Legal Newsletter 4 – Recent California Legal Developments

By May 21st, 2017

Legal Newsletter No. 4
Recent California Legal Developments
Business, Contracts, and Real Property Law
“The 20-Minute Legal Developments Review”

The following is a summary of recent statutory enactments and judicial decisions affecting California or California-based businesses, contracts, and real property. Except in rare instances, the scope of my Newsletters is limited to transactional matters — business, contracts, and real property law, and only California laws and cases are referenced. However, legislation and rulings from other jurisdictions are sometimes noted if they may have immediate or future applicability to California businesses or if they may serve as useful reminders or cautions.

These enactments and decisions are only briefly summarized below. Since most of these enactments and decisions are both blessed and burdened with numerous exceptions and conditions, their applicability to any specific matter should be closely examined. The following matters are not presented in any order of priority, and please know that your comments are always welcomed.

The Advisability of Business Succession Planning

By Owners of Privately-Held Businesses

The use of planning in the context of succession strategies is particularly important for small and medium-sized, closely-held businesses for several reasons. First, such businesses oftentimes have a highly centralized and pyramidal management structure and oftentimes lack a strong governing infrastructure. Relatedly, they oftentimes have a more limited depth of personnel – and especially management personnel — and frequently have far less resources and liquidity options than those of publicly-held companies. The highest risk is that in the event of the retirement or incapacity of one or more of the owners, the viability and value of the company can quickly diminish. Tax planning is certainly a component of this planning, but it is this author’s experience that, for example, estate and gift taxation issues are rarely the driving, let alone dominant, forces behind the need for succession planning. Instead, the driving forces more frequently relate to deriving (or even preserving or maximizing) value for one’s company in an orderly manner. This can oftentimes be done by the thoughtful packaging and marketing of a company (or interest therein) long before being triggered by one’s desire or need for retirement or by one’s unexpected death or incapacity. The owners and senior managers of a well-run company are the best informed and are in the best position to package, market, sell their company to third-parties in order to achieve the highest and best value of the business as an on-going concern. Such business dispositions or mergers can be complicated, frustrating, and even costly, but a successful, well-timed sale or merger of a business simultaneously can preserve the long-earned great value one’s company and provide for substantial familial wealth. The business alternative of merely closing one’s door and liquidating is oftentimes and by far the least advisable approach.

Continuance of Property Insurance Coverage during Periods of Vacancy

                Many commercial and homeowner insurance policies contained special provisions relating to vacancy of the subject property. Sometimes these provisions exclude coverage of a property which is or becomes vacant during the policy’s term (with exceptions for vacations during periods of construction or renovation). Courts in various jurisdictions have argued many aspects of these types of insurance denials. For examples courts have opined on  whether the term “vacant” means “devoid of contents” and what level of renovation activity is sufficient to constitute “occupancy.” A recent California Supreme Court case focused upon whether or not the “under construction” exception (assuring continuing insurance) required a “substantial and continuing presence of workers at the premises.” If a party has or may have vacant commercial or residential (e.g. second-hone) property, it may be prudent to confirm the sustained continuance of insurance during periods of vacancy.

Certain Parties NOT Liable for Hazardous Waste Cleanup of Real Property

                Fortunately for its many beneficiaries, the California Land Reuse and Revitalization Act of 2004 was recently extended to 2027. Under this now-extended legislation, innocent landowners, bona fide purchasers, and adjacent property owners may be absolved of (usually costly) hazardous waste cleanup liability if they qualify for immunity under the act.

California Drought-Based Legislation Affecting Homeowners, Homeowner Associations (HOAs), Common Interest Developments (“CIDs”), and Landlords and Tenants.

                A considerable amount of drought-based legislation was generated in the recent sessions of the California legislature. Examples of such legislation are as follows: (1) Artificial grass – cannot be banned by HOAs/CIDs rules or by architectural policies thereunder, and (2) Clotheslines – cannot be banned by HOAs, CIDs, or landlords (so long as the clotheslines remain in owners or tenants backyards or private areas). (Minor Note: Banning of drying from balcony railing can still be prohibited).

New Transfer on Death Deeds

                California has (finally) adopted legislation authorizing the use of transfer-on-death (TOD) deeds. TOD legislation was first adopted by Missouri in 1989, and the use of such TOD deeds is now common in many other states. Such TOD Deed allow owners of real property to transfer certain types of property simply, easily and without the burden and cost of probate proceedings upon the owner/transferor’s death. The uses of such TODs as estate planning and property conveyance tools are considerable. First, unlike joint tenancies, they create no present interest in the named beneficiary (or contingent beneficiaries, if they are also named in the TOD deed). Therefore, the use of a TOD deed has no triggering tax consequences since, for example, there is no completed gift for gift tax purposes. Second, since the beneficiaries are not on title and have no interest in the subject property until the owner’s death, the property remains beyond the risk and reach of the beneficiary’s creditors. Third – and possibly most importantly, such TOD deeds are revocable. Thus, the owner/transferor can change his or her mind at any time by recording a new TOD deed or by recording an instrument of revocation. Fourth, the use of such TOD deeds may be far simpler and less expensive than the use of revocable or other types of trusts. And, fifth, upon the owner’s death, the beneficiaries avoid the cost and burden of probate proceedings. Obviously such TOD deeds must be carefully prepared and there are some theoretical downside issues, but they can be very useful for death transfers of these types of properties. (Cautionary Note: Despite the adoption of the California’s new “trial-run” authorizing legislation, if such statute is not extended, then it will be repealed in January, 2012).

Fact of the Day

The Elusive, But Surprising, Definitions of “Small Business”

As Used by Governmental Authorities

There are many definitions of “small businesses.” However, the government’s definitions of “small businesses” vary considerably from most colloquial uses of such term and vary from widely-shared, “mom-and-pop business” perceptions of the term. For example, even though the U.S. Small Business Administration has a complex system for defining “small businesses,” the commonly used rule of thumb is that a “small business” is generally a business which employs 100 people or less and has annual revenues of $100 million (!!) or less. Other governmental and regulatory agencies and legislation define small business as those employing less than 50 persons. Many business persons would not consider a $100 million company a “small business,” but by the use of these seemingly high revenue- and employee-based definitions, it is less surprising when political and economic debates frequently (but arguably misleadingly) reference that such “small businesses” comprise 95% of the U.S. economy.

Legal Newsletter No. 4 – Blog No. 71 – Business Succession Planning – Property Insurance Coverage during Period of Vacancy – Hazardous Waste Liability – Drought-Based Legislation and HOAs – New Transfer of Death Deeds – The Elusive, but Surprising, Definition of “Small Business” by Governmental Authorities

Blog 71

May 21, 2017

By Mack W. Borgen
Santa Barbara, California
Copyright © 2017. Mack W. Borgen. All rights reserved. University of California at Berkeley (Honors, Economics); Harvard Law School; Author, The Relevance of Reason – Business Politics (Volume 1) and —  Society and Cultue (Volume 2) – As Advertised in The New York Review of Books andRecipient of Four National Book Awards
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