West Coast Real Estate Update: August 27, 2019

Landlord's Defenses Against Leasing Fraud Further Limited by Court of Appeal

In Orozco v. WPV San Jose, LLC, California's Sixth District Court of Appeal upheld a decision by the Superior Court in Santa Clara County in support of a commercial tenant who sued his landlord for fraud. The tenant, represented by its principal, Paul Orozco, leased space for Pauly's Famous Franks N Fries in a San Jose shopping center. After the leasing manager assured the tenant numerous times that no restaurant with competing concepts or products would open in the same shopping center, the two parties entered into a lease together. Nevertheless, a competing restaurant opened shortly after, which Orozco alleged caused Pauly's Famous Franks N Fries to close within six months. The jury found the leasing manager was negotiating the lease with the competing restaurant at the time she gave Orozco assurances that no competing restaurants would be leased.

The 80-page lease, which Orozco did not fully read, contained that the landlord had not made any promises about products offered by current or future tenants. Nevertheless, the jury found intentional misrepresentation and concealment from the landlord's part during the negotiations of the lease and awarded the tenant compensatory damages, primarily in lost profits.

HUD Proposed Rule Could Weaken a Civil Rights-Era Housing Discrimination Law

The U.S. Department of Housing and Urban Development (HUD) released a proposed rule seeking to amend HUD's interpretation of the Fair Housing Act's disparate impact standard on Aug. 1, 2019. The Fair Housing Act prohibits discrimination in the sale, rental or financing in housing-related activities on the basis of race, color, religion, sex, disability, familial status or national origin. For the past four decades, HUD and federal courts have interpreted the Fair Housing Act to ban conduct that has a discriminatory effect even while not motivated by discriminatory intent. This theory of liability is known as "disparate impact."

However, HUD's proposed rule shifts the burden to the plaintiff when raising a disparate impact claim. Under the rule, the plaintiff would now be required to establish that a specific policy or practice caused the discriminatory effect and that the indicated policy or practice was "arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective." The challenged policy or practice must have a "robust causal link" with the discriminatory effect. The proposed rule would state that a practice that has a discriminatory effect may still be lawful if the defendant proves that the challenged practice is necessary. The proposal also maps how landlords can successfully defend themselves against disparate impact claims and states that the Fair Housing Act "is not intended to invalidate, impair or supersede" any state laws that regulate the business of insurance.

Another Prop 13 Battle Begins

Under Proposition 13 (Prop 13), the California property tax initiative passed in 1978, general property taxes for both residential and business properties are calculated based on one percent of the purchase price. Annual increases in property valuations are capped at two percent per year. Prop 13 prevents fluctuations in property tax assessments, which, by some counts serves to benefit property owners, renters and businesses. However, there is a view that Prop 13 handicaps city and county general fund budgets and limits the ability of cities and counties to pay for general services. As such, a ballot measure, which may be on the California ballot in 2020, calls for changes that treat commercial property and residential property differently.

Under the proposed initiative, county assessors would split their tax rolls into two lists. Homeowners and some small businesses would still receive the full Prop 13 benefits: a one percent tax based on a property's purchase value and annual tax increases of no more than two percent.

However, commercial and industrial property owners would be required to pay more. While the tax rates will not initially change, beginning in 2022 the levy would be based on the current market value of the real estate. Business property values would have to be updated by county assessors at least every three years.

The push for the changes to Prop 13 comes from a variety of groups with the goal of increasing funding for schools and other public services. The counter argument to changing Prop 13 is that there is a trickle-down effect, and that increased property taxes will lead to less affordable goods and services and further impair the ability of builders of multifamily units to provide affordable housing.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.