Are you contemplating entering into a real estate transaction with individuals who own the real property as tenants in common ("TICs") or with a partnership? If so, a recent California case, Elias Real Estate, LLC v. Tseng, 67 Cal.Rptr.3d 360, (Cal.App. 2 Dist., 2007) ("Tseng"), contains a relevant discussion of the effect of the interplay between the statute of frauds and the law of agency on your real estate transaction. Below is a brief review of the Tseng case and some actions to consider taking in your real estate transaction.
A Review of the Tseng Case
Tseng involved the listing and sale of commercial real property in San Pedro, California owned by four brothers as TICs. One of the four brothers listed the property with a real estate broker pursuant to a written listing agreement and subsequently entered into a written purchase agreement for the property with the buyer. Both the listing agent and the buyer knew that he was not the sole owner of the property but did not request or obtain documentation that he was authorized to act on behalf of the other brothers and relied solely on his assurances of his authority. After calling his brothers to "verify" that they still wanted to sell the property, he informed the broker that they had decided not to sell the property. The buyer sued the brothers for specific performance (the completion of the purchase of the property), and the brothers cross-complained against the buyer and the broker. The trial court entered judgment for the buyer and the broker, and the brothers appealed.
On appeal, the court held that the purchase agreement was not enforceable against the non-signatory brothers because it did not comport with the statute of frauds, codified in California Civil Code section 1624(a)(2), which provides in part that an agreement for the leasing for a longer period than one year or for the sale of real property that is made by an agent of the party sought to be charged is invalid, unless the authority of the agent is in writing, subscribed by the party sought to be charged. The court, therefore, reversed the judgment of specific performance.
In its analysis of the facts of this case, the court found that, although the brother who executed the documents represented, both orally and in writing, that he was authorized to sell the property, there was no evidence that his brothers provided written authorization to him to do so. Since the statute of frauds prevents a TIC from selling real property without the written authorization of the other TICs to do so, the court held that the buyer could not obtain specific performance.
The buyer then characterized the relationship of the four brothers as partners in a partnership and argued that the non-signatory brothers' written authorization was not required based on California Corporations Code section 16301. This statute provides in subsection (1) that each partner is an agent of the partnership for the purpose of its business. It further provides that an "act of a partner, including the execution of an instrument in the partnership name, for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership, unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received notification that the partner lacked authority."
In its analysis of the buyer's argument, the court found that section 16301, subdivision (2) [which states that an act of a partner that is not apparently for carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership only if the act was authorized by the other partners] applied and that the brothers, who owned the property as TICs, were partners in a partnership which was in the business of importing and distributing clothes. It found that this partnership was not in the business of holding real property for appreciation and resale. It thus found that the signatory brother's execution of the purchase agreement was not for carrying on in the ordinary course the partnership's business or business of the kind carried on by the partnership.
Therefore, the signatory brother's execution of the purchase agreement could only bind the brothers' partnership if it was authorized by the other partners. As the court discussed, "the statute of frauds applies to the authority of partners to act under section 16301, subdivision (2)." Since there was no evidence that the non-signatory brothers gave him written authority to execute the purchase agreement, the court held that the purchase agreement was not enforceable against the non-signatory brothers because it did not comport with the statute of frauds and reversed the trial court's judgment of specific performance.
Some Actions To Consider Taking In Your Real Estate Transactions With TICs Or Partners
If you are interested in purchasing or leasing real property, or if you are a realtor involved in the sale or leasing of real property, consider checking the property profile or vesting to ascertain the ownership of the property. If you find that the owners hold the property as TICs or partners, obtain all of their signatures on the purchase agreement and, if applicable, the listing agreement. If you are interacting with only one of the owners, obtain the signed written authorization of the other owners that specifies that the person with whom you are interacting may enter into the agreement on their behalf.
If you do not obtain the written authority of the TICs or partners that provides for an agent to sell or lease the real property on their behalf, and they later argue that the agreement is not binding on them because their agent did not have the requisite authority to act on their behalf after all, investigate whether their partnership is in the business of holding real property for appreciation and resale or for leasing. If you find that is the case, you can argue that there was no need for their express authority, the agent's acts were not subject to the statute of frauds, and their authority was not required to be in writing for the agreements to be binding on them.
Lastly, if you own real property as TICs or partners, and you are charged by your TICs or partners to sell or lease the real property, consider obtaining their authority for you to do so by a signed writing. You do not want to be in the position in which you believe you have the authority of your TICs or partners, take action, and then have your TICs or partners inform you that they did not in fact authorize your action, potentially leading to costly litigation.
Checking the property profile or vesting of real property and obtaining the signed written authorization of the TICs or partners of the individual with whom you are interacting in a real estate transaction will facilitate a smoother transaction and help to prevent loss of the transaction and/or costly and time-consuming litigation.
Sandra I. Herrera is an Associate in the Real Estate Practice Group and can be reached at (213) 612-7805 or sherrera@nossaman.com.