The City designed a rail/street grade-separation project that required part-take acquisitions from several properties. Only a few property interests were needed at the beginning of the project for funding certification. One property interest needed was from the backyard of a three bedroom single-family residence: 949 square feet of fee and a 362 square foot temporary construction easement. These property interests were needed to remove and replace an existing retaining wall. Preliminary title reports were obtained and the property owners of record were appropriately identified. The right of way maps and legal descriptions were prepared and forwarded to the appraiser. The appraisal was approved by the City Council who directed the right of way agent to make an offer to purchase the property.

The property owners met with the City and immediately and enthusiastically agreed to settle for the offered amount. The eagerness of the property owners seemed odd but it certainly was a refreshing change from the usual property owner angst. Escrow was promptly opened, escrow documents were quickly drawn, and the escrow agent began the process of closing this simple transaction. However, unbeknownst to the City, a new wrinkle would detour this simple transaction.

Real property money lenders in California use a “trust deed” system to effectuate non-judicial foreclosure for recovering monies lent to borrowers who default on loans. Monies are lent to borrowers using their real property as loan collateral. The non-judicial foreclosure method avoids many of the costs and most of the complexities typically associated with foreclosures performed within the judicial system. The borrowers execute a promissory note in favor of the lenders for the repayment of the money borrowed and the borrowers then agree to place their property in a “trust” that designates a “trustee” to perform a property foreclosure if the borrower defaults on the terms of the promissory note. Upon such a loan default, the lender notifies the trustee that the borrowers are in default and trustee then initiates the foreclosure process to sell the property to recover monies for the “trust beneficiary” lender.

The lender in this matter declared the property owners-borrowers in loan default and non-judicial foreclosure proceedings were already initiated by the trustee even before the City entered into the purchase and sale and escrow agreement with these property owners. Thus, this acquisition now involved a lender, the foreclosure trustee and their respective attorneys.
Despite the pending foreclosure, the property owners remained the “owners of record” until the completion of the foreclosure process and therefore the purchase and sale agreement was not yet invalid. The lender was aware of the purchase and sale agreement with the City for the part-take fee and temporary construction easement interest, and the lender wouldn’t agree to subordinate their lien interest in the part-take fee interest without being made whole on the late mortgage payments. Fight or flight?

The first task was getting the legal and right of way teams together to evaluate the project priorities and develop a strategy. The property owners remained ready and eager to make a deal with the City, but the lender would not approve any deal that required them to subordinate their lien interest in the property. The project priorities called for immediately securing the temporary construction easement, but the part-take fee interest acquisition could wait until much later in the project.

The City decided the best strategy was to cancel the escrow and enter into a new agreement with the property owners for the temporary construction easement. The right of way agent secured and immediately recorded the temporary construction easement. The City decided that the only way to obtain clear title to the part-take fee, given the complexities of the lender and trustee interjected into this proposed acquisition was by obtaining a resolution of necessity and condemnation. The City adopted a resolution of necessity and shortly thereafter the condemnation action was filed naming the lender, property owners, and trustee as interested parties. The property owner soon thereafter entered into a stipulation with the lender to release the just compensation directly to the lender. The court eventually issued a Final Order of Condemnation for the part-take fee interest and the case concluded.

In another strange turn, I received a call from a concerned property owner inquiring about the details of the City project and, in particular, the project’s impacts on their house. The call was from the new property owners of this parcel indicating that they had no warning that the City condemned a portion of their property and that a temporary construction easement had been acquired and recorded. Apparently, the new and former owners had been quietly negotiating for a “short-sale” of the property—sale of property below existing loan balance–during the active condemnation case. The new owners negotiated a deal with the bank but did not get a preliminary title report issued by the bank and before buying the house. Fortunately, the City acquired the property interests in the condemnation case before the short-sale was completed so there was no legal recourse against the City. In the end, the City’s project stayed on track even with the unplanned detours.