What is an Integration Clause in a contract?

An integration clause (also known as a merger clause or an entire agreement clause) is found in most contracts and simply provides that the agreement or contract between the parties is the final and complete understanding between the parties, and supersedes all prior negotiations, agreements, or understandings on the subject.

The typical integration clause will say something like this: This Agreement is the entire agreement between the parties in connection with the subject matter of this Agreement, and supersedes all prior and contemporaneous discussions and understandings.1

Integration clauses are key when there is a dispute between two or more contracting parties and one party wants to use prior or contemporaneous discussions to contradict or explain terms within a contract.

By way of example, suppose that Party A negotiates to sell Party B 100 “type-1” gears for a specified sum.  The parties sign a contract which states that Party A agrees to sell Party B 100 “industry standard gears” for a specified sum, but with no reference to “type 1” in the description.  Party A delivers 100 “type-3” gears (considered “industry standard”) and demands payment. Party B refuses to pay.  Party B wants to use communications between the parties before the contract was signed to show that Party A was to deliver 100 “type-1” gears.  Party A, on the other hand, claims that the gears delivered are “industry standard” and the contract contains an integration clause that excludes prior or contemporaneous agreements.

How would a court decide whether the pre-contract communications about “type-1” gears can be used?  Determining whether the written contract was meant to be the exclusive embodiment of the parties’ agreement is known as determining whether the contract is “fully integrated.”  Thus, the existence of an integration clause is a key factor because an integration clause is typically conclusive as to the issue of integration.  The court will therefore look at the contract to determine whether the parties intended the written agreement to be a final and complete expression of their understanding. (Code Civ. Proc., § 1856, subd. (d).)

California has codified (i.e., set out by statute) many rules of contract interpretation; these rules apply to all contracts, absent exceptional circumstances.  Civil Code § 1635.  The basic goal of contract interpretation is to give effect to the parties’ mutual intent that existed at the time of contracting. Civil Code § 1636. When an agreement is set forth in a final written contract, the parties’ intent is determined from the writing alone, if possible. Civil Code § 1639.  “The words of a contract are to be understood in their ordinary and popular sense” (Civil Code § 1644), and  the terms of a final, integrated contract “may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement” (CCP § 1856).

Nevertheless, in our example above, Party B may still be able to submit evidence that the agreement was for 100 “type-1” gears.   This is because a written contract “may be explained or supplemented by evidence of consistent additional terms unless the writing is intended also as a complete and exclusive statement of the terms of the agreement.” Code Civ. Proc., § 1856, subd. (b).  Also, technical words are to be interpreted as usually understood by persons in the profession or business to which they relate, unless clearly used in a different sense. Civil Code § 1645; Cal. Civ. Proc. Code § 1856 (“The terms set forth in a writing described in subdivision (a) may be explained or supplemented by course of dealing or usage of trade or by course of performance.”).

Thus, the dispute between the parties in our example above will center on the court’s determination as to whether the prior and contemporaneous statements are admissible as consistent additional terms and/or to explain what “industry standard” means in this context.

Grey v. Am. Mgmt. Servs., 204 Cal. App. 4th 803, 805 (2012).

Parent-Child Exclusion From Property Tax Reassessment

California provides various exclusions from reassessment of property tax when a “change of ownership” occurs.  One of the most common exclusions is used to prevent reassessment for transfers from a parent to a child or from a grandparent to a grandchild (often referred to as the “parent-child exclusion”).  However, it is important to understand when a “change in ownership” occurs and how long you have to apply for an exclusion from property tax reassessment.

“Change of Ownership”

Generally, Revenue & Taxation Code Sections 60 through 62 define the events (i.e., the sales and transfers) that trigger property tax reassessments under provisions of the California Constitution, commonly known as Proposition 13.  These trigger events are known as a change of ownership.  Generally, whenever a change of ownership occurs that is not subject to an exclusion provided under the Revenue and Taxation Code, the transferee must file a change in ownership statement in the county where the real property is located. Cal. Rev. & Tax. Code § 480(a).

Revenue and Taxation Code section 60 defines a “change in ownership” as “a transfer of a present interest in real property, including the beneficial use thereof, the value of which is substantially equal to the value of the fee interest.”  The transfer of a fee interest is commonly accomplished via a sale from one person or entity to another.

Transfers can also be through legal trusts.  In fact, transfers between parents and children typically take place through trusts that are set up by the parent(s) for the benefit of the child after the parent passes away.   The Revenue and Taxation Code also provides that circumstances constituting a “change in ownership” occur when any interests in real property which vest in persons other than the trustor (i.e., the trust creator) or when a revocable trust becomes irrevocable (such as the parent/trustor passing away).

Thus, there is a change of ownership when the children receive the full present interest in real property, even when the property remains in the trust.  Luckily an exclusion is available to prevent a costly property tax reassessment, but must be timely claimed.

The Parent-Child Exclusion

Certain constitutional initiatives (including Propositions 13, 58, and 193) were passed that provide for exclusions to reassessment when the transfer is from a parent to a child or from a grandparent to a grandchild.  Those initiatives were codified in the California Revenue & Taxation Code, which states (in relevant part) that “a change in ownership shall not include the purchase or transfer of real property . . . between parents and their children.”  Cal. Rev. & Tax. Code § 63.1.

But, in order to avoid reassessment under the parent-child exclusions described above, once there is a change in ownership a claim for the exclusion must be filed within three (3) years after the date of the purchase or transfer of real property, or prior to transfer of the real property to a third party (whichever is earlier).  If no claim for a parent-child exclusion is filed within the three (3) year period, then it may be filed within six months from the date of mailing of a notice of supplemental or escape assessment that was issued as a result of the purchase or transfer of the real property.  Cal. Rev. & Tax. Code § 63.1.

Doing Business in California: “Transacting Intrastate Business”

We have previously written about doing business in California, and how the California Corporations Code uses a “transacting intrastate business” test.  Importantly, if a corporation or other entity is deemed to be doing business in California under the “transacting intrastate business” test, that entity must obtain a “Certificate of Qualification” under Corporations Code § 2105.  This post will look at what will and will not constitute “transacting intrastate business.”

Transacting Intrastate Business

Transacting intrastate business means that the entity or some part thereof enters into or conducts repeated and successive business transactions (sales, deals, etc.) in California.  Like many legal tests, certain factors will be weighed to determine whether or not the test is satisfied.  To assist courts and businesses in determining what may or may not qualify as transacting intrastate business, Corporations Code § 191 sets out what activities will not be considered to be transacting intrastate business, although a listed activity may be taken with other activities that, taken together, constitutes transacting intrastate business.  Some of the protected activities include:

(1) Maintaining or defending any action or suit or any administrative or arbitration proceeding, or effecting the settlement thereof or the settlement of claims or disputes.

(2) Holding meetings of its board or shareholders or carrying on other activities concerning its internal affairs.

(3) Maintaining bank accounts.

(4) Maintaining offices or agencies for the transfer, exchange, and registration of its securities or depositaries with relation to its securities.

(5) Effecting sales through independent contractors.

(6) Soliciting or procuring orders, whether by mail or through employees or agents or otherwise, where those orders require acceptance outside this state before becoming binding contracts.

(7) Creating evidences of debt or mortgages, liens or security interests on real or personal property.

(8) Conducting an isolated transaction completed within a period of 180 days and not in the course of a number of repeated transactions of like nature.

Likewise, a foreign corporation will not be considered to be transacting intrastate business solely because one of its subsidiaries transacts intrastate business.  A foreign corporation or other entity  will also not be considered to be transacting intrastate business solely because of its status as any one or more of the following:

(1) It is a shareholder of a domestic corporation.

(2) It is a shareholder of a foreign corporation transacting intrastate business.

(3) It is a limited partner of a domestic limited partnership.

(4) It is a limited partner of a foreign limited partnership transacting intrastate business.

(5) It is a member or manager of a domestic limited liability company.

(6) It is a member or manager of a foreign limited liability company transacting intrastate business.

In addition to the above, it is important to note that, in the digital age, an entity conducting significant business over the internet may have sufficient contacts with California to allow a court to exercise personal jurisdiction over the entity.  Furthermore, California law permits a plaintiff to conduct initial discovery against a defendant corporation or other entity to determine whether or not the corporation has been doing business within the state.

California’s Presumption Against Non-Compete Agreements Recognized in Delaware

Terms of Employment ContractPreviously on the blog we discussed how non-compete agreements in California are presumed void unless they meet one of two very narrow statutory exceptions. A recent decision from the  Delaware Court of Chancery further emphasized the reach and effect of this presumption by upholding a California employee’s right to contract despite a non-compete agreement in an employment contract governed by Delaware law.

Specifically, in  Ascension Insurance Holdings, LLC v. Underwood et al., the Delaware Court addressed the issue of whether a non-compete provision governed by Delaware law could be enforced against a California-based employee competing against his California-based employer. Ascension Insurance Holdings, LLC v. Underwood et al., C.A. 9897-VCG (Del Ch. January 28, 2015). 

Ascension is a limited liability company incorporated in Delaware, but its principal place of business is in California.  Ascension acquired the assets of another company and as part of the acquisition Underwood entered into agreements not-to-compete with Ascension or its subsidiary Alliant Insurance Services, Inc. (“AIS”), where Underwood had been previously employed.

Underwood allegedly began competing in violation of the agreement’s non-compete, and Ascension sought an injunction seeking to enforce the non-compete against Underwood. The defendants argued that the covenant was not enforceable as it was against the public policy of California. However, Ascension argued that the covenant not-to-compete signed by Underwood contained a Delaware choice of law provision, and therefore the covenant was enforceable.

The Delaware Court of Chancery concluded that California law, not Delaware law, applied. Despite the fact that the employment agreement contained a Delaware choice-of-law provision, the court did not enforce the non-compete agreement and denied the request for an injunction. The court noted that it does not have to automatically defer to the parties’ choice of law selection, but rather examined whether enforcement of the non-compete would conflict with California’s strong statutory policy against non-compete agreements.  In fact, the court found that such a conflict did exist, and it also found that California’s interest in upholding its policy against the enforcement of non-competes outweighed Delaware’s interest in enforcing the non-compete agreement.

The impact of this case is significant in light of the fact that many companies chose to incorporate in Delaware but principally operate in California, and that those companies may also choose to apply Delaware law to their contractual agreements.  A recent report found that out of 211,929 observed businesses nationwide, 54.57% incorporated in Delaware. The next biggest state is New York with 5.15%, followed by California with 4.38%.  The top 10 states make up over 80% of all corporations.

If you have any questions about on-compete clauses, consult with an experienced attorney. Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. Contact us at (310) 277-7747 to see how we can help you.

Enforcing Restrictive Land Covenants

Land Covenant AttorneysRestrictive covenants are contract clauses that  limit a contracting party’s future conduct. A restrictive land covenant prevents certain use of the land. In this article, we will discuss restrictive land covenants, and how to enforce them in California.

In general, restrictive land covenants serve the purpose of enforcing neighborhood presentation standards. These are your restrictive easements, Covenants, Conditions, and Restrictions (“CC&Rs”), and other Home Owner’s Association rules. They can range from mandating where a home owner puts his trash cans to the permissible colors of a home’s façade. Such covenants are typically written into a deed, or at least referenced in the deed and recorded. Nahrstedt v. Lakeside Village, 8 Cal.4th 361 (1994). Restrictive land covenants are usually created by developers of a planned community, and enforced by community representatives or land owners.

Restrictive covenants “run with the land.” This means that they are tied to the property (land), and not to a  specific owner(s). In other words, the limitations of a restrictive land covenant are legally binding for anybody who subsequently buys the property.

A restrictive land covenant is enforceable as long it was recorded, it is being enforced in a fair and non-discriminatory manner, and there is still an individual or group benefiting from it. It can be enforced by any individual land owner who benefits from the restriction, or the collective homeowner’s association if there is one.  (Cal. Civ. Code §5975).

For the most part, homeowner’s associations are the principal enforcers of restrictive land covenants. California’s Civil Code authorizes these types of associations to initiate legal action, defend, settle, or intervene in litigation, arbitration, mediation, or administrative proceedings on behalf of the association membership (Cal. Civ. Code §5980). An association can take action to enforce CC&Rs, resolve issues concerning damage to common areas, and similar land-use matters.

Steps for enforcing a restrictive land covenant will vary based on the planned community. For example, one particular homeowner’s association may have outlined provisions for commencement of an enforcement action. In the absence of a homeowner’s association, the land owner seeking to enforce a restrictive land covenant can sue. A plaintiff in an action seeking to enforce CC&Rs can petition the court for an injunction against the defendant, which would require the defendant to stop non-compliance and seek money damages.

If you have any questions about restrictive covenants, consult with an experienced attorney. Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. Contact us at (310) 277-7747 to see how we can help you.

U.S. Supreme Court Will Hear Takings Clause Case from California

wine-countryIn January 2015, the United States Supreme Court agreed to hear a property case that originated in California dealing with whether the Fifth Amendment of the United States Constitution protects the seizure of personal property as well as real property.

The case, Horne v. U.S. Department of Agriculture, has already been before the United States Supreme Court before. In 2002 and 2003, the U.S. Department of Agriculture (the “USDA”) forced the Horne family to take almost half of its raisin crop off the market to help keep rising prices down. The Horne family sued, arguing that the USDA’s demand amounted to a taking of personal property for which the Horne family was entitled to compensation, just like a taking of real property would. When the case first came before the United States Supreme Court, the Court agreed to hear the case, but its decision did not address whether the government’s raisin marketing order constituted a “taking” of private property.  Instead the Court ruled on a procedural matter, holding that the San Francisco-based 9th U.S. Circuit Court of Appeals had jurisdiction to consider the takings claim, reversing the 9th Circuit’s finding that the claim had to be heard by the Court of Federal Claims.

The case went back to the 9th Circuit Court of Appeals, which ruled that there was no taking because the Takings Clause rule applies only to real property. The Horne family appealed, and the case will go before the United States Supreme Court once again. Horne v. U.S. Department of Agriculture, 750 F. 3d 1128 (2014).

The Takings Clause prohibits the Federal government from taking real property for public use without just compensation. The Supreme Court’s decision in this case can have major implications for business owners and farmers subject to government market orders.  However, the expansion of 5th Amendment protections to personal property could also set the stage for more federal lawsuits and claims that certain government regulations amount to takings of personal property.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business, contract, and real property claims. Contact us at (310) 277-7747 to see how we can help you.

What is a Partition Action?

As a business law firm, we often deal with partnership disputes.  We have shared information on our blog on how to protect against partnership disputes, as well as tips for solving them such disputes.  Unfortunately, not all disputes can be prevented or solved.  In these circumstances, partnerships often dissolve. When that is the case, , and a partition action may be necessary to distribute partnership assets.

In a partition action, known as a partition of partnership property, a court is asked to divide partnership property equally between amongst interested parties. The guidelines for distributing assets in a partition action are set out in California Code of Civil Procedure section 872.010, et seq.  Although most partition actions involve real estate, but the laws of partition actions can be applied to distributing any type of partnership property, such as manufacturing equipment. Specifically, this type of action would be referred to as an action for partition of partnership property.

If a partner wants to file for a partition action, he or she will have to file a complaint with the court seeking a partition action is initiated like any other legal dispute, meaning that the partner would file a complaint in the appropriate court alleging a cause of action for partition of partnership property.  When the action involves real property, the plaintiff will shall also have to record a notice of pendency of the action, called a ““lis pendens,” in the office of with the county recorder of each county in which any real property described in the complaint is located.  Once recorded, the party should file a Notice of Lis Pendens with the court. This will prevent the other partner from selling or taking loans out on the property by putting buyers and lenders on notice of the pending action.

In general, a court will allow a partition unless it is against the interest of the parties. To determine whether the partition is in the best interest of the parties, the court will consider the character of the property and expenses associated with the partition.

If a court finds that a partition is in the best interest of the parties, it will usually order that the business or property be sold and the proceeds be divided amongst the partners. However, sometimes the parties are able to come to a partition settlement agreement, and the court will merely issue a judgment so that the agreement will be enforced.

If you have questions about partition actions or partnership disputes, consult an experienced attorney. Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business, commercial and real property claims. Contact us at (310) 277-7747 to see how we can help you.

Defining Conflicting Terms in a Contract

Conflicting terms in a contract exist when there are certain provisions that cannot each be complied with because performing one would violate another, or where the use and meaning of a particular term or terms varies throughout the contract. This situation can occur  when multiple parties are drafting and revising a contract without carefully reviewing the impact of each change on other portions of the contract, or when conflicting changes are made to a standard form contract that one or more parties are not entirely familiar with, and again, do not carefully review the impact of each change.  Conflicts can also occur when the terms used in the agreement are not defined and are unclear to people unfamiliar with the deal, industry, or product.

For example, sometimes other contracts or documents are alluded to in a contract but not actually defined in the agreement.  A contract could also rely heavily on terms that are defined by industry standards but which are foreign to people outside of the industry. All of these situations cold give rise to potentially conflicting terms, such as a reference to a term where the industry meaning and usage is in conflict with the meaning and use applied  in the contract.

A properly drafted contract will avoid conflicting terms and ambiguities, and, in anticipation of potential conflicts, include clauses which provide rules of interpretation. Contracts can also designate clauses in one portion of a contract to supersede conflicting provisions found in another part of the contract. Almost every contract will have a provision stating that if one provision is in conflict with another, the rest of the contract is still enforceable, and provide how the conflicting terms will be handled.

Also, a contract can very well provide a means for resolving conflicting terms and ambiguities, but still fail to resolve a conflict that arises under an unanticipated or obscure situation. In that situation, the contract parties can turn to California statutes and appellate court cases to find other rules of interpretation.

If you have any questions about conflicting terms in a contract, consult with an experienced attorney. Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business, real estate, construction and property claims. Contact us at (310) 277-7747 to see how we can help you with your business, real estate or construction law needs.

Obtaining a Variance to a Zoning Restriction

In order to build a development, home, or addition that does not comply with local zoning ordinances or restrictions, a property owner or developer must obtain a variance. The exact process of obtaining a variance will vary based on applicable city or county laws, and can vary depending on the scope of the project and the type of variance sought.

For example, there could be different processes or requirements for “residential use” variances versus “residential area” variances.  Generally speaking, there are two types of variances: an “area variance” and a “use variance.” An area variance can be requested by a property owner or developer who is seeking an exception to a regulation dealing with land configuration or physical structure improvements.  A use variance, on the other hand, seeks an exception to the type of use of land permitted by a zoning ordinance or restriction.

Similarly, the process or requirements for residential variances differ as compared to variances for agricultural, industrial, recreational, or commercial property.  Once you have determined the type of variance you will need, the next step will be to contact the local city or county government office that handles development in the area where the property is located.  The local government office will usually have an application that must be completed, and typically require copies of relevant site plans, floor plans, and elevation drawings, as well as the payment of any fees associated with application submission.  Once complete, a city board will review your application and may require public hearings on the application.  If the variance request is denied, there is generally an appeals process.

If you have questions about obtaining a variance, consult an experienced attorney. Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business, real estate, construction and property claims. Contact us at (310) 277-7747 to see how we can help you with your business, real estate or construction law needs.

What Constitutes Doing Business in California?

Even if your business is not based in California, you may be held to certain California filing obligations and tax liabilities if your business meets the legal definition of “doing business” in California.

There are two definitions for doing business in California. One is from the Franchise Tax Board, and determines whether an individual or business will have tax liabilities in California. The other is established by the California Corporations Code, and it determines what corporate filing obligations an out-of-state business will have with the California Secretary of State.

Doing Business in California According to the Franchise Tax Board

According to the Franchise Tax Board, doing business in California consists of “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” An out-of-state entity is treated as “doing business” in California if:

  • The entity is commercially domiciled in California (meaning the entity is controlled in California, like a headquarters);
  • Sales in California exceed the lesser of $500,000 or 25% of the entity’s total sales;
  • The entity has real or tangible property in California exceeding the lesser of $50,000 or 25% of the entity’s total real and tangible property; or
  • The amount paid in California by the entity for compensation exceeds the lesser of $50,000 or 25% of the total compensation paid.

If none of those situations apply, an entity organized in a jurisdiction outside of California could still be considered to be doing business in California if it is a member or general partner of an entity that does business in California, or if any of the entity’s members, managers, or other agents conduct business in California on behalf of the entity.

Doing Business in California According to the California Corporations Code

Under the California Corporations Code, “doing business” is referred to as “transact[ing] intrastate business,” which is defined as “entering into repeated and successive transactions of its business in [California], other than interstate or foreign commerce.” An entity might need to register with the California Secretary of State if it meets this definition. However, the application and meaning of this definition differs from entity to entity. Because of this varied application, it is best to consult with an experienced business attorney to determine your precise tax liabilities  and filing obligations.

Ezer Williamson Law provides a  wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law needs.