BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 728|
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THIRD READING
Bill No: AB 728
Author: Leno (D)
Amended: 8/26/03 in Senate
Vote: 21
SENATE LOCAL GOVERNMENT COMMITTEE : 7-0, 7/9/03
AYES: Torlakson, Ackerman, Hollingsworth, Machado,
Margett, Perata, Soto
SENATE JUDICIARY COMMITTEE : 6-0, 8/19/03
AYES: Escutia, Morrow, Ackerman, Cedillo, Ducheny, Kuehl
NO VOTE RECORDED: Sher
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR : 74-0, 5/22/03 (Passed on Consent) - See
last page for vote
SUBJECT : Real estate: condominiums: financing
SOURCE : Author
DIGEST : This bill makes it easier for developers to
finance condominium projects by allowing them to (1)
pre-sell individual condominium units earlier in the
development process, and (2) retain enough of the buyer's
deposit to cover actual damages suffered when a buyer of a
pre-sold unit defaults on the contract. To accomplish the
second of these goals, the bill establishes an exception to
the existing "liquidated damages" statute for contracts for
the sale of residential property.
CONTINUED
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ANALYSIS : The Subdivision Map Act regulates the division
of property, requiring a subdivision's design and
improvements to be consistent with the local general plan.
The Subdivision Map Act spells out the subdivider's duties
as well as the requirements that a city or county must
follow when reviewing and approving a proposed subdivision.
The Subdivided Lands Act is a consumer protection law that
regulates the sale of subdivisions and ensures public
disclosures.
A 2002 report for the San Francisco Chamber of Commerce
contended that state laws hamper developers from getting
favorable financing for building attached housing,
particularly condominiums. Builders and lenders say that
constructing attached housing is financially riskier than
standard subdivisions. The San Francisco Chamber of
Commerce's report argued that statutory changes that cut
the risk of building attached housing could boost condo
construction and increase homeownership.
Changes to existing law :
Existing law provides that, in a contract for the sale of
residential property, a provision allowing the seller to
retain some or all of the buyer's deposit as "liquidated
damages" if the buyer defaults on the contract must satisfy
one of these conditions:
1. If the amount paid does not exceed three percent of the
purchase price, the provision is valid unless the buyer
establishes that the amount is unreasonable as
liquidated damages.
2. If the amount paid exceeds three percent of the purchase
price, the provision is invalid unless the seller
establishes that the amount is reasonable as liquidated
damages.
This bill would provide that, when a buyer has paid more
than three percent of the purchase price under a liquidated
damages clause in a contract to purchase a newly
constructed attached condominium unit, and later defaults
on the contract, the seller shall:
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1. Account for its costs and revenues fairly allocable to
the construction and sale of the unit, including costs
related to the buyer's default, within 60 days of the
unit's final sale.
2. Make reasonable efforts to mitigate any damages arising
from the default.
3. Refund to the buyer any amount in excess of either three
percent of the purchase price or the seller's actual
damages suffered as a result of the buyer's default,
whichever is greater.
This bill further would provide that, if the amount
retained by the seller after the accounting does not exceed
three percent of the purchase price, the amount is valid
unless the buyer establishes that the amount is
unreasonable.
This bill further would provide that if a "newly qualified
buyer" contracts to purchase the property in question for
the same price or a higher price than the defaulting buyer
had contracted to pay, the accounting of any actual damages
shall be performed within 60 days of the execution of the
new contract.
This bill further would define a "newly qualified buyer" as
one who (a) has contracted to pay a purchase price equal to
or greater than that contracted for by the original buyer;
and (b) has been issued a satisfactory loan commitment, as
defined.
Existing law, the Subdivided Lands Act, allows for the sale
of residential units in specified multiple-unit
developments prior to the completion of construction once
the Commissioner of Real Estate has issued a conditional
public report on the project.
Existing law further provides that the term of a
conditional public report shall not exceed six months, and
may be renewed for one additional term of six months, if
the commissioner determines that the requirements for
issuance of a public report are likely to be satisfied
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during the renewal term.
This bill would provide that the term of a conditional
public report for attached residential condominium units
consisting of 25 units or more shall not exceed 30 months,
and may be renewed for one additional term of six months if
the commissioner determines that the requirements for
issuance of a public report are likely to be satisfied
during the renewal term.
Existing law, the Subdivision Map Act, provides that a map
of specified multiple-unit dwellings need not show the
buildings or the manner in which they are configured, and
that the governing body may not refuse approval of a
parcel, tentative or final map of the project based on the
absence of this information.
This bill would provide that a map need not include a
condominium plan or plans, as defined, and that the
governing body may not refuse approval of a map on account
of the absence of a condominium plan.
This bill further would provide that, once a tentative map
is deemed approved, a subdivider shall be entitled, upon
request of the local agency or the legislative body, to
receive a written certification of approval.
Comments
Stated need for legislation to create exception to
liquidated damage law . According to the author, AB 728
would help condominium development by making it easier for
developers to obtain larger buyer deposits on pre-sold
condo units, and then using those deposits to obtain bigger
construction loans at better terms.
Under existing law, a sales contract for residential
property may require the buyer to pay the seller
"liquidated damages" if the buyer fails to complete the
deal. Liquidated damages are a predetermined amount of
money damages, often paid as a pre-sale deposit on
residential property, that the seller may retain upon
breach of contract when the exact amount of actual damages
from the breach would be difficult to determine.
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Current law presumes that a provision for liquidated
damages in an amount up to three percent of the purchase
price of the property is valid, placing the burden on the
buyer to show that the amount is unreasonable. When a
contract provides for liquidated damages exceeding three
percent of the purchase price, the provision is presumed
invalid unless the seller shows that the amount is
reasonable.
Some builders say that California's three percent limit on
liquidated damages makes it more difficult to obtain
attractive financing terms for condominium projects. Since
the amount of a buyer's deposit that a seller may retain if
the buyer defaults is fairly low, sellers must obtain more
financing at less attractive terms than they would if funds
from pre-sold units were more reliable, instead of being
subject to refund upon buyer default. Builders note that
other states have either higher caps, or no caps at all, on
the amount of a deposit that may be retained as liquidated
damages when a buyer defaults on a contract.
An earlier version of this bill would have done away with
any caps on liquidated damages clauses in contracts for the
purchase of newly constructed condominiums. In response to
arguments that this would unfairly shift the risk of
construction from developers and banks to home purchasers,
however, the bill has been amended to establish a new
process for determining damages when a buyer defaults on a
contract to purchase a newly constructed condominium.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
SUPPORT : (Verified 8/26/03)
San Francisco Chamber of Commerce
California Building Industry Association
California Mortgage Bankers Association
Home Ownership Advancement Foundation
Key Bank Real Estate Capitol
Bank One
Bank of America
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ASSEMBLY FLOOR :
AYES: Aghazarian, Bates, Benoit, Berg, Bermudez, Bogh,
Calderon, Campbell, Canciamilla, Chan, Chavez, Chu,
Cogdill, Corbett, Correa, Cox, Diaz, Dutra, Dutton,
Dymally, Firebaugh, Frommer, Garcia, Hancock, Harman,
Haynes, Jerome Horton, Shirley Horton, Houston, Jackson,
Keene, Kehoe, Koretz, La Malfa, La Suer, Laird, Leno,
Leslie, Levine, Lieber, Liu, Longville, Lowenthal,
Maddox, Maldonado, Matthews, Maze, McCarthy, Montanez,
Mountjoy, Mullin, Nakanishi, Nakano, Nation, Negrete
McLeod, Oropeza, Pacheco, Parra, Pavley, Plescia, Reyes,
Richman, Ridley-Thomas, Runner, Salinas, Samuelian,
Spitzer, Steinberg, Strickland, Vargas, Wiggins, Wolk,
Wyland, Yee
LB:sl 8/26/03 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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