(US) Commercial Real Estate Brokerage Agreements: Imprecise Commisson Language Can Cost You

It would be unfair (and likely bad faith) for a property owner to terminate a brokerage agreement prior to entering into a sales agreement or lease just to avoid paying a real estate commission. Yet, if a property owner is dissatisfied with the services of the broker, the owner should be able to terminate the contract and list the property with another broker or sell or lease the property on its own.

There have been a number of formulations used in brokerage contracts to come to a fair resolution of these competing interests. One is the subject of a recent opinion of the Court of Common Pleas of Allegheny County, Pennsylvania, in Pittsburgh Commercial Real Estate, Inc. v. Baum Boulevard Investors, LP, No. GD13-3233 (February 17, 2015).

In that case, the brokerage agreement provided that the broker, Pittsburgh Commercial Real Estate (PCRE), would be entitled to a commission if the owner entered into a lease within 180 days after expiration or termination of the brokerage agreement “with any tenant to whom the Premises were submitted” by the broker during the agreement term. The agreement also required PCRE to deliver to the owner, within 30 days following the expiration or termination of the agreement, a list of the prospects to whom or which the property had been submitted by the broker. The point of this provision was to allow PCRE to benefit fairly from its work performed during the contract term without tying the owner to PCRE indefinitely. This provision or one similar to it is common in commercial real estate brokerage agreements used in the Greater Pittsburgh market.

Within 180 days after the expiration of the brokerage contract, the owner’s assignee entered into a new brokerage agreement with another broker, and, still within the 180 day period, entered into a lease for the property, as a result of which the assignee now owed the second broker a commission.

PCRE sued the Owner for the payment of a commission.

There were two primary issues in the case:

  • (i) PCRE submitted their prospect list more than 30 days after expiration. Did the failure of PCRE to deliver the prospect list in time preclude PCRE from being entitled to a commission?
  • (ii) was the property “submitted” by PCRE to the tenant during the term of the brokerage agreement?

Under Pennsylvania law, an event like the 30 day prospect list is not a condition precedent unless the contract expressly provides that it is a condition precedent. The original brokerage agreement did not expressly state that delivering the list within 30 days was a condition precedent to the broker’s entitlement to a commission. The Court ruled that failure to deliver the list of prospects within the 30 day period did not preclude PCRE from receiving a commission.

With regard to the second issue, the brokerage contract did not define the conduct that would constitute “submitting” the property. The Court went to the dictionary, which defined “submitting” as “to commit (something) to the consideration or judgment of another”. The Court then described the numerous communications between PCRE and the tenant and concluded that those communications were sufficient to constitute “submitting”.

The owner argued that PCRE had not “submitted” the property to the tenant because PCRE had never actually shown the property to the tenant. The Court held that actually showing the property was not a necessary element to establish that the property had been submitted to the tenant.

Therefore, the owner’s assignee was required to pay two commissions on the same lease, one to PCRE and one to the second broker.

This case illustrates the need for careful and precise drafting of the language in a brokerage contract concerning the payment of commissions. With better language, the litigation in this matter might have been avoided entirely and a lot of money saved by the Owner on lease commissions.

(US) Limiting the Sky: Is There Space for Drones in Real Estate Law?

Real property is generally conceived of as tangible and two dimensional. We acquire land described by courses and distances in a deed, depicted by lines on a survey. The laws respecting that land are well-formed; most in the U.S. derive from English common law. These laws give landowners extensive rights in their property, including the right to exclude others. Anti-trespass laws in the U.S. generally permit landowners to use whatever means necessary, short of excessive force, to preserve their right to exclusive use and enjoyment of their land.

Real estate law does not stop at the surface, however. At least in theory, the boundary lines described in a deed extend to the depths of the earth and the reaches of the atmosphere. The ad coleum doctrine, a relic of U.S. property law, assigns to each landowner the column of air extending indefinitely above his or her parcel. Though the Supreme Court has limited that doctrine to make space for modern air travel, landowners’ air rights generally extend approximately 500 feet above the ground. Unless you’re in a large city (where air rights have a marketplace all their own), the sky is the limit.

Lately, however, a new tool for law enforcement, delivery companies, photographers, dronestagram users, real estate agents, journalists, utility companies, and myriad other industries has entered the airspace. Drones—once a product of science fiction—are now mass-manufactured, commercially-used machines that challenge existing rules regarding airspace and property rights. As drones have risen in popularity, complaints about drone activity have soared, and the question of how to integrate them into existing legal frameworks has become more pressing. What right does an individual or business have to exclude drones from the area above its land? At what point does excessive drone activity around a parcel constitute a taking?

Though academics and legislators have discussed drones at length in the context of privacy rights and modern warfare, until recently few had spoken about drones’ effect on modern property law. Part of the difficulty in answering this question is that drones challenge the conflicting (yet equally compelling) aims of real property law and aviation law. The former protects landowners’ interests by relying on firmly-drawn boundary lines and rules of exclusion, while the latter protects airspace as a regulated commons, open for the benefit of the world.

Some believe the Federal Aviation Administration is best equipped to regulate drone activity because of the extensive communal benefits and risks that drones offer. Congress has endorsed this perspective, at least preliminarily, by passing legislation in 2012 that tasks the FAA with regulating “civil unmanned aircraft systems” by September 2015 (a deadline the FAA will not likely meet). Others believe that state and local governments should dictate drone use in and around their communities. At least 17 states have already passed laws restricting drone use. (In one failed local Colorado initiative, property owners lobbied for the right to hunt drones flying above their property.) A third perspective calls for coordinated legislative action grounded in property law principles that harmonize with FAA regulations. Under this scheme, state and local legislatures would pass laws giving landowners a definite right to exclude drones from airspace in a definable area above their land. Supporters believe these laws, in coordination with a broader regulatory scheme, would balance the interests of drone users with those of property owners, as well as provide direction for courts facing novel issues arising from drone use.

Increasing drone activity in commerce, government, and law enforcement will undoubtedly affect individual property rights. Whether or not the laws surrounding drones evolve as quickly as drone technology itself, however, remains to be seen. One thing is certain: these little flying machines paint a pretty picture of home.

More UK Residential Property for the IHT Net

The headline-grabbing inheritance tax (IHT) news from last week’s Budget was the introduction, from April 2017, of an additional nil rate band when a residence is passed on death to direct descendants. However this is only one part of the changes that were announced in relation to IHT and residential property, as significant changes were also announced in relation to UK residential property held by foreign domiciled persons.

UK Residential Property Held by Foreign Domiciled Persons

From April 2017, all UK residential property held directly or indirectly by foreign domiciled persons will be brought into charge for UK inheritance tax (IHT) purposes. This will be the case even when the property is owned through an indirect structure such as an offshore company, partnership or trust.

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(UK) New Rules for Residential Landlords in Wales

Residential landlords of properties in Wales need to be aware of the extra regulatory burden that applies to them and particularly because breach could be a criminal offence.

The Welsh Assembly has added an additional layer of regulations which affect private rented residential property in Wales only and which are expected to come into force in autumn 2015.

The new regulations require –

  • all private sector landlords and letting and managing agents to be registered with the licensed authority (currently Cardiff) and
  • all those carrying out property management activities have to be licensed.

If a private residential landlord does want to manage its own portfolio, it must obtain a licence from the authority and for this it will have to –

  • pass a “fit and proper person” test,
  • follow a code of conduct and
  • attend and pass a one day training course.
  • The Regulations allow the authority to charge a fee but the fees policy is not yet available!

As part of the licensing arrangement, landlords will be required to notify the licensing authority of changes in circumstance including the sale of a rental property. There is a grace period of 28 days for the outgoing and incoming owners to notify the licensing authority of the change in ownership and for the new owner to register.

Typically the cost to a residential landlord of instructing a managing agent is around 10% of the rental income each month plus one off costs for tenant find services, AST and inventory preparation, tenant check in and check out, deposit protection and renewals. However, given the increasing regulatory burden for private residential landlords in Wales it seems increasingly advisable to pay an accredited managing agent to do the job.

(US) It’s that Time of the Year ; Pennsylvania Real Property Assessments are on the Horizon

It’s that time of year again, as Pennsylvania real property tax assessments will soon be upon us. It is important that property owners do not take an assessment or reassessment at face value. Please contact us if you would like assistance in evaluating your property for a possible 2016 appeal.

The annual appeal deadlines for tax year 2016 in Pennsylvania counties are as follows:

  • August 1: Adams, Bucks, Cambria, Chester, Dauphin, Delaware, Erie, Fayette, Franklin, Lancaster, Lawrence, Lehigh, Luzerne, Monroe, Montgomery, Northampton and York
  • August 15: Berks
  • August 31: Wyoming and Butler
  • September 1: Armstrong, Beaver, Bedford, Blair, Bradford, Cameron, Carbon, Centre, Clarion, Clearfield, Clinton, Columbia, Crawford, Cumberland, Elk, Forest, Fulton, Greene, Huntingdon, Jefferson, Juniata, Lackawanna, Lebanon, Lycoming, McKean, Mercer, Mifflin, Montour, Northumberland, Perry, Pike, Potter, Schuylkill, Snyder, Somerset, Sullivan, Susquehanna, Tioga, Union, Venango, Warrant, Washington, Wayne and Westmoreland

Deadline Change: Indiana County has nearly completed its county-wide reassessment and has set a July 2015 deadline for mailing all reassessment notices effective for tax year 2016. Importantly, the deadline for appealing the 2016 reassessment is 40 days from the date of the reassessment notice. Additional information regarding Indiana County’s reassessment, as well as other county-wide reassessments presently underway, can be found here:

Please contact the Real Estate Practice Group at Reed Smith to request an evaluation of your property’s assessment.

(UK) Residential Service Charges Update

As increasing numbers of investors now include residential and mixed use properties in their portfolios there are bound to be issues dealing with the residential element of service charges and you really can’t be too careful about the administration of residential service charges.

From our perspective it seems like an almost endless stream of cases appear on the subject of residential service charge and this is a short summary of the most significant, highlighting just how much attention to detail is required when setting up and managing service charges for buildings and estates with any residential element.

  • The first (and most recently decided) case is the most significant in legal terms and unusual in that the landlords were the victors.  The Supreme Court in Arnold v Britton declined to bend the usual rules of construction in favour of the tenants of holiday chalets let on long leases.

    The service charge provisions in the long leases were inconsistent but a significant minority of them provided for a fixed charge service charge with annual uplifts which resulted in a huge individual service charge liability as the term progressed.  The fixed service charge increased in an amount that was massively higher than inflation and well beyond the actual service costs.

    The Supreme Court held that, because the service charge was a fixed amount, it would be legitimate for the landlord to continue to collect that fixed amount without any need for the landlord to follow the Service Charge Consultation Regulations and without any scope for appeal to the First Tier Tribunal as to the reasonableness of the sums charged.  A warning though: the outcome was manifestly unjust to quite a number of the tenants at the holiday park and all of the Law Lords suggested petitioning Parliament for a change in the law.  That makes it difficult to say that fixed charge service charges will continue to be outside the service charge consultation requirements and incapable of challenge in the First Tier Tribunal on grounds of reasonableness.  For now, however, they are.

  • In an unusual case involving a right to manage company (“RTM”) administering the service charge, the Upper Tribunal found that the RTM had not complied with the regulations on service charge consultation to the letter.  The RTM had failed to make adequate arrangements for the tenants to be able to inspect the estimates. Failure to comply with the fine detail of the regulations means the amount that a landlord can collect is capped by statute.  The statutory cap is just £250 per tenant for one-off expenditure and £100 per tenant for ongoing contracts (an ongoing contract being 12 months or longer).  The level of the statutory caps is such that it is highly unlikely that a landlord who fails to comply with the regulations will be able to recover all or even a substantial part of its expenditure.

    The Upper Tribunal did point out that the RTM could have proceeded with an application to dispense with the need to comply with the consultation requirements and if it had successfully done so would have been afforded full recovery.  We have posted on this process before.  The moral to this Ashley Court Right to Manage Company v De-Nuccio case is that the fine details of the consultation regulations really do matter and it is the prejudice that can be suffered by the tenants that the Tribunals will consider in deciding whether or not to allow full or partial recovery, not the size of the actual mistake made by the landlord in complying with the regulations.

  • A final case worth mentioning arose when the tenant of a long lease applied to enfranchise his lease, i.e. extend his lease term and vary the service charge provisions, arguing that it was no longer fair to pay service charge on the existing fixed percentage basis.  The facts of the case were such that a much altered Victorian property had a service charge where the landlords were collecting well over 100% of the service charge.  The Upper Tribunal agreed that the service charge provisions should be amended in principle but we don’t know as yet how the new service charge percentage in the new long lease will be calculated as the Upper Tribunal sent this question back to the First Tier Tribunal. There is therefore more to come from Rossman v The Crown Estate Commissioners and we will, of course, keep you posted.

 

(US) 4 Ways Buyers Can Speed Up Commercial Real Estate Due Diligence

In a June 9th article on Law360.com, Simon Adams comments on the challenges commercial real estate investors face when seller are requiring prospective buyers to undertake due diligence in ever shortening time frames.

Among the four methods is locating pre-existing surveys and documents, which can be substantial time and money savers for prospective buyers. The idea, says Simon Adams, “is to understand from the seller team at the outset what current due diligence documentation is available from historic reports and to identify those consultants that are often very willing to work with the buyer teams to reproduce their reporting with an update.”

A prospective buyer can avoid delays in finding property consultants by utilizing the knowledge of contractors and consultants already familiar with the property. “This is particularly helpful if a buyer is in need of engineer survey work or other technical information,” Adams said.

The text of the full article can be found here.

 

 

 

 

(US) Property Reassessments are coming to some Pennsylvania Counties

Multiple counties throughout Pennsylvania are conducting county-wide real property tax reassessment projects in 2015, including Washington, Indiana, Lancaster and Blair counties. Information requests are also being mailed out to property owners.

Here are some details for each county.

Washington County  The county-wide reassessment is underway and is expected to conclude by the end of calendar year 2015.  The county is scheduled to mail all reassessment notices by February 2016, effective for tax year 2017.

The formal deadline for appealing Washington County reassessment notices is September 1, 2016, their usual annual deadline. Washington County is also providing property owners an opportunity to informally appeal their reassessments during the period of March 2016 through April 2016. We will advise clients accordingly should these dates change.

Indiana County  The reassessment project is nearly complete, with the county setting a July 2015 deadline for mailing all reassessment notices effective for tax year 2016.

The deadline for appealing reassessment determinations is 40 days from the date of the notice, not the usual appeal deadline of August 1. However, prior to filing a formal appeal, property owners may request an informal review to ask questions about their reassessed property values, verify information, and present facts about their property that may affect the value. Property owners will be notified about how to utilize the informal administrative review process. This process will not toll the 40-day appeal period, and a formal appeal must still be filed.

Lancaster County  The  reassessment project is expected to conclude by the end of  2015. The first of two notices to property owners are to be mailed by the county during March 2016. Upon receipt of this first notice, property owners may participate in an informal appeal process that will be conducted from March 2016 through June 2016.

In June 2016, Lancaster County will be mailing its second and final notice to property owners. The formal appeal deadline for appealing the final notice of reassessment determinations is 40 days from the date of the notice and not the usual appeal deadline of August 1.

Blair County  The reassessment project is nearly complete, and the county indicated that it will mail all reassessment notices by July 1, 2016, effective for tax year 2017.

The deadline for appealing reassessment determinations is 40 days from the date of the notice and not the usual annual appeal deadline of September 1. As with Indiana County, property owners will be provided the opportunity to participate in an informal review of their reassessment values, with information regarding that process to be provided by the county.

In conjunction with completing a county-wide reassessment, many counties retain the services of mass reappraisal companies to aid in the collection of data from property owners. For example, Indiana County and Blair County are utilizing Evaluator Services and Technology, Inc., while Washington County’s data collection is being handled by Tyler Technologies. In the course of performing their data collection, these third parties issue mailers to real property owners seeking additional information. Most recently, Washington County circulated a mailer to all commercial property owners titled “2015 Annual Income and Expense Report.” Among other things, the mailer requests income and expense information and rent schedules for Tax Years 2013 and 2014.

Generally, we recommend against providing the requested information, as your response is completely voluntary and most of the requested information is private and confidential. Despite the fact that such mailers typically state that any information provided will be kept “strictly confidential and completely private,” we are not aware of any law clearly supporting that statement. Therefore, the possibility remains that once divulged, this information will become part of the public record. Moreover, your property information will not be used solely for your property assessment, but will also be used as foundational information for the mass appraisal process.

We will continue to keep clients apprised of reassessment projects throughout the state as information becomes available. In the interim, if  there any questions about whether you should respond to a request for information, or have any other real property tax assessment issues, please contact Dusty Kirk (dkirk@reedsmith.com) at 412.288.5720 or Steven Chadwick (schadwick@reedsmith.com) at 412.288.3118.

(US) Revised Phase I Environmental Standards Will Impact Property Acquisitions this Fall

This post was written by SueLyn Athey, Tala Gardner and Todd Maiden

The All Appropriate Inquiries Rule (the “AAI Rule”), set forth at 40 CFR Part 312, serves as a benchmark protocol for inspecting a property’s environmental condition. If the benchmark is met, a prospective purchaser can be insulated from liability under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). In order to satisfy the requirements of the AAI Rule, a prospective purchaser must be able to demonstrate satisfaction of certain industry standards promulgated by the American Society for Testing and Materials (“ASTM”). On December 20, 2013, the Environmental Protection Agency approved ASTM Standard 1527-13 (the “Revised ASTM”), relating to Phase I Environmental Site Assessments (“Phase I Assessments”), as sufficient to satisfy the AAI Rule for protection under CERCLA. The EPA approval goes into effect on October 6, 2015. After this date, prospective purchasers of property must verify that all Phase I Assessments and related due diligence are performed in accordance with the Revised ASTM. The changes, discussed below, could impact the time and costs associated with due diligence, and prospective purchasers should start planning now.

Changes in Recognized Environmental Conditions

A subtle but significant change relates to how the term “recognized environmental condition” (or “REC”) is now differentiated. As background, a REC means the presence or likely presence of any hazardous substances or petroleum products in, on, or at a property: (1) due to any release to the environment; (2) under conditions indicative of a release to the environment; or (3) under conditions that pose a material threat of a future release to the environment. Further, a Historical REC (“HREC”) is defined as an environmental condition that in the past would have been considered a REC but has been satisfactorily remediated or addressed in such a manner that it is no longer considered to be a REC, i.e. the environmental conditions have been fully remediated with no restrictions.

The Revised ASTM breaks down this differention further by defining a “controlled REC” or “CREC”) as a past release of hazardous substances or petroleum products that has been addressed to the satisfaction of the applicable regulatory authority, with hazardous substances or petroleum products allowed to remain in place subject to the implementation of required controls (e.g., a land use control or deed restriction, limiting a property to commercial or industrial while prohibiting residential use or certain specific uses such as crop growingetc.

The above distinctions will require additional due diligence on the part of environmental consultants who must verify what remedial measures were taken, which could increase costs, including title searches and review of land use controls. The new distinction could attract additional scrutiny from lenders and insurance carriers as well.

Vapor Intrusion as a Recognized Environmental Condition

The changes also broaden the scope of an acceptable Phase I Assessment to include vapor intrusion and clarified that releases of contaminants that migrate via vapor in subsurface or in soils constitute a REC, heighten due diligence standards with respect to adjoining properties, and add new title search requirements. All this will inevitably add time and delay to the due diligence process, and could necessitate additional due diligence, including a Phase II Site Assessment, which could stop some deals in their tracks.

Most consultants and lenders already work to the Revised ASTM, but prospective purchasers should carefully evaluate a consultant’s scope of work going forward, as the Phase I Assessment is typically obtained to support a statutory defense to strict liability for environmental contamination caused by prior owners and the Revised ASTM must be satisfied in order to support such a defense.

(US) Foreign hotel investors: What you don’t know will hurt you

Simon Adams of Reed Smith’s San Francisco office commented on a Law360 article concerning the pitfalls foreign investors face when investing in US based hotels.

The article addresses five areas where investors new to the US hotel market should exercise care. A failure in any one area can be the difference in a successful hotel investment.

The areas of concern are:

  • Financing
  • Hotel Management
  • Tax Implications
  • Hotel Operations
  • Due Diligence

The full article can be found here.

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