Sandy Brower of Sullivan Wertz McDade & Wallace says development is a privilege, not a right. (photo/alandeckerphoto.com)

If it is true, as Woody Allen once said, that the world can be seen as a giant restaurant, then real estate is bread, the staff of life. Unlike bread, real estate has no fixed value: its worth is whatever the market will bear. Real estate hits us where we live: the couple sees The Money Pit and “falls in love with it.” In “A Charlie Brown Christmas,” Lucy says she never gets the present she really wants — real estate.

Out of necessity, lawyers have to look less romantically at what in law school hypothetically is called Blackacre, mindful of its downside potential. The land is polluted. You’re blocking the neighbor’s view. They want to build the new elementary school in your swimming pool. “Starting from when the project is still on the drawing board, there can be significant litigation right out of the gate,” says John Yacovelle, partner and leader of the construction, environmental, real estate and land use litigation practice group of Sheppard, Mullin, Richter & Hampton.

Title, including a raft of issues relating to the control and disposition of the property, should be established prior to building. “You’ve got to buy the dirt and frequently one developer is selling to another, and you get litigation around the specific performance of the deal,” says Yacovelle.

Sometimes a developer doesn’t want to buy a property until all the title issues are resolved. So the buyer can enter into an agreement to place money in an escrow account for a few years while the title problems are being resolved.

“A lot of things can happen in the meantime, like the seller seeing that this property is worth a lot more than it was two years ago, and if there’s any way to get out of it he’s going to try so they’ll look for some kind of contractual loophole,” says Yacovelle.

Or, even though there is a “deal,” it can change depending upon which party can gain leverage as the deal goes forward. A “sunset” clause can be inserted to set a deadline for something to be done (i.e., title must be cleared up) before the deal is completed. “(The deadline) rolls around and the seller secretly wants out of the deal because he thinks he can sell it for more,” Yacovelle says. “The buyer wants the property. Does he waive the requirement that the property be fully entitled, or does he negotiate an extension of the sunset?”

John Yacovelle, partner of the Sheppard, Mullin, Richter & Hampton law firm, says there can be significant litigation on a development right from the start. (photo/alandeckerphoto.com)

Once the developer has title, he is subject to a long list of objections.

“Development is a privilege, it’s not a right,” says Sandy Brower, an expert in eminent domain litigation at Sullivan Wertz McDade & Wallace. “From a fence to a 20-story high rise, you have to get a permit, and many permits to build residential today are ‘discretionary’ in that they do not have to grant what the developer wants in terms of density, size, height, placement, all the way down to architecture and color.”

City approval does not mean the developer is out of the woods. “Neighboring owners might not like the development, so opponents sue the city and the developers (on the grounds that) you didn’t comply with a provision of the building code or the environmental review that’s required,” Brower says. In California, the Environmental Quality Act provides “fertile ground” for opponents of development.

The real estate practitioner’s task is to keep track of the various constitutional, federal, state and local roadblocks to development depending on which side he’s on.

For example, Brower specializes in cases where the government (or redevelopment district, or school district) wants to seize property. Though the owner is unlikely to stop the railroad from coming through, he wants just compensation.

“There are disputes over what fair market value is, because appraising isn’t an exact science,” Brower says. “One appraiser will opine one value, and another will opine something else, and it’s complicated by the escalation in the real estate market, because it’s hard to keep tuned in to what the market is when it goes up every few months.”

The real estate market also exercises a profound effect on the parties’ appetite for litigation.

“Right now, we’re in one of the biggest real estate economies California has ever seen,” says Roger Haerr, partner at Luce Forward Hamilton & Scripps and leader of the firm’s construction practice. “When there’s money to be made, people tend not to have as many disputes; there are more suits in bad times.”

Not only is there more to be gained in good times by going through with a transaction than fighting about it, but a possible plaintiff such as a homeowner with a construction defect doesn’t want the claim on his property’s record. “It hurts the property’s value,” says Haerr, “plus, if I have to disclose the defect, I’ll sell it for less.”

The last major real estate downturn uncorked a flood of new home construction defect litigation in California that required legislation to dam up. “In San Diego County in the early ’90s there wasn’t a single condo project that hadn’t been sued, according to the BIA,” Haerr recalls.

Resulting legislation, Senate Bill 800, took effect in 2003 and gave defendant developers a “right of repair” before plaintiffs could get standing in state court.

“I’m not sure you can say it’s had any great impact on the condo market,” says Yacovelle. “The growth in the condo market may be based more on the reality that there’s a great demand and limited supply. Plus, bringing a construction defect suit has the impact of tying up your property for however long you’re in it. If times are good it really doesn’t help to have that issue sitting out there on the title.”

The developers’ new bête noire is a federal act called the Real Estate Settlement Procedures Act, or RESPA. RESPA is a consumer protection statute designed to eliminate kickbacks and referral fees from title companies to developers that increase the cost of title insurance.

Bill Reavey, a real estate attorney at Higgs Fletcher & Mack, says developers have to establish procedures to prove they are not the recipients of illegal inducements. (photo/alandeckerphoto.com)

Bill Reavey, a real estate attorney at Higgs Fletcher & Mack who represents developers, says “because (developers) don’t want to violate the act, they have to establish procedures that prove they are not the recipients of illegal inducements.”

Developers have exposure because “title insurance companies come to them and offer inducements to try and steer business to one company or another,” Reavey says. In February, California Insurance Commissioner John Garamendi started an investigation of title insurance firms alleged to be involved in kickback activities.

In the meantime, real estate law practitioners are watching an imaginary sphere called “the bubble.”

“I’m anticipating that the bubble will pop. When? I wish I knew,” Reavey says. “My son is interested in buying a place to live and I was trying to tell him not to do it because I thought he’d get caught in the bubble — but he didn’t listen to me.”