On January 12, 2007, the California Fourth District Court of Appeal (the Court) filed its decision in Black Hills Invs., Inc. v. Albertson's, Inc. (2007) 146 CA4th 883, 53 CR3d 263, reported at 30 CEB RPLR 50 (Mar. 2007). The case was not appealed. Upon its filing, Black Hills made hundreds, and more likely thousands, of California real estate contracts void or potentially void. Simply put, Black Hills held that, under the Subdivision Map Act (SMA) (Govt C §§66410-66499.37), any offer or contract to sell, lease, or finance real property for which the approval and filing of a final subdivision map or parcel map is required under the SMA is void unless such offer or contract is expressly conditioned on the approval and filing of a final subdivision map or parcel map, as required under the SMA.

It is common for developers to enter into contracts to sell or acquire portions of a single legal parcel that have yet to be subdivided in accordance with the SMA (unsubdivided parcels). It is also common for buyers in these transactions to enter into agreements for the financing or leasing of these unsubdivided parcels prior to closing on the property. The Black Hills decision may have voided all such agreements—not because any parties to these agreements had any intent to violate the SMA, but because none of their contracts or agreements is “expressly conditioned upon the approval and filing of a final subdivision map or parcel map, as required under [the SMA].” Govt C §66499.30(e).

Parties to leases or financing agreements often indirectly condition their performance on compliance with the SMA. Precisely because the parties to those leases and financing agreements generally have no intention of violating the SMA, those leases and financing agreements are typically conditioned on the closing on, or actual acquisition of, the relevant land, with the clearly understood implication that such land will be a legal parcel prior to the close of escrow. However, it is unlikely that these contracts contain the express compliance language required by the Black Hills decision. Parties to an acquisition contract with respect to an unsubdivided parcel might be better off than their leasing and financing counterparts—more often than not, an acquisition contract will discuss the mapping process for creating a legal parcel in some manner, if only to address the timing involved so as to identify a closing date. Nonetheless, although it is common for the mapping process to be acknowledged in such agreements, as a result of the Black Hills decision, the question now becomes whether such acknowledgment will satisfy the SMA requirement that the contract be “expressly conditioned upon the approval and filing of a final subdivision map or parcel map, as required under [the SMA].” Govt C §66499.30(e). It is the author's guess that most contracts for acquisition of unsubdivided parcels, including those drafted by seasoned real estate attorneys, will not satisfy the hypertechnical requirement imposed by the Black Hills court.

Overview of the Black Hills Case

In Black Hills, Albertson's and Black Hills Investments, LLC (BHI) entered into two similar contracts whereby BHI agreed to purchase from Albertson's two unsubdivided parcels (the Property). Albertson's was obligated to record parcel maps legally subdividing the Property before the closing date, but that obligation was subject to a condition allowing Albertson's either to terminate the contracts, if Albertson's failed to obtain the government approvals for this subdivision, or to waive the obligation. Albertson's recorded a parcel map creating the two legal parcels before the closing date, but BHI complained that it had not approved the conditions to the parcel map and did not agree to certain deed restrictions being required by Albertson's. BHI notified Albertson's that it was terminating the contracts and demanded a return of its deposits. Albertson's refused to return the deposits, and BHI brought suit claiming that the Contracts were voidable under the SMA. BHI petitioned for summary judgment. The trial court ruled in its favor.

In its appeal, Albertson's claimed that its contracts satisfied the exception of Govt C §66499.30(e), but the appellate court concluded that they did not. The court noted (146 CA4th at 893):

Paragraph 8A(b) of both contracts provided: “Notwithstanding the execution of this contract, [Albertson's] may terminate this Contract without liability unless the following condition has been satisfied or waived in writing by [Albertson's] prior to the Closing Date: [T]-... [] (b) Subdivision. If required to comply with local subdivision or similar laws, ordinances, rules or regulations, [Albertson's] shall have obtained, at [Albertson's] expense, any and all governmental approvals relating to any lot split, ... subdivision or similar actions required by the appropriate local governmental agency or entity to certify that the Subject Property and the remaining parcels shown on Exhibit ‘A' comply with such laws, ordinances, rules or regulations following the conveyance of the Subject Property to [Black Hills] upon terms and conditions acceptable to [Albertson's] in [Albertson's] sole discretion.” (Italics added.)

The foregoing express language of paragraph 8A of the contracts obligated Albertson's, as the seller, to obtain and record a parcel map legally subdividing the property prior to the agreed-upon closing date, but made that obligation subject to an express condition that gave Albertson's the right to terminate the contracts “without liability” in the event Albertson's, before the closing date, either (1)–failed to obtain governmental approval of the creation of the two parcels, or (2) “waived” the condition in writing.

The undisputed material facts in this case thus establish that paragraph 8A of the contracts did not comply with section-66499.30(e) because it did not “expressly condition[]” Albertson's sale of the unsubdivided parcels “upon the approval and filing of a ... parcel map, as required under [the SMA]” within the meaning of that subdivision to except the sale from the prohibition codified in subdivision (b) of that section. We conclude the contracts were illegal under the SMA, and thus void rather than voidable, as a matter of law at the time they were executed because (1) the sale of the unsubdivided parcels violated the prohibition codified in section 66499.30(b), and (2) the exception to that prohibition codified in section 66499.30(e) did not apply as the contracts did not expressly condition the sale upon the approval and filing of a parcel map, as required under the SMA.

Analysis of the Court's Ruling

With the three paragraphs quoted above, the court lays down a rule of strict compliance with the SMA. Absent such strict compliance, contracts dealing with the sale, lease, or financing of unsubdivided parcels are void. It appears clear that, when drafting any new contracts dealing with unsubdivided parcels, the safest route is to incorporate the specific language contained in §66499.30(e), that is, that the sale, financing or lease in question is “expressly conditioned upon the approval and filing of a final subdivision map or parcel map, as required under [the SMA],” and to further provide that such condition may not be waived by either party. Of course, the more interesting question is whether the thousands of California contracts currently in effect that deal with unsubdivided parcels contain language that satisfies the statutory requirement articulated above.

In the second of the above quoted paragraphs, it appears that the appellate court does not necessarily require that the specific language contained in §66499.30(e) be inserted into contracts involving unsubdivided parcels. Rather, the court implies that Albertson's “obligation” to obtain and record a parcel map before the closing date may have satisfied the requirement, except that Albertson's “made that obligation subject to an express condition” giving Albertson's the right to terminate the contracts without liability if Albertson's either (1)–failed to obtain the governmental approval or (2) waived the condition. (The court may have slightly misstated Paragraph 8A of the contract, where the language provides that Albertson's may terminate the contract “unless the following condition has been satisfied or waived in writing.”) As noted above, most contracts involving the acquisition of unsubdivided parcels will contain some acknowledgment that a mapping process needs to occur to create a legal parcel. Practitioners will need to analyze that language to determine whether it will satisfy the requirements of §66499.30(e) without inadvertently compromising the required condition with any other rights, such as a right of waiver.

It is the author's guess that the majority of acquisition contracts identifying the approval and filing of a final subdivision parcel map as a condition to closing do not identify it as an absolute condition (as the Black Hills court seems to require), but rather as a condition for the benefit of one or both of the parties to the contract. As in the Albertson's contracts, it is quite common to have language whereby a party's duty to perform is conditioned on the “satisfaction or waiver” of a litany of conditions, such as approval of title, approval of reports and surveys, the parties' reaffirming their representations and warranties, and, when the creation of legal parcels is involved, compliance with the SMA. Even if the agreement does not specifically give a party an express right of waiver, if the condition is for the “benefit” of that party, there should be an implied right of waiver, as CC §3513 has established that “[a]nyone may waive the advantage of a law intended solely for his benefit” and California case law has established that this right of waiver extends to all rights and privileges to which a person is legally entitled, whether secured by contract, conferred by statute, or guaranteed by the Constitution, as long as such rights and privileges rest in the individual and are intended for his or her sole benefit. See Benane v International Harvester Co. (1956) 142 CA2d Supp 874, 877, 299 P2d 750, and Isaacson v G.D. Robertson & Co. (1948) 85 CA2d 71, 192 P2d 486. Therefore, a party trying to enforce a contract containing such a waiver right will be forced to argue that certain additional factors mentioned by the court in Black Hills must exist in addition to the commonplace right to waiver in order for a court to find the contract void. Unfortunately, as discussed below, it is unlikely that this strategy will be successful. As long as an express condition of compliance is compromised by the poison pill of a right of waiver, the other factors mentioned in Black Hills will probably be of little persuasive value.

One such additional factor is the suggestion that compliance with the SMA under Black Hills is the seller's, rather than the buyer's, obligation. As noted above, it is typical for acquisition agreements to provide that compliance with the SMA is a condition to closing for the benefit of one or both parties. Black Hills noted that Albertson's, “as seller,” had the right to terminate the contracts “without liability” if before the closing date Albertson's either (a) failed to obtain governmental approval or (b)-”waived” the condition in writing. The court noted that one important public purpose of the SMA is protection of individual real estate buyers; indeed, §66499.30(a) and (b) both state “[n]o person shall sell, lease, or finance,” thereby putting the prohibition on sellers and owners. No mention is made as to whether BHI also had the right to terminate the contracts or waive the condition in the same manner as Albertson's. Given that BHI filed the initial lawsuit in Black Hills, it is unlikely that BHI had a termination right. However, it does not seem likely that the court's decision was based on the fact that, “as the seller,” Albertson's had the right to terminate the contract or waive the condition. If BHI, as the buyer, had those same rights, then that too would defeat the purpose of §66499.30. If, under the SMA, an unsubdivided parcel cannot be sold, leased, or financed, then it follows that an unsubdivided parcel cannot be bought, rented, or used as security.

Some of what makes the court's analysis of Albertson's illicit rights confusing is its focus (by way of italics and quotation marks in the passage quoted above) on Albertson's right to “terminate” the contract “without liability” if it did not obtain governmental approval on terms and conditions acceptable to Albertson's. It would seem, however, that Albertson's right to terminate without liability is consistent with §66499.30(e). If the contract is void unless there is an express condition requiring the approval of a final subdivision map or parcel map, why would it be inconsistent to allow a party to terminate the agreement without liability if such approval is not obtained? Whether the contract is void or terminated without liability, the parties end up in the same place. It would appear, therefore, that the crux of the matter was that Albertson's had a right to “waive” the condition, which waiver certainly runs afoul of the statutory requirement that the contract be “expressly conditioned” on such approval and filing.

Impact of the Court's Ruling on Practitioners

It is hard to argue with the court's analysis or rationale in the context of its statutory interpretation of §66499.30. The statute clearly states that contracts for the sale, lease, or financing of unsubdivided parcels must be “expressly conditioned” on the future approval and filing of the appropriate map. Unfortunately, the court's analysis fails to account for the impact that the Black Hills decision will have on thousands of contracts currently in effect. As in the Albertson's contracts, it is common for an acquisition contract to have a list of conditions for the benefit of a party that need to be satisfied or waived before the party is obligated to perform or close the transaction under the contract. Compliance with the SMA is usually lumped into this list. Undoubtedly, none of the parties to the transaction believed or intended that it would have the right to waive a legal requirement that the parcel being transferred must be a legal parcel. As practitioners learn of the Black Hills decision, appropriate language consistent with §66499.30(e) will be included in contracts for the sale, lease, or finance of unsubdivided parcels. For now, practitioners need to address those contracts that have not yet closed and may be void.

Many of these contracts may be in the form of purchase or option agreements (assuming the option agreement in question is treated as an offer to sell for purposes of the SMA) with extended escrows that took into consideration the time it would take to obtain entitlements for the property, including parcelization of the property under the SMA. Given the time it takes to obtain entitlements, years of option payments and nonrefundable deposits in the thousands, perhaps millions, of dollars paid to sellers may need to be refunded. Conversely, buyers who have negotiated for a purchase price that is now below fair market value will have lost the benefit of their bargain, along with the thousands or millions of dollars spent on consultants and engineers preparing studies and reports required to obtain the entitlements necessary for the property to be subdivided. Given the potential amount of dollars at stake, it is very likely that a number of lawsuits will be filed based on the Black Hills ruling.

Given the unlikelihood that anyone intended to violate the SMA in any of these transactions, the court could have minimized these potentially disastrous consequences—and kept its statutory interpretation intact—by also holding that the required contractual condition of complying with the SMA under §66499.30(e) is not a waivable condition. It is well established that “a law established for a public reason cannot be contravened by a private agreement.” CC §3513. Therefore, as California case law establishes, a party may waive a statutory right when its public benefit is merely incidental to its primary purpose, but a waiver is unenforceable when it would seriously compromise any public purpose that the statute was intended to serve. See Azteca Constr., Inc. v ADR Consulting, Inc. (2004) 121 CA4th 1156, 18 CR3d 42. On this basis, it does not seem like too much of a stretch to argue that a condition requiring compliance with the SMA cannot be waived, either impliedly or expressly. If the court in Black Hills would have held that the condition could not be waived, such a holding would have supported the goals of the SMA, been consistent with the court's statutory analysis, and maintained the status quo with thousands of currently operational contracts. As litigation ensues as a result of Black Hills , it may be that an appellate court of a different district will make such a finding. Until that time, practitioners need to advise their clients whose contracts are still in effect as to how to address the Black Hills decision.

Practical Tips in Light of Black Hills

If a transaction's closing is imminent, there may be an inclination to stick one's head in the sand rather than discuss the implications of Black Hills. Nevertheless, practitioners need to contact their clients, explain the implications, and take direction from the clients. Of course, the easiest and most equitable solution would be for the parties to (a) acknowledge that they had no intent to violate the SMA and (b) enter into an agreement to reinstate their existing agreement, clarifying that they acknowledge and agree to the express condition contained in §66499.30(e), and that such condition is not waivable by either party. In many cases, it will not be that easy, since there will be clients who may benefit from declaring their contract void under the Black Hills decision. Additionally, some clients will be concerned that if they raise the issue of reinstatement with the other party to the contract, that other party will use it as an opportunity to declare the contract void or as leverage for some other concession. These will not be easy decisions for clients, as, given human nature, someone is always looking for their “pound of flesh.”

In addition, practitioners will need to determine the effect the Black Hills decision will have beyond purchase and sale agreements. Though Black Hills dealt with a purchase and sale agreement, option agreements, as noted above, for an unsubdivided parcel may also be susceptible. Practitioners will also need to consider the applicability of Black Hills to an agreement under which a currently legal parcel is being acquired, but the buyer has the right to acquire the parcel in phases based on parcels that will be created subject to a final subdivision map or parcel map. If the contract is drafted so that the current legal parcel can only be acquired in phases of unsubdivided parcels, Black Hills would seem to apply. If the buyer has the alternative of acquiring the current legal parcel either in whole or in unsubdivided parcels, it would seem that given the alternate right to acquire unsubdivided parcels, Black Hills would apply and the contract is void. The question may then become whether the contract has a severability clause allowing that portion of the contract that is not illegal (the acquisition of the current legal parcel without any subdivision or split) to continue, while only the alternative phased acquisition provisions are deemed void. This question can only be answered on a case-by-case basis, with individual assessments of contractual intent.

Practitioners will also want to consider the effect of the Black Hills decision on ground leases in a commercial retail center, business/warehouse park, or office park when the premises are the footprint of the area on which a building is to be built and is cut out of a larger legal parcel. Though the SMA is inapplicable to the leasing of “offices, stores, or similar space within ... industrial buildings [or] commercial buildings,” under Govt C §66412(a), if the building is not built, or the “lease” not contingent on the completion of the building, the lease may be void under the Black Hills decision. As noted in Black Hills, the contracts being litigated were illegal under the SMA as a matter of public policy and therefore void. This was true despite the fact that Albertson's ultimately recorded a parcel map and created legal parcels prior to the closing, and that, after such maps were recorded, BHI took actions indicating its intent to ratify the contracts. Therefore, if the premises of a ground lease (which always presumes a building is not yet built so the lease is not yet for space “within” a building) are less than the full legal parcel, it may be void under Black Hills despite the fact that the anticipated building is now built and the tenant would otherwise fall under the exception contained in §66412(a). Unless the lease contained the required express condition of §66499.30(e), it was void when executed because the building space did not exist.

Similarly, the parties will need to review loan documents that involve parcels to be subdivided. Loan commitments for such properties may be void if they do not contain the required language under §66499.30(e). Loan documents that are entered into as of the closing date of a newly created legal parcel might not be considered void. Query, however, what happens to a deed of trust that anticipates further subdivisions of the legal parcel, and further provides for the release of such later subdivided parcels when they are sold? Will the deed of trust be void and the note become unsecured? A practitioner who does not include the required language of §66499.30(e) in such circumstances risks producing a void financing document.

Conclusion

Given the widespread use of the documents impacted by the Black Hills decision, it is likely that we will see at least one or two decisions over the next few years that will further define its effect or create limitations. In the meantime, practitioners need to adjust their handling of Black Hills-related issues and assist their clients in doing the same.

The author would like to acknowledge the assistance of Brandon Williams and Danielle Stephens, associates of Downey Brand Attorneys LLP, in Sacramento, in the research and editing of this article.

This material is reproduced from the Real Property Law Reporter (v.30:6 (November 2007)), copyright 2007 by the Regents of the University of California.  Reproduced with permission of Continuing Educaiton of the Bar - California.  (For Information about CEB publication, telephone toll free 1-800-CEB-3444 or visit the website, CEB.com).