Nuisance-When Neighbors Clash

In California, the legal requirements for a nuisance was clarified in the recent Court of Appeal decision in Wilson v. Southern California Edison Company, that involved a homeowner–plaintiff Simona Wilson–who bought a house next door to an electrical substation operated by defendant Southern California Edison Company.

After remodeling her master bathroom four (4) years after she moved into the house, Wilson felt low levels of electricity in her remodeled shower when she adjusted the showerhead. This flow of electricity was due to neutral-to-earth voltage (NEV), also referred to as stray voltage, on her property. Because NEV is unavoidable in a grounded electrical system, such as the one operated by Edison, Edison was unable to completely eliminate it from Wilson’s property as Wilson insisted, although it recommended ways to reduce the voltage in her shower to below-perceptible levels.

Fearing for her safety and the safety of her three children, Wilson moved out of the house into a rental property. Because she could not afford to pay both the rent on that property and the mortgage on her house, the house went into foreclosure, ruining her credit.

Wilson sued Edison for negligence, intentional infliction of emotional distress (IIED), and nuisance, and sought punitive damages. In the first trial, the jury found in favor of Wilson on all three claims, awarding $550,000 on the negligence and IIED claims, $500,000 on the nuisance claim, and $3 million in punitive damages. Edison appealed.

In a published decision, the Court of Appeal found there was insufficient evidence to support the negligence and IIED claims or the punitive damages award, and found that the jury relied upon irrelevant evidence when determining the nuisance claim. The judgment was reversed, a new judgment was entered in favor of Edison on the negligence and IIED claims, and the case was sent back to the trial court for a retrial on the nuisance claim.

During the retrial, Wilson was allowed to present extensive evidence of incidents related to stray voltage at the house that occurred before she bought it and at other nearby properties, and Edison’s conduct with regard to those incidents. The jury again found in favor of Wilson, and awarded her $1.2 million in damages on her nuisance claim.

On appeal, Edison contended that:

            (1) It is entitled to judgment because, as a matter of law, the harm Wilson suffered cannot outweigh the public benefit of providing electricity;

            (2) It is entitled to a new trial because the trial court improperly allowed Wilson to present inflammatory irrelevant evidence related to stray voltage incidents involving prior owners or tenants of the property or other nearby properties;

            (3) It is entitled to a new trial on damages (if not a retrial on both liability and damages) because the jury improperly included in its award damages to which Wilson was not entitled, such as attorney fees; and

            (4) It is entitled to a new trial on damages (if not a retrial on both liability and damages) because the $1.2 million award was excessive.

Based upon the evidence presented at trial, the Appellate Court could not conclude as a matter of law that the harm Wilson suffered did not outweigh the public benefit of Edison’s conduct, and deferred to the jury on that issue.  But it was error to admit irrelevant evidence related to stray voltage incidents involving prior owners or tenants of the house or other properties, and the admission of that evidence was prejudicial to Edison, so the case was sent back to the Superior Court for a re-trial on the nuisance claim. 

The relevant jury instruction, CACI No. 2022, states: “In determining whether the seriousness of the harm to Simona Wilson outweighs the public benefit of Southern California Edison’s conduct, you should consider a number of factors. To determine the seriousness of the harm Simona Wilson suffered, you should consider the following:

            (a) The extent of the harm, meaning how much the condition Southern California Edison caused interfered with Simona Wilson’s use or enjoyment of her property and how long that interference lasted; and

            (b) The character of the harm, that is, whether the harm involved a loss from the destruction or impairment of physical things that Simona Wilson was using, or her personal discomfort or annoyance.”

The critical questions were:

             (1) Did Edison create a condition that was an obstruction to the free use of property so as to interfere with the comfortable enjoyment of life or property;

            (2) Was this condition of such duration, nature, or amount as to have unreasonably interfered with Wilson’s use or enjoyment of her land;

            (3) Was Edison’s conduct a substantial factor in causing Wilson harm; and

            (4) Did the seriousness of the harm outweigh the public benefit of Edison’s conduct–the jury was split nine to three.

A private nuisance claim is a claim for “a nontrespassory interference with the private use and enjoyment of land.” and it requires proof of three elements:

            (1) The plaintiff must prove an “interference with the plaintiff’s use and enjoyment of that property”.

            (2) The plaintiff must prove “that the invasion of the plaintiff’s interest in the use and enjoyment of the land was substantial, i.e., that it caused the plaintiff to suffer substantial actual damage." This is a question of fact for the jury that turns on the circumstances of each case.

            (3) The interference with the protected interest must not only be substantial, but it must also be "unreasonable", i.e., it must be of such a nature, duration or amount as to constitute unreasonable interference with the use and enjoyment of the land. The primary test for determining whether the invasion is unreasonable is whether the gravity of the harm outweighs the social utility of the defendant’s conduct, taking a number of factors into account.

In its review of the factors that determine the seriousness of the harm the plaintiff suffered, the jury should consider the following:

            (1) The extent of the harm, meaning how much the condition defendant caused interfered with plaintiff’s use or enjoyment of plaintiff's property, and how long that interference lasted.

            (2) The character of the harm, that is, whether the harm involved a loss from the destruction or impairment of physical things that plaintiff was using, or personal discomfort or annoyance.

            (3) The value that society places on the type of use or enjoyment invaded. The greater the social value of the particular type of use or enjoyment of land that is invaded, the greater is the seriousness of the harm from the invasion.

            (4) The suitability of the type of use or enjoyment invaded to the nature of the locality. The nature of a locality is based on the primary kind of activity at that location, such as residential, industrial, or other activity.

            (5) The extent of the burden (such as expense and inconvenience) placed on plaintiff to avoid the harm.

To determine the public benefit of defendant’s conduct, the jury should consider:

            (1) The value that society places on the primary purpose of the conduct that caused the interference. The primary purpose of the conduct means [name of defendant]’s main objective for engaging in the conduct. How much social value a particular purpose has depends on how much its achievement generally advances or protects the public good.        

            (2) The suitability of the conduct that caused the interference to the nature of the locality. The suitability of the conduct depends upon its compatibility to the primary activities carried on in the locality.

            (3) The practicability or impracticality of preventing or avoiding the invasion.

A finding of an actionable nuisance does not require a showing that the defendant acted unreasonably. An intentional interference with the plaintiff’s use of his property can be unreasonable even when the defendant’s conduct is reasonable. This is because a reasonable person could conclude that the plaintiff’s loss resulting from the intentional interference ought to be allocated to the defendant.

This is the type of decision that should be saved for future reference, as it provides the legal outline for a nuisance cause of action, and what needs to be proved to prevail.  It also shows how complicated an action for nuisance can be because of the competing interests in our society, and when neighbors clash, it is prudent to obtain competent legal advice.

Lease Option to Purchase Real Property in California

In a recent California appellate decision, the interaction between a lease and an option to purchase real property was clarified.  The tenant contented that it was entitled to an offset against the purchase price for the rents that it paid to landlord after it exercised its purchase option under the lease and during the pendency of the litigation over the purchase price. According to tenant, upon its valid exercise of the purchase option, the lease was transformed into a contract of sale, thereby extinguishing any landlord-tenant relationship, as well as any right the landlord had to receive further rent because no provision for payment of rent pending the close of the purchase was specified.

Landlord contended that tenant's notice to exercise the purchase option was not an unconditional acceptance of the terms of the purchase option, and therefore, did not constitute a valid exercise of the option. Landlord also argued that by continuing to pay rent, tenant was acting according to the understanding of the parties that rent would remain owing as long as tenant continued to possess the property during the pendency of any lawsuit between the parties.

An option may be viewed as a continuing, irrevocable offer to sell property to an optionee within the time constraints of the option contract, and at the price set forth therein. It is a unilateral contract under which the optionee, for consideration it has given, receives from the optionor the right and the power to create a contract of purchase during the life of the option.  An irrevocable option is a contract, made for consideration, to keep an offer open for a prescribed period.

An option is transformed into a contract of purchase and sale when there is an unconditional, unqualified acceptance by the optionee of the offer in harmony with the terms of the option and within the time span of the option contract. The "exercise" of an option is merely the election by the optionee to purchase the property.  Importantly, the exercise of an option results in a contract of purchase and sale.

Where an option to purchase exists within a lease agreement, the exercise of the option to purchase causes the lease and its incorporated option agreement to cease to exist, and, instead, a binding contract of purchase and sale comes into existence between the parties. Further, a consequence of the termination of the lease agreement is that the former lessee's obligation to pay rent under the lease also terminates, unless there is an express stipulation that requires continued rent payments after the exercise of the purchase option.  Where the relation of landlord and tenant exists under the terms of a written lease, containing an option to purchase which the lessee exercises, he is no longer in possession as a tenant, but his possession is that of a vendee (i.e., buyer).

The landlord ordinarily is not entitled to recover rent from the date when the tenant sought to exercise an option to purchase if landlord prevented effective exercise of the option.
In the recent decision, landlord did not argue that tenant never validly exercised the purchase option. Rather, landlord argued that tenant was required to continue paying rents until such time as tenant could "perform" (i.e., purchase the property), and that performance could not occur until the fair market value of the property was determined by the court due to the parties lack of agreement on the purchase price. However, tenant argued that it had a logical reason for continuing to pay rents, a reason that had nothing to do with believing that such rents continued to be due. Tenant stated that it continued to pay rents as a protective measure in order to ensure that it would not be found to be in default of the lease.

Landlord also contended that tenant's notice conditioned its "exercise" and willingness to enter into an agreement with landlord on the parties reaching an agreement on the "fair market value" of the Property, and the exercise of the option was not complete until the fair market value was determined.

Ultimately, the trial court determined that tenant validly exercised the purchase option, and the exercise of the purchase option caused the lease to cease to exist, and in its place was formed a contract for purchase and sale, which meant that tenant possessed the property as a vendee, rather than a lessee.

Unless there was an express agreement in the lease that required the lessee to continue to make rent payments after the exercise of the purchase option, no further rents were due.
Also, the fact that the purchase option does not specify a price, but instead refers to the "fair market value" of the property, does not render the option unenforceable. Specifying "fair market value" as the price to be paid when exercising the option to purchase does not require future agreement of the buyer and seller, and it is a proper substitute for a specific purchase price and will support an action for specific performance.

It is fundamental that both the seller and the buyer are entitled to receive full performance of the contract where specific performance has been granted, and because execution of the judgment on a specific performance cause of action will occur at a date substantially after the date of performance provided by the contract, or the reasonable date of performance if no set date is provided, financial adjustments must be made to relate their performance back to the contract date.

First, when a buyer is deprived of possession of the property pending resolution of the dispute and the seller receives rents and profits, the buyer is entitled to a credit against the purchase price for the rents and profits from the time the property should have been conveyed. 

Second, a seller also must be treated as if it had performed in a timely fashion and it is entitled to receive the value of the lost use of the purchase money during the period performance was delayed.

Third, any award to the seller representing the value of the lost use of the purchase money cannot exceed the rents and profits awarded to the buyer, for otherwise the breaching seller would profit from its wrong.

This decision confirms that a purchase option in a lease is a viable method for a tenant to purchase real property, but the terms of the lease and purchase option provision are critical to determine the method by which the tenant can "exercise" the option, and such a lease should include terms for the payment of rent until the purchase is completed, and a mechanism to determine the price for the purchase and to resolve any disputes over the price.

California Real Estate Salesperson: Employee or Independent Contractor?

Whether a real estate salesperson ("agent") will be considered an employee or independent contractor  ("IC") is often a question of fact, dependent upon the particular circumstances of each case.

In California,  an agent is normally classified as a non-employee either under the common law "control" rule or as an outside salesperson,  and the minimum wage laws are not applicable.  The less control exerted by the broker, the more likely the agent will be considered an IC, and the relationship should be defined in a written IC Agreement.

Under California's Business & Professions Code and the Unemployment Insurance Code ("UIC"), most agents who enter into an IC Agreement with a broker will be considered an IC.  B&P Code § 10032 provides that the determination of whether an agent is an employee or an IC is determined by UIC  §§ 650, and 13000 to 13054. 

UIC § 650 applies a three part test:

1.         Agent must be a licensed real estate salesperson;

2.         Substantially all of the agent's remuneration must be directly related to sales or other output, including the performance of services, and not to the number of hours worked; and

3.         The agent's services must be performed pursuant to a written agreement between the broker and agent that states that the agent is not an employee for federal tax purposes.

California's Code of Regulations, Title 22 § 4304-2, provides 22 basic guidelines in determining the status of an agent, including:

1.         IC Agreement:  Written agreement between broker and agent specifying IC status should include many of the issues listed below.

2.         Broker Policies:  Broker should have written policies regarding IC activities, with proof of their delivery to existing and new agents, and the credibility of the policies is enhanced if they are up-dated periodically. 

3.         No assignments other than licensed activities: All assignments should be related to licensed activities.

4.         No required educational requirements, training and skills:  A licensed IC should not require mandatory training, and the broker should not require such training or the agent may be considered an employee. Voluntary attendance at in-house training is not evidence of employee status.

5.         Reasonable charge for desk and office space: IC Agreement should specify payments to broker for agent's use of desk and office equipment, including any secretarial or receptionist services, at reasonable charges based upon the actual value of the facilities and services. 

6.         Business cards and advertising require IC's name:  In addition to the broker's name, the IC's name should be on the business cards used by the IC, and if the cards are provided by broker, IC should be reasonably charged.  Agent may advertise with or without broker, and by cost sharing with broker.

7.         No mandatory assignments in office: The agent's presence and activities in the office must be voluntary, or the agent may be considered an employee.

8.         No imposed requirements re open houses:  Imposed requirement to attend open houses based upon specified hours may cause agent to be classified as an employee.  Any such requirements should be disavowed in the IC Agreement.

9.         No required attendance at sales meetings:  Any requirement that an agent attend sales or agent meetings may cause agent to be classified as an employee.

10.       No assigned territory:  Any division of territory or "farm" among agents is broker control of the manner and means by which the agent practices, and will be considered evidence of employment.

11.       No minimum hours or work days:  An IC should have sole control and discretion over the hours and work schedule.

12.       Method of payment:  Payment should be limited to agreed share of commissions.  Payment by salary, minimum compensation, draws or advances against commissions, unless secured and applied against expected commissions from open escrows, will be considered employee compensation.

13.       Participation in benefit plans:  An agent's participation in programs for health, medical, life, or retirement insurance are not evidence of employment, so long as the IC is required to and pays all premiums necessary for participation in the programs.

14.       Workers compensation insurance: The IC Agreement should specify that workers compensation insurance is for broker's benefit, or mutual benefit.

15.       Insurance and fidelity bonds:  Any broker requirement that agent provide a fidelity bond or malpractice insurance should be at agent's expense.

16.       MLS Services:  The IC agreement should require agent to reimburse broker in whole or in part for MLS services.

17.       Business licenses:  Agent should pay for any business license that the agent may be required to have by the governmental authority.

18.       Separate operations:   The agent and broker should keep their respective operations and services separate.

19.       Termination of IC agreement:  Termination should be based on 30 days notice by either party,  unless due to breach of ethics, statutory or regulatory requirements,  or for the protection of the public.

20.       Limited purpose agreements:   The IC  agreement may provide for agent's services for limited transactions, specified developments or building tracts,  or for other limited purposes.

21.       IC should not be manager:  Managers such as sales,  office, and general managers are considered employees of the broker.

22.       IC receives FORM 1099 (federal) and Form 599 (California):  Agent should receive tax forms 1099 (federal) and 599 (California) specifying compensation paid.

The federal Fair Labor Standards Act excludes independent contractors from coverage.  For federal tax purposes, if the broker classifies the agent as an IC, the broker files a 1099-MISC for payments to the agent in excess of $600.  If the agent is classified as an employee, the broker files a FORM W-2 and withholds the appropriate taxes

If the broker is unclear about an individual's classification, the broker can file a

FORM SS-8 to obtain a determination of worker status for purposes of federal employment taxes and income tax withholding.  The IRS will review the facts and circumstances and officially determine the agent's status, but this review may take over six months.

The agent's relationship with the broker should be subject to, and the terms specified in, a written independent contractor agreement that should include most of the issues listed above, and should be tailored for the particular policies and circumstances of the broker's office.