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Posting for
Tuesday, July 14, 1998
by: Bert Rush
brush@firstam.com
WARRANTIES/LEASEHOLD ESTATES/ENCROACHMENTS
This reported case shows the importance of obtaining title insurance for leasehold estates. The citation is Quality Wash Group V, Ltd. v. Hallak (1996) 50 Cal.App.4th 1687, 58 Cal.Rptr.2d 592.
The property in question was a car wash business on leased land in San Diego County, CA. The car wash improvements were originally constructed in 1962 by Harvey and Patricia Allan. In 1978 the Allans sold the business to Robert and Jo Lynn Brower. As part of this sale, the Browers executed a promissory note in favor of the Allans (the Allan note). In 1984 the Browers sold the business to Shawkat and Nahida Hallak--and the Hallaks became obligated with the Browers under the Allan note.
In 1986 the Hallaks sold the business to Quality Wash Group. In negotiations prior to the sale Mr. Hallak and Mr. Allan (who was acting as the real estate broker for the Hallaks) pointed out for a Quality representative what they believed to be the west boundary of the leasehold on which the business was situated. The purchase agreement between the Hallaks and Quality included this sellers' warranty:
"Seller makes the following representations regarding the assets: (a) The title to all assets of the business (is) vested in the corporation...and (is) free from any liens and/or encumbrances."
The agreement also contained a hold harmless provision, as follows:
"Seller and the corporation warrant that all the above representations are true and hereby (hold) buyer harmless from any damage resulting from their falsity. This warranty shall be true as of the close and shall survive the close. Seller and corporation agree to hold buyer harmless from all loss, liability, tax or expense arising out of any claim or other loss resulting directly or indirectly from the assertion against seller or corporation of any claim arising from facts existing before the transfer of the corporate stock provided by this agreement and not fully disclosed or expressly excepted by the provisions hereof."
Through closing the Browers were relieved of liability under the Allan note, and Quality became jointly and severally obligated with the Hallaks. Quality also executed a promissory note to the Hallaks (the Hallak note).
In 1987 the lessor of the land notified Quality that car wash improvements were encroaching onto adjacent property (apparently also owned by the lessor). A subsequent survey disclosed that the west boundary of the leasehold ran through the car wash building, putting its vacuums and a substantial portion of area needed for its operations on the adjacent land. To continue its business Quality had to negotiate a new lease with substantially higher rent.
Disputes ensued as the Hallaks and Mr. Allan refused to reimburse Quality for losses resulting from the encroachment, and Quality stopped making payments under the Allan and Hallak notes. The parties ended up in court.
Before trial Quality settled with the Allans and paid off the Allan note.
After a trial the court ruled that the Hallaks were not liable to Quality for negligent misrepresentation or breach of contract and, further, that the Hallaks were not liable for contribution in the payoff of the Allan note because Quality had become the primary obligor. On the Hallak note, the court awarded the Hallaks $157,500 without any setoff on account of the encroachment. The trial judge found that the aforementioned purchase agreement did not contain any mention of land boundaries--so the encroachment problem was not covered by the warranty and/or hold harmless provisions.
The Court of Appeal reversed (in part), finding (as a matter of law) that the encroachment constituted a breach of sellers' warranty and hold harmless promises. The Court reasoned that the purchase agreement expressly warranted that title to all assets of the business were free from encumbrances, that the leasehold was an asset of the business, and that (citing Johnson v. Bridge [1923] 60 Cal.App. 629, 213 P. 512) an encroachment is an encumbrance sufficient to trigger a seller's liability under an agreement to deliver title free of encumbrances.
The Court of Appeal affirmed the trial court's findings that the Hallaks were not liable for negligent misrepresentation, and that the Hallaks were not liable under the Allan note.
While there's no mention of title insurance in the opinion, it wouldn't surprise me if none of the parties here had an extended coverage owner's policy covering the leasehold estate. If one or more of them had, this problem should have been resolved at much less expense and inconvenience to them. This should be of particular interest to those who have sold a business and given warranties--they should be reminded that title insurance coverage continues so long as they have any interest in, or outstanding warranties of title for, covered land.
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