10892265.21

The Practical

Real EstateLawyer

CALIFORNIA PURCHASE AND SALE ISSUES FORBUYERS

By Stevens A. Carey*

Based on an article published in the July 2016 issue ofThe Practical Real Estate Lawyer

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* Stevens A. Carey is a partner with Pircher, Nichols & Meeks, a real estate law firm with offices in Los Angeles andChicago. The author thanks Rob Krapf (DE), Fred Klein (DC), Marty Schwartz (FL), Josh Kamin (GA), Gene Leone(IL), Kevin Shepherd (MD), John Sullivan (MA), Joshua Stein (NY), and John Nolan (TX) for their input regarding theirrespective jurisdictions (as indicated parenthetically), Jeff Brown for his input regarding litigation matters, MichaelCaplinger for his input regarding sales and use tax matters, Michelle Hickey for her input regarding statutory sellerdisclosure requirements, Michael Soejoto for his input regarding tax matters, John Cauble and Richard MacCracken forproviding comments on a prior draft of this Article, and Kaleb Keller and Tim Durkin for cite-checking. This Article isnot intended to provide legal advice. The views expressed (which may vary depending on the context) are notnecessarily those of the individuals mentioned above, Pircher, Nichols & Meeks or the publication. It is important toremember that every transaction is different and what is appropriate for one transaction may not be appropriate foranother. Any errors are those of the author.

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CALIFORNIA PURCHASE AND SALE ISSUES FOR BUYERS

By Stevens A. Carey*

Sales of California real estate are typically governed by California law and customs. While there areexceptions to this rule, a buyer may find it difficult to deviate from the norm and, in the author’s experience,most buyers do not even try. So what does this mean for the prudent commercial buyer? Aren’t the laws andcustoms for commercial real estate purchases basically the same throughout the United States? The answer isno, and sometimes the variance can be significant, especially in an outlier state like California. As noted byone author, “California sometimes operates like its own country, with laws that aren’t like anyone else’s.”Zimmermann, Three Things To Know About Doing Business in California, XCONOMY.COM (Jan. 28, 2016),available at http://tinyurl.com/z9tu8nw. Consequently, it is important to understand the local rules and toseek the advice of local experts to make an informed purchase. While not intended to be exhaustive, thisArticle will highlight some of the local matters for a buyer to keep in mind when entering into a Californiacommercial real property purchase agreement.

CAPSULE SUMMARY

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1. Recitals. In California, recitals are conclusively presumed to be accurate so the buyershould be careful about what is recited in the purchase agreement.

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2. Due Diligence Termination Right. Seemingly broad due diligence termination rights mayyield unexpected results based on California case law: the buyer’s discretion to terminateduring the due diligence period may not be as unlimited as the buyer thinks; and if it isunlimited, there is a risk that the purchase agreement may be subject to challenge as anillusory contract if it is not supported by consideration.

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3. Title Insurance and Escrow. California title insurance forms and rates are more flexiblethan some states (e.g., Texas, Florida and New York) but less flexible than others (e.g.,Illinois). Unlike some states (e.g., Florida), the buyer should not expect any recourseagainst the title company in California if the title report it obtains is inaccurate, even if thetitle company has been negligent in preparing the report. Also, attorneys do not act as titleagents in California as they do in some states (e.g., Florida and Georgia) and, althoughallowed by California law, generally do not act as escrow agents in the author’sexperience (other than relatively informal arrangements between counsel to hold signaturepages while counterparts are collected pending delivery).

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4. Closing Procedure. The customary forms of several closing documents in California maybe different from the forms in other states (e.g., the form of deed, state tax withholdingcertificate, preliminary change of ownership report, and local transfer tax statements).The customary closing cost allocations in California may vary not only from the customsin other states but may also vary depending on the location in California.

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5. Certain Remedies and Defenses. California has a statute governing liquidated damageclauses in real property purchase agreements, and statutes indicating that a liquidateddamage provision does not eliminate the possibility of specific performance by the seller.California also has some conflicting case law regarding survival limits, numerousstatutory seller disclosure requirements, a broad concept of fraud, limitations on waiversof fraud, conflicting case law regarding the survival of fraud if a buyer closes the purchase

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with knowledge of the fraud (and the contract is silent as to this circumstance), and specialrules regarding jury trial waivers, arbitration, judicial reference and attorneys’ feesclauses.

6. Special Qualifiers (Good Faith, Best Efforts and Knowledge). In California, the terms“good faith” and “best efforts” and the various “knowledge” qualifiers that are frequentlyused in purchase agreements may not always mean what the buyer expects.

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7. Supplementing and Modifying the Written Agreement. It may be easier in California thansome other states for courts to expand upon and sometimes even change what is set forthwithin the four corners of the written purchase agreement.

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8. Timing. “Time is of the essence” clauses are sometimes enforced in California, butsometimes they are not. Also, California has statutes addressing business days and timezones, some of which may be surprising.

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9. Entity, Property, Transfer and Sales Taxes. California taxes may be relevant indetermining the form of the buyer, the price, and the structure of the transaction.

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10. Property and Transaction Specific Matters. Numerous other California laws and customsmay be relevant depending on the nature of the property and the structure of thetransaction.

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A more detailed discussion follows.

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1. RECITALS

Most purchase agreements begin with recitals, which may tell the story behind the deal (to establish thebackground and create a framework for the agreement). In California, buyers may prefer to keep this storyshort. According to the California Evidence Code:

The facts recited in a written instrument are conclusively presumed to betrue as between the parties . . . . Cal. Evid. Code § 622.

With the exception of a recital of consideration (which may be questioned), this statute estops the parties todeny the truth of the recitals. See, e.g., 13 WITKIN, SUMMARY OF CALIFORNIA LAW § 193(1)(c) at 531–32(10th ed. 2015). Many California legal practitioners were surprised in 2000 when a California court, relyingon this statute, found that a tenant was bound by an inaccurate termination date set forth in its estoppelcertificate. Plaza Freeway Ltd. Partnership v. First Mountain Bank (Cal. App. 4th Dist. 2000)81 Cal.App.4th 616. In the author’s experience, it is typically the buyer who wants to add, and the seller whowants to delete, information about the property (e.g., square footage) in the recitals. But query whether thebuyer would be precluded from complaining if the information it added turns out to be wrong (e.g., the statednumber of square feet overstated the actual number)? “An open question is whether placing contractual termsin a recital will safeguard the parties against claims of promissory fraud . . . .” CEB, CALIFORNIA REAL

PROPERTY REMEDIES AND DAMAGES § 3.80 at 3-101 (2d ed. 2015). (But see Bruni v. Didion (Cal. App. 4thDist. 2008) 160 Cal.App.4th 1272, 1291, which states that “section 622, however, does not bar an assertion offraud or other grounds for rescission.”)

2. DUE DILIGENCE TERMINATION RIGHT

Buyers often, if not usually, want the right to decide during the due diligence period whether or not to proceedwith the purchase without being second-guessed. The discretion given to the buyer to make this decision,namely whether to terminate the purchase agreement during this period, is key to determining whether thebuyer’s decision may be challenged. For example, some commentators have suggested that “sole discretion”merely indicates whose discretion is being exercised and may not preclude the imposition of the impliedcovenant of good faith and fair dealing. And even “absolute discretion” might not be entirely free from doubtin California. But if this termination right (sometimes called a “free look”) is crystal clear, it may come at acost if it is not supported by independent consideration: the purchase agreement may be subject to attack asan illusory contract. Thus, there are two concerns when the buyer expects to have an ironclad terminationright during the due diligence period: (1) making sure the buyer has unfettered discretion to exercise thetermination right; and (2) making sure there is consideration to avoid an illusory contract. To address thesetwo points, many California purchase agreements (1) provide that the buyer may decide whether to proceedfor any or no reason, and (2) require the buyer to pay the seller some amount (often $100) of independentconsideration that may be part of the deposit that is deposited in escrow, but ultimately goes to the sellerunder any and all circumstances, and is nonrefundable (and that obligation survives any termination of thepurchase agreement). For more background (including a discussion of some of the relevant California caselaw), see Carey, Cauble & MacCracken, The “Free Look” in California—You Get What You Pay For,33 REAL PROP. L. REP. 89 (July 2010).

3. TITLE INSURANCE AND ESCROW

3.1 Regulation of Forms and Rates. “In California, the types of forms and the rates theindustry may charge are largely unregulated. The Insurance Code, however, does set forth general rateguidelines and requires that all rates be filed with the Department of Insurance. California also requires thateach title insurer file with the Insurance Commissioner any policy form it intends to use on a regularbasis . . . .” CEB, CALIFORNIA TITLE INSURANCE PRACTICE § 6.8 at 6-13 (2d ed. 2015). In the author’s

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experience, title insurance companies in California seem to have considerably more flexibility regarding theforms of and rates for endorsements (than they have for the basic policy).

3.2 Customary Forms of Policy and Endorsements. “There are essentially two types of titleinsurance policies available in California for owners of real property interests—CLTA policies and ALTApolicies. CLTA policies insure primarily against defects in title that are discoverable through an examinationof the public record. ALTA policies [may] provide greater coverage in that they [may] also insure against[certain] off-record defects . . . .” Ibid. § 6.10 at 6-15. Although a CLTA form is available, and its cost maybe relevant for the allocation of closing costs, in the author’s experience, buyers in commercial real estatepurchases typically obtain a 2006 ALTA extended coverage owner’s policy. A 2006 ALTA standardcoverage owner’s policy in California includes the so-called “Western Regional Exceptions” and providescoverage comparable to a CLTA owner’s policy. Ibid. § 7.21 at 7-20. In California, as in many states, theCLTA endorsement forms are used along with the ALTA endorsement forms and customized forms that maybe negotiated with the title insurance company.

3.3 Preliminary Reports and Title Commitments. It is common in California, as in manystates, for the buyer to obtain a preliminary report. This report is sometimes referred to in purchaseagreements as a “preliminary title report,” although the name was changed in California by statute effectiveJanuary 1, 1982. Cal. Ins. Code § 12340.11. The deletion of the word “title” was intended to distinguish apreliminary report from a title abstract, because (unlike a title abstract) a preliminary report is not intended tocreate any duty or liability for the title insurance company. Although the preliminary report appears to be areport of the status of title, it is loaded with disclaimers (including a statement that there may be other titleexceptions) to make clear that a buyer relies upon it at its own risk. By statute, it is not to be construed as atitle representation. Cal. Ins. Code § 12340.11. And case law has made clear that “[a] party that seeks to holdan insurer liable for negligently providing title information upon which the party relied must obtain anabstract of title . . . . In short, there are two ways in which an interested party can obtain title information uponwhich reliance may be placed:   an abstract of title or a policy of title insurance.” Soifer v. Chicago TitleCompany (Cal. App. 2d Dist. 2010) 187 Cal.App.4th 365, 374. Sometimes, the buyer will obtain acommitment rather than a preliminary report, but commitments may fare little better because the statute refersto both preliminary reports and commitments. Cal. Ins. Code § 12340.11. “Until a contract to issue a policyis created . . . , the commitment carries with it the same statutory protections as the preliminary report.” CEB,CALIFORNIA TITLE INSURANCE PRACTICE, supra, § 5.31 at 5-29. Commitments can create a bindingobligation to issue a policy, but they often do not reach that stage because, for example, they may not includethe name of the buyer or the liability amount or the commitment fee has not been paid. See ibid. § 5.33 at5-30.

3.4 Property Tax Liens. Generally, the tax lien for each fiscal year (July 1–June 30) inCalifornia arises on the immediately preceding January 1. Cal. Rev. & Tax. Code § 2192; Cal. Gov. Code§ 29001. The lien for government improvement special assessments (for assessment districts or communityfacilities districts) arises when a notice of assessment or notice of special tax lien is recorded. Cal. Sts. & Hy.Code §§ 3114–3115. The 2006 ALTA form owner’s policy generally covers any liens for taxes orassessments that are due or payable and are unpaid and are not specified on Schedule B. See paragraph 2(b)of the Covered Risks. But what if the voters approve a local special assessment for public improvements andthe government has not yet levied an assessment and the lien does not attach until after the deed is recorded?This special assessment is not likely to be covered by the 2006 ALTA title insurance policy because ofparagraph 3 of the Exclusions From Coverage: “Defects, liens, encumbrances, adverse claims, or othermatters . . . (d) attaching or created subsequent to Date of Policy.” And what happens if the purchase is notexpected to result in a reassessment? See infra part 9.2. Might there be some assessments specific to theproperty that have not been processed and could increase the property taxes for the period after closing? SeeCal. Rev. & Tax. Code § 75.54(c) for proration of supplemental assessments between seller and buyer andCal. Rev. & Tax. Code § 531.2 for potential proration between seller and buyer of escape assessments.

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3.5 Escrows. California real estate purchases often, if not usually, involve an escrow, both tohold the deposit and to consummate the closing. The most common closing alternative, namely a “table”closing (in which the parties meet face to face to close the transaction), is rarely used to close a Californiapurchase agreement. See 3 FRIEDMAN ON CONTRACTS AND CONVEYANCES OF REAL PROPERTY § 13:4 at 13-26–13-29 (7th ed. 2015) for a description of a table closing. See also CEB, CALIFORNIA TITLE INSURANCE

PRACTICE, supra, §§ 10.3–10.4 at 10-3–10-4. (Sometimes a table closing is referred to as a “New York styleclosing”, but the words “New York style closing” are used by some to refer to a “gap closing”, which is arelatively common arrangement under which the funds are disbursed before the deed is recorded and the titleinsurance company insures the gap, usually based on a gap indemnity from the seller. Even in New York, thetable closing has largely become a part of history. Most real estate purchase closings occur through escrow,although they are often gap closings.) Although independent escrow companies are occasionally used inSouthern California, many, if not most, practitioners in California prefer to use an escrow agent that isaffiliated with the title company. See ibid. § 10.3 at 10-3.

3.6 Role of Attorneys. In California, unlike some states (e.g., Florida and Georgia), attorneysare not used as title agents and, although allowed, typically do not function as escrow agents (althougharrangements between counsel to hold executed signature pages or counterparts pending closing or furtherinstruction are common). See, e.g., NAIC TITLE INSURANCE TASK FORCE, SURVEY OF STATE INSURANCE

LAWS REGARDING TITLE DATA AND TITLE MATTERS (Mar. 22, 2010), available athttp://tinyurl.com/gv6q7jk; Bernhardt, Attorneys as Escrow Agents, 29 REAL PROP. L. REP. 342, 344(Sept. 2006) (“California not only allows attorneys to serve as escrow agents, it makes it easy to do so bywaiving [certain] license requirements . . . . The best thing we might do for ourselves is to get that exemptionrepealed.”).

4. CLOSING PROCEDURE

4.1 Closing Documents.

4.1.1 Form of Deed. In California, the custom is to use grant deeds. The statutory form isset forth in Cal. Civ. Code § 1092. Unless otherwise provided, the following are implied covenants under agrant deed in California:

1. That previous to the time of the execution of suchconveyance, the grantor has not conveyed the same estate, or any right, title,or interest therein, to any person other than the grantee;

2. That such estate is at the time of the execution of suchconveyance free from encumbrances done, made, or suffered by the grantor,or any person claiming under him.

Cal. Civ. Code § 1113. For more information regarding California deed requirements, see CEB, CALIFORNIA

REAL PROPERTY SALES TRANSACTIONS Ch. 10 (4th ed. 2015).

4.1.2 Tenant Notices. A buyer may wonder why a seller in California cares about howtenant notices are delivered. The reason is to ensure that the seller is released from further liability withrespect to the security deposits. Under Cal. Civ. Code § 1950.7(d), the seller (landlord) is relieved of furtherliability with respect to a security deposit under a commercial lease upon transferring the deposit to the buyer(successor landlord) and thereafter notifying the tenant “by personal delivery or certified mail of the transfer,of any claims made against the . . . deposit, and of the transferee’s name and address. If the notice is made bypersonal delivery, the tenant shall acknowledge receipt of the notice and sign his or her name on the

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landlord’s copy of the notice.” See Cal. Civ. Code § 1950.5(h) for the corresponding requirements that applyto a residential lease.

4.1.3 State Tax Withholding Certificate. The purchase agreement should require the sellerto deliver any required state tax withholding or non-foreign status certificate. Although not necessary, forclarity, consider specifying the applicable California form of tax withholding certificate (currently, CaliforniaState Form 593-C).

4.1.4 Preliminary Change of Ownership Report. In California, the buyer typically preparesand files a preliminary change of ownership report (PCOR) to put the county assessor on notice of the changein ownership resulting from the buyer’s purchase. The PCOR is a brief questionnaire requesting informationon the property, principals involved in the transfer, type of transfer, purchase price and terms of sale, ifapplicable, and other pertinent data. The county recorder may charge an additional $20 recording fee if thePCOR is not filed with the deed. The buyer is still obligated to file a Change in Ownership Statement (COS)with the county assessor within the time limits set forth in Cal. Rev. & Tax. Code § 480 (typically 90 days ofthe date of transfer for commercial transactions). Many California purchase agreements do not address thePCOR.

4.1.5 Transfer Tax Statements. Many buyers and sellers would prefer not to disclose theprice in the public record. So, for many years in California, a separate statement of documentary transfer taxwas delivered (rather than indicating the amount of the transfer tax on the deed). This practice was oncepermitted by Cal. Rev. & Tax. Code § 11932. However, the law was changed as of January 1, 2015 to requiredisclosure of the amount of the transfer tax on the face of the deed. Cal. Rev. & Tax. Code §§ 11932–11933.Many counties also require a separate transfer tax affidavit. Check with the title company to determinewhether one is required by the county where the property is located.

4.2 Closing Cost Allocation. The custom for allocating closing costs varies between Southernand Northern California and, in some cases, among counties. In Southern California, (1) the seller pays(a) transfer taxes (which are discussed in part 9.3 below), except that the custom for allocating municipaltransfer taxes varies (i.e., some sellers argue that city transfer taxes should be split equally or at least that theallocation is negotiable in larger transactions), (b) the premium for a CLTA title insurance policy, and(c) 50% of any escrow fees; and (2) the buyer pays (a) possibly all or a portion of the municipal transfer taxesas noted above, (b) the additional costs to obtain an ALTA title insurance policy and any endorsements, and(c) 50% of any escrow fees. Unlike Southern California, Northern California does not have a single customfor allocating closing costs. For example, it is often stated that, in several Northern California counties,including San Francisco, the buyer pays the entire title insurance premium. In other Northern Californiacounties, the base title insurance premium may be split between the seller and the buyer 100/0, 75/25 or50/50, depending on the county. The allocation of escrow charges may also vary from county to county inNorthern California. The customary allocation (arguably other than for municipal transfer taxes) is oftendetermined by visiting most national title insurance company websites. See, e.g., COMMONWEALTH LAND

TITLE COMPANY, REAL ESTATE LAWS & CUSTOMS BY STATE (May 2014), available athttp://tinyurl.com/jsk22qs; FIRST AMERICAN TITLE, YOUR GUIDE TO REAL ESTATE CUSTOMS BY STATE

(Sept. 2014), available at http://tinyurl.com/zpsv9c2. But since dollars are fungible, it is possible to usedifferent allocations, which happens from time to time (particularly in large deals involving one or moreout-of-state parties). This practice has added to the lack of uniformity in Northern California (especially inSan Francisco). To add to the confusion, the author has encountered purchase agreements (prepared by or forSouthern California professionals) that use Southern California customs to sell Northern California real estate(especially in San Francisco). Indeed, real estate professionals may be able to point to past transactions thathave consistently used an allocation (e.g., having the seller pay all or a portion of the base premium inSan Francisco) that is contrary to the custom published on the title insurance company websites.

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4.3 Property Tax Prorations. Unlike some states (e.g., Illinois and Florida), property taxes inCalifornia are generally not paid more than six months in arrears. See Carey, Prorations: Watch Out for RealEstate Taxes Paid in Arrears, REAL EST. FIN. J., Spring 1993, at 11. With the exception of a few cities,property taxes in California for each half of the year are paid partially in advance and partially in arrears:property taxes for each July 1–June 30 tax year are assessed as of the preceding January 1 and are due in twoequal installments; the first is due on November 1 (becoming delinquent on December 10) and the second isdue on February 1 (becoming delinquent on April 10). See, e.g., WHITNEY, ED., GUIDEBOOK TO CALIFORNIA

TAXES ¶ 1708 at 790 (2015).

5. CERTAIN REMEDIES AND DEFENSES

5.1 Liquidated Damages. Many, if not most, California real property purchase agreementsprovide that, if the buyer breaches its obligation to close, then the deposit is forfeited to the seller as liquidateddamages.

5.1.1 General Rule. With some exceptions, liquidated damage clauses are generally validin California “unless the party seeking to invalidate the provision establishes that the provision wasunreasonable under the circumstances existing at the time the contract was made.” Cal. Civ. Code § 1671(b).Consequently, it is relatively common in California to see statements intended to support the reasonablenessof the manner in which the liquidated damages were determined.

5.1.2 Real Property Purchase Agreement. With the exception of certain residentialpurchase agreements (i.e., involving not more than four residential units, at least one of which the buyerintends to occupy), the general rule stated in part 5.1.1 above applies to a California real property purchaseagreement (that liquidates damages if the buyer breaches its obligation to close) subject to the followingadditional requirements (Cal. Civ. Code § 1676):

A provision in a California real property purchase agreement liquidatingdamages if the buyer fails to close is invalid unless “[t]he provision isseparately signed or initialed by each party.” Cal. Civ. Code § 1677(a).

“If the provision is included in a printed contract, it [must be] set out eitherin at least 10-point bold type or in contrasting red print in at leasteight-point bold type.” Cal. Civ. Code § 1677(b).

The latter statutory requirement is probably intended to apply to so-called “preprinted” contracts rather thanthe typical contract prepared through word processing and then printed on an office printer. To be safe, manybuyers (and sellers) in California use at least 10-point bold type.

5.2 Specific Performance by Seller. Most sophisticated buyers in California also insist that theseller’s right to liquidated damages is the sole and exclusive remedy (and not merely the sole and exclusiveright to damages) if the buyer breaches its obligation to close (without limiting, however, certain obligationsthat survive termination). Their concern is that otherwise the seller may be able to bring an action for specificperformance despite the existence of a liquidated damage clause. Cal. Civ. Code §§ 1680 (“Nothing in thischapter affects any right a party to a contract for the purchase and sale of real property may have to obtainspecific performance.”) and 3389 (“A contract otherwise proper to be specifically enforced, may be thusenforced, though a penalty is imposed, or the damages are liquidated for its breach, and the party in default iswilling to pay the same.”); see also CEB, CALIFORNIA REAL PROPERTY SALES TRANSACTIONS, supra,§ 4.143 at 4-132–4-134; Schaefer, A Seller’s Specific Performance Remedy in a Residential Real EstateTransaction, 40 MARIN LAW. 3 (Feb. 2009).

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5.3 Survival Limits. In California, as in other states, the amount of time, if any, a buyer mayhave after closing to make a claim for the seller’s breach of a real property purchase agreement may dependon a number of factors including (1) the doctrine of merger, (2) the applicable statute of limitations, and(3) contractual limits.

5.3.1 Merger. “Absent fraud, mistake, agreement or other special circumstances, thebuyer’s acceptance of the deed at closing results in a merger of prior negotiations and agreements . . . .However, matters collateral to the conveyance (i.e., those that ordinarily do not become part of the deed) arenot merged . . . .” CEB, CALIFORNIA REAL PROPERTY SALES TRANSACTIONS, supra, § 4.109 at 4-106.See also MILLER & STARR, CALIFORNIA REAL ESTATE § 8:4 at 8-23–8-24 (4th ed. 2015) (emphasizing thatthe application of the merger doctrine depends upon the intent of the parties); POWELL ON REAL PROPERTY

§§ 81.01[3][a] at 81-15; 81.03[6][h] at 81-153–81-155; 81.05[11][d] at 81-247; 81A.07[1][d] at 81A-135–81A-137 (2015). Exactly what obligations are encompassed by the concept of merger may not always seemclear.

Some practitioners believe that, without a survival provision,representations and warranties do not survive closing because they mergewith the deed. Support for this view may be found in some secondaryreference materials both in California and elsewhere. See, e.g., citations inHerring v. Teradyne Inc. (S.D. Cal. 2002) 256 F.Supp.2d 1118, 1127(which was reversed by the Ninth Circuit as to a related but different issue).For example, GREENWALD & BANK, CALIFORNIA PRACTICE GUIDE: REAL

PROPERTY TRANSACTIONS ¶ 11:92.1 (2015) states: “Absent a ‘survivalclause’ . . . representations and warranties in a purchase and sale agreementmerge into the deed and are thereby extinguished by the closing; after theconveyance, they have no independent existence.” [citations omitted].Ostensible support for this broad merger concept may be found in WesternFilter Corp. v. Argan, Inc. (9th Cir. 2008) 540 F.3d 947, 952, a caseinvolving a stock purchase agreement governed by California law, in whichthe Ninth Circuit stated that: “Unless the parties agree to a survivalclause—extending the representations and warranties past the closingdate—the breaching party cannot be sued for damages post-closing for theirlater discovered breach.”

But “[t]he rule that prior expressions are merged into the deed is not asbroad and absolute as some abbreviated statements of the doctrine mightindicate.” Szabo v. Superior Court (Cal. App. 2d Dist. 1978) 84 Cal.App.3d839, 843 (delivery of deed did not necessarily preclude enforcement of arepresentation and warranty in the purchase agreement that the propertycomplied with zoning laws). Indeed, there are often qualifications that mayeasily be overlooked. Consider the impression that would have beencreated had the quote at the beginning of this part 5.3.1 been limited to thefirst sentence. Similarly, the language quoted above from theGREENWALD & BANK CALIFORNIA PRACTICE GUIDE is qualified with anadmonition to see Ram’s Gate Winery, LLC v. Roche (Cal. App. 1st Dist.2015) 235 Cal.App.4th 1071, 1079–1081, which states a much narrowerrule: “[W]e agree with those courts which have limited application of themerger doctrine to circumstances where the contractual terms areinconsistent with the deed, or where the parties clearly intend to have allcontractual obligations subsumed by the recitals of the recorded deed.”Ibid. at 1081. Moreover, the GREENWALD &BANK CALIFORNIA PRACTICE

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GUIDE identifies only two cases to support the quoted statement in the priorparagraph, both of which involved survival clauses so merger was not anissue. One of them, Linden Partners v. Wilshire Linden Associates(Cal. App. 2d Dist. 1998) 62 Cal.App.4th 508, 524, does not mention themerger doctrine at all. The other one, the Western Filter case discussedabove, may not be given great weight because its statement of the mergerdoctrine was not only dicta, it was also stipulated by the parties.

But most buyers try to avoid any doubt that representations and warranties (and sometimes other obligations)are intended to survive closing (and delivery of the deed) for some survival period. While many, if not most,covenants in the purchase agreement may be “collateral” agreements that are not subject to the doctrine ofmerger, sellers sometimes want to provide that nothing survives the closing unless expressly provided to thecontrary. The buyer may want to take the position (and provide) that all obligations survive for some periodafter closing.

5.3.2 Statute of Limitations. The statute of limitations for breach of a written contractvaries from state to state. See, e.g., TWOMEY, JENNINGS & GREENE, BUSINESS LAW: PRINCIPLES FOR

TODAY’S COMMERCIAL ENVIRONMENT § 18-4d at 328 (5th ed. 2017) (“The time limitation provided by statestatutes of limitations varies widely.”). In California, the general rule for a written contract is four years. Cal.Code Civ. Proc. § 337. See also 3 WITKIN, CALIFORNIA PROCEDURE §§ 508–514 at 650–59 (5th ed. 2015).By contrast, the corresponding general rule (for a written contract) is, for example:

three years in the District of Columbia, D.C. Code § 12-301(7), Maryland,Md. Cts. & Jud. Proc. Code § 5-101, and Delaware, 10 Del. Code§ 8106(a);

six years in New York, N.Y. Civ. Prac. Laws & Rules § 213(2); and

ten years in Illinois, 735 Ill. Comp. Stat. 5/13-206.

As in other parts of the country, this time limit may not be relevant in commercial real property purchaseagreements because of contractual time limitations that are typically included in the purchase agreement,which are discussed in part 5.3.3 below. But the author has encountered purchase agreements with provisions(e.g., a reciprocal brokerage indemnity) that are not the subject of any contractual modification of the statuteof limitations. In such instances, the buyer may want to know not only the length of the limitation period butalso when it begins. “A cause of action for breach of contract ordinarily accrues at the time of breach, and thestatute begins to run at that time regardless whether any damage is apparent or whether the injured party isaware of his or her right to sue.” WITKIN, CALIFORNIA PROCEDURE, supra, § 520 at 664; see also CEB,CALIFORNIA LAW OF CONTRACTS §§ 9.2–9.5 at 9-4–9-8 (2015). See also CEB, CALIFORNIA REAL

PROPERTY REMEDIES AND DAMAGES, supra, § 4.60 at 4-88–4-89. For example, the cutoff may be longerthan four years from closing (e.g., the breach of a post-closing brokerage indemnity where a broker makes aclaim for indemnification after closing and the obligation to indemnify is not breached until that time). And,in some circumstances, the time period may not begin to run until after the breach. See, e.g., Cal. Code Civ.Proc. § 337.3 (if a rescission action is based on fraud or mistake “the time does not begin to run until thediscovery . . . of the . . . fraud or mistake”); WITKIN, CALIFORNIA PROCEDURE, supra, §§ 520–21 at 664–67,§ 529 at 678–80.

5.3.3 Shortening the Period. As in other states, sellers in California typically try to limitthe survival of any claims against the seller to a period that is much shorter than the applicable statute oflimitations. And, as in many other states, such limitations have been permitted when tested by the courts ifthey are not unreasonable. See, e.g., CEB, CALIFORNIA LAW OF CONTRACTS, supra, § 9.5 at 9-7; Capehart v.

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Heady (Cal. App. 1st Dist. 1962) 206 Cal.App.2d 386 (three-month period in real property lease); see also15 CORBIN ON CONTRACTS § 83.8 at 287 (rev. ed. 2003) (shortening the statutory period “assists the publicpolicy behind statutes of limitations: preventing stale claims.”). However, the law in California is notentirely consistent regarding the relevant public policy and some California courts have looked upon contractsthat shorten the statutory period with disfavor and have strictly construed them. Compare, e.g., (x) Lewis v.Hopper (Cal. App. 1st Dist. 1956) 140 Cal.App.2d 365, 367 (“‘[C]ontractual stipulations which limit the rightto sue to a period shorter than that granted by statute, are not looked upon with favor because they are inderogation of the statutory limitation. Hence, they should be construed with strictness against the partyinvoking them.’” [citations omitted]), which was followed by the 9th Circuit (applying California law) inWestern Filter Corp., supra, at 952, with (y) Zalkind v. Ceradyne (Cal. App. 4th Dist. 2011) 194 Cal.App.4th1010, 1030, which declined to follow Lewis.

5.3.4 Extending the Period. In some states, the statute of limitations for a breach ofcontract may be extended by opting into a longer statute of limitations for contracts under seal. For example,a contract under seal is subject to a statute of limitations of:

12 years in Maryland, Md. Cts. & Jud. Proc. Code § 5-102(a)(5), and theDistrict of Columbia, D.C. Code § 12-301(6); and

20 years in Georgia, Ga. Code § 9-3-23, and Massachusetts, Mass. Gen.Laws ch. 260, § 1.

This option is not available in California, which has no separate statute of limitations for contracts under seal.But what if the parties simply agree to a longer statute of limitations? Corbin suggests that a contractualextension of the statute of limitations for breach of a written contract may be of dubious value:

Because the purpose of a statute of limitations is “to prevent the bringingand enforcement of stale claims, involving extra danger of fraud andmistake,” courts do not enforce parties’ agreements to lengthen thelimitations period.

CORBIN ON CONTRACTS, supra, § 83.8 at 289–90 [citations omitted]. On the other hand, according to Witkin:

In some jurisdictions . . . a waiver or contractual extension [of the statute oflimitations] is void; in others it is valid if the duration is reasonable.

WITKIN, CALIFORNIA PROCEDURE, supra, § 468 at 593 [citations omitted]. For example, prior to enactmentof Cal. Code Civ. Proc. § 360.5 in 1951, “California courts, stressing the theory of ‘personal privilege’ . . .took the extreme position [subject to potential public policy exceptions] that a permanent waiver (or itspractical equivalent, a waiver for 99 years) [of the statute of limitations] was valid.” Ibid. Some statelegislatures have also taken a more permissive approach. For example, in Delaware (a case from which iscited to support the above quote from CORBIN), the legislature has recently taken action: Delaware previouslyallowed the parties to opt into a 20-year statute of limitations by using a contract under seal, Whittington v.Dragon Group, L.L.C. (Del. 2009) 991 A.2d 1, 10; and in late 2014, Delaware enacted a statute allowing forcontractual extensions for most contracts (involving at least $100,000) of up to 20 years without requiring aseal. 10 Del. Code § 8106(c). By contrast, California’s statute appears to be less permissive than theCalifornia case law that preceded it, and unlike the Delaware statute (which refers to “a period specified” inthe contract), the California statute refers to a “waiver” of the statute of limitations. While California does notallow unlimited waivers, it does appear to allow certain more limited extensions, including an initial extensionfor four years. Cal. Code Civ. Proc. § 360.5. As stated by Witkin:

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Although the section is somewhat complicated, it seems clear that (a) itabolishes perpetual and longtime waivers in the original instrument; but(b) it permits a provision extending the period (up to 4 years for writtencontract) by an additional 4 years; and (c) it allows any number ofsuccessive but separately executed renewal agreements for additionalperiods of up to 4 years.

WITKIN, CALIFORNIA PROCEDURE, supra, § 468 at 594. See also California First Bank v. Braden (Cal. App.2d Dist. 1989) 216 Cal.App.3d 672, 676 (“We conclude that the plain language of the statute provides that awritten waiver executed prior to the running of the applicable statute of limitations shall be effective for aperiod of four years from the commencement of the running of the statute of limitations.”). Consequently, abuyer should not assume that a provision in a California purchase agreement stating that a particularrepresentation or covenant “survives indefinitely” will operate to extend the statutory period for more thanfour years.

5.4 Requirements and Limits for Seller Disclosures; Fraud.

5.4.1 Seller Disclosures. There are numerous statutory disclosure requirements imposedupon sellers in California depending on the type of transaction, including disclosures regarding: (a) releasesof hazardous substances under Cal. Health & Saf. Code § 25359.7; (b) natural hazards (e.g., seismic hazardzones under Cal. Pub. Resources Code § 2694, delineated earthquake fault zones under Cal. Pub. ResourcesCode § 2621.9, earthquake safety for certain buildings under Cal. Gov. Code §§ 8875.6 & 8893.2, specialflood hazard areas under Cal. Gov. Code § 8589.3, areas of potential flooding under Cal. Gov. Code § 8589.4,very high fire hazard severity zones under Cal. Gov. Code § 51183.5, and certain wildland areas that maycontain substantial forest fire risks and hazards under Cal. Pub. Resources Code § 4136); and (c) meth labcleanup orders under Cal. Health & Saf. Code § 25400.28. There were energy use disclosure requirementsunder Cal. Pub. Resources Code § 25402.10, but they were phased out on December 31, 2015; new energyuse disclosure requirements are expected to be implemented in California by 2017. CALIFORNIA ENERGY

COMMISSION, BUILDING ENERGY USE BENCHMARKING AND PUBLIC DISCLOSURE PROGRAM, available athttp://tinyurl.com/jj5bo7e; A.B. 802, ch. 590 (Statutes of 2015). Additional statutory disclosure requirementsthat will take effect in the future include: compliance with water-conserving fixtures statutes (to take effecton January 1, 2019), Cal. Civ. Code § 1101.5(e); and the presence of mold in certain buildings (to take effecton the first January 1 or July 1 that is at least six months after the California State Department of HealthServices adopts the relevant standards), Cal. Health & Saf. Code § 26140. There may also be local (e.g.,municipal) and federal disclosure requirements. Many, if not most, sellers try to turn the statutory disclosurerequirements on their head to make them the buyer’s problem. The key here for most buyers in California isto be on the lookout for disclosures of actual problems relating to the property and to make sure that thedisclosure language does not inadvertently undercut any express representations or impose anything morethan an acknowledgement of the absence of seller liability.

5.4.2 As-Is Provisions and Other Disclaimers: Fraud. In California, “[a]ll contracts whichhave for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud” areunlawful. Cal. Civ. Code § 1668. (See Cal. Civ. Code § 1667 for definition of unlawfulness.) In a purchaseagreement, “an ‘as-is’ clause does not relieve the seller of the common law and statutory duties of disclosureor liability for fraud.” CEB, CALIFORNIA REAL PROPERTY SALES TRANSACTIONS, supra, § 6.9 at 6-13.Fraud is broadly defined in California. For example, California “case law has long held that negligentmisrepresentation is included within the definition of fraud.” Blankenheim v. E. F. Hutton & Co. (Cal. App.6th Dist. 1990) 217 Cal.App.3d 1463, 1472–73. See also Cal. Civ. Code §§ 1572(2), 1572(5), 1573 and1710(2). However, the seller’s common law disclosure obligations may not extend to matters that areapparent upon inspection, and (although the law in California is not completely clear) the buyer’s failure toconduct a reasonable, permitted inspection may even hamper its ability to rely on the express representations

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of the seller. See, e.g., 1 MILLER & STARR, CALIFORNIA REAL ESTATE, supra, § 1:156 at 1-654 (duty todisclose material facts known only to the seller and not reasonably accessible to the buyer), § 1:160 at 1-675(there is “no lesser duty . . . when the property . . . is . . . commercial . . . rather than residential . . . .”), § 1:168at 1-721 (“An express right of investigation may limit the buyer’s right to rely [on the seller’srepresentations], but the law is uncertain on this issue.”); 1 CEB, CALIFORNIA REAL PROPERTY SALES

TRANSACTIONS, supra, § 4.49 at 4-46 (The seller is obligated to disclose material facts “that would not beapparent to the buyer on inspection.”), § 4.70 at 4-68 (“The buyer is charged with constructive notice ofmatters discoverable by inspection of the property”). So the buyer should take steps to discover whatever isreasonably discoverable.

5.4.3 Releases. If a California purchase agreement contains a release, there is often areference to Civil Code section 1542. This statute provides:

A general release does not extend to claims which the creditor does not know or suspect toexist in his or her favor at the time of executing the release, which if known by him or hermust have materially affected his or her settlement with the debtor.

The seller’s counsel usually tries to waive the benefits of this statute with a so-called “1542 waiver.” There isno statutory form for this waiver. “Furthermore, mere recital, as in the release signed by plaintiffs, that theprotection of Civil Code section 1542 is waived, or that the release covers unknown claims or unknownparties is not controlling. Whether the releaser intended to discharge such claims or parties is ultimately aquestion of fact.” Leaf v. City of San Mateo (Cal. App. 1st Dist. 1980) 104 Cal.App.3d 398, 411. To make itclear that the parties intend to waive this statute, a 1542 waiver typically recites the statute and states thewaiver with all capital letters and bold type. Sometimes it is separately initialed too. A 1542 waiver isrelatively standard in California. Consequently, the buyer should carefully consider the scope of claims beingreleased and what, if any, claims should be preserved. See, e.g., Belasco v. Wells (Cal. App. 2d Dist. 2015)234 Cal.App.4th 409, 421–23 (waiver of Civ. Code § 1542 was effective to release the builder from claimsfor latent defects discovered in the future); San Diego Hospice v. County of San Diego (Cal. App. 4th Dist.1995) 31 Cal.App.4th 1048, 1053–54 (waiver of Civ. Code § 1542 was effective to release the seller fromclaims for environmental contamination discovered in the future).

5.4.4 Defense Based on Buyer Knowledge (Anti-Sandbag). What if a buyer learns of aseller’s fraud or breach of a representation before the closing and proceeds to closing? Does the closingwaive the buyer’s claim? There are California cases holding that seller fraud discovered after the contract andprior to closing is waived by closing, e.g., Kazerouni v. De Satnick (Cal. App. 2d Dist. 1991) 228 Cal.App.3d871, and other California cases holding the opposite, e.g., Jue v. Smiser (Cal. App. 1st Dist. 1994)23 Cal.App.4th 312. One commentator has stated that “[t]he decisions are divided [in California] . . . . Theweight of California case law supports the rule that a party to an executory contract does not waive his or herright to recover damages caused by the fraud of the other party by completing the transaction after the fraudhas been discovered. . . . However, there is contrary authority . . . .” MILLER & STARR, CALIFORNIA REAL

ESTATE, supra, § 1:171 at 1-747–1-748. Corporate merger and acquisition agreements often providecontractual support for, and seldom provide contractual support to negate, this rule (i.e., which allows abuyer’s fraud claim to survive closing despite the buyer’s knowledge) in the context of representations andwarranties. Whitehead, Sandbagging: Default Rules and Acquisition Agreements, 36 DEL. J. CORP. L. 1081(2011); see also West & Shah, Debunking the Myth of the Sandbagging Buyer: When Sellers Ask Buyers toAgree to Anti-Sandbagging Clauses, Who is Sandbagging Whom?, 11 M&A LAW. 3 (Jan. 2007). By contrast,sellers in real property purchase agreements often include a so-called “anti-sandbag” provision (under whichclaims known to the buyer prior to closing are waived by closing). Whether it is appropriate to resist oraccept such a provision may depend on the facts and the relative bargaining power of the parties. Whether itwill change the ultimate result under California law in the absence of such a provision will also depend on thefacts and perhaps the relevant court. For example, in Jue v. Smiser, the court based its holding on the fact that

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reliance was established at the time the purchase agreement was signed, noting that “reliance must beestablished at the time the initial contract is struck [and it] is not necessary that a claimant establishcontinuing reliance until the contract is fully executed in order to maintain an action for damages”; but thecourt also seemed influenced by the fact that “no evidence was presented . . . that further investigation of thevalidity of the representations . . . was contemplated by anyone.” Jue v. Smiser, supra, 317 and 318 at n.6.Indeed, the court stated: “When [a due diligence] examination is contemplated by the parties at the time theoriginal purchase agreement is struck, a buyer will face a difficult burden of establishing that he, in fact, reliedon a seller’s representations when the original agreement was struck.” Jue v. Smiser, supra, 318 at n.6. SeeMILLER & STARR, CALIFORNIA REAL ESTATE, supra, § 1:168 at 1-721 (“[T]here is a conflict in theauthorities as to whether [a due diligence inspection] provision precludes the buyer’s reliance on therepresentations of the seller . . . .”).

5.5 Dispute Resolution (Jury Trial, Arbitration, Judicial Reference and Attorneys’ Fees).

5.5.1 Jury Trial Waiver. In California, pre-dispute jury trial waivers are unenforceable, butthe parties may agree to arbitration (Cal. Code Civ. Proc. § 1281) or judicial reference (Cal. Code Civ. Proc.§ 638) to avoid going to trial. See Grafton Partners v. Superior Court (Cal. 2005) 36 Cal.4th 944, 964;Block & Paal, Trial by Jury in Real Property Cases, 32 CAL. REAL PROP. J. 3, 15 (2014); but see MILLER &STARR, CALIFORNIA REAL ESTATE, supra, § 45:5 at 45-12 (4th ed. 2015) (“In some cases, courts havedeclined to enforce a judicial reference agreement due to concerns about the efficiency of a jury trial waiver.”[citations omitted]).

5.5.2 Arbitration. If an arbitration clause is included in a California real property purchaseagreement, it must be clearly titled “ARBITRATION OF DISPUTES” and the arbitration provision must beset out in capital letters if the contract is typed (and there are special rules for printed contracts requiringeight-point type in bold or contrasting red). Cal. Code Civ. Proc. § 1298(a). It must also contain a statutoryall-cap form of notice that is initialed by the parties, which must also be in capital letters if the contract istyped (and there are special rules for printed contracts requiring 10-point bold type or eight-point contrastingred type). Cal. Code Civ. Proc. § 1298(c). Another point to consider when there is an arbitration clause in aCalifornia purchase agreement is the interplay between the arbitration clause and the recording of a lispendens. See, e.g., Cart & Lanphear, The Lis Pendens: Strategies and Pitfalls, 33 CAL. REAL PROP. J. 28(2015).

5.5.3 Arbitration vs. Judicial Reference. In deciding whether to use an arbitration clause ora judicial reference clause in California, the buyer should consider the following points.

Privacy: arbitration may be more private, especially if the participantsagree to confidentiality restrictions; see, e.g., Cal. Evid. Code § 703.5imposing restrictions on the arbitrator’s testifying regarding the arbitration;judicial reference hearings are open to the public, CHERNICK, HALDEMAN &BETTINELLI, CALIFORNIA PRACTICE GUIDE, ALTERNATIVE DISPUTE

RESOLUTION § 6:213 at 6-65 (2015).

Predictability: arbitrators are less predictable, CEB, A LITIGATOR’S GUIDE

TO EFFECTIVE USE OF ADR IN CALIFORNIA § 9.20 at 374 (2008); MercuryIns. Group v. Superior Court (Cal. 1998) 19 Cal.4th 332, 345 (“contractualarbitration generally frees the arbitrator from making a decision strictly inaccordance with the law”), and some litigants complain that arbitratorssimply “split the baby”; a judicial referee must follow the law; seeMILLER & STARR, CALIFORNIA REAL ESTATE, supra, § 45:6 at 45-13

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(referencing Cal. Code Civ. Proc. § 645); CHERNICK, HALDEMAN &BETTINELLI, CALIFORNIA PRACTICE GUIDE, supra, § 6:254 at 6-75.

Finality: arbitration awards are generally not subject to appellate review,CEB, A LITIGATOR’S GUIDE TO EFFECTIVE USE OF ADR IN CALIFORNIA,supra, § 9.9 at 370; a judicial reference is subject to appeal, Cal. Code Civ.Proc. §§ 644(a), 904.1.

Rules of Evidence: the California rules of evidence do not apply to anarbitration, unless the parties so agree, CEB, A LITIGATOR’S GUIDE TO

EFFECTIVE USE OF ADR IN CALIFORNIA, supra, § 9.18 at 373; theCalifornia rules of evidence do apply to a judicial reference, Cal. Evid.Code § 300.

Enforceability: as noted in part 5.5.1 above, some California courts haveexpressed reservations about enforcing agreements providing for a judicialreference under certain circumstances. See, e.g., Tarrant Bell Properties v.Superior Court (Cal. 2011) 51 Cal.4th 538 (Cal. Code Civ. Proc. § 638gives the court discretion to refuse to allow a judicial reference; caseinvolved numerous mobile homeowners); and Treo @ Kettner HomeownersAssociation v. Superior Court (Cal. App. 4th Dist. 2008) 166 Cal.App.4th1055 (CC&Rs are not a “contract” within the meaning of Cal. Code Civ.Proc. § 638; case involved homeowners association). However, in thecontext of a commercial real property purchase agreement between twosophisticated parties, it seems unlikely that there will be enforceabilityissues with either an arbitration or judicial reference provision.

In the author’s experience, some parties favor arbitration simply because they desire more privacy, whereas anumber of litigators prefer judicial reference because it may make the outcome more predictable. Asobserved by the California Supreme Court, “‘[p]rivate arbitration is a process in which parties voluntarilytrade the safeguards and formalities of court litigation for an expeditious, sometimes roughshod means ofresolving their dispute.’ . . . The parties accept the bad with the good.” Brennan v. Tremco (Cal. 2001)25 Cal.4th 310, 315–17 [citation omitted].

5.5.4 Attorneys’ Fees Clause. California generally makes unilateral attorneys’ fees clausesreciprocal in favor of the prevailing party. Cal. Civ. Code § 1717; Hoffman, Attorney Fee Clauses inCalifornia Contracts, 21 CAL. BUS. L. PRAC. 82 at 84–85 (Summer 2006). See also Bright, UnilateralAttorney’s Fees Clauses: A Proposal to Shift to the Golden Rule, 61 DRAKE L. REV. 85 (2012), for adiscussion of the varying approaches taken by different states.

6. Special Qualifiers (Good Faith, Best Efforts and Knowledge)

6.1 Good Faith. The meaning of the term “good faith” is not always clear in California. It mayvary depending on the context and the court interpreting its usage (and could involve, for example, asubjective test, an objective test, or both). See Carey, Cauble & MacCracken, supra, at 99. If a Californiapurchase agreement uses the term “good faith,” the buyer may want to define it.

6.2 Best Efforts. Many practitioners prefer not to use the term “best efforts” because of thevarying interpretations in different states over the years ranging from an illusory obligation to an extremelyonerous one. See, e.g., Fisher, The Dangers of a “Best Efforts” Clause in a Real Estate Agreement, 1 PRAC.REAL EST. LAW. 43 (Mar. 1985); Adams, Understanding “Best Efforts” and Its Variants (Including Drafting

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Recommendations), 50 PRAC. LAW. 11, 15 (Aug. 2004) (“Best Efforts and its variants are vague.”). Anintermediate California court has stated that “California courts have . . . not defined the term ‘best efforts’”and held that, when a contract does not define the term, a “best efforts” obligation “is different than a promiseto act in ‘good faith’ . . . but the obligation is framed within the bounds of reasonableness.” California PinesProperty Owners Association v. Pedotti (Cal. App. 3d Dist. 2012) 206 Cal.App.4th 384, 392 and 395 [citationomitted]. Many buyers avoid using the term “best efforts” in a California purchase agreement.

6.3 Knowledge. Some of the seller’s representations and warranties may be subject toknowledge qualifiers, the most common of which refer to “knowledge,” “actual knowledge” or “bestknowledge.” The author is not aware of any law in California that establishes the meaning of these terms in areal property purchase agreement when they are not defined. Indeed, there is not an immense amount of law(in California or elsewhere in the country) interpreting these quoted terms, and what there is may be irrelevant(because the context is, more often than not, so different) and sometimes may be surprising. See, e.g., Levin,“Best” Is Not Always Best When It Comes to Knowledge?, 30 PROB. & PROP. 44 at 45, 47 (Jan./Feb. 2016)(“Many commercial lawyers believe that . . . ‘best knowledge’ . . . implies that the knowledge . . . is basedon . . . investigation . . . . But most reported cases . . . have reached the opposite conclusion . . . .” Andquoting from the Maryland Revised Uniform Partnership Act, “A person has notice of a fact if the person . . .(2) Has received a notification of it; or (3) Has reason to know it exists from all of the facts known to theperson at the time in question.” Md. Corp. & Ass’ns § 9A-102(b)); Hexter v. Pratt (Tex. Comm’n App. 1928)10 S.W.2d 692, 693 (which stated, in a different context, that “actual knowledge embraces those things ofwhich the one sought to be charged has express information and likewise those things which a reasonablydiligent inquiry and exercise of the means of information at hand would have disclosed”); Peterson, TheEffective Use of Representations and Warranties and Selected Provisions Relating to Income Properties inCommercial Real Estate Contracts, ACREL PAPERS, Fall 1999, at 103; ABA Model Rules of ProfessionalResponsibility, Comment on Rule 4.2 ¶ [8], available athttps://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_4_2_communication_with_person_represented_by_counsel/comment_on_rule_4_2.html (“ . . .actual knowledge may be inferred from the circumstances. See Rule 1.0(f). Thus, the lawyer cannot evade therequirement . . . by closing eyes to the obvious”); Notaro, Sales Contract Tug of War—Representations andWarranties, NOTARO LAW, available at http://tinyurl.com/jdybzn8 (stating, without citation, that “[s]omecourts will construe actual knowledge to include a duty to inquire where ‘.. with no duty of inquiry’ ismissing.”); see also Kuney, To the Best of Whose Knowledge, 22 CAL. BUS. L. PRAC. 58 (Spring 2007);Adams, To the Best of Its Knowledge, ADAMS ON CONTRACT DRAFTING (posted Apr. 22, 2007), available athttp://tinyurl.com/zcw7wdb. A buyer may want to expressly define the knowledge qualifier to include theagreed-upon level of diligence required (e.g., by adding, if and to the extent it reflects the understanding ofthe parties, “after reasonable inquiry” or “without any obligation to investigate”).

7. SUPPLEMENTING AND MODIFYING THE WRITTEN AGREEMENT

7.1 Integration Clause. California takes a liberal approach under its parol evidence rule: it maybe easier in California (than in some other states) to allow evidence that is extrinsic to the purchase agreementto be admitted even if the contract contains an integration clause (stating that the entire agreement of theparties is set forth in the purchase agreement). See Riverisland Cold Storage, Inc. v. Fresno-MaderaProduction Credit Association (Cal. 2013) 55 Cal.4th 1169, 1174 (which held that extrinsic evidence could beadmitted under certain circumstances even though there was “no dispute in this case that the parties’agreement was integrated”); see also Carey, Cauble & MacCracken, supra, at 91. Some commentators havesuggested that integration clauses in California should be made more conspicuous (e.g., “in all caps, bolded,and/or separately initialed”). See, e.g., Di Geronimo, Not Worth the Paper It’s Printed On?, 25 MILLER &STARR REAL EST. NEWSALERT 193, 197 (Jan. 2015); but see Hot Rods, LLC v. Northrop Grumman Sys.Corp. (Cal. App. 4th Dist. 2015) 242 Cal.App.4th 1166 (upholding integration clause with express prohibition

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of extrinsic evidence in a judicial reference). However, the ineffectiveness of an integration clause could be abenefit to a buyer who feels it has been misled in a purchase transaction.

7.2 Implied Covenant of Good Faith and Fair Dealing. A California court may implyprovisions under the implied covenant of good faith and fair dealing to effectuate the presumed intent of theparties as to matters that are not expressly addressed. For example:

Consents and Approvals. Absent an express standard for granting or withholding arequired approval, a California court might impose a standard requiring subjectivegood faith, objective reasonableness or otherwise. See discussion of approvals inCarey, Cauble & MacCracken, supra, at 97–99.

Closing Conditions. A closing condition may be subject to a good faith obligationto take steps to allow the condition to be satisfied. See, e.g., Jacobs v. TennecoWest, Inc. (Cal. App. 5th Dist. 1986) 186 Cal.App.3d 1413 (agreement subject toboard of director’s approval is subject to a good faith obligation to have the boardconsider the agreement).

Consequently, many California buyers try to be explicit about any rights or obligations which are important(especially when the implied covenant of good faith and fair dealing might otherwise lead to an undesirableresult).

7.3 Oral Modifications. An oral modification of a California purchase agreement may beenforceable absent a provision prohibiting oral modifications. See Cal. Civ. Code § 1698. However, it wouldbe unusual if such a provision did not appear in a California purchase agreement.

8. TIMING

8.1 Time of the Essence. California courts “may . . . decide not to strictly enforce a ‘time is ofthe essence’ clause because money damages usually compensate the parties for any harm resulting fromdelayed performance. However, a ‘time is of the essence’ provision is sometimes given effect.” CEB,CALIFORNIA REAL PROPERTY SALES TRANSACTIONS, supra, § 4.152 at 4-141. See also Cal. Civ. Code§ 3275 (“Whenever, by the terms of an obligation, a party thereto incurs a forfeiture . . . by reason of hisfailure to comply . . . , he may be relieved therefrom, upon making full compensation to the other party,except in case of a grossly negligent, willful, or fraudulent breach of duty.”). It may be difficult to predictwhether a California court would strictly enforce a time is of the essence clause or grant relief (under thisstatute or otherwise). The California case law is not clear. See, e.g., MILLER & STARR, CALIFORNIA REAL

ESTATE, supra, § 1:108 at 1-438–1-447.

8.2 Business Days. Purchase agreements often include a provision to address the possibility thata deadline lands on a nonbusiness day. In California, failure to include such a provision (and define “businessday”) can be particularly treacherous. California does have a statute to address deadlines that occur onnonbusiness days. In fact, it has two.

One is in the California Civil Code (the “Civil Code Statute”): Cal. Civ. Code § 11(“Whenever any act [with some exceptions] is appointed by law or contract to beperformed on a . . . holiday, it may be performed upon the next business day . . . .”).

The other is in the California Code of Civil Procedure (the “CCP Statute”): Cal.Code Civ. Proc. § 12a(a) (“If the last day for the performance of any act provided or

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required by law to be performed . . . is a holiday, then that period is hereby extendedto . . . the next day that is not a holiday.”).

But somewhat surprisingly, holidays do not include Saturdays in the Civil Code Statute, as they do in the CCPStatute.

Cal. Civ. Code § 7 (“Holidays within the meaning of this code are every Sunday andsuch other days as are specified or provided for as holidays in the Government Codeof the State of California”); Cal. Civ. Code § 9 (“All other days than thosementioned in Section 7 are business days for all purposes . . . .”).

Cal. Code Civ. Proc. § 12a(a) (“For purposes of this section, ‘holiday’ means all dayon Saturdays, all holidays specified in . . . .”).

In other words, contrary to common usage, Saturday is not a holiday and is therefore a business day inCalifornia under the Civil Code Statute. Gans v. Smull (Cal. App. 2d Dist. 2003) 111 Cal.App.4th 985, 989–90 indicates that the Civil Code Statute is the relevant statute for (and the CCP Statute does not apply to) actsgoverned solely by contractual provisions. Consequently, many buyers in California define “business day” toexclude Saturdays.

8.3 Time Zones.

8.3.1 Standard Time. In a California purchase agreement, the words “standard time”(lower case) mean the time then in effect, whether “Standard Pacific Time” or “Daylight Saving Time.”Miracle Auto Ctr. v. Superior Court (Cal. App. 1st Dist. 1998) 68 Cal.App.4th 818, 822 (case involving ageneral commercial liability insurance policy but noting the more general rule provided for under theGovernment Code); Cal. Gov. Code §§ 6807-2–6807-4.

8.3.2 Notices. If one of the parties is east of the Pacific time zone, it may want to providethat notices must be received before 5:00 p.m. “local time where received.” However, the buyer usually haslocal people involved in the purchase and may want to be able to utilize the full local business day (i.e., until5:00 p.m. Pacific Time) to meet certain deadlines (e.g., a deadline for delivering a termination notice).

9. ENTITY, PROPERTY, TRANSFER AND SALES TAXES

A buyer may want to consider how local taxes in California will add to the costs of the transaction and thebuyer’s future operations and whether the structure of the transaction and the form of the buyer entity (or theentity that will take title to the property) can be tailored to reduce these costs. Three key taxes typically worthchecking are entity, property and transfer taxes. Sales taxes may also be relevant depending on the facts.

9.1 Entity Taxes. In most purchases of California real estate in which the author is involved, aspecial purpose entity (SPE) buyer is formed as a limited liability company or a limited partnership. In theauthor’s experience, the buyer entity is formed in Delaware rather than California, despite the additionalDelaware costs, due to uniformity, predictability and flexibility concerns, and to facilitate any anticipatedinstitutional financing. See, e.g., CEB, FORMING AND OPERATING CALIFORNIA LIMITED LIABILITY

COMPANIES § 14.3 at 14-3–14-4 (3d ed. 2016). The buyer entity is then qualified to do business in California.The buyer should be informed about California entity taxes that may apply to this form of ownership:

9.1.1 Minimum Franchise Tax. The California corporate annual minimum franchise tax of$800 is imposed on limited partnerships and limited liability companies. Cal. Rev. & Tax. Code §§ 23153(corporations), 17935 (limited partnerships), and 17941 (limited liability companies).

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9.1.2 LLC Gross Receipts Tax. There is also a California annual gross receipts taximposed on limited liability companies (ranging from $0 to approximately $12K per annum depending on theamount of annual gross revenues). Cal. Rev. & Tax. Code § 17942(a). If annual income is expected to besufficiently high (and the asset will be owned for a significant time), some buyers may want to own theproperty through a limited partnership (which may be structured to be a disregarded entity for federal incometax purposes) to avoid or minimize the gross receipts tax.

9.2 Property Taxes. In 1978, Proposition 13 changed California’s property tax regime so thatgenerally property taxes in California do not exceed 1% of acquisition value, with annual increases capped at2% per year. Among other exceptions to the general rule, there may be additional tax rates to pay for“bonded indebtedness for the acquisition or improvement of real property approved . . . by two-thirds (55%, ifrelated to school bonds) of those voting in a local election.” WHITNEY, 2016 GUIDEBOOK TO CALIFORNIA

TAXES, supra, ¶ 1706 at 780. See also ibid. ¶ 1702 at 773. Moreover, reassessment is generally required asof the first day of the month following the “completion of new construction” (for the new construction) or a“change in ownership” (for the property as to which ownership has changed). See Cal. Rev. & Tax. Code§§ 75, 75.41(b).

9.2.1 Reassessments—Changes in Ownership. The buyer should understand that apurchase will generally constitute a “change in ownership” of the property, and cause the property to bereassessed at its full fair market value. However, there may be exceptions to this general rule depending onthe nature of the property and the structure of the transaction. For example:

The transfer of property subject to a ground leasehold estate with aremaining term (including renewal options) of 35 years or more is not achange in ownership. Cal. Rev. & Tax. Code § 62(g).

Similarly, the transfer of a leasehold estate with a remaining term (includingrenewal options) of less than 35 years may not be a change in ownership.See Pacific Southwest Realty Co. v. County of Los Angeles (Cal. 1991)1 Cal.4th 155.

A direct or indirect transfer of ownership interests (in an entity that ownsreal estate) does not result in a change in ownership, subject to threeexceptions. Cal. Rev. & Tax. Code § 64; Cal. Code Regs. (C.C.R.), tit. 18,§ 462.180(c)–(d). First, there is a change in ownership of the real propertyowned by an entity when a change in control of that entity occurs (i.e.,when a person or entity acquires more than 50%). Cal. Rev. & Tax. Code§ 64(c)(1). Second, if there is an exempt transfer after March 1, 1975 underCal. Rev. & Tax. Code § 62(a)(2) (the mere change in form exemption),then an additional exception springs into effect with respect to subsequenttransfers of interests in the title-holding entity. When this exceptionapplies, the owners (of the title-holding entity) immediately after thetransfer are called the “original co-owners,” and there is a change inownership if and when more than 50% of the ownership interests aretransferred by the original co-owners in one or more transactions. Cal.Rev. & Tax. Code § 64(d). Third, there is an exception involving certaintransfers of stock in a cooperative housing corporation. Cal. Rev. & Tax.Code § 61(i). The rules for entity ownership interest transfers become morecomplex in multitiered ownership structures.

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9.2.2 Structure—Changes in Ownership. Although most purchases of California real estateresult in a full reassessment, it is possible on occasion to take steps to avoid or reduce the reassessment.Some illustrations follow.

If one is buying land subject to a ground lease, and the closing is scheduledfor the first day that the remaining term (including renewal options) is lessthan 35 years, then by accelerating the closing date of such land purchase byonly one day, a reassessment may be avoided.

However, conditioning the closing of the purchase of a ground lessor’sinterest on an extension of the ground lease so that the remaining term isthen 35 years or more would be dangerous. More generally, a series ofsteps, none of which alone may trigger a reassessment, may be collapsedunder the so-called step transaction doctrine, and result in a taxable event (ifthere would have been a taxable event had the end result been reacheddirectly from the beginning). Compare, e.g., Shuwa Investment Corp. v.County of Los Angeles (Cal. App. 2d Dist. 1991) 1 Cal.App.4th 1635 (theparties unsuccessfully attempted to have only half the Arco Plaza indowntown Los Angeles reassessed when the entire property was sold usingthe following three steps: (i) a 50% interest in the owner was sold to thepurchaser; (ii) the owner was then liquidated so that the purchaser acquireda 50% undivided interest in the property; and (iii) the remaining 50%undivided interest in the property was then sold, so that only the 50% of theproperty sold under the final step would be reassessed), with DyanlynTwo v. County of Orange (Cal. App. 4th Dist. 2015) 234 Cal.App.4th 800(the step transaction was held inapplicable to a sale by the ground lessor ofproperty improved with a shopping center when, less than a month beforethe sale, the remaining ground lease term was extended from less than35 years to more than 35 years, because there was no evidence that all theparties knew the sale would take place when the ground lease wasextended).

Perhaps the most talked about structuring technique to avoid a change inownership involves the purchase of ownership interests in an entity ratherthan real estate when the original co-owner rules do not apply, by makingsure that no one acquires more than 50%. This structure might be utilized,for example, by a JV buyer that has no owners with more than 50% byhaving each owner buy an equal percentage of the ownership interests in theseller (assuming the seller is not subject to the original co-owner rules). “In2002, for example, wine barons E&J Gallo purchased 1,765 acres ofvineyards in Napa and Sonoma from Louis M. Martini. But the dealavoided a reassessment, because 12 Gallo family members individuallyobtained minority interests.” Eskenazi, Prop 13: The Building-SizedLoopholes Corporations Exploit, SF WEEKLY (Jan. 4, 2012), available athttp://tinyurl.com/zedvk9k.

The most publicized example of this technique was the purchase by MichaelDell, the founder of the Dell computer company, of the Fairmont Hotel inSanta Monica in 2006. According to the Los Angeles Daily News, Dell usedthis technique by splitting ownership among his wife and investmentadvisers, and paid $200 million for the property, but the property taxes

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continued to be based on the old valuation of $86 million, saving Dell andhis co-owners more than $1 million of property taxes per year. Editorial,Anti-Prop. 13 Resolution Must Be Rejected by L.A. City Council,LOS ANGELES DAILY NEWS (Aug. 25, 2014), available athttp://tinyurl.com/j7gnesz.

The Dell transaction led to a public outcry that homeowners were bearing adisproportionate share of California property taxes. A bill (A.B. 2372) wasintroduced in the California legislature in 2014 that would have requiredreassessment any time 90% or more of the ownership was sold, but it failedto pass. See CALIFORNIA LEGISLATIVE INFORMATION, AB-2372 PROPERTY

TAXATION: CHANGE IN OWNERSHIP, available athttp://tinyurl.com/gqzswlg.

9.3 Transfer Taxes. The buyer may want to know whether the purchase will trigger transfertaxes and what they will be, especially if (as discussed in part 4.2 above) it will be expected to pay any ofthem.

9.3.1 Amount. Transfer taxes in California vary depending on the location of the propertyand, unless an exemption applies, may range from 0.11% in a county where there is no additional local tax to2.5% in the City and County of San Francisco. Transfer taxes in California are often expressed as an amountper $500 or $1,000 of the value of the land (e.g., $0.55/$500 or $1.10/$1,000). See Cal. Rev. & Tax. Code§ 11911. The relevant amount may be found on the same websites mentioned in part 4.2 above for closingcost allocations and on city and county websites. Additionally, most local jurisdictions (but not Oakland,San Francisco, San Jose and San Rafael) subtract any mortgage debt assumed by the buyer from the value ofthe property when determining the applicable transfer taxes. See, e.g., Cal. Rev. & Tax. Code § 11911; S.F.Bus. & Tax Regs. Code, art. 12-C, § 1102; Cruz, 2015 Update: Transfer Taxes in California, 33 CAL. REAL

PROP. J. 5, 7 (2015).

9.3.2 Application. The sale of California real estate generally results in a transfer taximposed by the applicable county and city. See Cal. Rev. & Tax. Code § 11911. And sometimes sales ofdirect or indirect interests in the owner of real estate are treated as sales of the real estate for purposes of thetransfer tax. But there are exceptions to the general rule and often, if not usually, the sale of a minorityinterest in the owner of real estate will not trigger a transfer tax in California. For example:

Although local ordinances might differ, for purposes of the state statute, thetransfer of property subject to a ground leasehold estate with a remainingterm (including renewal options) of 35 years or more may not trigger atransfer tax. Cruz, supra, at 17 & n.127.

Similarly, although local ordinances might differ, for purposes of the statestatute, case law has established that the “transfer of a leasehold interest inreal property for a period of less than thirty-five years is not subject totransfer tax. The thirty-five year period is determined at any point in timeby including the remaining primary term of the lease and all renewaloptions.” Cruz, supra, at 16 [citation omitted].

A transfer of direct or indirect ownership interests in a partnership (or otherentity treated as a partnership for federal income tax purposes) may betreated as a sale of the entire partnership property if the transfer results in a“termination” of the partnership under I.R.C. § 708 (which occurs when

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“(A) no part of any business, financial operation, or venture of thepartnership continues to be carried on by any of its partners in a partnership,or (B) within a 12-month period, there is a sale or exchange of 50 percent ormore of the total interest in the partnership capital and profits.” I.R.C.§ 708(b)). Cal. Rev. & Tax. Code § 11925(b). Thus, the sale of a majorityinterest (or even a 50% interest) in a partnership (or other entity treated as apartnership for federal income tax purposes) could result in a termination ofthe partnership under I.R.C. § 708(b)(1)(B) and therefore a transfer tax asthough there were a sale of the real estate owned by the partnership (or suchother entity). Even the sale of a minority interest could result in atermination under I.R.C. § 708(b)(1)(A), and therefore such a transfer tax, ifpurchased directly by the majority member in a two-member limitedliability company that is treated as a partnership for federal income taxpurposes (because, absent an election to be taxed as a corporation, a single-member limited liability company is a disregarded entity and, in particular,not a partnership, for federal income tax purposes; Treas. Regs. § 301.7701-3(a), (b)(ii)).

Many municipalities (e.g., Los Angeles, San Francisco and Oakland) alsoimpose a transfer tax whenever there is a “change in ownership” (asdiscussed in part 9.2.1 above) of the entity that owns the property. Whilesome cities (e.g., San Francisco) impose the tax pursuant to its localordinances, Los Angeles and other cities and counties have simply assertedan interpretation that a transfer tax is due in connection with a change inownership. This approach was upheld by the California Supreme Court in926 North Ardmore Avenue, LLC v. County of Los Angeles (2017) ___Cal.4th ___. In light of this decision, more cities and counties are likely totake a similar approach. However, there is a statutory (transfer tax)exemption for the transfer of an interest in a partnership or other entitytreated as a partnership for tax purposes holding realty if (1) the entity istreated as a continuing partnership under I.R.C. Section 708 and (2) theentity continues to hold the realty concerned. Cal. Rev. & Tax. Code§ 11925(a). If an entity interest transfer constitutes a change in ownershipbut this exemption applies, then presumably there will be no transfer tax.But will there be a fight? And if the realty is not owned directly by theentity, will the exemption be unavailable?

9.3.3 Structure. It may be possible on occasion to reduce or eliminate the transfer tax.For example:

The acceleration of the closing date in the first example under part 9.2.2above, to avoid a reassessment, would also avoid a transfer tax.

If a buyer is acquiring a 50% interest in a partnership or a limited liabilitycompany (taxed as a partnership), then the same structuring that iscommonly used to avoid an I.R.C. § 708 termination may avoid a transfertax (e.g., buying only 49.9% and not buying the other 0.1% or waiting morethan 12 months to do so). Cal. Rev. & Tax. Code § 11925(a).

If a majority member in a two-member limited liability company that istreated as a partnership for federal income tax purposes is acquiring the

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minority member’s interest, then it may be possible to avoid a transfer tax(that might otherwise result from a termination under I.R.C. § 708(b)(1)(A))by using a separate taxpayer affiliate to acquire the minority member’sinterest to prevent the limited liability company from “terminating.” Cal.Rev. & Tax. Code § 11925(a).

If the property is subject to debt and (unlike San Francisco) the localjurisdiction subtracts the debt to determine the net value to which thetransfer tax applies, then buying the property subject to the debt may reducethe transfer tax.

All available exemptions should be considered. However, in many cities (e.g., San Francisco andLos Angeles), the buyer may face a claim for a transfer tax unless it also avoids a reassessment, as discussedat the end of part 9.3.2 above.

9.4 Sales Taxes. The sales tax in California applies to “retail sales” by a “retailer” of tangiblepersonal property. Cal. Rev. & Tax. Code § 6051.

9.4.1 Generally. A common misconception is that sales taxes do not apply in real propertysale transactions in California. One might reach this conclusion by assuming that the seller is not a “retailer”or the sale is not a “retail sale.” But the statutory definitions of these quoted terms may not be what onewould expect.

A “retail sale” is defined as “a sale for any purpose other than resale in theregular course of business . . . .” Cal. Rev. & Tax. Code § 6007. Thebreadth of this definition makes it extremely likely, at least in the author’sexperience, that the tangible personal property sale that is part of a typicalreal estate purchase (between real estate investment entities) is a “retailsale.”

A “retailer” is defined to include “[e]very seller who makes any retail sale.”Cal. Rev. & Tax. Code § 6015(a)(1). On its face, the requirement that theseller be a retailer appears superfluous: if the sale is a retail sale, isn’t theseller automatically a “retailer” under this definition? Fortunately, theanswer is no because there is a separate statute that defines “seller.” Cal.Rev. & Tax. Code § 6014, identifying what are normally consideredwholesalers and retailers (“‘Seller’ includes every person engaged in thebusiness of selling tangible personal property of a kind the gross receiptsfrom the retail sale of which are required to be included in the measure ofthe sales tax . . . whether or not tangible personal property is ever sold atretail . . . .”). Thus, a seller of an industrial building who uses the buildingto manufacture equipment may be a “retailer.” See, e.g., Davis WireCorp. v. State Board of Equalization (Cal. 1976) 17 Cal.3d 761. And, ofcourse, the owner of a hotel, resort or other real estate project involvingsome retail sale activity (e.g., operation of a bar, restaurant or gift shop) bythe owner would also be a “retailer.”

These definitions of “retailer” and “seller” do not appear to be exclusive (using “includes” instead of“means”). Indeed, any owner of a real estate project—even an owner who is not a retailer or a wholesaler, ascommonly understood—may be a “retailer” for purposes of the statute. Cal. Rev. & Tax. Code §§ 6019(anyone “making more than two retail sales of tangible personal property during any 12-month period . . .

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shall be considered a retailer”) and 6275 (e.g., anyone making a retail sale of a mobile home or vehicle that issubject to certain registration requirements). In sum, the potential application of a sales tax in connectionwith the purchase of a California real estate project will depend on the facts and an interpretation of thetortuous statutory framework. But, in the author’s experience, California sales tax issues typically arise (in asale between real estate investment entities) only when the buyer is acquiring a hotel, resort or other projectthat includes some incidental retail sale activity (e.g., a bar, a restaurant or a gift shop).

9.4.2 Retail Sale Inventory. There are two sales tax issues to consider regarding retail saleinventory: (1) whether the seller has paid all required sales taxes on prior sales of retail sale inventory; and(2) whether sales tax is payable in connection with the buyer’s purchase of retail sale inventory.

The buyer must withhold a portion of the purchase price to cover unpaidsales taxes on prior sales unless and until the buyer receives a tax clearancecertificate. Cal. Rev. & Tax. Code § 6811. In practice, this issue may beaddressed (at least until tax clearance certificate is obtained) byindemnification because the seller does not want any withholding but is notlikely to have time to get a tax clearance certificate before closing.

Even though the seller may be a retailer, the purchase of retail saleinventory is not a “retail sale” if, as discussed in part 9.4.1 above, thepurpose of the sale is “resale in the regular course of business.” The sellerhas the burden of proving that the sale is not a “retail sale” unless it receivesa resale certificate from the buyer. Cal. Rev. & Tax. Code § 6091.Consequently, sellers will usually require the buyer to provide a resalecertificate. Note that the buyer may not issue a resale certificate until it hasa seller’s permit. Cal. Rev. & Tax. Code § 6092. A resale certificate maybe in any form, such as a note, letter or memorandum, but must containcertain specified information (e.g., the number of the buyer’s seller’spermit). Cal. Rev. & Tax. Code § 6093; 16 C.C.R. § 1668; CALIFORNIA

STATE BOARD OF EQUALIZATION, USING A RESALE CERTIFICATE (2016),available at http://tinyurl.com/zgeg55j.

9.4.3 Related Tangible Personal Property. There will also be a sales tax on the capitalassets (e.g., refrigerators used as minibars) used in connection with the retail sale business. See Davis WireCorp., supra. According to the CALIFORNIA STATE BOARD OF EQUALIZATION, SALES AND USE TAX

ANNOTATION ¶ 395.0071 (Aug. 30, 1991), available at http://tinyurl.com/j2svud2:

395.0071. Sale of Hotel Assets. In addition to the fixtures and equipmentof the restaurant and cocktail lounge, in-room refrigerators stocked withbottled water, individual size liquors, and soft drinks are subject to sales taxwhen a hotel is sold. The sale of the other in-room furnishings is not madetaxable because of the presence of the refrigerator in the room. The sale ofthe other assets of the hotel may be taxable if they are one sale of a series ofsales sufficient in number, scope, and character to require the holding of apermit. 8/30/91.

9.4.4 Other Tangible Personal Property. For other tangible personal property (e.g., beds,furniture and other FF&E that is not used in connection with an incidental hotel retail sale business), theparties typically attempt to take advantage of the “occasional sale” exemption. Cal. Rev. & Tax. Code§§ 6006.5, 6367, which is discussed further below. The State Board of Equalization has tried(unsuccessfully) to argue that the retail sale activity taints all tangible personal property that is not held for

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resale. Ontario Community Foundation Inc. v. California State Board of Equalization (Cal. 1984) 35 Cal.3d811. In the Ontario case, the Board attempted to impose sales tax on all tangible personal property (includingall hospital equipment and furniture) included in the sale of a hospital because it was also involved inincidental retail sales (cafeteria, hospital supply and pharmacy sales) for which it had a seller’s permit. TheCalifornia Supreme Court stated that the Board’s position could not be reconciled with the occasional saleexemption, which “was designed expressly to exempt from the sales tax a one-time sale of tangible personalproperty which is not held or used by a seller in the course of activities for which it is required to hold aseller’s permit.” Ontario Community Foundation, supra, at 822–23.

9.4.5 Occasional Sale. There are actually two different occasional sale exemptions worthnoting. One, which does not apply to the typical real property sale (to an unrelated third party), applies to atransfer when the ultimate ownership after the transfer is substantially similar to what it was before thetransfer. Cal. Rev. & Tax. Code § 6006.5(b). The availability of the other occasional sale exemption dependson how the tangible personal property involved is used. It applies only to “property held or used in the courseof an activity not requiring the holding of a seller’s permit.” 18 C.C.R. § 1595(a)(1). See also Cal. Rev. &Tax. Code § 6006.5(a). Thus, if a hotel, theater, hospital or similar service enterprise has incidental retail saleactivities (such as a restaurant and bar in a hotel), the sales tax may apply only to the tangible personalproperty held or used in that retail sale activity (that are not acquired for resale). 18 C.C.R. § 1595(a)(5)(A)1;see Ontario Community Foundation, supra; CALIFORNIA STATE BOARD OF EQUALIZATION, SALES AND USE

TAX MEMORANDUM OPINION ¶ 395.0071 (Aug. 20, 1991), available at http://tinyurl.com/z6lnqt2 (which isthe memorandum opinion upon which the annotation quoted in part 9.4.3 is based). However, the exemptionmay not apply if the seller has engaged in more than two retail sales of the relevant property within12 months. Cal. Rev. & Tax. Code § 6019; 18 C.C.R. § 1595(a)(1); see also Hotel Del CoronadoCorporation v. State Board of Equalization (Cal. App. 2d Dist. 1971) 15 Cal.App.3d 612 (finding that theoccasional sale exemption was not available for the FF&E in connection with a hotel resort sale because of aseries of salvage sales of FF&E within 12 months prior to the sale of the hotel); CALIFORNIA STATE BOARD

OF EQUALIZATION, SALES AND USE TAX MEMORANDUM OPINION PRATT NORTH PLAZA ASSOCIATES

(Oct. 28, 1993), available at http://tinyurl.com/h8zls5s, and the associated CALIFORNIA STATE BOARD OF

EQUALIZATION, SALES AND USE TAX ANNOTATION 21,260.10 (Oct. 28, 1993), available to RIA subscribersat http://tinyurl.com/jp69yfz (occasional sales exemption was not available for the FF&E in connection with ahotel resort sale because of a series of sales of furniture and equipment to hotel employees and others). Also,note that the occasional sale exemption (other than the substantially similar ultimate ownership exemption)does not apply to vehicles that are required to be registered with the Department of Motor Vehicles. Cal.Rev. & Tax. Code § 6367; 18 C.C.R. § 1595(c). See NIELSEN, CALIFORNIA SALES AND USE TAX ANSWER

BOOK Q 8:19–Q 8:32 at 106–12 (2010).

A buyer should consult with a California tax expert with respect to sales tax issues (including the impact ofany purchase price allocation to different types of personal property), as well as other local tax issues (e.g.,transient occupancy taxes imposed at the municipal level).

10. PROPERTY AND TRANSACTION SPECIFIC MATTERS

Other California laws and customs may apply depending on the nature of the property and the structure of thetransaction. For example:

10.1 Bulk Sale Requirements. Article 6 of the Uniform Commercial Code (Bulk Sales) wasdesigned to protect against the seller defrauding its creditors (by disposing of all its inventory and thenrunning off with the sale proceeds without paying its bills). However, the benefits of the statute have beenquestioned for many years due to, among other matters, advances in technology and more protective businesspractices adopted by creditors. Unlike most states, California did not follow the recommendation of theUniform Law Commission to repeal the bulk sales law in Article 6. See, e.g., Balovich, Revised Article 6

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Bulk Transfers, CREDITWORTHY NEWS (Aug. 4, 2011), available at http://tinyurl.com/gmjb74k; MANUAL OF

CREDIT AND COMMERCIAL LAWS Vol. II, ch. 3, art. 6 at 3-16 (2014). Consequently, if a buyer fails tocomply with California’s bulk sales law (which basically requires advance notice to the seller’s creditors), thebuyer could be liable to a creditor for damages that would not have been suffered if the buyer had complied.Cal. Com. Code §§ 6104, 6105 & 6107(a). Buyers in California may therefore want to know if the bulk saleslaw applies. The key requirement is that the “seller’s principal business is the sale of inventory from stock,including those who manufacture what they sell, or that of a restaurant owner.” Cal. Com. Code § 6103(a)(1).In particular, California’s bulk sale requirements, Com. Code § 6103(a)(1), apply “if the seller’s principalbusiness is ‘that of a restaurant owner.’ Although there appears to be no reported California appellatedecision interpreting this provision in the sale of a hotel with a restaurant, bar, and banqueting business, aninterpretation of this provision may exclude such a business from the [California] bulk sale laws.” CEB,CALIFORNIA REAL PROPERTY SALES TRANSACTIONS, supra, § 5.23 at 5-48. While the parties may not takeany action regarding the California bulk sales laws, buyers in California often insist on an indemnity from theseller for noncompliance in transactions (such as hotel purchases) that a creditor might argue are subject tothese laws.

10.2 Seller Guaranties. As in other states, the buyer may want some assurance that there is creditstanding behind the obligations of the seller under the purchase agreement that survive the closing (becausethe seller is typically an SPE and may be liquidating shortly after closing). A seller guaranty is sometimes asolution to this problem (although sellers often resist providing any guaranties). While California has anumber of statutory guarantor defenses in Cal. Civ. Code §§ 2787 to 2855, it also has a statute stating that aguarantor may waive these and certain other defenses and that a “contractual provision that expresses anintent to waive [these defenses] shall be effective . . . without regard to the inclusion of any particularlanguage . . . .” Cal. Civ. Code § 2856(b). Indeed, it may come as a surprise that California, with all its debtorprotections (e.g., the California anti-deficiency rules in secured lending transactions), may be viewed ascreditor friendly when it comes to guaranties (or at least much less protective of guarantors than it can be ofprimary debtors). See, e.g., Hansen, Guaranties in California Trust Deed Financing—How Did “SecondarilyLiable” Parties End Up With All of the Liability? (Part 1), 37 CEB REAL PROP. L. REP. 76 (July 2014), and(Part 2), 37 CEB REAL PROP. L. REP. 108 (Sept. 2014). (Cal. Civ. Code § 2856 came about to address lenderconcerns with certain secured real estate financing decisions, but the statute is not limited to that context.)However, buyers should not be overconfident when they obtain a guaranty in California. Despite the breadthof Cal. Civ. Code § 2856, there remain some defenses that may not be waived by a general waiver (e.g.,equitable or public policy defenses). See, e.g., California Bank & Trust v. Del Ponti (Cal. App. 4th Dist.2014) 232 Cal.App.4th 162; Geier, Here We Go Again: The Vicissitudes of Public Policy and GuarantorLiability for California Real Estate Loans, MILLER & STARR REAL EST. NEWSALERT at 3 (Sept. 2015).

10.3 Seller Financing. If the purchase involves seller financing secured by the real estate, thenCalifornia’s one action and anti-deficiency rules may be relevant. See, e.g., CEB, CALIFORNIA MORTGAGES,DEEDS OF TRUST, AND FORECLOSURE LITIGATION Chs. 4–5 (4th ed. 2016); CALIFORNIA REAL PROPERTY

SALES TRANSACTIONS, supra, ch. 9. Seller financing secured by the real estate is generally not recourse tothe buyer in California. Cal. Code Civ. Proc. § 580b. But the buyer should not get too comfortable becausethere are exceptions to this rule. Moreover, if the buyer is required to provide a guaranty (from a guarantorwho is not an alter ego of the buyer), then it may be enforceable. (See discussion of seller guaranties inpart 10.2 above.)

10.4 Subdivision Map Act. If the legal description of the property does not reference a recordedsubdivision, the buyer may want to inquire with the local jurisdiction within California to confirm compliancewith California’s Subdivision Map Act. Cal. Gov. Code § 66410 et seq. Noncompliance could render thepurchase agreement void unless compliance is a closing condition. See CEB, CALIFORNIA REAL PROPERTY

SALES TRANSACTIONS, supra, § 4.31 at 4-31. See also Cal. Gov. Code § 66499.35(a) (“Any [buyer] . . . mayrequest, and a local agency shall determine, whether the real property complies with the provisions of this

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division and of local ordinances enacted pursuant to this division. If a local agency determines that the realproperty complies, the city or the county shall cause a certificate of compliance to be filed for record with therecorder of the county in which the real property is located.”).

10.5 Other. Other areas of California law and custom may be relevant depending on the facts(e.g., California liquor license issues and California labor issues). If so, California counsel specializing insuch areas should be consulted. The approach in California may be very different from other states. Forexample, California has particularly strict rules limiting noncompetition agreements. See, e.g., BECK REED

RIDEN LLP, 50 STATE NONCOMPETE CHART (updated as of March 25, 2016), available athttp://tinyurl.com/jpg7s4w.

* * *

Word Count (excluding bibliography): 15,742

10892265.21 Bibliography – Page 1

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(Aug. 4, 2011), available at http://tinyurl.com/gmjb74k(http://www.creditworthy.com/3jm/articles/cw80411.html)

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REAL EST. NEWSALERT 193, 197 (Jan. 2015)10261085

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REAL EST. NEWSALERT at 3 (Sept. 2015)

10674229

14. Hansen, Guaranties in California Trust Deed Financing—How Did“Secondarily Liable” Parties End Up With All of the Liability? (Part 1),37 CEB REAL PROP. L. REP. 76 (July 2014), and (Part 2), 37 CEB REAL

PROP. L. REP. 108 (Sept. 2014)

9918520

15. Hoffman, Attorney Fee Clauses in California Contracts, 21 CAL. BUS. L.PRAC. 82 at 84–85 (Summer 2006)

5940629

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PNM Doc. No.

16. Kuney, To the Best of Whose Knowledge?, 22 CAL. BUS. L. PRAC. 58(Spring 2007)

10929052

17. LaMance, Statute of Limitations for Breach of Contract Actions,LEGALMATCH LAW LIBRARY (Aug. 2, 2012), available athttp://tinyurl.com/h2nmnmg (http://www.legalmatch.com/law-library/article/statute-of-limitations-for-breach-of-contract-actions.htm)

10958690

18. Levin, “Best” Is Not Always Best When It Comes to Knowledge,30 PROB. & PROP. 44 at 45, 47 (Jan./Feb. 2016)

10929267

19. Notaro, Sales Contract Tug of War—Representations and Warranties,NOTARO LAW, available at http://tinyurl.com/jdybzn8(http://www.notarolaw.com/Articles/Reps_and_Warranties.pdf)

10933970

20. Peterson, The Effective Use of Representation and Warranties andSelected Provisions Relating to Income Properties in Commercial RealEstate Contracts, ACREL PAPERS, Fall 1999, at 103

10932942

21. Schaefer, A Seller’s Specific Performance Remedy in a Residential RealEstate Transaction, 40 MARIN LAW. 3 (Feb. 2009)

10924952

22. West & Shah, Debunking the Myth of the Sandbagging Buyer: WhenSellers Ask Buyers to Agree to Anti-Sandbagging Clauses, Who IsSandbagging Whom?, 11 M&A LAW. 3 (Jan. 2007)

10906944

23. Whitehead, Sandbagging: Default Rules and Acquisition Agreements, 36DEL. J. CORP. L. 1081 (2011)

10906890

24. Zimmermann, Three Things To Know About Doing Business in California,XCONOMY.COM (Jan. 28, 2016), available at http://tinyurl.com/z9tu8nw(http://www.xconomy.com/national/2016/01/28/three-things-to-know-about-doing-business-in-california)

11113242

Newspapers

25. Editorial, Anti-Prop. 13 Resolution Must Be Rejected by L.A. City Council,LOS ANGELES DAILY NEWS (Aug. 25, 2014), available athttp://tinyurl.com/j7gnesz(http://www.dailynews.com/opinion/20140825/anti-prop-13-resolution-must-be-rejected-by-la-city-council-editorial)

10930519

26. Eskenazi, Prop 13: The Building-Sized Loopholes Corporations Exploit,SF WEEKLY (Jan. 4, 2012), available at http://tinyurl.com/zedvk9k(http://www.sfweekly.com/sanfrancisco/prop-13-the-building-sized-loopholes-corporations-exploit/Content?oid=2183637&showFullText=true)

10930512

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B. BOOKS

1. CALIFORNIA LEGISLATIVE INFORMATION, AB-2372 PROPERTY

TAXATION: CHANGE IN OWNERSHIP, available athttp://tinyurl.com/gqzswlg(http://leginfo.legislature.ca.gov/faces/billHistoryClient.xhtml?bill_id=201320140AB2372)

11111622

2. CEB, A LITIGATOR’S GUIDE TO EFFECTIVE USE OF ADR IN CALIFORNIA

§§ 9.9 at 370; 9.18 at 373; 9.20 at 374 (2008)10926094

3. CEB, CALIFORNIA LAW OF CONTRACTS §§ 9.2–9.5 at 9-4–9-8 (2015) 10958992

4. CEB, CALIFORNIA MORTGAGES, DEEDS OF TRUST, AND FORECLOSURE

LITIGATION Chs. 4–5 (4th ed. 2016)11103318

5. CEB, CALIFORNIA REAL PROPERTY REMEDIES AND DAMAGES §§ 3.80 at3-101; 4.60 at 4-88–4-89 (2d ed. 2015)

10926022

6. CEB, CALIFORNIA REAL PROPERTY SALES TRANSACTIONS §§ 4.31 at 4-31; 4.109 at 4-106; 4.143 at 4-132–4-134; 4.152 at 4-141; 5.23 at 5-48; 6.9at 6-13; ch. 9; ch. 10 (4th ed. 2015)

10885073

7. CEB, CALIFORNIA TITLE INSURANCE PRACTICE §§ 5.31 at 5-29; 5.33 at5-30; 6.8 at 6-13; 6.10 at 6-15; 7.21 at 7-20; 10.3–10.4 at 10-3–10-4(2d ed. 2015)

10926034

8. CEB, FORMING AND OPERATING CALIFORNIA LIMITED LIABILITY

COMPANIES § 14.3 at 14-3–14-4 (3d ed. 2016)10961540

9. CHERNICK, HALDEMAN & BETTINELLI, CALIFORNIA PRACTICE GUIDE,ALTERNATIVE DISPUTE RESOLUTION §§ 6:213 at 6-65; 6:254 at 6-75(2015)

10925963

10. 15 CORBIN ON CONTRACTS § 83.8 at 287, 289–90 (rev. ed. 2003) 10958995

11. CUSHMAN, CUSHMAN & COOK, CONSTRUCTION LITIGATION:REPRESENTING THE OWNER § 4.45 at 162 (Wiley 1990)

10959071

12. 3 FRIEDMAN ON CONTRACTS AND CONVEYANCES OF REAL PROPERTY

§ 13:4 at 13-26–13-29 (7th ed. 2015)10925972

13. GREENWALD & BANK, CALIFORNIA PRACTICE GUIDE: REAL PROPERTY

TRANSACTIONS ¶ 11:92.1 (2015)10974759

14. MANUAL OF CREDIT AND COMMERCIAL LAWS Vol. II, ch. 3, art. 6 at 3-16(2014)

11106341

15. MILLER & STARR, CALIFORNIA REAL ESTATE §§ 1:108 at 1-438–1-447;1:168 at 1-721; 1:171 at 1-747–1-748; 8:4 at 8-23–8-24; 45:5 at 45-12;45:6 at 45-13 (4th ed. 2015)

10877648/10931532

16. NIELSEN, CALIFORNIA SALES AND USE TAX ANSWER BOOK Q 8:19–Q 8:32 at 106–12 (2010)

10919190

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PNM Doc. No.

17. POWELL ON REAL PROPERTY §§ 81.01[3][a] at 81-15; 81.03[6][h] at81-153–81-155; 81.05[11][d] at 81-247; 81A.07[1][d] at 81A-135–81A-137 (2015)

10877695

18. TWOMEY, JENNINGS & GREENE, BUSINESS LAW: PRINCIPLES FOR

TODAY’S COMMERCIAL ENVIRONMENT § 18-4d at 328 (5th ed. 2017)10959582

19. WHITNEY, ED., 2016 GUIDEBOOK TO CALIFORNIA TAXES ¶¶ 1702 at 773;1706 at 780; 1708 at 790 (2015)

10925939

20. 13 WITKIN, SUMMARY OF CALIFORNIA LAW § 193(1)(c) at 531–32 (10thed. 2015)

10925933

21. 3 WITKIN, CALIFORNIA PROCEDURE §§ 468 at 593–94; 508–514 at 650–59; 520–21 at 664–67; 529 at 678–80 (5th ed. 2015)

10961552

C. CASES

1. 926 North Ardmore Avenue, LLC v. County of Los Angeles (Cal. App. 2dDist. 2014) 229 Cal.App.4th 1335

10885440

2. Avco Community Developers v. South Coast Regional Commission (1976)17 Cal.3d 785

8428866

3. Belasco v. Wells (Cal. App. 2d Dist. 2015) 234 Cal.App.4th 409, 421–23 10269611

4. Blankenheim v. E. F. Hutton & Co. (Cal. App. 6th Dist. 1990) 217Cal.App.3d 1463, 1472–73

5241003

5. Brennan v. Tremco (Cal. 2001) 25 Cal.4th 310, 315–17 10932920

6. Bruni v. Didion (Cal. App. 4th Dist. 2008) 160 Cal.App.4th 1272, 1291 10892265

7. California Bank & Trust v. Del Ponti (Cal. App. 4th Dist. 2014)232 Cal.App.4th 162

10146595

8. California First Bank v. Braden (Cal. App. 2d Dist. 1989) 216 Cal.App.3d672, 676

10974753

9. California Pines Property Owners Association v. Pedotti (Cal. App. 3dDist. 2012) 206 Cal.App.4th 384, 392 and 395

10928871

10. Capehart v. Heady (Cal. App. 1st Dist. 1962) 206 Cal.App.2d 386 10961547

11. Davis Wire Corp. v. State Board of Equalization (Cal. 1976) 17 Cal.3d 761 10927056

12. Dyanlyn Two v. County of Orange (Cal. App. 4th Dist. 2015)234 Cal.App.4th 800

10928877

13. Gans v. Smull (Cal. App. 2d Dist. 2003) 111 Cal.App.4th 985, 989–90 10885441

14. Grafton Partners v. Superior Court (Cal. 2005) 36 Cal.4th 944, 964 9949730

15. Herring v. Teradyne Inc. (S.D. Cal. 2002) 256 F.Supp.2d 1118, 1127 10974793

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16. Hexter v. Pratt (Tex. Comm’n App. 1928) 10 S.W.2d 692, 693 10925426

17. Hot Rods, LLC v. Northrop Grumman Sys. Corp. (Cal. App. 4th Dist.2015) 242 Cal.App.4th 1166

11222080

18. Hotel Del Coronado Corporation v. State Board of Equalization(Cal. App. 2d Dist. 1971) 15 Cal.App.3d 612

10904978

19. Jacobs v. Tenneco West, Inc. (Cal. App. 5th Dist. 1986) 186 Cal.App.3d1413

10928881

20. Jue v. Smiser (Cal. App. 1st Dist. 1994) 23 Cal.App.4th 312, 317 and 318at n.6

11110243

21. Kazerouni v. De Satnick (Cal. App. 2d Dist. 1991) 228 Cal.App.3d 871 10928887

22. Leaf v. City of San Mateo (Cal. App. 1st Dist. 1980) 104 Cal.App.3d 398,411

10885444

23. Lewis v. Hopper (Cal. App. 1st Dist. 1956) 140 Cal.App.2d 365, 367 10885447

24. Linden Partners v. Wilshire Linden Associates (Cal. App. 2d Dist. 1998)62 Cal.App.4th 508, 524

10972803

25. Mercury Ins. Group v. Superior Court (Cal. 1998) 19 Cal.4th 332, 345 10930848

26. Miracle Auto Ctr. v. Superior Court (Cal. App. 1st Dist. 1998)68 Cal.App.4th 818, 822

10928891

27. Moreno v. Sanchez (2003) 131 Cal.Rptr.2d 684, 106 Cal.App.4th 1415 10968821

28. Ontario Community Foundation Inc. v. California State Board ofEqualization (Cal. 1984) 35 Cal.3d 811, 822–23

10927074

29. Pacific Southwest Realty Co. v. County of Los Angeles (Cal. 1991)1 Cal.4th 155

10885448

30. Plaza Freeway Ltd. Partnership v. First Mountain Bank (Cal. App. 4thDist. 2000) 81 Cal.App.4th 616

470445

31. Ram’s Gate Winery, LLC v. Roche (Cal. App. 1st Dist. 2015)235 Cal.App.4th 1071, 1079–1081

10973266

32. Riverisland Cold Storage, Inc. v. Fresno-Madera Production CreditAssociation (Cal. 2013) 55 Cal.4th 1169, 1174

9014322

33. San Diego Hospice v. County of San Diego (Cal. App. 4th Dist. 1995)31 Cal.App.4th 1048, 1053–54

10961536

34. Shuwa Investment Corp. v. County of Los Angeles (Cal. App. 2d Dist.1991) 1 Cal.App.4th 1635

10928896

35. Soifer v. Chicago Title Company (Cal. App. 2d Dist. 2010)187 Cal.App.4th 365, 374

10928977

36. Szabo v. Superior Court (Cal. App. 2d Dist. 1978) 84 Cal.App.3d 839, 843 10976056

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PNM Doc. No.

37. Tarrant Bell Properties v. Superior Court (Cal. 2011) 51 Cal.4th 538 10973329

38. Treo @ Kettner Homeowners Association v. Superior Court (Cal. App. 4thDist. 2008) 166 Cal.App.4th 1055

10976106

39. Western Filter Corp. v. Argan, Inc. (9th Cir. 2008) 540 F.3d 947, 952 10973274

40. Whittington v. Dragon Group, L.L.C. (Del. 2009) 991 A.2d 1, 10 10961549

41. Zalkind v. Ceradyne (Cal. App. 4th Dist. 2011) 194 Cal.App.4th 1010,1030

7964888

D. SALES TAX ANNOTATIONS AND MEMORANDUM OPINIONS

1. CALIFORNIA STATE BOARD OF EQUALIZATION, SALES AND USE TAX

ANNOTATION ¶ 395.0071 (Aug. 30, 1991), available athttp://tinyurl.com/j2svud2(http://www.boe.ca.gov/lawguides/business/current/btlg/vol2/suta/395-0000-all.html)

10933817

2. CALIFORNIA STATE BOARD OF EQUALIZATION, SALES AND USE TAX

ANNOTATION ¶ 21,260.10 (Oct. 28, 1993), available to RIA subscribers athttp://tinyurl.com/jp69yfz(https://checkpoint.riag.com/app/main/doc?usid=2ab607x275e5b&DocID=i5e805041626b62978b97c610a2a65ae2&collFilterId=104.ANNOTATIONS&collId=104.ANNOTATIONS&feature=tcheckpoint&lastCpReqId=3281421&searchHandle=i0ad82d0800000152906855701615aeb2)

10933838

3. CALIFORNIA STATE BOARD OF EQUALIZATION, SALES AND USE TAX

MEMORANDUM OPINION ¶ 395.0071 (Aug. 20, 1991), available athttp://tinyurl.com/z6lnqt2(http://www.boe.ca.gov/sutax/annotations/pdf/395.0071.pdf)

10927413

4. CALIFORNIA STATE BOARD OF EQUALIZATION, SALES AND USE TAX

MEMORANDUM OPINION PRATT NORTH PLAZA ASSOCIATES (Oct. 28,1993), available at http://tinyurl.com/h8zls5s(http://www.boe.ca.gov/lawguides/business/current/btlg/vol2/sutmo/sutmo-39.html)

10932555

E. STATUTES

1. A.B. 802, ch. 590 (Statutes of 2015)

2. Cal. Civ. Code §§ 7, 9, 11, 12a(a), 1092, 1101.5(e), 1102–1103.14, 1113,1542, 1572(2), 1572(5), 1573, 1667–1668, 1671(b), 1676, 1677(a)–(b),1680, 1698, 1710(2), 1717, 1938, 1940.7, 1950.5(h), 1950.7(d), 2079.10a,2787–2856, 3275, 3389

3. Cal. Code Civ. Proc. §§ 12a(a), 337, 360.5, 580b, 638, 644(a), 904.1,1281, 1298(a), 1298(c), 1542

4. Cal. Code Regs., tit. 14, div. 6, ch. 3, § 15000; tit. 18, §§ 462.180(c)–(d),1595(a)(1), 1595(a)(5)(A)1, 1595(c), 1668

10892265.21 Bibliography – Page 7

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5. Cal. Com. Code §§ 6103(a)(1), 6104, 6105 & 6107(a)

6. Cal. Evid. Code §§ 300, 622, 703.5

7. Cal. Gov. Code §§ 6807-2–6807-4, 8589.3–8589.4, 8875.6, 8893.2,29001, 51183.5, 65864, 66410, 66498.1, 66499.35(a)

8. Cal. Health & Saf. Code §§ 13113.8, 17920.10, 18029.6, 25359.7,25400.28, 25400.36, 26140

9. Cal. Ins. Code § 12340.11

10. Cal. Pub. Resources Code §§ 2621.9, 2694, 4125, 4136, 21000, 25402.10

11. Cal. Rev. & Tax. Code §§ 61(i), 62(a)(2), 62(g), 64, 75, 480, 531.2, 2192,6006.5, 6007, 6014, 6015(a)(1), 6019, 6051, 6091–6093, 6275, 6367,6811, 11911, 11925(b), 11932–11933, 17935 (limited partnerships),17941 (limited liability companies), 17942(a), 23153 (corporations)

12. Cal. Sts. & Hy. Code §§ 3114–3115

13. D.C. Code §§ 12-301(6), (7)

14. 10 Del. Code § 8106(a), (c)

15. Ga. Code § 9-3-23

16. 735 Ill. Comp. Stat. 5/13-206

17. I.R.C. § 708

18. Mass. Gen. Laws ch. 260 § 1

19. Md. Corp. & Ass’ns § 9A-102(b)

20. Md. Cts. & Jud. Proc. Code §§ 5-101, 5-102(a)(5)

21. N.Y. Civ. Prac. Laws & Rules § 213(2)

22. S.F. Bus. & Tax Regs. Code, art. 12-C, § 1102

23. Treas. Regs. § 301.7701-3(a), (b)(ii)

F. WEBSITES (MISCELLANEOUS)

1. BECK REED RIDEN LLP, 50 STATE NONCOMPETE CHART (updated as ofMarch 25, 2016), available at http://tinyurl.com/jpg7s4w(http://www.beckreedriden.com/50-state-noncompete-chart/)

11127149

2. CALIFORNIA ENERGY COMMISSION, BUILDING ENERGY USE

BENCHMARKING AND PUBLIC DISCLOSURE PROGRAM, available athttp://tinyurl.com/jj5bo7e (http://energy.ca.gov/benchmarking/)

11127151

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3. CALIFORNIA STATE BOARD OF EQUALIZATION, USING A RESALE

CERTIFICATE (2016), available at http://tinyurl.com/zgeg55j(https://www.boe.ca.gov/sutax/faqresale.htm)

11127150

4. COMMONWEALTH LAND TITLE COMPANY, REAL ESTATE LAWS &CUSTOMS BY STATE (May 2014), available at http://tinyurl.com/jsk22qs(http://www.fntgemarketing.com/cltc/ebooks/Real_Estate_Laws_Customs)

11127152

5. FIRST AMERICAN TITLE, YOUR GUIDE TO REAL ESTATE CUSTOMS BY

STATE (Sept. 2014), available at http://tinyurl.com/zpsv9c2(http://www.firstam.com/assets/commercial/real-estate-customs-guide/real-estate-customs-guide-by-state.pdf)

11127153

6. LEGISLATIVE ANALYST’S OFFICE, UNDERSTANDING CALIFORNIA’S

PROPERTY TAXES (Nov. 29, 2012), available at http://tinyurl.com/ljkr59b(http://www.lao.ca.gov/reports/2012/tax/property-tax-primer-112912.aspx)

11127154

7. NAIC TITLE INSURANCE TASK FORCE, SURVEY OF STATE INSURANCE

LAWS REGARDING TITLE DATA AND TITLE MATTERS (Mar. 22, 2010),available at http://tinyurl.com/gv6q7jk(http://www.naic.org/documents/committees_c_title_tf_survey_state_laws.pdf)

11127155

8. STATE BOARD OF EQUALIZATION, CALIFORNIA PROPERTY TAX—AN

OVERVIEW, Publication 29 (July 2015), available athttp://tinyurl.com/2w6c6te(http://www.boe.ca.gov/proptaxes/pdf/pub29.pdf)

11127156