Be Careful in Executing a Third-Party Easement While under a Contract to Sell: Real Estate Contract Rescinded Because Power Line Easement Executed without Buyer's Knowledge

A buyer was entitled to rescind a real estate contract after the seller negotiated and executed a power line easement without the buyer's knowledge, according to a recent decision from 9th Circuit. Applying California law, the court held that the easement, which continued to exist for more than five months after the scheduled closing date, constituted a breach sufficient to permit the contract's rescission.

Toll Brothers, Inc. entered into a purchase and sale agreement (PSA) in which the Lins agreed to sell Toll-a national homebuilder- parcels of land in Dublin, California. The land in dispute was scheduled for closing on June 30, 2007.

Without consulting Toll, the Lins negotiated and executed a temporary easement to Pacific Gas & Electric Company (PG&E) for overhead power lines. Throughout 2007, the Lins attempted to get the easement extinguished, but PG&E did not quitclaim the power line easement back to the Lins prior to the scheduled closing. With the easement still conveyed to PG&E, and no knowledge or reasonable expectation of when it would be extinguished, Toll terminated the PSA in December 2007, more than five months after the specified closing date.

In Toll Bros., Inc. v. Chang Su-O Lin, 615 F. Supp. 2d 1100 (N.D. Cal. 2009) [enhanced version], the district court found that the Lins' grant of an easement did not constitute a breach of the PSA because it did not interfere with Toll's planning for the area. However, the 9th Circuit reversed in Toll Bros., Inc. v. Chang Su-O Lin, 2011 U.S. App. LEXIS 2303 (9th Cir. Cal. Feb. 3, 2011) [enhanced version / unenhanced version available from lexisONE Free Case Law]. The 9th Circuit held that:

Our decision that the power line easement constituted a breach of the PSA is not based solely on the inability of the Lins to deliver unencumbered title on the scheduled closing date. Indeed, Toll did not rescind because the Lins had not cured the defect in title by the closing date specified in the PSA. Instead, Toll waited over five months beyond the scheduled closing before rescinding the contract. Moreover, despite the fact that the Purchase Sale Agreement gave the Lins the option to extend closing in order to cure a breach of contract, the Lins made it clear prior to the scheduled closing on June 30, 2007, that they would not extend closing. . . .

Significantly, the dispute created by the power line easement was of the Lins own making because they chose to violate the Purchase Sale Agreement by conveying an easement to PG&E without Toll's knowledge or consent and without requiring a termination date on the conveyed easement. Moreover, the breach created by the power line easement was . . . "of uncertain and unspecified duration." . . . [T]he Lins were unsuccessful in extinguishing the easement and could not provide a date-certain as to when the easement would be extinguished. While the dissent argues, with the benefit of hindsight, that the easement had "no practical impact," it ignores the fact that, when Toll rescinded the contract, it did not know when or if the easement would be extinguished, or if doing so would require legal action.

(citations omitted)

Additional Resource:

10-104 California Real Estate Guide: Litigation and Transactions § 104.23 Rescission (Purchase this treatise at the LexisNexis Store) ( customers can access this treatise directly)


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