Tag: commercial real estate

Open Permits, Empty Pockets

Real estate transactions can be influenced by various factors. One often-overlooked aspect is the existence of open building permits at a municipal building department. These seemingly minor components may significantly affect the dynamics of buying or selling commercial or residential properties, potentially causing delays, financial burdens, and legal complications.

UNDERSTANDING OPEN PERMITS:

Open permits refer to permits that have been issued for construction or renovation projects and that appear as uncompleted at the local building department. They may have been left open because the construction was commenced but not completed, or the contractor failed to obtain final inspections, or the required land use or operational approvals were not obtained, such as a board of health license. Such permits remain open in the property’s records until properly closed out, potentially posing significant challenges when buying or selling commercial real estate. This occurrence is especially problematic in the context of commercial real estate where a landlord may have multiple tenants who engage contractors for construction projects. Such permits may remain open without landlord’s knowledge. Landlords may also be unaware of the specific contractor undertaking the work, thus preventing landlord from directing such contractor to cause the permit to be closed. The COVID-19 pandemic exacerbated this problem, as closures of municipal offices interfered with filings and on-site inspections, and the tenants that engaged the contractors (and sometimes the contractors themselves) went out of business, resulting in numerous permits being left open.

THE IMPACT ON COMMERCIAL REAL ESTATE TRANSACTIONS:

Open permits can complicate real estate transactions in several ways. Firstly, they can signal potential safety or code compliance issues, raising concerns for buyers about a property’s integrity and potential code violations. Moreover, open permits can hinder the closings, as lenders may hesitate to provide financing; buyers may similarly be unwilling to take on the burden of owning a property subject to open permits. Resulting delays may jeopardize a deal, or result in price reductions to offset risks associated with open permits. Sellers may also be required to spend time and money to undertake necessary filings and obtain inspections. Longstanding open permits may result in fines or penalties, further complicating matters and potentially souring the deal.

MITIGATING AND PREVENTING HARM:

To mitigate the impact of open permits on real estate transactions, proactive measures are essential. For buyers, conducting thorough due diligence is paramount, including comprehensive inspections of building records at the municipal building department to identify any open permits and/or notices of building violations early in the sale process. Sellers should prioritize closing out permits before listing a property in order to streamline the transaction and enhance marketability.

Commercial landlords should take additional measures with tenants to ensure these issues do not arise in the first place. For example, landlords should include lease provisions requiring tenants to obtain landlord’s prior consent for any work requiring a permit, and require that all open permits be closed within a stated period of time (within 30 days of completion), with proof of closure furnished to landlord. Landlords can enforce such provisions by mandating that the failure to adhere constitutes an event of default under the lease. They may also stipulate in the lease that a security deposit will not be released unless and until all open permits attributable to the specific tenant are closed out.

CONCLUSION:

In conclusion, open permits can pose significant complexities in commercial real estate transactions. By taking proactive steps to address them, stakeholders can minimize disruptions and facilitate smoother transactions.

© 2024 SHERIN AND LODGEN LLP
For more news on Open Permits in Real Estate, visit the NLR Real Estate section.

More Places, Less Spaces: California is Driving Down Development Costs

In an effort to decrease the skyrocketing development costs and reduce greenhouse gas emissions, Assembly Bill 2097 (AB 2097) aims to eliminate a key obstacle for new developments: parking. More specifically, starting on January 1, 2023, this law prohibits public agencies from imposing minimum automobile parking requirements for residential, commercial and other development projects if the project is located within a 1/2-mile of a “High-Quality Transit Corridor”[1] or a “Major Transit Stop.”[2]

Prior to the enactment of AB 2097, cities and counties retained the authority to impose a minimum number of parking spaces required for new developments. This condition is typically the result of a calculation found in the city or county’s zoning code, and is usually determined based on the use or type of project being developed, regardless of project specifics. Oftentimes, the use of a universal calculation results in excess parking. For example, a new restaurant may be required to provide 4 parking spaces for every 100 square feet of use even if the restaurant concept does not necessitate a large number of parking spaces or if the restaurant is in a pedestrian- or transit-friendly location. While California remains in the throes of a housing crisis, some areas within the state boast an oversupply of parking spaces. For example, Los Angeles County has 18.6 million parking spaces, which equates to almost 2 parking spaces for every 1 resident.[3] This statistic is similar in the Bay Area where there are 1.9 parking spaces for every 1 resident.[4]

Moreover, not only can a static calculation result in unnecessary parking (and blacktop), it can add untenable costs to new developments. For example, new residential developments are typically required to provide 1 to 2 parking spaces per unit. The requirement results in an additional cost of approximately $36,000 per unit.[5] As the cost to develop residential projects is at an all-time high,[6] builders are welcoming all efforts to reduce the cost and eliminate unnecessary development “standards.”

To avoid a complete free-for-all, under AB 2097, public agencies will still retain the ability to impose a minimum parking requirement, if, within 30 days of the receipt of a completed application, the public agency makes a written finding that not imposing a minimum automobile parking requirement would have a substantial negative impact. However, there are a number of exceptions to this caveat that wholly restrict public agencies from imposing a minimum parking condition. These exceptions include certain affordable housing projects or small residential housing projects.

For parking spaces that are voluntarily included in proposed project designs, public agencies may still require: (i) spaces for car share vehicles; (ii) parking spaces to be shared with the public; or (iii) for the project to charge for parking. Nothing in AB 2097 shall reduce or eliminate the requirement that new developments provide for the installation of electric vehicle supply equipment (i.e., EV-charging stations) or to provide parking spaces accessible to persons with disabilities.

AB 2097 is intended to give developers more flexibility and lower the costs associated with development, which will – hopefully – result in an influx of housing and the redevelopment of vacant buildings where it may not have been previously feasible to provide parking in a quantity necessary to meet a jurisdiction’s minimum requirements. By reducing the oversupply of parking, there is the expectation that the use of mass transit will increase, thereby reducing traffic, greenhouse emissions and air pollution.

Critics of AB 2097 are concerned that the elimination of parking requirements could actually weaken local efforts to provide more affordable housing as many public agencies offer reductions in parking requirements to incentivize developers to add on-site affordable housing units to the project.[7] There is also concern that, despite the decrease in availability, many residents will continue to own vehicles, which – ironically – will lead to increase parking demand and congestion.

Although there is a lot of speculation of AB 2097, many are hopeful that it is a step in the right direction when it comes to addressing California’s housing crisis. As Governor Gavin Newsom stated when he signed the bill: “Reducing housing costs for everyday Californians and eliminating emissions from cars: That’s what we call a win-win.”

FOOTNOTES

[1] “High-Quality Transit Corridor” means a corridor with a fixed-route bus service with service intervals no longer than fifteen minutes during peak commute hours.

[2] “Major Transit Stop” means a site containing an existing rail or bus rapid transit station, a ferry terminal served by bus or rail, or the intersection of two or more major bus routes with a frequency of fifteen minutes or less during peak commute periods.

[3] Aguiar-Curry, Cecilia. Assembly Committee on Local Government – AB 2097 (Friedman) – As Introduced February 14, 2022. (April 20, 2022. )

[4] Inventorying San Francisco Bay Area Parking Spaces: Technical Report Describing Objectives, Methods, and Results. Mineta Transportation Institute – San Jose State University. (February 2022.)

[5] Some estimates place the aveage cost of one residential unit at $1,000,000 in development costs. (The Costs of Affordable Housing Production: Insights from California’s 9% Low-Income Housing Tax Credit Program. Terner Center for Housing Innovation – UC Berkley. A Terner Center Report [March 2020].)

[6] Dillon, Liam and Posten, Ben. Affordable Housing in California Now Routinely Tops $1 Million per Apartment to Build. Los Angeles Times. (June 2, 2022.)

[7] California Daily News.

Article By Amanda S. Lee of Sheppard, Mullin, Richter & Hampton LLP

For more real estate legal news, click here to visit the National Law Review.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.

Proposition 13 Overhaul Qualifies for November Ballot

California Secretary of State Alex Padilla announced on Friday, May 29, 2020, that the revised initiative entitled “The California Schools and Local Communities Act of 2020” officially qualified for the November ballot. If passed, the initiative would establish a “split roll” where retail, office, commercial, and industrial real property would be taxed based on their market value, while residential property would continue to be assessed based on its purchase price.

THE CURRENT TAX REGIME: PROPOSITION 13

The current property tax regime under Proposition 13 generally provides that real property is taxed at one percent of its fair market value, which usually is the property’s purchase price. Unless there is a change in ownership of the property such as a sale, this “base value” can only increase by an inflationary rate that cannot exceed two percent per year. When property changes ownership, it is reassessed and the property’s base value is reset to its then current fair market value. Under Proposition 13, a property’s base value can be lower than its current fair market value, which in turn can reduce the amount of property tax that might otherwise be owed.

THE SPLIT ROLL

The ballot initiative creates a “split roll” if voters approve it in November. Under the split roll, commercial and industrial property with a fair market value of more than $3 million would be reassessed at its current fair market value at least every three years. The current tax regime under the Proposition 13 rules described above would continue to apply to all residential property, including both single-family and multi-unit structures and the land on which those structures are constructed or placed. The current rules also would remain in place for real property used for commercial agricultural production.

The process of administering this new tax regime will be determined by the California legislature, which will include, among other things, a process for reassessment appeals. The taxpayer will have the burden of proving that the property was not properly valued. The legislature also will determine a process by which to allocate mixed-use property between its commercial and residential uses for purposes of implementing the split roll.

The new regime will not apply to commercial or industrial property with a fair market value of $3 million or less unless any of the direct or indirect owners of such real property also own interests in other commercial and/or industrial real property. In that case, the new regime will apply if all such real property has an aggregate fair market value in excess of $3 million.

TANGIBLE PERSONAL PROPERTY TAX RELIEF

If passed, the ballot initiative would exempt small businesses from property tax on all of its tangible personal property. A small business is a business that: (1) has fewer than 50 annual full time employees, (2) is independently owned and operated such that the ownership interests, management and operation are not subject to control, restriction, modification, or limitation by an outside source, individual or another business, and (3) owns real property located in California.

For all other taxpayers, an amount up to $500,000 of combined tangible personal property and fixtures (other than aircraft and vessels) will be exempt from taxation.

WHEN WOULD THE SPLIT ROLL TAKE EFFECT?

The split roll would become operative beginning January 1, 2022, and the tangible personal property tax relief would become operative on January 1, 2024.

Despite the split roll becoming operative on January 1, 2022, the reassessment of undervalued commercial and industrial property will be implemented through a phase-in over two or more years. An owner of commercial or industrial property would only be obligated to pay taxes based on the new assessed value beginning with the lien date for the fiscal year when the assessor has completed the reassessment. In addition, if 50% or more of the square footage of a commercial or industrial property is occupied by a small business, such property will not be subject to the new regime at least until the 2025-26 fiscal year.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP

For more on real estate taxation, see the National Law Review Tax law section.

Issues Facing Commercial Mortgage Lenders in the COVID-19 Pandemic

The far-reaching impacts of the COVID-19 pandemic will create challenges for commercial mortgage lenders and their borrowers. Rents, and therefore borrowers’ ability to make debt service payments, will be curtailed as, for example, retail tenants are forced to shutter their businesses and apartment dwellers face economic hardship on a rising tide of unemployment. In this environment, lenders will face tough decisions on how to proceed with transactions that have yet to close and with closed transactions that are running into trouble.

Deals in the Pipeline

In the commercial real estate world, whether you are a borrower or a lender, one question you will be asked countless times during the pandemic is, “What do you have in the pipeline?”

From the commercial mortgage lender’s perspective, the pipeline likely means the loan transactions for which a term sheet or a commitment letter has been issued to a borrower, and for which no closing date has been set or for which various closing conditions have not yet been satisfied. Most loans require as a closing condition that on the date of closing, no adverse change in the economic viability of the project or the borrower shall have occurred since the date the loan terms were agreed upon. Given the extreme economic uncertainty now pertaining in the United States, and virtually everywhere else, it is hard to imagine a lender with deals in the “pipeline” that is not asking, “Do I have to fund?”

Many times the answer to this will be found in the list of closing conditions set forth in the term sheet or commitment letter. The condition addressing material adverse changes can vary greatly from lender to lender and deal to deal. One version of this condition is the following: “The absence of any material disruption or material adverse change in current financial, banking, or capital market conditions that in the sole judgment of the lender, could materially impair the loan.” The clause may also appear more simply and require only that there is “no material change in the market value of the project or condition of the borrower.”

As long as this terrible pandemic is impacting the country, it would seem to be nearly impossible for a lender to be able to accurately underwrite an asset under existing conditions, even one for which it had planned to lend against as recently as two and a half weeks ago. Borrowers who have based major equity investments and personal guaranties on the value of a project will have the same concerns.

However, there are borrowers that retain confidence of the same level as they had a month ago, and who may insist on closing. It will behoove lenders with deals in the pipeline to immediately review the closing conditions in their documents to determine the answer to “Do I have to fund?”  If the answer is “no,” a lender could decide to either close regardless or terminate the transaction. However, a third option also exists, whereby a lender could invoke the material adverse change clause as the basis for introducing new lender protections to the deal. For example, a lender could require that the borrower fund a debt service reserve at closing, require additional guaranties, or require that the loan terms include cash management features such as a lockbox.

Modifications to Loans That Have Closed

With the economy in turmoil, borrowers will be contacting secured lenders to discuss their actual or anticipated inability to make debt service payments. Most lenders will require that borrowers in distress propose specific modification terms, as opposed to non-specific requests for relief. A borrower might request modifications such as a reduction in the interest rate, the conversion of an amortizing loan to require interest-only payments for a period, or some other waiver, reduction or deferral of payments. A borrower might also want to take the approach of adding investors to its capital stack, and therefore request that the lender consent to the addition of one or more new equity partners.

When faced with such requests, a lender will need to perform its underwriting on the proposed modifications to determine their feasibility and prudence. It would therefore be appropriate for a lender to ask for additional property and financial information and reports, perform a site visit, and require additional due diligence materials such as title, judgment and lien searches.

Such borrower requests for relief also present the lender with an opportunity to better protect itself. Upon receiving a loan modification request, a lender should review its loan file in order to identify and correct any deficiencies.The following are but a few of the inquiries that should be included in such a review of the loan file. Are any documents missing?  Have all documents been properly recorded or filed?  Do the documents contain any errors?  Is all insurance up to date with the lender properly named?

In the end, a lender might agree to the borrower’s requested loan modifications (or some variation thereof). The lender could also add its own conditions to the changes requested by the borrower. For example, a lender could require new reserves, a letter of credit or other additional collateral, a new guaranty and/or new cash management arrangements.

If some sort of a deal seems possible, the lender should require a pre-negotiation agreement before discussing terms. If it turns out that a deal is not to be had, the lender might agree to enter into a forbearance agreement, in order to give its borrower time to turn things around or find takeout financing. Both of these types of agreements are discussed in more detail below.

Pre-Negotiation Agreements

Before having any substantive discussions, the lender should require any borrowers and guarantors (the “Borrower Parties”) sign a “pre-negotiation” or “pre-workout” agreement (“PNA”) in order to allow the parties to have frank and open discussions about a potential resolution to the borrower’s distress. The PNA should, at a minimum, provide the current status of the loan, including the admission of any defaults, and have the Borrower Parties admit the genuineness of the loan documents. The PNA should also (1) provide that any negotiations, discussions, draft documents, or loan modification proposals are non-binding until a definitive agreement is executed, (2) include provisions preserving the lender’s rights and remedies under the loan documents, (3) provide for the mutual termination of the PNA by either party for any reason, and (4) confirm the ground rules governing settlement discussions, including that all discussions and writings be confidential and inadmissible for evidentiary purposes. Finally, and most controversially, the lender could require a full general release from the Borrower Parties to protect the lender from future lawsuits.

Forbearance Agreements

Because a lender may want to give the Borrower Parties some breathing room, one option is for the lender and Borrower Parties to execute a forbearance agreement. The purpose of such agreement is for the lender to agree to wait to begin exercising remedies (namely, foreclosure or suing personal guarantors), while giving the borrower time for the economy to recover or to seek refinancing. In exchange for the lender agreeing not to proceed against the Borrower Parties, the Borrower Parties should reaffirm the validity of the loan documents, the amount due on the loan, and provide the lender with a general release through the date of the Forbearance Agreement. The lender also can require the borrower to make reduced payments during the forbearance period. Lastly, the parties could use the forbearance agreement to cure any defects in the loan documents discovered after closing.

Conclusion

The economic impact of the COVID-19 pandemic spells bad news for commercial mortgage borrowers. In this environment, lenders will need to re-examine transactions that are currently in their pipelines. In addition, lenders should expect an uptick in requests for relief from borrowers of closed loans. In these uncertain times, lenders will need to be careful and exercise diligence in deciding how to proceed with troubled properties.

© Copyright 2020 Sills Cummis & Gross P.C.

For more on COVID-19 impacts on real estate and beyond, see the Coronavirus News section of the National Law Review.

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.

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.

Can the Town Make Me Change My Sign?

Giordano Logo

A business’ signage can be one of the most distinctive characteristics of its brand and one of its most important assets.  This is especially true when the sign display’s the business’ federally registered trademark and color is a feature of the mark.  But what happens when that brand runs afoul of state and local laws?

It is common place for commercial real estate development plans to impose requirements on the characteristics of the signs that tenants may display in the development.  Sometimes, those requirements impose restrictions on the colors that such signs may display.  For owners of federally registered trademarks where color is claimed as a feature of the mark, the last thing they want is to have to change the color of their sign.

For example, imagine telling McDonalds that its famous golden and red sign must be displayed in other colors, say, like this:

McDonalds Logo w Inverted Colors

For most consumers, I suspect this sounds ridiculous.  But that is exactly the obstacle that federal brand owners must overcome when faced with local zoning restrictions on color.

Fortunately, the federal trademark law provides some relief.  Or does it?   The Lanham Act expressly provides that federal law preempts state law by providing (in part):

No State or other jurisdiction of the United States or any political subdivision or any agency thereof may require alteration of a registered mark …. (15 USCA §1121(B))

While this may seem pretty clear on its face, courts are split as to whether towns can lawfully impose color restrictions on signs displaying a federally registered trademark.

Two courts in the 9th Circuit (including the 9th Circuit Court of Appeals) have shot down Tempe, Arizona’s attempts to impose such color restrictions under this section of the Lanham Act.  Blockbuster Videos, Inc. v. City of Tempe, 141 F.3d 1295 (1998); Desert Subway, Inc. v. City of Tempe, 322 F. Supp.2d 1036 (2003).  Conversely, two courts in the 2d Circuit (including  the 2d Circuit Court of Appeals) have upheld town zoning boards’ imposition of signage color restrictions as superior to the rights of federally registered trademark holders.  Payless Shoesource, Inc. v. Town of Penfield, NY, 934 F. Supp. 540 (1996); Lisa’s Party City, Inc. v. Town of Henrietta, 185 F.3d 12 (1999).

According to the 9th Circuit courts, from looking at the legislative history, it is clear that while local governments can prohibit the display of outdoor signs altogether, there is nothing to suggest that local zoning ordinances may require alteration of trademarks.  Looking at the identical legislative history and, in some cases, quoting from the same testimony, the 2d Circuit courts agreed that the law would allow local zoning ordinances to prohibit outdoor signs altogether or even materially restrict their size.  However, the 2d Circuit found that the statute was intended to prohibit state-mandated changes in the trademark  itself since the brand owner would be free to use the unaltered mark in every other aspect of its business.

So who is right?

Like any other situation where courts are split geographically, they both are.  Until the Supreme Court takes up the issue, local ordinances in the 2d Circuit are free to place restrictions on colors used in trademarks displayed on signs, whereas in the 9th Circuit (especially, Tempe, Arizona), local ordinances may not.  For those of us in other circuits, the moral of the story for brand owners is to be mindful of local zoning restrictions before committing to a store location.  Real estate developers should also be mindful of signage restrictions included in their plans when seeking local approvals.

Article By:

Kurt E. Anderson
Of: 
Giordano, Halleran & Ciesla, P.C.