Real Estate Legal Update : Global Corporate Real Estate Property and Planning Lawyer & Attorney : Reed Smith Law Firm

Last week, two more federal district courts dismissed suits seeking to collect transfer real estate taxes from Fannie Mae, Freddie Mac, and their conservator, the Federal Housing Finance Agency.

Counties in New Jersey and Maryland had brought class action suits, arguing the government-backed mortgage guarantors failed to pay state and local real estate transfer taxes on foreclosures.

Fannie and Freddie have taken ownership of countless foreclosures, which local governments have been eyeing as a potential treasure trove of tax revenue ever since March 2012, when the U.S. District Court for the Eastern District of Michigan ruled the agencies were not statutorily exempt from real estate transfer taxes.

Michigan, however, still stands alone in this interpretation. Judge Deborah Chasanow in the U.S. District Court for the District of Maryland, and Judge Robert B. Kugler in the U.S. District Court for the District of New Jersey, are the most recent to follow the other federal district courts that have decided in favor of Fannie and Freddie.

The suit filed in New Jersey was the first nationwide class action, but more are pending in state and federal courts around the nation. Stay tuned for updates on new decisions and the inevitable wave of appeals to follow.

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Last August, we reported that a Pennsylvania Superior Court decision (Butler v. Charles Powers Estate) threatened to undermine nearly 200 years of mineral-rights law in Pennsylvania by rejecting the “Dunham Rule” – a legal doctrine that presumes that in private deed transactions where there is a reservation or exception for “minerals,” without any specific mention of oil or natural gas, the term minerals was not intended by the parties to include oil or natural gas. The surprising court decision in Butler had the potential to impact thousands of private deed transactions that relied upon the Dunham Rule for certainty of title to oil, gas and minerals.

In a unanimous decision announced April 24, 2013, however, the Pennsylvania Supreme Court overturned the lower court in Butler and affirmed the applicability of the Dunham Rule. As a result, the claims of the heirs of Charles Butler to natural gas in the Marcellus Shale underlying the Butlers’ property was rejected because the 1881 deed in question reserved to them “one-half of the minerals and petroleum oils” – but not the natural gas. In its reasoning, the Supreme Court traced the history of the Dunham Rule, finding that it has been an unaltered, unwavering rule of property law for 177 years. The court further held that longstanding rules of real property should not be overthrown except for compelling reasons of public policy or demands of justice. Neither the superior court nor the heirs of Charles Powers provided any basis for overruling or limiting the Dunham Rule, which has formed the basis for thousands of real property transactions spanning two centuries.

By affirming the Dunham Rule, the Pennsylvania Supreme Court delivered a level of certainty to title to oil, gas and minerals in private deed transactions. If a reservation or conveyance of “minerals” does not also specifically grant or reserve oil and gas, the law presumes that the oil and gas was not granted or reserved. Buyers and sellers of real property intending to grant or reserve oil, gas and minerals must express such intent in the deed. Property owners intending to enter into oil and gas leases may find that a reservation in a prior deed in the chain of title casts doubt on the owner’s oil and gas estate or rights. For fee mortgage lenders, the language of a deed grant or reservation may determine whether the lender’s collateral includes or excludes oil and gas rights and estates underlying the surface estate.

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Last year in this space we reported on a pair of Michigan court decisions (51382 Gratiot Avenue Holdings, Inc. v. Chesterfield Development Company (Chesterfield) and Wells Fargo Bank, N.A. v. Cherryland Mall (Cherryland), which each held that a CMBS borrower’s insolvency could trigger personal liability on the part of its non-recourse carve-out guarantor. Those decisions spelled catastrophe for the subject guarantors, and threatened a cataclysmic reconfiguration of the scope of limited recourse liability throughout the CMBS universe. Now, the same Michigan appeals court that handed down the Cherryland decision has relied on a new state law, hastily enacted in the wake of that decision, to reverse itself and rule in favor of the guarantor.

Almost before the ink dried on the initial Cherryland opinion, the Michigan legislature rushed to enact the Nonrecourse Mortgage Loan Act (NMLA). The NMLA, signed into law by Gov. Rick Snyder in March 2012, prohibits lenders from pointing to the solvency requirement in a loan agreement’s single-purpose entity provision as a basis for invoking a guarantor’s non-recourse carve-out obligations. Most significant, the NMLA was enacted to apply retroactively. This retroactive component of the NMLA not only underscored to real estate developers the benefits of having good friends in government, but it also led the Cherryland court to an about-face on its initial decision. The court ruled earlier this month that, in accordance with the NMLA, the foreclosing lender could not target the guarantor’s assets to satisfy a $2.1 million post-sheriff’s sale deficiency.

While the Cherryland borrower and its guarantor celebrate this fortuitous turn of events, CMBS lenders still have cause for worry. With a new precedent set for rapid-response legislative intervention into contracts between sophisticated lenders and borrowers, the actual worth of important credit enhancements like non-recourse carve-out guarantees has been thrown into doubt. Although some observers suggest that other states are unlikely to adopt NMLA-type laws (though Ohio has already enacted such a statute), a wise lender will be well-advised to keep Cherryland in mind as it negotiates loan documents going forward. As to what lenders can do about their limited recourse loans already on the books, it appears the answer to that question may float on the ever-shifting political winds.

Note: Chesterfield is making its way through Michigan’s federal courts, and attorneys are weighing the prospects for an appeal to the U.S. Supreme Court.

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With cash-strapped states and counties feeling increasing budgetary pressure, lawsuits seeking to collect real estate transfer taxes from Fannie Mae and Freddie Mac are popping up all over the nation. In the wake of the economic downturn, Fannie Mae and Freddie Mac have acquired vast portfolios of properties. It’s no wonder states have their eyes on the enormous possible revenue to be collected from real estate transfers. In Pennsylvania, however, local governments will have to look elsewhere.

In March 2013, Judge Gene Pratter of the United States District Court of the Eastern District of Pennsylvania, held that because Fannie Mae, Freddie Mac (and their conservator, the Federal Housing Finance Agency) are statutorily exempt from “all taxation” under federal law, they are not required to pay the Pennsylvania Realty Transfer Tax. This decision joins a growing line of federal district court cases that reject the reasoning of a March 2012 opinion from Eastern District of Michigan, which held that the same statutory exemption extended only to direct taxes, and not excise taxes such as real estate transfer taxes.

Thirty-nine states have real estate transfer tax regimes or allow local governments to impose a transfer tax, and similar suits by local governments are pending in dozens of courts. If other courts decide to adopt Michigan’s approach, enormous tax liability for Freddie Mae and Fannie Mac could result, estimated to be in the billions of dollars. It appears, however, that the tide has turned against the challengers on this question, and states will not be able to draw from Fannie and Freddie’s deep pockets.

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This post was written by Daniel Slattery and Ann Pille.

The United States District Court for the Central District of Illinois has arguably driven the last nail into the coffin of In re Crane, the much criticized decision of the United States Bankruptcy Court for the Central District of Illinois. The coffin was already set in place after the Illinois legislature passed S.B.0016 late last year, which was signed into law by Gov. Pat Quinn February 8, 2013, as Public Act 97-1164, as reported previously on the Reed Smith Real Estate Legal Update. Much to the disbelief and dismay of mortgage lenders, on February 29, 2012, the bankruptcy court in In re Crane held that the bankruptcy trustee could avoid two mortgages because the mortgages did not expressly state the interest rate and the maturity date on their face, as the bankruptcy court ruled was required by the Illinois Conveyances Act.

In an opinion by U.S. District Judge Michael P. McCuskey, entered February 28, 2013, the federal district court reversed the bankruptcy court’s order, ruled in favor of the mortgage lender, and in the process rejected the bankruptcy court’s reasoning on all fronts. The district court pointed with favor to the recent decision of the Bankruptcy Court for the Southern District of Illinois in In re Klasi Properties (Bankr. S.D. Ill. Jan. 18, 2013), where the bankruptcy court found that an incorporation by reference of loan documents in the mortgage was sufficient as constructive notice to the bankruptcy trustee of the mortgage loan so as to prevent avoidance of the mortgage. The district court also found persuasive the recent enactment of Public Act 97-1164, and its acknowledgement that the failure of a mortgage to state the interest rate or the maturity date does not undermine the validity of the mortgage.

The district court in In re Crane concluded in holding that "[section 11 of the Illinois Conveyances Act] was intended to create a safe harbor, rather than a mandatory checklist of requirements to be completed pro forma. Since [section 11] advises lenders how best to provide sufficient detail so as to provide constructive notice to a third party purchaser, this court cannot permit the Trustee to avoid the mortgages in question because both were recorded, identified the Debtors, provided a description of the mortgaged property, set forth the amount and purpose of the indebtedness, and incorporated the interest rate and maturity date by reference to a promissory note." So, almost one year to the day after the bankruptcy court ruling in In re Crane, the district court’s reversal in favor of the lender has finally eased the worried minds of mortgage lenders, and has validated the alignment of time honored mortgage-industry customs and practices with the dictates of the law. While the Trustee’s deadline to appeal the district court’s ruling has not yet expired, we do not anticipate the Trustee will appeal the ruling given the overwhelming rejection of the legal theory advanced by him by both the judiciary and the legislature.

We will continue to monitor any further developments as to the In re Crane decision, and post further updates as appropriate.

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According to the National Restaurant Association, the proliferation of food trucks has been one of the hottest trends in the food service industry the last few years. Such trucks have become technologically advanced and bear little resemblance to the “Good Humor” trucks and the so-called construction site “chuckwagons” that have previously dominated the mobile-food-truck sector. 

There are many benefits to the increased presence of mobile food trucks, including the social benefit of enabling potential restaurant owners to start a new business with little capital and low overhead; providing a forum for existing restaurant owners to test gourmet or unique food concepts for customer acceptance before bringing them to a more traditional food-service format and; for property and restaurant owners, meeting the demand for trendy food-service options in areas that may be underserved, such as fringe urban areas, retail centers, universities or suburban office parks - where brown bag lunches, limited choices and large parking lots are the norm. Food trucks contribute to environmental sustainability by reducing vehicle trips. Food trucks also may provide an excellent interim use of land prior to development.

Despite the benefits of mobile food trucks, not all property owners and developers may be in favor of their increased presence. Owners of brick-and-mortar restaurant sites could be adversely affected by food trucks if the latter’s increased sales result in a decrease in rents (especially percentage rent if tenants’ sales suffer). Food trucks also may use parking and loading spaces, which may be at a premium; create potential traffic-safety issues (both vehicular and pedestrian); and cause issues with trash, odor, vermin, pollution and loitering.

With careful planning, however, property owners and developers may be able to meet existing tenants’ and visitors’ needs while also creating additional foot traffic and bringing in new customers, all while mitigating any actual or perceived negative attributes of food trucks. Once owners and developers have determined that they might like food trucks at their properties - to satisfy a demand or need for additional food service, and that the presence of food trucks will not violate the rights of existing tenants - they should evaluate the local laws and regulations currently applicable to food trucks, as well as the broader regulatory environment, in order to ascertain if compliance costs may affect the benefits of allowing food trucks.

To read the full article written by David Houston published in Commercial Lease Law Insider, follow this link.

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This post was written by Katherine Campbell and Siobhan Hayes.

Do tenants who want to exercise a break part way through a quarter have to pay the whole quarter's rent on the quarter day in order to validly exercise the break? You will know from our previous posting that there have been two cases in the last year that have examined this question.

If the break clause provides that the rent due under the lease has to be paid as a condition of validly exercising the break, (subject to specific lease provisions otherwise) the current legal position is that the rent payment cannot be apportioned to the break date. It must be paid for the full quarter even though part of that falls after the break,

The two cases that were to go to the Court of Appeal on the point in February PCE Investors v Cancer Research and Canonical UK v TST Millbank (one of which we litigated) have both settled, the landlords having succeeded first time round in the High Court.

For now, a tenant who pays the whole quarter's rent in advance is left to negotiate with its landlord as to any reimbursement post break. Some leases provide for this, but many don't and there is no settled law which requires the landlord to reimburse anything. The tenant who doesn't pay the whole quarter up front however lays itself open to a claim that the lease hasn't been broken at all, leaving it responsible on all of the lease covenants for the remainder of the term.

Those negotiating new leases for tenants know that they need to negotiate specific apportionment or refund wording in order to ensure that the tenant only pays for the time the lease exists.

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A recent opinion by New York’s highest court (J. D’Addario & Co. v. Embassy Indus., Inc. Slip Op 07850, Court of Appeals) held that a seller’s "sole remedy" of retaining the purchaser’s deposit as "liquidated damages" means just that – that’s all you get (i.e., no court-imposed interest unless you expressly say so).

In the J. D’Addario case, after the purchaser failed to timely close on the real estate purchase, it had its 10 percent deposit at risk. Both sides blamed the other and the deposit sat in escrow during the litigation. Seller won the case at trial and was entitled to the escrowed deposit. The trial court also awarded seller the New York statutory 9 percent court-imposed interest (under the NY CPLR). On appeal, the court determined that the purchaser was not liable to pay even court-imposed interest, because per the language of the contract, the escrow deposit was the full measure of seller’s damages.

The takeaway is that if you have an "exclusive remedy" liquidated damage clause in your contract of sale (and we all do!), don’t expect to recover any interest or, based on the logic of this case, any attorneys' fees or court costs, unless you expressly add it to the basket of recoverable damages. This ruling may embolden buyers to drag out litigation if they fail to close because they do not risk the imposition of additional interest or costs. At the same time, we have at least been clearly warned and can draft seller protections for future deals.

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This post was written by Cynthia Jared and Daniel Slattery.

Custom and practice in Illinois with respect to mortgages has been to incorporate the note or other debt instrument by reference, rather than to disclose all of the financial terms of a loan transaction in the mortgage. Then, in April 2012 (as previously reported in the Reed Smith Real Estate Legal Update), the Bankruptcy Court for the Central District of Illinois, in In re Crane, held that an Illinois mortgage must comply strictly with the form of mortgage as set out in the Illinois Conveyances Act, and that a mortgage that fails to include the maturity date and the interest rate of the underlying debt can be avoided in bankruptcy because it does not provide constructive notice to the bankruptcy trustee.

This harsh and unexpected result for the mortgage lender had lenders with Illinois mortgage loans scrambling to amend their mortgages to comply strictly with the statutory form, even while the appeal of In re Crane was pending and the state legislature was preparing legislation in response to the decision.

Now we can report that Illinois has taken action to reject In re Crane and its reasoning. On February 8, 2013, Gov. Pat Quinn signed Senate Bill 16 into law as Public Act 97-1164, which includes an amendment to the Conveyances Act that specifically provides that the form of mortgage (as set out in section 11 of the Conveyances Act) is permissive and not mandatory, and that the failure of a mortgage to conform to the statutory form (including failing to state the interest rate and/or the maturity date) does not affect the validity or priority of the mortgage.

Although the effective date of Public Act 97-1164 is June 1, 2013, the new law includes a specific statement of legislative intent that the form of mortgage has always been permissive, such that the law should serve to eliminate the prospect of the In re Crane reasoning being available to aggressive bankruptcy trustees seeking to find reasons to avoid Illinois mortgages.

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This post was written by Meredith Hartley and Robert Diamond.

On January 14, 2013, the Fourth Circuit Court of Appeals held that liability under the anti-fraud provisions of the Interstate Land Sales Full Disclosure Act ("ILSA") extends to an entity that engaged in advertising or marketing activities in the course of a transaction covered by ILSA, even though the entity was not a party to the challenged real estate transaction. Enacted in 1968, ILSA was intended to regulate land sales where infrastructure was not yet in place to prevent shady developers from defrauding consumers. The classic situation was Florida developers selling swampland to northerners sight unseen.

In the case of In re Total Realty Management (2013 WL 142069; January 14, 2013), a case of first impression, the court analyzed the statutory language and the legislative history of the anti-fraud provision and concluded that the definition of "developer" under ILSA encompasses entities that sell or advertise for sale properties in covered subdivisions. This ruling is the latest holding in a continuing expansion of what entities fall under ILSA’s definition of "developer." District courts in the Fourth Circuit have found that other participants in the marketing effort, particularly those who lent their "prestige and good name to the sales effort," can be held liable as a "developer" under ILSA despite the fact that such entities are not part of the sale transaction. (See, e.g., Nahigian v. Juno Loudoun, LLC, 684 F.Supp.2d 731 (E.D. Va. 2010).)

Remedies for non-compliance under ILSA include both a two-year right to rescind the purchase and damages.

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The Government has made many headlines as the result of its desire to cut down on what has previously been thought to be legitimate tax planning and high on its list of targets are high value residential properties. The changes are a new annual residential property tax charge (a form of SDLT), increased rates of SDLT (already in force) and an extension of capital gains tax.

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This post was written by Siobhan Hayes and Katherine A. Campbell.

This morning we got the news that HMV had gone into administration and last week it was Jessop that went under. HMV’s administrators are still trading from the stores but the administrators of Jessops have ceased trading. Can their landlords expect their rent?

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Are you the owner of occupier of commercial real estate that the public visits? If so it may be that you should now be displaying your Energy Performance Certificate (EPC). If you are the seller or landlord of a listed building it may be that you do not need an EPC for your sale or lease! The reason is that we have new Energy Performance of Buildings Regulations and Government Guidance.

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This post was written by Katherine Campbell and Siobhan Hayes.

Most landlords are reasonably familiar with the rules set out in O’May v City of London Real Property Co Limited. As a result of that case, a landlord cannot introduce changes to lease terms on a renewal where the effect of the change is to shift a specified risk from landlords to tenants. In the O'May case, the lease had an inclusive rent, so the landlord was not able to force a renewal lease upon the tenant in which the rent became exclusive of service charge because this shifted the risk of fluctuating costs for the services from the landlord to the tenant.

Whenever a landlord seeks to change lease terms on a renewal, the burden is on the landlord to show that the proposed change is fair and reasonable in the circumstances.

In the recent case of Edwards & Walkden (Norfolk) Limited v City of London Corporation, we saw good illustration of the fact that general rules of thumb that we derive from case law are all dependant on the application of the facts of the case which is how case law evolves. In the Edwards & Walkden case, the lease renewals involved tenants at Smithfield Meat Market. On a number of the renewals, the landlord wanted to move from inclusive rents to exclusive rents plus a service charge and the tenants objected. The court held that the landlord, in this very particular case, was entitled to alter the terms of the renewal leases from inclusive to exclusive rents but what is very relevant are the facts of the case. Most of the leases were originally granted back in the 1980s and had exclusive rents. However, concessions were later given to compensate tenants for disruption due to major refurbishment works and that concession was then repeated in the renewal leases granted in the early 2000s albeit that the landlords position in those renewal leases was reserved for the future.

It appears that the Court were also influenced by the nature of the services provided in these Smithfield Meat Market leases. Most related to the trading requirements of the tenants covering things like health and safety, hygiene and refrigeration services. The cost of providing these services was causing the landlord a substantial loss each year and so on this very specific case, the landlord was able to change the terms of the renewal lease closer to the original 1980s leases.

None of us should get carried away thinking that there is any new law that was made by this case but we should all remember that cases do turn on their own specific facts and that even what appears to be a simple renewal case can turn out to be complicated.

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