Proving Fair Market Value of California Real Property

In the world of California real estate, the Fair Market Value (FMV) of the property being transferred is a crucial factor for both the seller and buyer, because the seller does not want to sell for less than the FMV, and the buyer does not want to pay more than the FMV.  Also, the FMV is usually the determining factor in how much a lender will agree to lend with a loan secured by the property.  Appraisals are frequently obtained and accepted by parties to a transaction and lenders, but sometimes there are conflicting appraisals, especially in litigated cases such condemnation-eminent domain and divorces.  

How can you prove FMV at trial when the FMV is contested?

Under the California approved jury instructions, fair market value is the highest price for the property that a willing buyer would have paid in cash to a willing seller, assuming that:

1.         There is no pressure on either one to buy or sell; and

2.         The buyer and seller know all the issues and purposes for which the property is reasonably capable of being used.

This instruction should not be used if there is no relevant market for the property, and instead, a special instruction needs to be approved by the court for an appropriate alternative method of valuation.

FMV is a question for the jury, or judge in a court trial, based on the highest and best use for which the property is geographically and economically adaptable.

In a condemnation case, where a governmental entity files an eminent domain case to take property, the highest and best use is defined as that use, among the possible alternative uses, that is physically practical, legally permissible, market supportable, and most economically feasible. The appraiser must make a determination of highest and best use as part of the appraisal process. 

"Market value" in turn, traditionally has been defined as the highest price estimated in terms of money which the land would bring if exposed for sale in the open market, with reasonable time allowed in which to find a purchaser, buying with knowledge of all of the uses and purposes to which it was adapted and for which it was capable.

Alternative methods of valuation particularly apply to properties such as schools, churches, cemeteries, parks, and utilities for which there is no relevant market; therefore these properties may be valued on any basis that the court finds is just and equitable. However, when there is a market for this property in the private marketplace as demonstrated by the evidence, the trial court errs in admitting evidence of a valuation methodology that ignores the developed market for a particular type of property.

In determining the FMV of the property, the jury must consider both the value of the land and whether any buildings, machinery, or other equipment attached to the property increase or decrease the value of the property.

The jury is required to decide the value of property based solely on the testimony of the witnesses who have given their opinion of fair market value. The jury may consider other evidence only to help it understand and weigh the testimony of those witnesses. The jury may find the same FMV testified to by a witness, or it may find a value anywhere between the highest and lowest values stated by the witnesses. If the witnesses disagreed with one another, the jury should weigh each opinion against the others based on the reasons given for each opinion, the facts or other matters that each witness relied on, and the witnesses’ qualifications.

California's Evidence Code § 813 provides that the FMV of property may be shown only by the opinions of any of the following:

1.          Witnesses qualified to express such opinions (i.e., expert witnesses);

2.         The owner or the spouse of the owner of the property or property interest being valued; or

3.         An officer, regular employee, or partner designated by a corporation, partnership, or unincorporated association that is the owner of the property or property interest being valued, if the designee is knowledgeable as to the value of the property or property interest.

Nothing in the California Evidence Code prohibits a view of the property being valued or the admission of any other admissible evidence (including but not limited to evidence as to the nature and condition of the property.  In an eminent domain proceeding, the character of the improvement proposed to be constructed by the plaintiff) may be admitted for the limited purpose of enabling the court, jury, or referee to understand and weigh the testimony given. Such evidence, except evidence of the character of the improvement proposed to be constructed by the plaintiff in an eminent domain proceeding, is subject to impeachment and rebuttal.

The “owner of the property or property interest being valued” who can give an opinion of value includes, but is not limited to, the following persons: 

1.          A person entitled to possession of the property; or

2.          Either party in an action or proceeding to determine the ownership of the property between the parties, if the court determines that it would not be in the interest of efficient administration of justice to determine the issue of ownership prior to the admission of the opinion of the party.

In determining FMV, comparable sales may be considered under California Evidence Code § 816, which provides that when relevant to the determination of the value of property, a witness may take into account, as a basis for his opinion, the price and other terms and circumstances of any sale or contract to sell and purchase comparable property if the sale or contract was freely made in good faith within a reasonable time before or after the date of valuation.  

In order to be considered comparable, the sale or contract must have been made "sufficiently near in time" to the date of valuation, and the property sold must be "located sufficiently near" the property being valued, and must be "sufficiently alike" in respect to character, size, situation, usability, and improvements, to make it clear that the property sold and the property being valued are comparable in value, and that the price realized for the property sold may fairly be considered as "shedding light" on the value of the property being valued.  Differences, such as a pool, are subject to an adjustment in the FMV.

California Evidence Code §  823 provides that the value of property for which there is no relevant, comparable market may be determined by any method of valuation that is "just and equitable".

The essence of comparability is recent and local sales, and after the trial court resolves this preliminary legal question, it is then ultimately for the jury to determine the extent to which the other property is in fact comparable.

No general rule can be laid down regarding the degree of similarity that must exist to make comparable sales evidence admissible.  It must necessarily vary with the circumstances of each particular case.  Whether the properties are sufficiently similar to have some bearing on the value under consideration, and to be of any aid to the jury, must necessarily rest largely in the sound discretion of the trial court, which will not be interfered with unless abused.

Seeking to prevail in a case based upon appraisals, and the various factors that are considered in determining FMV, requires an organized and substantiated presentation of all of the relevant evidence by competent and experienced legal counsel.

Common Law Duty of Landlords in California is Limited

In the recent California decision in Day v Lupo Vine Street, the Court of Appeal clarified whether a commercial landlord who leases space to an operator of a health studio owed a duty under Health and Safety Code § 104113 or under the common law to acquire and maintain an automated external defibrillator (AED) at the premises or ensure that the operator does so. 
After concluding there is no such duty under section 104113 because it is limited to the "health studio" tenant, the Appellate Court reviewed whether there was a common law duty in addressing the claims for negligence per se and negligence.  The trial concluded that it would be unreasonable to impose a duty on a mere property owner or landlord to inspect property being leased for use as a boxing training gym to ensure compliance with section 104113.

Plaintiffs contended that even if defendant did not have a statutory duty to acquire and maintain an AED, it had a common law duty to ensure the premises were equipped with an AED before Wild Card took possession of the boxing gym.  They contended that this duty required defendant to either provide an AED at the premises that it leased to Wild Card to operate a boxing gym, or to specifically require Wild Card to obtain and maintain an AED as a condition of the lease.

The elements of a cause of action for negligence in California are:
            1.         the defendant had a duty to use due care;
            2.         the defendant breached that duty; and
            3.         the breach was the proximate or legal cause of the resulting injury.

The existence of duty is a question of law to be decided by the court, and the courts have repeatedly declared the existence of a duty by landowners to maintain property in their possession and control in a reasonably safe condition.  However, acknowledgment of the broad proposition that landowners have a duty to exercise reasonable care to maintain their property in a safe condition provides scant guidance to a court that must determine the existence of the landlord’s duty in a particular case.

With regard to landlords, “reasonable care" ordinarily involves making sure the property is safe at the beginning of the tenancy, and repairing any hazards the landlord learns about later.  Because a landlord has relinquished possessory interest in the land, the duty of care to third parties injured on the land is attenuated as compared with the tenant who enjoys possession and control.  Thus, before liability may be thrust on a landlord for a third party’s injury due to a dangerous condition on the land, the plaintiff must show that the landlord had actual knowledge of the dangerous condition in question, plus the right and ability to cure the condition.

The existence of a duty is not an immutable fact, but rather an expression of policy considerations leading to the legal conclusion that a plaintiff is entitled to a defendant’s protection.  Duty is a question of whether the defendant is under any obligation for the benefit of the particular plaintiff; and in negligence cases, the duty is always the same – to conform to the legal standard of reasonable conduct in the light of the apparent risk.

In Rowland v. Christian, the California Supreme Court identified a number of factors that courts may consider to determine whether a duty applies in a particular case:
            1.         the foreseeability of harm to the plaintiff;
            2.         the degree of certainty that the plaintiff suffered injury;
            3.         the closeness of the connection between the defendant’s conduct and the injury suffered;
            4.         the moral blame attached to the defendant’s conduct;
            5.         the policy of preventing future harm;
            6.         the extent of the burden to the defendant and consequences to the community of imposing a duty to exercise care with resulting liability for breach; and
            7.         the availability, cost, and prevalence of insurance for the risk involved.

The chief element in determining whether defendant owes a duty or an obligation to plaintiff is the foreseeability of the risk.  But even when a risk is foreseeable, policy considerations may dictate a cause of action should not be sanctioned.

The California Supreme Court recently addressed the issue of whether a large department store owed its customers a duty to make available on its premises an AED for use in a medical emergency in Verdugo v. Target Corp. The Supreme Court observed that when determining whether a business owes a “duty to take precautionary steps prior to the time . . . an injury or illness has occurred” – such as having an AED on premises in case a patron suffers a cardiac arrest – California courts primarily look at a number of factors, including:
            1.         the degree of foreseeability that the danger will arise on the business’s premises; and
            2.         the relative burden that providing a particular precautionary measure will place upon the business.

If the relative burden of providing a particular precautionary safety or security measure is onerous rather than minimal, the governing cases have held that absent a showing of a "heightened" or "high degree" of foreseeability of the danger in question, it is not appropriate for courts to recognize or impose a common law duty to provide the measure.
Addressing the burden of providing an AED for the use of Target’s patrons, the Supreme Court in Verdugo found it would be “considerably more than a minor or minimal burden" on a business establishment. The statutory provisions and related regulations establishing the prerequisites to civil immunity for those entities acquiring an AED reflect the numerous related requirements that a jury is likely to view as reasonably necessary to comply with such a duty. Apart from the initial cost of the AEDs themselves, significant obligations with regard to the number, the placement, and the ongoing maintenance of such devices, combined with the need to regularly train personnel to properly utilize and service the AEDs and to administer CPR, as well as to have trained personnel reasonably available on the business premises, illustrate the magnitude of the burden.  Compliance with these numerous obligations clearly implicates more than a minor or minimal burden.

With respect to foreseeability, the Supreme Court found in Verdugo that there was no allegation that any aspect of Target’s operations or the activities that its customers engage in on the premises gives rise to a high degree of foreseeability that those customers will suffer cardiac arrest on the premises.  Instead, it appears that the risk of such an occurrence is no greater at Target than at any other location open to the public.  Therefore, the Court concluded that Target owed no common law duty to its customers to acquire and make available an AED.

Unlike Target, which was the operator of the business and therefore had possession and control of the premises and would have the ability to ensure compliance with these requirements, the defendant in Lupo Vine Street was a landlord out of possession of the premises.  Imposing a duty to provide an AED in this instance would require defendant to stay in constant contact with its tenant to see if the AED had been used (so it could be tested) and to obtain permission to enter the premises at least every 90 days to inspect the AED. This is a far greater burden than that which would have been imposed on Target.

Second, although plaintiffs contended that it was foreseeable that a patron of the boxing gym might suffer cardiac arrest because it is a matter of common experience and knowledge that people may experience heart problems during strenuous exercise, the Appellate Court questioned whether that purported “common experience and knowledge” may be imputed to the landlord, inasmuch as there is no evidence that any of the principals of defendant had any experience in the sports, health, or fitness business.  Thus, it is uncertain whether there was a sufficiently heightened or high degree of foreseeability of the danger in question to outweigh the considerable burden that would be placed on the landlord if the Appellate Court was to find a common law duty to provide an AED on the premises of the boxing gym.

Finally, even if it is “common experience and knowledge” that people who engage in strenuous exercise may experience heart problems, the question remains whether it is sound policy to require a landlord to investigate all of the dangers posed by the operation of the business of each of its tenants and to provide measures or devices to mitigate injuries caused by the tenant’s business rather than by any dangerous condition on the property itself.  The Appellate Court concluded it is not.  A landlord cannot be held to be responsible for all dangers inherent in a dangerous business. Accordingly, the Appellate Court ruled that the trial court correctly found that the landlord did not owe a duty to provide an AED on the premises where Wild Card operated its boxing gym.  

Having determined that the landlord did not owe a duty to Wild Card’s patrons to provide an AED on the premises, the Appellate Court determined whether defendant owed a duty to require as a condition of its lease that Wild Card provide an AED on the premises. The short answer is that defendant did require Wild Card to provide an AED, because the lease required Wild Card to comply with all laws and statutes, which would include section 104113.  But even if this provision was insufficient because it did not specifically identify section 104113, the Appellate Court concluded, based upon the Rowland factors, that the landlord did not owe a duty to specifically require Wild Card to provide an AED at the premises.

In sum, the balance of the Rowland factors weighed in favor of finding that the landlord did not owe plaintiffs a duty to ensure that Wild Card obtained and maintained an AED on the premises where it operated its boxing gym. Accordingly, the trial court did not err in granting the landlord summary judgment on the ground that plaintiffs could not establish a necessary element of their negligence cause of action.

This decision provides an outline of the issues a landlord should remain aware of regarding the condition of the premises leased to a tenant, and whether a common law duty is owed by the landlord to a tenant.  Although the Lupa Vine Street case addressed a commercial tenancy, it is also beneficial for a landlord of residential property to review the case and the various issues discussed in that decision.

California's Statute of Frauds-Get It In Writing

In California, the Statute of Frauds in Civil Code § 1624(a) requires many types of contracts to be in writing and signed by the party to be charged, or the contracts are invalid. 

Such contracts can include:

1. An agreement that by its terms is not to be performed within one year from the making thereof.

2. A special promise to answer for the debt, default or miscarriage of another.

3. An agreement for a lease for a longer period than one year, or for the sale of real property or an interest therein.

4. An agreement authorizing or employing an agent, broker or any other person to purchase or sell real estate or to lease real estate for a longer period than one year.

5. An agreement that by its terms is not to be performed during the lifetime of the promisor.

6. An agreement by a purchaser of real property to pay an indebtedness secured by a mortgage or deed of trust upon the property purchased.

7. A contract, promise, undertaking or commitment to loan money or extend credit in an amount greater than $100,000, not primarily for personal, family or household purposes, made by a person engaged in the business of lending or arranging for the lending of money or extending credit.

In the case of Westside Estate Agency, Inc. v. Randall, the broker lost a commission of $925,000 because he agreed to help a friend buy a $5 million Bel Air estate, but the deal was closed by another broker on different terms.  When the first broker sued his friend for the commission, the trial court dismissed the lawsuit for noncompliance with the statute of frauds because he did not have an agreement in writing, and the court of appeal affirmed.

If the statute applies, its bar against relief is absolute, and applies no matter how the unhappy broker styles his claim to recover compensation or a commission, and generally no recovery will be allowed on a theory of quantum meruit, unjust enrichment, or equitable estoppel.

However, the statute does not apply to all actions involving brokers, including:

1. An action to recover for a broker's performance of services other than and not incidental to the sale or purchase of real estate or procuring, introducing or finding a purchaser or seller of real estate;

2. An action by a principal against his broker to disgorge a commission already paid on the ground that the broker breached his fiduciary duty and obtained a secret profit; and

3. An action between brokers to divide a jointly earned commission.

There are three narrow exceptions in which the statute will not be deemed a bar to a broker's action to recover compensation or a commission if there is no written agreement:

1. A broker has a limited right to estop his principal from asserting the statute to "prevent either unconscionable injury or unjust enrichment", and a broker offering to buy or sell real estate may assert estoppel only if the principal has engaged in "actual fraud".

2. The broker's principal and the other party have executed a written and binding agreement for the purchase of real estate, the written agreement specifies that the broker will receive a commission, and the broker's principal cancels the written agreement.  In this case, the broker may sue because either (a) the principal breached an implied promise to complete the transaction so the broker could recover the commission, or (b) the broker is a third party beneficiary of the written agreement between the principal and the third party to the transaction.

3. The principal subsequently ratifies the agreement, presumably an alleged oral one, in a writing.

Performance of an oral contract may estop the assertion of the statute of frauds because the performance provides confirmation of the agreement, and to avoid an unconscionable injury or unjust enrichment.

It is the policy in California courts to construe the statute of frauds restrictively, and unless the statute clearly requires an agreement or authority to be in writing, the statute is not to be applied.

Lessons:

1. If an agreement relates to money, get it in writing, because it is likely that the person owing the money will dispute the debt, and

2. If you do not follow Lesson 1, and the debtor refuses to pay based on the statute of frauds, consult an attorney to see if you can fashion a winning argument that supports enforcement of the oral agreement or an award of the commission or compensation despite the statute of frauds.