Don’t Let Deposits Spoil the Deal

A recent case acted as a reminder of the risk inherent in taking a contractual deposit which is greater than the market norm. That case involved penalties for overstaying permitted parking times and re-confirmed the contract law principle that a deposit must represent a genuine affirmation of a party’s earnest intention to proceed and must not exceed the percentage set by long established practice – which in property contracts is 10%. Where deposits are more than 10% of the price there is a much higher chance of the deposit being repayable – the precise opposite of what the seller would be trying to achieve. Exceptions will be made only where there are special circumstances justifying a larger payment. So, tread very carefully before asking for or agreeing to accept a larger than usual deposit.

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(US) For Virginia Land Use, Local Governments Have To Follow The Rules

Starting July 1, 2016 Virginia local governments must, in reviewing a residential rezoning or concept plan amendment, determine whether a requested land use exaction addresses an impact that is “specifically attributable” to the proposed new residential development. Virginia’s unique proffer system allows a rezoning applicant to voluntarily offer to provide reasonable conditions governing the proposed use of property as part of classifying land into areas and districts by legislative action.  Virginia builders and developers, like their counterparts throughout the United States, are familiar with the reality of the land use entitlement process that allows the government to condition adjudicative approval of a use on the dedication of property, payment of fees or performance of obligations to the public, so long as the government quantifies an “essential nexus” and “rough proportionality” between the exaction the government demands and the social costs of the applicant’s proposal.

The revised proffer legislation codified in Code of Virginia Section 15.2-2303.4 places the burden on local government to demonstrate a proffer is not unreasonable because it addresses an impact that is “specifically attributable” to a proposed new residential development.  After July 1, 2016 Virginia local governmental entities must establish that the proffer addresses a need or an identifiable portion of a need for one or more public facility improvements in excess of existing public facility capacity at the time of the rezoning and each such new residential development applied for receives a direct and material benefit from the proffer.

Not surprisingly, Virginia units of local government strongly opposed the new proffer legislation arguing that the legislation will put an end to a constructive and collaborative development process and eliminate the ability of developers to offer proffers for public facilities or improvements.

The tension between units of local government and developers can be resolved by a cooperative effort to prepare a sound nexus study of the impact of a proposed project.  Some jurisdictions analyze environmental impacts of projects under state versions of the National Environmental Policy Act (“NEPA”).  The environmental impact statements required under NEPA and a variety of state legislation similar to NEPA could provide a model for determining the essential nexus and rough proportionality of Nollan and Dolan in the context of the “specifically attributable” impact analysis required by Code of Virginia Section 15.2-2303.4.

By using the same sort of analysis conducted for environmental review in some jurisdictions, Virginia units of local government and land use applicants could engage in a cooperative fact-based application impact analysis that would address the requirements of Code of Virginia Section 15.2-2303.4, without engaging in rezoning moratoria or unnecessary acrimonious debates that may follow the July 1, 2016 implementation of the new proffer legislation.  Use of an impact statement combined with supportive findings could allow units of local government and developers to comply with the new statute while achieving common goals.  Such a process would allow compliance with U.S. Supreme Court dictates while addressing the Virginia General Assembly’s revised proffer requirements.

The sky’s the limit…

What would you do if;

  1. your property development business had obtained planning permission to construct a 62 storey tower comprising 200,714 sq.m;
  2. you had secured funding in principle to commence the development; BUT
  3. the proposed development infringed the rights to light of 61 properties – of which 53 were maintaining their fundamental right to an injunction to prevent loss of light from the development as their primary remedy;
  4. you could see a failure to meet demand for space if pre-contract orders for materials are not placed in April 2016; and
  5. your investors had threatened to exit if the threat of injunctive remedies was not removed?

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A new broom: sweeper clauses in residential leases

Properly employed, sweeper clauses are designed to catch service charge costs that may be unforeseeable at the time of drafting. This is an essential fall back when drafting a long residential lease whose term will be somewhere between 99 and 999 years and subject to a statutory right of extension on the same lease terms.

However, sweeper clauses are not the all-encompassing saviour they may appear to be. The recent decision in Geyfords v O’Sullivan & others is a reminder that wide drafting is often narrowly construed by the courts: In that case the court held that a sweeper referring to “management” costs did not extend to the landlord’s legal costs in managing the development.

It is also worth remembering that sweeper clauses in residential leases will also be subject to the tests of reasonableness contained in s.18 and 19 of the Landlord and Tenant Act 1985. Those provisions require costs under residential service charges to be both reasonably incurred and for the works or services to have been carried out or provided to a reasonable standard commensurate with the cost incurred.

The First Tier Tribunal has jurisdiction to decide in advance whether proposed expenditure is within the scope of a particular residential service charge regime. The best approach for the cautious landlord may, therefore, be to seek a ruling from the First Tier Tribunal before expending large amounts of money on services or works that are not expressly covered by the wording of the lease in question.

Lease Assignments to Guarantors No Longer Valid

It is now clear that leases cannot be assigned to the tenant’s guarantor but serious issues arise out of the recent High Court case of EMI Group Limited v O&H Q1 Limited which specified that any lease assignment by a tenant to its guarantor is void. This means that the assignment is not effective, the lease is still held by the previous tenant and the intended assignee remains the guarantor of that previous tenant (and does not become the new tenant of the lease). In addition, be aware that the court’s decision applies retrospectively. This post summarises action landlords and tenants may want to take now and assesses the issues arising.
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(US) Washington County Real Estate Reassessments Are Arriving

Dusty Elias Kirk was interviewed this morning on Pittsburgh NPR station WESA concerning the upcoming property reassessments in Washington County, PA, the county immediately south of Pittsburgh’s home Allegheny County.

This is the first reassessment of property in Washington County in over 35 years. Allegheny County last reassessed in 2012. Nearby Butler County hasn’t reassessed property values since 1969.

The WESA website has the transcript here.

(US) Property Reassessment is Coming to Washington County, PA

Washington County, Pennsylvania recently concluded its first county-wide reassessment in over thirty-five years, with reassessment values effective for the 2017 tax year.  Property owners will receive two separate notices regarding the new values.

The first notice will be a Notice of Informal Review which will be mailed to property owners starting March 1, 2016.  These notices will be mailed to residential property owners first with commercial property owners to follow.  The second notice will be a formal Change of Assessment Notice which will be mailed to all property owners on July 1, 2016.  Property owners will have 40 days to file a formal appeal from this notice which will be due on August 10, 2016.   The County is considering extending this deadline until September 1, 2016.

You may see significant assessment increases as Washington County currently assesses property at 25% of its market value. Under the new reassessment, a property assessment will reflect 100% of market values.  By example, a property with a market value of $100,000 is currently assessed at $25,000.  As a result of the reassessment, a property with a market value of $100,000 will be assessed at $100,000.

In most cases, millage will decrease, but a property owner should determine:

Is the market value of the property correct?

Property owners have an option to meet with Washington County’s reassessment firm, Tyler Technologies, to informally discuss and review their reassessments between March and June, 2016.  Our experience is that informal reviews only correct property data errors and do not address specific valuation concerns.   If a property owner remains dissatisfied with the results of their informal review, they have the right to file a formal appeal with the Washington County Tax Revenue Department by August 10, 2016.

Property owners electing not to participate in the informal review process do not waive their right to file a formal appeal.   As such, you may bypass the informal review process and file a formal appeal with the Washington County Tax Revenue Department by the same August 10, 2016 appeal deadline.  

Here are some important Washington County reassessment dates

  • March 1, 2016 – Informal review notices to be mailed to property owners
  • March June 2016 – Informal reviews with Tyler Technologies
  • July 1, 2016 – Formal Change of Assessment Notice to be mailed to property owners
  • August 10, 2016 – Formal appeal deadline (deadline may be extended until September 1, 2016)

A property owner receiving a reassessment notice has some decisions to make. Owners should evaluate the following:

  • Is the property data correct  (i.e. land area, building size)?
  • Is the market value fair based on your location (i.e. compared to recent sales in your area)?
  • If the property is rented, is the market value based on the income generated by the property?

Reed Smith is prepared to assist you in evaluating your property for an informal review or a possible appeal.   Please contact us at the email or number listed below to request an evaluation of your property.

Dusty Elias Kirk: dkirk@reedsmith.com, (412) 288.5720
Jeffrey Mills: jmills@reedsmith.com, (412) 288.5724

 

(US) California Real Estate Legislation and Regulation in 2016

In a Law360.com article published on January 4th titled “California Real Estate Legislation and Regulation to Watch in 2016,” Andrew McIntyre of Law360 addresses the challenges facing the California real estate market in the new year.

Here are the items on the 2016 legislative agenda:

  • Proposition 13
  • Bay Area Housing
  • Earthquake retrofitting
  • San Francisco’s Proposition M
  • Overall of CEQA (California Environmental Quality Act)

Simon Adams of the San Francisco office of Reed Smith commented on efforts to overhaul California’s Proposition 13 property tax law. The 1978 law reassesses properties for tax purposes upon sale, as opposed to annually, as is the case in most states. “Every real estate expert will remain focused upon movement in the debate over state Proposition 13 and the chilling effect that this has had over the long term in regard to revenues for the operations of local authorities.”

Developers are against changes to the law, in particular efforts for a so-called split tax roll that would lift Proposition 13 protection from commercial properties while keeping it in place for residential properties. Yet, changes are likely. Simon adds “Some adjustment to the restrictions around the taxing of real property seem inevitable where California continues to expand the population and concurrently increase government services.”

It will take legislative and executive courage to change a law that is considered a “third rail” of California politics.

The full text of the article can be found here.

(US) 4 Areas Of Retail Real Estate To Watch In 2016

In a Law360.com article published on December 23rd titled “4 Areas of Retail Real Estate to Watch in 2016,” Andrew McIntyre of Law360 writes about the changes we will see in retail in the new year.

The four developing areas are:

  • Unlocking Additional Value
  • Moving to Smaller Spaces
  • Opening new categories of restaurants
  • Tinkering with the Apple Store model

Simon Adams of the San Francisco office of Reed Smith commented on the growing trend of retailers to unlock value from their real estate holdings, aided by a broader definition of real property by the Internal Revenue Service. “A retail trend that should come to fruition in 2016 will be the release of capital from certain big-box retailers that have traditionally owned their real estate.”  “The declining brick-and-mortar sales due to online retail completion will result in retailers such as Macy’s and others answering to shareholder pressure to unlock that value.”

McIntyre notes that Sears completed a REIT spinoff in 2015 with the creation of Seritage Growth Properties although Macy’s decided against a REIT creation.

The full text of the article can be found here.

 

 

(US) 4 Common Errors in Year-End Race to Seal Real Estate Deals

In a Law360.com article published on December 17th titled “4 Common Errors in Year-End Race to Seal Real Estate Deals,” Simon Adams of the San Francisco office of Reed Smith offered his thoughts on the risks that appear when speed becomes a requirement of year end deals.

Andrew McIntyre of Law360 identifies the following common errors:

Punting Issues to 2016

Forgetting to Plan for Signings
Simon advises to “not assume your client representatives will be readily available and in an office the day prior to closing when last minute documentation may be signed.” He uses an example where he “has a transaction where a party is due to travel overseas, and so we likely will have the partner take a limited power of attorney.”

Other problems with year end deals include:

Bypassing Bad Boy Carveouts

Skipping Safeguards

Privacy is Paramount

The full text of the article can be found here.

 

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