Legal
Contract Essentials
By Sonia M.
Younglove
When a borrower and a lender negotiate to stop a trustee’s sale foreclosure,
the lender’s oral representations to stop (or postpone) a foreclosure are not
binding on the lender. In Secrest v. Security National Mortgage Loan Trust
(2008), the 4th District Court of Appeal held that the lender wasn’t bound by
an oral agreement to stop the foreclosure despite the borrowers’ compliance
with the lender’s demands.
In January 2002, the borrowers, the Secrests, received a forbearance agreement
that was mailed to them by the first lender. The agreement had an incorrect
reinstatement amount on it so the lender’s representative, Neamon, told Luther
Secrest to modify the proposed forbearance agreement by crossing out the
incorrect reinstatement amount, signing it, faxing it back, and
wire-transferring the $13,422.51 to the lender. Neamon agreed that if Secrest
did those things, that “he would immediately stop any collection efforts,
perform a complete audit of our residential loan agreement ...” and if the
Secrests owed anything more on the loan, then he would have a corrected
forbearance agreement prepared and sent to them. Secrest did as instructed.
However, the loan audit was never conducted and a corrected forbearance
agreement was never delivered to the Secrests. After the loan was sold, the new
lender sent the Secrests a notice of default indicating a past due amount of
$75,577.69.
The January 2002 forbearance agreement modified the loan and deed of trust, and
an agreement to modify a contract that is subject to the statute of frauds is
also subject to the statute of frauds. The Secrests’ problem was that the
lender never signed the forbearance agreement, so it did not comply with the
statute of frauds.
However, “part performance allows enforcement of a contract lacking a requisite
writing in situations in which invoking the statute of frauds would cause
unconscionable injury.” In addition to part performance, the party seeking to
enforce a contract must have changed position in reliance on the oral agreement
to such an extent that application of the statute of frauds would be unjust.
The Secrests argued that their payment of $13,422.51 constituted part
performance and a change of position sufficient to prevent the lender from
asserting the statute of frauds.
The appellate court disagreed. The payment of money is not sufficient part
performance to take an oral agreement out of the statute of frauds. To take an
oral contract out of the statute of frauds, the required performance has been
limited to “conveying property, rendering personal services, or doing something
other than payment of money.”
Enforceable
Essentials
>> In Patel v. Liebermensch (2008), the California Supreme Court
addresses the issue of essential terms needed for a real estate option
agreement to be enforceable. Patel expressed interest in leasing Liebermensch’s
property with an option to buy. On July 25, 2003, Liebermensch faxed a proposal
to Patel that included the following information: address, monthly rental rate,
security deposit, and the following option to buy: “Through the end of year
2003, the selling price is $290,000. The selling price increases by 3 percent
through the end of the year 2004 and cancels with expiration of your occupancy.
Should this option to buy be exercised, $1,200 shall be refunded to you. Please
indicate your acceptance by signing below and returning to me at the above
referenced fax.” Patel signed the proposal and added a handwritten amendment
providing an option to renew until August 2005. Liebermensch signed the option
proposal and initialed Patel’s amendment.
In July 2004, Patel sent Liebermensch a letter exercising the option to
purchase. Liebermensch then sent Patel a purchase agreement. Patel responded
with an alternative proposal that Liebermensch rejected. Patel then signed the
original purchase agreement. Liebermensch did not respond and Patel sued for
specific performance.
The trial court ordered specific performance, but the court of appeal reversed
on the grounds that not all the essential terms were in the option contract—in
particular, the contract did not specify the time or manner of payment. The
appellate court focused on a dispute between the parties after Patel exercised
the option concerning the length of the escrow period and concluded that there
hadn’t been an agreement on all the material terms of the transaction.
The California Supreme Court, in reversing the appellate court, noted that “few
contracts would be enforceable if the existence of subsequent disputes were
taken as evidence that an agreement was never reached.” An “agreement for the
sale of real property does not have to be evidenced by a formal contract drawn
with technical exactness in order to be binding.” The material factors in the
written contract are the seller, the buyer, the price to be paid, and the
property to be transferred described so it may be identified. In addition, a
reasonable time of payment may be implied in a contract for the sale of real
property.
Q: Would you please explain the California deficiency judgment
rules?
A: A deficiency judgment is a court-ordered lien against
a borrower when the foreclosure sale proceeds are insufficient to pay off the
balance of the loan. First, if the lender forecloses by trustee’s sale, in
California the lender cannot legally go after the borrower for the deficiency
amount. To obtain a deficiency judgment, the lender must sue the borrower in a
judicial foreclosure. Second, the lender can go after a deficiency judgment
only if the loan is a recourse loan. The law does have certain exceptions for
bad faith waste (e.g., destruction of the property or failure to pay property
taxes) and will allow the lender to sue the borrower of a non-recourse loan for
“milking of the mortgaged property.”
Non-recourse loans are: (1) lender loan to purchase a residential one- to
four-unit property that the buyer intends to occupy, and (2) loan from the
seller to purchase any real property. Recourse loans are all other types of
loans, e.g., the refinance of any loan on any type of rental property,
residential properties consisting of five or more units, commercial property,
industrial property, or agricultural property.
Sonia M. Younglove, Esq., is C.A.R. senior counsel.
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