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PRIVATE ANNUITY TRUSTS (By: Dan G. McKinney)

Thursday 31st of August 2006 14:28

Recently, an excellent seminar was hosted by First American Title Insurance Company on Private Annuity Trusts to promote the services of Quantum Advisors (QA) and explain Private Annuity Trusts (PAT) to the real estate community. This article is intended not to discourage Private Annuity Trusts (PAT), but rather to point out a few caveats which should be considered if agents choose to market this product to their clients. First, PAT is a powerful tax deferral and estate planning tool. Like any such tool, there are significant limitations and complexities. A client considering such a program should obtain advice from and indepedent tax attorney as well as from the client's tax accounting professional. There are probably no tax professionals in the Roseburg area comfortable with giving advice on PAT. Second, unlike 1031 exchanges as a tax deferral tool which is provided for by statute and for which the IRS has set forth clear "safe harbor" rules, the use of PAT is not a guaranteed safe tax avoidance device. In fact, in one case, Stokes v. Commissioner 77 T.C.M. 2206, T.C.M. (RIA) 99, 204 (Tax Ct. 1999), the court held that the PAT constituted a "sham trust that lacked economic substance". Stokes was required to pay the entire tax due on the sale as well as penalties and interest. Thus, in any significant financial transaction, the client will be advised that no Attorney or CPA will assure the client of the success of the transaction unless a Private Letter Ruling is first obtained from the IRS. Third, the rules are complicated. For example, QA was of the opinion that a property in escrow could be shifted to the trust and the sale completed by the PAT. We do not agree with this advice. It would likely cause the IRS to find that the PAT was a sham transaction. Most professionals advise their clients to put the property into the PAT before selling it. Fourth, there are many risks which may follow from the creation of the PAT which the client must understand. It must be a separate legal entity. The client is not in control of it, any indications of control would invalidate the PAT. Similarly, if the client passes away before any significant payments are made by the PAT, the PAT has a zero or low basis in the trust assets. The beneficiaries will likely receive the trust property with a zero or low basis. This translates into a large taxable gain to the beneficiaries if the asset is sold. The inheritance tax deductionis lost, the stepped up basis in real property benefit is lost because the asset was not part of the client's estate. This negative effect must be evaluated. Fifth, the promoters extol the virtue of delaying the start of the annuity until age 65 or 70. The monthly payment becomes very large. The client should run a competing balance sheet to ascertain if the money received after taxes, properly invested and compounded, would still have generated a much larger income. The figure typically used in these investments is 5%. As the promoters indicate, the stock market has never done less than 8% over a long term. The promoters may indicate that if the market does well, the PAT assets would grow for the benefit of the estate. That is true, but the client may never touch that money. To qualify for a PAT, it must be in a non revocable trust, managed by others. Sixth, it is suggested that the annuity is an asset protection device. It is true that the principal of the trust is protected from future creditors if it is set up correctly. The client should be aware that the income from the trust is not protected from creditors. Moreover, the asset, if it were a home, may have been subject to homestead or other exemptions from execution, the income from the PAT is not. In conclusion, Private Annuity Trusts have been used for many years, but have only recently exploded in popularity. They will be valuable tool for sale of property for a few special clients as an "exit strategy" from real estate market to avoid taxes, but they are not for every client who wants to avoid payment of taxes.

UNUSUAL PRESCRIPTIVE EASEMENTS (By: Dan G. McKinney)

Friday 28th of July 2006 11:23

We are occasionally asked to comment on unusual prescriptive easements. For example, a downhill neighbor seeks to build a home or plant trees that would block a spectacular view. The uphill owner has been using the view openly, notoriously, exclusively, continuously, and possibly even under a claim of right for over 10 years; can a claim for prescriptive easement for view be made? No. Oregon does not recognize negative easements by prescription. Such negative easements include easements for light, easements for view, and easements prohibiting construction. Prescriptive easements for flooding, animal grazing and access are possible if the elements are met, but the claimant must understand that easements by prescription are not favored by law. Wood v. Woodcock, 276 OR 49, 56 (1976). They must be proven by "clear and convincing" evidence. An interesting case involving a claimed prescriptive easement for stray golf balls came before the Court of Appeals this year. In Beers v. Brown, 204 OR App 395 (2006), the Oregon Court of Appeals considered whether a golf range owner had obtained a prescriptive easement on his neighbor's adjacent property for stray golf balls. The golf balls form the driving range had been straying onto the neighbors property since in 1960's. The neighbor argued that a 1999 expansion of the golf course caused an increase in golf balls and constituted a nuisance. The Trial Court found against the golf course owner and on appeal, the decision was affirmed. The Court recognized that intermittent use can satisfy the open and notorious requirement, but infrequent use may not. The Court reviewing the evidence noted that the person claiming the prescriptive easement did not prove by "clear and convincing evidence" that the pre 1999 golf course expansion was frequent enough to create a nuisance and affirmed the award of damages. In conclusion, the are times that the doctrine of prescriptive easement is necessary and appropriate to create a property right, such as an encroachment or a long used road without a recorded easement, but please be aware that Oregon Courts are not eager to expand the application of this principle.

USING THE CONSUMER PRICE INDEX (By: Dan G. McKinney)

Friday 28th of July 2006 11:02

Landlords seeking to increase rent in future lease years or sellers seeking a price escalation clause in options to purchase use several methods. First, there can be a fixed increase each year. Second, the parties can agree on a percentage annual increase. Third, the parties can agree that the increase will be based on the Landlord/Sellers increase in maintenance, insurance or investment in the property. Finally, many parties use the Consumer Price Index (CPI). In using the CPI as a rent or price escalation tool, there are several guidelines which must be followed. First, the parties must be aware the CPI measures the average change in the prices paid for a market basket of goods or services. There are two basic types of CPI, "All Urban Consumers" is CPI-U and "Urban Wage Earners and Clerical Workers" is CPI-W. You must decide which index will apply. You must identify which area of coverage applies (US, City Average, West Region, Chicago, Portland, and so forth). In applying the CPI for escalation, you should clearly define the base payment that is subject to escalation as well as the index base period (1982-1984=100). You must specify a reference period from which the changes in the CPI will be measured. Some indexes are updated monthly. The index for Portland area is updated semi-annually only. If you use US average, you can obtain a semi-monthly index. It is critical that a full year be used to calculate the price escalation. Thus, do not identify a date for calculation that does not correspond to an index. We have seen leases that require the lease commencement date be the starting calculation date and the last available index be the final escalation rate calculation. This would not result in a full year of index increase. The agreement should state the frequency of adjustment as well as the formula for the adjustment. There is little dispute how to use CPI index. The parties should agree, however, on whether there would be a reduction in price if the CPI index goes down. Finally, the parties should agree on a process to use if the prarticular index becomes unavailable; an alternate index should be identified. In general, the CPI-U is used as it represents a larger group of the population and goods. In determining wage increase, the CPI-W is more accurate. Using a local metropolitan area such as Portland may give a large variance in the CPI as opposed to using the US average. We have found that using the CPI for real property transactions is an easy tool to measure short term increases due to inflation. It is not a useful tool for long term transactions as inflation for consumer goods does not always correspond well to increased value or rent on real property. For more information or rate information, see www.bls.gov/cpi

IMPORTANT THINGS TO REVIEW WITH YOUR CLIENT WHEN AN OFFER IS MADE (By: Dan G. McKinney)

Thursday 25th of May 2006 14:32

When you are reviewing an offer with the buyer or with the seller there are obviously many issues to be discussed, the most important of which is price and terms. The following represents a list of issues which buyers and sellers have presented to our office in which they claim to have entered into the agreement without a complete understanding of the details of the transaction. Accordingly, please add the following issues to your discussions with your clients so they will completely understand the terms of the transaction placing their trust in you as to these details. 1. Contingencies. We deal in contingencies every day, but the lay person does not understand the implications of a contingency such as financing or sale of a home. Be careful to explain to the sellers that the financing contingency will mean that the buyer receives his deposit back if the buyer is unable to close the escrow due to any reason relating to financing. Similarly, seller must understand available "counter contingencies" such as seller's right to leave the property on the market or 72-hour notice to remove the contingency. 2. What is included in the sale? I have counseled the realtors in this area to be more careful in identifying personal property to be included in the sale, yet buyers and sellers are frequently confused after the escrow closes as to whether certain items of personal property were included or excluded. Be specific. I have a case pending at this time in which the buyer and seller are disagreeing whether the firewood in the shed was included in the sale. People will argue over anything if they become unhappy with the transaction. Don't be in the middle of this dispute. 3. When does buyer take possession? Be sure your client understands when the change of possession is to occur. Many realtors routinely check "close of escrow" which can be terribly inconvenient for the seller when the buyer's obligation to fund escrow may not occur until a few days before closing. 4. Right to a walk-through and what will occur at that time. Do not leave this for later agreement. Agree in advance whether a walk-through will occur and what is expected of the seller and buyer as a result of the final inspection. 5. Title and escrow. Many of your clients do not understand either of these concepts or functions. They will be sorely disappointed when the charges occur on the settlement statement if they have not been warned in advance of the nature of these charges. In particular, buyers should be warned of the "junk fees" which are frequently tacked on their loan transactions. They should review the Good Faith Estimate provided by their lender carefully and hold the lender to this Good Faith Estimate. 6. Should the property be surveyed and who will pay for it? Everybody wants to fight over disputed boundaries. Make sure both sides are carefully counseled on the importance of understanding the boundaries to the property or disclaiming responsibility for boundary issues. 7. Inspections. There are going to be inspections. When problems arise after the close of escrow, buyers want to criticize the realtors for not having required more and better inspections. Moreover, try to anticipate problems caused by the inspections so the deal will remain in place if some minor work is required. For example, "if termite work is required, seller agrees to pay for termite work not to exceed $______." 8. Manner and method of presenting and accepting the offer. Clients don't need or want a lesson on contract law, but a simple explanantion of "offer" and "acceptance" so the offer and the acceptance can be made in a timely and correct fashion. When the real estate market is moving fast, many disagreements occur over whether an offer has been properly presented or accepted. This is an important detail that clients must understand and approve. 9. What is going to be fixed before the close of escrow? Recently, I have had a number of cases involving houses being remodeled where the buyers were led to believe the remodeling work will continue during escrow. Yet once the agreement is accepted, the seller quits and buyer takes possession with the work still to be completed. It is obvious that any agreement regarding seller's work to be performed must be in writing or it will be unenforceable. In response to the request by your Board, I have agreed to respond to questions of general interest to the real estate community in future columns. Please send your request for advice to Joan Parker at the DCBR and I will endeavor to answer the question in upcoming editions. The answer, of course, not constitute legal advice regarding any specific client or matter, but I will endeavor to give the best answer that I can with the information provided.

2006 LEGISLATIVE UPDATE (By: Dan G. McKinney)

Thursday 25th of May 2006 13:52

Of the 430 bills and measures passed by the Oregon Legislature in 2005, only a few are of interest to the Real Estate Community. Here are my top 10 amendments and matters addressed by our legislature. 1. Measure 37. Nothing happened of any importance despite a lot of controversy and proposals. ORS 93.040 was added to modify the disclosure language in a deed to inform the seller and the purchaser of potential effects of Measure 37 compensation claims. Despite the Marion County case, start using the new deed forms in 2006. 2. Certification of Negligence in any Action Against a Real Estate Licensee. Chapter 277 creates the requirement that before any real estate licensee can be sued for professional negligence relating to conduct occurring within the course and scope of the licensed activity, the attorney bringing the case must first file a certificate with the court which attests that the atttorney has counsulted another real estate licensee who is willing to testify that the real estate licensee's conduct did not meet the standard of profesisional care and the conduct that caused the damage, loss or harm to the claimant. There is an exception when the statute of limitations is about to expire, the Certificate of Negligence can be filed later. 3. Home Inspectors. ORS 701.350 has been amended to require the CCB adopt minimum standards of practice and professional conduct for home inspectors. Those of you in the know are aware that they have already set forth certain standards for home inspectors to follow. Those can be found in OAR 812-008 and in a publication by the CCB which outlines the Home Inspector Certification Law and the Standards of Practice for Home Inspections. See www.ccb.state.or.us. The amendment also permits competency testing of home inspectors. 4. Writeen Contracts for Small Residential Projects. ORS 701.055(14) is amended to require a written contract for residential construction projects of more than ,000. 5. Residential Homestead. The residential homestead exemption is increased for a single person to ,000 and for two or more joint debtors to ,600. 6. Notice to Landlords of Tenant's Default on Water Bills. ORS 757 has been added to provide that a water utility company must notify the property owner of any delinquency in payment of water bills when the account is more that 120 days overdue. Warning to Landlords: as the property owner or new tenant may be required to pay this charge, it is important to include in leases that failure to pay for utilities is a default under the lease agreement. 7. No Free Bite. Chapter 840 included many amendments to ORS 609.040 to 609.090 which creates classification of dangerous or potentially dangerous dogs and increases penalties for maintaining dogs which are a public nuisance. The statues provide strict liability for owners of a potetntially dangerous dog if it causes physical injury or property damage. 8. Sex Offenders. Chapter 812 amended ORS 891.592 and requires the State Police to maintain a publicly available database of predatory sex offenders and sexually violent dangerous offenders. The database must include the name, address and information about the offenders. Is this information you need to disclose? 9. Reverse Study. Chapter 543 amends ORS 94.595, 94.572 and 100.175 to create a statutory scheme that requires the board of directors of a condominium or PUD to include a 30-year plan for maintenance, repair and replacement of common area structures and improvements. 10. New Home Warranties. Chapter 169 amends ORS 205.246 and creates a statutory scheme permitting recording the written warranty for new homes. The warranty shall set forth the express warranties and shall benefit subsequent owners of the structure.

CAN A REAL ESTATE AGENT BE LIABLE FOR DAMAGES DUE TO ESCALATING MARKET CONDITIONS? (By: Dan G. McKinney)

Thursday 25th of May 2006 13:22

Everyone in the real estate industry in Douglas County is surprised by the rapid escalation of property values. Having practiced in Southern California for many years, I have seen a rapid "run-up" of property values in prior real estate boom cycles. This condition brings much litigation and a number of circumstances that Real Estate Agents need to be watchful for. The most obvious circumstances is a seller's claim that their agent undervalued the seller's real property. In the last few months, we have seen a few suits in which sellers claim their agent undervalued thier home for quick sale. In the historic Real Estate market in Douglas County, value did not change dramatically from year to year. With the recent growth and increase in value, buyers are able to purchase property and then sell it a short time later at a significant profit. The sellers of that property then questions whether their Real Estate Agent adequately assessed the value and did a proper market study and carefully marketed the property. We all know that properties priced right sell far quicker than those overvalued even slightly. This decision and the process undertaken to set the price should be documented well with the seller. We have seen many lawsuits for "specific performance" recently. In a long escrow the seller may realize the property value is greater than the sale price and decide not to close. The seller may take advantage of technical breaches by the buyers of the Earnest Money Agreement of Escrow Instructions. If you represent the buyers, carefully document extensions and performances. When the market is rising quickly, time actually beomes "of the essence." Do you think about protecting the seller's ability to buy a new home when they sell to move up? You probably assumed you do not represent the sellers of a home until they make an offer on a new home. For years, we have been predicting liability for Real Estate Agents for not protecting the seller's ability to locate a new residence in the rising market scenario. The California Court of Appeals has recently affirmed liability of a Real Estate Agent in this situation. (Strebel v. Brenlar Investments, Inc., 135 Cal. App 4th 740 (2006).) Strebel sold his home in San Bruno through a broker. The broker anticipated the seller buying another home in Sonoma, and assisted Strebel in making an offer on that home. The agent did have the foresight to place a contigency on the San Bruno sale such that Strebel was not obligated to sell unless he obtained the Sonoma home. When the Sonoma home escrow began to slow down, the agent negligently encouraged Strebel to close the San Bruno home. The Sonoma home never closed due to tax liens. The jury awarded Strebel "economic damages" for the lost ability to purchase a home due to a rapid run-up of the market in Sonoma. This included the value of the appreciation of the San Bruno home as well as the increased cost to acquire a new home in Sonoma plus damages for loss of use of his home. The Court of Appeals affirmed. The court reasoned that the loss of equity in the rapidly rising market was a forseeable measure of damages and the agent was responsible. I cannot predict what an Oregon court would do under the same facts, but you should be warned to protect your clients and yourself under the circumstances of a rapidly increasing market.

ALTERNATE DISPUTE RESOLUTION (ADR) PART II (By: Dan G. McKinney)

Wednesday 24th of May 2006 15:59

When there is a dispute, the parties have to recognize that the dispute must be resolved. Nearly all disputes result in a negotiated settlement. Even after cases are tried before a jury, often they are settled while on appeal. It should be the goal of the attorneys and parties to facilitate a resolution of the dispute at the earliest opportunity. ADR provides vehicles to accommodate The ADR options built into the Oregon Real estate Forms, LLC. Standard Real Estate Sale Agreement (1/04 version) include Mediation (Paragraph 32) and binding Arbitration (Paragraph 33). The advantages of using these ADR tools include: 1. Savings of time and money; 2. Increased control in the negotiation process and the ability to promote creative remedies; 3. Confidentiality; 4. ADR gives the parties a chance to tell their stories; 5. ADR affords increased satisfaction and reduced stress for the participants; and 6. ADR may permit narrowing of issues and disputes even if it is not able to ultimately resolve all of the disputes. The disadvantages of ADR include the following: 1. Fewer evidentiary and procedural protections, particularly if they pertain to binding ADR processes; 2. Mediators and Arbitrators often have no legal training whatsoever; 3. Less discovery is available and the parties must intentionally give up some formal discovery in exchange for a potentially fast more cost-effective dispute resolution; 4. Evidence or strategy may be revealed during the ADR process; 5. ADR may add time and cost if it is unable to resolve the dispute; 6. There is no recourse from a bad decision in binding arbitration because there is no appeal; and 7. ADR processes do not provide legal precedent. Unfortunately, when the dispute has just arisen, the parties retreat to separate camps and gear up for the battle. I am amazed how often parties show their indignance by refusing to participate in mediation which is required in the standard form agreement. Mediation should be viewed as an opportunity to hear from the other party first hand what is the nature of the dispute. Frequently, the problem can be solved easily if it is solved quickly. More importantly, and you have made it worth your time to read this article if you follow the next bit of advice, mediation is required by the contract and a party is not entitled to attorney fees at the end of the arbitration or lawsuit if that party refused to participate in mediation. (See Paragraph 34-Attorney Fees). Encourage your office and your clients to participate in any invitation for mediation at the beginning of a dispute. Frequently, the problem can be solved by just sitting around the table and allowing the complaining party to tell their story. It might not require the payment of money.

BETWEEN LANDLORDS AND TENANTS, SILENCE IS DANGEROUS (By: Dan G. McKinney)

Thursday 04th of May 2006 10:11

In representing landlords and tenants, we are frequently asked whether the lease contract controls despite silent waivers or a course of conduct different from the contract. This article advocates the obvious necessity of documenting all matters relating to this precarious relationship. First, most experienced property managers have discovered the unusual situation in Oregon that when a long term lease expires and the tenant remains in possession, the lease is renewed for a like term. Most states have statutes converting such leases to month to month. Oregon law provides otherwise (except in the case of manufactured home (ORS 90.545).) Cases interpreting ORS 91.040 have held that if the landlord consents to continued occupancy, the new lease terms are the same as the prior lease, including the lease duration. The landlord who wants to adjust rent or change terms must make provisions for this in the original lease or act at the end of the lease term by refusing rent and removing the tenant. Not to act is to act. Second, Oregon case law is replete with decisions finding a landlord has waived provisions in a rental agreement. The most common example is a waiver of the right to timely rent if late rent is regularly accepted. ORS 90.415 specifically sets forth statutory circumstances in which the landlord waives the right to terminate a rental agreement for a tenants breach. These include, acceptance of late rent and acceptance of partial rent. The statute also describes the documentation necessary to avoid the waiver. Siles is a waiver. Third, in dispute over lease termination notice, the tenants failure to complain about defective termination notices does not waive the defects. In Guardian Management, LLC v. Zamiello (194 Or App 524) decided August, 2004, the court held that a landlord's attempt to terminate the lease by "posting" a notice was ineffective as the expired 1996 lease required service of notices by "personal service of first class mail." The landlord argued the tenant failed to object to prior termination notices served by posting. The landlord won at trial. The Court of Appeal reversed, holding the lack of prior complaint did not constitute consent to service by posting. Silence is not consent. Does the landlord always lose? When it comes to reasonable opportunities to document the relationship and a failure to do so, the landlord will usually suffer. Regardless of which side you are on, document everything.

THE SELLER/TENANT LEFT PERSONAL PROPERTY BEHIND-WHAT DO WE DO WITH IT? (By: Dan G. McKinney)

Wednesday 03rd of May 2006 14:30

It is a frequent problem in the real estate industry that sellers do not wish to vacate the property until escrow has closed and in such case the sellers may remain in the property without becoming tenants. ORS 90.110(2) provides that a hold-over seller for less than 90 days does not become a tenant. Similarly, a seller refusing to leave can be evicted after 24-hours' written notice (ORS 91.130). On occasions, sellers leave personal property behind. Likewise, tenants who voluntarily leave or are forcibly removed by the sheriff may leave personal property behind. Landlords and new property owners usually neglect the rights of the former occupants in dealing with this personal property. We are seeing an increased amount of litigation involving claims for personal property wrongfully disposed of by the new occupants. Frequently, this litigation involves exaggerated claims regarding the amount and type of personal property which was left behind. In order to avoid these claims it is criticial that the new owner or landlord follow the correct procedure for storing and disposing of personal property which remains. ORS 105.165 sets forth the alternate methods if storing and disposing of personal property left on premises. With regard to residential tenants, the disposition of the personal property is governed by ORS 90.425. If you have not read this section, you should do so. This section consists of eight pages of fine print. It reads like an IRS Regulation. It is very difficult for landlords to understand and comply with its requirements. In cases other than residential property, such as commercial tenancies, ORS 105.165 creates an alternative expedited procedure to deal with personal property left behind. The process we recommend is a procedure declarnig the personal property to be "abandoned". A notice of the belief of abandonment to a tenant must be completed exactly according to the statute or the landlord is guilty of wrongful conversion of the personal property remaining. For example, the notice must contain a statement that the personal property is considered abandoned, the notice must provide the tenant or lien holder a date to contact the landlord (8 days for residential property and 45 days for recreational vehicle or manufatured home), a statement identifying where the personal proeprty is stored, a statement allowing the tenant to remove the personal property prior to the expiration date and identify the landlord's contact information, a statement that the landlord shall make the property available "by appointment at reasonable time", a statement that the personal property will be considered abandoned if not removed, a statement indicating the landlord is charging storage or not, a statement that if the tenant or property owner fails to contact the landlord by the deadline, the landlord may sell or dispose of the personal property, a statement that the landlord reasonably believes the property has a fair market value of 0. or less (or an amount so low that the cost of storage and conducting a sale exceeds the amount that would be realized at the sale), and a statement that the landlord intends to dispose of the property if not claimed. Finally, if the value of the property is greater than the expected cost of storage and sale, the landlord is required to conduct a sale of the tenant's personal property so that the tenant may realize its value after deducting the costs of sale. A commercial landlord is entitled to a landlord's lien under ORS 87.162 for money owed to the landlord including storage charges. The most important advise I can give landlords and buyers of real property where personal property was left behind is to carefully photograph and document the property remaining before it is collected and disposed of. Even if you believe the property to be completely valueless, you can protect yourself and your clients with a notice of abandonment of the property and photographs of the personal property just in case the seller or tenant returns months later inquiring about his "valuable" personal property left behind.

MEASURE 37 UPDATE (By: Dan G. McKinney)

Tuesday 25th of April 2006 15:16

I am sure you all know the Oregon Supreme Court "fast tracked" the Marion County trial court case which held Measure 37 (ORS Chapter 197) invalid, and the Supreme Court has found it to be valid and constitutional. The effective date of the ruling is March 13, 2006. Both the State of Oregon and Douglas County have resumed processing Measure 37 ("M-37") claims. I have received many inquiries from Real Estate agents and clients about a M-37 problem that keeps popping up. The factual scenario is as follows: Grandma owned the family ranch since 1950 and willed it to the client 4 years ago. Alternate scenario is that client owned the property since 1970, but during the 90's put it into a family corporation or family trust or deeded it to children as an estate planning device and title has transferred back to client. Does M-37 allow a waiver in these two situations? Those who followed the hype which led to M-37's adoption believed that it does permit a waiver. The statute extensively describes tracking of family interests and even tracks family ownership through family owned corporations and trusts. Most practitioners assumed the reason for tracking family interests was to permit either a waiver of the statute back to the date when the family first acquired the property, or permit compensation for loss of uses permitted when the family first acquired the property. Unfortunately, the State and County representatives are relying on a loophole in Section 8 of M-37 (ORS 197.352 (8)), which provides "in lieu of payment of just compensation under this act, the governing body...may modify, remove or not apply the land use regulation or land use regulations to allow the owner to use the property for a use permitted at the time the owner acquired the property." The latter language is a limitation on the waiver allowing only the zoning in existence when the present owner last acquired the property, not the family member who first acquired the property. No court has yet addressed this problem. In order to obtain a waiver, the present owner must show some ownership interest dating back to a date before the current zoning or land use regulation took effect. It would be enought o show a 1% ownership on title, but a family member ownership is not sufficient. In addressing scenario #2, there is a possible solution. If it can be shown that the present owner "retained an interest" at all times, the waiver may still be obtained. This may require a life estate or other documentation showing the client was always an "owner". The ownership interest may not appear of record. It may be enough to show the client resided on the property, paid taxes, insurance and mortgage payments and was the "equitable owner" at all times. Keith Cubic, the head of the Douglas County Planning Department has frequently stated his intent to enforce M-37 liberally as it was the will of the majority of residents, but he is obligated to follow the law. In these close calls, he has indicated that if the State approves the waiver, the County will likely do so also. Remember that if the client is seeking a change of Farm, Farm Forest, or a zoning less than 2 acres, a Sate waiver will also be necessary in most instances. The second major problem which has not been resolved is the right to transfer a waiver to a new owner once obtained. The State Attorney General has, in an extensive letter opinion dated February 24, 2005, rendered an opinion that such waivers are not transferrable. All cities and counties have adopted this position and will continue to do so until a court case interprets M-37 otherwise, or the legislature creates a statutory change to ORS 197.352.

ELECTRONIC EAVESDROPPING (By: Dan G. McKinney)

Tuesday 25th of April 2006 09:30

I am often asked whether a real estate agent or their clients can record their telephone conversations with the other real estate agents or persons. As this article will explain, I do not recommend this practice based upon the possibility of claims of invasion of privacy, but everyone should be aware that this practice is not generally prohibited by any statute or other law in Oregon. Our neighboring states specifically make it a crime to intercept or eavesdrop on any confidential communications without the consent of all parties (California-Penal Code Sec. 632, Wash. Revised Codes Sec. 9.73.030, Idaho Sec. 18-6702). Oregon follows the federal rule which provides that it is illegal to obtain or divulge a telecommunication or radio communication unless one is a party or has obtained consent from at least one party to the conversation. ORS 163.700, 165.535, 165.540. There are certain enumerated exceptions, but as indicated previously, the general rule is that as long as one party to the telephone conversation consents to its recordation or reproduction, it is not in violation of law, and the tape-recording can be used in a legal action involved in a dispute between the parties. This state's highest court has ruled that interception of cordless telephone conversations using a police "scanner" is illegal under the Oreogn wire-tapping laws. Oregon v. Carsten, 913 P.2d 709 (OR. 1996). Although most state laws are slow to catch up with evolving technology, the "nanny-cam" is an area which has not been addressed by the Oregon Legislature. There is, however, a statute providing that it is illegal to record another person "in a state of nudity" without consent when the person has a reasonable expectation of personal privacy. ORS 163.700. Those of us practicing litigation involving real estate transactions frequently encounter recorded telephone conversations. This evidence can have a powerful impact in th elitigation, particularly where it proves or disproves another party's position in the case. Such recordings are often faced, however, with claims of "invasion of privacy" and the suggestion that the conversations are manufactured or that a party is being "set up," when the party recording the conversations know it is being recorded and the other party does not. You must inform the parties to a recorded conversation if neither of the parties is otherwise aware of the recordation. Recorded conversations used for "customer service" require that the parties to the conversation be warned. Without this warning, a telephone system should never be set up to permit recording of all incoming or outgoing conversations because of the possibility that a party uses the phone without knowledge of the recording systems to communicate with another person who is also unaware of the recording system. And, finally, be especially careful if communicating with persons out of state, as most states have specific laws prohibiting undisclosed recording of telephonic conversations. It would be a violation of that state's law to engage in such recording even though the recording occurred in a state in which the recording was legal. In Krauss v. Globe International, a famous New York case, the court found that a telephone conversation legally recorded in New York to a Pennsylvania resident violated the Pennsylvania prohibition on recordation of telephone conversations.

THE RIGHT OF FIRST REFUSAL (By: Dan G. McKinney)

Monday 24th of April 2006 16:44

The right of first refusal is a valuable tool for property owners and tenants, but it can be troublesome if not properly drafted. Much litigation has been generated over missed or ambiguous rights of first refusal. What is a right of first refusal? Typically, it is the right to buy property on the same terms as a seller has offered it to another party ("Third-Party Buyer"). The most common use of it is found when a building owner ("Seller") decides to sell his property. Once a bonafide offer is made by a Third-Party Buyer, the Seller must first tender the offer to anyone holding a right of first refusal, typically a tenant ("Tenant"), who may buy it on the same terms and conditions. Only if the Tenant does not accept the offer can the Seller go ahead and sell to the Third-Party Buyer. The right of first refusal puts a serious contractual burden on the property owner who granted the right to a Tenant or non-owner. The Seller is hampered in selling the property because he must condition any listing and sale upon a condition that even if the deal is struck, it may be terminated if someone else (the Tenant) chooses to step in and purchase the property. A Third-Party Buyer fears their only option is to bid up the price for the tenant, and that they may be "spinning their wheels" by submitting an offer. This may result in making property less attractive. The right of first refusal, if poorly drafted, may be a continuing obligation of the Third-Party Buyer to the Tenant, throughout the lease term, even after the property is sold. The Tenant may object to an offer as not being bonafide, or object to the time to exercise. In commerical transactions Third-Party Buyers have spent considerable time and due diligence before making and offer, shouldn't the tenant be given the same time? What if the sale terms depended on a Third-Party Buyer's good credit, but the Tenant does not have good credit but is willing to agree to the same terms? What if the Tenant agrees to buy, but intentionally does not perform to chase away a real Third-Party Buyer? We have found that a Seller of property with a right of first refusal is forced to make cash sales with large deposits to avoid these disputes. Realtors are often faced with a Buyer who wnats to present an offer which is contingent upon the sal eof the Buyer's home elsewhere. You should consider a short-term right of refusal instead. This would allow Seller to contineu to market the property for sale, but if an offer is made, you would condition acceptance upon a brief period that the first Buyer has to purhcase the property without the sale contingency. Some real estate professionals consider this preferable to accepting the first offer and attempting to market the property for back up offers. No one wants to be the backup offer. Make sure the right of frist refusal is carefully and narrowly drafted. See an attorney knowledgeable in real estate law.

WHAT IS ALTERNATE DISPUTE RESOLUTION OR ADR? (By: Dan G. McKinney)

Monday 24th of April 2006 14:56

If dispute resolution is the goal, ADR involves the options that attorneys and clients must consider in order to achieve the "best result" in the dispute resolution process. The standard Oregon Real Estate Form (OREF 001-1) at paragraphs 30, 31, 32, and 33 provide dispute resolution models that are available for resolving disputes involving that form. Next month's column will describe how best to position yourself and your client when this process begins. ADR should be considered whenever potential litigation costs are high, the parties want to resolve their dispute quickly, litigation remedies are not well suited to the parties' interest or needs, the parties want or need a private forum for resolution or continuing involvement by the court is likely to be required if the dispute is not resolved. Some disputes such as matters within Small Claims jurisdiction are best resolved there. It is quick and final, no attorneys are generally involved and Small Claims costs are small. ADR may be inappropriate for disputes where there is a desire to establish a legal precedent, an overriding public interest in the outcome of the dispute, the need for public sanctioning of conduct, the need for immediate injunction, attachment or other provisional relief, or where there will be a likely quick dismissal of a truly frivolous action. The types of ADR processes which are most commonly used and available include the following: 1. Negotiations. Negotiations between the parties or their attorneys often resolve the dispute. 2. Mediation. Mediation is a process by which a neutral third party assists the parties in reaching a mutually acceptable resolution of their dispute. 3. Partnering. Partnering is designed to help parties prevent future dispute. This is often used in construction projects in which a neutral facilitator assists completion of a construction project by addressing potential conflicts before they become full fledged disputes. 4. Neutral evaluation. A neutral evaluation is when a neutral third party hears a brief presentation about the dispute and facilitates settlement negotiations between the parties. 5. Settlement conferences. In settlement conferences, the parties meet with a neutral third party to explore settlement options. 6. Fact finding. In fact finding, a neutral third party submits binding or non-binding findings to the party or the court on specified factual issues based on information submitted to the parties and/or independent research. This is most useful where the parties cannot agree on a few important issues of fact or where complicated issues require expert knowledge. 7. Arbitration. In arbitration, a neutral third party reviews evidence and renders a decision regarding the dispute which may be binding or non-binding. Unlike most ADR procedures, the artbitrator is an adjudicator, and not merely a facilitator. Next month we will discuss the advantages of each method and the process you should follow in preparing for "out of court" dispute resolution.

MEASURE 37-WHAT HAPPENS NOW? (By: Dan G. McKinney)

Saturday 15th of April 2006 14:39

As you know, on November 2, 2004, the Oregon voters by a large margin passed Measure 37. This was not a constitutional amendment, rather it was a statute creating a private claim for compensation or requiring a waiver of a Land Use ordinance restricting development of private property. As I previously reported, there are many ambiguous provisions in these ordinances, and we expected legislative or court interpretation of the statute. Nevertheless, most attorneys, including the State Attorney General felt it would withstand constitutional challenge. On October 14, 2005, Judge Mary Mertens James rendered a trial court opinion holding Measure 37 unconstitutional. I will not discuss the holdings here; you have probably read varying descriptions of the result. The focus of this article is to aid you in advising your clients what will happen next. First, is Measure 37 valid now? Legal experts disagree. The decision was in Marion County which is the only county a constitutional challenge may be brought. Many experts agree that although the general rule is that a trial court decision is not binding on other counties, a determination that a statute is unconstitutional in Marion County may be binding on all other trial courts. Second, the decision will be appealed. There were multiple parties filing briefs on each side of the case. Someone will appeal and the Court of Appeals or Supereme Court will ultimately decide the issue. Although an appeal may stay the trial court decision, it iwll have a ripple effect throughout the state. Your clients should assume that the 1000 Friends of Oregon's success in this case will cause them to file other lawsuits similar to the Marion County suit if your clients obtain development approval. Moreover, cities and counties will probably stall processing of Measure 37 claims to await the outcome of the case. Note that the statute only allows 180 days to process the claim. Our advice to clients is to file the Measure 37 claim, particularly where the claim is within the two year limitation to bring a Measure 37 claim. The statute requires that all Measure 37 claims seeking to set aside current restrictions must be brought before December 2, 2006. Based upon these new developments, property owners should not spend money constructing improvements if a Measure 37 waiver is obtained. If the Marion County decision is upheld, a property owner may be required to remove "unlawful" Measure 37 improvements. Remember, beginning January 1, 2006, ORS 93.040 requires the Measure 37 warning language be in any deed or contract. You should still include that language until legislation is passed to the contrary.

CAN A PRIVATE CITIZEN ENFORCE ZONING LAWS? (By: Dan G. McKinney)

Friday 14th of April 2006 10:32

A matter frequently disclosed and usually ignored in real estate transactions is the fact that the property in question is in violation of zoning or building codes. Everyone knows that Douglas County, as well as the local cities, is too busy to bother enforcing many minor or longstanding building and zoning code violations. Nevertheless, you should be aware that there exists a private cause of action in favor of neighboring property owners against any person who is in violaton of building or zoning laws. Although there is very little recent case authority, the court in Frankland v. City of Lake Oswego, (267. OR. 452, 1973) found a property owner could enforce a zoning regulation against his neighbor who was violating the ordinance. The court held: "The law is well established that the landowner is entitled to maintain an action to enjoin a violation of a zoning regulation where such violation will reduce the value of his property." The court found that four basic theories have been used to reach this conclusion. First, a zoning ordinance is similar to a third party beneficiary contract enforceable by a neighboring property owner. Second, a zoning ordinance is similar to a convenant running with the land. Third, the neighbors have a right to a nuisance claim in the event of a zoning violation. Fourth, a zoning ordinance creates a right of enforcement in favor of individuals as well as the public entities who are responsible. Most violations of the law do not give rise to a public right of enforcement. If the police choose not to prosecute someone for a crime, it is not within the right of a private individual to seek prosecution except in rare circumstances such as an unfair business practice. The right to maintain a private claim in the case of a zoning violation rests upon the fact that it affects the property rights of the neighboring property owner. The term "nuisance" is used whenever anyone conducts an activity on their property which interferes with the comfortable use and enjoyment of another's property. A zoning violation would naturally fall within this definition. If a zoning or building code violation exists, what is the remedy? The Frankland case and its successors require that the court weigh the respective equities and relative hardships to determine if an injunction is necessary and appropriate to cause removal of the violation. In the event the court determines that an injunction is not warranted, the neighbor may still recover damages, however, in such cases it will be necessary to prove a reduction in value of the complaining party's property as a result of the zoning or building code violation. In conclusion, although many properties in Douglas County are subject to zoning and building code violations, a disclosure of these violations is necessary and a buyer should be informed as to the risks associated with accepting property in such condition, include the possibility of a code enforcement action by the city or county as well as possible claims by neighbors.

Real Estate Law Report by Dan McKinney From the Douglas County Board Of Realtors October Edition of Realtor Review

Tuesday 08th of November 2005 20:08

Title: A Power of attorney may not be used for improper purpose. Text: Title companies have become very careful and wary about “power of attorney” forms. This reason for caution was reemphasized in the recent decision of Houck v Feller Living Trust (2003) 191 Or. App. 39. In this case, Feller created a revocable living trust. She gave her son, Kelly, a general power of attorney over her properties. Kelly proceeded to borrow two loans from Houck secured by the trust properties. After he defaulted, the lender brought an action to foreclose both liens. The trial court dismissed the action and the Court of Appeal affirmed. The court found that a power of attorney is “strictly construed”. A power of Attorney may only be used to execute authority granted by the principal. Since nothing in the power of attorney authorized Kelly to use the Trust’s property for his own purposes, Kelly necessarily exceeded the scope of the power of attorney. The court commented that even if the power of attorney were durable and made him general agent for the trust, he could not use the power of attorney for personal purposes without express authorization. In conclusion, this case confirms that a power of attorney must be carefully inspected to determine whether it confers agency upon the holder, and the circumstances of the transaction must also be considered to determine whether the transaction is for the benefit of the principal. In real estate transactions, if the parties anticipate that a principal will be unavailable, a limited power of attorney specifically approving of a particular transaction is preferred to a general or durable power of attorney, as it not only confers agency but authorizes the particular transaction.