The Section acknowledges the generous support of the following sponsors for their involvement in this year’s National CLE Conference:
• Archer & Greiner, P.C.
• ArentFox Schiff LLP
• Ballard Spahr
• Brown, Hay & Stephens LLP
• Carlton Fields P.A.
• Chestnut Cambronne PA
• Dungey Dougherty PLLC
• Fredrikson & Byron, P.A.
• Gordon, Fournaris & Mammarella, P.A.
• Gutter Chaves Josepher Rubin Forman Fleisher Miller P.A.
• Jackson Walker
• K&L Gates LLP
• Levin Schreder & Carey
• Prather Ebner & Wilson LLP
• Saul Ewing LLP
• Sher Garner Cahill Richter Klein & Hilbert, L.L.C.
• Stone Pigman Walther Wittmann
A monthly webinar featuring a panel of professors addressing recent cases or issues of relevance to practitioners and scholars of real estate or trusts and estates. FREE for RPTE Section members!
A monthly webinar featuring a panel of professors addressing recent cases or issues of relevance to practitioners and scholars of real estate or trusts and estates. FREE for RPTE Section members!
A monthly webinar featuring a panel of professors addressing recent cases or issues of relevance to practitioners and scholars of real estate or trusts and estates. FREE for RPTE Section members!
Register for each webinar at http://ambar.org/ProfessorsCorner
Register for each webinar at http://ambar.org/ProfessorsCorner
Register for each webinar at http://ambar.org/ProfessorsCorner
EMINENT DOMAIN USE AND ABUSE: ECHOES OF KELO (20 YEARS LATER)
TITLE FRAUD
Tuesday, May 16, 2023 12:30-1:30 pm ET
INHERITANCE AND WEALTH INEQUALITY IN THE 21ST CENTURY
Tuesday, July 11, 2023 12:30-1:30 pm ET
Tuesday, March 14, 2023 12:30-1:30 pm ET
PATRICIA H. LEE, Loyola University Chicago
VICTORIA J. HANEMAN, Creighton University
RONIT LEVINE-SCHNUR, Reichman University, Israel
GEORGE C. FATHEREE III, Sidley Austin
Moderator: SHELBY D. GREEN, Pace University
REGULATION AND A FUNDAMENTAL RIGHT TO PRIVATE PROPERTY
Tuesday, June 13, 2023 12:30-1:30 pm ET
Tuesday, August 8, 2023 12:30-1:30 pm ET
CHRISTINA JENKINS, Christina Jenkins PLLC
Tuesday, April 11, 2023 12:30-1:30 pm ET
STEWART STERK, Cardozo Law at Yeshiva University
Find updated program information, including topics and presenters, as well as past programs, at www.americanbar.org/rpte
JAN LAITOS, Sturm College of Law, University of Denver
Moderator: SHELBY D. GREEN, Pace University
Ronald Garfield and Hunter S. Ross
EDITORIAL BOARD
Editor
Edward T. Brading
208 Sunset Drive, Suite 409 Johnson City, TN 37604
Articles Editor, Real Property
Kathleen K. Law
Nyemaster Goode PC 700 Walnut Street, Suite 1600 Des Moines, IA 50309-3800
kklaw@nyemaster.com
Articles Editor, Trust and Estate
Michael A. Sneeringer
Porter Wright Morris & Arthur LLP 9132 Strada Place, 3rd Floor Naples, FL 34108
Senior Associate
Articles Editors
Thomas M. Featherston Jr.
Michael J. Glazerman
Brent C. Shaffer
Associate Articles Editors
Robert C. Barton
Travis A. Beaton
Kevin G. Bender
Jennifer E. Okcular
Heidi G. Robertson
Aaron Schwabach
Bruce A. Tannahill
Departments Editor
James C. Smith
Associate Departments Editor
Soo Yeon Lee
Editorial Policy: Probate & Property is designed to assist lawyers practicing in the areas of real estate, wills, trusts, and estates by providing articles and editorial matter written in a readable and informative style. The articles, other editorial content, and advertisements are intended to give up-to-date, practical information that will aid lawyers in giving their clients accurate, prompt, and efficient service.
The materials contained herein represent the opinions of the authors and editors and should not be construed to be those of either the American Bar Association or the Section of Real Property, Trust and Estate Law unless adopted pursuant to the bylaws of the Association. Nothing contained herein is to be considered the rendering of legal or ethical advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. These materials and any forms and agreements herein are intended for educational and informational purposes only.
© 2023 American Bar Association. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Contact ABA Copyrights & Contracts, at https://www.americanbar.org/about_the_aba/reprint or via fax at (312) 988-6030, for permission. Printed in the U.S.A.
ABA PUBLISHING Director
Donna Gollmer
Managing Editor
Erin Johnson Remotigue
Art Director
Andrew O. Alcala
Manager, Production Services
Marisa L’Heureux
Production Coordinator
Scott Lesniak
ADVERTISING SALES AND MEDIA KITS
Chris Martin 410.584.1905 chris.martin@mci-group.com
Cover iStockphoto
All correspondence and manuscripts should be sent to the editors of Probate & Property
Probate & Property (ISSN: 0164-0372) is published six times a year (in January/February, March/ April, May/June, July/August, September/October, and November/December) as a service to its members by the American Bar Association Section of Real Property, Trust and Estate Law. Editorial, advertising, subscription, and circulation offices: 321 N. Clark Street, Chicago, IL 60654-7598.
The price of an annual subscription for members of the Section of Real Property, Trust and Estate Law ($20) is included in their dues and is not deductible therefrom. Any member of the ABA may become a member of the Section of Real Property, Trust and Estate Law by sending annual dues of $70 and an application addressed to the Section; ABA membership is a prerequisite to Section membership. Individuals and institutions not eligible for ABA membership may subscribe to Probate & Property for $150 per year. Single copies are $7 plus $3.95 for postage and handling. Requests for subscriptions or back issues should be addressed to: ABA Service Center, American Bar Association, 321 N. Clark Street, Chicago, IL 60654-7598, (800) 285-2221, fax (312) 988-5528, or email orders@americanbar.org.
Periodicals rate postage paid at Chicago, Illinois, and additional mailing offices. Changes of address must reach the magazine office 10 weeks before the next issue date. POSTMASTER: Send change of address notices to Probate & Property, c/o Member Services, American Bar Association, ABA Service Center, 321 N. Clark Street, Chicago, IL 60654-7598.
If you are a young lawyer or in-house counsel new to commercial leasing, this article is for you. Below, Young Lawyers Network describes actions you can take to improve your knowledge, understanding, and skills related to drafting and negotiating commercial leases.
Commercial Lease Law Insider (CLLL) is a great trade publication for commercial leasing professionals. Owners, managers, leasing attorneys, and other real estate professionals all subscribe to its monthly newsletter. The newsletter contains practical tools that the reader can use when drafting and negotiating commercial leases. For example, CLLL’s February 2023 newsletter contained a featured article titled “Get 14 Lease Protections When Letting Tenants
Install EV Charging Stations: Jump-start your leases to prepare for tenant demand and legal compliance.” The article then goes through leasing considerations when an EV Station is located on commercial property. And the article ends with a sample model lease clause that sets rules for tenant installation of electric vehicle charging stations. In addition, the newsletter has columns titled “Traps to Avoid,” “Plugging Loopholes,” and “Recent Court Rulings” with other actionable and practical content. A yearly subscription runs about $524. CLLL also does a great job archiving its material for subscribers. So even if you were not a member a year ago, five
Young Lawyers Network Editor: Josh Crowfoot, Crowfoot Law Firm, 200 W. MLK Blvd., Suite 1000, Chattanooga, TN 37402, josh@crowfootlaw.com.years ago, or 10 years ago, when you purchase a subscription to CLLL, you get access to all the content that CLLL has ever produced, which equates to a sizable form bank of model lease clauses and other content. CLLL’s parent company, The Habitat Group, also publishes two great books on commercial leasing: Best Commercial Lease Clauses (geared toward landlords) and Best Commercial Lease Clauses: Tenant’s Edition. Each of these books contains numerous sample lease clauses along with explanations for why the clauses are drafted the way they are.
Join ICSC
ICSC (formerly the International Conference of Shopping Centers) is a trade association for shopping centers, shopping malls, and all other retail real estate. It has over 70,000 members in over 100 countries, including shopping center owners, developers, managers, marketing specialists, investors, retailers, brokers, academics, and public officials. In July 2021, ICSC rebranded itself in term of its initials alone, and adopted the tagline “Innovating Commerce Serving Communities.” Because of ICSC’s size, the organization has several conferences throughout the year based on different real estate markets in the country. They also have conferences geared toward specific member groups. For example, they have a North American Law conference every October. If you are a commercial leasing attorney focusing on retail space, this is an excellent conference to attend. You will get to meet industry peers who serve as outside counsel and inside counsel for various organizations in retail and real estate. The quality of the CLE programming is top notch. Registration for ICSC’s law conference runs about $1500
each year but is well worth the price.
The Practising Law Institute (PLI) is a nonprofit organization dedicated to providing the highest-quality, accredited, continuing legal and professional education programs in the legal industry. PLI offers CLE in 32 practice areas. It offers live programs and publish numerous publications—treatises, course handbooks, forms, and journals. PLI’s commercial leasing programs are done very well, and participants receive top notch materials and forms as part of their attendance with such programs. Many Big Law firms have a subscription to PLI. If your law firm or company does not have a subscription to PLI, individual memberships can be purchased for an annual fee of $3,495.
The Section’s Leasing Group is one of the most active groups in the Section with six sub-committees: Assignment and Subletting, Ground Leasing, Industrial Leasing, Office Leasing, Retail Leasing, and Emerging Issues and Specialty Leases. The Leasing Group puts on a commercial leasing series called Nuts & Bolts each year that offers a program on some key area of commercial leases. The series is free with your membership in the Section. In addition, the Leasing Group also puts on a Commercial Leasing Bootcamp, which is more comprehensive than the Nuts & Bolts series. In addition, the Leasing Group offers other CLE programming throughout the year.
In my time as a practitioner, three
books on commercial leases have been extremely valuable. The first book is April Condon & Rodney J. Dillman, The Lease Manual: A Practical Guide to Negotiating Office, Retail, and Industrial/ Warehouse Leases, Second Edition (American Bar Association 2d ed. 2022). If you are brand new to commercial leasing, this is a great book to start with. Each chapter in the book is dedicated to a specific paragraph in a commercial lease (for example, Term, Base Rent, Additional Rent, Assignment or Sublease). Each chapter presents model language that you can use for your commercial lease. The book lays out the landlord’s perspective as well as the tenant’s perspective for the
model language that is contained in the lease, and the book suggests common compromises between the parties. In addition, the book indicates which areas of the lease tend to get most heavily negotiated. The second book is Mark A. Senn, Commercial Real Estate Leases: Preparation, Negotiation, and Forms (Wolters Kluwer). I purchased this book as part of a commercial leasing course for the LL.M. program in real property development at the University of Miami. It’s a treatise, and it has a wealth of information for each area of a commercial lease as well as sample form language. If I need a comprehensive resource for a commercial leasing question, I consult this book first. The third
book is Best Commercial Lease Clauses published by The Habitat Group. It contains sample language for heavily negotiated provisions in a commercial lease and has excellent explanations and tips for negotiating such provisions.
If you are new to commercial leasing, there are many resources available to you to help you hone your drafting skills. Getting a subscription to Commercial Lease Law Insider and PLI, joining ICSC, participating in the Section’s Leasing Group, and buying the books above are a great start. I wish you the best as you embark on a fun practice area. n
Throughout the history of the United States, racial discrimination, including government-sanctioned discrimination in real estate ownership, prohibited people of color from fully and equally participating in American society. Racial covenants were used throughout the early and middle twentieth century to segregate homeowners’ associations, neighborhoods, and large swaths of many cities and suburbs. When a racial covenant was added to the title records for a parcel of real estate, it almost always excluded black people from occupancy, and some restrictive covenants excluded members of other ethnic or religious groups in addition or allowed occupancy of the property only by members of the Caucasian race. In 1940, an estimated 80 percent of residential properties in Los Angeles and Chicago had a restrictive covenant prohibiting occupancy by black residents. Racial covenants kept neighborhoods physically segregated, and because their use was so widely encouraged by those in the real property industry, these covenants served to perpetuate racism and segregation in American society on a broader and more lasting scale.
In 1948, the Supreme Court held that racial covenants were unenforceable in Shelley v. Kraemer, 334 U.S. 1 (1948), and in the 1953 decision in Barrow v. Jackson, 346 U.S. 249 (1953), the Court ruled that it was unconstitutional to allow an owner of a parcel with a
Uniform Laws Update Editor: Benjamin Orzeske,
Chief Counsel, Uniform LawCommission, 111 N. Wabash Avenue, Suite 1010, Chicago, IL 60602. Contributing
Author: Jane Sternecky, Legislative Counsel, Uniform Law Commission, 111 N. Wabash Avenue, Suite 1010, Chicago, IL 60602.Uniform Laws Update provides information on uniform and model state laws in development as they apply to property, trust, and estate matters. The editors of
racial covenant to recover damages for a neighbor’s violation of that covenant. Racial covenants were still widely used, however, until the Fair Housing Act became law in 1968 and outlawed them entirely.
Currently, even though racial covenants are unenforceable and can no longer legally be added to a property’s title records, the chains of title for many properties still contain historical restrictions discriminating on the basis of race, ethnicity, and religion, which are understandably disturbing to the property’s owners and their neighbors. The Mapping Prejudice Project at the University of Minnesota has located at least 26,000 racially restrictive covenants that remain in property records in the Minneapolis-Saint Paul area alone; experts estimate there are millions of restrictive covenants in deeds throughout the United States. Many homeowners have wished for a path to functionally remove these illegal restrictions without disrupting title, and a few states, including California, Delaware, Illinois, Maryland, Minnesota, Nevada, New Jersey, and Oregon, have created some procedures to allow the redaction or removal of these prohibited restrictions. However, the procedures differ from state to state.
After these early state laws were enacted, the American Land Title Association proposed that the Uniform Law Commission (ULC) undertake a study of the issue to determine whether a more uniform process for the removal of discriminatory restrictions was feasible. As a result, over the past two years, the ULC has been working to address this issue with its drafting committee for the Uniform Unlawful Restrictions in Land Records Act. This drafting committee engaged commissioners who are experts in real property and observers from the title insurance, realty, lending, and property records industries, along with government and academic professionals. Together, they set out to draft a comprehensive piece of legislation that allows homeowners to address the painful history of their property without compromising their title or any other aspects of their ownership.
At the outset of this project, the drafting committee sought to create legislation that would allow owners to expunge or remove racial covenants without incurring significant costs or disrupting existing recording practices. The committee later decided to expand the scope of its project to include not just restrictive racial covenants but to also include any discriminatory covenant that restricts ownership or tenancy on the basis of any class that is protected under fair housing legislation in a given state.
The new Uniform Unlawful Restrictions in Land Records Act achieves these stated goals in several ways.
First, the act empowers any individual owner of a property that is subject to a prohibited restriction to record an amendment to remove that restriction and requires the property owner
and your expenses are covered.
to comply with state requirements for the recording and execution of any such amendment. The specific wording of this section acknowledges that there are differences in local recording statutes while ensuring that any amendment is properly recorded under those laws so that future purchasers will have notice of the change.
Next, the act creates procedures that allow the removal of prohibited restrictions from the governing documents of a condominium or homeowners’ association. The drafting committee recognized that these prohibited restrictions are contained in the governing documents for many communities, even if individual deeds do not contain a reference to any such restrictions. Under the act, the association’s governing body can vote to remove the prohibited restriction, and any member of the association may request that the association remove the restriction from the governing documents.
• Protect your client’s interests if the tenant changes from a carrier to a tower management company. Many carriers traditionally leased their own towers. To raise funds to purchase more spectrum, major carriers have sold or assigned their towers to tower management companies. A recent AT&T and Crown Castle $4.85 billion tower transaction includes AT&T’s agreement to lease the rights to approximately 9,100 of its company-owned wireless towers to Crown Castle, which will also purchase approximately 600 AT&T towers. Most leases or licenses require the landlord’s written consent before any such transfer can be made. Because the business plans of a tower company are significantly di erent from those of the carriers, the landlord should also make sure that all future licenses have such a requirement for its approval.
The act also provides specific language for inclusion in all amendments removing prohibited restrictions and specifies that the removal of the prohibited restriction does not invalidate any other, non-prohibited restrictions contained within the instrument. To protect the chain of title and preserve the historical record, the act clarifies that original documents from the land records are not to be altered or destroyed in connection with the amendment removing a prohibited restriction.
When considering negotiation with a tower management company, these are four questions to consider in addition to the business terms of an access agreement.
• Does the agreement protect the landlord in this changed environment and new circumstances?
• Does the transfer comply with the requirements of the existing agreement?
Finally, the act shields recorders from liability for recording amendments in accordance with the law.
• Is the landlord named in insurance policies?
• Has the tower management company provided su cient documentation demonstrating its authority to act on behalf of the tenant?
All RPTE publications can be purchased on the ABA Web Store, ShopABA.org, or by calling the Service Center, 800-285-2221.
Mark Dall and Noble C. Hatfield
Leasing issues and language from the perspective of both tenant and landlord. Written by experienced commercial leasing attorneys with over seventy combined years of experience in the area, this new book identifies the issues, pitfalls, and potential resolutions when dealing with restaurant leasing. The authors examine commercial leasing for restaurants and franchise operations from both tenant and landlord perspectives, as well as from a franchisor perspective for franchises, and discuss leases for in-line, outlot, and urban settings. This book also provides valuable, practice-tested restaurant leasing clauses and agreements for franchise operations.
Conclusion
At press time, the Uniform Unlawful Restrictions in Land Records Act was expected to be approved at the ULC’s July 2023 Annual Meeting and available for state legislatures to consider beginning in the fall of 2023. The act creates a standard process for property owners to erase painful histories from their deeds and forge a path forward that is free from discrimination and bias. It should be considered by all state legislatures. n
Counsel for owners of cell tower sites should be prepared to negotiate license and lease agreements in order to protect their client’s property interests, keeping in mind the suggestions in the above checklist. ■
Carbon dioxide emissions could contribute to a global warming tipping point that the planet may not recover from during our lifetimes, and buildings are a large contributor to those emissions. Given the frightening scenarios, what do those in the building industry need to know, and what can they do?
The impact of buildings and community planning on global warming is larger than most people imagine. Buildings contribute around 40 percent of carbon dioxide emissions, both directly and indirectly, via the energy they use during operations and via the electricity generated by fossil-fuel-using power plants. During building operations, emissions are associated with energy use for heating, cooling, lights, plug loads (receptacles), industrial process loads, etc. Figure 1 is an image from Architecture 2030 that illustrates the relative global carbon dioxide emissions from various end uses, including buildings, transportation, industry, and others.
The planning of our communities also has a large impact on carbon dioxide emissions. Dense cities with good public transit have lower per-capita emissions because of the relative efficiency of multifamily housing and fewer individually owned automobiles as compared to low-rise suburban types of communities with few options for public transportation and mostly single-family housing.
In the recent past, architects, engineers, and building owners focused almost exclusively on operations and energy efficiency (operational carbon emissions). Less well understood is the large impact buildings have on carbon dioxide emissions during construction due to the emissions associated with mining, manufacturing, and the transportation of building materials, as well as the construction process. This is referred to as embodied carbon. Embodied carbon has come to the fore because of the urgency of reducing greenhouse gas emissions. Although reducing embodied carbon in buildings
Helen J. Kessler, FAIA, LEED Fellow, WELL AP is President of HJKessler Associates and a Principal at UpFront Regenerative Design. She is currently a sustainability consultant for the Discovery Partners Institute and the Advocate Aurora Healthcare Illinois Masonic Center hospital additions to the Center for Advanced Care. Helen is a frequent speaker and author on sustainability topics and teaches various courses, including “Systems Thinking for Sustainable Design” at Northwestern University.
will have only a short-term impact, given the urgency of the problem, it needs to be a key focus because embodied carbon contributes about 50 percent of a building’s carbon emissions during its first 15 or so years of occupancy, as illustrated in Figure 2.
Tearing down old buildings and building new ones severely and negatively affects climate change. Historic
preservationists have gotten it “right” for decades when they have advised saving old buildings is not just good for preserving history and culture; it’s good for the environment. A great deal of carbon is sequestered in existing buildings. When they are torn down, the carbon embodied in them is gone. Replacing them simply adds to the carbon emissions problem. As illustrated in Figure 3, refurbishment reduces carbon emissions throughout a building’s life.
According to Architecture 2030, “Just three materials—concrete, steel, and aluminum—are responsible for 23 percent of total global CO2 emissions (most from the built environment). There is an incredible opportunity for embodied carbon reduction in these high-impact materials through policy, design, material selection, and specification.”
Therefore, a focus on these materials and the reuse of existing buildings will have the greatest short-term impact on emissions in buildings. Together with reductions in operational carbon, the building sector can significantly reduce emissions related to climate change and global warming.
The following examples illustrate the potential for reducing carbon dioxide emissions in large and complex buildings as well as the benefits of using an integrative design process. This process helps the design team move beyond first-cost thinking to maximizing efficiency while minimizing costs.
An inspiring example of the reuse of an existing building while reducing operational energy is the retrofit of the Empire State Building. ESB case study (rmi.org); Alejandro de la Garza, The Empire State Building’s Green Retrofit Was a Success. Will Other Buildings Follow Suit?, Time (May 10, 2021, 2:22 PM EDT).
The owners of the Empire State Building were planning to replace their chillers and do some retrofits, so it was a perfect time to review the entire project and determine how to best maximize energy savings and comfort while minimizing costs. Rocky Mountain Institute helped the owner and design team use an integrative design approach to do this. When all the system upgrades and savings were taken together as a whole package and not piecemeal, the overall first-cost savings were huge and long-term energy savings were maximized. According to the Empire State Building owners, even after retrofitting all the windows in the building, upgrading lighting,
adding insulation, and doing more, they achieved approximately a threeyear payback. These measures reduced heating and cooling requirements, allowing the old chiller plant to be renovated rather than replaced. This process is referred to as “tunneling through the cost barrier.” Most owners and designers find “tunneling through the cost barrier” to be challenging because it requires a very integrated approach to design, requiring most of the design team and the owner to be closely involved in the new building or renovation from the beginning. In the author’s experience, it is by far the best way to achieve maximum savings.
Sarah E. Goode STEM Academy
A project for which the author provided sustainability consulting services is the Sarah E. Goode STEM Academy, a new 200,000-square-foot LEED Platinum high school on Chicago’s southwest side. This project also used an integrative design approach to reduce building costs and embodied carbon while maximizing energy efficiency. (LEED is a green building rating system created by the US Green Building Council and stands for Leadership in Energy and Environmental Design.)
Common to both of these project examples and to all high-performance projects is the use of an eco-charrette early in the design process to identify opportunities and potential system synergies that could lead to improved energy efficiency and reduced first costs. The cost to build Goode was less
than another prototype high school with the same floor plan (but with a different building envelope design, structural system, and HVAC systems). Because of its less expensive and more efficient HVAC system, the building height was reduced. Yet the energy consumption by Goode was significantly
in digital 284. present an form as 2022 Ill. Trust Serv. an “small $100,000. 2022 Directed 16. an adult Me. Legis. rules for among and cociary transfer of a permits rights of 1430. discrimination anatomical gi s on 20. vehicles form. discrimdonors. Uniform TesAct. 186. Oklahoma Okla. Sess.
SOUTH CAROLINA enacts the Uniform Transfers to Minors Act. 2022 S.C. Laws Act 128.
SOUTH DAKOTA allows succession to real property by a davit under specified circumstances. 2022 S.D. Laws Ch. 89.
lower than the consumption by the other school, which achieved LEED Gold. In addition, by reducing the building height and using a more effec tive structural system, the embodied carbon was also reduced.
SOUTH DAKOTA authorizes remote witnessing of non-holographic wills, durable powers of attorney for health care decisions, anatomical gi s, refusals to make anatomical gi s, and pre-need cremation authorizations. 2022 S.D. Laws Ch. 56.
UTAH adopts the Uniform Partition of Heirs’ Property Act. 2022 Utah Laws Ch. 304.
UTAH establishes a framework for the ownership of digital assets. 2022 Utah Laws Ch. 448.
VIRGINIA enacts the Uniform Fiduciary Income and Principal Act. 2022 Va. Laws Ch. 354.
WASHINGTON enacts the Revised Uniform Unclaimed Property Act. 2022 Wash. Legis. Serv. Ch. 225.
operational carbon in a building’s life cycle.
TENNESSEE passes the Small Estate A davit Limited Letter of Authority Act providing for the administration of small estates. 2022 Tenn. Laws Pub. Ch. 665.
US VIRGIN ISLANDS adopts the Uniform Electronic Wills Act. 2022 V.I. Laws Act 8556.
The thought process that goes into these projects is as follows: First, use passive strategies such as good orientation and appropriate windows for daylight and views, and avoid building orientation that increases heating and cooling requirements. Then consider how to reduce building loads by providing good window and wall insulation and high-quality efficient lighting, and reduce plug loads (through efficiency and realistic assumptions). Plug loads refer to equipment plugged into the
US VIRGIN ISLANDS enacts the Uniform Law on Notarial Acts. 2022 V.I. Laws Act 8542.
WEST VIRGINIA adopts the Uniform Unclaimed Property Act. 2022 W.Va. Laws H.B. 4511.
wall, such as computers, coffeemakers, and task lights. Next, consider the most effective HVAC systems. In the case of Goode, a ground source heat pump system was used, which significantly reduced the size of ducts and allowed the building height to be reduced. Once the building is as efficient as possible, consider the addition of renewable energy. Goode uses solar water heating for heating indoor water, including a swimming pool.
WISCONSIN provides for nonprobate transfers of farming implements at death. 2021–2022 Wisc. Legis Serv. Act 201. ■
The building industry has only recently begun to focus on embodied carbon. Figure 4 from the New Buildings Institute illustrates embodied vs.
Life cycle analysis is regularly used for analyzing which building materials will be most effective in reducing embodied carbon. In LEED, life cycle analysis is used to study the structural elements and building envelope. For structure, comparisons are most often made among concrete, steel, and wood (mass timber), and include how those products were manufactured and sourced. For instance, there are several ways to make steel, including electric arc and the basic oxygen process (BOP). An electric arc can use much more recycled content material than BOP can use and therefore has lower embodied carbon. There are also different ways to make concrete, some with carbon dioxide(!). Some ways use more recycled content materials than others. For the building envelope, there are many potential materials, such as glass, masonry, and precast concrete. To best understand trade-offs, it is important to compare how these materials work based on both embodied carbon and operational carbon (primarily energy use). Ideally, there should be no new buildings, just the reuse of existing ones. Clearly, this will not be effective in many situations. Life cycle analysis can illustrate the benefits of reuse.
Buildings are large contributors to global warming. Now is the time to step up the effort with all buildings, new and existing, to reduce both operational and embodied carbon. All professionals in the real estate industry have parts to play. n
Ideally, there should be no new buildings, just the reuse of existing ones. Life cycle analysis can illustrate the benefits of reuse.
Sponsored by
ADVERSE POSSESSION: Hostility is not satisfied by longstanding acquiescence to fence installed with neighbor’s permission. Dahlke Family Limited Partnership (Dahlke) and Fuoss are neighboring landowners. In the 1960s, the prior owners of both parcels discussed a problem of repeated flooding from a nearby creek. They orally agreed that Fuoss’s predecessor would install a fence on the Dahlke parcel, which resulted in the separation of a triangular area of over one acre from the rest of the Dahlke parcel. Fuoss claimed that he had purchased the fence-enclosed area although it was not covered in his legal description. Dahlke stated that he allowed Fuoss to use the triangular area just as he had allowed Fuoss’s predecessors to do so. In response to unauthorized hunting, Dahlke installed a locked gate, which deprived Fuoss of access to the triangular area. Fuoss sued to establish title by adverse possession or a prescriptive easement over the area. The trial court accepted Fuoss’s argument that the hostility element for adverse possession and prescriptive easement were satisfied by the doctrine of acquiescence to the longstanding location of the fence. Dahlke appealed, and a divided supreme court reversed and remanded, finding the lower court improperly applied the doctrine of acquiescence to reject uncontroverted evidence of permitted use. The court found the circumstances also did not give rise to a prescriptive easement. In the first place, there was no agreement to set or change the boundaries. Instead, the evidence
Keeping Current—Property Editor: Prof. Shelby D. Green, Elisabeth Haub School of Law at Pace University, White Plains, NY 10603, sgreen@law.pace.edu. Contributor: Prof. Darryl C. Wilson.
Keeping Current—Property offers a look at selected recent cases, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.
overwhelmingly showed possession and use with the owner’s permission. Allowing a neighbor to occupy and use part of the owner’s land does not change the boundary line or grant the neighbor a right to use the land in perpetuity. Permissive use can change into hostile occupation only when the neighbor’s conduct gives inquiry notice to the owner of the invasion of his rights. Neither Fuoss, nor any predecessor, ever provided notice of any kind of a claim beyond the use granted to them permissively. Fuoss v. Dahlke Family Ltd. P’ship, 984 N.W.2d 693 (S.D. 2023).
DEEDS: Labeling deed as warranty deed does not make it a statutory short-form deed without incorporation of statutory language. A bank foreclosed on real property and sold it to Lizotte, conveying by a deed with the caption “Warranty Deed.” Later Lizotte conveyed to Kneizys, who learned of a competing claim to title and brought a quiet title action against the claimants. After losing this action, Kneizys brought suit against the bank in federal court, claiming a breach of warranties of title. Kneizys claimed the deed contained warranties, even though there was no warranty-covenant language in the deed. The district court certified the question to the Maine supreme judicial court on the question of whether any warranty is implied by the use of the term “warranty deed” to describe the deed instrument. The court answered,
“No.” Maine has a statutory short-form deed, the use of which implies warranty covenants into the instrument. 33 Me. Rev. Stat. § 764. But to be entitled to this benefit, a party must substantially use the statutory form. The deed here contained only the words “Warranty Deed” in the title. Merely titling an instrument a warranty deed is not enough. Kneizys v. Federal Deposit Ins. Corp., 290 A.3d 551 (Me. 2023).
FORECLOSURE: Mention of additional rights in mandatory preforeclosure notice to borrower does not void the notice. The lender sent the borrower a notice required by statute before initiating foreclosure. N.Y. Real Prop. Actions and Proc. L. § 1304. The notice contained the mandatory provisions, including the length of default, what was required to cure, and notice of the availability of housing counselors. The statute provides that “the notices required by this section shall be sent . . . in a separate envelope from any other mailing or notice.” In addition, the lender’s notice advised that the lender was communicating as a debt collector, that if the borrower is in bankruptcy, the notice was for information only, and that if the borrower is a serviceman, he might be eligible for certain protections and benefits. The lender moved for summary judgment on the action to foreclose, and the borrower defended on the ground that the notice violated the statute’s “separate envelope” provision by including the additional notices in the same communication. The trial court ruled for the borrower, and the appellate court affirmed. The court of appeals reversed, rejecting the bright line rule applied by the lower courts, instead finding that the most sensible reading of the statute was that nothing in the required notice provisions prohibited additional information to be given to the borrower.
Here, the addition of information about rights under the Bankruptcy Code was consistent with the aim of the statute, enacted in the wake of the housing crisis of 2008, to ensure homeowners and tenants are aware of their rights upon being faced with the threat of foreclosure. The notice is valid so long as the information related to the pending foreclosure is not false, misleading, or obfuscatory. Bank of Am. v. Kessler, 206 N.E.3d 1228 (N.Y. 2023).
LANDLORD-TENANT: Terms of commercial lease and not Restatement rules determine whether tenant’s failure to pay rent is material breach. Dolly Investments LLC (Dolly) was the landlord under a 15-year lease of a building to MMG Sioux City, LLC (MMG), where it operated a Golden Corral restaurant. Article 13.1 of the lease stated if the tenant breaches its rent obligation, the landlord must send a written notice to cure in 15 days. After that time, failure to cure constituted a default, which gave the landlord an option to terminate the lease and recover costs and damages or reenter the property, expel the tenant, and relet without terminating the lease. In June 2019, MMG failed timely to pay rent and later paid a portion but notified Dolly it did not have the balance. Soon after, Dolly learned that the Golden Corral restaurant had closed, and then Dolly inspected the property, finding it abandoned in wretched condition. Dolly secured the property by changing the locks, and the next day MMG sent a letter complaining of the landlord’s actions and expressing a desire to terminate the lease. Dolly sent MMG a notice to cure on July 3 and terminated the lease on August 22. Dolly sued MMG, receiving $290,625 in damages for unpaid rent for over 15 months plus attorney’s fees. However, the trial court also awarded MMG $108,828 in damages for Dolly’s wrongful conversion of MMG’s furniture, fixtures, equipment, and other personal property. On a motion to reconsider, the trial court reduced Dolly’s damages to $9,375 to reflect the unpaid half of the June rent. The court of appeals affirmed
the lower court, and on further appeal, the supreme court found that Dolly and MMG both breached the lease, but only MMG’s breach was material. Dolly was determined to have breached the lease by changing the locks before sending a notice of default and notice to cure. The court stated that when a lease did not define whether a breach is material, the five-factor approach of Restatement (Second) of Contracts, § 241 may apply. Because the lease here contained provisions regarding the tenant’s duty to pay rent and the landlord’s concomitant rights and duties, those terms define what constitutes a material breach. MMG’s failure timely to cure its default on nonpayment of rent, therefore, breached the terms of the lease and was material. The court noted that because the lease had no terms addressing the landlord’s breach, the application of the Restatement factors was necessary. All factors weighed against materiality or were neutral regarding Dolly’s actions. Dolly deprived MMG of no reasonably expected benefit, Dolly could easily have compensated MMG for any lost benefit because of the change of locks, MMG did not suffer a forfeiture because of Dolly’s actions, Dolly was likely able to cure its own default, and Dolly did not appear to conduct itself below the standards of good faith and fair dealing. The court remanded for the trial court to award the originally calculated damages for unpaid rent but did not disturb the award to MMG of damages for the
conversion of personal property. [Eds. Given the court’s analysis of Dolly’s breach under the Restatement, it seems odd that MMG should have been entitled to such a large award, if anything.] Dolly Inv., LLC v. MMG Sioux City, LLC, 984 N.W.2d 168 (Iowa 2023).
LANDLORD-TENANT: Landlord may enforce tenant’s promise to vacate by voluntary stipulation in mediation without commencing summary proceedings. Dacey leased a two-bedroom apartment from Burgess for $1,250 a month. Thereafter, Burgess increased the rent to $1,315, Dacey refused to pay, and Burgess served a notice to quit. Before answering, Dacey filed a complaint for a temporary restraining order to remediate a bedbug problem. The parties agreed to mediate and reached a voluntary stipulation, which the judge approved. Under the stipulation, Dacey waived his claims against Burgess and agreed to vacate the premises by August 31 in exchange for one month’s free rent to assist with relocation expenses. After Dacey did not vacate as stipulated, Burgess obtained a judgment and execution to regain possession of the premises. Dacey sought to “revise, revoke, or vacate the judgment,” arguing that the Housing Court lacked authority to enforce the voluntary stipulation as Burgess failed to bring a summary proceeding under Mass. Gen. L. ch. 239. The trial court rejected the claim, and the supreme judicial court affirmed. The court concluded that a voluntary dismissal and settlement obviated the need for a summary proceeding. The plain language of the statute demonstrates that a summary process action, although the most common avenue for a landlord to recover possession of leased premises, is not the exclusive avenue for recovery of possession. In fact, the statute allows recovery
of possession of a leased premises by “other proceedings authorized by law,” Mass. G. L. ch. 184, § 18, demonstrating that the legislature understood that in some limited circumstances, a landlord may recover possession of leased property without a summary proceeding. Here, the parties chose to resolve their dispute by court-referred mediation in the housing court, which role the supreme judicial court previously had recognized and approved. Any summary proceeding action following the voluntary stipulation would have been superfluous. Entry of judgment based on a voluntary stipulation constituted an “other proceeding . . . authorized by law” under section 18. Dacey v. Burgess, 202 N.E.3d 1172 (Mass. 2023).
PREMISES LIABILITY: Landlord is not liable for injury suffered by tenant’s invitee on leased property. Fleurrey, a 54-year-old man with developmental disabilities, died by drowning in an unfenced pond near the home in which he lived with a fulltime caretaker. Fleurrey’s sister and estate administrator sued Upper Valley Services (UVS), which had supervised Fleurrey’s care for more than 25 years, the live-in caretaker, and the landlord who leased the home to UVS. The sister alleged that the landlord failed to fence the pond, thereby negligently failing to keep the property free from unreasonably dangerous conditions that it knew to exist. The landlord moved to dismiss, arguing it owed Fleurrey no duty to fence the pond. The trial court agreed and dismissed the claim against the landlord. On de novo review, the supreme court affirmed. The court recited precedents that required an invitee to seek redress for injuries sustained on negligently maintained property from the land possessor, who invited the injured invitee to the defective property, rather than the absentee landlord. Because this landlord was not a possessor, it owed no duty to Fleurrey. The court explained that liability should rest on the person in control with the power to make repairs. The court refused to impose the duties recognized by the Restatement (Second)
Torts §§ 343 and 343A, as both sections by their terms only apply to “possessors of land.” A possessor is a person who is in occupation of the land, with intent to control, or one entitled to occupation if no other person is in possession. Restatement (Second) of Torts § 328E. The court also rejected liability based on the foreseeability of the harm because foreseeability by itself does not give rise to a duty. Fleurrey v. Dep’t of Aging & Indep. Living, 292 A.3d 1219 (Vt. 2023).
PROPERTY INSURANCE: Public adjuster who is compensated by contingency fee cannot serve as “disinterested” appraiser under appraisal provision of insurance policy. Parrish was insured by State Farm when his home suffered damage from a hurricane. He filed a claim and hired Keys Claims Consultants (KCC) to provide public adjusting services to estimate repair costs. KCC was to receive ten percent of whatever Parrish received from State Farm. State Farm and KCC inspected the property and developed irreconcilable estimates. KCC later invoked the appraisal provision of Parrish’s homeowner’s policy and further stated KCC’s president would serve as Parrish’s appraiser. The policy language called for each party to “select a qualified, disinterested appraiser,” and State Farm argued that KCC already was serving as Parrish’s public adjuster and therefore was not qualified to be a disinterested appraiser. The trial court denied State Farm’s petition to compel Parrish to secure another appraiser. The appellate court reversed. The supreme court noted disagreement in the precedents of intermediate appellate courts. The supreme court resolved the issue by affirming the appellate court’s decision, expressly disapproving of prior decisions inconsistent with its reasoning. Because the term “disinterested” was not defined by the policy or in the state insurance code, the court resorted to the ordinary meaning of the term. According to Webster’s Third International Dictionary and Black’s Law Dictionary, “disinterested” means free from bias or partiality and not having a pecuniary interest in the matter
at hand. The contingency fee arrangement gave KCC a pecuniary interest in Parrish’s claim, meaning neither KCC nor its president could be disinterested. To the contrary, the more KCC helped Parrish recover, the greater its compensation. The court went on to say that disclosure of the appraiser’s interest makes no difference, nor does the fact that the appraiser might be independent, rejecting a view expressed by the dissenting justice. Parrish v. State Farm Florida Ins. Co., 356 So. 3d 771 (Fla. 2023).
TITLE INSURANCE: Coverage for filing of mechanic’s lien after construction lender stops funding the loan depends upon analysis of causation. A developer obtained a $41.1 million loan to finance the construction of a condominium project. The lender obtained a title insurance policy from Fidelity National Title Insurance, which insured the priority of its lien. After construction issues caused the developer to miss an installment payment of interest on the loan, the lender declared the loan in default and withheld further funding for the project. The developer failed to pay the general contractor for the completed work. The general contractor filed a notice and claim of mechanic’s lien. Three years later, the lender settled with the general contractor and then filed a claim under the title policy. Fidelity denied the claim, asserting exclusion 3(a), which bars coverage for losses or damages arising out of any “defects, liens, encumbrances, adverse claims, or other matters . . . created, suffered, assumed, or agreed to by the insured claimant.” The trial court held that the exclusion does not apply as a matter of law when an insured acts within its contractual right, as here by declaring a default and stopping funding of the construction loan. The court of appeals reversed the trial court, instead applying a bright line rule that when a construction lender cuts off funding, exclusion 3(a) precludes coverage for liens that arise when completed work goes unpaid because of a funding shortfall. In other words, a construction lender who exercises a right
to withhold funding “creates” the superior mechanic’s lien as a matter of law. The supreme court disagreed with both lower courts, adopting an intermediate position. Construing the policy under its plain meaning, the supreme court ruled that to “create” means to “cause,” to act affirmatively to bring about the risk. The “created” risk exclusion applies “whenever the insured intended the act causing the defect,” irrespective of the insured’s misconduct or intent that the defect occurs. The court remanded with instructions for a determination of causation with specific guidance: the exclusion applies if the developer failed to pay the general contractor because the lender withheld the remaining funds; by contrast, the exclusion does not apply if the developer’s failure to pay the general contractor preceded the lender’s withholding of funding. The court also observed that other facts may be relevant to causation: whether the lender notified the general contractor that funding would cease and whether the work that resulted in the mechanic’s lien occurred before or after the lender withheld funds. [Eds. Although the ruling seems to leave lenders in a most precarious position—continue funding a doomed project or withhold funds and trigger the policy exclusion—it nevertheless brings a bit of clarity to the infamous exclusion 3(a).] Fidelity Nat’l Title Ins. Co. v. Osborn III Partners, LLC, 524 P.3d 820 (Ariz. 2023).
ZONING: Statute prohibiting conservation agency from issuing mining permits if local ordinance prohibits mining does not apply to permits for non-conforming uses. Sand Land operated a sand and gravel mine. The mine became a non-conforming use when the Town of Southampton amended its zoning in 1972. In 2014, Sand Land sought a permit from the state environmental conservation agency to increase the depth of mining by 40 feet and also to mine on additional acres. After an exchange of proposals, the agency allowed Sand Land to increase its current activity by three acres, to cover a total of 34.5 acres of the 50-acre site, and to allow mining to a depth of 120
feet above sea level. The town opposed the permit, relying on the environmental conservation law that provides that no permit should be issued for mining “within [certain] counties… which draw their primary source of drinking water… from a designated sole source aquifer, if local zoning laws or ordinances prohibit mining uses within the area proposed to be mined.” N.Y. Envtl. Conserv. § 23-2703(3). The trial court determined that the statute did not apply because Sand Land’s proposed expansion of its mining operations was a renewal rather than a modification of the previous permit. In addition, the court concluded that the statute did not apply to permit modifications that authorized deeper mines within an existing footprint where mining is presently authorized. The appellate division reversed, holding that the statute applies to all applications, not just new permits seeking substantial modifications. The court of appeals reversed. In a textual analysis of the statute, it found that local laws preempt the agency only when local laws prohibit mining uses within the area proposed to be mined. Because Sand Land was already mining under an existing permit, preemption did not apply. Allowing Sand Land to continue under a non-conforming use was not otherwise prohibited by local law. The court nevertheless remanded the case for a determination of whether the proposed changes are allowable as non-conforming uses. Town of Southhampton v. New York State Dept. of Envtl. Conservation, 205 N.E. 3d 426 (N.Y. 2023).
ZONING: Standing to challenge zoning board decision does not require real property ownership. North Shores LLC proposed a planned unit development (PUD) comprising a variety of residences, buildings, dockominiums, a boat basin, and open spaces. The zoning commission granted preliminary approval, and an environmental group, the Saugatuck Dunes Coastal Alliance (SDCA), appealed. The members of the group alleged injury to their properties, businesses, riparian rights, and legacies by impacts on natural areas
bearing their names. The zoning board of appeals found that SDCA lacked standing, and the SDCA appealed further. The circuit court affirmed, as did the appellate court, holding that standing was lacking because the SDCA was not a party aggrieved by the commission’s approvals. The supreme court vacated and remanded. It noted that Mich. Comp. Laws § 125.3604(1) allows a “person aggrieved” to appeal a commission decision related to a PUD or special land use decision, and Mich. Comp. Laws §§ 125.3605, 125.3606(1) indicates any “party aggrieved” may further appeal a zoning board decision to the circuit court. Despite the use of those terms for a century, neither the statute nor legislature ever defined them. The court looked at various jurisdictions that have defined the same or similar terms and settled on a definition more expansive than its past precedent. The court stated its interpretation of “aggrieved party” was consistent with its historical meaning and that an aggrieved party must allege and prove special damages not common to other property owners. But “aggrieved” had become inappropriately intertwined with real property ownership. The court noted neither statute referenced an appellant’s property ownership. Because the legislature specifically required property ownership elsewhere in the statute, the omission in the applicable sections established a class of potential appellants broader than real property owners. The supreme court concluded that to be a party aggrieved under Mich. Comp. Laws § 125.3605 and a person aggrieved under Mich. Comp. Laws § 125.3604(1), an appellant must have taken a position in the challenged proceeding such as by letter or oral public comment, must claim some legally protected interest or protected right likely to be affected by the challenged decision, and must provide some evidence of special damages but not only as they compare to other real property owners similarly situated. As before, generalized concerns, such as traffic congestion or aesthetic and ecological impact, are not sufficient. A strong dissent criticized the majority
for destabilizing Michigan zoning law by overturning years of precedent and conjuring new definitions, criteria, and factors destined to be litigated for years to come. Saugatuck Dunes Coastal Alliance v. Saugatuck Twp., 983 N.W.2d 798 (Mich. 2022).
CONSTRUCTION LAW: In Construction Contracts and ADR: Choosing the Right Shoe Size and Style, 39 Prac. Real Est. Law 9 (2023), Daniel D. McMillan outlines the considerations faced most often in construction law regarding alternative dispute resolution (ADR). Consistent with the nature of pieces usually featured in practice-oriented periodicals, the article provides straightforward skills-oriented advice without exploring any theoretical or predictive analytics. As a practitioner’s piece, the article is instructionally expansive, providing valuable insight into a broad spectrum of considerations construction lawyers should address to be effective for their clients. Although ADR has been part of the legal landscape for centuries, it has only recently overtaken litigation as the primary
manner to settle property conflicts.
The article introduces readers to the variety of concerns and choices in construction contracts, many of which are traditional, but also some that have only recently become very popular.
The author begins by suggesting that each contract feature a dispute resolution ladder, which is an agreed-upon flow chart of how to resolve disputes through the life of the construction project. He details pitfalls to avoid, such as making steps in the ladder conditions precedent to moving forward, failing to set realistic time limits for each step, and making assumptions about standard ADR provisions regarding matters such as forum selection clauses. One may be surprised that so many states (30-40) have legislation voiding or limiting ADR clauses designating controlling law outside of their home state. As one expects, negotiation is an initial and important step in any commercial conflict, but the author highlights the benefit of having specific clauses addressing it, particularly noting when negotiations need take place at the project and stage levels as opposed to the executive level. The article’s main focus is on mediation clauses
for construction contracts. The author uses comparative analysis between models from various entities, including the American Institute of Architects (AIA), the American Arbitration Association (AAA), and Judicial Arbitration and Mediation Services (JAMS). Treatment in this section of the article is particularly helpful in highlighting the need to distinguish between facilitative mediation and evaluative mediation so that appropriate language is used. Although the two types of mediation are not mutually exclusive, their differences call for specifically drafted clauses. Arbitration rule options go beyond AAA and JAMS, and the author notes other routine choices such as the United Nations Commission on International Trade Law and International Centre for Dispute Resolution. Federal law considerations are paramount as well regarding compliance with the Federal Arbitration Act (FAA), at least when dealing with domestic parties. To that end, one needs to pay attention to avoiding conflicts between the FAA, institutional rules, and state law, as many states have been surprisingly active in efforts to regulate construction industry contracting and dispute resolution. More recent preferences for resolving disputes in this area that warrant consideration in drafting one’s dispute resolution ladder are partnering, project neutrals, and dispute resolution boards. These options share the feature of being available from the outset of a project until completion. The parties agree on the resource, time, and expenses related to conflicts throughout the construction period. He concludes that one should consider the full range of available selections, try them out as much as possible, and settle on what is the best fit for one’s client; no one size fits all.
PROPERTY INSURANCE: In Mitigating Catastrophe Risk for Landowners, 74 Hastings L.J. 869 (2023), Prof. Stewart Sterk exposes the gaps in the existing legal mechanisms for compensating landowners in the case of catastrophic events, from floods to pandemics. Private insurance, by its
business purpose, evaluates risks based on historical events and seeks to minimize claims either by charging higher rates or withdrawing from risk-prone markets altogether. In the case of insurance against floods, this latter course left many homeowners at risk of monumental losses, leading to the creation of the National Flood Insurance Program, a program itself fraught with difficulties, not the least of which is a mounting $20 billion federal deficit. Among the many obstacles to private insurance against other catastrophic-related losses, Prof. Sterk sees information deficits (how to predict the next wildfire for instance) and the moral hazard as the most challenging. But he has ideas for overcoming some of them, including reinsurance and catastrophic bonds. Prof. Sterk is skeptical that the federal government should continue as the insurer of last resort in the case of floods. He believes that insurance is not a good business for the government, and the absence of a profit motive, which animates private insurers, has led to governmental decisions on risk management that are less than optimal. Rejecting the idea that the government has a societal duty as a matter of corrective or distributive justice, Prof. Sterk believes that actuarially sound insurance is a preferred alternative to government assistance.
property mechanism, drawing upon the practice of unitization used in oil and gas development. Traditional unitization has the core characteristics of pooling shared interests in a resource, decision-making by voting of the community, and the communal sharing of the benefits and detriments. Mr. Lockman calls for the creation of “classes” of interest holders in wind resources and a requirement that each class approves of any proposed unitization plan. If nothing more, his ideas offer the promise of standardization and predictability.
MISSISSIPPI exempts real estate licensees from liability for failure to make required disclosures to buyers. Instead, only the property owners have liability for violations of the statute. 2023 Miss. S.B. 2647.
deemed an interruption. The use must be open and notorious and adverse. The holder of an easement so established may file a notice with the county clerk, describing the prescriptive easement. Once established, the easement holder acquires the right to access and repair the water conveyance. Upon notice to the servient owner, the easement holder may temporarily remove infrastructure in or spanning the water conveyance system for purposes of maintenance. 2023 Wyo. Sess. Laws 69. n
A 2018 ABA survey found that one in four law firms has experienced a data breach.
WYOMING provides for the continuation of property insurance coverage to a beneficiary of a transfer on death deed. The coverage is extended for a period of up to 60 days following the date of the death of the last owner unless the grantee beneficiary has disclaimed an interest in the real property. 2023 Wyo. Sess. Laws 85.
change has caused us to rethink our heavy reliance on fossil fuels for energy. Prominent among our responses is the development of carbon-neutral energy sources, particularly wind. Although the benefits of this alternative source are undeniable, there are many externalities yet to be grappled with, including noise pollution, damage to infrastructure from construction, sound and light pollution, and limitations on competing land uses. In Fencing the Wind: Property Rights in Renewable Energy, 125 W. Va. L. Rev. 27 (2022), Martin Lockman outlines the largely unaccounted-for harms and shows how existing legal theories are not a good fit for marking the boundaries of rights in wind. Mr. Lockman proposes a novel
The US Department of Homeland Security encouraged companies preparing for the impact of COVID-19 to adopt heightened cybersecurity standards as well as make e orts to mitigate the risk of cyber threats from employees working remotely. In April 2020, the FBI reported that the number of complaints about cyberattacks to their Cyber Division was up to as many as 4,000 a day. That represents a 400 percent increase from pre-COVID-19. Microso reported in June 2020 that COVID-19-themed attacks, where cybercriminals get access to a system through the use of phishing or social engineering attacks, had jumped to 20,000 to 30,000 a day in the US alone. These types of attacks are a particular risk in the remote work environment, where deception is more easily attainable.
WYOMING amends law for the creation of tenancy by the entirety. Unless the deed specifies another form of ownership, the designation of tenants on an instrument of conveyance or transfer of real property as “husband and wife,” “spouses,” or similar language is deemed to establish a tenancy by the entirety. 2023 Wyo. Sess. Laws 97.
financial aspects of data recovery and other activities in the unfortunate event of a cyberattack. But most crime and cyber policies require a computer hack or active invasion of a computer system by a criminal to trigger coverage, which can create coverage gaps. It is important for policyholders, such as lawyers and law firms, to adequately gauge their requisite cybersecurity coverage.
To an extent, the remote work environment, paperless law o ces, the COVID-19 pandemic, and all of the related shi s in technology have created a new standard in the context of legal malpractice. There is more to know about and di erent duties to uphold in new contexts. Lawyers must not lose sight of their ethical obligations, but also they cannot remain stagnant in their application.
For law firms, it can help to be proactive rather than reactive, especially because, under Model Rule 1.15, lawyers have an obligation to appropriately safeguard property of a client or third party that is in a lawyer’s possession. With cyberattacks more of a “when” than an “if,” one way law firms take a proactive approach is by seeking cybersecurity insurance, knowing that in spite of their best e orts to prevent hacks and mitigate risk, hacks are an inevitable possibility. Cybersecurity insurance is intended to assist companies and other organizations with the
WYOMING redefines criteria for prescriptive easement for water conveyance. An easement requires the use of a water conveyance system under a claim of right for a period of ten years, during which time the use must be continuous and uninterrupted and consistent with the historical and traditional use of the water conveyance system. A temporary change of use or cessation of use, so long as the water rights are not abandoned, shall not be
The 1957 sci-fi film Plan 9 from Outer Space has a line—“We are all interested in the future, for that is where you and I are going to spend the rest of our lives.” The future of the legal profession is looking more and more like the remote work environments and paperless law o ces we have seen spring up in recent years and take flight during the pandemic, and lawyers are going to spend their lives living and working that way. But they cannot do so successfully without keeping in mind the ethical considerations that may potentially arise out of doing so. ■
With cyberattacks more of a “when” than an “if,” one way law rms take a proactive approach is by seeking cybersecurity insurance.
By Michael Duffy
Modern estate plans in the United States, especially among the very wealthy, often involve the creation of long-term irrevocable trusts to hold assets for current and future beneficiaries. Among their many benefits, such trusts can keep trust assets out of the beneficiaries’ taxable estates and also protect them from their judgment creditors.
In the United States, wealth transfer planning using trusts has become so ubiquitous among wealthy families that heirs face the reality of not inheriting assets directly anymore, but rather inheriting trust structures that hold assets for them. Occasionally, such trusts are funded with
tangible personal property like fine art and collectibles. These assets present unique challenges for trustees to manage, especially in light of a trustee’s duties to exercise prudence and loyalty.
This article will highlight key administrative provisions that might be appropriate to include when designing irrevocable trusts to hold and manage art and collectibles over multiple generations.
Before the introduction of the Prudent Investor Rule in 1992, if a trust document was silent as to a particular investment, trustees were essentially limited to holding and making investment decisions under the concept of the Prudent Person Rule, which looked at each distinct investment on its own, without regard to its relationship with other trust investments. The rule favored income-producing stocks and bonds. The rule banned certain investments entirely. Under the Prudent Person Rule, trustees were essentially limited to blue-chip stocks, investment-grade municipal bonds, government bonds, commercial trust funds, and certificates of deposit. Alternative investments such as private equity, hedge funds, and fine art holdings would have violated the rule and exposed a trustee to personal liability from actions brought by that trust’s beneficiaries.
Today, most states have adopted some version of the Uniform Prudent Investor Act (the Act), which permits trustees to hold, invest, and sell any type of asset, as long as that asset’s potential investment return, income, liquidity, and volatility profiles make sense from an overall modern portfolio management viewpoint. See Uniform Prudent Investor Act, available at https://tinyurl.com/mr232zd8.
Even under the Act, however, trustees are generally required to diversify concentrated investments and resist investing in and holding illiquid assets. That creates an inherent conundrum for any trustee who is being asked to administer a trust that holds art and collectibles, which by their very nature are extremely illiquid, volatile, non-income-producing, hard to value, expensive to maintain, and subject to fraud (e.g., fakes), and have exceptionally high transactional costs when compared to listed stocks and bonds.
Because trustees are often sued by trust beneficiaries for failing to fulfill their duty to invest prudently, it may be impossible to find a qualified person or professional trust company that is willing to serve as trustee if you do not provide the trustee with clear written authority to acquire, hold, or exchange art assets.
In order to allay a trustee’s reservations about serving, consider including the following provisions in your trust:
• Waive Prudent Investor Rule. In order for your trustee to hold and invest in any type of illiquid asset, regardless of the asset’s expected return on investment and its overall anticipated effect on the trust’s remaining investable assets, consider waiving your state’s Prudent Investor Rule.
• Permit Concentrated Investments. Art held inside an irrevocable trust often represents an “outsized” asset allocation
(as an alternative asset class) under Modern Portfolio Theory. Consider providing the trustee with written permission in the trust document to hold so-called concentrated investments without fear of violating a trustee’s duty to diversify.
• Permit Illiquid Investments. There is a saying in the art world: “Buying art is easy … selling art is next to impossible.” That’s because there are no established art exchanges that provide real-time bid and ask prices similar to listed stock exchanges. To be sure, one may not ever be able to find a buyer for a piece of art that one might have spent thousands or even millions of dollars to acquire.
To exacerbate the illiquidity problem, extracting money another way, through an art loan, can be even more challenging. Most lenders consider making loans only against “blue-chip” works that have recently sold at auction. Good luck finding a bank to lend you money against a painting that you purchased in a local gallery. Lenders want to know that if the loan has to be foreclosed, there is a clear path to liquidity … which means the auction markets.
Because of art’s illiquid nature from both the sale and the loan perspectives, trustees normally want to see language in the document that recognizes these issues and allows the trustee to explicitly hold and invest in illiquid
investments like art and collectibles.
Permit Trustee to Retain All Tangible Personal Property with No Duty to Monitor Such Property’s Investment Performance. There are no listed art exchanges, and it is estimated that onehalf of art sales worldwide happen in private transactions that go unrecorded. This makes it impossible to monitor the fair market value of a work of art, and thus reporting a trust’s investment performance to beneficiaries is a challenge. In recognition of the poor and inaccurate pricing inherent in the art market ecosystem, most prudent investors would refrain from making an investment in something with a value that cannot be monitored. Thus, you should consider adding language that allows the trustee to hold art and collectibles and relieves the trustee from the duty to regularly obtain pricing information.
Add “Art and Collectibles” to the Nonexclusive List of Permissible Trust Investments. Some trusts merely state that the trustee has the power to invest in “any” asset. Other trusts will refer the trustee to the applicable state statute and the trustee powers set forth therein, while others offer readers a nonexclusive list of permissible investments.
In order to allay any concerns that art and collectibles are not an appropriate holding, your document might include a nonexclusive list that specifically identifies art and collectibles as potentially suitable investments. Corporate trustees in particular prefer to have
specific references in the document as to permissible investments rather than a general power to invest in anything. And because it is reasonable to expect that most long-term trusts might need a corporate trustee sometime in the future, you should consider adding art and collectibles to the investment list.
Include So-Called Directed Trust Language That Could Give an Art Investment Advisor the Right to Direct the Trust to Acquire or Sell a Work of Art. This provision is particularly important if you anticipate that a corporate trustee might ever be asked to serve in the future. Corporate trustees are generally ill-prepared to hold and manage art. They regularly refuse to take on trusts that hold unique assets, unless the trusts are formed in states that permit a third party to direct them to hold, buy, and sell the unique asset, thereby eliminating the trustee’s potential personal liability for doing so. These trusts are called “directed trusts” and generally require that the trust document specifically mention the state’s directed trust statute and the trust director or advisor’s powers, compensation, and successors.
Authorize Trustee to Lend Artworks to Museums. When a work of art is not being personally enjoyed by a trust beneficiary, the trustee may have an opportunity to lend it to a museum exhibition rather than place it in storage. All of the carrying costs associated with maintaining a work on loan are
It is estimated that onehalf of art sales worldwide happen in private transactions that go unrecorded.
normally paid for by the museum; furthermore, having a work appear in an exhibit that is well-received by the public can help drive up the price if the work is later sold.
Authorize Trustee to Pledge Art to Borrow Money. Trusts that hold art will incur ongoing expenses that are unique to this type of asset. Annual expenses generally range from 1percent to 3 percent of the fair market value of the entire collection and can include property and casualty insurance, storage, moving and handling, appraisals, art advisors, and conservators. If a trustee does not have sufficient resources to pay the trust’s ongoing expenses, it might be helpful to explicitly allow the trustee to engage in art loan transactions to obtain the needed liquidity.
Authorize Trustee to Sell Art. In order to pay for ongoing administration expenses, and to account for unforeseen circumstances in the future, your trustee might be given the sole and absolute discretion to liquidate a work of art, or the entire trust’s collection, in the best interests of the beneficiaries. For example, a trust that is established for a beneficiary will not serve its intended purposes if that beneficiary dies because they could not afford medical treatment. In a situation where a beneficiary is gravely ill and in need of money to pay for treatment, many settlors would make it clear in the trust agreement that the trustee can sell works to raise the needed capital and can exhaust all of it on behalf of the ill beneficiary.
Authorize Trustee to Lend Art to Beneficiaries. There should be express language in the trust document that allows the trustee to temporarily part with the art’s possession and allow it to be held by a beneficiary without the loan violating the trustee’s duty to preserve trust assets.
You might also include protective language that provides that the trustee has no duty to inspect the art when it is being used by a beneficiary and that the trustee is not liable for damages or destruction while in possession of the beneficiary.
Authorize Trustee to Donate Works to Charity. If the irrevocable trust
document is silent as to charitable donations of cash or property (e.g., art), the trustee will not be able to make such donations, even if requested to do so by the trust’s beneficiaries. Since nobody can know the future and whether it might make sense in the future for the trust to donate a work, many settlors will authorize the trustee to make such donations in the trustee’s sole discretion.
It is worth noting that trust beneficiaries (usually by majority vote) are often given the right, through a special power of appointment, to appoint some or all of the art and collectibles to charity during their lifetime or at their death.
Authorize Trustee to Hire Art Agents. If the purpose of a trust is to hold, preserve, and manage fine art for beneficiaries, we suggest that you consider adding discrete language in the trust document that specifically allows the trustee to hire art-world agents, including but not limited to art advisors, curators, archivists, auction house specialists, dealers, art historians, forensic art specialists, conservation experts, provenance experts, gallerists, and appraisers.
Authorize Trustee to File UCC Statement. To protect a consignor’s interest in a work of art from a successful judgment creditor of a dealer, gallery, or auction house, consignors are encouraged to file a UCC Financing Statement at the appropriate courthouse before they consign. These filings become part of the public record and are generally easy to search. Because trustees also have a duty to keep the trust’s business private, some trustees may not want to make a public filing of this type without express permission set forth in your trust document.
Authorize Trustee to Form Separate Limited Liability Companies in which to Hold Art. Trusts that are designed to be long-term multigenerational trusts often split into separate shares for beneficiaries at designated trigger points, such as when the donor’s youngest child attains the age of 21 or when a beneficiary passes away. The purpose of dividing a multigenerational trust is to allow a trust to be managed
and administered differently for each branch of the settlor’s family. However, this common and ubiquitous way of splitting up trusts for future generations presents a problem for art and collectibles since these assets are usually heterogeneous and not fungible and cannot be divided. One solution might be to allow the trustee to hold art through an LLC. When the trust is divided into further trusts at trigger dates, those resulting new trusts can hold pro-rata fractional interests in the underlying art by owning a pro-rata portion of the LLC.
Holding tangible personal property, like art and collectibles, inside multigenerational trusts presents unique challenges for any trustee. As set forth above, many of these challenges can be addressed in the administrative and investment provisions of the trust document. Art assets are inherently “clunky” assets for a trustee to hold for any length of time because such assets produce no income, have substantial overhead costs, and are not fungible.
As to this last point, consideration should be given as to how the underlying art can be shared among beneficiaries when multiple generations are expected. For example, if parents have three children and they each have three children, there could be a time when there are 12 living adult beneficiaries who might qualify to borrow a work of art. It would be impractical and expensive and may expose the art to damage if it were transferred to each beneficiary for one month. It might also be seen as unfair by some beneficiaries to rotate possession among them every 12 months if there are not enough pieces to be lent to every beneficiary on day one. This “sharing” problem will only get worse in multigenerational trusts as each new generation of trust beneficiaries comes into being. For this reason, it is always advisable to give your art advisors the sole and absolute discretion to sell the underlying art if it becomes impractical to administer the trust to the number of beneficiaries. n
JOINT TENANCY: Conveyance of real property held in joint tenancy to revocable trust severs the joint tenancy. Helen Schardein bought a plot of land and took title as joint tenants with Dan Sickels. After suffering a stroke, Schardein conveyed her interest in the land to a revocable trust. After Schardein’s death, the land was sold, and Sickels and the trustee litigated their respective rights to the proceeds. The trial court and the intermediate court of appeals found that the conveyance to the trust severed the joint tenancy and that the trust was entitled to all the sale proceeds because Schardein had provided all of the consideration for the purchase. On appeal, the Supreme Court of Iowa in Grout as Trustee v. Sickels, 985 N.W.2d 144 (Iowa 2023), held that the conveyance to the trust did indeed sever the joint tenancy but that the trust was entitled to reimbursement from the sales proceeds for homeowner’s association dues and real estate taxes and that the remaining proceeds must be divided equally between Sickels and the trust.
MALPRACTICE: Lack of privity does not bar a malpractice claim against the executor’s attorney. The New York intermediate appellate court upheld a malpractice verdict against the attorney for a removed executor, awarding damages to the substitute executor as the representative of the estate, in Betz v. Blatt, 180 N.Y.S.3d 599 (N.Y. App. Div. 2022). Although the defendant was not in privity with the estate—the client
Keeping Current—Probate Editor: Prof. Gerry W. Beyer, Texas Tech University School of Law, Lubbock, TX 79409, gwb@ ProfessorBeyer.com.
Contributing Authors: Julia Koert, Paula Moore, Prof. William P. LaPiana, and Jake W. Villanueva.
Keeping Current—Probate offers a look at selected recent cases, tax rulings and regulations, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.
was the former executor—the existence of special circumstances, including the failure of the attorney to take any action to halt the former executor’s self-dealing, continuing to disburse funds to the former executor, and the failure to inform the court or opposing counsel of the former executor’s violation of fiduciary duties, subjected the attorney to liability.
POWER OF ATTORNEY: Express language prevents amendment of revocable trust by agent under power of attorney. The settlor amended the settlor’s revocable trust in 2013 to provide outright distribution at the settlor’s death to the settlor’s children or their then-living descendants if the settlor’s spouse did not survive. In 2017, the settlor’s agent, under a power of attorney granting broad authority to the agent, amended the trust to require distribution of one of the children’s shares to the child’s supplemental needs trust, which provided for distribution to the child’s spouse on the child’s death. After the settlor’s death, distribution was made to the supplemental needs trust, and, upon the child’s death, the trust was distributed to the child’s surviving spouse. The child’s children brought a petition to invalidate the 2017 amendment and to distribute the trust under the 2013 terms. The district court found that the amendment was valid and on appeal the Court of
Appeals of Minnesota reversed, in In re Eva Marie Hanson Living Trust, 986 N.W.2d 1 (Minn. Ct. App. 2023), holding that the trust terms stating that the right to amend or revoke is personal to the settlor and may not be exercised by “my legal representative or agent.” This provision unambiguously prevented the amendment by the agent.
SPENDTHRIFT PROVISION: Spendthrift provision governs self-dealing by beneficiary trustee. The trustee and the trustee’s spouse obtained a loan using as collateral part of the trust property in the amount of the value of the trustee’s one-third interest in the remainder. The trustee’s interest as beneficiary was subject to a spendthrift provision. After the borrowers defaulted, the lender began foreclosure proceedings. One of the other remainder beneficiaries was permitted to represent the trust and resist foreclosure. The trust prevailed and on appeal, the South Dakota Supreme Court affirmed in Plains Commerce Bank, Inc. v. Beck, 986 N.W.2d 519 (S.D. 2023). The court held that the spendthrift restriction meant that the trustee could not encumber the remainder interest and that the beneficiaries’ consents to the self-dealing were ineffective because they did not affect the spendthrift restriction.
TRUST FUNDING: Declaration of trust deemed sufficient to fund trust with real property. The settlor created a trust by agreement between the settlor and another person as trustee. The agreement recited the transfer to the trust of property on Schedule A, which listed the settlor’s home and its furniture as two separate items. After the settlor’s intestate death, the trustee petitioned for a ruling that the property on Schedule A was indeed trust property. The lower court granted the petition and the Supreme Court
of Nevada affirmed in Matter of Living Trust of Davies, 522 P.3d 427 (Nev. 2022). The court held that the statute requiring a trust of real property to be evidenced by a written instrument signed by the trustee or a written instrument conveying the property and signed by the settlor does not require a conveyance by deed.
TRUST MODIFICATION: The settlor and the beneficiaries may modify the trustee replacement provisions through agreement. The settlor and the beneficiaries agreed to modify an irrevocable trust to add terms allowing a majority of the adult beneficiaries to remove and replace the independent trustee after the settlor’s death or incapacity. After the settlor’s death, the beneficiaries removed and replaced the independent co-trustees. The removed trustees challenged the modification on the grounds that they could be removed only by the court under 20 Pa. Cons. Stat. § 7766 (similar to U.T.C § 706) on request by the settlor or the beneficiaries. The lower courts agreed with the trustees, but on appeal, the Pennsylvania Supreme Court reversed in In re Trust Under Deed of Garrison, 288 A.3d 866 (Pa. 2023). The court held that the statutory provision for modification or termination by agreement of the settlor and the beneficiaries, 20 Pa. Cons. Stat. § 7740.1 (similar to U.T.C. § 411), authorizes an agreement to modify a trust to allow beneficiaries to remove a trustee.
TRUSTEE REMOVAL: The court may remove the trustee of land trust under common law. The beneficiaries of a Florida land trust moved for a temporary injunction removing the trustee based on the removal provisions in the Fla. Stat. § 736.0706 (closely based on U.T.C. § 706). The trial court granted the motion and removed the trustee. On appeal, the intermediate appellate court affirmed on other grounds in Freeman as Trustee of Fiddlesticks Land Trust, 352 So. 3d 452 (Fla. Dist. Ct. App. 2022), holding that although the statute expressly provides that its provisions
do not apply to land trusts, the trustee may nonetheless be removed under the common law.
ESTATE TAX: Estate generally not allowed to deduct a settlement payment from the value of the gross estate or as an administrative expense. The decedent was predeceased by her husband, who made her the beneficiary of a qualified terminable interest property trust. After her death, the estate litigated whether the income from the trust property had been properly distributed to the decedent during her lifetime. The estate settled and agreed that the trust would pay the estate a $9.2 million settlement. The settlement agreement attributed about two-thirds of that payment to undistributed income claims and the rest to various commissions and fees. The Tax Court in Estate of Kalikow v. Comm’r, T.C. Memo 2023-21, held that the settlement amount did not reduce the value of the gross estate under I.R.C. § 2044. In addition, the estate could not deduct the settlement payment as administrative expenses, except for one particular agreed-upon commission.
GIFT VALUATION: The Tax Court applied tax affecting in valuation of corporate stock. The taxpayers petitioned the Tax Court to redetermine a deficiency in their federal gift tax return. The taxpayers, a married couple, owned stock in the Biltmore Company, a family business and S Corporation. The gifts at issue involved voting class stock to the taxpayers’ children and nonvoting stock to their grandchildren in trust. The Biltmore Company operates a tourism company whose main feature is the Biltmore House. The evidence showed that over many years, the taxpayer, their children, and their grandchildren crafted a culture of keeping the company in the family through regular business meetings to teach each generation as well as with shareholder agreements. The Tax Court accepted
the taxpayers’ testimony that they had no intention to sell the assets of the Biltmore Company or their ownership interests. In Estate of Cecil v. Comm’r, T.C. Memo 2023-24, the Tax Court held that the facts and circumstances of this case allowed for tax affecting at a rate of 17.9 percent. This means in determining the value of the interest in the company, a corporate tax rate was assumed at 17.9 percent, even though the individual owners pay tax on pass-through income. The court also accepted a 20 percent discount for lack of control and rates of 19 percent, 22 percent, and 27 percent for lack of marketability.
GIFTS: Payments to female companions are considered gifts and payments to stepchildren under a prenuptial agreement are not deductible under I.R.C. § 2053(a)(3) as claims against the estate. The decedent, a wealthy lawyer and businessman, had been married four times, had numerous female companions to whom he made large payments, and had multiple children from several relationships. At the time of his death, the decedent and his wife were estranged. However, he had multiple female companions in the years before he died to whom he made large payments of money which he did not report to the IRS. The estate did not report these payments as taxable gifts. The estate also did not report payments to children and family members in the years before his death as taxable gifts. The decedent’s widow and stepchildren engaged in litigation in state court after his death concerning their rights under the prenuptial agreement. The estate settled. The settlement allowed the widow to remain in certain property for five years, and payments were made to the stepchildren. The estate deducted as claims against the estate the appraised value of the widow’s right to reside in the property and the payments made to the stepchildren. The IRS also issued a penalty for failure to timely file, even though the estate tax return showed no tax due at the time of death due to a payment made when the estate requested an extension. The
Tax Court in Estate of Spizzirri v. Comm’r, T.C. Memo 2023-25, held that the estate failed to meet its burden that the decedent’s sizeable payments to his family and friends were not gifts. The court noted that the estate’s failure to call the majority of the recipients to testify could give rise to an adverse inference that, had they been called, their testimony would not have supported the estate’s claim that these were payments for care and companionship services. Further, the checks did not indicate that they were meant as compensation, the decedent did not issue or file any Forms 1099 or W2 and did not report these payments on his personal tax returns. The Tax Court denied the deduction under I.R.C. § 2053(a)(3) for the bequests to the widow’s children and the value of her right to reside in the property. The court held that as stated in the modification to the prenuptial agreement, they were testamentary gifts “in lieu of any other rights” which may be available to the widow as the surviving spouse. The Tax Court also disallowed a deduction for repairs to real estate, stating that the delayed maintenance had been accounted for in the valuation of the properties. Finally, the court upheld a penalty for late filing even though the amount due on the date for payment was zero because the estate had remitted an overpayment before the filing deadline.
CHARITABLE PLANNING: In Charitable Planning in a Rising Interest Rate Environment, 50 Est. Plan. 32 (2023), Sanford Schlesinger and Andrew Auchincloss explore the role of interest rates in charitable planning, focusing on the IRC § 7520 rate used to determine the present value of future cash flows. The authors suggest that practitioners should be more alert to changes in interest rates when they are low and compare the available rates over a threemonth period to maximize discounts. They also discuss how higher interest rates affect different charitable giving strategies.
CRYPTOCURRENCY—DISTRIBUTION: In A Digital Market Emerges: An Analysis of the Difficulties Investors of Cryptocurrency Face in and Beyond the Probate Context, 36 Quinnipiac Prob. L.J. 153 (2023), Shelby Ross explores the issues surrounding cryptocurrency and its distribution in probate and provides recommendations for reform. Her note includes a background of cryptocurrency, problems with accessing cryptocurrency accounts, current regulations, compliance issues, and proposals for solutions to address these challenges.
CRYPTOCURRENCY—TRUST LAW:
In A New Gold Rush: How Trust Law Can Incentivize Prudent Cryptocurrency and Increase State Revenue, 36 Quinnipiac Prob. L. J. 171 (2023), Nathanael Scaniffe advocates for incentivizing cryptocurrency estate planning in Connecticut with the creation of a new class of trusts, Cryptocurrency-Specific Asset Protection Trusts (APTs), to address the “cryptocurrency intestacy problem.” The author suggests that the Connecticut General Assembly should adopt Cryptocurrency-Specific APTs to promote cryptocurrency estate planning, protect against the inefficient handling of cryptocurrency assets, and bring additional business to the state.
ELECTIVE SHARE: In Beyond Moribund: The Case for Repeal of K.S.A. 59-505, 92 Kan. Bar J. 24 (2023), Tim O’Sullivan argues that the Kansas law that provides a surviving spouse with a right to elect a 50 percent interest in specific real property the deceased spouse owned is problematic and inequitable. O’Sullivan suggests that the statute should be repealed and that the Kansas Spousal Elective Share Act, which comprehensively protects surviving spouses from impoverishment, should be the sole spousal elective share provision in Kansas law.
HIGH-NET-WORTH CLIENTS: In Complex Estate Planning Strategies for High Net Worth Clients, 34 J. Int’l Tax’n 43 (2023), Andrew Bechel and Eric
Kaplan explain how “current high gift, estate, and generation-skipping transfer tax exemptions scheduled to be reduced by half on January 1, 2026” has led to a shift in more complex estate planning strategies. These strategies include a combination of traditional estate planning, asset protection techniques, and complex trust strategies to reduce potential tax burdens and increase asset protection from creditors. They conclude with a case study illustrating the practical application of these strategies.
INSANE DELUSIONS: In Conspiracy Theory Belief and the Case for Abolishing Insane Delusion Doctrine, 16 Univ. St. Thomas J.L. & Pub. Pol’y 516 (2023), Payton Yahn explores the growing impact of QAnon’s influence on wills jurisprudence and the correlation among belief, sanity, and public policy. She questions “how can we distinguish conspiracy belief from other unpopular beliefs, especially in areas where evidence is necessarily scarce.” Finally, Yahn argues that the insane delusion doctrine should be abolished because it is overinclusive and other will-contest grounds can address the conspiracy problem without carrying the same risks.
MARRIAGE RESTRICTIONS: In Testamentary Restrictions on Marriage: A Reexamination of In re Estate of Feinberg in Light of Obergefell v. Hodges, 16 Univ. St. Thomas J.L. & Pub. Pol’y 481 (2023), Christian Poppe analyzes the conflict between the right to marriage and testamentary freedom. In the case of In re Estate of Feinberg, the testator’s will sought to restrict the beneficiary’s marriage rights. The Illinois Appellate Court and Illinois Supreme Court had differing opinions. Poppe argues that the appellate court’s decision invalidating the provision was correct, considering the firm public policy favoring an individual’s right to choose the individual’s marriage partner.
NIL: In NIL (Name, Image, or Likeness) Revenue and its Income Tax Implication,
50 Est. Plan. 07 (2023), Ken Milani shares the tax implications of college athletes who receive compensation for their name, image, or likeness under the National Collegiate Athlete Association’s new policy. In addition, Milani highlights the need for athletic programs to provide tax and financial advice for their student-athletes who may need more experience in preparing and filing tax returns.
REMOTE NOTARIZATION: In PostPandemic Estate Planning: Analyzing the Recent Changes in Remote Notarization Laws, 45 Seattle Univ. L. Rev. 741 (2022), Matthew Fiedler describes the benefits and drawbacks of using remote technology in the post-pandemic era. He also reviews the current legal requirements for notarizing estate planning documents in Washington compared to other states. Lastly, he emphasizes the movement toward digitalization in estate planning law, which encompasses implementing remote notarization laws in over 23 states and introducing the Uniform Electronic Wills Act.
SURVIVAL: In The Evolution of the Uniform Simultaneous Death Act and Its Shortcomings, 16 Univ. St. Thomas J.L. & Pub. Pol’y 464 (2023), Emily Gootzeit explores how the Uniform Simultaneous Death Act (USDA) was created to address legal issues when multiple individuals die simultaneously; however, the original version had some problems. To address these issues, the Uniform Probate Code proposed reforms, including the 120-hour survival rule, but the reformed USDA still lacks essential components such as guidance on life-assisting technology. Gootzeit suggests potential solutions to these problems by amending or revising the reformed USDA to guide courts and avoid unfair results.
TESTAMENTARY CAPACITY: In The Future of Testamentary Capacity, 79 Wash. & Lee L. Rev. 609 (2022), Reid Weisbord and David Horton explore how state guardianship systems have
undergone significant reform to protect those with cognitive, intellectual, or developmental disabilities, and lawmakers are currently experimenting with supported decision-making as an alternative to guardianship. But the legal system’s treatment of individuals with disabilities concerning testamentary capacity remains trapped in the past. The authors analyze several unresolved doctrinal issues, including whether testators have due process rights to participate in competency adjudications and the relationship between supported decision-making and will-making.
TRUST ALLOCATIONS: In Misadventures in Subtrust Allocation: When a Good Estate Plan Goes Bad, 65 Orange Cnty. L. 46 (2023), Hon. Glen Reiser (Ret.) explains how revocable living trusts have become America’s most common estate plan tool since the 1960s. A well-crafted estate plan, however, may still fail in family situations where beneficiaries are unequal or sub-trust allocation is absent.
WITHDRAWAL POWER: In Creditors’ Rights in Property Subject to a Beneficiary’s Right of Withdrawal, 57 Real Prop. Tr. & Est. L. J. 139 (2022), S. Alan Medlin and F. Ladson Boyle explain how estate plans often include withdrawal powers for tax and non-tax reasons. These powers are usually limited for tax purposes to prevent beneficiaries’ creditors from accessing trust property. Uniform statutes such as the Uniform Trust Code and the Restatement (Third) of Trusts guide the treatment of creditor rights in such cases. This article explores the reasons for creating these withdrawal powers and associated planning considerations.
DISTRICT OF COLUMBIA adopts the Uniform Electronic Wills Act. 2022 D.C. Laws 24-296.
MAINE modernizes its version of the Uniform Probate Code and enhances
provisions addressing revocable transfer on death deeds. 2023 Me. Legis. Serv. Ch. 4.
NEW YORK updates statutes to account for natural organic reduction, that is, the accelerated conversion of human remains to soil. 2023 Sess. Law. N.Y. Ch. 34.
SOUTH DAKOTA authorizes a trust enforcer to appoint an individual or a corporate fiduciary as a co-enforcer. 2023 S.D. Laws SB 95.
WEST VIRGINIA passes the West Virginia Private Trust Company Act to regulate private trust companies. 2023 W. Va. Laws H.B. 3272.
WYOMING authorizes the remote witnessing of wills. 2023 Wyo. Laws Ch. 170.
WYOMING creates a method for registering digital assets. 2023 Wyo. Laws Ch. 174.
WYOMING prohibits certain insurers from discriminating against living organ donors. 2023 Wyo. Laws Ch. 93.
WYOMING provides for revocation of probate and nonprobate transfers by divorce or annulment. 2023 Wyo. Laws Ch. 140. n
Real estate remains a popular investment strategy for the masses. There are many ways to invest in real estate. A real estate investment trust, or REIT, is a preferred investment vehicle of choice because of its tax-efficient nature and general simplicity for the “common” investor (e.g., a noninstitutional, individual investor who invests her own capital). Buying shares in a REIT is as simple as buying shares in any major publicly traded corporation. But what exactly are REITs, and given their popularity, why aren’t they more prevalent?
A REIT allows investors to pool capital to participate in real estate ownership—think of it as a mutual fund for real estate. Investors receive tax advantages that are more commonly associated with larger and more sophisticated investors and businesses, yet also benefit from professional management of a diversified portfolio of real estate assets. But setting up a REIT is not without challenges. A REIT must meet various organizational, operational, income, and asset requirements. Taxation as a REIT entitles the entity to a dividends-paid deduction so that a REIT may not
be required to pay any corporate-level income tax, rather than the normal double taxation applicable to “normal” US corporations. Although shareholders of a REIT must pay tax on the dividend income received (subject to certain exceptions), this results in a single level of tax payable by shareholders. Given these advantages, REITs are highly regulated, with their asset ownership, income, and activities scrutinized closely. Unsurprisingly, the administrative burden of maintaining REIT compliance can be costly.
This article aims to provide an overview of the wonderful world of REITs, including organizational requirements, distribution requirements, taxation, and certain nuanced complexities fac-
for US federal income tax purposes. A REIT must have at least 100 or more shareholders for at least 335 days of a 12-month taxable year. The days do not need to be consecutive. This rule applies to the second taxable year and subsequent taxable years thereafter. The closely held requirement means that five or fewer individuals may not own more than 50 percent of the REIT. Generally, ownership attribution rules are applicable (e.g., a corporation would be deemed to own its subsidiaries’ shares in the REIT along with its own shares for purposes of this requirement). Each tax year, a REIT generally will demand a written statement from its larger shareholders disclosing their direct or indirect ownership. These
disposition of stock or securities (other than stock of other REITs or interests in partnerships).
Rents from real property are a broad category and include amounts received for the right to use real property, including charges for services customarily rendered in connection with the rental of real property. This also includes real estate taxes, late charges, and tenants’ obligations towards certain operating expenses and utilities. (Rent attributable to personal property leased under, or in connection with, a lease of real property is included as rent from real property provided that the personal property portion does not exceed 15 percent.) Rents from real property do not include any related-party rent, certain contingent rent, amounts derived from impermissible tenant services, and rents from personal property if they do not meet the 15 percent rule described above.
ing REITs, while also briefly addressing notable recently proposed rule changes. This article discusses certain US federal income tax considerations applicable to REITs but does not comprehensively discuss all tax considerations; for example, state and local taxes, indirect taxes, and payroll taxes are not covered.
The Internal Revenue Code defines a REIT as a corporation, trust, or association (i) that is managed by one or more trustees or directors, (ii) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest, (iii) that (but for the REIT provisions) would be taxable as a domestic corporation, (iv) that is neither a financial institution nor an insurance company, (v) the beneficial ownership of which is held by 100 or more persons, (vi) that may not be closely held, and (vii) that must meet certain income and asset requirements. A REIT must elect to be taxed as a REIT
ownership rules ensure that a REIT is not just used as an investment vehicle for a closely held group and instead, is A REIT must also satisfy two income tests every year and certain asset tests every quarter of every year.
At least 75 percent of the gross income for each taxable year must be derived from (i) rents from real property, (ii) interest on obligations secured by mortgages on real property, (iii) dividends received on shares of other REITs, (iv) gain from the sale or other disposition of real property, including gain from the sale of shares of other REITs, and (v) other specified real estate–related items. Additionally, at least 95 percent of the gross income for each taxable year must be derived from (i) income that qualifies for the 75 percent gross income test, (ii) dividends (other than from other REITs), (iii) interest income from obligations not secured by real property, and (iv) gain from the sale or
Although a REIT may provide services to its tenant such as security services, maintenance, and cleaning, such services must be incidental to the rental of the property. This is a vital distinction because impermissible tenant services can actually cause all the rent from a property to be treated as income other than rents from real property. Accordingly, services income generally is reviewed closely by REITs to ensure they are not running afoul of any applicable rules.
So, what happens if a REIT fails to satisfy its income tests? In the worstcase scenario, an entity may lose its REIT status entirely and be treated like a “normal” US corporation. If, however, a failure occurs due to reasonable cause and not by willful neglect, and if the REIT discloses such failure to the IRS, the entity can maintain its REIT status, which, in some cases, may require the REIT to cure the failure. A REIT must also pay a tax equal to the greater of the amount by which it failed the 95 percent income test or the 75 percent income test multiplied by a fraction the numerator of which is generally the REIT’s taxable income for the year of the failure (determined without regard to the dividends-paid deduction and
If a REIT fails to satisfy its income tests, an entity may lose its REIT status entirely and be treated like a “normal” US corporation.
without regard to the deduction for taxes paid by the REIT) and the denominator of which is generally the REIT’s gross income for the year of the failure (subject to certain exclusions).
Reasonable cause may be construed broadly, but a REIT should exercise ordinary business care and prudence in attempting to satisfy the requirements of the gross income tests. Generally, reliance on a “reasoned, written opinion” constitutes reasonable cause, but the absence of such a reasoned, written opinion with respect to the transaction does not, by itself, give rise to any inference that the failure to meet a percentage-of-income requirement was without reasonable cause. Of course, reliance on an opinion is not reasonable if the REIT has reason to believe that the opinion is incorrect (e.g., if the REIT withholds facts from the party rendering the opinion). An opinion is not “reasoned” if it does nothing more than recite the facts and express a conclusion, without any sort of analysis.
Apart from making sure that a REIT is generating “good” income, at the close of each quarter of the taxable year, at least 75 percent of the REIT’s total assets must consist of real estate, cash and cash items, and government securities. Real estate assets include real property interests, and also generally include personal property (to the extent that such property complies with the 15 percent rule described above), debt secured by real property and debt instruments issued by publicly traded REITs, shares of other REITs, and other specified assets.
In addition to the aforementioned 75 percent test, the asset test also includes five additional requirements:
• No more than 25 percent of a REIT’s assets may be represented by assets that do not count towards the 75 percent asset test;
• No more than 20 percent of a REIT’s assets may be represented by stock or other securities of taxable REIT subsidiaries (TRSs);
• The value of securities of any one issuer owned by the REIT may not
exceed 5 percent of the aggregate value of the REIT’s assets (except for TRSs);
• The REIT may not own securities constituting more than 10 percent of the total value or voting power of the outstanding securities of any one issuer (except for TRSs); and
• No more than 25 percent of a REIT’s assets may be represented by specified debt instruments issued by publicly traded REITs.
So, what happens if a REIT fails to satisfy its asset tests? Similar to the consequences of failing the income test, a failure of the asset test may result in the loss of REIT status, as well as penalties and taxes. Generally, a REIT has a 30-day period to cure failures after the end of each quarter, provided that all requirements were satisfied in the previous quarter and the failure is not related to the 5 percent or 10 percent securities tests (mentioned above).
A REIT must also (i) demonstrate that the failure was due to reasonable cause rather than willful neglect, (ii) file a description of each asset that caused the REIT to fail the requirements, (iii) dispose of the nonqualified assets (or otherwise satisfy the tests) within six months, and (iv) pay a penalty equal to the greater of $50,000 or the tax computed on a specified amount of net income generated by the “bad” asset.
REITs may have subsidiaries, generally referred to as either a qualified REIT subsidiary (QRS) or a taxable REIT subsidiary (TRS).
A QRS can be any corporation for which 100 percent of the stock is held by the REIT (or other QRSs) and the corporation has not made a TRS election. (This may also include what tax practitioners refer to as “disregarded entities” for US federal income tax purposes.) All of the assets, liabilities, and items of income, deduction, and credit are treated for REIT purposes as if they were part of the REIT (i.e., the QRS is effectively ignored). Treatment as a QRS is automatic, and the corporation does not need to make an election. A QRS cannot elect to be treated as a REIT.
Alternatively, a TRS is a subsidiary of a REIT that may perform certain management services not customarily rendered in connection with the rental of space. The TRS may be 100 percent owned by a REIT, but such ownership is not required. Because a TRS must pay corporate-level federal income taxes (currently at a rate of 21 percent), a TRS allows a REIT effectively to “cleanse” non-qualifying REIT income (under the income tests described above) if directly earned by a REIT and convert it to qualifying income in the hands of the REIT. Rents received by a REIT from tenants also receiving non-customary services from a TRS will not be disqualified as “rents from real property.”
To be treated as a TRS, both the TRS and the REIT must sign an election statement to be submitted to the IRS. The TRS election automatically applies to any corporate subsidiaries of the TRS of which the TRS directly or indirectly owns a greater-than-35 percent interest
in the voting power or value of the subsidiary. Once the TRS election has been made, however, it is irrevocable unless both the REIT and the TRS consent to the revocation.
Although a TRS must pay tax on its activities, certain restrictions apply. A TRS does not include any corporation that, directly or indirectly, engages in either (i) operating or managing a lodging or health care facility or (ii) providing rights (under a franchise, license, or other arrangement) to operate or manage a lodging or health care facility under a brand name. But a REIT may
the close of the taxable year. Shareholders are required to take dividends into account as taxable income in the year received.
Although maintenance of a REIT can be costly and complicated, and may not allow the flexibility that other investment vehicle alternatives may provide, REITs remain a preferred real estate investment vehicle because of this single layer of tax. Using a simple example, assume a domestic corporation invests in real estate and receives $100 of rental income. The
No discussion regarding REITs would be complete without a mention of the Foreign Investment in Real Property Tax Act (FIRPTA).
Generally, the tax code treats gain from the sale of stock by a foreign corporation as foreign source income and therefore not subject to US federal income tax. FIRPTA, however, provides that gain derived from dispositions of stock of certain “US real property holding corporations” (USRPHC) is treated as income that is effectively connected with a US trade or business and therefore subject to US federal income tax.
lease property to a TRS, and the TRS may hire an eligible independent contractor to undertake such services.
Each tax year, a REIT must distribute as a dividend at least 90 percent of its REIT taxable income, although most REITs will distribute 100 percent of their taxable income. Tax at the corporate income tax rate, levied at 21 percent, is owed by the REIT on the taxable income that is not distributed. Capital gains may be retained by the REIT, in which case the REIT pays the 21 percent corporate income tax, and amounts are deemed distributed and then recontributed by each shareholder, respectively. Shareholders receive a credit for the tax paid by the REIT in respect of such capital gains.
A REIT can deduct dividends paid on its US federal income tax return, to the extent it has current and accumulated earnings and profits. The dividendspaid deduction can be claimed for the year the dividend is declared, and the dividend can actually be distributed within the 12-month period following
corporation would owe $21 of tax (with a 21 percent corporate income tax rate) and then distribute the remaining $79 to its shareholders. The shareholders would owe tax on the income received. Assuming a 35 percent personal income tax rate for all shareholders, that leaves them with $51.35 remaining. That is a whopping 48.65 percent effective tax rate, without even factoring in any state and local taxes.
On the other hand, the same income earned through a REIT would not suffer the corporate income tax “leakage” because the REIT would receive a dividends-paid deduction on the entire $100 distributed. Shareholders would then receive the $100, subject to our assumed tax rate of 35 percent, leaving them with $65 remaining. This is a difference of $13.65. This example shows that investing through a REIT can potentially lead to a significant amount of tax savings. (A REIT dividend is ordinary income and is generally not “qualified dividend income,” which, for individuals, is taxed at capital gains rates. This calculation also does not include the net investment income tax of 3.8 percent.)
The disposition of a US real property interest (USRPI) by a foreign person is subject to income tax withholding in the United States. A USRPI includes any interest in a US corporation unless it is established that at no time during the five-year period immediately preceding the date of the disposition was the US corporation a USRPHC. A corporation is a USRPHC if the fair market value of its USRPIs equals at least 50 percent of the fair market value of the company’s USRPIs, its interest in real property located outside the United States, and any other assets the corporation used in the US trade or business. Most direct interests in US real property, such as land, improvements on the land, buildings, and other “inherently permanent structures,” are USRPIs.
To the extent that a US corporation is a USRPHC, a sale of stock would be treated as a sale of a USRPI and subject to FIRPTA. Upon disposition of a USRPI, FIRPTA rules require that the buyer withhold 15 percent of the amount realized on the disposition and remit such amount to the IRS. The 15 percent is on the gross amount of the consideration, not just the seller’s profit on the USRPI. Tax treaties generally do not provide any exemption from FIRPTA.
A foreign investor that disposes of a USRPI is required to file a US tax return with respect to the income arising from the disposition. Any tax withheld shall
A REIT generally acts as a “blocker” corporation in respect to the underlying investments.
be credited against the amount of any income tax due.
A REIT generally acts as a “blocker” corporation in respect to the underlying investments (i.e., the activities of a REIT, including its income, are not attributed to the owners of a REIT). REITs are generally USRPHCs, which means that FIRPTA taxes and tax filing obligations may apply to (i) gains from dispositions of REIT shares because such shares are considered USRPIs and (ii) REIT capital gain distributions, which are treated as if the foreign shareholder disposed of the USRPI itself.
Shares in a domestically controlled REIT, however, do not constitute USRPIs. As a result, any gain on the disposition of a domestically controlled REIT should not be subject to FIRPTA. A REIT is treated as domestically controlled if at all times during the past five years, less than 50 percent in value of the stock was held directly or indirectly by non-US persons (the DC-REIT Exception). The DC-REIT Exception can be tax favorable to non-US shareholders upon disposition of their investment.
The Department of the Treasury released proposed regulations (the Proposed Regulations) on December 29, 2022, that address (among other things) the determination of whether a REIT is domestically controlled, and, therefore, whether its non-US shareholders are eli gible for an exemption from FIRPTA. The Proposed Regulations provide that the following nonpublicly traded entities should be “looked through” to their underlying owners: (i) domes tic and foreign partnerships, (ii) REITs, (iii) regulated investment companies, and (iv) domestic corporations formed under subchapter C of the Code (C cor porations) that are owned 25 percent or more directly or indirectly by foreign persons. See Proposed Treas. Reg. § 1.897-1(c)(3)(ii).
A foreign-owned domestic corporation is any nonpublic domestic corporation in which foreign persons
hold directly or indirectly 25 percent or more of the fair market value of the corporation’s stock. This look-through approach with respect to C corporations is a significant departure from the wellestablished tax norm of not looking through a C corporation for the domestically controlled determination. The preamble to the Proposed Regulations provides that that purpose of this lookthrough rule is to “prevent the use of intermediary domestic C corporations by foreign investors to create domestically controlled [REITs]” that would be exempt from the application of FIRPTA for stock held directly by those or other foreign investors. Essentially, Treasury is worried that the DC-REIT Exception is being taken advantage of by certain fund sponsors and non-US investors.
Many real estate funds invest through REITs and currently use an investment structure for their non-US investors in which the REIT’s US ownership is 50 percent or higher in order to permit non-US investors to benefit from the DC-REIT Exception. This US ownership is maintained through a C corporation that is typically 100 percent owned by non-US investors. (The remaining less-than-50 percent interest may be held directly by non-US investors.) Under the Proposed Regulations, the C corporation would now be a “foreign-owned domestic corporation” and
would be looked through for purposes of the DC-REIT Exception.
These new rules may result in real estate fund sponsors and other non-US investors re-evaluating their existing investment strategies and structures and potentially considering other alternatives to satisfy the DC-REIT Exception under the new rules. However, the Proposed Regulations may be updated as a result of comments received, and it is expected that the IRS will receive various comments opposing these new lookthrough rules. Additional guidance is expected in the near future.
There are various tax considerations that must be considered when making a US real estate investment. Although REITs have very stringent rules with respect to organizational requirements, income earned, assets owned, and required distributions, they are generally a suitable investment vehicle for a variety of investors. US investors may prefer investing through a REIT because of its tax-efficient nature, and non-US investors may prefer a REIT because it serves as a blocker (which may also be preferred for certain tax-exempt organizations). Although there is no “one size fits all” approach to investing in real estate, most will agree that REITs are all right. n
Crafted with you, your practice, and your clients in mind, the Krause Report contains essential asset-preservation strategies for long-term care.
Development agreements are powerful legal tools commonly used by local governments, landowners, builders, and real estate developers for all manner and size of developments. These agreements have many different forms and can differ greatly in their function, in each case depending on the specific concerns being addressed. This article will focus on their use as a means of environmental protection of lands in a city that wants to encourage development, but in a way that addresses issues of public health and safety. On the “other side” of the equation, the agreement must confer benefits upon a developer or landowner sufficient to make the development viable and worthwhile. More specifically, we will consider the use of development agreements in a few specific cases in Minnesota, primarily for residential real estate development.
Frederic W. Knaak is head of the municipal and development law practice of North Star Law Group in St. Paul, Minnesota. Jordan J. Espinoza is a law clerk at North Star Law Group and a third-year law student at Mitchell Hamline School of Law in St. Paul, Minnesota. He is a member of both Mitchell Hamline’s Latine Law Student Association (LLSA) and Black Law Student Association (BLSA).
Although the use of development agreements could be called commonplace, and their interpretation invariably is one of contract law, the underlying authority for them varies among states. Hawaii and California, for example, have statutes dealing expressly with development agreements and their form and use. California, in particular, has a rich history of litigation of development agreement issues. Minnesota is among many states in which the grant of authority is broad under state statutory or case authority. Over the years, issues related to whether language in development agreements would violate the takings clauses of the federal or state constitutions, or as an unlawful delegation of the state’s reserved powers, have been tested in the courts. Generally, the courts have allowed their use in a manner that favors use of properly crafted development agreements. It is beyond the scope of this article to delve into the details of the analysis on a state-by-state basis, but readers should see the excellent, short summary of the law in the field and a good general overview provided in David Callies, Cecily Barclay & Julie Tappendorf, Development by Agreement: A Tool for Land Developers and Local Governments (ABA Books, 2012).
With the narrower focus of this article, we are ignoring many of the historical uses of development agreements in larger commercial and industrial developments, including in Minnesota. It is a coincidence that the cities we’re looking at are all located on the Mississippi River or its close tributaries.
In Newport, Minnesota, a development agreement was key to dealing with a former sewer disposal plant location with attendant environmental concerns. A development agreement was entered into by the developer and the city that guaranteed a certain valuation of the property being redeveloped, including otherwise non-taxable but very valuable industrial equipment to be installed, and also made use of tax increment financing possible. A stateof-the-art refuse-derived-fuel (RDF) plant was constructed that created combustible fuel from garbage for electrical generation, thereby eliminating much of the need for landfill space. It also created a tax increment sufficient to allow wholesale, and very successful, industrial redevelopment to occur in the surrounding area on the river, resulting in a massive boost to the city’s tax base.
Similarly, only a bit further upstream, Fridley, Minnesota, was able to use an elaborate development agreement to establish an increment sufficiently large to raze a blighted area in the city and allow for the construction of the central headquarters campus of Medtronic. Nearby, a large defense contractor was struggling to expand on its own site but was hampered by brownfield conditions that were the result of its operations over many years. With the pollution on its property, the contractor was finding it impossible to obtain financing for a necessary expansion of its industrial plant. It was effectively being forced to move elsewhere to meet its space needs, notwithstanding the very large size of its lot in the city. In that case, the development agreement allowed a subdivision of the property to occur that created five lots, four of which were unpolluted and one that was. By obtaining financing on the unpolluted portions, the ownerdeveloper was able to construct a large expansion to its industrial facilities and, through the sale of its now neighboring parcels, to provide designated funding to resolve the environmental cleanup the site required by law and the development agreement.
In all these cases, we see the proverbial “win/win” by both the cities’ seeking to solve significant environmental issues and the developers’ being able to build on otherwise “difficult” properties.
Development agreements for the kinds
of large commercial properties just discussed are elaborate documents, carefully drafted and worked out by large law firms after extensive negotiations. They are, although not rare, not routine. Yet the concept has expanded well beyond the megaproject level to a more broadly accepted use for environmental issues. The past several years have seen the almost pervasive use of development agreements to address environmental issues involved in smaller residential developments or smaller commercial projects. Their successful proliferation is a testament to both their convenience and practicality.
The following examples show how even smaller cities are able to use these tools to accomplish important environmental—and economic—goals with the full cooperation of developers.
Newport, which we just discussed, is a small city of 3,500 residents wedged between industrial St. Paul to the north, a refinery immediately to the south, and two large and expanding full-size, affluent suburbs to the east. It is among the oldest cities in Minnesota and was suffering from a lack of space to add areas for upscale residential development. Its reputation was that of a gritty, former meatpacking town just across the Mississippi River from what used to be the largest stockyards in the country outside of Chicago. Nearly 40 percent of its residents live in “affordable” multifamily housing.
Yet, Newport was sitting on a gem, if only it could be fully utilized. A very
high river bluff line bisected the city. Below it, sewer and water could be provided by the city. Above it, the costs were prohibitive. Above the bluff, houses were being built on 10-acre lots to accommodate onsite sewage treatment. These rural-level densities eliminated any possibility of building and accessing water or sewer services. Moreover, the tops of the bluffs were either sand moraines left over from the glaciers or the underlying porous sandstone that acted like a sponge feeding any contaminants directly to the aquifers below. Whatever development that did occur could not allow for any contaminate seepage into the soils, which were also highly erodible.
The undeveloped area was surrounded by many acres of parkland and adjoined a small, pristine lake. The other side of the lake was a large park owned by an adjoining city. Views from the edge of the bluff had direct lines of sight with both the Minneapolis and St. Paul downtown skylines. To the south was a vista overlooking the Mississippi River valley for over 20 miles. The city owned 20 acres of the area that had originally been purchased for a water tower site. These were joined with neighboring, privately-owned parcels for the purpose of marketing the entire acreage for a development that would be of sufficient density to allow for the provision of sewer and water to the site. Any development would have to provide full assurance that no soil pollution or erosion would occur, particularly with regard to the nearby lake.
After very active marketing, the city found an experienced, creative developer who was willing to undertake the development of the area, all strings attached. The city’s zoning code allowed for what is known as a “planned unit development,” which is a zoning classification that allows a city to negotiate greater densities and lower setbacks. After significant negotiation back and forth on the number of housing units and their location on the site, the parties entered into a very carefully drafted development agreement. Over 30 units would be built in an area that, under other circumstances, might have
The past several years have seen the almost pervasive use of development agreements to address environmental issues involved in smaller residential developments or smaller commercial projects.
allowed three or four homes. Very careful restrictions on water runoff and retention ponds, as well as erosion control, were inserted into the agreement with penalties for noncompliance. More importantly, financial provisions were put into place that allowed the city to construct the necessary sewer connections and an elevated municipal water tank and water lines to service the development without need for bonding. The water system was sized to service
not only the new construction but surrounding areas that previously would not have been allowed to develop at the densities needed to provide municipal service.
The success of the project was immediate. Designed to be built in three phases, the project construction was continuous and completed well before the initially planned time frame. The developer won awards for the environmentally positive development and
earned substantial profits from the rapid sale of well-above-market-value homes. For its part, the city, for the first time in the memory of many, gained tens of millions of dollars’ worth of new, private residential development and dealt with potential erosion and pollution problems in a unique and stunningly beautiful part of the city. Not coincidentally, the city was able to construct an impressive new, combined city hall, police station, and primary
By Christopher P. Cline
Disclaimers are governed by both state and federal law. This concise guide explains the Uniform Acts involved and the specific issues raised by Section 2518 in order to create the best strategies and techniques for effectively utilizing disclaimers.
ambar.org/disclaimersrpte
Understand how to effectively handle a commercial real estate deal. Useful for attorneys with all levels of experience, the authors explain every aspect of a real estate transaction, focusing on the drafting, negotiation, and revision needed to get the deal done. Includes forms and appendices.
ambar.org/practicalguiderpte
fire station without bonding. None of these benefits could have occurred without the assurances and guarantees the parties provided one another in the development agreement.
Afton: How Green Is Our Valley Afton, Minnesota, is just a few scant miles east of Newport on the Wisconsin border, but it could not be in a more different development environment. Affluent and idyllic, it is located in the St. Croix River valley that separates Minnesota from Wisconsin. The city, also little more than three thousand people, is spread out over an area of nearly 36 square miles. With the exception of a charming, old downtown located directly on the St. Croix River, the city is largely rural, with many stillactive farms. “Preservation of the rural character of the city” is a fairly constant battle cry and a fundamental tenet of the city’s comprehensive plan.
The St. Croix River valley is a federally protected scenic waterway along which any development within view of the river is discouraged and highly regulated at the federal, state, and local levels. Unlike Newport, which was
seeking to pack density in a planned unit development in a way that would actually enhance environment safeguards, fleeting attempts to allow clustered developments near Afton’s borders as a trade-off to open space and wetland protection were nearly universally unpopular within the city. Yet concerns were also increasingly being raised about environmental degradation in some sensitive areas of the community. Afton created a “Preservation and Land Conservation District” that could be used to offer incentives to landowners and developers to protect environmentally sensitive features and areas.
One such area was the very upper reaches of one of the trout streams located in the city that flowed down to the St. Croix River. Much of the land in that drainage area had been planted in corn for many years, with no small deleterious effect on the water quality. The land was an undulating mix of deciduous woods and open terrain with farm fields.
The owner approached the city seeking a multi-lot development where he might otherwise have only been able to build one or, perhaps, two homes
under the usual restrictions in the code on agricultural development. Careful negotiations with enough “carrots” to provide an incentive to protect the sensitive area resulted in a development whose overall plan included 16 multiacre parcels clustered to one side of the land, far from the creek. The drainage into the creek was contained on a single outlot, planted in approved native grasses, that was owned in common by the individual landowners, subject to a conservation easement held by the city. A key “in case we missed it” catchall provision of the carefully crafted development agreement stated:
The Developer expressly recognizes that this subdivision is located on land of exceptional environment sensitivity, particularly with respect to the existence on this site of a natural trout stream. All technically feasible and necessary precautions will be taken during construction on this site to assure that no pollution or other damage to this resource will occur as the result of the construction process.
Although a considerable amount of give-and-take occurred during the construction of the development among the developer, the city planning staff, and no small number of city residents, the development was built out in an extraordinarily short period of time. Valuations of the homes built on the development were upward to $6 million. The protection of the highly sensitive trout stream reaches were secured by easements and covenants provided for in the development agreement. Needless to say, the close proximity to a natural and protected trout stream was one of many selling points used by the developer. And the city benefitted with a high-valuation increase in property taxes.
Ramsey is several miles upstream from Newport, on the other corner of the Twin Cities metropolitan area. On the cusp of development pressures, it is just under 30 square miles in size, with nearly 30 thousand residents. Only half of it is within the Metropolitan Urban Service District (called MUSA, in MinnesotaSpeak), meaning that accessible sewers are available only in that part of the city and the balance can be developed only at rural densities. Bordered by the Mississippi and Rum rivers, it sits upon a geological feature known as the “Anoka Sand Plain,” a 50- to 100-foot layer of porous, washed sand caused by a massive glacial outflow thousands of years ago. The water table is high to the surface in many areas, and the city has large amounts of surface water and sensitive wetlands requiring protection. Until recently, a large percentage of the land in the city was owned by farm families, one of which was now seeking to sell the property to a developer interested in commercial and industrial development.
Two key problems came with the site: (1) A large percentage of the property contained wetlands and (2) the overall parcel was owned by a multiple-family trust, the terms of which prohibited its subdivision or reconveyance to the third party. The city was
very interested in seeing a high-end hotel from a national chain come into the city near its growing commercial area but was very concerned about the impact that kind of density would have on the sensitive property nearby. Joint ownership of parcels developed in the city was a practice strongly discouraged for reasons of accountability. In this instance, a carefully crafted development agreement guaranteed sufficient resources in the event of default by the developer, as well as detailed agreements related to the protection of the wetlands on the site that gave both sides what they needed to allow the commercial development to occur.
These examples show how the creative use of development agreements have served as powerful tools for “smaller” developments to accomplish environmental goals in a way in which both the developer and the city could leave the table satisfied with the end result. Each community presented unique problems and solutions, all in the context of reaching an agreement via development agreement. By offering positive incentives to cooperation and allowing developers to earn more than zoning would otherwise have permitted, these cities avoided issues of takings or undue exactions in exchange for genuine environmental protections and community benefit. n
917-887-0166
Info@1031financial.com
1031 Financial focuses solely on investors' needs in the real estate space. We help educate, source, and provide investment options specifically using Delaware Statutory Trusts (DSTs) for investors selling investment property who want to defer capital gains.
1031 DSTs may provide benefits for high net worth investors, including but not limited to the potential for capital gains tax deferral, asset protection, and balance sheet advantages. DST real estate investments are only available to accredited investors ($1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly for the prior two years and same expected going forward). There are material risks associated with the ownership of 1031 DST Real Estate investments, including but not limited to tenant vacancies, loss of entire principal amount invested, and potential cash flows, returns, and appreciation are not guaranteed.
Securities offered through TCFG Wealth Management, LLC Member: FINRA, MSRB & SIPC. Visit us at http://tcfgcompanies.com/ TCFG Wealth Management, LLC, and 1031 Financial are unaffiliated. Scott Offerman, 1031 Financial and TCFG Wealth Management, LLC, are not tax advisors and do not provide tax advice.
By Michael H. Rubin
The minute you read something you can’t understand, you can almost be sure it was drawn up by lawyers.
—Will RogersTransactional lawyers write contracts every day. Leases. Purchase agreements. Easements. Finance documents.
We’ve become so skilled at this that we frequently use terms of art and legal phrases that are clear to other experienced transactional lawyers. We’re adept at deciphering long paragraphs comprising only one or two sentences, at parsing through complex provisions with parentheticals galore, and at relishing the opportunity to add to our next document some useful phrase, clause, or provision that we have found in another contract.
Yet, although we understand documents others send us and know that they’ll understand ours and can negotiate complex provisions with knowledgeable counsel on the other side of the table, in our often-closed world of transactional practice we tend to lose sight of the most important purpose of contracts.
Of course, contracts exist to memorialize the intent of the parties, delineate how the relationships should work, define events of default, set forth remedies, and make sure that all the deal points are covered. But, even with all these bases covered, one underlying issue remains—enforcing the contract’s provisions in court.
Whether the issue is to be tried by a judge or a jury, someone who is not an expert in transactions will have to read the document, interpret it, and decide how to enforce it. And if a jury is involved, the task becomes difficult, and not only because jurors are not trained transactional lawyers. According to The Literacy Project, the average American reading level is that of a seventh- or eighth-grader—someone 12-to-13 years old. Another study suggests that half of US adults cannot read and comprehend materials written at or above the eighthgrade reading level. Thus, it is likely that as many as half of the jurors serving in any case may be functioning at or below the eighth-grade level of reading comprehension.
Litigators enforcing a contract in a jury setting are at a disadvantage if they have to explain what a provision means, “translate” unfamiliar legal terminology, or clarify the parties’ intent when the jurors cannot ascertain it on their own because of the document’s complexity of language, verbiage, or prolixity. Indeed, the average juror may not easily comprehend the previous sentence.
The best contracts are the ones that can be easily understood by the average juror, and our contract drafting should be driven by this fact.
Each of us is always trying to make documents and contracts more precise and cover more areas of concern.
One “easy” way to do this is to cut and paste sentences, clauses, or entire sections from other contracts that we encounter. But doing so often results in contracts containing inadvertent internal inconsistencies—often in style, and sometimes even in substance. The way drafters usually deal with potential discrepancies is not to do the difficult work of reworking the entire contract from scratch but rather by using the phrase, “notwithstanding anything to the contrary.” This formulation, however, does not make contracts clearer; rather, it is an indication that the contract contains provisions that may be ambiguous or incompatible. As difficult and as timeconsuming as it may be, the solution is to rethink contracts and phrase them in such a way that a juror with an eighthgrade reading level can understand the meaning of each sentence.
The price of clarity, of course, is that the clearer the document, the more obvious its substantive deficiencies. For the lazy or dull, the price may be too high.
—Professor F. Reed Dickerson, Indiana University Law SchoolThink Hemingway, Not Faulkner
When I started law school many years ago, I asked a 3L how to get good grades. She said, “Write lots, use big words, and spell them all correctly.” Although that was sound advice for the situation, it is the wrong advice for drafters of contracts. Even when there are bench trials and no juries involved, judges complain about having to decipher a contract with “confusing and complex language and unclear construction, ” a provision that is “poorly worded and confusing,” or a document with “paragraphs as long as seven pages and lengthy, confusing sentences.”
Writing clearly and succinctly can be arduous. Mark Twain is reputed to have said, “I didn’t have time to write a short letter, so I wrote you a long one instead.” Writing short sentences in tightly-crafted paragraphs that easily convey to the reader precisely what you mean is not a simple task. The premier
book on effective written communication, one that every lawyer should have, is The Elements of Style by Strunk and White, which states: “Vigorous writing is concise. A sentence should contain no unnecessary words, a paragraph no unnecessary sentences.”
One of the problems lawyers have is that, in law school, we were not only trained to decipher poor writing, but also we were rewarded for it. We read cases written in legalese, most often by judges who employed Latin phrases, formalisms, and convoluted syntax. Our grades often correlated to how well we wrote in this style. We began to think that all lawyers should write this way, forgetting that judges were writing for other lawyers and judges, not for the lay public, and certainly not for a juror with an eighth-grade reading level.
Ernest Hemingway was known for his succinct and powerful writing. Once, when asked for the shortest story possible, he wrote: “For sale. Baby shoes. Never worn.” On the other hand, William Faulkner won kudos for his novels, though he could wax eloquent at length. In Absalom, Absalom!, there is one sentence containing 1,287 words.
In drafting contracts, we should seek to follow Strunk and White’s advice and emulate Hemingway rather than Faulkner.
As drafters of contracts and documents, we should keep in mind not only the reading level of the average juror, but also the fact that even judges, arbitrators, and mediators may not have been trained as transactional lawyers who are unfazed by a Faulknerian sentence.
Most legal writing is atrocious.
—Judge Mark P. Painter (Ohio)There are many articles and references for better contract drafting, and from these, I have culled a few helpful suggestions:
• No multiple definitions. Not: The parties to this agreement are Conglomerate Inc. (“Conglomerate” or “Contractor”). Multiple definitions are confusing and a sign of a
cut-and-paste contract. Use a single definition for each party or concept.
• All definitions in one place. Don’t scatter definitions throughout the contract. Not: For the purposes of this Section, “Utilities” shall mean Put all the defined terms in a single definition section, and then make it easy for the reader to understand by always putting the defined term in bold or italics or with the Initial Letter capitalized. But don’t use all caps; that’s hard for anyone to read, and it looks like shouting. For example, “Utilities” instead of “UTILITIES.”
• Define “shall” and “may.” Some courts have held that “shall” does not necessarily indicate something that must be done. Make the contract clear. Define “shall” as mandatory and “may” as discretionary,” and then don’t confuse things either by using “will” and “must” elsewhere in the contract or by writing that a party “shall, in its discretion, . . .”
• No legalese. Avoid all of the following: whereas, heretofore, hereinafter, hereinabove, and pursuant to. Never use “said” to modify any noun, such as, “said contract”
(that’s as opposed to the unsaid contract?).
• No “and/or.” And/or has rightly been called “a Janus-faced verbal monstrosity” and “senseless jargon.” It can lead to ambiguity. For example, one court held that the following sentence was ambiguous: There must be approval from all appropriate divisions and/ or groups. Did it require, if there were both divisions and groups that were “appropriate,” that all had to concur? Did it mean that the approval of “all appropriate groups” was sufficient even if a division did not approve? Clarity was impaired, not improved, through the use of and/or.
• No Latinisms. “Later,” not “subsequently.” “Before,” not “prior to.”
• Use the Oxford comma. When there are three or more items with either an “or” or “and” before the last item, put a comma between each item as well as before the “or” or “and.” That way one avoids confusing formulations such as “A panda eats, shoots and leaves,” or “She finds inspiration in cooking her family and her dog.”
• Give examples of calculations
Many contracts use words to describe formulas, percentages, or other mathematical calculations. To help clarify the formula or calculation for the judge or jury, give an example in the document using numbers so that there is no question about how the calculation should be made.
It’s easy to pull a form contract up on the computer, rework a previous contract, or plug in clauses from other contracts. Making the drafting process easy for a lawyer, however, is not in the client’s primary, secondary, or even tertiary interest. The client wants clarity and the ability to enforce the document precisely as intended. When litigation occurs, if a contract is hard to read or understand, the opposing party will likely assert that the document is ambiguous, which means that summary judgment cannot be obtained. It can be tough and demanding to rethink how to write contracts clearly and succinctly and then produce a result that accomplishes these goals. That hard task, however, pays off when the contract has to be enforced. n
The client wants clarity and the ability to enforce the document precisely as intended.
This series is designed for paralegals and will also be useful for attorneys new to managing or supervising estate administrations. Each program features a panel of leading industry professionals with in-depth knowledge and hands-on experience in administering estates.
In the first five programs, panelists will review the fundamental and practical concepts that commonly arise in estates, including immediate pre- and postmortem considerations, dealing with non-probate assets, and ancillary issues related to closely held entities and irrevocable trusts. The second set of programs will include a deep dive into fiduciary income tax reporting, estate tax reporting, and fiduciary accountings and releases.
www.ambar.org/rptecle
Most work letters require the landlord to construct the improvements that are needed for the tenant’s occupancy of the leased space—we covered this type of work letter in Part One. Marie A. Moore & G. Trippe Hawthorne, Lease Work Letters, Part One: When Landlord Performs the Work, 37 Prob. & Prop., no. 3, May–June 2023, at 26. But not all tenants are willing to permit the landlord to build out their leasehold improvements, and not all landlords want to take on the job of satisfying their tenants’ construction requirements. For example, in retail leases, landlords seldom agree to perform work beyond putting up demising walls, bringing utilities to the space, and sometimes providing basic air-conditioning and heating equipment. Instead, in retail space, the tenant is more likely to install its own wall coverings, floor coverings, partitions, trade dress, and trade fixtures, even though the landlord may fund a part of this construction (the “allowance”).
When the tenant is to construct its own leasehold improvements and the landlord is to provide an allowance, a different type of work letter is needed—one that deals with the landlord’s concerns as property owner when a third person (in this case the tenant), is to perform construction on its property. This work letter will also give the tenant the right to perform the work and receive the allowance.
The main goals of each party (and its lawyer) in this type of work letter include (i) being sure the leasehold improvements that the tenant will construct will satisfy the tenant’s requirements, while being acceptable to the landlord, with a reasonable mechanism for approvals and changes; (ii) establishing the landlord’s share of the construction costs, the time at which it will be paid, and the conditions for this payment; (iii) requiring the tenant to use
proper construction practices and to complete the work without risks to the landlord; and (iv) providing for lienfree completion and payment of the final draw of the allowance.
Landlords seldom get heavily involved in the design details of a retail tenant’s improvements, and many tenants, particularly national tenants with recognized trade dress, resist that involvement. However, landlords do need to review and approve improvements that might affect the value, use, and functioning of their property, particularly the utility connections, mechanical equipment, and work that may affect the foundation, roof, structural elements, and mechanical systems of the landlord’s building.
Generally, the landlord’s approval rights begin with the preliminary plans, then extend to the final plans and specifications for the tenant’s leasehold improvements. Like the landlord’s lawyer when the tenant has the right to approve the landlord’s plans, as discussed in Part One, in this case, the tenant’s lawyer should (i) specify a fixed time for review, with the landlord being deemed to have approved the plans if it does not respond with specific objections by the end of the fixed period; and (ii) prohibit the landlord from unreasonably withholding its approval, with limits on the grounds on which the landlord may do so. The bases for landlord disapproval often include matters that adversely affect the value or use of the overall retail or office building, other tenants, the common areas, or the building’s roof, structural elements, or mechanical systems. The landlord may also stipulate that the improvements must be in accordance with the tenant’s use permitted in the lease; in a retail lease, this can be important if the landlord is counting on and has specified a particular type of retail or restaurant use.
The landlord should—and generally does—include in the body of the lease
construction requirements that apply to all tenant work in the landlord’s building, including the initial tenant improvements and any major repairs and replacements that the tenant may perform. These requirements should include the following:
• The tenant must obtain all permits required for the work and, on the landlord’s request, deliver a copy of each permit to the landlord. Similarly, upon completion of construction that requires a certificate of occupancy, the tenant must obtain this certificate of occupancy and, upon request, deliver a copy to the landlord.
• The work must be performed by a contractor licensed in the state and approved by the landlord. If the tenant resists, the landlord may be willing to provide a list of its approved contractors. Using a particular contractor is particularly important if there are existing roof and other warranties that may be invalidated unless the warranting contractor performs the work.
• In many states, the landlord may impose labor union requirements and prohibitions on labor disturbances—no one wants a disgruntled union to install an inflated rat in front of the building. Similarly, the landlord may include the right to have workers causing a disturbance or otherwise engaging in unacceptable behavior removed from the property.
• The work must be performed in accordance with the plans, specifications, and other matters approved by the landlord, in a good and workmanlike manner, with reasonable diligence, and in accordance with all codes and laws, using only new materials that are consistent in quality with the materials in the rest of the building.
• Upon completion of the work, the landlord may require the tenant to provide a certificate from the tenant’s architect or contractor
that the work has been substantially completed in accordance with the approved plans.
• Landlords often require that the tenant install specified types of equipment, procured from specified manufacturers, and that the tenant provide manufacturers’ warranties with respect to these items. For example, the landlord may require the tenant to install a compressor with a specific capacity, procured from a particular manufacturer, and with a specified warranty period. When the tenant is installing warranted equipment, the landlord should also request that all warranties be assignable to the landlord, and if the landlord is responsible for maintenance and repairs after installation of this mechanical equipment, that these warranties actually be assigned to the landlord before the term begins.
• Landlords should always require that during the tenant’s leasehold improvements work and during the term, when the tenant performs any construction in the premises, the tenant’s contractor must maintain workers’ compensation coverage (including a waiver of the insurer’s rights of subrogation as to the landlord in states where this waiver is
permitted) as well as specified levels of liability and “builders risk” insurance. The tenant should be required to provide the landlord with proof of this insurance, which at a minimum should include a certificate of insurance and a copy of the endorsements in favor of the landlord, before any construction begins.
In addition to avoiding tort liability and damage to the building, the landlord must take steps to keep the property free from liens arising from the tenant’s work. In some states such as Illinois, a lien arising from the tenant’s work generally attaches to both the tenant’s leasehold estate and the landlord’s fee estate even if the contract contains a waiver by the contractor and subcontractors of their right to lien the landlord’s fee estate. See 770 Ill. Comp. Stat. 60/1(a), 1(d), 21(a). See also Paul Peterson, The Practical Aspects of Illinois Mechanics’ Lien Claims at 24 (Fid. Fam. of Title Insurers, last revised Aug. 2017); Jennifer L. Johnson, Mechanics Liens (Ill. Inst. of Continuing Legal Educ. 2019) (ch. 1, Introduction to the Illinois Mechanics Lien Statute, sec. VI.C.1.c, at 1-11 to 1-12). Even in states
in which the lien technically attaches only to the tenant’s leasehold interest, a title commitment covering the landlord’s fee interest will take exception to all liens filed by the tenant’s contractor or subcontractor, and a future buyer or lender will require that this lien be removed.
A payment bond is generally the best way to assure that liens will not attach to the landlord’s property. But bonds can be expensive, and tenants resist bonds because of the cost. If the tenant will not agree to purchase and post a payment bond for all of the work, the landlord can include in the lease a number of provisions to hedge against future liens. First, and in all leases, the landlord should require the tenant to pay its contractors and prohibit the tenant from allowing liens to be filed against the landlord’s property or the tenant’s leasehold interest in that property. The landlord should also obligate the tenant to “bond over” or otherwise have all liens that are filed released of record within a certain time—the tenant should ask that this time period run from the date on which the tenant receives actual notice of the lien. Many tenants request the right to contest liens that have been filed against the tenant’s or the landlord’s interest in the leased property, but landlords generally object to a lien remaining of public record unless the tenant has provided the landlord (and perhaps its lender) with a substantial deposit (greater than the lien amount) to assure that the landlord can pay that lien and the attorneys’ fees incurred because of that lien and have it released if necessary.
To head off possible lien issues on tenant work that is not bonded, the landlord needs to monitor the construction, obtain the names of all contractors and subcontractors (including material suppliers and other possible lien claimants under state law), and require the tenant to provide partial and final lien releases from the tenant’s contractor and subcontractors.
In some states, a landlord may be
If the tenant will not agree to purchase and post a payment bond for all of the work, the landlord can include in the lease a number of provisions to hedge against future liens.
able to require that notices be posted or that other steps be taken to prevent the contractor and its subcontractors from asserting a lien against the landlord’s interest in the property, but mechanics and materialmen’s laws and the steps that a landlord can and should take vary widely from state to state. For example:
• In Florida, section 7.13.10 of the Florida Statutes provides that when both (i) the lease expressly contains “no-lien language” providing that the landlord’s interest will not be subject to liens for the tenant’s improvements and (ii) the lease or a short form of lease containing this specific “no lien” language is recorded in the county where the property is located before commencement of the work, then the interest of the landlord will not be subject to liens arising from the tenant’s work.
• In Louisiana, on the other hand, although the landlord’s interest is technically not subject to liens for the tenant’s work unless the landlord has contracted for the work or agreed in writing to the price and contract and to be liable for resulting liens, there is nothing the landlord can place of record to confirm such nonliability (absent requiring the posting of a payment bond with the notice of contract), and subcontractors that have not been paid by their contractor often disregard the legal technicalities and lien both the landlord’s ownership interest and the tenant’s leasehold interest to enforce their claims. See La. Rev. Stat. § 9:4802 (general lien right); id. § 9:4806 (the “owner” subject to liens is “the owner or owners who have contracted with the contractor” and “any owner or owners who have agreed in writing to the price and work of the contract made by another owner and . . . to be liable for any claims granted by La. R.S. § 9:4802”).
In Louisiana, in addition to the
general provisions prohibiting liens and requiring lien waivers, it is best for a landlord to require that upon substantial completion of the tenant’s work, the tenant file in the public records of the parish in which the property is located a notice of substantial completion and that, after the applicable lien filing period has ended, the tenant provide the landlord with a certificate from the parish recorder showing that no liens have been filed. See id. §§ 9:4822, 4823, 4832.
Because of the many differences in state laws, in order to take the steps needed to protect the landlord from liens arising out of the tenant’s work,
the landlord’s lawyer should ascertain the lien laws specific to the state in which the property is located and require what is available and customary in that state to (i) avoid the attachment of liens filed by the tenant’s contractor and subcontractors; and (ii), confirm that no liens have been filed upon completion of the construction. If the landlord will provide an allowance, the allowance payment requirements should provide the landlord with the leverage sufficient to assure both that (i) it receives all lien waivers (if the landlord knows the identity of all contractors and subcontractors) and that (ii) no liens are pending when construction is completed and the final payment is due.
When the tenant is performing the construction, the landlord has little control over the design, nature, and cost of the leasehold improvements; consequently, the allowance should be a fixed amount that does not depend on the final costs. Generally, the allowance will be the lesser of (i) the cost of the work, including a percentage of the actual cost payable to the landlord for its administrative tasks (tenants will contest this administrative charge and may be able to have it waived) or (ii) the fixed maximum amount. Whether the costs to which the allowance can be applied include “soft costs,” like engineering fees, architectural fees, and design fees, will depend on the parties’ negotiations, but if the landlord wants to exclude these soft costs, it should specify this exclusion, and, if the tenant wishes to apply the allowance to these costs, it should so stipulate expressly.
The allowance may be payable either after the leasehold improvements have been completed or in draws during the performance of the work. If the allowance is payable in draws, the draws generally correspond to a completion percentage, their amount is reduced by a retainage hold-back, and they are not payable until a fixed number of days after compliance with the landlord’s requirements, generally including presentation of the following:
1. A written request for the draw stating the reasons for it and the completion percentage for which it is requested;
2. Copies of invoices for the work;
3. Architect and tenant certifications as to the percentage of completion, the type of work that has been performed, and the cost of the work to date; and
4. Partial lien waivers from the contractors and subcontractors.
To avoid having to provide lien
waivers from subcontractors that have performed a minimal amount of work, the tenant may be able to negotiate a limit on subcontractors from whom lien waivers will be required based on the dollar amount of work the subcontractor is performing or materials the subcontractor is providing.
For the final payment upon substantial completion of construction (and for payment of the entire allowance if it is not payable at all until substantial completion), the landlord will generally require the following from the tenant as part of the written request for the final draw:
1. A certification by the tenant’s architect and the tenant that the leasehold improvements, including all punch list items, have been completed, often accompanied by a required certificate of substantial completion by the landlord’s architect;
2. A certificate of occupancy (or a preliminary certificate if customary in the jurisdiction) for the leased premises, issued after the leasehold improvements have been substantially completed, and all other certificates and approvals required for the opening and the use of the premises;
3. A breakdown of the tenant’s final and total construction costs, possibly along with supporting invoices, agreements, and related documents covering at least the amount of the allowance;
4. Where allowed by state law, an unconditional waiver (or at least a conditional waiver conditioned only on payment of a stated amount) of all liens and privileges and a sworn statement from all contractors and all subcontractors showing that these contractors and subcontractors have been paid in full, perhaps accompanied by additional evidence that upon final payment of a specified amount, the tenant and its contractor will have been fully paid for the work; and
5. In states like Louisiana in which
this evidence is possible, evidence that the lien filing period has ended and that no liens have been filed.
For final payment or payment in full of the allowance, many landlords also require that the landlord has accepted the leasehold improvements as substantially completed and that the tenant has moved into the space, opened for business, and started paying rent. The retainage is generally paid as part of the final payment, but if the entire allowance is payable on substantial completion of the leasehold improvements, the tenant’s contractor, and therefore the tenant, will require that it be paid before completion of the punch list items, but will permit the landlord to hold back a sum equal to the estimated cost of correcting those items.
As an additional condition to the landlord’s payment of allowance draws and final payment of the allowance, the landlord should require that there be no tenant defaults—or at least no tenant defaults that have not been cured within the applicable notice and cure period.
Both the landlord and the tenant have other practical concerns with respect to the payment of the allowance. If the landlord is borrowing the funds for the allowance, then it should include the lender’s requirements for each loan disbursement and a reasonable amount of time after receipt of the required deliveries within which to provide them to the lender and receive the lender’s disbursed funds. The tenant, on the other hand, should (try to) require its contractor to provide the landlord’s required deliveries that are in the contractor’s control for each draw, and (try to) negotiate the contractor’s retainage percentage and payment provisions so that they are consistent with the corresponding provisions of the landlord’s work letter. Payment terms under the construction contract, however, may need to accommodate the contractor’s prompt payment obligations to its own subcontractors, particularly where
governed by state law and the contractor’s contractual obligations in its subcontracts. Applicable state law may also govern the amount of retainage that may be held and the duration for which it can be held.
A final practical concern of both parties is how to deal with a tenant’s failure to deliver the allowance to the contractor or a landlord’s failure to pay the allowance to the tenant when due. Many landlords expressly retain the right to make allowance payments directly to the contractor in addition to reserving the right to exercise their default rights against the tenant. The tenant’s remedies for the landlord’s failure to pay tend to be more varied. If the tenant is expecting a large allowance payment to pay for its construction costs and has a strong bargaining position, it may ask the landlord for the guaranty of its parent company or owner or even security for this payment, perhaps in the form of a letter of credit. But, like bonds, letters of credit are costly; consequently, the more common tenant remedy for a failure by the landlord to pay the allowance when due is an express tenant right to offset the allowance against the rent as it accrues, perhaps with interest.
The allowance can raise other issues with the landlord’s lender. Most tenants require that at lease execution, or shortly after execution, the landlord deliver to the tenant a nondisturbance agreement in which each mortgage lender certifies to the tenant that if the landlord defaults and the lender, its
designee, or a foreclosure purchaser takes title to the leased premises, the lender will comply with all of the landlord’s obligations going forward. Lenders commonly exclude the landlord’s payment obligations, including its obligation to pay the allowance. To provide this nondisturbance agreement without the exclusion of the obligation to pay the allowance, a mortgage lender, particularly one that is not financing the allowance, may require the landlord to escrow the allowance amount with the lender for disbursement in accordance with the lender’s requirements.
Additional Issues: The Timing of Construction, Change Orders, and Defects
If the tenant constructs the leasehold improvements, the tenant, not the landlord, should be the party at risk for construction delays, construction cost overruns, and defects in the tenant improvements, both as designed and as constructed, unless it can show that the landlord caused any such delay, cost overrun, or defect. Although it needs the right to review and approve the tenant’s plans and to inspect the tenant’s construction, the landlord does not generally want to be liable to the tenant if there are design flaws in the plans or if the completed improvements are not in compliance with codes or other laws. Landlords should therefore include in their leases a statement that they are not reviewing their tenants’ plans
Many landlords expressly retain the right to make allowance payments directly to the contractor in addition to reserving the right to exercise their default rights against the tenant.
for legal compliance and that their approval is not a representation or warranty that the improvements in them, or as constructed, will be in compliance with laws, free from design or other defects, or fit for any general or particular use or purpose. Similar language should be included with respect to the landlord’s inspections.
Few landlords need to reserve the right to initiate changes in the tenant’s plans once they have been approved by the landlord. As a consequence, most change orders are initiated by the tenant or its contractor. The landlord’s approval rights with respect to these change orders should be consistent with its approval rights with respect to the tenant’s improvements generally. For example, if the landlord has the right to approve only certain aspects of construction, such as structural changes, roof penetrations, or tie-ins to building systems, it should have the right to approve the tenant’s change orders only to the extent that they relate to these types of changes or improvements. The landlord should not be as concerned about increases in costs or the time of construction because the tenant, not the landlord, should be the party at risk for construction costs and timing.
Unless the lease is a percentage rent lease that requires the tenant to open on a certain date, the timing of the tenant’s construction should not be a major landlord concern except to the extent that ongoing construction may disturb other tenants. The landlord, however, should not permit rent commencement to depend on the completion of the tenant’s construction. Instead, the landlord should fix the date for the commencement of rent—generally a specified number of days after lease execution—though this period may be extended by construction delays actually caused by the landlord. The tenant may also reserve the right to claim an extension of the rent commencement date if its work is delayed
by force majeure, though whether a force majeure delay includes delays in permitting or a pandemic will be a matter of negotiation between the parties, as will the daily damages for delay in the tenant’s completion and opening for business in percentage rent leases.
In addition to matters customarily dealt with in the work letter, the business decision as to which party is designing, constructing, and paying for the leasehold improvements has ramifications throughout the lease. For example:
1. The parties’ respective maintenance and repair obligations throughout the term should be influenced and perhaps determined by who performed the construction of particular maintenance and repair items, and by who is benefitted by the warranties covering those items—if the party that didn’t perform the construction must perform the maintenance and repairs on those items, then the warranties should run in its favor, and the constructing party should be obligated to correct construction deficiencies.
2. Cost overruns leading to an increase in the allowance (if the landlord agrees to pay that increase) may cause an increase in the rent. Some leases, specifically some build-to-suit leases, may provide a calculation for the increase in the rent if the allowance is increased, but, of course, the landlord should have the right to refuse to increase the allowance.
3. Who owns the leasehold improvements, who will receive the property damage proceeds if casualty damage causes the lease to terminate, and whether the leasehold improvements will remain with the premises at the end of the term may be determined by which party paid for them and perhaps by which party
constructed them. The tenant may own them and have the right to remove them if the allowance is viewed as being in the nature of a construction loan that is repaid by the tenant over the term of the lease as part of the rent. The tax treatment of the improvements, including which party gets to claim the depreciation, should also be dealt with in the lease if it is important to the parties.
4. The parties’ division of reconstruction obligations upon a casualty may be allocated by which party constructed the leasehold improvements initially, since the party that constructed them will have the best idea of how to restore them. This party should, of course, receive the property insurance proceeds paid for that restoration—though perhaps in draws through an escrow agent.
5. Early tenant termination rights, also called “kick-out clauses,” should condition the tenant’s termination on its reimbursing the landlord for the portion of the allowance that has not been amortized on the date of early termination
One often-overlooked area for both parties is the role of the allowance in the landlord’s damages if the tenant defaults and the landlord terminates the lease. The allowance will be repaid by the tenant as part of the future rent if there is no default termination and the lease continues for its originally fixed duration. If the rent stops because of a tenant default, the landlord will lose the unamortized portion of its allowance, particularly if the leasehold improvements will not be marketable to a new tenant. Following a default termination of the lease, the landlord may try to recover this loss through continuing lease payments if state law permits the landlord to continue to collect the rent after re-entry by the landlord, or at least through collection of liquidated damages in the amount of the rent differential (the difference between the rent payable under the lease and what the landlord can immediately receive
from a new tenant). But not all states and not all tenants permit the rent to continue to be payable or permit the full future rent differential to be recovered. In those cases, the landlord’s lawyer should try to draft the landlord’s damages so that the landlord has the right to recover at least the unamortized portion of the allowance. On the other hand, tenants should object to lease termination damages that include both the lost rent or lost rent differential and the unamortized allowance—if both are permitted, the landlord will be double-dipping.
As in the case of work letters used when the landlord is constructing the leasehold improvements, when the tenant is performing that work, the work letter should provide a roadmap, but with the following general goals:
• In the case of the landlord and its lawyer: (i) establishing reasonable approval rights over the tenant’s plans; (ii) requiring the tenant to use good construction practices to assure that the improvements constructed by the tenant are sound and properly warranted, and to avoid damaging the landlord’s property as well as avoiding tort claims against the landlord arising from the work; (iii) providing hedges against liens being filed against either the landlord’s or the tenant’s interest in the leased property, as well as a mechanism for removing those liens; and (iv) fixing the allowance amount and the time for its payment in a manner that gives the landlord assurances that the tenant has properly performed and paid for the work, without liens being filed against the work or the landlord’s property.
• The tenant and its lawyer will be more concerned about (i) assuring that the landlord’s review of the tenant’s plans does not keep the tenant from constructing the improvements that it needs to operate, and that the landlord responds promptly
of checkbox variables, one for each document, with the name of the document to be assembled. If the user checks the box associated with a particular document, then that document will be assembled into the package. But what if the user is unsophisticated and doesn’t fully understand which documents are required for the loan package? In this case, you would ask a series of questions about the type of loan and the parties. Based on the answers to those questions, the correct set of documents for the package would be chosen.
and reasonably to all approval requests; (ii) establishing construction requirements that permit the tenant to perform its construction in its anticipated manner, as bid by its contractor, and in accordance with tenant’s cost goals; (iii) giving the landlord reasonable assurances that no liens have been or are likely to be filed, while coordinating the landlord’s waiver and documentation with the contractor; and (iv) negotiating an allowance that is sufficient, when combined with other available funds, to permit the tenant to build out its space and that will be paid at times that will permit it to pay its contractor,
Single Document Versus Separate Documents. In defining a wizard, you also need to define what the output will be. If all your templates are Microsoft Word documents, you can merge them into a single Word document and output
with a reasonable remedy for the landlord’s failure to pay the allowance when required.
Most important, however, regardless of which party is constructing the tenant improvements, the landlord, the tenant, and their respective lawyers must consider the lease transaction as a whole, reviewing the overall flow of funds and the ramifications resulting from which party performs and pays for the construction. Each party should remember that the work letter will not operate in a vacuum, and that in addition to setting out each party’s construction rights and requirements, the allocation of responsibilities in the work letter needs to work as part of the lease deal as a whole. n
them to Word or PDF. Alternatively, you can produce a series of individual Word documents. In XpressDox and PatternBuilder, you can set the name of each of those output documents. In HotDocs, output documents get the filename associated with the template. If you have a mix of pdf forms and Word documents, you would need to choose to output separate documents. Depending on your desired output, your app design would change.
In PatternBuilder, you would create a page early on, maybe even the first page, where you would ask which documents the user wants to prepare. If you were doing rule-based document selection, your first pages would define the type of loan, the type of property being financed, and the nature of the parties. Based
on these appear place conditions vidual is integrated workspace, file the the ClientMatter PatternBuilder port inserted XpressDox to producing In HotDocs, Answer view questions. series wished documents. create instructions plates
The Editorial Board of Probate & Property magazine is interested in reviewing manuscripts in all areas of trust and estate or real property law. Probate & Property strives to present material of interest to lawyers practicing in the areas of real property, trusts, and estates. Authors should aim to provide practical information that will aid lawyers in giving their clients accurate, prompt, and efficient service.
Manuscripts should be submitted to the appropriate articles editor:
FOR REAL PROPERTY: FOR TRUST & ESTATE:
Kathleen K. Law
Nyemaster Goode PC
Michael A. Sneeringer
Porter Wright Morris & Arthur LLP
700 Walnut Street, Suite 1600 9132 Strada Place, 3rd Floor Des Moines, IA 50309-3800 Naples, FL 34108
kklaw@nyemaster.com
MSneeringer@porterwright.com
On our website (www.americanbar.org/groups/real_property_ trust_estate/publications/probate-property-magazine/) click on the links under the “Probate & Property Resources” section for complete author guidelines and submission requirements.
If you have any questions, please email erin.remotigue@americanbar.org
In XpressDox, be to create plate would instruction template could which arate document, in the ments to dictate the folder Recently, documents spaces
Are You The new ment possible to access document to quickly code smart not to system. will allow ate a legal type. The in improvements and in ents. In you really would
By Ronald Garfield and Hunter S. Ross
Airbnb, Inc. (Airbnb) launched in 2007, causing massive disruption to the entire hospitality industry. Before Airbnb’s launch, those wishing to rent a home or condominium on a short-term basis usually worked with a travel agent, real estate broker, or rental management company. Now, renters may simply search Airbnb (or its competitors, such as VRBO) and book their vacation getaways directly with homeowners. Though Airbnb cuts out middlemen such as travel agents or real estate brokers, the company still takes a substantial portion of revenues. Hosts are charged a flat fee of three percent of the total booking price, and guests pay Airbnb a service fee of around 14 percent of the total booking price. How Much Does Airbnb Charge Hosts, Airbnb (Nov. 16, 2020), https:// bit.ly/3KI87xL.
But Airbnb’s explosion onto the scene has created interesting legal questions as lawyers attempt to represent the interests of both landlords and tenants, while homeowners associations (HOAs) and local governments attempt to control short-term rental use.
This article begins with a brief discussion of the common terminology in the short-term rental industry and attempts to define a “short-term rental.” Then, it discusses local and state laws that are attempting to regulate the industry. Next, it discusses how HOAs are attempting to rein in short-term rentals, analyzing the rights of both HOAs and owners. Then, this article discusses common legal challenges to short-term rental regulations. Finally, this article offers practical advice for lawyers and property owners who are attempting to navigate this relatively new industry.
Because Airbnb, VRBO, and the like have caused local governments and HOAs to regulate STRs, the question often arises: What is a short-term rental? Generally, short-term rentals are defined as tenancies of 30 days or fewer. See, e.g., Aspen Mun. Code § 26.104.100. (This article uses the term “STR” to refer to short-term rentals generally.) Although that term usually refers to tenancies of 30 days or fewer, states, localities, and HOAs are free to define the term however they please. It is important to remember that an STR can be procured without the aid of Airbnb or its competitors, and a booking on Airbnb could last longer than the standard 30 days. Therefore, this article uses the general term “Airbnb” to refer to the online STR industry generally.
Airbnb and the increasing frequency of STRs have spurred state and local governments to step in and regulate the industry. Airbnbs have attracted the attention of state and local lawmakers largely because of their perceived social, economic, and environmental impacts. Housing that was once exclusively residential can now become a form of mixed-use real estate. Peter Coles et al., Airbnb Usage Across New York City Neighborhoods: Geographic Patterns and Regulatory Implications at 1, in Cambridge Handbook on the Law of
the Sharing Economy (Nestor M. Davidson, Michèle Finck & John J. Infranca eds. 2017). STRs raise the concern that properties previously used as long-term rentals are being converted into more profitable short-term uses, thereby reducing the local housing supply and increasing rent. Id. at 4.
Sensing competition from Airbnb, the hotel industry’s leading trade organization, the American Hotel and Lodging Association, has launched a campaign encouraging lawmakers to crack down on Airbnbs, referring to them as “illegal hotels.” See Illegal Hotels, Am. Hotel & Lodging Ass’n (accessed Feb. 2023), https://bit.ly/43CI43G. The authors of this article are unable to speculate as to how much the hotel industry’s lobbying efforts have caused a change in laws. It is apparent, however, that local governments are increasing efforts to regulate the industry.
Many local governments have enacted licensing requirements for homeowners hoping to use their property as an STR. For example, Aspen, Colorado, requires homeowners to obtain an STR permit and maintain an active business license. Aspen Mun. Code § 26.530.020(a)(1)–(5). In Austin, Texas, STR permit applicants are required to pay a nonrefundable fee in excess of $700. License My Short-Term Rental, Austin, Texas (accessed Feb. 2023), https://bit.ly/41bg4lY. Several
towns in Colorado have also created requirements that STRs have a property manager who is near the property 24/7. Vail Mun. Code § 4-14-5; Winter Park Mun. Code § 3-10-5(A)(8)(a). Typically, the licenses are not permanent and instead required annual renewal and automatically terminate upon the transfer of ownership. Licenses can also come with ongoing responsibilities of the owner such as trash removal, noise mitigation, or limits as to on-site parking, and the like.
But permitting requirements are not the only way localities have sought to regulate STRs. Summit, Lake, and Aspen Counties, Colorado, Clatsop County, Oregon, and others have enacted outright moratoriums on the issuance of STR permits to allow time to enact sufficient regulations. The upshot of these regulations is that those hoping to use their properties as Airbnbs should be careful to comply with all local regulations. In many cases, a consultation with an attorney would be wise.
Although most localities regulate STRs, HOAs have also attempted to grapple with the disruptive Airbnb industry. HOAs also can face legal issues when attempting to rein in Airbnbs. Eight states, including Colorado, have enacted the Uniform Common Interest Community Ownership Act. Common Interest Ownership Act, Uniform Law Comm’n (accessed Feb. 2023), https://bit.ly/3ULN8P1. That law states that restrictions on the use of units must be contained within the recorded declaration. See Colo. Rev. Stat. § 38-33.3-205(1)(l). Common interest declarations, however, cannot be amended without a vote of 67% of the unit owners. Id. § 38-33.3-217(4.5). Therefore, assuming an STR ban or other restriction restricts the “use” of a unit, unit owners (not the HOA board) must approve such a restriction by more than a two-thirds majority.
Each state, however, will be different. In Arizona, where the Uniform Common Interest Ownership Act has not been adopted, HOA properties may
be used as rentals unless the declaration specifically forbids it. Ariz. Rev. Stat. § 33-1806.01. Additionally, the Arizona Supreme Court recently held that an HOA’s general amendment powers may be used only to amend restrictions of which the HOA’s original declaration provided sufficient notice. Kalway v. Calabria Ranch HOA, LLC, 506 P.3d 18, 22 (Ariz. 2022). In that case, because the original declaration did not provide reasonable notice of a possible total STR ban, the court struck it down. Id. at 25. Keep in mind that if an HOA can ban short-term rentals under its private governing documents, then licensing from a local government would likely not be sufficient for an owner to engage in the STR business.
Both localities and HOAs have found themselves in the courtroom over their enactment of STR regulations. This portion of the article discusses those legal challenges and practical considerations for litigators considering a challenge to an STR regulation.
As a type of zoning law, the right to regulate STRs falls within localities’ inherent police power. E.g., Ewing v. City of Carmel-by-the-Sea, 234 Cal. App. 3d 1579, 1587 (1991); see also Vill. of Belle Terre v. Borras, 416 U.S. 1, 9 (1974) (noting that “The police power is not confined to elimination of filth, stench, and unhealthy places. It is ample to lay out zones where family values,
youth values, and the blessings of quiet seclusion and clean air make the area a sanctuary for people.”). Therefore, constitutional challenges to STR regulations under the Due Process or Equal Protection Clauses will usually fail when the locality has a rational basis for enacting the regulation. For example, in Ewing, the plaintiffs brought due process and equal protection challenges against a city’s total ban on STRs in residential zone districts. 234 Cal. App. 3d at 1584. Because the ban was rationally related to the legitimate government interest of maintaining community character, the court upheld the law. Id. at 1596. In doing so, it noted that:
Short-term tenants have little interest in public agencies or in the welfare of the citizenry. They do not participate in local government, coach little league, or join the hospital guild. They do not lead a scout troop, volunteer at the library, or keep an eye on an elderly neighbor. Literally, they are here today and gone tomorrow—without engaging in the sort of activities that weld and strengthen a community.
Id. at 1591. In addition, courts have held that STR landlords are not “similarly situated” with long-term landlords. See, e.g., Draper v. City of Arlington, 629 S.W.3d 777, 792 (Tex. App. 2009). Because disparate treatment of similarly situated people is an essential element of equal protection claims, these challenges are also likely to fail. See id.
Challenges under the Takings Clause of the Constitution are also unlikely to successfully strike down STR regulations. For example, a town in Oregon completely banned STRs. See Cope v. City of Cannon Beach, 855 P.2d 1083, 1084 (Or. 1993). Because the ban did not deprive owners of all “economically viable” use of their homes, the Oregon Supreme Court determined no taking occurred. See id. at 1086–87. Under certain circumstances, however, STR bans could constitute a taking. In one Texas case, for example, the plaintiff
Overall, 88 percent of US adults said they favor prevention of evictions and foreclosures above other proposals.
homeowners alleged they bought their properties with the specific intention of using them as STRs. Village of Tiki Island v. Ronquille, 463 S.W.3d 562, 569 (Tex. App. 2015). Considering the case under the more limited eminent domain power granted to the state of Texas by Article 1, Section 17 of the Texas Constitution, the Texas Court of Appeals concluded the plaintiffs had sufficient, investment-backed expectations to render the ban an unconstitutional taking. See id. at 581. Therefore, the appellate court upheld the lower court’s temporary restraining order enjoining enforcement of the ban. See id. at 582. The lack of additional appellate cases concerning that dispute indicates a resolution at the trial court level. Lawyers should keep in mind that Tiki Island is an exception to the norm and turned on the fact that homeowners had bought properties with the intention of using them as STRs.
There has been at least one successful challenge to an STR regulation based on the Dormant Commerce Clause. The so-called Dormant Commerce Clause is an unwritten, implicit restraint on state authority. Hignell-Stark v. City of New Orleans, 46 F.4th 317, 325 (5th Cir. 2022). When a state or local law discriminates against interstate commerce in favor of local interests, it is virtually per se invalid. Id. Against this backdrop,
the City of New Orleans passed an ordinance prohibiting anyone from using a property as an STR unless it was that person’s “primary residence.” Id. at 321. By enacting a residency requirement to obtain an STR permit, the Fifth Circuit found that New Orleans’s regulation violated the Dormant Commerce Clause. See id.
For local governments and municipal or town attorneys, the takeaway from these cases is that they can generally regulate STRs, but, in doing so, they should make sure that their measures do not discriminate against out-oftown visitors or non-residents and that the regulations are rationally related to some legitimate government interest.
Although local governments generally face smooth sailing when regulating STRs, HOAs should take care to ensure their restrictions comply with any governing documents and state laws regulating common interest communities. For example, a Colorado HOA’s covenants expressly prohibited any commercial use. See Houston v. Wilson Mesa Ranch Homeowners Ass’n, 360 P.3d 255, 256 (Colo. App. 2015). Using that provision, the HOA board (not the owners) banned STRs, labeling them “commercial uses.” Id. Finding that STRs were not “commercial uses,”
the Colorado Court of Appeals struck down the HOA’s ban. See id. at 259. If an HOA board wishes to restrict STRs, it should be careful to strictly comply with its governing documents and, in most cases, should consult with its attorney. A failure to do so could result in the HOA finding itself in court. And in states that have enacted the Uniform Common Interest Ownership Act, a prevailing owner would be entitled to attorney fees. See Colo. Rev. Stat. § 38-33.3-123(1)(b).
This article will now discuss practical considerations lawyers representing homeowners engaged in the STR industry should consider. First and foremost, lawyers should be careful to ensure their clients obtain all proper permits and otherwise comply with any regulations or HOA restrictions.
Most states have some sort of statutory provision governing landlord rights when a tenant defaults on its lease. These statutes require the landlord to turn to the courts to evict a tenant wrongfully holding over in the leased premises. See, e.g., id. § 13-40-101 et seq For that reason, STR leases should be called licenses, avoid terminology such as “landlord” and “tenant,” and
expressly provide the owner with the right to perform a nonjudicial lockout in the event of a default. To that end, the STR lease (i.e., license) should also require the tenant (i.e., user) to represent that the home is not its residence and the rental (i.e., use) agreement is not governed by the relevant forcible entry and detainer statute. The authors of this article are unable, however, to find any definitive case law confirming that this kind of draftsmanship will take the arrangement outside of statutory provisions that regulate more normal residential leasing.
Because STR landlords are usually renting their properties to relative strangers, it is advisable to take steps to ensure an unscrupulous tenant does not harm the landlord. This should begin with the lease requiring the tenant to list the name, phone number, and contact information for everyone who will reside at the property. Then, the property owner should perform a background check through a commercial service on each tenant. This allows the owners to know that they are renting their property to safe, responsible people.
STR landlords should make sure every lease gives them the right to immediately evict the tenant for any of the following reasons: (i) a criminal act occurring on the premises; (ii) the tenant’s failure to pay; (iii) the tenant’s failure to maintain the property in a clean and habitable condition; and (iv) the tenant’s failure to abide by the agreed-upon occupancy limits. These eviction rights help ensure the landlord has a remedy when a tenant disrespects the home.
Like all leases, STR landlords should consider adding no-smoking provisions, prohibiting cannabis and other illegal substances, limiting the number of pets (and taking pet deposits), and collecting security deposits or credit card numbers. The problem with a credit card, however, is that the renter can always dispute the charge. In addition, the lease should include waivers holding the landlord harmless from injuries arising out of use of things like barbeques, pools, and bicycles. Further, STR landlords should impose
cancellation fees against anyone who attempts to renege on a booking and consider adding cleaning fees to the lease. Finally, when the leased property is inside a common interest community, the relevant rules and regulations should be attached to the lease along with a promise that the tenant will obey them.
When renting their property to strangers, some homeowners may be inclined to install surveillance cameras. Surveillance cameras may be installed where people do not have a reasonable expectation of privacy. There is no reasonable expectation of privacy in the “common areas” of apartments and condominiums. See United States v. Maestas, 639 F.3d 1032, 1038 (10th Cir. 2011). But there is a reasonable expectation of privacy inside a home. See, e.g., United States v. Hatfield, 333 F.3d 1189, 1194 (10th Cir. 2003). That expectation extends to the home’s “curtilage” (i.e., enclosed areas immediately surrounding the home) but not to open fields. See id. Therefore, STR landlords should never, under any circumstances, install surveillance cameras inside the home unless the tenant is made aware of their presence and agrees to them. A failure to do so could result in criminal liability. See Colo. Rev. Stat. § 18-7-801(1).
It is advisable that STR landlords own their real property in a single-asset entity and enter into lease agreements through said entity. If an owner personally owns the property and personally enters into leases, he or she could be personally liable if anything goes awry and litigation with the tenant ensues.
Most STR landlords will engage property managers to handle the daily tasks that come with renting property on short-term bases. In such cases, lawyers should always ensure the contract with the property manager contains a termination clause. That way, if the property manager neglects its duties, the homeowner can easily move on from the
relationship. Homeowners and their lawyers should also consider whether they are amenable to a property management contract being assignable. If a property manager assigns a contract to another entity, the homeowner may be faced with a stranger managing their property. Homeowners should also consider inserting indemnification clauses that protect the homeowner from any liability arising from the property manager’s own negligence.
Homeowners and their attorneys should be certain the homeowner insurance extends to STRs, which might be considered a business use. This may require an endorsement to the policy.
In most states, the STR landlord is required to collect a sales tax. Some states, however, exempt continuous leases. See id. § 39-26-713(1)(a). In addition, localities may treat STRs like hotels and collect a lodging tax, as is the case in Aspen, Colorado. Aspen Mun. Code § 23.50.010. If a property owner rents his or her home for more than 14 days per year, he or she must pay federal income tax. 26 U.S.C. § 280A(d)(1)(A). Additionally, HOAs may charge fees for each STR use. Landlords should consider adding these taxes to the fees that must be paid by the tenant.
Airbnb has disrupted the hospitality industry. While it certainly makes travel easier for some and provides a reliable revenue stream for homeowners, Airbnb has drawn the ire of lawmakers around the country. These laws are generally upheld, but HOAs must be careful to comply with their governing documents. Those wishing to rent their properties on Airbnb should take care to comply with all relevant laws and applicable HOA rules. Additionally, landlords should make sure that their leases are drafted in such a way that allows for the quick eviction of problematic tenants and limits the landlord’s liability. n
Any sufficiently advanced technology is indistinguishable from magic.
—Arthur C. ClarkeI have elected, somewhat reluctantly, to devote this month’s Technology—Probate column to artificial intelligence (AI). My reluctance is not due to a lack of excitement over how AI will change our lives and the practice of law—I firmly believe that AI will be the most transformative technology of our lifetimes. Rather, my hesitation to talk about AI here is because it oddly feels both too late and too early to opine upon the subject, particularly generative pre-trained transformers or GPTs (the most well-known version of which is OpenAI’s chatbot, ChatGPT). The possibilities of how AI and GPTs will continue to evolve and what they can help us build and change about the practice of law—for better or worse—are simultaneously enthralling, terrifying, and mind-boggling.
Returning to my hesitations around this topic, it feels late to write about the emergence of ChatGPT because unless you’ve purposely tried to avoid the topic, you’ve likely been inundated with dozens, if not hundreds, of articles and podcasts that explain how ChatGPT and all of its AI-focused competitors (such as Google’s Bard and Microsoft’s Bing AI) work, what they are currently capable of, and how they could potentially reshape the legal world. Furthermore, AI is evolving so quickly and its uptake has been so rapid (ChatGPT reached 100 million
users within two months of its launch) that articles that are only a few weeks or months old already feel remarkably out of date. This rapid transformation is also the reason any article about ChatGPT feels premature. At this time, it seems nearly impossible to accurately predict how or when ChatGPT will go from something you heard someone talk about at a cocktail party to a ubiquitous tool we rely on daily that is the modern equivalent of the influential transformations of the internet in the late 1990s or the smartphone in the late 2000s. Nonetheless, to observers like me, this transformation seems inevitable in the coming years.
Concerning estate planning specifically, we learned early on in ChatGPT’s existence that it is capable of drafting legal documents. Initial users who asked ChatGPT to draft a will, trust, or power of attorney were often surprised to see the platform respond with language that looked, to the untrained eye, like passable planning documents. However, a closer examination of these outputs revealed that they were often missing important clauses, failed to consider appropriate laws and statutes, and included confusing if not completely incorrect language. OpenAI quickly prohibited its software from honoring requests for legal documents. Many who feared AI’s threat to the
legal profession breathed a sigh of relief with the implementation of this ban. Currently, if you ask ChatGPT to draft a will for you, you’ll get the following response:
I’m sorry, but as an AI language model, I cannot provide legal services, such as drafting a will. Drafting a will is a complex and important legal matter that requires the expertise of a licensed attorney who is familiar with the laws and regulations of the relevant jurisdiction. It is important that you seek the advice of a qualified attorney to ensure that your will is legally valid and reflects your wishes. They can also provide you with guidance and advice on other important estate planning matters.
This ban was necessary because ChatGPT wasn’t well-trained at the time. When a user asked for a will, ChatGPT provided a document but often fell short of giving a strong output because it didn’t have access to the best forms nor did it understand why certain clauses were important and how they are interconnected within the document. Similarly, some critics point to instances when users ask questions and ChatGPT answers with suspicious or even provably false answers as evidence that ChatGPT will never be a reliable tool for legal research. Unfortunately, ChatGPT is sometimes inclined to make up data to provide realistic-sounding answers rather than simply say “I don’t know.” But both of these problems are fixable. ChatGPT and other AI competitors can be trained to produce highly sophisticated legal documents and provide more accurate responses to complex legal queries, provided they are given access to the right data and are shown how to use it effectively. ChatGPT, in
particular, can be thought of as a first-year associate that has a good understanding of the purpose and basic format of a will but may lack much knowledge beyond this. Unlike a human associate, however, ChatGPT can remember every instruction given to it and can learn and improve its skills at a pace that far exceeds human capabilities. Training a young attorney to draft legal documents correctly can take months or years, but with the appropriate prompts and inputs, ChatGPT can learn the equivalent in a matter of days. Thus, it’s clear that AI will eventually be able to draft flawless legal documents with the right training—it’s just a matter of whether laws or policies will be implemented to restrict it from doing so either with or without attorney oversight.
Although it’s not my intention to fearmonger about the future of our profession, we need to acknowledge that we don’t know exactly what lies ahead. It’s likely that when change does happen, it will be sudden and transformative, and we should be ready for a major shift in how AI will impact our profession. Predicting the exact timeline of this shift is difficult, and it’s possible that a year from now AI may not have had any significant impact on our daily lives. However, this reminds me of a quote from Bill Gates: “Most people overestimate what they can achieve in a year and underestimate what they can achieve in ten years.” I believe this is true for the potential of AI as well. I may be overly optimistic or misguided about its short-term effects, but I’m also aware that we may not fully comprehend the long-term implications. Therefore, we should approach this new technology with both caution and curiosity and continuously educate ourselves to adapt to whatever the future holds by gaining a better understanding of how to work with AI.
Effective use of ChatGPT currently requires repetition. In many cases, the output it produces from your initial request may fall short of your desired result. For instance, if you ask ChatGPT to draft an email advising clients on a planning topic, the first draft may loosely resemble what you want but be far from perfect and thus insufficient to circulate to clients without editing. If junior
associates produced a similar work product, you would likely ask them to rewrite it entirely and give them specific instructions for corrections in the next attempt. Then, if subsequent attempts also fail to meet your expectations, your frustration (and the associates’) would likely rise each time you ask for changes and the associates fail to meet your expectations. Working with ChatGPT is different, however. The key to improving its output is to ask it to try again and again, with small tweaks each time to guide it in the right direction. And because new attempts are nearly instantaneous (unlike when working with the associates), it’s possible to be subtle in each of one’s numerous requests. For example, in successive attempts, you can ask ChatGPT to adjust its tone, add new facts, or modify the word count. Gradually, the work product will get closer to what you’re aiming for. Developing effective prompts and understanding how to interact with ChatGPT takes time, but it’s not rocket science. Some users may give up after the second or third attempt, thinking it takes longer to refine their prompts than it would take to write the email themselves. Although this may be true initially, the process will become faster and easier as users gain experience. Perseverance is the key and once you master giving ChatGPT prompts to help you build what you’re looking for, you will unlock much more of AI’s potential usefulness. Additional tips for creating better ChatGPT prompts include:
1. Be specific: Try to provide as much detail as possible in your prompt. The more specific your prompt is, the better ChatGPT can understand your request and provide a relevant response.
2. Use examples: Providing examples of what you’re looking for can help ChatGPT better understand your prompt and generate more accurate responses. This can also help clarify any ambiguities in your prompt.
3. Avoid ambiguity: Make sure your prompt is clear and unambiguous. Ambiguous prompts can lead to irrelevant or confusing responses from ChatGPT.
4. Use clear language: Use language that is easy to understand and
avoid jargon or technical terms that may not be familiar to ChatGPT.
5. Stay on topic: Keep your prompt focused on a single topic. If your prompt is too broad or covers multiple topics, it may be difficult for ChatGPT to provide a coherent response.
6. Be open-ended: Provide prompts that allow ChatGPT to be creative and provide diverse responses. Avoid prompts that require a yes or no answer or a single specific response.
7. Provide context: Providing context can help ChatGPT understand the intent behind your prompt and generate more accurate responses. This can include information about your audience, your goals, and any relevant background information.
8. Consider the tone: The tone of your prompt can influence the tone of ChatGPT’s responses. Consider using friendly and conversational language to encourage ChatGPT to do the same.
And for those still leery of devoting time to working with AI configuration, fear not—the latest GPT development is “AutoGPT,” which is a user interface designed to automatically fill in prompts to make the entire process easier. Many consider this to be the next evolution of ChatGPT and although it sounds very promising in helping new users adapt more quickly to AI, and assisting experienced ChatGPT users to further expand what AI is capable of, it won’t completely replace the need for users to adjust how they approach their work, which requires repetition and experimentation.
In closing, I believe there are an unlimited number of GPT and AI applications that will benefit both planning practitioners and clients alike by providing faster, clearer, more financially accessible, and more accurate estate planning and administration solutions in the future. But AI is not magic. For now, at least, it requires effort and focus to understand how it responds to human prompts to maximize its potential. And, if you haven’t already explored this promising future by experimenting with AI, now is the time to try it out.
Your client is a developer of residential housing who would like to build manufactured housing on several vacant lots he purchased in a residential subdivision. The city recently blocked his plans, telling him that the zoning ordinance does not allow manufactured housing in residential zoning districts. He has asked for your advice.
Your client’s rejection raises a housing affordability problem. An increasing number of families are priced out of the housing market, and not enough affordable housing is available to meet their housing needs. Manufactured housing adds to the affordable housing supply but often is blocked by restrictive zoning, as your client learned.
Manufactured housing is affordable because it has a major cost advantage. Cost is reduced by smaller size, faster building times, minimal waste problems, and protection from weather delays during construction. Estimates of cost savings vary, but manufactured housing is estimated to cost as much as one-third to 50 percent less than housing built on the site when structure, transport, installation, land, and site development costs are considered. See Jon Gorey, How Manufactured Housing Could Help Solve the National Affordability Crisis, Land Lines 36 (Jan. 2023), https://tinyurl.com/ ycxr6n4m.
This Land Use Update explains the zoning problems of manufactured housing and recommends changes in the zoning system that can make manufactured housing more available.
Negative assumptions about manufactured housing trigger restrictive zoning and support court decisions that uphold these restrictions. Restrictive zoning often is based
Land Use Update Editor: Daniel R. Mandelker, Stamper Professor of Law Emeritus, Washington University School of Law, St. Louis, Missouri.on outdated objections to the appearance of manufactured housing, which is assumed to be a trailer on wheels with metal sides and a flat roof. This image is false today. Well-designed manufactured housing is attractive single-family and multi-family housing that is comparable in quality and appearance to housing built on the site.
Other negative assumptions support restrictive zoning. One is that manufactured housing is poorly constructed. This assumption also is false. Manufactured housing is made of high-quality materials required by building standards mandated by the National Manufactured Home Construction and Safety Standards Act of 1974, 42 U.S.C. § 5403, which is administered by the US Department of Housing and Urban Development.
Another assumption is that manufactured housing has a negative effect on the value of neighboring property. This assumption is especially concerning because zoning statutes require “reasonable consideration” of the “character of a district” in zoning regulations. A local government could reject zoning for manufactured housing because its negative impact on property values affects the character of a district, but studies show that well-maintained manufactured housing built to national standards does not harm the value of the neighboring property.
Restrictive zoning also is based on objections to the occupants of manufactured housing, who have lower incomes and tend to be younger or older than residents of housing built on the site. These objections are not valid. The occupants of manufactured housing are a respectable segment of the housing market. Lower incomes and differences in age are not legitimate reasons for zoning restrictions.
Restrictions in local zoning codes can create major zoning barriers. The national construction and safety law does not help. It preempts state and local building codes
but does not preempt local zoning. State legislation authorizes the adoption of zoning ordinances that organize land uses into zoning districts but, with very few exceptions, does not regulate their content. Local governments decide how zoning should control manufactured housing. Only a few states prohibit local restrictions on manufactured housing.
Unequal treatment of manufactured housing through restrictive zoning is a major problem because zoning ordinances can include a wide variety of restrictions that treat manufactured housing unequally. They include exclusion from single-family residential districts where single-family housing built on the site is allowed, a special exception requirement in residential zoning districts, and design standards that can increase costs.
Unequal treatment through zoning can violate the constitutional equal protection clause, but courts seldom hold that the unequal zoning treatment of manufactured housing is unconstitutional. Zoning is social and economic legislation that receives rational-basis judicial review and requires only a legitimate governmental purpose to make it constitutional. Courts hold that zoning restrictions on manufactured housing serve a legitimate governmental purpose by relying on discredited negative assumptions. A federal district court, for example, justified zoning restrictions on manufactured housing by accepting perceptions by residents of the community that manufactured housing is incompatible with traditional homes, threatens the tax base, or depreciates the market values of traditional housing. Colorado Manufactured Housing Ass’n v. City of Salida, 977 F. Supp. 1080, 1085 (D. Colo. 1997).
State zoning statutes can prohibit unequal treatment, and some do. A simple statutory prohibition authorizes the adoption of zoning requirements for manufactured housing only if they apply to all housing. This statute prohibits a zoning ordinance that excludes manufactured housing, but not housing
built on the site, from residential zoning districts. Legislation can explicitly deal with the exclusion problem by providing that “manufactured housing is a permitted use in all single-family and multifamily zoning districts.” A zoning ordinance should include a similar provision.
All zoning statutes authorize the creation of a local zoning board, which is authorized to grant special exceptions from restrictions in a zoning ordinance. A special exception is a land use that can be permitted in a zoning district but that requires administrative approval to decide whether it should be allowed, such as a daycare center in a residential district. The zoning statute gives local governments the unrestricted authority to decide which land uses will require a special exception, and they decide on the standards for the approval of special exceptions. The difficulty is that designation as a special exception provides an opportunity to discriminate against manufactured housing through arbitrary denials.
There is no rational basis for distinguishing manufactured from site-built housing, and local governments do not have a rational basis for requiring a special exception for manufactured housing in a residential zoning district. Because deciding on a requirement for a special exception is a legislative decision, however, most courts likely will uphold the designation of a special exception for manufactured housing in a residential zoning district.
The standards that local governments usually adopt for the review of special exceptions give a zoning board considerable discretion to decide whether a special exception should be approved. Compatibility with land uses in the adjacent area is a common discretionary requirement, and compatibility is an important factor a zoning board should take into account when it decides whether to approve a land use as a special exception in a zoning district. Here is an example of zoning ordinance language: “The special exception shall be compatible and consistent with the character of the zoning district and the area immediately adjacent to the special exception.” Courts hold that this standard is not constitutionally vague, but “compatibility” is not definable, and “character” is a proxy for exclusion.
Subjective standards like compatibility and character allow courts to accept biased assumptions to uphold the denial of a special exception for manufactured housing. One court, for example, upheld a rejection for five manufactured homes in a subdivision of 26 site-built and predominantly single-family brick homes. It held that “the aggregate placement of manufactured homes was not compatible with the character of the existing neighborhood, which is one that is well-established and consists of modest, well-kept homes where all but one are brick-and-frame structures.” There also was concern about housing quality and the effect on property values. Rolling Pines Ltd. Partnership v. City of Little Rock, 40 S.W.3d 828, 834 (Ark. 2001).
The zoning statute and the zoning ordinance should prohibit special exceptions for manufactured housing in residential districts. If a special exception is required, the zoning ordinance should not include standards that apply only to manufactured housing. Special exception standards should be clear and objective. Compatibility, for example, should be defined by objective factors, such as land use and density.
Another problem is that administrative procedures for zoning decisions are basic in most states and do not require an adequate administrative record. An administrative process that includes a disciplined hearing, findings of fact, and reasons for the decision is essential.
Residential design standards are an aesthetic land use regulation that most courts hold constitutional when the standards are not vague. Modern manufactured housing is well-designed but must comply with residential design standards that are included in a zoning ordinance.
Design standards come in two forms. A zoning ordinance can require discretionary design review, usually by an architectural board, to decide whether a residential design complies with the standards contained in the ordinance, such as standards for building façade articulation. As an alternative, the zoning ordinance can include mandatory design standards
that apply without design review, such as a standard that requires a minimum roof pitch.
Problems can be created by mandatory design standards that apply only to manufactured housing, such as a standard that prohibits flat roofs and vinyl siding. Standards such as these are not defensible aesthetically and can add substantially to building costs. Discretionary design standards that apply only to manufactured housing also can cause problems, such as a standard that “exterior material shall be of a color, material, scale comparable with those existing in residential site-built, single-family construction.” This standard confers significant discretion on the architectural review board, and comparability is not definable. Courts have upheld design standards such as these that apply only to manufactured housing, but they are prohibited in states that have unequal treatment statutes.
Design standards adopted for all residential housing in a municipality apply to manufactured housing and also can be problematic. A customized residential design standard is an example. It can require an architectural review board to approve customized designs for floor plans, building façades, building mass, building orientation, building materials, architectural features, and color. Manufactured housing is produced in a limited number of design formats, and customized design may be impossible and costly.
Reform is needed. Local governments should not adopt discriminatory design standards for manufactured housing that are impracticable to meet and that can increase costs. Design standards should be clear and objective and should respect the design opportunities that manufactured housing can accommodate. Procedures for design review require improvement. Timely decision-making based on a record created by a disciplined hearing is essential.
Design issues can be managed by adopting a special residential zoning district that is limited to manufactured housing. Development can occur on individual lots or in subdivisions, and design standards can be limited to design requirements that manufactured housing can meet. n
A lot of attention is being given to the concept of well-being generally. Specific attention is being given to well-being in the workplace. An issue raised by employers is whether employer investments in well-being programs will be beneficial to the business in ways other than something that is simply good for people. The answer is that employers can have significant positive business results by actively promoting well-being.
The Gallup organization gathered data from many of its employer organizations and engaged in studies related to wellbeing. Additionally, other organizations have used the Gallup data regarding employees to determine whether employer promotion of well-being can affect business success. The data and studies have been summarized in a variety of articles such as “The Business Case for Well-Being” by the Harvard Business Review.
It seems obvious that a law firm filled with burned-out lawyers and angry staff is fodder for turnover and underproduction. It is less obvious what a law firm can do to shift burned-out lawyers to engaged, productive, and satisfied lawyers.
An employee who is stressed and struggling is more likely to take unplanned days off and be less productive when at work. An organization that promotes well-being is likely to have less absenteeism, better productivity, and a higher level of customer satisfaction and loyalty. Again, it might seem obvious that a burned-out, angry receptionist will frustrate customers, and a positive, happy receptionist will have a customer feeling well attended to. In organizations with higher levels of well-being, profitability has been shown to exceed that of organizations without.
Well-being is defined in different ways but can generally be thought of as a positive emotional outlook, a sense of life satisfaction, a sense of value or purpose, and the ability to manage life stress. The Gallup researchers identified five components of well-being: (1) physical well-being, (2) financial
Contributing Author: Mary E. Vandenack, Vandenack Weaver LLC, 17007 Marcy Street, #3, Omaha, NE 68118.well-being, (3) career well-being, (4) social well-being, and (5) community wellbeing. It might be easy to conclude that the well-being policies of an employer should focus on career well-being, but research supports that employers who promote all five areas of well-being will have the most significant positive impacts in the areas of productivity, customer loyalty, profitability, and employee retention.
Career well-being is about enjoying what one does and positive engagement in work activities. The person with career well-being isn’t looking at the clock to see if it is time to end the workday but is instead trying to get everything done before leaving.
One factor that contributes to career well-being is having the opportunity to use one’s skills without being overloaded. Employers should develop a clear understanding of an employee’s skills and provide each employee an opportunity to use the employee’s skills while avoiding the tendency to push the beyond their highest and best use. A content estate planning associate doing basic planning may be miserable when asked to step into drafting complex trusts.
Learning and development opportunities should be offered. Attention should be given to creating a positive workplace culture. Acknowledging and rewarding employees in a way that is meaningful to them is important. Most importantly, communication skills simply matter. We each have different communication skills. An employer supporting career well-being will find ways for all employees to understand their own communication skills as well as those of others.
People want to have a sense of belonging and positive experiences engaging with others. Water cooler chats are an important aspect of social connection at work. Although a manager might experience a sense of annoyance when witnessing two employees chatting at the water cooler, the fact is that such chats help employees connect. The chat may sometimes be purely social, but the employees often end up supporting each other on work issues as well.
Supporting social well-being can be achieved by
providing opportunities for employees to connect both in and out of the office. An employer might sponsor a team in a 5k, have an escape room event, or plan an outing to a local museum or restaurant. In planning activities, the abilities and interests of all employees should be considered.
exercise. If snacks are provided in the workplace, provide healthy snacks. Also, consider subsidizing employee involvement in wellness programs.
rather than an opt-in plan. Information about financial health can be provided, including opportunities to meet with advisors regarding benefit plans.
The Joy of Zoom and National Organizations
At a very basic level, physical well-being is being well enough to get through a day of normal activity. Physical wellbeing supports mental well-being. Physical well-being is a matter of the best health possible. This may mean something different for an individual with an auto-immune disorder than someone without.
I openly acknowledge that part of my commitment to the ABA is the result of the generous mentoring I received in so many areas of my life. Though the organization is a professional organization, the people whom I have gotten to know have o ered me so much more than professional mentoring. I practice law in a
An employer can support employee well-being by providing information about health issues, healthy eating, and
small, big town. Everyone knows a lawyer or is related to a lawyer. As a result, it was di cult to feel comfortable in a mentoring relationship with another lawyer in my own hometown. Meeting people who had no connection to my home state but understood what I did made it easier to mentor. In an era of the readily-available videoconferencing, it is easy to remain connected or become connected to
Financial well-being is not connected to the amount of income one receives. Instead, financial well-being exists when someone can effectively manage day-to-day finances. An interesting fact about financial well-being relates to spending: Those who can spend money on others in a way that creates a positive memory achieve a sense of well-being that is greater than if the money had been spent on themselves. Employers can assist with financial well-being by offering benefit plans and incentives. Studies have shown that employees are more likely to save if the
mentors outside of your own geographical area.
Community well-being exists where all members of a community have basic needs met and feel a sense of fairness and justice. In the employment context, there are two communities to consider. One is the community consisting of all the employer’s employees. Another is the community in which the business exists.
A significant value of mentorship is that a positive mentoring relationship can improve the mental health and state of wellbeing of both the mentor and the mentee. ■
Within the specific workplace, an employer can support well-being by being accountable for policies involving fairness. Within the larger community, the employer can engage employees in supporting community activities. n
ambar.org/casualtyinsurance
In school, I was taught that a proper exposition has five paragraphs: an introduction with a thesis, two supporting paragraphs, one refutation paragraph anticipating the main point against the thesis, and a concluding paragraph with a summary. I have come to learn that there is another perspective—in lieu of the refutation paragraph, a third supporting paragraph is used. Either way, these approaches reflect a more scientific glide path to writing, and that brings us to the question: Is writing art or science?
Artists, like lawyers, seek clarity of expression. As it turns out, the “art” versus “science” way of painting engaged in a similar tug of war, dating back to Renaissance Italy. The two camps were concentrated geographically: one in Florence, the other in Venice.
The Florentine style focused on the design of a work called disegno. First, artists would work on separate paper or parchment to perfect their design before moving on to the canvas. The design was fundamental, and drawing was the most important element for perfection. This idea started long before the High Renaissance because “the notion that drawing serves as a foundation for the arts of painting and sculpture had been expressed at least as early as Petrarch.” Robert Williams, Art, Theory, and Culture in Sixteenth-Century Italy 16 (1997). Disegno was more than just for painting. It was the staple for all areas of Renaissance art: painting, sculpture, and architecture.
In Venice, the focus was not solely on design. Color—and the application of color—were important. Colorito is an
Italian verb meaning the application of color and the process of painting. The Venetians would draw directly on the canvas and create and change their design while painting, focusing on the brushwork and color that they were applying right onto the canvas. The artist “drew on the canvas with charcoal and paint rather than using the complicated drawing process” of the Florentines. Bruce Cole, Titian and Venetian Paintings: 1450-1590, at 70 (1999). It was not disegno or “the muscular energy or movement of the figure…but the colorito in all its variety and its blending is the source of animation, of the pulse of life and likeness, in Venetian eyes.” Paul Hills, Venetian Colour: Marble, Mosaic, Painting, and Glass 1250-1550, at 216 (1999). This “flowing” process is probably what most think of as art, in contrast to a structured approach deemed as scientific.
Expository writing is one of the four styles of composition. Its primary purpose is to deliver information about an issue, subject, method, or idea using facts. The other three styles are narration, description, and argumentation. Though lawyers may use all four in a day, we focus here on the expositive as many write in this style every day. Good exposition provides essential background information and context. For example, think of the opening crawl of Star Wars: “A long time ago in a galaxy far, far away…” Typical readers of lawyers’ writings may be unengaged by a “once upon a time” opening, so the product must be compelling. The question at the moment is how to create such content.
For some of us, we open a blank Word document and simply write. We narrow our focus to the task at hand, seeking to get into a flow and modifying our approach as we go along.
This writing is akin to the Venetian approach to art.
For others, the process is Florentine. We contemplate our thesis, perhaps engage in relevant research, prepare an outline, and complete a first draft. The first (and additional) drafts are the analog to the sketches before the masterpiece is transferred to canvas.
Consider the last email you composed, letter crafted, brief written, or presentation delivered in light of whether your nature and approach were more like the artists from Florence or instead the artists from Venice. Do you use a rigid methodology (Florentine) or intuitively create the content in the moment (Venetian)?
I am in no position to suggest that you should use one or the other. I instead submit that one be purposeful and mindful in using the approach that better suits you and the situation. As George Leonard noted in his book Mastery: The Keys to Success and Long-Term Fulfillment 96 (1992), “intentionality fuels the master’s journey.”
Many golfers have a pre-shot routine they follow, a prescribed series of steps they work through before hitting a golf ball. This tends to help consistency and success. So perhaps a good way to start writing would be to borrow the golfer’s approach and adopt a pre-writing routine. The routine would include those steps to prepare you for the task at hand and could include the intentional decision on whether this particular endeavor would be enhanced by an art or science (i.e., colorito or disegno) approach. Implementing such a routine could increase the correlation between what we intended to do and what we did. As Pablo Picasso has been credited with saying: “What one does is what counts. Not what one had the intention of doing.” n
The Fund for Justice and Education for The Section of Real Property Trust and Estate Law
The ABA, Section of Real Property, Trust and Estate Law Fund for Justice and Education (FJE) is the 501(c)(3) charitable fund that supports the public service, policy, fellowship programs, education, diversity, equity and inclusion work within the Section of the American Bar Association.
PLEASE BE ON THE LOOKOUT FOR MORE INFORMATION.
