PROPERTY II

FINAL EXAMINATION

PROFESSOR CADGENE

SPRING 2006

1. You have three (3) hours to complete this exam.

2. This is a closed book exam.

3. This exam consists of two (2) parts.

a. Questions I and II: Two (2) Essay questions. Please note that the special instructions for the essay questions are set forth in Sections 5, 6 and 7 below.

b. Question III: Twenty-five (25) Multiple Choice questions. Please note that the special instructions for the Multiple Choice questions are found at the beginning of Question III.

4. The questions are of equal weight. The questions will be weighted as follows:

Percentage Suggested Time

Question I 33.33% 60 min.

Question II 33.33% 60 min.

Question III 33.33% 60 min.

100% 180 min.

5. Answer the essay questions 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.

6. 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. Unless otherwise noted, if you conclude that different results could be reached dependant 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 which you are applying.

8. Write your exam number on your exam envelope. Put your correct class section and student exam # at the top of this page, each page of questions, each blue book, and the “ParSCORE TEST FORM.” Do not use your name, student ID number or Social Security number on any exam materials.

9. At the conclusion of the exam, return all test materials, including blue books, ParScore answer sheet, scratch paper, and this exam packet to the envelope and submit it to the proctor. DO NOT seal the envelope. Students who do not return all exam materials at the end of the exam may not be graded.

GOOD LUCK!

QUESTION I

ESSAY QUESTION

(Suggested Time: 60 min)

On March 27, 1995 Barbara Roberts (“Barbara”) acquired a three-acre parcel of land located at 135 Harris Street, City of Urban, State X (the “Harris Street Property”) for $225,000. The Harris Street Property was improved with a 20,000 square foot commercial building. On June 1, 1995 Barbara entered into a fifteen (15) year written lease (the “Lease”) with Jim Hipp (“Jim”), doing business as Everybody’s Gym. Jim planned on using the leased premises as a fitness center. Because the cost of improvements that Jim was making to the leased premises exceeded $200,000, Barbara agreed to give Jim an option to purchase the Harris Street Property commencing in the tenth year of the Lease. Contemporaneous with the execution of the Lease, Barbara and Jim also executed a separate option agreement (the “Option Agreement”) which gave Jim the right to purchase the Harris Street Property beginning June 1, 2005 through the expiration of the lease at the following purchase prices:

June 1, 2005 – May 30, 2006 $1,000,000

June 1, 2006 – May 30, 2007 $1,050,000

June 1, 2007 – May 30, 2008 $1,100,000

June 1, 2008 – May 30, 2009 $1,150,000

June 1, 2009 – May 30, 2010 $1,200,000

If the option were exercised, the purchase price was payable all cash and the closing was to occur 30 days from the time of exercise.

On August 12, 2000 Barbara died. She had no heirs. She loved cats. She left the Harris Street Property to the Home for Wayward Cats (“Cats”), a State X non-profit corporation. Cats did not want the Harris Street Property, so Cats decided to sell the property and use the proceeds to build a luxury feline hotel. On November 1, 2000 Cats entered into a six-month written exclusive right to sell listing agreement with Carol Gilbert (“Carol”), a licensed real estate broker in State X. Carol entered the listing into the City of Urban’s MLS database. The Harris Street Property was listed for $1,000,000, all cash or other terms acceptable to Cats. Before entering into the listing agreement with Carol, Sharon Cook (“Sharon”), the executive director of Cats, told Jim that Cats intended to list the property for $1,000,000 and she wanted to know whether or not Jim was interested in buying the property. Jim told Sharon that at the present time he didn’t think he could afford to buy the property and in any event he thought $1,000,000 was too high a price. Jim did not mention the option agreement during his conversation with Sharon because he did not think it relevant.

There was a lot of interest in the Harris Street Property. Eventually, Cats entered into a written purchase agreement with Biggergym at an agreed upon sales price of $1,100,000. Biggergym was shown the Harris Street Property by Billy Buff (“Billy”), a licensed real estate broker in State X. Billy and Carol orally agreed to share the five (5%) commission equally. Although Biggergym would have liked to own the Harris Street Property even if Jim were not a tenant, they were also motivated to purchase the

Harris Street Property because they would be able to put a competitor out of business when the lease terminated.

During the due diligence period, Biggergym’s President was given a copy of the Lease, but was not given a copy of the Option Agreement. It was not clear whether or not Cats had a copy of the Option Agreement and Sharon, who negotiated the sale of the property on behalf of Cats, was not aware of the Option Agreement. The sale of the Harris Street Property closed on March 1, 2001 with Cats executing a special warranty deed to Biggergym. Biggergym purchased a standard ALTA title insurance policy from Eveready Title Company with a policy amount of $1,100,000.

By June 1, 2005, the Harris Street Property had gone up in value to $2,000,000. Jim did not like a competitor being his landlord. As soon as he could, he gave Biggergym written notice that he was exercising his option to purchase the Harris Street Property for $1,000,000. The written notice was delivered to Biggergym on June 15, 2005. When Biggergym received Jim’s notice of the exercise of his option, Biggergym wrote back indicating that they were unaware of any option and that they were referring the matter to their attorney.

On June 30, 2005, there was a lightening storm and the improvements on the Harris Street Property were completely destroyed by fire. Biggergym maintained a fire insurance policy with Big Flame Insurance Company (“ Big Flame”) on the structure itself with a policy limit of $1,800,000 and Jim maintained coverage on his improvements and trade fixtures in the amount of $500,000 with Little Smoke Insurance Company (“Little Smoke”). All parties agreed that it will cost $1,400,000 to rebuild the structure and $400,000 to replace Jim’s tenant improvements and trade fixtures.

Please discuss each party’s rights and liabilities toward each other:

Jim versus Biggergym,

and

Biggergym versus a. Jim, b. Cats, c. Carol, d. Billy, e. Eveready Title Company

Please think about how to organize an answer to this question before you begin to write.

END OF ESSAY QUESTION I

QUESTION II

ESSAY QUESTION

(Suggested Time: 60 min)

In 1996 Diggs, Inc. (“Diggs”) acquired a twenty-five acre parcel of land “Greenacre” located in the City of Urban, State of X. Diggs successfully obtained subdivision approval to divide Greenacre into fifty residential lots, which Diggs planned on selling to others. In 1996 and 1997, Diggs installed roads, curbs, sidewalks, sewer and storm drains and other utilities necessary to obtain approval for the subdivision from the City of Urban. Final subdivision approval was obtained on March 15, 1997. Carol Stone (“Carol”) graduated from law school in the Spring of 1993. She passed the State’s bar exam and commenced working for Wigley, Swagger and Disgusting. She was just a little bored practicing law and had heard everyone was making “tons of money” in real estate. She was aware of the Diggs’ single family residential subdivision and decided to purchase six lots upon which she planned to build speculative homes. She closed on the purchase of the six lots (Lots 101-106) on July 15, 1997 paying $40,000 per lot. Each lot contained 5,000 square feet. Carol decided it would be unwise to build all six houses at once so she decided to build one at a time and not start the next house until the prior house had been completed and sold.

She chose to build on Lot 101 (“124 Green Street”) first and completed an architecturally designed home consisting of 4,000 square feet. She sold 124 Green Street to Stan and Barbara Cruz (collectively “Cruz”) on July 1, 1998 for $900,000 and made approximately $150,000. She felt smug. She thought to herself, “This is better than working eighty hours per week.” Stan and Barbara Cruz only lived in 124 Green Street for about two months before Stan’s employer transferred him to another state and they were required to sell 124 Green Street. Cruz entered into a six month written listing agreement with Elliot Cool (“Elliot”), doing business as Stonerock Realty. Elliot listed the house in the MLS and Cruz accepted an offer made by Charles Hill (“Charles”) at a purchase price of $925,000. The Charles’ offer was made through Linda Lovelace (“Linda”), doing business as Loving Realty. Cruz filled out a disclosure statement indicating that they did not know of anything wrong with the property. Because it was a new house, Charles asked Linda whether it was necessary to have a professional inspection of the property. Linda replied, “Well it’s a new home. It is up to you.” The Cruz/Charles purchase and sale closed on January 14, 1999. The closing occurred without a professional inspection.

After living in the house approximately two years, Charles noticed that the sun porch built at the rear of the house was starting to sink so that the floor was no longer level and cracks started to appear in the foundation. They also began to notice a musty smell. As the condition of the floor worsened, the cracks grew larger, and the smell grew more intense, Charles commissioned an engineering study to find out what was wrong with 124 Green Street. The Sybell Engineering study identified three defective conditions:

1. The sinking sun room was caused by faulty grading and inadequately compacted soils that was undertaken by Diggs in order to complete the subdivision process. The cost of repair is estimated at $95,000.

2. The installation of defective windows, manufactured by Bestwindows, Inc., allowed water to penetrate into the building causing extensive dry rot damage and allowed mold to grow throughout the crawl space. The estimated cost to repair these items is as follows:

a) Replace defective windows $5000

b) Dry rot repairs and mold remediation $80,000

3. Shear walls designed to withstand high winds and seismic forces were improperly constructed and fastened. Fire walls designed to slow down the spread of fire from one part of the structure to another were improperly constructed. The defective shear walls and fire walls have not resulted in any damage or injury but they present possible design defects that could lead to

structural failure or the more rapid spread of fire under adverse conditions.

You work for the law firm of Work, Workmore and Workmost. Your firm has been contacted by Charles with respect to the defects that have arisen at 124 Green Street and identified in the Sybell Engineering report. The partner for whom you work has asked you to prepare a memorandum and has alerted you to the fact that he has just learned that the purchase agreement entered into between Carol and Cruz contained the following provisions:

“12. For a period of two years from the closing, Seller warrants that the house will be free from defects due to the failure to have been constructed in a skillful manner, except for such defects attributable to causes that existed prior to Seller’s acquisition of the property. This warranty shall not be assignable.

13. Except for the express warranties set forth in Section 12, Buyer specifically acknowledges and agrees that Seller is selling and Buyer is purchasing the property on an “as is with all faults” basis, and except as set forth in Section 12, Buyer is not relying on any representations or warranties of any kind, whatsoever, express or implied by Seller or its agents as to any matter concerning the property and Buyer is relying solely on its own investigation of the property.”

Please write a memorandum for the partner in charge with respect to the causes of action and expected defenses that Charles could assert against other parties including:

a.) Diggs, Inc. (“Diggs”)

b.) Carol Stone (“Carol”)

c.) Stan and Barbara Cruz (“Cruz”)

d.) Elliot Cool (“Elliot”)

e.) Linda Lovelace (“Linda”)

END OF ESSAY QUESTIONS