Property C1 & E1 Fall 2010

PROPERTY C1 & E1 FALL 2010

Information Memo #8 (11/30/10)

TABLE OF CONTENTS

(A) Recording Acts: Answers to Student Questions from Prior Years (IM164)

(B) Chapter 5 Review Problems: Comments & Best Answers (IM164-78)

(A) Recording Acts: Answers to Student Questions from Prior Years

Q: Is the relevant time to determine when a subsequent purchaser has notice the time of the sale or the time she records?

A: The time of sale. You examine all three kinds of notice as of the time of closing. Information gained subsequently is not relevant. Otherwise, any earlier purchaser who recorded first would win, which is not true in a notice jurisdiction. Moreover, you can be a BFP without recording at all.

Q: What do you do if both purchasers are BFPs?

A: Generally speaking, this cannot happen. BFP means without notice of an earlier transaction. That means the first purchaser is never a BFP because there is no earlier transaction. The issue in cases where notice matters is whether or not the second purchaser is a BFP. To look at the issue another way, keep in mind that the first purchaser will always prevail unless the second purchaser meets the requirements of the relevant recording act. So in order for the second purchaser to prevail in a notice or race-notice jurisdiction, he will have to show that he is a BFP and the first purchaser will have to try to show that the second purchaser had notice.

(B) Chapter 5 Review Problems: Comments & Best Answers

(1) Review Problem 5A: Studio Noise (Short Problem)

(a) Professor’s Comments: Note that in the original version, this problem asked the students to apply Stambovsky. Many of you applied the elements from Johnson v. Davis to this question, instead of those from Stambovsky. I was looking for discussion of whether the landlord of a tenant that created the noise could be said also to have created it, and some discussion about whether there was enough information to hold a prudent purchaser to notice of the noise. A number of you also did solid discussions of whether the defect was material.

(b) Student Answer #1: New York does not have a duty to disclose; they adhere to caveat emptor. However, with the decision in Stambovsky, they have allowed some exceptions to exist. Stambovsky concerned a haunted house, the reputation for which was "created" by the seller. The court stated that it would be "unfair" to insist that the buyer found out about the likelihood of ghosts. One of their reasons was that the purpose of caveat emptor was to not allow buyers to "sleep," they must inspect the premises. However, it would be unreasonable to expect the buyers to inspect for ghosts. In addition, the seller had "created" the condition, and was taking advantage of the buyer's unlikeliness to inquire.

Generally, W is under caveat emptor. Unless the court finds that the situation is similar to that in Stambovsky, she is out of luck. First, we must ask whether W could have discovered the "noise" with reasonable inspection. Certainly, "noise" is not as intangible as ghosts. It would not require "specialists" to speculate as to its existence; anyone on the property would hear it. The difficult question concerns the timing. Are we going to require a potential buyer to check the house around the clock in order to make sure there is no noise?

Another problem w/ inspection is the sign listing the studio as a tenant. Certainly this would hint at loud noises. Does this instill inquiry notice in W? Again, this is a difficult question - does the average member of society think a recording studio, a business, would operate late at night? Maybe yes- rock bands are unusual. Maybe no-- how many people know what's going on w/ a rock band.

Finally, as far as W is converned--could she have found out by asking neighbors? Almost assuredly yes. But so could the buyers in Stam. The question is - are we going to require a buyer to think of all possible scenarios and question the neighbors? Is late night noise foreseeable, and therefore a conscientious buyer would ask?

Now, as to J, it is definitely w/in his knowledge- he bought the studio to stop the noise. Also, he is definitely getting an advantage- he is selling the house b/c the studio is so profitable. Is his silence like Stam's in that he is taking advantage of a situation a buyer is likely not to asak for his own benefit? It appears even more clear on his side. He gets high rent, where the seller in Stam was just selling for normal value for his house. The question is only whether it is reasonable to assume the buyer would generally not ask about noise.

Finally, it could be argued he "created" the problem. He owns the business, he has not kicked them out, he knows of the noise. He could put restrictions in lease as to what hours thety can play music. He is in control.

(c) Student Answer #2: The rule set forth in Stamb. is where a condition which has been created by the seller, materially impairs the value of the property and is peculiarly within knowledge of the teller, or unlikely to be discovered by a prudent purchaser exercising due care.

Issue 1: Was this created by Jamie the seller? On one hand, yes, he purchased the commercial building knowing the existence of the studio, but allowed the studio to remain. Although he did not open the studio himself, by allowing it to continue, this could be interpreted as create or at least contributing to the defect (i.e. noise). Might argue that teller did not create the defect because studio and its noise always there and merely allowed it to continue for financial benefit.

Issue 2: Does noise materially impair value? Materially affect is an objective standard and usually applies to physical defects such as holes in the roof, broken staircases, etc. Here, though, noise is a nonphysical quality. In Stambousky, the defect was of mere reputation and the court ruled that seller had violated to duty to disclose. The main issue is, does the noise lower the value of the property? On one hand, yes, because no one wants to live next to a music studio that keeps neighbors awake at night. But on the other hand what if building and home are right next to an airport, a few extra takes of Stairway to Heaven at night is not going to effect the value too much. Or what if the studio is only used sporadically? The value of the property will not be affected too greatly.

Issue 3: Peculiarly knowledgeable to seller. From the facts, it appears Jamie knew of studio and how often is used. He is knowledgeable, but the issue is peculiarly knowledgeable. The sign listed all the tenants. Many of the neighbors probably know of the studio and the music. Might argue that knowledgeable to most of surrounding neighborhood, not just seller, which leaves us to our final issue.

Issue 4: Did Wendy act with due care as a prudent purchaser would? On one hand, yes. Why should we place the burden on the buyer to go searching for all non-physical defects in the property. The is the policy of good faith and fair dealing that should be considered when a seller who knows of a potential defect, he should have the duty to disclose. On the other hand, if Wendy did minimal inquiries she probably could have found out about the studio and the noise and made a rational decision based on her research.

(2) Review Problem 5B: Fraternity Noise (Short Problem)

(a) Professor’s Comments: This is from the Spring 2010 exam. Generally speaking, most students did pretty well. I rewarded students who knew and used the four elements of the test laid out in Strawn, those who added additional points from the case, and those who saw significant arguments for each side.

(i) Four-Part Test: This should have been the heart of your analysis.

(A) Unknown to Buyer:This was the element that merited the least discussion. The problem includes no evidence that B knew of the noise, although he might have, e.g., attended FSU at some point and become aware of PZA’s parties. Note that this element is about actual knowledge only. Arguments that B should have known about the problem belong under “readily observable.”

(B) Seller Knew: As with the prior element, the focus here is on actual knowledge (not what the seller shouldhave known). Nothing we looked at required a seller to disclose info that she didn’t actually know about. Key info to discuss included:

• S 30 years in residence, so presumably aware of earlier parties. However, as many of you noted, she is retiring, so might have impaired hearing and not be fully aware of extent of parties before probation.
• Parties had stopped for a year. Did S know they were continuing? Did S believe PZA would be more careful after probation? S doesn’t have to disclose if she truly doesn’t believe party noises will start p again.
• S is a univ. administrator, so might have special knowledge of end of probation, but as some clever students noted, problem doesn’t say for sure that she works at FSU. Moreover, even if she does, if she is, e.g., financial aid director at the sadly declining FSU law school, might have no info re fraternities.

(C) Materially affects value: Strawn says a defect is material if it affects a reasonable buyer’s use, habitability or enjoyment of the property. Noises sufficiently loud to prevent an average buyer from working or sleeping several nights a week would meet this test. The contestable facts that might make the noise here not material are:

(1) Whether there is enough background noise in the neighborhood that the PZA parties don’t make a significant difference?

(2) Whether B is much more sensitive to noise than an average person?

(3) Whether the parties will continue indefinitely? (do they go on after rushing ends? Will PZA get shut down again?).

The most common problems involved assuming that this element was not met if

(1) the objective market value of the house took into account that there was, or was likely to be be, noise in the neighborhood;

(2) most of the neighborhood experienced the same problem (this was true in Strawn); or

(3) many people would want to purchase the house despite the noise bcause of the benefits of living near campus.

These mistakes stem from losing sight of the gist of the cause of action: it is unfair for people to purchase a residence unaware of a problem that might affect its desirability; they might not have been willing to pay the contract price if they were properly informed.

(D) Not Readily ObservableB could not have heard the noise at the time of purchase, because PZA was on probation. Also, if the noise was not significantly different than other neighborhood noise, you could argue that it was readily observable, although in that case, it probably would not have been material. Assuming the noise was significant, this element probably turns on two questions: What kinds of research should we expect a homebuyer to do (a policy question)? Would various forms of research at the time of sale have revealed the possibility that the PZA noise would start up again in the future (a fact question)? Relevant areas for discussion included:

• Internet searches re neighborhood: Should you have to do them? Would terms of probation be reported?
• Drive Around: How big an area should a buyer have to check out? Was PZA within that area? If you see Greek letters on a big house near a campus, does that provide notice of extreme noise?
• Personal Inquiry: Should you have to ask neighbors or university administrators about noise in a college neighborhood? Would these inquiries urn up the info that PZA could start partying again a year after purchase?

(ii) Other Points from Strawn

(A) Transient Social Condition?Strawn says that sellers do not have a duty to disclose defects that fall into this category. The first model provides a nice little discussion of this issue. Most students who discussed this phrase focused on whether the noise was “transient” or temporary, a plausible way to read the case.

(B) Off-Site Defects/Professional Sellers: Although Strawn makes clear that New Jersey has held non-professional sellers must disclose some defects, it also says that the duty to disclose off-site defects is limited to professional sellers. Some students argued that this clearly prevented any cause of action here. I think the analysis is a bit more complicated, because, although the source of the noise is off site, it is easily noticeable on the surface of the lot, so perhaps the N.J. Supreme Court would not consider it “off-site.” This point is strengthened because, unlike the hazardous waste sites at issue in Strawn, no particular expertise is necessary to identify the noise as a problem. See second model.

(iii) Common Problems:

• I asked you to apply Strawn. Quite a few students got the Strawn elements mixed up with those from Stambovsky or discussed other tests like caveat emptor. Checking to see if there was a statutory list or discussing possible negotiated compromises were also outside the scope of the question.
• Afew students argued the noise was not a defect at all because it wasn’t as serious as the toxins at issue in Strawn. However, Strawn seems to say that any problem that materially affects the value is a “defect” and cites to a N.J. case finding roach infestation to be a defect.
• Several students suggested that the possibility of having dangerous hazing rituals spill over onto B’s land could be significant. However, you were only asked about disclosre of the noise, not other PZA problems.
• Many students suggested that the noise would be a violation of the Covenant of Quiet Enjoyment. This is incorrect; that covenant protects tenants or buyers against challenges to their legal right to occupy the land, not against noise.

(b) Student Answer #1: This student provided nice two-sided analysis of the three key prongs of the test and did some nice two-sided analysis of “Transient Social Conditions.”

(1) Known to Seller- Most likely S knew about the wild parties at PZA. She had lived there for 30 years. However, for the past year, no parties had occurred because of the probation. Perhaps S believed the condition no longer existed, and therefore that she had no duty to disclose. However, S works in the administration of the college. If the parties are as notorious as indicated, it seems likely she probably found out about the short term probation at her job, and thus knew that the parties would likely resume after the probation. It is unclear if she would have known the abatement was temporary or permanent.

(2) Materially affects the value? Under this test, courts generally use an objective standard: would it bother a normal person? Thus, even if it didn't bother S, she would still have a duty to disclose if the condition would bother a normal person. Frequent loud noise probably would bother a normal person. Like Strawn, if smell can be bothersome and offensive to the senses, it seems a logical extension to noise. However, unlike Strawn, the noise was only at nighttime on certain nights, not a constant smell. Nonetheless, the frequency may be enough to overcome this discrepency.

However, Strawn also makes note that the problems it seeks to impose a duty for sellers to disclose must be rooted in the land, not transient social conditions. S may argue that a frat is considered a transient social condition, and thus she had no duty to disclose. However, given the notoriety of the parties, it seems like this particular problem is connected to that particular property next to the university. This may be something that a court would be more comfortable imposing on a seller to disclose, especially if this is a residential neighborhood, because it is does not reek of discrimination that the test seems aimed at preventing.

(3) NotReadily Observable? Because the fraternity was on probation when BB purchased it, there is no way he could have observed the loud parties that created the problem. However, if PZA has such a notorious reputation, perhaps BB could have easily learned about the problem. Moreover, BB works at the university and could have easily asked around about the surrounding neighborhood or Googled the address. However, because BB is a new hire, he may not have the relationships or networks at the university to learn about the problem.

Additionally, most people realize that college kids party. Thus, a court would probably recognize if an individual lives next to a university, and the neighbors include a fraternity, heshould expect some noise from partying. It's common experience. Because it is so easily discoverable, a court may hold BB to investigating this type of information given the neighborhood next to a university.

(4) Not known to the buyer? The facts suggest BB that did not know about the problem.

Conclusion: Because a court would probably find the 3rd test (not readily observable) was not met, S likely had no duty to disclose the presence and partying of PZA to BB.