(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.

 

(UK) Lease Guarantees: An Update

This post was written by Stuart Wright and Siobhan Hayes

When tenants offer landlords guarantees of their lease liabilities landlords need to take care what assignment rights the tenant can have and this was demonstrated in last week’s Court of Appeal decision in Tindall Cobham 1 Ltd v Adda Hotels.

As you may recall, prior to the KS Victoria case (previously reported here) it was quite common for guarantors of an outgoing tenant to also guarantee the obligations of the incoming assignee. The KS Victoria case held that this arrangement fell foul of the provisions the 1995 Act as it sought to limit the release of the liabilities of outgoing tenants and guarantors upon assignment.

In the Tindall case the tenant sought to take advantage of the outcome of the KS Victoria case on a lease assignment to a group company where there was only one pre-condition to the assignment to a group company - that the tenant’s guarantor had to provide a repeat guarantee of the group company assignee. The lease was drafted before the KS Victoria case and contained stringent controls on assignment to a company outside the tenant’s group but more freedom to assign intra-group.

Facts
Since the KS Victoria case it has been clear that a repeat guarantee will be invalid. In light of this the tenant took the view it did not need to re-state the guarantee previously given and the tenant simply assigned the lease without landlord’s consent. The landlord objected to this on the basis that it had lost the valuable guarantor of the lease and the assignee of lease was now a shelf company which it would not have consented to.
 

Implications of case for Landlords

  1. What the Court of Appeal did was apply a common sense approach to removing from the lease the invalid provisions for the repeat guarantee on a group company assignment. It found a commercial solution.
  2. The court therefore stated that landlord’s consent to the assignment to a group company would still be needed, such consent not to be unreasonably withheld. It specified that the Landlord and Tenant Covenants Act 1927 applied to enable the landlord to impose reasonable requirements upon the assignment in order to sufficiently protect the investment value of their lease.
  3. This enabled the landlord to request a replacement guarantor (not a repeat guarantor) thus protecting asset value.

On first reading this would appear to be a sensible decision and victory for common sense as it would appear at the time the lease was entered into it was the intention of the parties that the tenant and any permitted assignee would need to be a substantial company or be supported by a guarantor. The result of this case preserved this intention.

The Uncertainty for Landlords and Tenants

As always this case turns on its particular facts and has not created a general rule as to how invalid assignment provisions will be severed. When tenants offer a parent company guarantee of their lease liabilities landlords have to be aware of the fact that the guarantee exists for the time during which the tenant holds the lease and then may continue as a sub-guarantee following assignment but not as a fresh guarantee of the assignee. This case again shows the difficulties tenants may face in assigning leases where they only have one parent company who has the covenant strength to provide a guarantee and that company has already provided a guarantee of the tenant’s obligations.
 

(US) The Case That Could Disrupt a Century of Settled Law: PA Supreme Court to Hear Appeal of Shedden v Anadarko

This post and related article was written by Steven Chadwick, Michael Joy and Robert Jochen

In an article that appears in The Legal Intelligencer, the authors discuss the significant impact that will result from a successful PA Supreme Court appeal of the lower court decisions surrounding Shedden v. Anadarko E & P Co., L.P., 88 A.3d 228 (Pa. Super. Ct. 2014).

The Court's decision will have far-reaching implications for the constantly evolving relationship between landowners and oil/gas producers in the Commonwealth. The legal issues before the Supreme Court include the enforceability and effect of Mother Hubbard Clauses and the doctrine of estoppel by deed. This appeal has the potential to not only change more than 100 years of settled law, but to disrupt the long-standing paradigm of using Mother Hubbard Clauses in oil and gas leases to address the very issues now before the Supreme Court.

The full text of the article can be found here.

(US) Public Private Partnerships Can Work: Pittsburgh Penguins and Community Agree on Development Plans

The Pittsburgh Penguins have finalized a groundbreaking agreement with local community groups after years of negotiations involving the development of the 28 acre site where the former Civic Arena once stood. The agreement provides for, among other things, the inclusion of minority participation in the development of the 28 acres and a percentage of affordable housing.

The announcement, made by City and County officials earlier this week, was a turning point in what has been a long process of negotiations between competing interest groups and stakeholders in the Hill District. In articles published in the Pittsburgh Post-Gazette and Pittsburgh Business Times, the team and local political leaders announced a wide ranging set of terms addressing the minority participation details and the percentage of affordable housing.

The full text of the Post-Gazette article can be found here.

The full text of the Pittsburgh Business Times article can be found here.

(US) California Green Building Boom Adds Many Shades Of Legal Work

In an article appearing on law360.com, Simon Adams of Reed Smith's Real Estate Practice Group was interviewed on the impact of changes to California green building laws and mandates. In particular, his comments focused on new real estate investors and developers:

"Certainly, in terms of counseling anybody particularly coming in from outside of the state, we’re quick to advise as to the changes they may see that would be different from their state,” said Simon T. Adams of Reed Smith's San Francisco office. “Or if they’re coming in from outside the U.S., we advise as to how to address these issues.”

The full article, including additional comments from Simon, can be found here.

(US) Subrogation Waivers: They Can Protect Both The Landlord and Tenant

Subrogation is the principle under which an insurer that has paid a loss under an insurance policy is entitled to all of the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. In simple terms, subrogation means substitution of one person for another. Subrogation permits a landlord’s insurer, in the event of a casualty negligently caused by one of its tenants, to “step into the shoes of landlord” and make a claim against such tenant. Because such a claim could mean millions of dollars to a client, counsel should pay careful attention to matters of subrogation in lease negotiations.

How subrogation works is best explained with an example:

A tenant leases office space from a landlord in a multi-tenant office building. The landlord is responsible for maintaining insurance covering damage to the office building and common areas, while the tenant is responsible for maintaining insurance covering tenant’s personal property and any improvements within the leased premises. The lease agreement between landlord and tenant does not include a waiver of subrogation provision. As a result of tenant’s negligence, a fire causes $1.5 million in damage to the building. Landlord files a claim with its insurer and landlord’s insurer pays landlord $1.5 million. Under landlord’s policy, the insurer is subrogated to landlord’s claim against the tenant (meaning that once the insurer pays landlord, landlord’s claims against tenant are assigned to its insurer). The insurer then sues tenant for the $1.5 million loss.

Without mutual waiver of subrogation the landlord’s insurer could obtain a judgment against landlord’s negligent tenant, which may make it difficult or impossible for tenant to make its rental payments. Such a result would have a direct impact on landlord’s income stream.

By including a waiver of subrogation provision in the lease, however, landlord and tenant waive the right of their respective insurers to make a claim against the negligent party who caused the casualty. Mutual waiver of subrogation can be desirable to both tenant and landlord because it places the risk on the insurer. Because the insurer has been paid (in the form of premiums) to assume the risk of a casualty, insurers frequently agree to waive subrogation. Waiver of subrogation also can prevent costly litigation for all parties.

If the parties negotiate a mutual waiver, here are some practice tips to keep in mind:
 

  • If subrogation is waived, each party will look to its own insurance to cover the damage, so it is critical that landlord and tenant have their respective insurance advisors confirm whether the applicable insurance policy’s coverage amounts are adequate. Counsel should check that the correct additional insured parties are named.
  • Simply including waiver language in a lease agreement is not always sufficient. Tenant and landlord should each review a copy of each other’s insurance policies to see if they allow waivers of subrogation.
  • Counsel should consider how the remaining sections of the lease fit together with the waiver of subrogation provision, particularly the indemnification section. Counsel should revise such section to make clear that the obligations are subject to the waiver of subrogation provision.
  • Some lease provisions are conditioned on obtaining a waiver of subrogation from the insurer of each party. It is good practice for counsel to advise its client of the need for follow up to obtain the waiver from the insurer and to confirm that the other lease party has done the same.

(US) Estoppel by Deed Follow-Up: PA Supreme Court To Consider Appeal of Superior Court Decision

this is a follow-up to an earlier blog post on this issue from March, 2014

On Thursday, August 14, 2014, the Supreme Court of Pennsylvania advised that it would consider the appeal from the Superior Court determination dated March 14, 2014 in the matter of Sheddon v. Anadarko E&P Co. LP. We will continue to update this blog as new information regarding the Supreme Court’s review becomes available.

(US) Pop-up Shops: Here Today, Gone Tomorrow

This entry was written by Lesley Vars and Leah Speckhard

Recent years have seen the increase in popularity of pop-up shops as solutions for landlords in need of cash flow. Retailers like pop-ups as a chance to test the waters before signing a long-term lease or to sell seasonal merchandise. Pop-up shops began to take hold during the 2008 recession, when retail vacancies were high and landlords became more open to alternative leasing structures. For the small business owner, pop-up shops provide an opportunity to see how their goods fare and how much foot traffic there is around their store. For established larger retailers, pop-up shops provide a unique or seasonal marketing boost as demonstrated by Patagonia, Kate Spade and Toys R Us, among many others. For the landlord, a pop-up shop can serve as a quick fix until a longer-term tenant can be secured.
 
The short-term nature of pop-up shops does not necessarily mean that they are low risk with respect to legal issues from the landlord or tenant perspective. Below are some of the items that landlords and tenants should consider when negotiating a pop-up arrangement:

Lease or License:
Landlords and tenants must consider which type of agreement is best for the space. Whether the parties agree to a license or a lease is largely dependent on the length of the proposed tenancy and the prospect that the arrangement may become long-term. Landlords and tenants should be aware of the fundamental difference between a lease and a license. A lease conveys exclusive possession of a space in exchange for rent from the tenant. A license makes permissible a tenant’s (licensee’s) acts in the space that would not otherwise be permitted was the license not granted. Furthermore, licenses are typically revocable by the landlord (licensor) allowing a landlord to use self-help to remove a defaulting tenant. Landlords should, however, be aware of the fact that even if a license is used instead of a lease and the tenant fails to timely vacate the space, the tenant may allege a landlord-tenant relationship and a right to possession which may result in litigation.
 
Alterations:
Given the short term nature of pop-up arrangements, Landlords will want to make sure the space is preserved in good condition by the tenant. The amount and type of changes that can be made to the space should be limited so that the space remains as vanilla as possible and attractive to both potential long term tenants and other pop-up tenants without the landlord having to spend significant amounts of money. In contrast, a retail tenant may want the right to make necessary alterations to make the space suitable for their short term needs, and may want to minimize the need for landlord approvals because of the limited time frame of occupancy.
 
Insurance:
Landlords should make sure that adequate insurance is in place, exactly like it would be in a long term lease. This usually includes public liability, product liability, employer liability, and accidental damage liability, but depending on the space and situation, different types of insurance may be required. Retailers in particular may want to consider business interruption and loss of profits insurance.
 
Term:
Landlords must insure that they are adequately protected and compensated should a tenant fail to vacate the space upon expiration of the agreement. Even if a license agreement includes standard provisions such as:

  • (i) the right of the landlord/licensor to revoke the license “at will”,
  • (ii) landlord’s obligation to supply all the services to the space for the tenant to carry on its business and
  • (iii) landlord’s complete control over the space,

given that that the agreement gives exclusive use to the tenant/licensee for a defined period of time and for a defined space, a court may find that the pop-up arrangement is in fact a lease. This gives rise to a landlord-tenant relationship and therefore removing a tenant may not be all that simple. At the same time, tenants, especially small business retailers, will want to negotiate minimal penalties for failure to timely vacate whether using a license or lease structure. 
 
Utilities and Maintenance:
As in a long term lease arrangement, the documentation must address which party is responsible for providing and paying for utilities and maintenance of the premises. From the tenant’s perspective, the tenant will want the landlord to deliver the space with HVAC and all systems properly functioning from day one. The tenant will also want the landlord to be responsible for all costs and expenses of continual maintenance of these systems. In contrast, the Landlord may want to minimize the amount that landlord is investing in the space given that the tenant is short term. The landlord may insist on delivering the space “as is” and refuse to take on significant on-going maintenance responsibilities.

The list above should serve as a starting point for issues to consider in the context of a pop-up arrangement and is by no means exhaustive. Although pop-up arrangements are short term, the risks may be just as substantial as those found in a long term leasing arrangement.
 

(US) PA Oil & Gas Lease Act: There's more to Section 34.1 and the Rule of Apportionment

This entry was written by Michael Joy, Robert Jochen and Steven Chadwick

Article 34.1 of the Pennsylvania Oil and Gas Lease Act was enacted July 9, 2013, and has received heavy scrutiny since its enactment based on the misperception that it permits unfettered, "forced pooling" by oil and gas developers.

In an article written by Michael Joy, Robert Jochen and Steven Chadwick in the July 29th, 2014 edition of The Legal lntelligencer,  the authors address this misconception and consider the second part of the statute that has received little public attention, that of apportionment.

The full text of the article can be found online at www.thelegalintelligencer.com

 

(US) EB-5 Visas: When Real Estate and Immigration Law Collide

Part 5 of a series on creative Real Estate financing.
A developer financing method returns - IRS provides clarity on the use of historical rehabilitation tax credits 
Using Crowdfunding to finance real estate projects
Using New Market Tax Credits to finance projects
Let the Purchaser do the Financing

 E5-B visas are another growing source of liquidity in the real estate and construction world.

The Immigrant Investor Program, commonly known as the EB-5 Program, is a federal immigration program run by the U.S. Citizenship and Immigration Services that gives foreign nationals a tempting proposition: invest at least $500,000 in a U.S. business in an economically depressed area and obtain an EB-5 visa for themselves and their families. At the end of a two-year period, if the investment creates 10 new full-time jobs, the investor and accompanying relatives obtain permanent residency in the U.S. The Program applies to projects in non-economically depressed areas as well, but the minimum required investment is increased to $1,000,000.

Originally launched in 1990 to little fanfare, the EB-5 Program has boomed in the past seven years, in part due to Chinese nationals looking to invest in the U.S. real estate market and avoid the regular green card lottery. It’s quite possible another surge in applicants is on its way, this time from Russia.

The Program is proving to be very popular with hotels and franchise owners looking for new franchisees. The Wall Street Journal reports that Marriott International Inc., Sony Pictures Entertainment, and the developers of the Barclays Center, home of the Brooklyn Nets, are some of the larger companies that have funded projects using EB-5 visas.
 
Investors typically see a low rate of return on their investment - around 1 to 3% - which can be very attractive to developers looking to borrow at low cost. EB-5 Program funds also are considered more flexible because they usually do not carry as many restrictions as loans from a traditional lender. The dependence on USCIS approval, however, can create timing issues in the development process. Additionally, there have been some concerns of fraud and the SEC has recently been involved in multiple investigations.

The Program’s growth will likely continue as long as the lending market remains tight and any substantial immigration reform remains tabled in Washington.