Tag: real estate

Rent Relief Considerations in the Time of COVID-19

“In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing,” said Theodore Roosevelt.

By now, everyone recognizes the havoc and uncertainty of the Coronavirus’s impact on almost every aspect of the commercial real estate sector – e.g., 630,000 US retail locations have closed, with the office and other sectors experiencing similar impacts. The duration of this crisis is uncertain, but in this evolving situation, every landlord, tenant, lender, and investor is processing and planning next steps with respect to their real estate relationship counterparties (while at the same time determining the applicability, if any, of insurance coverages; the applicability, timing, and requirements of government stimulus programs, such as the CARES Act; and countless other business continuity challenges). As April rents and debt payments come due or past due, many have already reached out to their counterparties (or their lawyers) to discuss short term solutions. These conversations are important to have.

While each situation may have unique aspects, and the lease language and overall relationship between the parties play a significant role in the outcome, there are some possible approaches for landlords and tenants to consider at this time including the following:

Rent Deferral: An agreement to defer all or a portion of rent (be it fixed or basic rent and some or all of the additional rent components – operating costs, taxes, insurance, etc. – due under the lease) for a defined period – say 60, 90 or 120 days. Deferred rent would then be repaid at some later date either in a lump sum or amortized (with or without an interest component) and repaid over a defined period once full rent commences – ideally, from a landlord’s perspective, quickly following full rent commencement, but this may vary based on many factors, including the tenant’s business operations and the landlord’s asset “hold” period. Restructured short-term repayment agreements deliver some immediate structure and “certainty” while providing tenant rent relief and maintaining the landlord’s cash flow under the lease, albeit restructured and extended, without adding defaulting tenants to the rent roll.

Rent Abatement/Tolling: An agreement to simply abate or “toll” rent (again, all or a portion of the various rent components) for a fixed period. After the abatement period, rent would recommence. This abatement approach provides tenant breathing room and cash flow relief but does not address the landlord’s on-going obligations – debt service, taxes and operating costs (although the landlord may be seeking similar relief from some of these). Accordingly, a landlord may resist this or add the abatement or tolling period to the end of the lease term (at what may then be higher rents).

Rent Reduction: An agreement to simply reduce rent for a short period of time to get tenant over the “hump” of the crisis while maintaining some level of cash flow to the landlord. While more economically favorable to the tenant than the landlord, this approach may provide other relationship benefits when coupled with other factors, such as an agreement to exercise (or not exercise) an extension or other option, future rent restructuring or other agreement.

Tapping the Security Deposit: An agreement or understanding that a landlord can apply some or all of the cash security deposit to rent shortfalls may provide a liquidity solution for both parties during the short term. The agreement could include replenishing of the security deposit at a later date or over time, or treat the reduction as a burn-down or burn-off.

Hardline: Some landlords and tenants will elect a more aggressive approach – exercising defaults and further remedies based on non-performance, or asserting that non-performance is excused or extended during the current Coronavirus pandemic based on lease language or legal doctrines (e.g., force majeure, impossibility or impracticability, frustration of purpose, etc.). In some situations, this approach may be appropriate. For instance, non-performance where a tenant is clearly not impacted or where the lease documents unambiguously prohibit such non-performance (e.g., a fully-net ground lease). It is also likely that a few will use this situation as a pretext for unrelated non-performance. Regardless of merit, these positions may simply set a difficult tone during and after the resolution, and the current court closures and restrictions (and likely backlog when those abate) won’t easily or quickly allow for a judicial determination.

Other considerations include the following:

Realistic Expectations: Set and seek goals that are practical and reasonable in terms of economics and duration and workable for all parties to the extent discernible and practical. While unilateral actions may be or become necessary, a mutually agreeable short term solution to span this crisis will likely leave parties in better positions post-Coronavirus impact.

Transparency: In order to seek and obtain relief, the requesting party should be willing to provide some level of transparency and evidence of hardship if requested. At the same time, while a showing of need may be important, requests for this information should be realistic and practical given the situation and fit the scope of the tenant and situation – rather than an exhaustive list difficult to quickly provide in current circumstances. This shouldn’t simply be a hurdle landlords use to reject requests, but landlords may need to explain, share or at least attest to tenant restructurings in order to obtain lender approval or latitude under loan documents to grant relief. Similarly, landlords may want to explain the limitations they face due to underlying financing or other restrictions.

Competent Planning: While difficult to assess the duration of the current situation, any request for relief should be accompanied by a competent and professional showing that there is a current plan to bridge the crisis based on realistic assumptions and that relevant stakeholders are putting skin in the game.

Lender (or Other) Approval: Parties should keep in mind that third party (e.g., lender) approvals may be necessary to restructure or amend leases. Consider seeking programmatic approval for parameters to restructuring/relief deals now to cut down on individual approvals.

Other Issues or Concerns: This may be an opportunity to address other outstanding issues or concerns providing the benefit to the other party and allowing relief to go forward – such as extending the term, waiving rights, acknowledging facts, etc. The degree of leveraging these issues during a crisis, however, should be prudently and strategically applied.

Documentation: Any agreement to modify, restructure or affect a lease should be in writing. This step is essential to ensure there’s an actual agreement to actual terms and conditions – even stripped-down writing is better than none.

This crisis has placed significant stress on both sides of the landlord-tenant equation. Both sides have suddenly found their operations interrupted, cash flow jeopardized, business continuity models upended, and have had their ability to perform their obligations to their lenders, investors, employees, and clients and customers severely strained. To the extent practical, each party should seek the mutually shared goal in this time to outlast the crisis impact in a manner that allows as quick a recovery as possible.

© 2020 SHERIN AND LODGEN LLP

For more on rent considerations among the COVID-19 pandemic crisis, see the National Law Review Coronavirus News section.

Three Real Estate Contract Questions to Consider Now

Whether you hold an interest in an industrial, commercial, retail, residential asset class; whether you are an owner, buyer, seller, landlord and/or tenant, lender or borrower, property manager, or homeowner; and whether your real estate is business or personal, there is a need to address COVID-19’s immediate impact on real estate agreements.

Generally, real estate agreements reflect the business climate and risk assessments at the time the contracts were made. In negotiating, executing, and performing their contracts, parties relied on their relationships with the parties on the other side of the transaction. However, when an unforeseeable or disruptive event occurs, parties must look back at their agreements and reassess their standing, rights, remedies, recourse, and relationships.

Now is the time to check on provisions of your real estate contracts. Below are three common questions you may be asking:

1. Which provisions of a real estate purchase and sale contract, lease, or loan document might offer protections or provide guidance at this time?

The following is a sample list of applicable contract provisions:

  • Force Majeure/Acts of God – Force majeure and other provisions in real estate documents that address the parties’ rights and obligations if events occur beyond their control. Some may cover national emergencies and governmental orders.

  • Defaults – Define which actions or inactions will result in a default under the relevant document and whether the defaulting party has any right to notice and an opportunity to cure.

  • Taking – What happens when all or some material right to utilize your real estate asset has been taken away or restricted in a way that diminishes the property value or prevents you from utilizing it for your intended purposes.

  • Access – Property owners will often have certain rights to enter and inspect leased premises and may have the right to restrict access. Purchasers and sellers of a property may have ongoing rights or obligations to allow access to properties to complete due diligence. These provisions may or may not address how circumstances may change in exigent circumstances.

  • Covenant of Quiet Enjoyment – The covenant of quiet enjoyment provides tenants with the assurance they will be able to peaceably use and enjoy their leased premises. These provisions may or may not specifically address a situation where a landlord voluntarily or involuntarily restricts access to the property.

  • Maintenance – Leases allocate maintenance and repair obligations, including but not limited to cleaning. Purchase and sale contracts may contain obligations of various parties on how the owner or operator must maintain the property through closing. These provisions may or may not address who pays or the additional costs of implementation of precautionary measures.

  • Payment Obligations – Payment and closing obligations are often excluded from a force majeure clause with specific clauses that provide that time is of the essence or require payment, despite any other provision that would excuse it.

  • Notice and Cure Periods – Leases, purchase contracts, and loan documents are often very specific about the required protocols for tendering notices, which then trigger specific cure periods. Failure to give or receive proper notice might impact deadlines for cure or performance and termination rights. Cure periods may be extended as a result of the inability to perform or governmental mandates.

  • Environmental – Environmental clauses in contracts may provide additional options.

  • Remedies – Real estate agreements often provide stringent remedies for nonperformance and default. Available remedies should be analyzed in the context of the overall climate in the courts and marketplace. Different parties may be able to avail themselves of certain defenses. Essential businesses may be entitled to certain protections at law and equity. Remedy rights may be expanded or contracted temporarily by governmental entities at the municipal, state, and federal level.

  • Duty to Notify – Parties may have an express or implied duty to notify other occupants of employees, agents, and/or visitors who have been diagnosed or are experiencing symptoms of the virus and were present at the property.

  • Performance, Contingency, and Delivery Periods – Contracts related to real estate may have performance, contingency, or delivery periods. Those dates (often expressed as a number of “days” or “business days”) should be carefully reviewed to determine whether voluntary or mandatory building closures affect the number of “days” or “business days” allowed for performance. Governmental mandates might offer tolling or temporary waivers of obligations.

  • Operating Covenants – Sellers of businesses and real estate or tenants may have obligations to keep operations going or risk default. Check contracts for provisions which require “continuous operation.” Parties may or may not have the right to close buildings, cease services, or implement security or screening measures. Some contracts may require notices of material change to representations and warranties, valuations or business operations.

  • Abatement/Self Help – Agreements may provide abatement rights or self-help rights for missed delivery dates or failed obligations on the part of the other party. It is possible that governmental actions, force majeure, and common law doctrines might already or soon will provide protections or require reasonable extensions.

  • General Deadlines for Performance and Termination/Extension Rights – Carefully watch dates and deadlines in contracts. Extension and termination rights are often narrowly construed, especially where there is a “time of the essence clause.” Some deadlines may allow for tolling in the event of a force majeure, but others may not.

2. What else should purchase and sale, lease, or loan parties consider as we all move forward from this point?

The following are some additional considerations:

  • Reliance on Third Party Providers – Not all third party providers whose services are necessary to perform obligations under a transaction will be classified as essential workers. Governmental orders may prohibit or allow such parties to provide services or restrict the providers to provide services remotely. Check the applicable and evolving ordinances and contact the providers directly to determine if services are available remotely. Assess how deadlines (including, but not limited to, filing deadlines, IRS Section 1031 deadlines, due diligence deadlines for inspections, title, and survey) may be impacted.

  • Electronic Signatures and Notarization – Some states have adopted legislation related to electronic signing and notarization procedures. Not all jurisdictions and providers have equivalent technology available at this time.

  • Recording Office Delays – Buyers, sellers, lenders, and borrowers are reminded that there will likely be delays in conducting recordings. Local recording offices may not be open for business or may experience a backlog. Electronic recording is available in some, but not all, jurisdictions.

  • Closings – Check with the title company on whether electronic signatures, electronic notarization, insurance over the gap period between closing, and electronic recordings are available during periods where there might be restrictions on face-to-face closings. There are fluid situations where maintaining a physical office may not be permitted. For example, the governors of California, Pennsylvania, New York, and Illinois have issued “stay at home” orders for residents in those states and restrictions on businesses. Discuss contingency plans if title companies and lenders are not able to fund on time. Essential service providers will be stressed, and electronic transfers of funds can be delayed.

  • Insurance Coverages – Do the parties have coverages for economic losses, including business interruption/business income and loss of rents? Are there any issues that are covered by commercial general liability insurance? Most standard form insurance policies will not provide business interruption/business income insurance coverage for forced/voluntary shuts down caused by pandemics, but the parties should carefully review all of their insurance policies with their risk management teams to see whether the relevant policies are non-standard forms that do include such coverage.

  • Evolving Federal, State, Municipal laws, Ordinances, and Doctrines – New laws and ordinances will result from the most immediate public needs and will continue to evolve as contract provisions are interpreted differently by different parties whose interests differ. Our Coronavirus Task Force has analyzed several legislative updates including this one on the Families First Coronavirus Response Act.

3. From a practical perspective, where should I start?

Discuss your specific situation with your attorney. Apply good business judgment. Everyone is suffering through this together. It is important to understand the applicable contract documents and assess your relationship with your transaction parties. Courts and Congress may end up taking unusual positions and taking protective steps in the coming months to avoid recession, flatten the curve, and share the loss in ways that today’s contracts might not have contemplated.

© 2020 Schiff Hardin LLP

I Have an Easement for Lake Access. Am I a Riparian?

The Michigan Court of Appeals recently said no. In Wenners v Chisholm, the plaintiffs owned property on Portage Lake in Washtenaw County. The defendant owned a back lot, but she and the previous owners of her property had accessed the lake using a strip of land located between the plaintiffs’ properties for more than 30 years.

The trial court found that the defendant had established a prescriptive easement for ingress and egress to the lake. However, the easement did not include riparian rights, and the defendant was barred from installing a dock or mooring any watercraft in the lake.

The defendant argued that the trial court could not grant her a prescriptive easement for lake access without also giving her riparian rights. The Court of Appeals rejected her arguments. It concluded that since the defendant could not show that she and the previous owners of her property had exercised riparian rights for a 15-year period, the prescriptive easement did not include riparian rights.

Had the defendant presented evidence showing that she and the previous owners of her property had installed a dock and moored a boat in the lake for at least 15 years, perhaps the outcome might have been different. But without that, the defendant’s easement to access the lake did not include riparian rights.

© 2020 Varnum LLP

ARTICLE BY Bradley S. Defoe of Varnum LLP.
For more easement access issues, see the National Law Review Real Estate law page.

Swap New Year’s Resolutions for Real Property with a 1031 Tax-Deferred Exchange

A 1031 Tax-Deferred Exchange (“§ 1031 Exchange”) is an extremely useful tax strategy for taxpayers that maintain real property for productive use in trade, business or for investment. It allows a taxpayer to defer payment of capital gains tax on investment properties that are sold.

A taxpayer continues to qualify for a § 1031 Exchange if the following rules are met: (1) the properties being exchanged must be “like-kind”; (2) the taxpayer must transfer property held for productive use in a trade, business or for investment (the “Relinquished Property”) and subsequently receives property to be held either for productive use in a trade, business or for investment (the “Replacement Property”)”; (3) the Replacement Property value must be greater than or equal to the Relinquished Property value; (4) the taxpayer must not receive “boot” in order for the exchange to remain tax-free; (5) the name on title of the Relinquished Property must mirror the name on the title of the Replacement Property; (6) the taxpayer must identify a replacement property within 45 days after the taxpayer transfers the Relinquished Property; and (7) the taxpayer must receive the Replacement Property within 180 days of the transfer of the Relinquished Property, or on the date the taxpayer’s tax return is due, whichever is earlier.

Section 1031 Exchanges, while an excellent tax deferral tool, are not without complications. Section 1031 Exchanges must be used exclusively for the exchange of real property held for investment or business purposes. Section 1031 Exchange rules also require the title of the Replacement Property to be under the same name as the title of the Relinquished Property. Any real property interests owned by a limited liability company or a partnership must be reinvested by the entity in real property of “like-kind” nature for investment or business purposes in order for it to qualify under § 1031. This is a problem if an individual member or partner of the entity wishes to “cash out” or reinvest in something other than “like-kind” real property. To remedy this problem, many transactions are structured as a “drop and swap” where the interests in the real property are transferred to the individuals as tenants in common and those tenants in common, as individuals, deed the Relinquished Property to the buyer. Because the taxpayers, as individuals, sold the Relinquished Property, it is the individuals that must reinvest in the Replacement Property to utilize the tax deferrals under § 1031. Because the individuals are tenants in common, each is able to choose independently whether to reinvest in a Replacement Property and defer tax under § 1031 or cash out and pay the tax on their individual earnings from the sale of the property.

However, this “drop and swap” technique is increasingly disfavored by the IRS and may create tax implications for the taxpayers if the real property is acquired by the individual taxpayers immediately prior to the sale. Since real property must be for investment or business purposes to be eligible under a § 1031 Exchange, it is best practice to distribute the interests in the property to the individuals well in advance of the date of the relinquishment so each individual holds the property long enough to constitute an investment. While the IRS has not provided guidelines on the length of the holding period, it is recommended that such transfer, or “drop” to the individuals occur at least a year in advance before the closing on the Relinquished Property and that records be kept of the transfer and the intent of the taxpayers to hold the real property for business or investment. Moreover, taxpayers need to take care when transferring (“dropping”) the interest in the real property from the entity to individual tenancy-in-common interests to ensure the taxpayers aren’t viewed as operating as a partnership and thus, subject to ownership constraints of a partnership (this would likely negate the drop and swap technique and require the individuals, as tenants-in-common but operating as a partnership, to all invest in the Replacement Property for some to benefit from tax deferral under a §1031 Exchange).

There does not appear to be any limitation on how an individual taxpayer uses their proceeds if they are cashing out, and have no intent to defer tax under a § 1031 Exchange. However, for a taxpayer to defer tax under a § 1031 Exchange the above requirements must be met, and there can be no actual or constructive receipt of money or other property before the taxpayer actually receives the Replacement Property. Even if the taxpayer may ultimately receive the like-kind Replacement Property, any receipt of cash or other property, including an interest in an additional entity or personal property, prior to that Replacement Property will make the transaction a sale rather than a deferred exchange and prevent the taxpayer from gaining the tax deferral under a § 1031 Exchange.

© 2020 Davis|Kuelthau, s.c. All Rights Reserved

See more on the topic via the National Law Review Tax Law page.

Real Estate Developer Rights When Cities Demand Too Much [PODCAST]

ANTHONY DE YURRE

Welcome to Land Development in the 305, a podcast featuring news, observations, and analysis on the redeveloping and reshaping of the Miami skyline. My name is Anthony De Yurre, I’m a partner in Bilzin Sumberg’s Land Development and Government Relations Practice Group, and I have with me today, my partner and chair of our department, Stanley B. Price. On my side, I focus most of my day on transit-oriented development, large scale mixed-use projects, and P3 development with government infrastructure. Stan, why don’t you tell us a little bit about yourself and your practice?

STANLEY B. PRICE

Thank you, Anthony. I have practiced for 45 years as a zoning attorney, and I had the privilege of being an assistant county attorney for ten years in charge of zoning in Miami-Dade County. I’ve been in private practice since 1981, and as you indicated, my practice is almost exclusive land development regulations, planning, and governmental law.

ANTHONY DE YURRE

So today, Stan, we’re very glad to have you here with us. We’re going to talk about a very important case in Florida. The decision of Koontz v. Saint Johns River Water Management District is a 2013 case that essentially requires municipalities to follow the constitutional rule of law and reigns in some aggressive requirements that were made on behalf of property owners in order to try to move forward with a particular project they had. Tell us a little bit about your view on the significance of the Koontz case.

STANLEY B. PRICE

The Koontz case is a seminal case in that it provides protection to property owners and the bane of every zoning attorney is standing in front of a public hearing and asking the local government to respond to exaction requests, money for a park, money for a school program, and the like. That practice used to be legalized extortion, but the Koontz case has changed that procedure, and the Supreme Court has recognized a constitutional condition — a principle which applies to Koontz. I think it’s important to understand the background of Koontz and it goes back to the taking jurisprudence of Penn Central Railroad in the 1970s where the Supreme Court indicated that as long as government takes property and gives you an equal compensation in that case in terms of transferred development rights, there is no governmental taking. We fast forward many years later to the Nollan case out of California. The Nollan case was a situation where a property owner was remodeling a house along the ocean in California, and the California Coastal Commission required him, as a condition of getting the permit to remodel his home, to grant a public easement through his property to the beach for the use of the general public. The Supreme Court rejected that concept. They said this is nothing more than an appropriation of private property and found that to be a regulatory taking. A few years later, in the Dolan case, the Dolan case involves the construction of a store, and as part of the condition of approval, the local government required the property owner to build a bike path and other improvements which bore no reasonable relationship to the project. The Court held and has become the framework of the Koontz case that before a government can impose a burden on a property owner, there has to be a rational nexus between what is being asked for and the request must be in conformity with the impact caused by the property. Fast forward to 2013 and the Koontz case, which was authored by Justice Alito. Justice Alito seemed to get in the head of every zoning attorney who practiced in the United States, and he recognized that a zoning hearing is nothing but authorized extortion. And he used those terms in the case and indicated that it is inappropriate for a government, exact donations from a private property owner, which have no conceptual reality to what is the impact is. The property owner owned a 13-acre parcel of property. It was designated wetlands under the local plan. The property owner came forward with a plan to development uplands three-and-a-half acres which were not wetlands by definition and the state agency said well if you want to develop that, we only want you to develop one acre, or if you develop the three-and-a-half acres we want you to give us $150,000, so we can nourish wetlands several miles from the property.

ANTHONY DE YURRE

Stan, that is literally the definition of extortion. Which is why I think the court uses such strong language, and we’re all thankful they did. And what is also interesting is that you know when you talk about constitutional rights what we see in the news nowadays, we will talk about you know First Amendment rights, religious freedom rights, things of that nature. But people just seem to gloss over the fact that this country was founded on property rights, and that is really one of the biggest issues that we deal with on a daily basis, upholding constitutional property rights. I guess it just does not get the same headline attention that the other constitutional protections do, but without that and particularly the Koontz case, you know, it really goes to the heart and fabric of what ownership in the United States is all about.

STANLEY B. PRICE

When the Koontz case was decided, I was going through a zoning process in a town in Northeast Dade to build a religious facility, and the city manager came to me and said: “I want you to donate $100,000 for town beautification and I want you to pave a roadway several blocks from your synagogue.” And my client was obviously very upset. I was very upset. We waited. The Koontz case came out. I brought the Koontz case to a meeting, and I said, do you want to be the picture in the dictionary for the Koontz case. They dropped their demands immediately, and we were able to develop the property.

ANTHONY DE YURRE

And you know what is interesting about that is that really is a great anecdote about the importance of constantly staying on top of all the latest case law that comes out. Whether it is our local jurisdiction here in Miami-Dade County, at the State of Florida level, at a federal level, and even at the Supreme Court level, you know? I think that of the almost 20 members of our department each mention an anecdote about a matter we had at hand that was pressing and because we specifically monitored case laws that came out, just like you did in this instance with the Koontz case, we were able to win the day and really,  you have to practice this type of law, you have to do land development, you have to do zoning, it has to be focused, and you cannot be a jack-of-all-trades, so to speak. You really have to be focused in that particular field and stay at the cutting-edge and the tip of the spear with the case law.

STANLEY B. PRICE

What has occurred as a result of Koontz is that generally United States Supreme Court cases, while they are important on a national basis, usually don’t filter down to local governments. But in this instance, the Koontz case formed the foundation of the state legislature in Florida forming and creating section 70.45 of the Florida statutes which basically provides a cause of action for a property owner who feels that they have been aggrieved by an illegal exaction, which is defined as an exaction which has no correlation to the impact caused by the development. The statute is a very clean statute. It puts the burden of proof on the government, not on the property owner.

ANTHONY DE YURRE

Incredibly important.

STANLEY B. PRICE

Yes.

STANLEY B. PRICE

To show that there is a reasonable proportionality. The statute awards attorney’s fees for the prevailing party, which is very important. And what it does, it creates a cause of action that basically provides that you have rights that you did not have before. Generally, zoning decisions are handled by a petition for a certiorari. This creates a de novo action you can take if you are at a hearing, and you are concerned that these conditions will be egregious to your client. You could wait until after the hearing. You do not have to object at the hearing. And then you avail yourself by this statute. Now, what is important about this statute is that…

ANTHONY DE YURRE

Before you continue, I just want to jump in on something you noted, which is the fact that you get statutory attorney’s fees for this. And in the State of Florida, unless you have a contractual right to attorney’s fees or a statutory right to attorney’s fees, you are not awarded attorney’s fees for causes of action in the State of Florida. But even more so, it is important in the case where you are dealing with litigation with a government entity because remember, the government entity really has an unlimited resource of attorneys at their disposal. They really have very deep pockets with tax dollars, and so ultimately that is something that I think both of us have had experience with, and when a client looks at that and says, you know when I go up against the government, the problem is I have a finite amount of dollars, am I ever going to get that back because the expense might be significant in this case.

STANLEY B. PRICE

— and the way to developers, of course, by unnecessary litigation. What is interesting about section 70.45 is that there is – the government has tried to wave their liability by having applicants sign a waiver beforehand that they will not seek damages.

ANTHONY DE YURRE

Yeah, sure, of course.

STANLEY B. PRICE

This specifically indicates in the statute it cannot be waived. You can sign every contact you want, but it can’t be waived. Number two it requires you to file an action no earlier than 60 days but no later than 180 days, to make your claim. The government has the ability to respond, they must respond, and what they say cannot be used against them at a later time except as to attorney’s fees. And the government has the burden of showing that the unconstitutional condition basically is in proportion to the impact of the development.

ANTHONY DE YURRE

So we have 2013 Koontz comes out. Then we have the Florida statue. Where are we right now in more recent case law? Because obviously, this goes back again, as you mentioned, in Penn Central, Nollan, Dolan, then we have Koontz. Now we have the Florida statues. Tell us where we are today. In particular, I think it would be helpful to talk about the city of Venice and mandarin development as well.

STANLEY B. PRICE

The City of Venice case is an interesting case in that the cause of action accrued prior to the effective date of the Florida statute 70.45. So the rules of procedure were somewhat different, and a clever municipal attorney had the applicants sign a waiver of liability to say that this was an annexation case. This was not a zoning case. And he said if you want to be in next to our jurisdiction, you have to make a list of 15 things. One of which was to make what they call an extraordinary monetary contribution to the local government. The Court struck down that extraordinary contribution as an unconstitutional condition, and in addition, the Court held that you could not waive — a party cannot waive a constitutional right in writing and must — and it cannot be foreclosed from bringing such an action. A somewhat similar case was decided shortly thereafter in Manatee County. It really wasn’t a decision, but the property owner was asked to dedicate property far in excess of what the impact of his project would be, and the property owner filed an action, once again a pre 70.45 action — and many land-use cases take several years to go through the court system — and the county — the judge in the Manatee County case refused to grant summary judgment to the local government. And in fact, wrote in his order what the county was doing here was an unconstitutional condition because the proportionality test of Nollan and Dolan was not met. The parties subsequently settled this case, and the settlement is interesting in that Judge Hall, who was the judge in this case, wrote a 45-page opinion indicating that the property rights were trampled in a good way. What does this mean to our practice and the like? Number one, applicants for zoning hearings no longer have to be a punching bag and get up and play Let’s Make a Deal. You want door number one, door number two, or door number three? Those days are over. However, you still see the local government attempting to do this on a regular basis. Sophisticated local attorneys, municipal attorneys know the Koontz case and know about 70.45. Unfortunately, several jurisdictions do not know that. I had a case earlier today, which I had been on a conference call.

ANTHONY DE YURRE

I heard you through the wall, by the way.

STANLEY B. PRICE

Right.

ANTHONY DE YURRE

It was an interesting conversation.

STANLEY B. PRICE

I talk loud. This indicates that this government is going to be sued under the Civil Rights Act and under the equitable estoppel principles were withdrawing a building permit for no basis whatsoever. Koontz is a tremendous weapon for a municipal attorney, a zoning attorney to know how far your client can be pushed and when you can push back. And I urge everyone to look at the statute and the decision of the Supreme Court, and it will make you feel good that Justice Alito may have been one time a zoning attorney.

ANTHONY DE YURRE

Well, Stan, I really appreciate your insight and walking us through the importance of Koontz and the pertinent Florida statutes. I think that we can’t forget that the constitutional right to this country was founded on really are those that pertain to property and it applies to everyone in this country from the largest developer on down to the apartment complex owner or the owner of the smallest condo unit and a micro-unit perhaps. It really defends people equally. Thank you all again for joining us on our podcast. Stan Price, again, chair of our department, thank you very much for your time in this podcast. Thank you for listening to us, and if you want more on this and other land development related topics, you can visit us at Bilzin.com and also subscribe to our new Miami blog at Newmiamiblog.com. We publish all the latest case law and other decisions that are pertinent to land use, zoning, and development in Miami-Dade County and as well as the State of Florida. Thank you.

STANLEY B. PRICE

Thank you, Anthony.

ANTHONY DE YURRE

Thank you, Stan.

© 2020 Bilzin Sumberg Baena Price & Axelrod LLP

More on zoning laws & development on the National Law Review Real Estate law page.

California’s New Statewide Rent Control – What You Need to Know

Summary:

As expected, California’s legislature passed AB 1482 this month, which imposes statewide rent control, restricting the ability of landlords to terminate certain tenancies without just cause, and further restricting the ability of landlords to increase rent on an annual basis. For those properties already subject to rent control, the new law is unlikely to change much if anything, but owners of other residential rental properties should be aware of the new restrictions.

Below is a summary of the key points of the new law.

When does it apply? 

AB 1482 applies to tenants that have occupied a dwelling unit for more than 12 consecutive months. If additional adult tenants are added during the lease term, it applies once the new tenant has occupied for 12 months, or one of the existing tenants has occupied the unit for 24 or more consecutive months.

What properties are exempt? 

AB 1482 applies to all residential properties in California, excluding the following:

  • Housing that has been issued a certificate of occupancy within the previous 15 years.
  • Transient and tourist hotel occupancy.
  • Housing accommodations in a nonprofit hospital, religious facility, extended care facility, licensed residential care facility for the elderly or an adult residential facility.
  • Dormitories owned and operated by colleges or schools.
  • Housing accommodations in which the tenant shares bathroom or kitchen facilities with the owner who maintains their principal residence at the residential real property.
  • Single-family owner-occupied residences, as long as the owner does not lease more than 2 units (including ADUs).
  • A duplex in which the owner occupied one of the units as the owner’s principal place of residence at the beginning of the tenancy, so long as the owner continues in occupancy.
  • Residential real property that is alienable separate from the title to any other dwelling unit, provided the owner is not a REIT, corporation or limited liability company in which at least one member is a corporation, and further subject to certain tenant notice requirements.

What are the limitations on increasing rent?

The bill restricts the owner of residential real property from increasing rent during any 12-month period by more than the lesser of (i) 5% plus a cost of living adjustment based on the California CPI, or (ii) 10%. The percentage increase in any 12-month period is based on the lowest applicable rate during the preceding 12-month period, but the value of any rent discounts, incentives or other concessions made by the landlord are not taken into account when determining the lowest rate in effect during such period.

When can a landlord terminate a lease? 

A landlord can terminate the lease for at-fault just cause for (i) defaults in the payment of rent, (ii) a material breach of the lease, (iii) nuisance uses, (iv) illegal or criminal activities, (v) committing waste, (vi) refusal by the tenant to sign a lease extension, (vii) refusal by the tenant to allow owner entry as required by law, (viii) assignment or subletting in violation of the lease, (ix) failure to vacate after signing a vacation agreement, or (x) failure to vacate upon termination of employment.

A landlord can also terminate for no-fault just cause if (i) the owner or certain family members intend to occupy the property (for leases entered into after July 1, 2020 other requirements must be satisfied), (ii) the property is withdrawn from the rental market, (iii) the owner is required by law to vacate the property (and if the tenant was the cause, the tenant will not be entitled to relocation assistance), or (iv) the owner intends to demolish or substantially remodel the property.

For any no-fault just cause termination, the landlord must provide the tenant with relocation assistance by either paying the tenant an amount equal to one month’s rent or waiving in writing the final month’s rent before the same is due. A landlord’s failure to strictly comply with the provisions relating to a no fault just cause termination renders the termination void.

© Polsinelli PC, Polsinelli LLP in California

ARTICLE BY Herman Enayati and David V. Hall of Polsinelli PC.
For more on rental laws, see the National Law Review Real Estate law page.

California’s “Housing Crisis Act of 2019” May Boost Housing Production or Just Boost Housing-Related Litigation

On October 9, 2019, Governor Newsom signed into law Senate Bill (SB) 330, or the “Housing Crisis Act of 2019” in an effort to combat California’s current housing shortage, which has resulted in the highest rents and lowest homeownership rates in the nation. In a nutshell, the Housing Crisis Act of 2019 seeks to boost homebuilding throughout the State for at least the next 5 years, particularly in urbanized zones, by expediting the approval process for housing development. To accomplish this, the Housing Crisis Act of 2019 removes some local discretionary land use controls currently in place and requires municipalities to approve all developments that comply with current zoning codes and general plans. If not extended, SB 330 will only be effective from January 1, 2020 through January 1, 2025.

Governor Newsom signed SB 330 over the objections of local governments to help meet his ambitious goal of 3.5 million new housing units by 2025. One study by UCLA found that localities have already approved zoning for 2.8 million new housing units – 80% of Governor Newsom’s goal. However, if zoning alone was enough to increase housing production, California’s rate of housing production would be increasing. Instead, in the first half of 2019, there was a 20% reduction in the issuance of residential building permits compared to the same time period in 2018. California believes the reduction was due, in part, to excessive hearings and local approval procedures, mid-application spikes in development impact fees, and mid-application changes to development regulations, all of which can render a residential development project infeasible.

Only time will tell if SB 330 will actually increase the rate of housing production or merely fill the courts with more housing-related litigation prior to SB 330’s sunset in 5 years. However, one thing is for sure – local governments must tread carefully before denying the next housing project.

Major Provisions:

The Housing Crisis Act of 2019 applies to all housing developments consistent with objective general plan, zoning and subdivision standards in affect at the time an application is deemed complete, and affects all cities and counties in California – including charter cities. A “housing development” is defined as a project that is (1) all residential; (2) a mixed use project with at least two-thirds of the square-footage residential; or (3) for transitional or supportive housing.

SB 330 also places extra restrictions on certain “affected” cities and counties with housing statistics below national averages. As defined by the legislation, today there are nearly 450 cities and unincorporated parts of counties that qualify as “affected.”

For all cities and counties, the Housing Crisis Act of 2019’s major impacts include:

  • Retroactive prevention of zoning codes or design standards alterations that reduce residential density or intensity of use from that which was in place on January 1, 2018;
  • Authorization of proposed housing developments to override the local zoning codes that are inconsistent with the general plan, if the project is consistent with the general plan or land-use element of a specific plan;
  • Prevention of non-scheduled impact fees increases after a project applicant has submitted all preliminary required information;
  • Limitation of the number of public hearings on a development to 5; and
  • Specification that applications must be reviewed for completeness within 30 days of submission, provision of a written notice to the applicant if the agency believes the project is inconsistent with objective local development plans, policies and standards within 30 days if a housing project is under 150 units (and 60 days if the housing project is over 150 units).

Additional controls on “affected”[1] cities include:

  • Prevention of municipalities from enacting moratoriums on residential and mixed use projects;
  • Prevention of municipalities from establishing caps on the number of people who can live in the municipality, the number of housing units allowed, or the number of housing units to be constructed; and
  • Prevention of any density reductions or changes to design standards that downzone or limit housing development.

In addition to the above-mentioned controls on a local government’s ability to restrict development, there are also special limitations on reductions to affordable housing in a community. As to cities and counties, a local agency may not disapprove, or condition approval in a manner that renders infeasible a housing project for very low, low-, or moderate-income households or emergency shelters without specific written findings based on a preponderance of evidence in the record. This only applies to projects with 20% of the total units set-aside for affordable housing at 60% area median income (AMI) or 100% of the total units set-aside for affordable housing at 100% AMI.

As for developers, the Housing Crisis Act of 2019 bans any demolition of affordable or rent-controlled units unless the developer replaces all such units, allows tenants to stay in their homes until 6 months before construction begins, provides relocation assistance to tenants, and offers tenants a first right of return at an affordable rent.

SB 330 also implements penalties for violation of Housing Accountability Act (Govt. Code § 65589.5) (HAA) rules. Specifically, a court may require an agency make appropriate findings of denial or pay a $10,000 per unit fine into affordable housing funds. In the case of a local agency’s bad faith and failure to comply with a court order within 60 days, fines can increase to $50,000 per unit and the court can overturn a project denial and approve the project itself. Bad faith includes decisions that are frivolous or entirely without merit.

[1] SB 330 sets out criteria for identifying “affected” cities based on incorporation, size, and the average rent and vacancy rate compared to the national average.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

ARTICLE BY Jeffrey W. Forrest and Kelsey Clayton, Law Clerk at Sheppard, Mullin, Richter & Hampton LLP.
For more on housing development, see the National Law Review Real Estate law page.

Beware of the Barter: A Cautionary Tale

A recent ruling by Tennessee’s top court sends a strong message: be leery of waiving traditional forms of payment in favor of accepting goods or services. In TWB Architects, Inc. v. The Braxton, LLC, et al., an architecture firm and a cash-strapped developer executed an agreement for the architect to receive a penthouse condominium instead of his design fee. When the developer could not deliver a deed for the condominium, the architecture firm sued the developer for its fees.

So far, the ensuing litigation has lasted over 10 years and, most recently, resulted in an opinion by the Supreme Court of Tennessee that reversed summary judgment in favor of the architect and remanded the matter back to the trial court for still more proceedings.

The parties originally entered in a standard Architect Agreement, whereby the plaintiff, TWB Architects, was to be paid for its design services based on two percent of the construction costs for the project. After failing to obtain sufficient financing for the project, the defendant, The Braxton, informed TWB that it could not pay the design fees and suggested TWB accept a condominium in the project as payment instead. TWB agreed, and the parties executed the Condominium Agreement.

Thereafter, TWB’s owner acted as though he owned the condominium contemplated in the deal, which just so happened to be a penthouse. He invested nearly $40,000 in upgrades and repeatedly referred to the penthouse as “his penthouse.” In December 2008, he moved into the penthouse and represented himself as its owner.

However, shortly thereafter, issues arose with Braxton’s ability to deed the condominium to TWB’s owner. At that point, TWB decided to change course. It claimed that it was still entitled to the original design fee under the Architect Agreement and filed a mechanic’s lien for the unpaid fees. Braxton claimed the Condominium Agreement had acted as a novation, nullifying the Architect Agreement and, accordingly, TWB’s ability to collect its fee thereunder.

The trial court granted summary judgment in favor of TWB, holding it could still recover its design fees because there was insufficient evidence that the parties intended a novation by substituting the Architect Agreement for the Condominium Agreement. The court of appeals affirmed, but the Tennessee Supreme Court reversed. The Supreme Court found that summary judgment was improperly granted because disputed questions of material fact existed about whether TWB and Braxton intended a novation when they executed the condominium agreement.

Unless the parties can settle the matter, the case will now require a trial to determine whether TWB can recover its fees. It’s unknown whether TWB’s owner is still living in the penthouse.

This case is a great example of how a tempting barter – like accepting a penthouse from a cash-strapped developer – may sound like a nice solution at the time, but can lead to further headaches and protracted litigation.

© 2019 BARNES & THORNBURG LLP

For more developer-architect concerns, see the National Law Review Real Estate law or Construction Law pages.

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.