Exam Number __________________
Property I, Law 715A
Professor Cadgene
Spring 2005 Final Exam / May 7, 2005
2:00pm – 5:00pm
INSTRUCTIONS
1. This is a three (3) hour examination.
2. The examination is a closed book exam.
3. The examination consists of eighteen (18) total pages including instructions: one essay question on three (3) pages (Part I), five (5) Multiple Choice questions on two (2) pages (Part II) and eighty (80) True/False questions on nine (9) pages (Part III). Please note that special instructions for the Multiple Choice 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. Please also 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. A machine will score the exam and any ambiguities will be counted as a wrong answer.
4. The Parts are not of equal weight. The questions will be weighted as follows:
Percentage & Suggested Time
Part I – Essay 50%, 90 minutes
Part II – Multiple Choice 10%, 18 minutes
Part III – True/False 40%, 72 minutes
5. 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 answerbefore you begin to write, and write clearly. Typed examinations
through ExamSoft are appreciated, but are not required.
6. 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.
7. 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.
8. 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 both the Multiple Choice and True/False questions and on the Multiple Choice and True/False answer sheet.
9. 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.
10. Good luck!
QUESTION I
ESSAY (Suggested Time: 90 min.)
Barbara Goodknow (“Barbara”) and John Carpenter (“John”) were married in March 1988. Ever since their marriage they have resided in State X, a community property state. In 1990 with funds accumulated during marriage they purchased a 10,000 square foot commercial Property (the “Property”) in County Z, State X for $200,000. When they purchased the Property they took title in the name of Barbara Goodknow and John Carpenter, husband and wife as joint tenants at the suggestion of the real estate broker who represented them in the purchase of the Property. In 1992 the existing tenant who rented the entire Property vacated at the termination of their lease. John was able to find a new restaurant tenant, specializing in raw vegetarian food who was willing to rent the entire Property. The lease (the “Lease”) with Raw Veggie, Inc., (“Veggie”) a State X corporation, provided in part as follows:
“COMMERCIAL BUILDING LEASE
THIS LEASE is made as of the 15 day of March, 1992 by and between Landlord and Tenant.
1. TERMS AND DEFINITIONS. For purposes of this Lease, the following terms shall have the following definitions and meanings:
Landlord: John Carpenter
1.2 Tenant: Raw Veggie, Inc.
1.2.1 Use: Restaurant.***
1.8 Leasehold Improvements: Landlord is delivering the premises in their “as is” condition. Tenant shall be required to make all desired leasehold improvements, which Tenant desires to make, including installation of Tenant’s furnishings and fixtures. Tenant estimates that said leasehold improvements will cost not less than $400,000. In consideration of Tenant agreeing to pay for all of its leasehold improvements, Landlord agrees that Tenant shall have the right to purchase the Property on the terms provided for in Section 21.1.9 Commencement Date: April 1, 1992
1.10 Expiration Date: March 31, 2007
***
15. SUBORDINATION, ATTORNMENT. Without the necessity of any additional document
being executed by Tenant for the purpose of effecting a subordination, this
Lease shall be subject and subordinate at all times to: the lien of any mortgage
or deed of trust which may now exist or hereafter be executed in any amount
for which said Property, or Landlord's interest or estate in said Property is
specified as security. Notwithstanding the forgoing, the holder of any security
interest may, upon written notice to Tenant, elect to have this Lease prior
to its security interest regardless of the time of the granting or recording
of that security interest. In the event that any mortgage or deed of trust is
foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant
shall, notwithstanding any subordination, attorn to and become the Tenant of
the successor in interest to Landlord, at the option of such successor in interest.
Tenant covenants and agrees to execute and deliver, upon demand by Landlord
and in the form requested by Landlord, any additional documents evidencing the
priority or subordination of this Lease with respect to any such mortgage or
deed of trust.
***
20. OPTION TO EXTEND. Landlord hereby grants to Tenant the option to extend
the term of this Lease for a fifteen year period commencing when the original
term expires and terminating March 31, 2022 upon each and all of the following
terms and conditions:
1. Tenant shall not be in default at the time Tenant delivers the notice of his election to extend the term nor for a period of more than thirty (30) days at any time during the original term.
2. Tenant shall have given Landlord written notice of its election to extend the term not less than one hundred eighty (180) days prior to March 31, 2007, time being of the essence. If the notification is not so given, this option shall automatically expire.3. All of the terms and conditions of the Lease shall apply except that the rent during the option term shall be as follows: (intentionally omitted)
21. OPTION TO PURCHASE. Landlord herby grants to Tenant the exclusive option
to purchase the Property at the following purchase prices:
i. During the period April 1, 1992 through March 31, 1997 the purchase price shall be $1,000,000.00
ii. During the period April 1, 1997 through March 31, 2002 the purchase price shall be $1,050,000.00
iii. During the period April 1, 2002 through March 31, 2007 the purchase price shall be $1,100,000.00
Provided Tenant elects to extend the term of this Lease, the Purchase Price during the extended term shall be as follows:
iv. During the period April 1, 2007 through March 31, 2012 the purchase price shall be $1,200,000.00
v. During the period April 1, 2012 through March 31, 2017 the purchase price shall be $1,250,000.00
vi. During the period April 1, 2017 through March 31, 2022 the purchase price shall be $1,300,000.00. ”
Since Barbara was out of town when the Lease with Veggie was negotiated and signed, only John executed the Lease. A memorandum of the lease was recorded in official records of County Z on April 1, 1992. Since the inception of the Lease, rent and other monetary obligations owed by Veggie have been directly deposited in Barbara and John’s joint bank account with Little Bank.
In 2003 John started a new business. The business did not go well and in order
to pay mounting personal expenses, John and Barbara borrowed $950,000 from Little
Bank (the “Little Bank Loan”). The Little Bank Loan was secured
by a deed of trust on the Property and by its terms was non recourse, meaning
that in the event of a foreclosure Little Bank could cause the Property to be
sold at a foreclosure sale (if Little Bank where the highest bidder at the foreclosure
sale it would acquire ownership of the Property), but John and Barbara would
not otherwise be personally liable on the Little Bank Loan. With respect to
the Little Bank Loan, both John and Barbara executed a promissory note and deed
of trust. The proceeds of the Little Bank Loan were first used to pay off the
existing indebtedness secured by the Property and other liens that had been
recorded against the Property. The remaining proceeds were used to pay personal
debt that John and Barbara had accumulated.
John’s new business venture continued to suffer losses. John and Barbara
began using funds deposited by Veggie in their Little Bank account to pay personal
expenses and have made no payments on the Little Bank Loan since June 2004.
Little Bank is threatening forclosure. As a creditor of John and his new business
Allied Supply, Inc. obtained a personal judgment against John for $400,000 on
March 1, 2005, which judgment was recorded in the official records of County
Z on March 9, 2005.
The following events have subsequently taken place:
1. On March 10, 2005 having learned of John’s mounting financial problems, Veggie has delivered a notice to John of their election to exercise their option and purchase the Property for $1,100,000 all cash.
2. Because of the stress John died on March 17, 2005 of a sudden heart attack. In his will John left his interest in the Property to Randy Carpenter, a son from a prior marriage.
3. As of May 1, 2005 the total owned to Little Bank with back payments, interest and penalties is $1,150,000.00.
4. As of May 1, 2005, Allied’s judgment with interest and costs totals $430,000. Allied has asked the sheriff to levy on John’s interest in the Property.
5. Barbara has received an appraisal of the Property of $2,000,000 as of May 1, 2005 based on what comparable properties have sold for free and clear of all encumbrances (e.g. debt, liens, etc.).
You work as an associate for the law firm of Grouton, Grouton, and Grouton. Barbara has come to your law firm for advice. The partner in the firm for whom you work has talked to Little Bank who is willing to delay foreclosure so long as Barbara is able to quickly sell the Property and pay them off.
Please prepare a memorandum discussing Barbara’s objectives and the respective
rights, obligations, remedies, and defenses that Barbara has with respect to
the following parties:
1. Barbara v. Veggie, Inc.
2. Barbara v. Allied Supply, Inc.
3. Barbara v. Randy Carpenter
Your discussion should include what you expect the other side to argue and an evaluation of Barbara’s chances of success.
Finally, the partner has asked you to discuss the relationship between Veggie and Little Bank should Little Bank foreclose and acquire ownership of the Property. Were that to happen what are the possible consequences to Barbara? As Barbara has no personal liability on the Little Bank Loan you should not discuss any potential liability Barbara has to Little Bank other than assuming that Barbara will lose the Property if Little Bank forecloses.
END OF ESSAY