Property I § X and Y
Professor Cadgene
Spring 2003 Final Exam / May 10, 2003
INSTRUCTIONS
1. This
is a three-hour examination. The
examination is a closed book exam.
2. The
examination consists of 15 total pages including instructions: one essay
question on four pages (Part I), and True/False questions on nine pages (Part
II). Please note that special
instructions for the True/False questions are found at the beginning of that
section. Using a #2 pencil, darken in
the letter corresponding to the correct answer on your ParScore answer sheet (A
for True/ B for False). If you change
your answer, please be sure that your erasures are complete. The exam will be
scored by a machine and any ambiguities will be counted as a wrong answer.
3. The
Parts are of equal weight. The questions will be weighted as follows:
|
|
Percentage
|
Suggested Time
|
|
Part I - Essay
|
50%
|
90 minutes
|
|
Part II - True/False
|
50%
|
90 minutes
|
4. Answer the essay question or part thereof in order in your
blue books unless you are typing your exam. Start each question on a separate page. Please write on every other line and only on one side of the page. Please take time to organize your answer
before you begin to write, and write clearly. Typed examinations through
ExamSoft are appreciated, but are not required.
5. For the essay, if you believe a question is vague or a
material fact is lacking, state explicitly the assumption of fact you are
making in answering the question. In some questions a key fact or facts may
have been intentionally omitted. In these instances, in order to fully answer
the question, you must make an assumption and supply the key fact or
facts. Be sure to make your analysis
and/or argument in the alternative: e.g., If X were the case, then the result
would be Y. If W were the case, then
the result would be Z.
6. For the essay, unless otherwise noted, if you conclude that
different results could be reached dependent upon the applicable law of a
particular jurisdiction, your answer should cover alternative situations, e.g.,
the majority, the minority, and the California rule. When applying California law, you should always indicate that
this is the law that you are applying.
7. Write your exam number on your exam envelope, at the
top of this exam question packet and any used exam materials. Do not use your name, student ID number
or Social Security Number on any exam materials. Please also enter your Student Examination Number on the essay
question, and True/False questions and on the True/False answer sheet.
At the conclusion of the exam, return all exam materials to
the exam envelope and submit it to the proctor. Do not seal the envelope.
UESTION I / (Suggested
Time: 90 min.)
Your client is Opportunity Investors (“Opportunity”).
Opportunity is considering purchasing Fallen Leaf, an existing mixed-use
retail/office project together with certain adjacent unimproved land
(collectively “the Property”) located in City Y, State X.
The Property is currently owned by the Bank of Commerce (the
“Bank”), which acquired the Property at a nonjudicial foreclosure sale on March
1, 2003. The Bank had lent Pamela Brown (“Brown”) and Eugene Ogburn (“Ogburn”),
the former owners, over three million dollars ($3,000,000) on January 1, 1993,
to purchase and renovate the Property. Brown and Ogburn acquired the Property
as joint tenants. In the late 1990s, motivated by higher rents, Brown and
Ogburn replaced more traditional commercial uses with dot-com businesses, all
of whom subsequently failed. This together with declining rents and a scarcity
of new tenants led to their inability to service the debt, which was secured by
the Property, and resulted in the foreclosure.
Your client has asked you to advise them with aspects of
their due diligence work to help them decide whether they should purchase the
Property. They have asked you to provide them with a memorandum on each of the
following due diligence issues:
A. Lease with Lobster King (the “Restaurant”). The
written lease with the Restaurant (the “Restaurant Lease”) commenced on June 1,
1990, and was executed by the predecessors of Brown and Ogburn. The Restaurant
Lease has a term that expires on May 30, 2110, and provides for annual rent of
$200,000.00, payable in equal monthly installments. The annual rent increases
each year by seven percent (7%). Section 14 of the Restaurant Lease provides,
in part, as follows:
“(a) This Lease is, and at all
times hereafter shall be, subject and subordinate to the lien of any mortgage
or deed of trust in any amounts or amounts whatsoever now or hereafter placed
on or against said property, all without the necessity of the execution and
delivery of any further instruments on the part of Tenant to effectuate said
subordination.
(b) Notwithstanding Section 14(a),
Tenant’s rights and privileges under the Lease shall not be diminished by the
lender’s exercise of its rights or remedies under Section 14(a).”
Section 22 of the Restaurant Lease provides, in
part, as follows:
“Upon default or breach of this Lease, Landlord may:
(a) Terminate this
Lease and expel Tenant from the Premises, in which case Tenant shall remain
liable for the payment of all rent and other sums payable by Tenant pursuant to
this Lease until the date this Lease would have expired had such termination
not occurred and all other damages recoverable at law or in equity, all of
which shall be deemed accelerated and shall be immediately due and payable upon
termination;
(b) Continue this
Lease in effect and to enforce all of its rights and remedies under this Lease,
in accordance with the law of State X, including the right to recover rent as
it becomes due, for so long as Landlord does not terminate Tenant's right to
possession. Acts of maintenance or preservation, efforts to relet the Premises,
or the appointment of a receiver upon Landlord's initiative to protect its
interest under this Lease shall not constitute a termination of Tenant's right
to possession.”
The Bank has received a hand-delivered written notice from
Restaurant, dated March 15, 2003, terminating their lease as of March 16, 2003,
and indicating their intention to vacate the premises on or before March 16,
2003.
Your client wishes to know the status of the Restaurant
Lease and what their rights, remedies, and obligations would be with the
Restaurant were they to acquire the Property.
B. Lease with Shades of Sarah (“Shades”). The
written lease with Shades (the “Shades Lease”) was executed on September 1,
1995, by Ogburn and Shades. The Shades Lease has a term of fifteen (15) years,
and the lessee was obligated to pay $15,000 per month with specified annual
adjustments. Section 26 of the lease provides, in part, as follows:
“This Lease is, and at all times
hereunder shall be, subject and subordinate to the lien of any mortgage or deed
of trust in any amount seized by the Property. In the event that Landlord at
any time sells or conveys its estate in the real property or in the event that
Landlord’s estate is acquired by any other party upon foreclosure, if requested
within sixty (60) days of such event, Tenant shall attorn to such successor in
interest and enter into a new lease containing all the terms and provisions of
this Lease or at the election of the successor in interest, this Lease shall
automatically become a new lease between Tenant and such successor in
interest.”
Eugene Ogburn died on February 1, 2003.
Your client wishes to know the status of the Shades Lease
and what their rights, remedies, and obligations would be with Shades were they
to acquire the Property.
C. Proposed City Y Ordinance. Because of the SARS
scare, City Y is considering passing an ordinance that would require all
building owners of commercial property whose buildings exceed 20,000 square
feet to install special screening equipment and air filtering systems to
identify carriers to prevent the spread of the SARS virus. The estimated cost
of complying with the proposed ordinance is one hundred and twenty-five
thousand dollars ($125,000.00) for each commercial tenant at Fallen Leaf.
Each of the existing commercial leases at Fallen Leaf,
including the leases with Restaurant and Shades contain the following
provisions:
Tenant shall not use
the Premises or permit anything to be done in or about the Premises which will
in any way conflict with any law, statute, ordinance or governmental rule or
regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense,
promptly comply with all laws, statutes, ordinances and governmental rules,
regulations or requirements now in force or which may hereafter be in force and
with the requirements of any board of fire insurance underwriters or other
similar bodies now or hereafter constituted, relating to, or affecting the
condition, use or occupancy of the Premises.”
* * *
“By entry hereunder
Tenant accepts the Premises as being in the condition in which Landlord is
obliged to deliver the Premises under the terms of this Lease. Tenant shall, at
all times during the term hereof and at Tenant's sole cost and expense, keep
the Premises and every part thereof in good condition and repair (ordinary wear
and tear, damage thereto by fire, earthquake, act of God or the elements
excepted). Notwithstanding the above,
Landlord shall repair and maintain the structural portions of the Project
unless such maintenance and repairs are in any way caused by the act, neglect,
fault or omission of any duty by Tenant, its agents, servants, employees or
invitees, in which case Tenant shall pay to Landlord the reasonable cost of
such maintenance and repairs.”
* * *
“Throughout the term of this Lease, Tenant shall pay as
additional rent its percentage share of the operating expenses paid or incurred
by Landlord in such calendar year and its percentage share of property taxes
assessed against the Property paid or incurred by Landlord in such calendar
year.”
Assuming that they purchase the Property, your client
wants you to know what the consequences would be should City X enact the
proposed ordinance.
D. Adjacent Property. Barbara Rural (“Rural”) owned
100 acres of farmland that had been in her family for generations. She lived on
her property on a house set back from the road. A long driveway led to her
farmhouse. Rural sold 20 acres of her land to Brown and Ogburn in 1993. The 20
acres adjoins Fallen Leaf at the rear, is currently owned by the Bank, and is
being sold together with Fallen Leaf. Rural wanted to maintain the rural
character of the land. The 1993 deed from Rural to Brown and Ogburn for the 20
acres provided, in part, as follows:
“The Grantee hereby covenants on
behalf of themselves, their heirs, successors, and assigns not to construct any
improvements on the property.”
In 1999, Rural died, leaving no will.
All of her property passed to her adult daughter, Amanda Rural (“Amanda”).
Amanda wants to take advantage of her inheritance and is proposing to subdivide
the remaining 80 acres into 10-acre parcels as a residential subdivision,
including a 10-acre parcel for the original farmhouse.
To increase the development potential
of Fallen Leaf, your client has determined that additional improvements could
be built on the existing parking area of the original Fallen Leaf parcel
provided that parking could be developed and relocated on the 20-acre parcel.
The existing zoning of all of Rural’s
original 100 acres is currently agricultural, which would not permit the use of
either the 20-acre portion for parking purposes or allow the 80-acre portion to
be subdivided for a residential development.
Prepare a memorandum for your
client discussing all potential impediments to achieving their objectives as
well as discussing potential solutions. See diagram below (not to scale).
