provisions are incorporated inthe form in which they exist at the time of thereference and not as subsequently modified,...in the absence of a clearly expressed intentionto the contrary.") and Cruz, Feds To The Rescue:2019 California Transfer Tax Update, Cal. RealProp. J. &Cal. Tax Law. (Joint Issue) (2019), whichassumes (without discussion of Palermo) thatthe amended test applies.

Under the former test, the sale of a majorityinterest (or even a 50 percent interest) in a part-nership (or other entity treated as a partner-ship for federal income tax purposes) during a12-month period would result in a terminationof the partnership under I.R.C. § 708(b)(1)(B) andtherefore a transfer tax as though there were asale of the real estate owned by the partnership(or such other entity).

Under both the former and amended tests, thesale of a member's interest (whether a minor-ity or majority interest) could result in a termi-nation under I.R.C. § 708(b)(1)(A), and thereforea transfer tax, if purchased directly by the othermember in atwo-member limited liability com-pany that is treated as a partnership for federalincome tax purposes (because, absent an elec-tion to be taxed as a corporation, a single-mem-ber limited liability company is a disregarded


entity and, in particular, not a partnership,

for federal income tax purposes; Treas. Regs.

§ 301.7701-3(a), (b)(ii)). The termination/deemed

transfer rules of Rev. &Tax Code Section 11925

may not apply if the terminating partnership

does not directly own any real estate because

the statute contemplates a deemed transfer of

"all realty held by the partnership or other entity

at the time of the termination."

Prior to Ardmore, many local jurisdictions (e.g.,

Los Angeles, San Francisco and Oakland) also

imposed a transfer tax whenever there was a

"change in ownership" (as discussed in part 9.2.1

above) as a result of ownership interest trans-

fers within the entity that owned the property.

While some local jurisdictions (e.g., San Francisco)

imposed the tax pursuant to their local ordi-

nances, Los Angeles and some other local juris-

dictions simply asserted an interpretation that a

transfer tax was due in connection with a change

in ownership. This approach was upheld by the

California Supreme Court in Ardmore. In light of

the Ardmore decision, more cities and counties

are likely to take a similar approach. However,

there is a statutory (transfer tax) exemption for

the transfer of an interest in a partnership (or

other entity treated as a partnership for tax pur-

poses) holding realty if (1) the entity is treated as

a continuing partnership under I.R.C. Section 708

and (2) the entity continues to hold the realty

concerned. Cal. Rev. &Tax. Code § 11925(a). If an

entity interest transfer constitutes a change in

ownership but this exemption applies, then pre-

sumably there will be no transfer tax. But if the

realty is not owned directly by the entity, under

the literal language of the statute, the exemption

appears to be unavailable.

9.3.4. Structure

It may be possible on occasion to reduce or elimi-

nate the transfer tax. For example:

The acceleration of the closing date in the first

example under part 9.2.2 above, to avoid a reas-

sessment, may also avoid a transfer tax.

• If a buyer is acquiring a 50 interest in a partner-

ship or a limited liability company (taxed as a

partnership) and the 2017 amendment to I.R.C.

§ 708 does not apply to Section 11925 of the

California Revenue &Taxation Code, then the

same structuring commonly used (prior to such

amendment) to avoid an I.R.C. § 708 termination

may avoid a transfer tax (e.g., buying only 49.9

percent and not buying the other 0.1 percent or

waiting more than 12 months to do so). Cal. Rev.

& Tax. Code § 11925(a).

If a majority member in atwo-member limited

liability company that is treated as a partner-

ship for federal income tax purposes is acquir-

ing the minority member's interest, then it may

be possible to avoid a transfer tax (that might

otherwise result from a termination under I.R.C.

§ 708(b)(1)(A)) by using a separate taxpayer

affiliate of the majority member to acquire the

minority member's interest to prevent the lim-

ited liability company from "terminating:' Cal.

Rev. &Tax. Code § 11925(a).

• If the property is subject to debt and (unlike

San Francisco) the local jurisdiction subtracts the

debt to determine the net value to which the

transfer tax applies, then buying the property

subject to the debt may reduce the transfer tax.

9.3.5. Private Transfer Fees

The transfer taxes discussed above are imposed by

local governments and are to be distinguished from

private transfer fees, which are now severely restricted

by statute in California. Cal. Civ. Code § 1098.6.

All available exemptions should be considered.

However, in light of Ardmore, a buyer in California

will likely face a claim for a transfer tax unless it also

avoids a reassessment, as discussed at the end of

part 9.3.2 above.

9.4. Sales Taxes

The sales tax in California applies to "retail sales" by

a "retailer" of tangible personal property. Cal. Rev. &

Tax. Code § 6051.


9.4.1. Generally

A common misconception is that sales taxes do notapply in real property sale transactions in California.One might reach this conclusion by assuming thatthe seller is not a "retailer" or the sale is not a "retailsale:' But the statutory definitions of these quotedterms may not be what one would expect.

A "retail sale" is defined as "a sale for any pur-pose other than resale in the regular course ofbusiness in the form of tangible personal prop-erty." Cal. Rev. &Tax. Code § 6007. As might beexpected, a sale by a manufacturer to a whole-saler (who intends to resell to retailers) and asale by a wholesaler to a retailer (who intendsto resell to customers) may be exempt. But whatabout real estate sales involving incidental tan-gible personal property? Indeed, the breadthof this definition makes it extremely likely thatthe tangible personal property sale that ispart of many, if not most, real estate purchases(between real estate investment entities) is a"retail sale"

• A "retailer" is defined to include "[e]very sellerwho makes any retail sale:' Cal. Rev. &Tax. Code§ 6015(a)(1). On its face, the requirement thatthe seller be a retailer appears superfluous: ifthe sale is a retail sale, isn't the seller automat-ically a "retailer" under this definition? Fortu-nately, the answer is no because there is a sep-arate statute that defines "seller." Cal. Rev. &Tax. Code § 6014, identifying what are normallyconsidered wholesalers and retailers ("'Seller'includes every person engaged in the businessof selling tangible personal property of a kindthe gross receipts from the retail sale of whichare required to be included in the measure ofthe sales tax...whether or not tangible personalproperty is ever sold at retail...."). As explainedby the California Supreme Court:

[The requirement that the seller be a"retailer" is note...superfluous....Although...every seller who makes a retail sale is aretailer,...certain non-"sellers" who makeretail sales are not retailers. A vendor who

is not "engaged in the business" of sellingtaxable property is not a seller. (§ 6014.) Ifsuch a vendor makes a single sale of non-exempt property at retail, it is not a retailersince section 6015, subdivision (a) embracesonly sellers who make a retail sale. Thus, sec-tion 6051's requirement that the vendor be a"retailer" is significant; it exempts from taxa-tionthe person not engaged in the businessof selling taxable goods - at wholesale orretail -who makes an isolated retail sale oftaxable property.

Davis Wire Corp. v. State Board of Equalization(Cal. 1976) 17 Cal.3d 761, 766-67. Consequently,in Davis Wire Corp., a seller of an industrialbuilding who used the building to manufactureequipment was found to be a "retailer" and thesale of its machinery and other tangible per-sonal property used to manufacture was subjectto sales tax. And then, of course, there are cer-tain real estate projects where one would expectthe owner to be treated as a "retailer," such as ahotel, resort or other real estate project involy-ing some retail sale activity (e.g., operation of abar, restaurant or gift shop) by the owner.

Unfortunately, the definitions of "retailer" and "seller"are worded as illustrations rather than limiting defi-nitions (using "includes" instead of "means"). Moreo-ver, under certain circumstances, any owner of a realestate project—even an owner who is not a retaileror a wholesaler, as commonly understood—may bea "retailer" under the express terms of the relevantstatutes. Cal. Rev. &Tax. Code §§ 6019 (anyone "mak-ing more than two retail sales of tangible personalproperty during any 12-month period...shall beconsidered a retailer") and 6275 (e.g., anyone mak-ing aretail sale of a mobile home or vehicle that issubject to certain registration requirements). In sum,the potential application of a sales tax in connectionwith the purchase of a California real estate projectwill depend on the facts and an interpretation of thetortuous statutory framework. But, in the author'sexperience, California sales tax issues typically arise(in a sale between real estate investment entities)only when the buyer is acquiring a hotel, resort or


other project that includes some incidental retail

sale activity (e.g., a bar, a restaurant or a gift shop).

(For other transactions, a seller would presumably

argue that the sale tax statutes were not intended to

include the seller as a retailer or that the occasional

sale exemption discussed below should apply.)

9.4.2. Retail Sale Inventory

There are two sales tax issues to consider regarding

retail sale inventory: (1) whether the seller has paid all

required sales taxes on prior sales of retail sale inven-

tory; and (2) whether sales tax is payable in connec-

tionwith the buyer's purchase of retail sale inventory.

The buyer must withhold a portion ofthe purchase

price to cover unpaid sales taxes on prior sales

by the seller unless and until the buyer receives

a tax clearance certificate. dal. Rev. &Tax. Code

§ 6811. In practice, this issue may be addressed (at

least until tax clearance certificate is obtained) by

indemnification because the seller does not want

any withholding but is not likely to have time to

get a tax clearance certificate before closing.

Even though the seller may be a retailer, the pur-

chase of retail sale inventory is not a "retail sale"

if, as discussed in part 9.4.1 above, the purpose

of the sale is "resale in the regular course of busi-

ness:'The seller has the burden of proving that the

sale is not a "retail sale" unless it receives a resale

certificate from the buyer. Cal. Rev. &Tax. Code

§ 6091. Consequently, sellers will usually require

the buyer to provide a resale certificate. Note that

the buyer may not issue a resale certificate until it

has a seller's permit. Cal. Rev. &Tax. Code § 6092.

A resale certificate may be in any form, such as a

note, letter or memorandum, but must contain

certain specified information (e.g., the number of

the buyer's seller's permit). Cal. Rev. &Tax. Code

§ 6093; 16 C.C.R. § 1668; California State Board

of Equalization, Using a Resale Certificate (2016),

available at http://tinyurl.com/zgeg55j.

9.4.3. Related Tangible Personal Property

There will also be a sales tax on the capital assets

(e.g., refrigerators used as minibars) used in

connection with the retail sale business. See Davis

Wire Corp., supra. According to the California State

Board of Equalization, Sales and Use Tax Annotation

11 395.0071 (Aug. 30, 1991), available at http://tinyurl.

com/j2svud2:

395.0071. Sale of Hotel Assets. In addition to

thefixturesand equipmentofthe restaurantand

cocktail lounge, in-room refrigerators stocked

with bottled water, individual size liquors, and

soft drinks are subject to sales tax when a hotel

is sold. The sale of the other in-room furnishings

is not made taxable because of the presence

of the refrigerator in the room. The sale of the

other assets of the hotel may be taxable if they

are one sale of a series of sales sufficient in num-

ber, scope, and character to require the holding

of a permit. 8/30/91.

9.4.4. Other Tangible Personal Property

For other tangible personal property (e.g., beds,

furniture and other FF&E that is not used in connec-

tionwith an incidental hotel retail sale business), the

parties typically attempt to take advantage of the

"occasional sale" exemption. Cal. Rev. &Tax. Code

§§ 6006.5, 6367, which is discussed further below.

The State Board of Equalization has tried (unsuccess-

fully) to argue that retail sale activity taints all tan-

gible personal property that is not held for resale.

Ontario Community Foundation Inc. v. California

State Board of Equalization (Cal. 1984) 35 Cal.3d 811.

In the Ontario case, the Board attempted to impose

sales tax on all tangible personal property (includ-

ingall hospital equipment and furniture) included in

the sale of a hospital because it was also involved in

incidental retail sales (cafeteria, hospital supply and

pharmacy sales) for which it had a seller's permit.

The California Supreme Court stated that the Board's

position could not be reconciled with the occasional

sale exemption, which "was designed expressly to

exempt from the sales tax aone-time sale of tan-

gible personal property which is not held or used

by a seller in the course of activities for which it is

required to hold a seller's permit:' Ontario Commu-

nity Foundation, supra, at 822-23.


9.4.5. Occasional Sale

There are actually two different occasional sale

exemptions worth noting. One, which does not

apply to the typical real property sale (to an unre-

lated third party), applies to a transfer when the

ultimate ownership after the transfer is substantially

similar to what it was before the transfer. Cal. Rev. &

Tax. Code § 6006.5(b). The availability of the other

occasional sale exemption depends on how the tan-

gible personal property involved is used. It applies

only to "property held or used in the course of an

activity not requiring the holding of a seller's per-

mit." 18 C.C.R. § 1595(a)(1). See also Cal. Rev. &Tax.

Code § 6006.5(a). Thus, if a hotel, theater, hospital

or similar service enterprise has incidental retail sale

activities (such as a restaurant and bar in a hotel),

the sales tax may apply only to the tangible per-

sonalproperty held or used in that retail sale activity

(that are not acquired for resale). 18 C.C.R. § 1595(a)

(5)(A)1; see Ontario Community Foundation, supra;

California State Board of Equalization, Sales and

Use Tax Memorandum Opinion 11 395.0071 (Aug. 20,

1991), available at http://tinyurl.com/z61ngt2 (which

is the memorandum opinion upon which the anno-

tation quoted in part 9.4.3 is based). However, the

exemption may not apply if the seller has engaged

in more than two retail sales of the relevant prop-

erty within 12 months. Cal. Rev. &Tax. Code § 6019;

18 C.C.R. § 1595(a)(1); see also Hotel Del Coronado

Corporation v. State Board of Equalization (Cal. App.

2d Dist. 1971) 15 Cal.App.3d 612 (finding that the

occasional sale exemption was not available for the

FF&E in connection with a hotel resort sale because

of a series of salvage sales of FF&E within 12 months

prior to the sale of the hotel); California State Board

of Equalization, Sales and Use Tax Memorandum

Opinion Pratt North Plaza Associates (Oct. 28, 1993),

available at http://tinyurl.com/h8zls5s, and the asso-

ciated California State Board of Equalization, Sales

and Use Tax Annotation 21,260.10 (Oct. 28, 1993),

available to RIA subscribers at http://tinyurl.com/

jp69yfz (occasional sales exemption was not avail-

able for the FF&E in connection with a hotel resort

sale because of a series of sales of furniture andequipment to hotel employees and others). Also,

note that the occasional sale exemption (other than

the substantially similar ultimate ownership exemp-

tion) does not apply to vehicles that are required to

be registered with the Department of Motor Vehi-

cles. Cal. Rev. &Tax. Code § 6367; 18 C.C.R. § 1595(c).

See Nielsen, California Sales and Use Tax AnswerBook Q 8:19—Q 8:32 at 8010-16 (2011).

A buyer should consult with a California tax expertwith respect to sales tax issues (including the impactof any purchase price allocation to different types ofpersonal property), as well as other local tax issues(e.g., transient occupancy taxes imposed at the

municipal level).

10. PROPERTY AND TRANSACTIONSPECIFIC MATTERS

Other California laws and customs may apply

depending on the nature of the property and the

structure of the transaction. For example:

10.1. Bulk Sale Requirements

Article 6 of the Uniform Commercial Code (Bulk

Sales) was designed to protect against the seller

defrauding its creditors (by disposing of all its

inventory and then running off with the sale pro-

ceeds without paying its bills). However, the bene-

fits of the statute have been questioned for many

years due to, among other matters, advances in

technology and more protective business practices

adopted by creditors. Unlike most states, California

did not follow the recommendation of the Uniform

Law Commission to repeal the bulk sales law in Arti-

cle 6. See, e.g., Balovich, Revised Article 6 Bulk Trans-

fers, Creditworthy News (Aug. 4, 2011), available at

http://tinyurl.com/gmjb74k; Manual of Credit and

Commercial Laws Vol. II, ch.3, art.6 at 3-16 (2014).

Consequently, if a buyer fails to comply with Califor-

nia'sbulk sales law (which basically requires advance

notice to the seller's creditors), the buyer could

be liable to a creditor for damages that would not

have been suffered if the buyer had complied. Cal.

Com. Code §§ 6104, 6105 & 6107(a). Buyers in Cali-

fornia may therefore want to know if the bulk sales

law applies. The key requirement is that the "seller's

principal business is the sale of inventory from stock,

including those who manufacture what they sell, or


that of a restaurant owner." Cal. Com. Code § 6103(a)

(1). In particular, California's bulk sale requirements,

Com. Code § 6103(a)(1), apply "if the seller's princi-

pal business is'that of a restaurant owner.' Although

there appears to be no reported California appellate

decision interpreting this provision in the sale of a

hotel with a restaurant, bar, and banqueting busi-

ness, an interpretation of this provision may exclude

such a business from the [Californian bulk sale laws:'

CEB, California Real Property Sales Transactions,

supra, § 5.23 at 5-48. While the parties may not take

any action regarding the California bulk sales laws,

buyers in California often insist on an indemnity

from the seller for noncompliance in transactions

(such as hotel purchases) that a creditor might argue

are subject to these laws.

10.2. Seller Guaranties

As in other states, the buyer may want some assur-

ance that there is credit standing behind the obli-

gations of the seller under the purchase agreement

that survive the closing (because the seller is typi-

cally an SPEand may be liquidating shortly after clos-

ing). Aseller guaranty is sometimes a solution to this

problem (although sellers often resist providing any

guaranties). While California has a number of stat-

utory guarantor defenses in Cal. Civ. Code §§ 2787

to 2855, it also has a statute stating that a guaran-

tor may waive these and certain other defenses

and that a "contractual provision that expresses an

intent to waive [these defenses] shall be effective...

without regard to the inclusion of any particular lan-

guage...." Cal. Civ. Code § 2856(b). Indeed, it may

come as a surprise that California, with all its debtor

protections (e.g., the California anti-deficiency rules

in secured lending transactions), may be viewed as

creditor friendly when it comes to guaranties (or at

least much less protective of guarantors than it can

be of primary debtors). See, e.g., Hansen, Guaranties

in California Trust Deed Financing—How Did "Sec-

ondarily Liable" Parties End Up With All of the Liabil-

ity? (Part 1), 37 CEB Real Prop. L. Rep. 76 (July 2014),

and (Part 2), 37 CEB Real Prop. L. Rep. 108 (Sept.

2014). (Cal. Civ. Code § 2856 came about to address

lender concerns with certain secured real estate

financing decisions, but the statute is not limited to

that context.) However, buyers should not be over-

confidentwhen they obtain a guaranty in California.

Despite the breadth of Cal. Civ. Code § 2856, there

remain some defenses that may not be waived by

a general waiver (e.g., equitable or public policy

defenses). See, e.g., California Bank &Trust v. Del

Ponti (Cal. App. 4th Dist. 2014) 232 Cal.App.4th 162;

Geier, Here We Go Again: The Vicissitudes of Pub-

lic Policy and Guarantor Liability for California Real

Estate Loans, Miller &Starr Real Est. NewsAlert at 3

(Sept. 2015).

10.3. Seller Financing

If the purchase involves seller financing secured

by the real estate, then California's one action and

anti-deficiency rules may be relevant. See, e.g., CEB,

California Mortgages, Deeds of Trust, and Foreclo-

sure Litigation Chs. 4-S (4th ed. 2019); CEB California

Real Property Sales Transactions, supra, ch. 9. Seller

financing secured by the real estate is generally not

recourse to the buyer in California. Cal. Code Civ.

Proc. § 580b. But the buyer should not get too com-

fortable because there are exceptions to this rule.

Moreover, if the buyer is required to provide a guar-

anty (from a guarantor who is not an alter ego of the

buyer), then it may be enforceable. (See discussion

of seller guaranties in part 10.2 above.)

10.4. Subdivision Map Act

If the legal description of the property is not

described as one or more lots or parcels of a

recorded subdivision, the buyer may want to inquire

with the local jurisdiction within California to con-

firm compliance with California's Subdivision Map

Act. Cal. Gov. Code § 66410 et seq. Noncompliance

could render the purchase agreement void unless

compliance is a closing condition. See CEB, Califor-

nia Real Property Sales Transactions, supra, § 4.31

at 4-31. See also Cal. Gov. Code § 66499.35(a) ("Any

[buyer]...may request, and a local agency shall

determine, whether the real property complies with

the provisions of this division and of local ordinances

enacted pursuant to this division. If a local agency

determines that the real property complies, the city

or the county shall cause a certificate of compliance


to be filed for record with the recorder of the county

in which the real property is located.").

10.5. Other

Other areas of California law and custom may be rel-

evant depending on the facts (e.g., California liquor

license issues and California labor issues). If so, Cal-

ifornia counsel specializing in such areas should be

consulted. The approach in California may be very

different from other states. For example, California

has particularly strict rules limiting noncompetition

agreements. See, e.g., Beck Reed Riden LLP, 50 State

Noncompete Chart (updated as of March 25, 2016),

available at http://tinyurl.com/jpg7s4w.

A. ARTICLES

Journals

BIBLIOGRAPHY

PNM Doc. No.

1. Adams, To the Best of Its Knowledge, Adams onContract Drafting (posted Apr. 22, 2007), availableat http://tinyurl.com/zcw7wdb (http://www.adamsdrafting.com/best-of-its-knowledge) 10906769

2. Adams, Understanding "Best Efforts" and Its Variants(Including Drafting Recommendations), 50 Prac. Law.11, 15 (Aug. 2004) 10906160

3. Balovich, Revised Article 6 Bulk Transfers, Creditwor-thy News (Aug. 4, 2011), available at http://tinyurl.com/gmjb74k (http://www.creditworthy.com/3jm/articles/cw80411.html) 1 T 102299

4. Bernhardt, Attorneys as Escrow Agents, 29 Real Prop.L. Rep. 342, 344 (Sept. 2006) 5955654

5. Block & Paal, Trial by Jury in Real Property Cases, 32Cal. Real Prop. J. 3, 15 (2014) 10129556

6. Bright, Unilateral Attorney's Fees Clauses: A Proposalto Shift to the Golden Rule, 61 Drake L. Rev. 85 (2012)

9225650

7. Carey, Prorations: Watch Out for Real Estate Taxes Paidin Arrears, Real Est. Fin. J., Spring 1993, at 11 514051

8. Carey, Cauble & MacCracken, The "Free Look" in Cali-fornia—You Get WhatYou Pay For, 33 Real Prop. L. Rep.89, 91, 97-99 (July 2010) 8889783

9. Cart & Lanphear, The Lis Pendens: Strategies and Pit-falls, 33 Cal. Real Prop. J. 28 (2015) 10928963

10. Cruz, 2015 Update:TransferTaxes in California, 33 Cal.Real Prop. J. 5, 7, 16-17 & n.127 (2015) 10708830

11. Cruz, Feds To The Rescue: 2019 California TransferTaxUpdate, Cal. Real Prop. J. &Cal. Tax Law. (Joint Issue)(2019) 13306277

12. Di Geronimo, Not Worth the Paper It's Printed On?, 25Miller &Starr Real Est. NewsAlert 193, 197 (Jan. 2015)

10261085

13. Fisher, The Dangers of a "Best Efforts" Clause in aReal Estate Agreement, 1 Prac. Real Est. Law. 43 (Mar.1985) 5798318

14. Geier, Here We Go Again: The Vicissitudes of PublicPolicy and Guarantor Liability for California Real Es-tate Loans, Miller &Starr Real Est. NewsAlert at 3 (Sept.2015) 10674229

15. Hansen, Guaranties in California Trust Deed Financ-ing—How Did "Secondarily Liable" Parties End UpWith All of the Liability? (Part 1), 37 CEB Real Prop. L.Rep. 76 (July 2014), and (Part 2), 37 CEB Real Prop. L.Rep. 108 (Sept. 2014) 9918520

16. Hoffman, Attorney Fee Clauses in California Contracts,21 Cal. Bus. L. Prac. 82 at 84-85 (Summer 2006)

5940629

17. Kuney, To the Best of Whose Knowledge?, 22 Cal. Bus.L. Prac. 58 (Spring 2007) 10929052

18. LaMance, Statute of Limitations for Breach of Con-tract Actions, LegalMatch Law Library (Aug. 2, 2012),available at http://tinyurl.com/h2mm~mg (http://www.legalmatch.com/law-library/article/statute-of-limitations-for-breach-of-contract-actions.htm)

10958690

19. Levin, "Best" Is Not Always Best When It Comes toKnowledge, 30 Prob. & Prop. 44 at 45, 47 (Jan./Feb.2016) 10929267

20. Notaro, Sales Contract Tug of War—Representationsand Warranties, Notaro Law, available at http://tinyurl.com/jdybzn8 (http://www.notarolaw.com/Articles/Reps_and_Warranties.pdf) 10433970

21. Peterson, The Effective Use of Representation andWarranties and Selected Provisions Relating to In-come Properties in Commercial Real Estate Contracts,ACREL Papers, Fall 1999, at 103 10932942

22. Schaefer, A Seller's Specific Performance Remedy ina Residential Real Estate Transaction, 40 Marin Law. 3(Feb. 2009) 10924952


23. West &Shah, Debunking the Myth of the Sandbag-

ging Buyer: When Sellers Ask Buyers to Agree to Anti-

Sandbagging Clauses, Who Is Sandbagging Whom?,

11 M&A Law. 3 (Jan. 2007) 10906944

24. Whitehead, Sandbagging: Default Rules and Acquisi-

tion Agreements, 36 Del. J. Corp. L. 1081 (2011)

10906890

25. Zimmermann, Three Things To Know About Doing

Business in California, Xconomy.com (Jan. 28, 2016),

available at http://tinyurl.com/z9tu8nw (http://www.

xconomy.com/national/2016/01 /28/three-things-to-

know-about-doing-business-in-California) 11113 42

Newspapers

26. Editorial, Anti-Prop. 13 Resolution Must Be Rejected

by L.A. City Council, Los Angeles Daily News (Aug. 25,

2014), available at http://tinyurl.com/j7gnesz (http://

www.dailynews.com/opinion/20140825/anti-prop-

13-resolution-must-be-rejected-by-la-city-council-

editorial) 10930519

27. Eskenazi, Prop 13: The Building-Sized Loopholes Cor-

porations Exploit, SF Weekly (Jan. 4, 2012), available

at http://tinyurl.com/zedvk9k (http://www.sfweekly.

com/sanfrancisco/prop-13-the-building-sized-loop

holes-corporations-exploit/Content?oid=2183637&

showFullText=true) 10930512

B. BOOKS

1. California Legislative Information, AB-2372 Prop-

erty Taxation: Change in Ownership, available

at http://tinyurl.com/ggzswlg (http://leginfo.

legislature.ca.gov/faces/billHistoryClient.xhtml?bill_

id=201320140AB2372) 11111622

2. CEB, A Litigator's Guide to Effective Use of ADR in Cali-

fornia §§ 9.9 at 370; 9.18 at 373; 9.20 at 374 (2008)10936094

3. CEB, California Law of Contracts §§ 9.2-9.5 at 9-3-9-9

(2019) 10958992.2

4. CEB, California Mortgages, Deeds of Trust, and Fore-

closure Litigation Chs.4-5 (4th ed. 2019) 771U3318

5. CEB, California Real Property Remedies and Damages

§~ 3.80 at 3-100.1-3-101; 4.60 at 4-88-4-89 (2d ed.

2019) 10926fl22.2

6. 1 CEB, California Real Property Sales Transactions §§

4.31 at 4-31; 4.49 at 4-46; 4.70 at 4-68.1; 4.82 at 4-82;

4.109 at 4-106; 4.143 at 4-132-4-134; 4.152 at 4-141;

5.23 at 5-48; 6.9 at 6-13; ch. 9; ch. 10 (4th ed. 2019)

10885073.2

7. CEB, California Title Insurance Practice §§ 5.31 at 5-29;

5.33 at 5-30; 6.8 at 6-14.1; 6.10 at 6-14.5; 7.21 at 7-19;

103-10.4 at 10-3-10-4 (2d ed. 2019) 10926034

8. CEB, Forming and Operating California Limited Liabil-

ity Companies § 14.3 at 14-3-74-4 (3d ed. 2018)10961540.2

9. Chernick, Haldeman & Bettinelli, California Practice

Guide, Alternative Dispute Resolution §§ 6213 at

6-66; 6:254 at 6-76 (2018) 10925963.2

10. 15 Corbin on Contracts § 83.8 at 287, 289-90 (rev. ed.

2003) 10958995

11. Cushman, Cushman &Cook, Construction Litigation:

Representing the Owner § 4.45 at 162 (Wiley 1990)

10959071

12.3 Friedman and Smith on Contracts and Conveyances

of Real Property § 38.5 at 38-30-38-34 (8th ed. 2019)

10925972.2

13. Greenwald &Bank, California Practice Guide: Real

Property Transactions 11 11:92.1 at 11-33 (2019)

133758202

14. Manual of Credit and Commercial Laws Vol. II, ch. 3,

art. 6 at 3-16 (2014) 11106341

1 S. 1 Miller &Starr, California Real Estate §§ 1:108 at

7 - 441-1-450; 1:156 at 1-656; 7 :160 at 7 -677; 1:168 at

1-723; 1:171 at 1-749-1-750; 8:4 at 8-23-8-24; 45:5 at

45-13; 45:6 at 45-14 (4th ed. 2019)

10877648.2/10931532

16. Nielsen, California Sales and Use Tax Answer Book

Q 8:19-Q 8:32 at 8010-16 (2011) 10919190

17. Powell on Real Property §§ 81.01 [3][a] at 81-15;

81.03[6][h] at 81-153-81-155; 81.05[11][d] at 81-247;

81A.07[1][d] at 81A-135-81A-137 (2019) 10877695.2

18. Twomey, Jennings &Greene, Business Law: Principles

for Today's Commercial Environment § 18-4d at 328

(5th ed. 2017) 1t~~S95$2

19. Whitney, Ed., 2019 Guidebook to California Taxes, 1111

1702 at 808; 1706 at 816; 1708 at 828 (2018)

1335~~33

20.3 Witkin, California Procedure §§ 468 at 593-94; 508-

514 at 650-59; 520-21 at 664-67; 529 at 678-80 (5th

ed.2015) 109675S2

21.13 Witkin, Summary of California Law § 215(1)(c) at

568 (11th ed. 2017) 1~9~~33


C. CASES

1.926 North Ardmore Avenue, LLC v. County of Los An-geles (2017) 3 Cal.Sth 319 13361224

2. Avco Community Developers v. South Coast RegionalCommission (1976) 17 Cal.3d 785 8428866

3. Belasco v. Wells (Cal. App. 2d Dist. 2015) 234 Cal.App.4th 409, 421-23 1069611

4. Blankenheim v. E. F. Hutton & Co. (Cal. App. 6th Dist.1990) 217 Cal.App.3d 1463, 1472-73 5241003

5. Brennan v. Tremco (Cal. 2001) 25 Cal.4th 310, 315-1710932920

6. Bruni v. Didion (Cal. App. 4th Dist. 2008) 160 Cal.App.4th 1272, 1291 10892265

7. California Bank &Trust v. Del Ponti (Cal. App. 4th Dist.2014) 232 Cal.App.4th 162 10146595

8. California First Bank v. Braden (Cal. App. 2d Dist. 1989)216 Cal.App.3d 672, 676 10974753

9. California Pines Property Owners Association v.Pedotti (Cal. App. 3d Dist. 2072) 206 Cal.App.4th 384,392 and 395 10928871

10. Capehart v. Heady (Cal. App. 1st Dist. 1962) 206 Cal.App.2d 386 10961547

11. Davis Wire Corp. v. State Board of Equalization (Cal.1976) 17 Cal3d 761, 766-67 10927056

12. Dyanlyn Two v. County of Orange (Cal. App. 4th Dist.2015) 234 Cal.App.4th 800 10928877

13. Gans v. Smull (Cal. App. 2d Dist. 2003) 111 Cal.App.4th985,989-90 10885441

14. Grafton Partners v. Superior Court (Cal. 2005)36 Cal.4th 944, 964 9949730

15. Herring v. Teradyne Inc. (S.D. Cal. 2002) 256 F.Supp.2d1118,1126 10974793

16. Hexter v. Pratt (Tex. Comm'n App. 1928) 10 S.W.2d692,693 10925426

17. Hot Rods, LLC v. Northrop Grumman Sys. Corp. (Cal.App. 4th Dist. 2015) 242 Cal.App.4th 1166 11222080

18. Hotel Del Coronado Corporation v. State Board ofEqualization (Cal. App. 2d Dist. 1971) 15 Cal.App.3d612 10904978

19. Jacobs v. Tenneco West, Inc. (Cal. App. 5th Dist. 1986)186 Cal.App.3d 1413 10928881

20. Jue v. Smiser (Cal. App. 1 st Dist. 1994) 23 Cal.App.4th312, 317 and 318 at n.6 11110243

21. Kazerouni v. De Satnick (Cal. App. 2d Dist. 1991) 228Cal.App3d 871 10928887

22. Leaf v. City of San Mateo (Cal. App. 1 st Dist. 1980) 104Cal.App.3d 398, 41 1 10885444

23. Lewis v. Hopper (Cal. App. 1st Dist. 1956) 140 Cal.App.2d 365, 367 10885447

24. Linden Partners v. Wilshire Linden Associates (Cal.App. 2d Dist. 1998) 62 Cal.App.4th 508, 524 10972803

25. Mercury Ins. Group v. Superior Court (Cal. 1998)19 Cal.4th 332, 345 10930848

26. Miner v. Tustin Ave. Investors, LLC (Cal. App. 4th Dist.2004) 116 Cal.App.4th 264, 272 13361238

27. Miracle Auto Ctr. v. Superior Court (Cal. App. 1 st Dist.1998) 68 Cal.App.4th 818, 822 10928891

28. Moreno v. Sanchez (2003) 131 Cal.Rptr.2d 684, 106Cal.App.4th 1415 10968821

29.Ontario Community Foundation Inc. v. CaliforniaState Board of Equalization (Cal. 1984) 35 Cal.3d 811,822-23 10927074

30. Pacific Southwest Realty Co. v. County of Los Angeles(Cal. 1991) 1 Cal.4th 155 10885448

31. Palermo v. Stockton Theatres, Inc. (1948) 32 Cal.2d 53,58-59 13361242

32. Pinnacle Museum Tower Assn. v. Pinnacle Market De-velopment (US), LLC (2012) 55 Cal.4th 223, 245

13361474

33. Plaza Freeway Ltd. Partnership v. First Mountain Bank(Cal. App. 4th Dist. 2000) 81 Cal.App.4th 616 470445

34. Ram's Gate Winery, LLC v. Roche (Cal. App. 1st Dist.2015) 235 Cal.App.4th 1071, 1079-81 10973266

35. Rincon EV Realty LLC v. CP III Rincon Towers, Inc.(2017) 8 Cal.App.Sth 1, 18 13361484

36. Riverisland Cold Storage, Inc. v. Fresno-Madera Pro-duction Credit Association (Cal. 2013) 55 Cal.4th 1169,1174 9014322

37. San Diego Hospice v. County of San Diego (Cal. App.4th Dist. 1995) 31 Cal.App.4th 1048, 1053-54

10961536

38. Shuwa Investment Corp. v. County of Los Angeles(Cal. App. 2d Dist. 1991) 1 Cal.App.4th 1635 10928896

39. Soifer v. Chicago Title Company (Cal. App. 2d Dist.2010) 187 Cal.App.4th 365, 374 10928977

40. Szabo v. Superior Court (Cal. App. 2d Dist. 1978) 84Cal.App.3d 839, 843 10976056


41. Tarrant Bell Properties v. Superior Court (Cal. 2011) 51

Cal.4th 538 10973329

42. Treo @ Kettner Homeowners Association v. Superior

Court (Cal. App. 4th Dist. 2008) 166 Cal.App.4th 105510976706

43. Western Filter Corp. v. Argan, Inc. (9th Cir. 2008) 540

F.3d 947, 952 10973274

44. Whittington v. Dragon Group, L.L.C. (Del. 2009) 991

A.2d 1, 10 10961549

45. Zalkind v. Ceradyne (Cal. App. 4th Dist. 2011) 194 Cal.App.4th 1010, 1030 7964888

D. SALES TAX ANNOTATIONS ANDMEMORANDUM OPINIONS

1. California State Board of Equalization, Sales and UseTax Annotation 11395.0071 (Aug. 30, 1991), avail-

able at http://tinyurl.com/j2svud2 (http://www.

boe.ca.gov/lawguides/business/current/btig/volt/

suta/395-0000-all.html) 10933817

2. California State Board of Equalization, Sales and Use

Tax Annotation 11 21,260.7 0 (Oct. 28,1993), available toRIA subscribers at http://tinyurl.com/jp69yfz (https://checkpoint.riag.com/app/main/doc?usid=2ab607x27

5e5b&DocID=i5e805041626b62978b97c610a2a65ae

2&coIlFilterld=104.ANNOTATIONS&collld=104.ANNOT

ATIONS&featu re=tcheckpoi nt&IastCpReq Id=3281421

&searchHandle=i0ad82d0800000152906855701615aeb2) 10933838


Tax Memorandum Opinion 11395.0071 (Aug. 20,

7991), available at http://tinyurl.com/z61ngt2 (http://www.boe.ca.gov/sutax/annotations/pdf/395.0071.pdf) 10927413


Tax Memorandum Opinion Pratt North Plaza Associ-

ates (Oct. 28, 1993), available at http://tinyurl.com/h8zls5s (http://www.boe.ca.gov/lawguides/business/

current/btlg/volt/sutmo/sutmo-39.html) 10932555

E. STATUTES

1. A.B. 802, ch. 590 (Statutes of 2015)

2. Cal. Civ. Code §§ 7, 9, 11, 1092, 1098.6, 1101.5(e),

1102-1103.14, 1113, 1542, 1572(2), 1572(5), 1573,1667-1668, 1671(b), 1676, 1677(a)-(b), 1680, 1698,1710(2), 1717, 1938, 1940.7, 1950.5(h), 1950.7(d),

2079.10a, 2787-2856, 3275, 3389

3. Cal. Code Civ. Proc. §§ 12a(a), 135, 337, 360.5, 580b,638, 644(a), 904.1, 1281, 1283.05, 1298(a), 1298(c),1542

4. Cal. Code Regs., tit. 14, div. 6, ch. 3, § 15000; tit. 18,

§§462.180(c)-(d), 1595(a)(1), 1595(a)(5)(A)1, 1595(c),

1668

5. Cal. Com. Code §§ 6103(a)(1), 6104, 6105 & 6107(a)

6. Cal. Evid. Code §§ 300, 622, 703.5

7. Cal. Gov. Code §§ 6700, 6807-2-6807-4, 85893-

8589.4, 8875.6, 8893.2, 29001, 51183.5, 65864, 66410,

66498.1, 66499.35(a)

8. Cal. Health & Saf. Code ~§ 13113.8, 17920.10, 18029.6,

25359.7, 25400.28, 2540036, 26140

9. Cal. Ins. Code § 12340.11

10. Cal. Pub. Resources Code §§ 2621.9, 2694, 4125, 4136,

21000

11. Cal. Rev. &Tax. Code §§ 61(i), 62(a)(2), 62(g), 64, 75,

480, 531.2, 2192, 6006.5, 6007, 6014, 6015(a)(1), 6019,

6051, 6091-6093, 6275, 6367, 6811, 11911, 11925

(11925(a)-71925(b)), 11932-11933, 17935 (limited

partnerships), 17941 (limited liability companies),

17942(a), 23153 (corporations)

12. Cal. Sts. & Hy. Code §§ 3114-3115

13. D.C. Code §§ 12-301(6), (7)

14. 10 Del. Code § 8106(a), (c)

15. Ga. Code §§ 9-3-23-9-3-24

16.735 III. Comp. Stat. 5/13-206

17. I.R.C. § 708

18. Mass. Gen. Laws ch. 260 §§ 1- 2

19. Md. Corp. & Ass'ns § 9A-102(b)

20. Md. Cts. & Jud. Proc. Code §§ 5-101, 5-102(a)(5)

21. N.Y. Civ. Prac. Laws &Rules § 213(2)

22. S.B. 259

23. S.F. Bus. &Tax Regs. Code, art. 12-C, § 1102

24. Tax Cut and Jobs Act of 2017

25. Treas. Regs. § 301.7701-3(a), (b)(ii)


F. WEBSITES (MISCELLANEOUS)1. ABA Model Rules of Professional Responsibility,Comment on Rule 4.2 11 [8], available at https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_4_2_communication_with_person_represented_by_counsel/comment_on_rule_4_2.html; also Rule 1.0(f) 13360718

2. Beck Reed Riden LLP, 50 State Noncompete Chart (up-dated as of March 25, 2016), available at http://tinyurl.com/jpg7s4w (http://www.beckreedriden.com/50-state-noncompete-chart/) 11127149

3. California Association of Realtors, Sales DisclosureChart (Nov. 13, 2019), available at https://www.car.org/en/riskmanagement/disclosure-charts/sales-disclosure-chart 13384175

4. CaliforniaStateBoardofEqualization,Usinga ResaleCer-tificate (2016), available at http://tinyurl.com/zgeg55j (https://www.boe.ca.gov/sutax/faq resa le.htm)

11127150

5. California Tax Data, Property Tax Disclosure (2002),available at https://www.californiataxdata.com/A_Free_Resources/faq.asp 13351521

6. Commonwealth Land Title National Commercial Ser-vices, Real Estate Laws &Customs by State (2019;information current as of 06/16), available at http://tinyurl.com/jsk22gs (http://www.fntgemarketing.com/cltc/ebook~s/Rea I_Estate_Laws_Customs)

11127152

7. First American Title National Commercial Services,Your Guide to Real Estate Customs by State (2018;02/18), available at http://tinyurl.com/zpsv9c2 (http://www.firstam.com/assets/commercial/real-estate-customs-guide/real-estate-customs-guide-by-state.pdf) 11127153

8. Legislative Analyst's Office, Understanding Cali-fornia's Property Taxes (Nov. 29, 2012), available athttp://tinyurl.com/Ijkr59b (http://www.lao.ca.gov/reports/2012/tax/property-tax-primer-112912.aspx)

11127154

9. NAIC Title Insurance Task Force, Survey of State In-surance Laws Regarding Title Data and Title Matters(March 2019), available at https://tinyurl.com/gqs8lav(http://www,naic.org/documents/committees_c_title_tf_survey_State_laws.pdf) 11127155

10. State Board of Equalization, California PropertyTax—An Overview, Publication 29 (July 2015), available athttp://tinyurl.com/2w6c6te (http://www.boe.ca.gov/proptaxes/pdf/pub29.pdf) 11127156


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