Category: Real Estate

Chicago’s Willis Tower – No Longer the Highest Roof in the Western Hemisphere

Well, it had to happen someday. Though Chicago’s Willis Tower hasn’t held the honor of being the world’s tallest building since 1998 and dropped off the world’s 10 tallest list in 2016, the famous 1973 skyscraper had still held on to the claim of tallest roof height in the Western Hemisphere. Until now. As reported in Curbed Chicago on July 29, New York’s Central Park Tower overtook the 1,453-foot-tall Chicago icon on its way to an eventual final roof height of 1,550 feet.

Roof height took on special importance among Chicago skyscraper fans in 2013 when Willis officially lost its status as the tallest building in the U.S. to New York’s One World Trade Center under somewhat contentious circumstances. Despite the East Coast skyscraper’s considerably lower 1,368-foot roof, it managed to dethrone the Chicago tower by using a 1,776-foot-tall decorative spire. The twin antennas of Willis, however, were determined not to count toward official building height, per the Council on Tall Buildings and Urban Habitat rules.

 

© 2019 BARNES & THORNBURG LLP
For more in building-related news, see the National Law Review Construction Law page.

New Website Designed to Avoid Eviction Proceedings: Hello Landlord from BYU, the University of Arizona & SixFifty

In an attempt to mitigate the devastating effects of being evicted, BYU Law, the University of Arizona James E. Rogers College of Law and SixFifty, a subsidiary of the law firm Wilson Sonsini, created Hello Landlord, a bilingual web-based tool designed to facilitate communication between tenants and landlords. Hello Landlord is the result of a semester-long collaboration between BYU’s LawX Legal Design Lab and University of Arizona Law’s Innovation for Justice program.  The Innovation for Justice program challenges law students to think critically about the power of the law and technology, and encouraging students to be disruptive problem-solvers in the changing world of legal services. After time spent studying the issue and problem of eviction, the students helped develop Hello Landlord as a creative, practical solution to landlord-tenant communication problems which ideally will avoid traditional legal mechanisms, such as going to court.

The Problem of Eviction: Law Students Study the Issue from All Angles

In order to create this tool, the students in the BYU Law Design Lab studied evictions from a variety of angles, questioning the assumptions commonly made and interviewing a broad spectrum of individuals involved in the process in order to understand the issue.  To do this, the students took their diverse perspective to the problem, observing over 200 eviction court proceedings and speaking with landlords, tenants, social services providers, attorneys, and journalists.  The broad net cast by the students enabled them to see the multiple facets of the issue and identify a proactive solution–facilitating communication between landlord and tenant to cut off the eviction procedure before it begins. Because once the eviction process starts, it’s unlikely to stop.

The findings related to the landlords were surprising.  Kimball Dean Parker, the President of SixFifty, the technology subsidiary of Wilson Sonsini Goodrich & Rosati, said, “I came in very skeptical of landlords thinking like so many evictions and there must be some issue with landlords. And actually when we looked at it, I think the landlord’s really became very sympathetic characters.”  The research pointed out that landlords were open to negotiation.  In fact, landlords hated filing for evictions; it was unpleasant and it weighed on the landlords psychologically.  Parker said, “One landlord cried on the phone to us talking about the emotional toll of filing an eviction . . . so landlords don’t want to do this and actually will work a lot with a tenant to avoid filing an eviction.”

Evictions can be incredibly damaging with consequences that create a ripple effect.  According to EvictionLab.org,  beyond the obvious of eviction causing a family to lose their home, it also involves losing possessions, children changing schools and loss of community, and a court record–making it more difficult to find housing as many landlords do a search for past evictions.  Evictions can impact employment, with the strain leading to more mistakes on the job, and eviction can impact mental health, leading to higher rates of depression, for example. In short, if landlords and tenants can reach some kind of agreement–even if it involves the tenant leaving voluntarily–the situation would be better for everyone.

Hello Landlord: An Automated Tool to Encourage Communication and Designed to Avoid Eviction Proceedings

The issue, according to Parker is simple: tenants don’t know what to say to their landlord and when faced with the inability to pay the rent, often the first impulse is to duck, hide and avoid the problem.   The situation is made more complicated because of embarrassment and shame and the  “official” nature of the contractual rental relationship.  Parker says, “A  lot of tenants we talked to were like, I don’t even know what I’m supposed to say to my landlord.”  Enter Hello Landlord.  This is a web-based tool available in both English and Spanish, asks the tenant a series of questions about their situation, helping them create a letter which addresses their issues with their landlord, from repairs that need to be taken care of to missed rent payments.  By asking a series of direct questions, the tool automatically generates a letter that strikes a professional, business-like tone designed to address the tenant’s issue(s). Kimball says, “We wanted to go upstream with the issue.  If we can help the tenants communicate with the landlords, the landlords want the tenant to communicate. And if the tenants do that, then the landlords will work with them.”

A tenant can use Hello Landlord to explain that an unforeseen medical expense, for example, leaves them unable to pay their rent, and the tool will ask a series of questions about how much rent the tenant can pay, and on what timeline–then constructs a letter offering the alternative schedule to the landlord.  Importantly, Hello Landlord crafts the response in such a way to indicate that the tenant is proposing a solution, but is also open to discussion, creating a dialogue that will hopefully lead to a successful resolution instead of an eviction.  Kimball says, “ the real work was to get the tone right in the letter. . . we really zeroed in on what a landlord wants to hear, which is like, they want an explanation that makes sense and, and that, that creates empathy for the tenant. ”  In fact, Kimball relates that of the landlords surveyed, 95% indicated they would work with tenants who presented them a letter like the one generated by Hello Landlord.

Another aspect of  Hello Landlord, according to Kimball is “that these letters are not jurisdiction specific. Somebody in South Carolina or somebody in Seattle could use this.” This greatly enhances its usefulness, and since it lives on the internet, it is available to all who know the URL.

During the testing process, tenants responded very positively.  A lot of the tenants were so enthusiastic, and they wanted to jump right in.  Kimball said,  “we ended up like generating letters, in real time that they could use.” The founders were encouraged by this reaction,  as it demonstrates the urgency of the problem Hello Landlord was designed to address. To more systematically test out the program, the Innovation for Justice program received grant funding from the Agnese Nelms Haury Program in Environment and Social Justice to conduct further research and implement Hello Landlord.

While further research and testing play out, anecdotally it’s hard to see the downside of this creative and practical solution.  Hello Landlord is widely available, easy to use and provides an important service, making it a great opportunity for everyone involved.

 

Copyright ©2019 National Law Forum, LLC.
This post was written by Eilene Spear of National Law Forum, LLC.
Read more real estate news on our real estate type of law page.

Avoiding Commercial Lease Disputes – Clearly Reflecting the Intent of the Parties is Key!

A commercial lease symbolizes a consensual relationship between parties that can be enduring and rewarding, or short-sighted and emotionally and financially taxing.

Entering into a clearly drafted lease agreement at the outset of the relationship helps to set expectations, which minimizes the possibility of disputes over how the lease should be interpreted.

However, not all commercial leases are clearly drafted, and disputes often arise between the parties over such issues as:

  • How the property can be used,
  • Who has responsibility for maintaining the property,
  • Effect of short term non-payments of rent caused by factors beyond the control of the tenant or just sheer forgetfulness, and
  • Who gets what when the lease terminates.

Disputes can also arise over the interpretation of provisions in commercial leases which deal with insurance coverage and liability of the parties.  Commercial leases typically include provisions which require one or both of the parties to have and maintain property and liability insurance policies with specific amounts of coverage.  These clauses also may include provisions which address the responsibility of the parties for damages or personal injuries.

Insurance and liability clauses are very important, and clearly drafting such clauses when the lease is created can minimize disputes between the parties regarding their obligations and liabilities under the terms of the lease.  Understanding how North Carolina Courts interpret such clauses may help the parties draft clear and unambiguous provisions which will set appropriate expectations and minimize the risk of future disputes between the parties.

The North Carolina Supreme Court recently published an opinion which addresses this issue and provides guidance on how the North Carolina courts should interpret insurance and liability provisions in commercial leases.  On December 7, 2018, the North Carolina Supreme Court reversed a decision of a divided panel of the North Carolina Court of Appeals in the case of Morrell v. Hardin Creek, Inc.  The issue decided by the Court was whether the insurance and liability provisions of a commercial lease operated as a complete bar to the tenant’s claims for damage against the landlord and other defendants.  In a split decision, the Court determined that the clear and unambiguous language of the subject lease indicated that the parties intended to discharge each other from all claims and liabilities resulting from hazards covered by insurance.

In Morrell, the tenant was in the business of manufacturing and distributing specialty pasta.  The tenant entered into a commercial lease for a building located in Boone, North Carolina.  During the term of the lease, an inspection of the premises found that modifications needed to be made to the building in order for the building to comply with state regulations regarding the production of food.

The lease contained a provision which allowed the tenant to alter or remodel the premises.  That provision also included language which stated that the parties agreed to discharge each other from all claims and liabilities arising from or caused by any hazard covered by insurance regardless of the cause of the damage or loss.  The landlord agreed to make the modifications in exchange for an extension in the term of the lease.  The project was completed but later discovered to be in violation of certain building code provisions related to fire sprinkler systems.

The violations were discovered when the sprinkler pipes burst and flooded the premises.  The flooding destroyed the tenant’s inventory and specialty equipment.  The tenant sued the landlord for negligence and other claims relating to the damages.  The landlord moved for summary judgment and asserted that the damages discharge clause in the provision of the lease which allowed the remodeling barred all of the tenant’s claims against the landlord.

The trial court agreed with the landlord and dismissed the complaint with prejudice.  On appeal, a divided panel of the North Carolina Court of Appeals reversed the decision and held that the provision of the lease was ambiguous in that it did not clearly reflect the intention of the parties to bar negligence claims.  The landlord filed an appeal to North Carolina Supreme Court based on the dissent in the Court of Appeals and for discretionary review of additional issues, which the Court allowed.

In its analysis of the case, the North Carolina Supreme Court discusses well-established principles of North Carolina law regarding the interpretation of contracts and, more specifically, provisions in contracts which exempt parties from liability ­­– so-called “exculpatory” clauses.  The Court cites to prior decisions which held that the intent of the parties is the deciding factor in contract interpretation cases.

Also, the Court states that contract provisions which exempt individuals from liability for their own negligence are not favored in the law.  As a result, such provisions will not be construed to exempt a party from liability for its own negligence or the negligence of those acting for that party in the absence of explicit language clearly showing that this is the intent of the parties.

So, when a provision that exempts a party from liability for its own negligence is well drafted, and the intention of the parties is clearly and unambiguously shown, the provision exempting the party from liability will be upheld.

With regard to the exculpatory language of the lease in question in Morrell, the tenant acknowledged the broad and expansive nature of the language while also arguing that the breadth of the clause did not satisfy the general rule that such clauses must contain explicit language which clearly shows the intent of the parties to exclude liability.  The Court was not persuaded and stated,

[Tenant’s] chameleonic construction of this contractual language is unworkable.  Given the ‘broad and expansive’ nature of the phrase ‘all claims and liabilities . . . regardless of the cause of damage or loss,’ it is a challenging exercise to conjure up language in an exculpatory clause that would meet [tenant’s’] implied standard for unambiguity regarding waiver of negligence-based claims other than to require such a waiver to explicitly mention the term ‘negligence.’

The parties had agreed that the hazard of flooding which caused the tenant’s damages was covered by insurance.  For this reason, the Court found that the exculpatory language of the lease barred the tenant from bringing an action against the landlord for all claims and liabilities caused thereby, including business losses.

The tenant also argued that the exculpatory provision was limited by language contained in another provision of the lease which required the tenant to maintain insurance and to indemnify the landlord.  The Court stated that, in effect, the tenant was asking the Court to add limiting language to the exculpatory clause based on inferences made from the separate insurance clause.  The Court rejected the argument and stated,

This Court cannot creatively interpret the parties’ actual lease agreement in the manner urged by [tenant], and must instead enforce the parties’ intent as evidenced by the clear and explicit language of the lease.

The Court was very clear that North Carolina Courts must enforce contracts as written and may not, under the pretext of construing an ambiguous term, rewrite the contract for the parties.

The bottom line is that disputes over the interpretation of provisions in commercial leases can potentially be avoided if issues like the one describe in Morrell are thoroughly addressed and the intention of the parties is explicitly and unambiguously stated in the lease.

As always, those who need assistance with drafting commercial leases, or with a dispute over the interpretation of the terms of a commercial lease, should consult an attorney who is experienced in the area of drafting commercial leases or litigating commercial disputes.

 

© 2019 Ward and Smith, P.A.. All Rights Reserved.
This post was written by Eric J. Remington of Ward and Smith, P.A.
Read more on commercial lease agreements on the National Law Review’s Real Estate page.

Recent Utah Decision Enforces the Importance of Eminent Domain Provisions In Commercial Leases

A recent Utah case serves as a cautionary tale of the importance of eminent domain provisions in commercial leases. In Utah Dep’t of Transportation v. Kmart Corp., 2018 UT 54, 428 P.3d 1118, the Utah Supreme Court examined a provision in Kmart’s shopping center lease which provided the lease terminated if eminent domain left Kmart’s “points of ingress and egress to the public roadways…materially impaired.” In 2010, the Utah Department of Transportation (“UDOT”) condemned property which provided access to the property Kmart leased. Both Kmart, as tenant, and its landlord, FPA, sought compensation from UDOT for the condemnation of the access point. In 2012, the Utah Supreme Court held that Utah’s just compensation statute required courts and appraisers to determine the value of a condemnation award for each party’s property interest separately using the “aggregate-of-interests approach” and remanded it to the district court for further proceedings. Upon remand, after review of separate appraisals of FPA’s and Kmart’s respective property interests, the district court determined UDOT’s condemnation “materially impaired access and caused the [l]ease to terminate” and awarded Kmart $1.4 million plus interest. UDOT appealed.

On appeal, UDOT urged the Utah Supreme Court to adopt the “termination clause rule” which had been adopted by other jurisdictions. Under that rule, when a lease’s termination clause is triggered, the tenant loses its claim to just compensation because any of the tenant’s continuing interest in the leased property is extinguished.

Kmart argued the 2012 Utah Supreme Court decision, where the “aggregate of interests” approach was adopted, rendered UDOT’s “termination clause rule” argument meaningless. Kmart argued that a condemnation clause’s sole purpose is to determine the landlord’s and tenant’s separate shares of condemnation awards. Because the “aggregate of interests approach” determined the value of each party’s interests separately, there was no reason to contract for each party’s share of the award. Thus, said Kmart, the condemnation clause in its lease should have no effect.

The Utah Supreme Court disagreed with Kmart and instead adopted UDOT’s “termination clause rule.” In rejecting Kmart’s argument, the court explained the “aggregate of interests” rule addressed only the value of a party’s property interest. In contrast, the “termination clause rule” dictated whether a tenant even had a property interest following condemnation. Put another way, the “termination clause rule” determines what is owned where the valuation method determines what is owed.

In examining Kmart’s lease, the Utah Supreme Court determined the termination clause was triggered when condemnation left “points of ingress and egress to the public roadways…materially impaired.” Because the district court already concluded UDOT’s taking left access “materially impaired,” the termination clause—in terminating Kmart’s lease—extinguished Kmart’s property interest. Consequently, the Utah Supreme Court held Kmart was not entitled to just compensation since it no longer had an interest in the property.

Issues relating to condemnation clauses in leases have also arisen in Wisconsin. In 1980, the Wisconsin Supreme Court tacitly acknowledged that it had “become customary” to include condemnation clauses in leases. Like Utah, Wisconsin courts hold that these clauses can terminate the tenant’s interest and bar any claim the tenant would have had to a portion of a just compensation award.

The importance of reviewing condemnation clauses in leases is often undervalued. Unclear drafting of condemnation clauses may also result in landlords having to share condemnation proceeds with tenant. Maxey v. Redevelopment Auth. of Racine, 94 Wis. 2d 375, 288 N.W.2d 794 (1980). Clauses that fail to contemplate Wisconsin’s specific eminent domain rules can also result in the inability of landlords to collect attorney fees. Van Asten v. State, 214 Wis. 2d 135, 571 N.W.2d 420 (Ct. App. 1997).

The Kmart case serves as a warning as to the drastic effects that a condemnation clause can have on the compensation of leasehold interests in a condemnation. To avoid the potentially devastating results of a poorly worded condemnation provision, landlords and tenants should request their real estate attorneys review the condemnation provisions in their leases to confirm that their rights are adequately protected.

 

©2019 von Briesen & Roper, s.c
This post was written by Joseph J. Rolling of von Briesen & Roper, s.c.
Read more real estate news on NLR’s Real Estate type of law page.

Update to Price Gouging Prohibitions in Disaster Zones in California

California’s 2017 wildfire season – which caused at least 47 deaths, and destroyed approximately 1.4 million acres of land and 11 thousand structures – was unprecedented at the time, both in scope and destruction. Following the 2017 wildfire season, the pricing of consumer goods and services – which is normally best left to the marketplace under ordinary conditions – experienced abnormal market disruptions, both at the state and local-levels. This led to increased complaints of unlawful “price gouging” for goods and services offered in markets affected by wildfires, including rental housing.

As a result, in January, 2018, the California Committee on Public Safety introduced Assembly Bill (AB) 1919, which amends §396 of the CA Penal Code (California’s price gouging statute).

AB 1919 went into effect on January 1, 2019, and applies to owners/landlords of residential homes, as well as owners of multifamily and hotel properties. Following is a summary of a number of significant restrictions on residential landlords’ ability to increase rents following a disaster under the new law.

PRIOR LAW DID NOT COVER NEW RENTAL UNITS

Under prior law, following a declared state of emergency (either at the State or local level), an owner/landlord could not increase an existing tenant’s rent by more than 10% for a period of 30 days following the declared state of emergency. The prior law did not, however, cover new rental units coming on line during or immediately following a declared state of emergency, nor did it address when (i) a declared state of emergency was extended, or (ii) the Governor or another local authority extended the prohibition on price gouging during a declared state of emergency (both of which happened in each of the past two California wildfire seasons).

Following the 2017 wildfires, these “loopholes” resulted in numerous complaints of unlawful price gouging, with owners of residential housing exploiting the marketplace/displaced residents by increasing existing tenants’ rents by up to 35% following the expiration of the initial 30-day period, or relocating from their homes and offering the same as rental housing at well-above market rent prices. AB 1919 seeks to close such loopholes.

NEW LAW LIMITS THE INCREASE OF RENT ON NEW AND EXISTING UNITS

Under the new law, following a declared state of emergency, an owner/landlord cannot (i) increase an existing tenant’s “rental price” by more than 10% of the then-current rent, or (ii) increase the “rental price” advertised or offered to prospective tenants by more than 10% of the “rental price” advertised or offered to prospective tenants prior to the declared state of emergency, in each case for a period of 30 days following the declared state of emergency or for any period of time that such declaration is extended.

The statutory definition of “Rental Price”, which provides guidance on the various caps on rent increases, is as follows:

  1. For housing rented within one year prior to the declaration of emergency, the “Rental Price” is the actual rent paid by the existing or prior tenant.
  2. For housing not rented at the time of the declaration, but rented, or offered for rent, within one year prior to the declaration, the “Rental Price” is the most recent rent offered before the declaration.
  3. For housing rented at the time of the declaration but which (i) becomes vacant during the declaration, and (ii) is subject to any local ordinance/rule that establishes a maximum amount that a landlord may charge a tenant [e.g., rent control], the “Rental Price” is the greater of (A) the actual rent paid by the prior tenant, or (B) 160% of the “Fair Market Rents” (FMRs) established by the U.S. Department of Housing and Urban Development (FMRs for all counties are posted on the HUD website).
  4. For housing not rented and not offered for rent within one year prior to the declaration, the “Rental Price” is 160% of fair market rent per HUD.

Note that the new law allows owners/landlords to increase the cap on rent increases from 10% to 15% under certain circumstances, including if such owners/ landlords incur costs for furnishing previously un-furnished rental units.

Note also that the new law prohibits vendors or suppliers of building materials (i.e., lumber, construction tools, windows, and anything else used in the building or rebuilding of property) from increasing the cost of such materials by more than 10% for a period of 30 days following a declared state of emergency (with certain exceptions for actually-incurred costs).

In addition, the new law prohibits contractors working on residential or commercial projects from increasing prices for any repair or reconstruction services (i.e., any services performed by a licensed contractor for repairs to residential or commercial property of any type that is damaged as a result of a disaster) by more than 10% for a period of 180 days following a declared state of emergency (again, with certain exceptions for actually-incurred costs).

PENALTIES

Failure to comply with §396 of the Penal Code is a misdemeanor offense and can result in various penalties, including fines of up to $10,000 and up to one year’s imprisonment, in addition to injunctive relief and civil penalties.

CONCLUSION

Given the recent increase in wildfires throughout the state, commercial landlords and investors/developers of multifamily or hotel properties that are active and/or interested in becoming active in wildfire-prone California markets (e.g., Napa, Sonoma, Butte, Lake, Mendocino, Nevada and Yuba Counties, based off of prior declared states of emergency), should be cognizant of the new limits imposed on rent increases by AB 1919.

© 2010-2019 Allen Matkins Leck Gamble Mallory & Natsis LLP
Read more legal news from California on our California Jurisdiction page.

The Real Estate Problem of Retail

The retail sky is falling.  At least that is how it appears from recent and unprecedented number of retailers filing for bankruptcy. From iconic stores such as Sears and Toys ‘R’ Us, to department stores such as Bon Ton, to mall stores including Brookstone, The Rockport Company, Nine West, among others.  The reasons given for such filings vary as much as their products but one theme seems to be constant — the inability of retailers to maintain “brick and mortar” operating expenses in the era of online shopping.  Accordingly, it appears that what some retailers actually have is a real estate problem.

Another troubling theme of many retail filings is the use of bankruptcy courts to achieve a quick liquidation of the company, rather than a reorganization.  Chapter 11 filings over the past several years have shown a dramatic shift away from a process originally focused on giving a company a “fresh start” to one where bankruptcy courts are used for business liquidation.  The significant increase in retail Chapter 11 cases and the speed at which assets are sold in such cases is disturbing and provides a cautionary tale for developers and landlords alike.  Indeed, such parties need to be extremely diligent in protecting their rights during initial negotiations as well as when these cases are filed, starting from day one, lest they discover that their rights have been extinguished by the lightning speed of the sale process.

Recent statics suggest that the average time to complete a bankruptcy sale is only 45 days from the petition date.  Moreover, under the Bankruptcy Code, and arguably, best practices, the sale will close shortly after court approval thereby rendering any appeal likely moot.  This leaves little time for parties to protect their rights.

Bankruptcy Code Section 363(f) permits a debtor to sell property free and clear of interests in the property if certain conditions are met.  Unlike a traditional reorganization, which requires a more engaging process, including a disclosure statement containing “adequate information,” a sale under Section 363 is achieved by mere motion, even though it results in property interests being entirely wiped out.  Not only are property rights altered by motion, rather than by an adversary proceeding or a plan process, but these sale motions are being filed in retail cases as “first day motions” and concluded in as short as a month and half.

Even more alarming is that the notice accompanying such motions can be ambiguous as to how it will impact parties such as developers who have multiple interests in retail/multi-use properties.  Often, the reference to the developer and its property is buried in a 20+ page attachment in 8 point font, listed in an order only the debtor (or its professionals) understands.  If that was not concerning enough, these notices are being served by a third-party agent who may not have access to the most updated contact information necessary to ensure that non-debtors are actually receiving the notices in time to properly protect their rights.  It is not uncommon for these notices to be inaccurately addressed and not be received until after an order is entered; an order which will undoubtedly contain a provision that notice was proper.

Notably, despite Section 363(f)’s reference solely to “interests” (the group of things that an asset may be sold free and clear of), these sales are commonly referred to as sales free and clear of “claims and interests.”  Lacking an actual definition, courts have expansively interpreted “interests” to include “claims.”  Indeed, it is now the norm for bankruptcy courts to enter extensive findings of fact and conclusions of law supporting 363 sales that extinguish every imaginable potential claim (rather than merely “interests”).  While consistent with the overall spirit of the Bankruptcy Code to promote maximization of value through the alienability of property, it comes at the expense of those holding an interest in that property, such as a mall or shopping center developer.

Fortunately, there are certain well-accepted exceptions to the courts’ expansive application of “interest.”  Courts generally limit a debtor’s attempt to use Section 363 to strip off traditional in rem interests that run with the land.  When faced with such attempts, courts routinely constrain the interpretation of the statute to block the sale free and clear of an in rem interest.

The majority of state laws have long treated covenants, easements, and other in rem interests that are said to “run with the land” as property interests.  Although clearly falling within the common definition of “interests,” courts routinely hold them not to be strippable interests for purposes of a Section 363(f), as being so ingrained in the property itself that they cannot be severed from it, or, alternatively, that the in rem interests are not included in Section 363(f)’s use of the term “interests.”

The protection afforded to in rem interests should provide forward-thinking transactional attorneys with a valuable opportunity to insulate many rights and remedies for their developer clients.  A hypothetical real estate transaction is illustrative — consider a transaction in which a developer sells two parcels to a large retailer as part of a retail/mixed use shopping center and takes back a long-term ground lease for one of the parcels. There are a number of methods available to document this deal: a sale-leaseback agreement; a separate contract to convey in the future secured by a lien; entry into a partnership, joint venture, or similar agreement. When analyzed with respect to the risk of a potential retailer bankruptcy, these mechanisms are inferior to the use of a reciprocal easement agreement (“REA”) or similar devise that creates an in rem property interest that runs with the land in favor of the developer.

If traditional contractual methods are used, the documents run the risk of being construed as executory contracts in the retailer’s subsequent bankruptcy case, subject to rejection, leaving the developer with only a prepetition claim.  A lien in favor of the developer would only marginally improve its position, as any lien will likely be subordinated to the retailer’s development financing and therefore of little value.  But, based on the current state of the law, a non-severable REA or similar document recorded against the retailer’s property will not be stripped off the property absent consent or a bona fide dispute. Thus, rights incorporated into a properly drafted and recorded REA provide the developer with a level of “bankruptcy-proofing” against a potential future retailer bankruptcy. Further, as REAs in mixed-use developments are the norm in the industry, they are likely to be accepted, if not embraced, by the retailer’s construction lender, making their adoption that much more likely.

The lesson is be forward thinking and be diligent.

© Copyright 2019 Squire Patton Boggs (US) LLP.

They Are Taking Our Common Area!

The power of eminent domain, also referred to as condemnation, refers to the power of the government or other quasi-governmental entity, such as a utility company, to take private property for a public purpose.

The law requires “just compensation” to be paid when a taking occurs.  What happens, however, when the property taken is common area owned by a community association, property owners’ association (“POA”), or homeowners’ association (“HOA”) (collectively, “Association”)?

In a subdivision or planned community managed by an Association, the common area and elements are typically owned by the Association.  However, the individual property owners have easement rights granting them the right to use the common area (for example, parks, playgrounds, swimming pools, tennis courts, streets and walkways, and other commonly shared property).  An easement is a property right that, if taken, requires the payment of just compensation to the holder of the easement; in this case, the various lot owners in the planned community or subdivision.  In the case of a condominium, the condominium unit owners actually own the common area in fee simple as tenants in common.  This fee simple ownership, if taken, would normally require the payment of “just compensation” to the unit owners for the value of the property interest lost as a result of the taking.

The taking of common area and common elements can significantly impair the value of the lots, homes and units in a community.  Picture, for example, a DOT taking where an elevated highway is built where the community’s swimming pool once stood.  Are the lot and unit owners entitled to just compensation for the value of the common area taken and the damage done to their property values in a condemnation proceeding?  The answer is “yes, no, and maybe.”

Uniform Planned Community Act/Uniform Condominium Act

In states such as North Carolina that have enacted legislation that substantially follows the Uniform Planned Community Act (“UPCA”) and the Uniform Condominium Act (“UCA”), the Association is granted the power and authority to act for all of the lot owners or unit owners in a condemnation or eminent domain case where common area is taken.  The Acts provide that the portion of the just compensation award “attributable to the common elements taken” shall be paid to the Association.  The Acts and the governing documents of the planned community or condominium dictate how the just compensation paid to the Association can be used or disbursed.

It would seem that, despite this law, a lot owner or unit owner whose property value has been substantially affected by the taking of common area should also be entitled to compensation for the reduced value of the lot or unit.  In a case decided by the Supreme Court of Kansas, for example, the Kansas DOT took lots in a subdivision that were subject to Restrictive Covenants preventing the construction of anything but single-family homes on the subdivision lots. The Court held that the single-family home restriction was a “property right” of the remaining lot owners in the subdivision that was taken when a highway bridge was constructed on the taken lots.  The Court sent the case back to the trial court with instructions to determine the damage that each lot owner had sustained as a result of the taking.

Fiduciary Duty

The officers and directors of an Association have a fiduciary duty to properly respond to and deal with a taking.  The Association should take advantage of any opportunities that arise before the taking actually occurs for input into the nature and extent of the taking, including, in the case of roads or highways, their location and design.  Typically, the condemning entity will have an appraisal done estimating the value of the property to be taken and the just compensation that should be paid to the property owner or, with common elements, the Association.  Often times it will be incumbent upon the Association to retain its own appraiser to ensure that a fair price is paid.  The condemning entity will certainly have legal counsel, and the Association would be wise to retain its own legal counsel to provide guidance through this process and to ensure that the Association is fulfilling its fiduciary duty.

Conclusion

The taking of a common area or common elements by a condemning entity can be a devastating and traumatic occurrence for an Association and its members.  The Association needs to understand the process and deal with it appropriately.  Having an attorney who is experienced in both the areas of community association law and eminent domain law will be essential.

 

© 2019 Ward and Smith, P.A.. All Rights Reserved.
This post was written by Ryal W. Tayloe and Allen N. Trask, III of Ward and Smith, P.A.

New Jersey Appellate Panel Countenances Beach Easement Condemnations for Federal Funding

A New Jersey appeals court recently upheld the Township of Long Beach’s exercise of eminent domain to acquire beachfront access easements in the consolidated appeal of Twp. of Long Beach v. Tomasi, N.J. Super. App. Div. (per curiam) – the latest chapter in a series of disputes between coastal New Jersey municipalities and owners of beachfront property within those municipalities.

The Township of Long Beach sought federal funding pursuant to the “Sandy Act,” which authorizes the Army Corps of Engineers (“Army Corps”) to protect the New Jersey shoreline through beach replenishment and dune construction projects funded either in whole or in part by the federal government. See Disaster Relief Appropriations Act, 2013 (Sandy Act), Pub. L. No. 113-2, 127 Stat. 4. In order to obtain such federal participation and funding, the township was required to comply with conditions set forth in the Army Corps’ engineering regulations, including the requirement that participating municipalities provide “reasonable public access rights-of-way” to the beach, defined as “approximately every one-half mile or less.” U.S. Army Corps of Engineers, ER 1105-2-100, Planning Guidance Notebook 3-20 (2000); see also N.J.A.C. 7:7-16.9.

As the township’s shoreline did not have the required public access, it resolved to obtain public access easements in various locations to achieve compliance with the Army Corps and NJDEP regulations such that it would be eligible for inclusion in an ongoing shoreline protection project undertaken by those entities. Accordingly, the township passed appropriate resolutions authorizing it to condemn and acquire via eminent domain four public access beach easements, including a ten-foot-wide strip of land along the defendants’ properties. After unsuccessfully negotiating with the defendants to purchase the easements, the township initiated condemnation proceedings in the Superior Court, giving rise to the Tomasilitigation.

In September 2017 the trial court entered summary judgment in favor of the township and held that it had properly exercised its eminent domain power in acquiring the beach easements for public use. The defendants appealed and sought reversal based on their contention that the township was unable to establish either necessity or proper public purpose for the condemnations. More specifically, the defendants argued that reasonable beach access already existed in the township such that there was no necessity to condemn the easements under the Public Trust Doctrine or otherwise; and that the stated impetus for the condemnations, i.e. seeking federal funding, could not constitute a viable public purpose.

On December 20, 2018, the two-judge appellate panel issued its decision affirming the lower court and rejecting both of the defendant-appellants’ primary arguments. The court noted its “limited and deferential” review of municipal exercises of eminent domain power, cited the traditionally broad conceptual scope of public use, and held that the township’s undertaking to protect its shoreline – including conforming to state or federal requirements to obtain project funding – was a proper public use or purpose.

There are several relevant takeaways from the Tomasi decision, though they should be understood with an important caveat. The court resolved the narrow question before it without engaging in a comprehensive or detailed legal analysis and as a result, land use practitioners and municipal personnel should be cautious not to overstate the holding in this brief unpublished opinion. Nevertheless, the Tomasi decision is significant based on its factual distinctions from more traditional beach easement litigations.

Specifically, the easements at issue in Tomasi were for perpendicular access to the beach and ocean rather than for dune construction. Though both dune construction and access easements relate to shore protection, the former directly enable and contribute to such protection, whereas the latter are merely incidental to it. In that sense, the Tomasi easements are arguably less justifiable than dune construction easements in the eminent domain context – and the defendants in Tomasi appeared to base their public purpose-driven arguments on precisely that premise. However, the court evidently did not find the above-described “direct vs. incidental” distinction meaningful and rejected the defendants’ argument, finding that pursuing federal funding for shoreline protection was a sufficient public purpose for eminent domain purposes.

Under the facts of this case, that is a logically defensible outcome, as the township’s acquisition of the access easements was a de-facto prerequisite for constructing dunes and otherwise protecting its shoreline area, per the Army Corps and NJDEP regulations. Accordingly, a possible implication for future cases is that the precise nature of the condemnation easement in question will not necessarily be dispositive, and the focus of a reviewing court’s inquiry instead will be whether such an easement is ultimately necessary to effectuate the contemplated shoreline protection program.

It is unclear if this premise informed the court’s decision in Tomasi. To the extent that it may have, it would be valuable for municipalities, property owners, and land use practitioners to know that the court employs a functional analysis in evaluating public use / purpose in eminent domain cases. Similarly, but conversely, it would be equally valuable for those stakeholders to know that the court did not equate access easements with dune construction easements but rather expanded the scope of eminent domain by permitting condemnation for easements which are merely incidental to shore protection.

Accordingly, the ambiguity in this space following the Tomasi decision is worth monitoring, both in that litigation as the Supreme Court considers whether to hear a (presently unfiled but) likely forthcoming appeal, and in future cases with similar or slightly different facts. Though its implications are presently limited, the Tomasi case clearly stands for the proposition that beach access condemnation easements to obtain federal funding for shore protection projects are permissible exercises of municipal eminent domain power.

 

© 2018 Giordano, Halleran & Ciesla, P.C. All Rights Reserved

The Evolution of the Health Club as a Tenant in Retail and Mixed-Use Developments; Pros and Cons

A health club used to be an unwelcome tenant in any retail shopping center.  The traditional thinking was that health club patrons occupied the parking areas at peak shopping times and for extended periods, and then left without shopping at the other retail stores in the center. The number of people with a membership to a fitness center or health club continues to grow, with 60.87 million in 2017, up from 32.8 in 2000, approximately an 85% increase (see more here). As personal fitness has become the rage, the health club has become not only mainstream, but the anchor store and a requirement in both retail shopping centers and mixed-use and residential developments.

The move for more fitness centers has coincided with the transformation of the shopping center with traditional big box retail anchors into destination centers with restaurants, green open space, retail stores, and of course health clubs and health related uses focused on personal fitness and group related activities – all things one cannot do on the internet.  Circuit City has been replaced by Life Time Fitness, Equinox, or other fitness centers.

While this may have saved the retail shopping center, as a neighbor the health club can be hard to take.  The parking problem continues to be a challenge.  Absent a distinct and separate building, the noise and vibration emanating from a fitness center can deprive neighboring stores (next to, above and below the health club) of the quiet enjoyment of their space.  The slamming of heavy weights, vibrations and blaring music, all typical in health clubs, can create major disruptions to retail, office, and residential tenants alike.  Imagine doing eye exams while the walls and floors shake from the dropping of heavy weights, and as heavy bass vibrates through the walls from the cycling class.  Will you be seeing eye to eye with the health club?

Landlords must consider the location of the health club – preferably a separate pad site otherwise on grade or below, away from residences and professional (particularly medical) offices.  The onus should be on the health club to insulate the sound and vibration or discontinue the offending use.  Upgrading of walls and/or reinforcement or padding of floors and soundproofing the ceiling may be required.  The building structure generally must be considered.

The attraction of a health club as a tenant in a high end residential or mixed-use building cannot, however, be denied. Landlords looking to add a fitness center tenant to their roster should contact their attorney to ensure their lease covers their unique needs of these tenants.

 

© 2018 SHERIN AND LODGEN LLP
This post was written by Gary D. Buchman of Sherin and Lodgen LLP.

Are You Ready for the Next Downturn? Ninth Circuit “Cramdown” Cases Affecting Real Estate Lenders

Plan Approval in a Multi-Debtor, Single-Plan Context

In In re Transwest Resort Properties, Inc., the Ninth Circuit addressed the Chapter 11 reorganization plan approval process where a single plan was proposed for multiple affiliated debtor entities whose cases were being administered jointly. Generally, for “cramdown” plans, the Bankruptcy Code requires that at least one class of impaired creditors vote in favor of a plan for it to be approved. In Transwest, a mezzanine lender who was the sole creditor for two of the five debtor entities and whose loan would be extinguished under the single, jointly administered plan, argued that impaired class approval had to occur on a per debtor basis, and that since it was the only impaired class member for two of the debtors, its votes against the plan in those debtor cases barred confirmation (as there were no impaired classes of creditors in those cases voting in favor of the plan). The bankruptcy court, the district court, and the Ninth Circuit rejected that position, holding instead that impaired class approval applied on a per plan basis, and that the votes of the impaired class of creditors of the other three debtors established consent from an impaired class across all debtors, and supported plan confirmation. The Ninth Circuit is the first circuit-level court to address this issue, and the lower bankruptcy courts remain split on the issue.

Potential Impact

Lenders, particularly mezzanine lenders, who lend to one or more isolated borrowing entities within a corporate group of debtor entities may not have the voting control in the plan confirmation process they assume exists to block “cramdown”, and should factor that reality into their risk assessments.

“Cramdown” Value = Replacement Value (even if it’s less than foreclosure value)

In In re Sunnyslope Housing Limited Partnership, the Ninth Circuit, in an en banc opinion, addressed how a secured creditor’s interest should be valued in the context of a “cramdown,” i.e. where the debtor seeks to retain and use creditor’s collateral in the reorganization plan and the value of that collateral is to be determined based on the proposed use of the property. Valuation of the property in the “cramdown” context was critical to how much the secured creditor would recover under the proposed plan, given that amount of its secured claim would be determined by the value of the property. The Sunnyslope case presented a highly unusual circumstance where the foreclosure value of the apartment complex collateral was significantly higher than its replacement or use value due to the existence of low-income housing covenants that would be extinguished in a prospective foreclosure.

Despite the higher foreclosure value supported by the secured creditor, the Ninth Circuit affirmed application of the replacement value standard for determining the secured creditor’s present value of its claim under the plan. In doing so, the Ninth Circuit affirmed prior precedent holding that only a property’s replacement value – to be determined in light of its “proposed disposition or use” – could be utilized for determining the amount of a secured claim in the cramdown context. In applying its replacement value standard in Sunnyslope, the Ninth Circuit confirmed that the highest and best use of collateral may not dictate the value of a creditor’s secured claim, even where the replacement value, as determined by the collateral’s anticipated use or disposition, is lower than its foreclosure value.

Potential Impact

Lenders facing a potential “cramdown” of its secured claim, based on present value of its claim against real property, should carefully analyze the potential difference between a property’s foreclosure value and its replacement value and adjust expectations accordingly.

© 2010-2018 Allen Matkins Leck Gamble Mallory & Natsis LLP

This post was written by Michael R. Farrell of Allen Matkins Leck Gamble Mallory & Natsis LLP.