(US)Northern California Tech Firms Hunt for Space: Dramatic Impact On The Commercial Office Market

In an article published on Law360.com titled "Tech Was 'Not Tethered To Spreadsheets' For 2014 RE Buys," Simon Adams of Reed Smith's Real Estate Practice Group comments on the real estate market effects in Northern California caused by a booming tech industry demand for office space.

Tech companies are doing massive deals, often demanding lease terms and amenities not driven by bottom line considerations. And, they're willing to pay top dollar, affecting the overall market for commercial space.

“Players in Silicon Valley are into what you would describe as a land grab,” Simon T. Adams of Reed Smith LLP said. “They are so willing to take real estate positions.”

The demand for space is so great that due diligence periods have narrowed, forcing lawyers to work quickly and creatively to get deals completed before competitors for the same space can take action.

“Lawyers have both anticipated their clients’ needs and desires and at the same time kept a very close eye on other interested parties and anticipated what their reaction would be,” Adams said. “Because of that, they’re willing to change the structure of a transaction or part of a transaction. ... There’s a level of creativity that’s new.”

The full article can be read here.
 

(US) Preservation vs Development: History Complicates San Francisco's Surging Real Estate Development Market

 In an article published on Law360 titled "History Complicates San Francisco's Surging Real Estate Development," Simon Adams of Reed Smith's Real Estate Practice Group comments on the challenges developers face with historic-designated properties in the city.

 " I think [the need for housing is] a particular challenge to San Francisco right now,”  noting the tension between the city’s need for more development — particularly residential — and the challenges of getting such development done in historical building-heavy downtown cores such as SOMA, where many are made of nonreinforced masonry, making renovations a costly endeavor.

The full article can be read here.

 

(UK) Dan's Banger's Didn't Break and other Break Clause news

This post was written by Stuart Wright, Lynsey Ellard and Siobhan Hayes.

We have two items to post on breaks.

  • The first is the surprising news that M&S have been given leave to appeal to the Supreme Court over the issue of the refund of the rent they had paid their landlord when they exercised a break. We will post again when there is news. We have a number of posts on apportioning and refunds of rent that you can read here.
  • The second is The Dan’s Bangers case (Sirhowy Investments Ltd v Henderson & Anor) – involving a second hand car dealer’s site which highlighted the continuing trend in lease break clause cases where compliance with the pre-conditions to a break are required to be strictly complied with for the break to be effective.
     
Continue Reading...

(US) The Oil and Gas Industry in Pennsylvania: The State of Compulsory Integration

This entry is a link to an article written by Michael Joy, Robert Jochen and Steven Chadwick

In an article titled"The State of Compulsory Integration in Pennsylvania" that appears in The Legal Intelligencer, Michael Joy, Robert Jochen and Steven Chadwick of our Pittsburgh office review the challenges oil and natural gas developers face in Pennsylvania.

The authors argue that an established compulsory integration process will benefit the industry by providing a predictable permitting process and will increase opportunities for smaller operators. Costs of production will also be lower due to a reduction in the number of wells necessary to tap oil and gas formations. They believe that the state, its residents and the oil and gas companies operating in Pennsylvania will be best served by revisiting and revising the state's outdated laws on pooling and unitization.

 

 

(US) Present Value in Lease Terms: PA Superior Court Holds Reductions in Present Value Must Be Explicited Stated In The Lease

This post was written by Paul Didomenico and Gerald Dickinson

On August 19, 2014, the Pennsylvania Superior Court affirmed a trial court’s decision not to reduce accelerated damages awarded to a landlord to present value, thereby strengthening the landlord’s position with respect to acceleration clauses in an already landlord-friendly state. The case, Newman Development Group of Pottstown, LLC v. Genuardi’s Family Market, Inc. and Safeway, Inc., provides an important lesson for commercial tenants: Be sure to discuss a provision in the lease that explicitly requires acceleration damages to be reduced to present value upon a breach by a tenant.

Rent acceleration clauses may provide that the accelerated rent will be reduced to “present value” by discounting the aggregate amount by a percentage. The point is that the value of the dollar paid at the time of the breach is worth more than the value of the dollar paid in the future.

In Newman, the landlord and tenant, both of whom are sophisticated parties and were represented by attorneys, negotiated two important aspects to the lease: (1) contingencies of performance over a 20-year term and (2) consequences of breaches of the agreed upon terms. Under the lease, the damage calculation for breach by the tenant included sums for future rents. The lease also provided for the rate of interest the tenant was obligated to pay to the landlord on sums owed as a result of the tenant’s breach. However, the lease did not explicitly require that those sums be reduced to present value.

The tenant argued that the reduction to present value was already implied in the lease pursuant to Pennsylvania law, thus it was not necessary to draft the explicit present value language into the lease.

The Superior Court disagreed:

“To the extent it was intended to be consideration in the calculation of damages for breach, a discount rate would have been so stated in the lease.”

In other words, there was nothing in the lease that suggested that the parties intended for a reduction to present value of future damages, nor does Pennsylvania law mandate such a reduction.

The important take away is that parties should not assume that future rent will be reduced to present value. Instead, parties must remember to negotiate those terms explicitly into the lease agreement. Otherwise, courts under Pennsylvania law will not permit a reduction to present value to be implicitly read into what is, otherwise, an unambiguous lease agreement.

The Tenant has filed a Petition for Allowance of Appeal to the Pennsylvania Supreme Court. We are monitoring the case as the matter moves through the appeal process.
 

(US) PA Landlord Tenant Act: More PA Legislation on Abandoned Property

Pennsylvania Act No. 129 of 2012 (effective September 4, 2012), amended the Landlord and Tenant Act of 1951 to provide for the disposition of personal property deemed abandoned by a tenant. The Pennsylvania legislature has returned to this subject with Pennsylvania Act No. 167 of 2014 (effective December 21, 2014). Under the prior law, there were two relatively limited circumstances under which a tenant’s personal property remaining in a rental premises was deemed to be abandoned:

  • upon execution of an order of possession in favor of the landlord, or 
  • the tenant physically vacating the premises and providing a forwarding address or written notice stating that the tenant has vacated the premises.

Unfortunately the law did not cover the circumstance where the tenant simply abandons the premises without notice. The new law adds three additional circumstances under which a tenant may be deemed to have abandoned personal property: 

  • the tenant has vacated the premises following the termination of a written lease;
  • an eviction order or order for possession has been entered and the tenant has vacated the premises and removed substantially all personal property; and 
  • the tenant has vacated the premises without communicating an intent to return, the rent is more than 15 days past due, and thereafter the landlord has posted a notice regarding the tenant’s rights regarding the personal property.

The statute also includes a form of notice to be used.

The new law continues the requirements set forth in the prior law requiring the landlord to store abandoned property for 10 days after giving notice to the tenant, which period is extended to 30 days after the date of the notice if the tenant requests.

There are several problems created for landlords under the new law.

First, where does the landlord store the property during the 10 or 30 day periods? The law states that it may be at a place of the landlord’s choosing, but what if the landlord does not have a storage facility? Then, presumably, the landlord must store the property at the premises, creating problems with the use of the premises for the landlord or a new tenant during such periods. Even if a new tenant is willing to allow storage of the prior tenant’s property during the 10 or 30 day period, retrieval by the prior tenant could be problematic. If the landlord does have a separate storage location, the landlord will have to arrange to have the property moved to such location.
 
Second, the law states that the tenant is responsible for the landlord’s costs of storage, but the law does not address whether the landlord may demand reimbursement as a condition of releasing the property to the tenant. Therefore, it seems likely that landlords will have difficulty recovering costs of storage.

Third, the new law adds a provision making the landlord liable for treble damages, attorney fees and court costs for violations.

The new law also adds a provision making conflicting provisions of the lease control (except where the landlord has notice of a protection from abuse order). Therefore, the landlord and tenant may (and probably should) agree in the lease to alternative provisions.
 

(US) Lease Recapture Provisions: Don't Get Caught By Poor Drafting

Under some circumstances recapture provisions can offer substantial benefits to both landlord and tenant. The tenant is relieved of its future performance obligations, and the landlord can put the premises to better use, in a direct relationship with a new tenant, perhaps gaining rent at a newly higher market rate or a lease for a longer term. In the situation where the tenant has outgrown its space, or needs to move to a smaller space and determines to offer the lease for assignment or the premises space for sublease, the tenant may have to reconcile this business decision with a cost of transfer. Like all lease provisions, recapture provisions can contain traps for the unwary.

In negotiating a new lease, landlords and tenants both would do well to pay particular attention to the language of the recapture provision that describes the triggering event. Landlords will want to have some certainty as to whether or not the tenant has triggered the provision. A well drafted recapture provision will allow the landlord the option to dispossess the tenant of the premises and avoid allegations of breach of the lease. Provisions often found in retail leases allowing the landlord to recapture if the tenant’s business “goes dark” for a certain number of days will require very specific definitions of the various events under tenant’s control that could trigger the recapture. In addition, tenants will want a certain time limit on how long the landlord must wait, or may wait, before exercising its right.

With a typical office recapture provision – a right to recapture when the tenant proposes an assignment or a sublet – tenants will want to limit the level of effort and expenditure required on tenant’s part before the landlord’s recapture right is ripe. A lease that requires the tenant to engage a broker, advertise the space, find a subtenant and fully negotiate the sublease before the landlord must make its determination to recapture could have a severe chilling effect on the tenant’s ability sublease. The landlord in this example will want the recapture provision to include adequate time for due diligence on the proposed assignee or subtenant and any potential new tenant before it has to make a decision to recapture the space.

Careful consideration of this provision during lease negotiation will, if actioned on a later date, provide both parties with greater certainty over the course of the lease term.
 

(US) DC Real Property Tax Abatement: Another Tool to Free Up Cashflow

In many cases nonprofit organizations do not have large endowments or reserves in place from which they draw upon to readily accomplish and sustain a real estate acquisition. In today’s market, buyers are typically expected to contribute between 10-20% cash equity upfront as well as meet reoccurring payments of debt service, operating expenses and real estate taxes. As a result, many transactions require creative ways to maintain sufficient cash flow from various sources to fund operational and programmatic needs.
 
Some nonprofit organizations have been able to make their project work by obtaining a real property tax abatement from the local jurisdiction within which the property resides. Some nonprofit organizations are automatically exempt from real property taxes simply due to the nature of their charitable mission, however, it is not quite as easy in other jurisdictions. For example, in the District of Columbia, a nonprofit organization must meet very specific criteria to fit within the real property tax exemption category. On the other hand, although an abatement is not guaranteed, any nonprofit is eligible to request a tax abatement from DC Council.

The abatement frees up cash flow for a finite period so that the organization’s cash can be used towards other necessary expenditures. In the past, our clients have achieved varying amounts for different periods of time. We have seen one nonprofit organization receive a $5 Million Dollar tax abatement over the course of 5 years while another received up to $20 Million Dollars for a period of 10 years.

A variety of factors may impact a tax abatement request. Certainly the size and duration of the abatement are significant factors that weigh heavily on the outcome of the request. However, other factors that should be highlighted to help achieve a favorable result are the benefits that the organization specifically brings to the District of Columbia, the services that the organization brings to District residents, how many jobs are created for District residents, whether the organization is relocating into the District from outside the city or moving into an area that is in need of revitalization and more!

In summary, receiving a tax abatement is not guaranteed since it is subject to and at the discretion of the DC Council. However, if you use the proper channels, it is typically a fairly quick process to determine the likelihood of being successful. Thus, the monetary risk is fairly minimal but the potential gain can be the deciding factor when it comes to making the project financially viable.
 

(US) Not All Title Companies Are Created Equal: Choosing Wisely

Selecting a title company for a transaction is influenced by a number of factors, including the level of customer service, responsiveness and sophistication (particularly when dealing with complex commercial transactions). Knowledgeable and responsive escrow officers and underwriters can facilitate closings tremendously. However, underwriting guidelines may adversely affect an underwriter’s ability to deliver an acceptable title insurance policy.

Recently, title underwriters have changed underwriting guidelines regarding matters shown on an updated ALTA survey. Traditionally, title companies agreed to limit survey related exceptions to “as shown on the survey” based on an ALTA survey. Now, despite providing an updated ALTA survey for the insured property, a title company in a recent deal involving Indiana real estate was unwilling to limit survey related matters to “as shown on the survey” when the client requested the survey deletion endorsement to its title policy. The title company attempted to limit its coverage relative to survey issues by inserting “as approximately shown on the survey” based on the recent ruling in Lawyers Title Insurance Corporation v. Doubletree Partners, L.P., (5th Circuit, January 14, 2014). In the Doubletree Partners case, which involved Texas property and a Texas title policy, the insured obtained the survey deletion coverage and the title insurance company was liable for damages suffered as a result of a flowage easement affecting the property that was not accurately reflected on the survey. As a result of the Doubletree Partners case, the title company changed its national underwriting guidelines which are now out of step with other insurers.

Oil, gas and mineral leases offer another example of a title company changing its underwriting guidelines in a manner inconsistent with longstanding practice and the title insurance market as a whole. Typically, oil and gas leases affecting real property where the primary term has expired, are removed as exceptions to title by the title company upon producing an affidavit of non-production. However, many title underwriters refuse to remove expired oil and gas leases based on an affidavit of non-production and, in many cases, will not remove expired oil and gas leases absent a release of the lease, contrary to generally accepted practice within the industry.

The insured is not without options. Before selecting a title company, careful research into different title companies’ practices is recommended.
 

(UK) BRING ME SUNSHINE: UK Government Reviewing Support For Renewable Projects From The Renewable Obligation Scheme

This post was written by Malcolm Dunn and Julia Berry

The solar industry has experienced further recent upheaval as the Government is again reviewing the support it gives for renewable projects from the Renewables Obligation Scheme. The initial intention was that there would be a gradual transition for renewable projects to new Contracts for Difference up until March 2017.

However, at the start of this month the Department for Energy and Climate Change announced that it would be unaffordable to keep the RO Scheme open for large solar projects (i.e. greater than 5MW) and so it would be closed to new projects from 1 April 2015. DECC is offering a concession by the introduction of a “grace period” in order to acknowledge projects where significant financial commitments have been made subject to them having been incurred prior to 13 May 2014. To take the benefit of such grace periods, projects must have :

1.   A grid connection offer and acceptance;
2.   Confirmation of land ownership (including an option to purchase); and
3.   A planning application submitted (which cannot be materially varied);

before 13 May 2014. Even then, those projects would then need to be commissioned and accredited prior to 31 March 2016 to qualify for the RO Scheme.

The consultation is ongoing and so at this stage there is uncertainty as to how the “grace periods” will be interpreted. For this blog, we just want to consider the planning aspects and discuss what might represent a ‘material’ variation from an original application.

Of course, it is not uncommon for non-material amendments (under Section 96A of the Town and Country Planning Act) to be made on large solar applications and if DECC follows the planning regime, then such changes would not be considered as material variations.

The difficulty that might arise is if the changes are regarded as ‘minor material’ and so an application under Section 73 is required. Of course, whilst the planning regime consider these changes to be material, they are not sufficiently material as to require a new planning application and so it will be interesting to see what interpretation is made by DECC.

Practice Note – these “grace periods” mean that investors need to be even more careful in the planning due diligence that they do on solar projects as it is not always apparent when planning amendments have been made – some LPAs will put the applications separately on their websites rather than linking them to the main consents.

For more detail on these changes and the UK Government’s evolving policy on support for the Renewables sector, follow this link .
 

(US) Pennsylvania Rehabilitates the Abandoned & Blighted Property Conservatorship Act

Property owners, lien-holders and community development organizations in Pennsylvania, take note. Governor Corbett recently signed House Bill No. 1363 amending the act of November 26, 2008 (P.L.1672, No.135), also known as the Abandoned and Blighted Property Conservatorship Act. Depending on your viewpoint, the amendment gives much needed teeth to a tool for combating blight, or expands the already broad power of neighboring residents and business owners to interfere with a legitimate property owner’s interest. The amendment sailed through the Pennsylvania Legislature without a single “nay”, showing the Commonwealth is unified on the topic of remediating blighted real estate holdings.

The Abandoned and Blighted Property Conservatorship Act allows the court to appoint a conservator to rehabilitate deteriorating residential, commercial and industrial buildings. The conservator is then responsible for bringing buildings into municipal code compliance when owner fails to do so, and steps into the owner’s shoes for the purposes of filing plans, seeking permits, and submitting applications.
 
The Act does not relieve the actual property owner of any liability or obligation with respect to the property, and the property owner may become responsible for debts incurred as a result of the conservatorship.

A brief summary of the changes to the Act:

Expansion to Vacant Lots and Adjacent Property: The amendment allows conservators to take over vacant lots, which is a boon to neighbors eying up a trash-filled lot for a community garden. Previously, it was uncertain whether the Act only applied to land containing buildings or other improvements. Adjacent properties may be now considered in a single petition if they are owned by the same owner and used for a single or interrelated function.

Definition of Abandoned Property and Standard for Assessment: The Act now provides a definition of “abandoned property”, which was curiously missing from the original text considering the Act’s title. This fills a much-needed hole for judges, who previously had to dig into the legislative history and other acts to provide a definition. The court must give “reasonable regard” to the conservator’s determinations when assessing the rehabilitation plan, including costs to develop the property.

Expansion of Potential Conservators: The definition of a “party in interest” is expanded. Neighboring residents or business owners, previously limited to a 500 foot radius, may now petition the court if they are located within 2,000 feet of the subject property (in Philadelphia terms, essentially a change from 1 block to 4 blocks). A non-profit may have participated in a prior rehabilitation project within a five mile radius of the subject property, rather than a one-mile radius. The old definition tended to limit prospective non-profit conservators to a handful of neighborhoods.

Swapping Lien Priority: Important for senior lien-holders: a senior lien-holder can lose its priority status if it declines to provide financing for the rehabilitation. New rehabilitation financing can get priority status over the senior lien if the court determines the change in priority is necessary to induce another lender to provide financing. Furthermore, distribution from the proceeds of a sale now go first to Commonwealth liens, unpaid property taxes, and properly recorded municipal liens. It appears other government liens, such as federal income tax liens, have been moved further down the list.
 
Shifting Burden of Proof: The burden to prove whether the property has been on the market in the past 12 months has been shifted to the owner, who must present “compelling evidence” that the property has been actively marketed. Previously, the burden was on the petitioner to prove a negative, i.e., that the property had not been marketed.

Petition Costs Recoverable: The owner must reimburse the petitioner for costs of preparing the petition whether the owner elects to repair, the owner sells the property to the conservator or the court approves the conservator’s petition. Previously, if the recalcitrant owner opted to repair the property, the petitioner had no mechanism to recoup its costs. The ultimate goal of the petition –a repaired property- ends up being realized, even if conservatorship does not end up with control of the property, which incentivizes more petitions and workouts.

Reduced Time to Sale: The conservator must control the property for three months before sale (without a successful petition from the owner to terminate the conservatorship), down from six months.
 
Miscellaneous Provisions:
• Bids for contracts are no longer required if the conservator is financing the development.
• If the owner opts to repair the property, a bond is required rather than left to the discretion of the court.
• The petition requires submission of title reports, and notice to certain municipal authorities, such as utility providers.
• A hearing is no longer required for abatement if the court approves the submitted plan.
• The developer’s fee has been expanded to include a conservator’s fee.

Property owners should consider curing any outstanding municipal code violations, including health, fire or occupancy, and completely secure any abandoned property in compliance with the Doors & Windows Ordinance. In addition, senior lien holders should review requests for rehabilitation financing carefully to retain lien priority.

Lastly, neighbors, business owners, and non-profit community development organizations should take note.  You might want to take a tour of the scofflaw buildings in the neighborhood.
 

(US) A Groundbreaking Community Agreement in Pittsburgh: A Renewed Vision for Urban Development & Community Participation

This Entry was written by Gerald S. Dickinson and Peter Kogan

As part of the ongoing efforts to redevelop the 28-acre site of the former Civic Arena near Downtown Pittsburgh, the Pittsburgh Penguins’ redevelopment subsidiary Pittsburgh Arena Real Estate Redevelopment LP recently signed a groundbreaking agreement with representatives of Pittsburgh’s Hill District community, the City of Pittsburgh, and Allegheny County .

The agreement, known as the Community Collaboration and Implementation Plan (CCIP), outlines specific goals, strategies and processes for maximizing the inclusion of the Hill District community and its residents in various aspects of the Lower Hill District redevelopment project. The CCIP envisions, among other things, the creation of the largest Tax Increment Financing (TIF) district in the City of Pittsburgh to utilize the proceeds of future development on the Lower Hill District for redevelopment projects within the Greater Hill District, which encompasses the Lower, Middle and Upper Hill District areas.

The CCIP was signed after more than three years of negotiations and public meetings involving the Penguins, local community leaders and elected officials on how to maximize the redevelopment of the Lower Hill District and have that development act as a catalyst to benefit the greater Hill District. In addition to its stated goals, the signing of the CCIP enabled the Penguins organization and City and County officials to move forward with previously stalled master plan approval and private redevelopment efforts for the Lower Hill redevelopment site.

The  Preliminary Land Development Plan (PLDP)  will reconnect the Hill District to Downtown Pittsburgh. The PLDP is the document that identifies the guidelines for the development plan, street types, building types, signage, lighting and street furniture. The Plan designates open space and landscape standards, systems and network integration (utilities), sustainability goals and objectives, and off-site improvements. 

The CCIP's goals are to generate jobs, businesses and wealth building opportunities for Greater Hill District residents. The document is one of the most comprehensive community benefit arrangements in the United States. It seeks to build on the success of the Pittsburgh Penguins organization in bringing jobs and economic investment to the community in connection with the development of CONSOL Energy Center and to capitalize on the new opportunities created by the redevelopment of the Lower Hill District.

The following are some of the primary benefits that the CCIP envisions for the Lower Hill District redevelopment site.

Minority and Women Business Enterprises
The minority and women business enterprise (M/WBE) component of the CCIP facilitates opportunities for business enterprises owned and operated by minorities and women to participate in the ownership, development, design, construction, operation, and management of the redevelopment of the Lower Hill District redevelopment site. Further, the percentage of residential development to be developed on the site by an M/WBE includes a minimum of 250 units.

Affordable Housing
The CCIP also includes a groundbreaking affordable housing component. The CCIP promotes a housing program that will provide opportunities for affordable housing and home ownership on the site and throughout the Greater Hill District. The formula for determining affordable rates is determined by Area Median Income (AMI). AMI is the median (or midway point) in the family-income range for a metropolitan area. CCIP terms address the developer requirement to provide affordable residential development on the site. Specifically, 20% of the housing stock will be affordable housing. Of the 20%, 15% will be set aside for households earning at least 80% AMI, 2.5% will be set aside for households earning at least 70% AMI and 2.5% will be set aside for households earning at least 60% AMI.

Wealth Building
The CCIP seeks to cultivate opportunities for residents of the Greater Hill District to form their own businesses that could benefit from investment in the redevelopment of the Lower Hill. Further, the agreement envisions an investment in future development opportunities that may arise in the Greater Hill District.

Cultural and Community Legacy Initiatives
The CCIP seeks to enhance cultural and community legacy initiatives to incorporate the history of the Greater Hill District community in the design of the public areas and to preserve the vision and spirit of the Preliminary Land Development Plan (PLDP).

Greater Hill District  Neighborhood Reinvestment Fund
The CCIP provides for the establishment of the Greater Hill District Neighborhood Reinvestment Fund (Reinvestment Fund). The Project Stakeholders will use commercially reasonable efforts to facilitate one or more revenue streams to be deposited into the Reinvestment Fund from future development on the Lower Hill District redevelopment site to fund long-term development projects in the Greater Hill District.

The Lower Hill District redevelopment has the potential to be one of the most transformative development projects in the Southwestern Pennsylvania region. The redevelopment of the Lower Hill will reconnect the Downtown, Uptown and Hill District communities and will serve as a catalyst for economic development throughout the Greater Hill District community. The CCIP, and its primary components outlined in this blog, serves as the redevelopment’s vehicle to drive this comprehensive project forward.
 

(US) PA Supreme Court Attempts to "Take" Eminent Domain Apart: Ruling restricts water authorities power to condemn but avoids broader constitutional law questions

In September, the Pennsylvania Supreme Court unanimously decided in Reading Area Water Authority v. Schuylkill River Greenway, that a “water authority” may not condemn a utility easement over privately-owned land for the sole purpose of providing a private developer sewage and drainage facilities for a proposed residential housing development. The case is important because it substantiates the 2006 Eminent Domain Code’s amendment barring takings for “private enterprise.” However, the Court’s decision avoided any seismic shifts in eminent domain takings law by side-stepping important constitutional law questions and preserving the power of regulated “public utilities” under PA law to condemn utility easements to provide water and sewer access in tandem with private development.

In Reading Area Water Authority, the Schuykill River Greenway Association (“Greenway”), a non-profit corporation, owned a strip of land along the Schuykill River. Greenway had planned to construct a public recreational trail on its property. But, adjacent to the Greenway property was a tract of land owned by a private developer, who sought to construct a single, 219-unit residential development on the tract of land. The private developer needed a utility easement that ran across the Greenway property to access the Schuykill River for purposes of water and sewage facilities that would supply water and sewage to the planned residential development. The development, in other words, could not be completed without the utility easement. The developer persuaded the Reading Area Water Authority (“RAWA”) to support the development project.

After negotiations to purchase an easement across the property with Greenway failed, RAWA filed a Declaration of Taking to take the land to construct, maintain and operate utility and water lines to be placed under the Schuykill River. Greenway challenged the taking, alleging the condemnation was invalid under the Property Rights Protection Act (“PRPA”), because the purpose of the taking was to use the property for private enterprise, which is prohibited under the Pennsylvania Eminent Domain Code.

The Pennsylvania Supreme Court unanimously agreed.

There are two important points to clarify when analyzing the Court’s decision.

First, the case is limited in its broader impact on future takings. The Court narrowed its review to the statutory validity of the water authority’s attempt to condemn the utility easement under the Pennsylvania Eminent Domain Code. The Code was amended by the state legislature in 2006 with the introduction of the PRPA, which prohibited takings for private enterprise. The amendment was a direct response to the 2005 US Supreme Court ruling in Kelo v. City of New London, which found that takings for purposes of economic development satisfied the Public Use Doctrine under the Constitution.

However, the Pennsylvania Supreme Court did not review the taking in Reading Area Water Authority under the US Constitution, but rather reviewed the taking under the statutory exceptions carved out by the PRPA and its limitation on the water authority’s power to condemn a utility easement. The Court stated, “We need not decide the constitutional issue because, even if we assume the condemnation can pass Fifth Amendment scrutiny, to be valid is must also be statutorily permissible.”

The Court essentially side-stepped the much broader and perhaps more significant question of whether condemning a utility easement for purposes of providing a private developer sewage and drainage facilities for a proposed residential housing development violated the Public Use Doctrine under the Fifth Amendment Takings Clause by bestowing a private benefit on the private developer instead of resulting in a broader public use. This means that, conceivably, a court still could uphold a similar taking that was at issue in Reading Area Water Authority by relying on the Public Use Doctrine of the Fifth Amendment in its determination rather than through statutory construction.

Second, the case does not completely bar the condemnation of utility easements for purposes of private enterprise. Instead, the Court’s decision restricts a “municipal water authority” from condemning for such purposes. However, a regulated “public utility” is exempt from the statutory restriction under Section 204(a)(2)(i) of the PA Eminent Domain Code and may condemn utility easements for the purpose of providing water and sewer access in tandem with private development. In other words, a water and sewer company designated as a regulated public utility under the Public Utility Code (66 Pa.C.S. § 102), and not a municipal water authority, may still condemn utility easements for purposes that may still bestow a private benefit to a private developer.

These are important distinctions to be pulled from the opinion. Landowners and condemning authorities should be aware that the ruling is not a broad sweeping bar on condemnations for private enterprise per se, but rather a strictly confined ruling on distinguishing between water authorities and public utilities power to condemn for purposes of private enterprise through a statutory construction interpretation.
 

(US) New York City Air Rights: The Sky's The Limit

In an article that appears on Law360.com, Joe Marger of our New York office is quoted in an article titled "Developers Reaching Deep for Rights to Build Sky-High."

The demand for sky-high condos and penthouse apartment has changed how property owners look at air rights. They are now valuable real estate assets.

In an interview conducted by Kaitlin Ugolik of Law360, Joe Marger addresses how development air rights are sometimes selling for more per square foot than the land they're attached to. Not only can air rights allow for higher and therefore more expensive apartments, they can have a big impact on the ground floors of a development.

"That extra square footage may be the difference between being able to put a Nordstrom at the bottom of the building or not," Marger said. "It could dramatically change the way you pencil out a deal."

The full text of the article can be found here.

(US) Condominiums Exempted From Filing & Registration Requirements of the Interstate Land Sales Full Disclosure Act

On September 18, 2014 Congress amended the Interstate Land Sales Full Disclosure Act (“ILSA”) to exempt condominiums from the filing and registration requirements. Originally intended to protect consumers against fraudulent land sales practices such as selling lots that were underwater or unable to obtain utility services, the federal courts and the Department of Housing and Urban Development (“HUD”), the agency originally tasked to administer the law, ruled that ILSA applied to the sale of condominium units. Most condominiums were exempt from ILSA either because they had fewer than 100 units or because they could be completed and delivered within two years after the date of the contract of sale. However, after the real estate bubble burst in 2008, purchasers who contracted to pay more than the reduced fair market value got buyer’s remorse and turned to ILSA either to cancel their purchase agreements or to seek damages. Those developers who had structured their purchase agreements to qualify for exemption were able to enforce those contracts. Others who had not paid attention to HUD’s detailed requirements for exemption found that their sales evaporated and that their deposits had to be returned. Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) transferred rulemaking authority for ILSA to the Bureau of Consumer Financial Protection (“CFPB”) as of July 21, 2011.

ILSA has always had two forms of exemption:

(1) under 15 U.S.C. §1702(a) “lots” were completely exempted from all provisions of ILSA if, among other exemptions, the contract was for “the sale or lease of any improved land on which there is a residential, commercial, condominium, or industrial building, or the sale or lease of land under a contract obligating the seller or lessor to erect such a building thereon within a period of two years;” -or-
(2) under 15 U.S.C. §1702(b) “lots” were exempt from only the filing and registration requirements that a “Property Report” be filed with HUD before the developer could enter into any binding contracts of sale. The three main ways to qualify for a subsection (b) exemption were to contain less than 100 units, to be sold entirely within one state to in-state residents who visited the unit and by selling not more than 12 units in any twelve-month period.

Although most condominiums could qualify for an exemption, larger, high-rise buildings could not be completed within the two-year period and were required to register with HUD and distribute a HUD-approved Property Report which could take up to six months to be approved—in addition to any disclosure document required by state condominium law. Thus, the legislation was particularly problematic for developers in New York City where many condominium projects could not qualify for an exemption and a massive securities-like offering plan also had to be filed with the state Attorney General’s office and given to purchasers. Introduced primarily by congressional representatives from New York, the changes to ILSA were contained in H.R. 2600 and S. 2101.

The changes essentially added a new exemption to 15 U.S.C. §1702(b) for “the sale or lease of a condominium unit that is not exempt under subsection (a)” and defined the term “condominium unit” to mean:

a unit of residential or commercial property to be designated for separate ownership pursuant to a condominium plan or declaration provided that upon conveyance—
(1) the owner of such unit will have sole ownership of the unit and an undivided interest in the common elements appurtenant to the unit; and
(2) the unit will be an improved lot.

Although a significant change for developers of condominium projects that could not previously qualify for exemption, depending on how the CFPB implements this change in regulations, this may not have much effect on most developers who can deliver units within two years. The CFPB will have to determine whether the additional regulatory requirements for the purchase agreement—regarding (1) force majeure delays, (2) purchasers’ right to specific performance and (3) the 180-day limit on the developer’s right to cancel for failure to meet a presale requirement—will continue to apply in order to qualify for an exemption under 15 U.S.C. §1702(a). To be clear, the new exemption does not affect the misrepresentation and fraud provisions of ILSA—they will still apply to projects exempt under 15 U.S.C. §1702(b).

Nevertheless, the legislation finally permits larger condominium projects to avoid duplicative disclosure requirements without reducing necessary protections for consumers purchasing vacant lots they have never seen.
 

An article published on Law360.com provides additional insight on the impact of the prospective new law. The article can be viewed here.