VIABILITY OF PHOTOS IN WILLS
STRATEGIES FOR REMEDIATING LOAN DEFAULTS
INTANGIBLE ASSETS IN PROPERTY TAX APPEALS
Leases and REAs, COREAs, and Operating Easements
Considerations for Drafting and Negotiating
The American Bar Association’s 36th Annual RPTE National CLE Conference
This premier American Bar Association’s real property, trust and estate law conference will take place in Washington, D.C. May 8–11, 2024. The American Bar Association’s 36th Annual RPTE National CLE Conference is renowned for its exceptional business connection opportunities, innovative programming, and trending legal topics. We cannot forget about the latenight fun if you choose!
WHY ATTEND?
Dear Esteemed Colleagues,
I am thrilled to extend a warm welcome to all of you as we approach the 36th Annual Real Property, Trust, and Estate (RPTE) National CLE Conference, scheduled for May 8-11 at the Capital Hilton in Washington, D.C.
Premier Experience: Upgrade your conference experience. As a premier registrant, you will gain exclusive access to the VIP Only Lounge, discounts on conference events, first access to reception, red carpet check-in area and gold name badge.
In-Depth Programming: Interactive sessions led by industry experts. Business Connection Opportunities: Connect with fellow legal professionals. Innovative Trending Legal Content: Stay at the forefront of the real property and trust and estate landscape.
36TH ANNUAL RPTE NATIONAL CLE CONFERENCE
May 8-11, 2024 | Capital Hilton
This year’s conference promises to be an enriching experience, filled with engaging sessions, valuable business connections, and the chance to earn CLE credits. Our agenda is packed with insightful presentations by leading experts in real property, trust, and estate law, ensuring that you leave with a wealth of knowledge and practical tips to apply in your practice.
The Capital Hilton, with its prestigious location and exceptional facilities, provides the perfect backdrop for our gathering. In addition to the educational sessions, we have arranged a variety of social events to allow you to connect with peers and build lasting professional relationships in a relaxed and friendly atmosphere.
May 8-11, 2024 |
Washington, D.C., with its rich history and vibrant culture, is an ideal setting for our conference. I hope you will take some time to explore all that our nation’s capital has to offer.
36TH ANNUAL RPTE NATIONAL CLE CONFERENCE May 8-11, 2024 | Capital Hilton
www.rptecleconference.com
As Chair of the RPTE Section, I am proud to be a part of this incredible community and look forward to welcoming you in person. Let’s make the 36th Annual RPTE National CLE Conference a memorable and productive event!
Robert S. Freedman
Chair | American Bar Association, Real Property, Trust, and Estate Law Section
May 8-11, 2024
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Tuesday, March 14, 2024
Register
Register for each webinar at
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In 2021, the Uniform Law Commission began drafting the Mortgage Modifications Act, which aims to remove uncertainty in the law addressing the making and interpretation of modifications to recorded mortgages. The Mortgage Modifications Act is currently being drafted by a committee consisting of Uniform Law Commissioners, an ABA advisor, and observers from the title insurance, mortgage lending, and property records industries. The act aims to clarify and refine the law by introducing clear parameters for when and how mortgages can be modified and the implications of various types of changes.
Mortgage modifications may be initiated for many reasons, including as a common alternative to foreclosure for both residential homeowners and commercial borrowers. Typical modifications may include extending the loan’s maturity date, changing the interest rate or the method for capitalization of interest, increasing the principal amount of the loan in exchange for additional advances, or adjusting insurance requirements, escrow requirements, or financial covenants. A lender may agree to a modification in response to a borrower’s actual or prospective default on payments or in light of changing conditions in debt markets.
The common law serves as a baseline for mortgage modifications, but there are several gaps in the common law when applied to modern
Uniform
Author: Jane Sternecky, Legislative Counsel,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 Probate & Property welcome information and suggestions from readers.
mortgages. First, the common law does not provide clarity regarding whether the modification of a loan or other obligation secured by a mortgage affects the mortgage’s priority against junior lienholders. Furthermore, the common law is unclear on whether recording a mortgage modification agreement is an adequate basis for maintaining mortgage priority. To complicate matters further, case law indicates that when a modification results in a novation of an obligation that is secured by the mortgage, then the mortgage no longer secures the obligation.
Beyond the common law, each state establishes its own rules for recording mortgages and determining mortgage lien priority. This patchwork of mortgage modification law creates confusion as borrowers move between states and complicates the administration of mortgage loans by national entities. This confusion can result in foreclosure, even when a borrower and lender have agreed to a modification. A uniform law on mortgage modifications would benefit residential and commercial borrowers by providing predictability in transactions and reducing delays associated with mortgage loan modifications. Additionally, the Mortgage
Modifications Act should reduce costs by significantly decreasing the need for a borrower to pay to record an amendment or bear the cost of a title policy endorsement or legal opinion.
This project is a work in progress. As currently drafted, the Mortgage Modifications Act will permit safe harbor modifications of mortgage loans and other transactions secured by a mortgage. Permissible modifications will likely include: (1) extension of the maturity date; (2) decrease in the interest rate of an obligation; (3) modification to the method of calculating interest if it does not increase the rate; (4) change to capitalization of unpaid interest or other unpaid obligations; (5) forgiveness, forbearance, or reduction of principal, interest, or another monetary obligation; (6) addition, modification, or elimination of escrow or reserve requirements; (7) addition or modification of insurance requirements; (8) modification of existing conditions to an advance of funds; (9) addition or modification of an obligor’s financial covenant; and (10) change to the payment amount or schedule. The drafting committee chose to include these modifications as part of the safe harbor because they either are changes that do not affect the priority of a junior interest holder or are changes that are not typically materially prejudicial.
For these safe harbor modifications, the Mortgage Modifications Act plans to ensure that the mortgage will continue to secure the obligation as modified and that the priority of the mortgage will not be affected. Additionally, the act as currently drafted will not require recording of modifications to retain priority and states that a safe harbor modification will not constitute
a novation. Similarly, senior interests, including tax liens with statutory priority, should not be affected by the modification.
Under the current draft, modifications that occur outside of the safe harbors, such as modifications that increase the principal or interest rate in a way that was not contemplated by the original loan and which would materially prejudice a junior lienholder, will still be governed by existing law. Additionally, the Mortgage Modifications Act will likely defer to state law for the
required contents of a mortgage agreement, the statute of limitations for enforcing obligations or mortgages, and the procedures for recording.
The Mortgage Modifications Act is expected to be finalized at the Uniform Law Commission’s annual meeting in the summer of 2024 and should be made available for state-level enactment in the fall of 2024.
The Mortgage Modifications Act strives to reduce costs and facilitate modifications to avoid foreclosure whenever feasible. Mortgage
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A reciprocal easement agreement can take many forms including a COREA (Construction, Operation and Reciprocal Easement Agreement), DOE (Declaration of Easements), OEA (Operation and Easement Agreement), OE (Operating Easement), or ECR (Easements, Covenants, and Restrictions). For the purpose of these materials, all of the foregoing will be collectively referred to as REA(s).
REAs are agreements that set the terms, conditions, and obligations for the easements, restrictions, and covenants between owners of real property and stakeholders with a leasehold interest in the real property to ensure harmony in the development, operations, and maintenance of such real property. REAs can be used in both commercial or residential contexts but typically apply to integrated shopping centers, retail, office, and other mixed-use properties. REAs set forth a uniform standard for the subject real property with respect to construction; maintenance obligations; architectural theme; prohibited, restricted, and exclusive use protections; site plan controls; signage rights; and other operational requirements.
Here are the most common and pertinent provisions contained in REAs.
Access: The parties to the REA will want to grant and receive reciprocal easements for ingress and egress across parcels to ensure that driveways, walkways, parking lots, lanes, aisles, roadways, and ring roads located on the various tracts allow the parcel owners and their respective employees, customers, and suppliers the ability to travel between the public roads and the subject real property.
Parking: Parking is a key point of consideration for REAs. The parties to the REA grant each other the right for their tenants, customers, employees, and suppliers to park in designated parking areas on the real property subject to the REA. Similar to the access easement, consideration should be given to the rights and limitations on the right to relocate parking areas. An important item to consider is whether each parcel has to be self-sufficient for parking or if one owner will be allowed to count parking on another owner’s parcel to meet
D. Joshua Crowfoot is the managing attorney of Crowfoot Law Firm in Chattanooga, Tennessee. Karen M. T. Nashiwa is the deputy general counsel of Triple Oak Power LLC in Portland, Oregon. Joseph M. Saponaro is the chief operating officer and chief legal counsel of Kohan Retail Investment Group LLC in Great Neck, New York.
required parking ratios on the subject real property.
Operation of Common Areas: The definition of “common areas” typically includes, but is not limited to, the following: access roads, driveways, walkways, ring roads, outdoor green spaces and seating areas, lobbies, elevators, escalators, hallways, and other shared or common areas of the property that are available for all tenants, customers, employees, visitors, and others to use throughout the property. The REA should provide the party that controls the common areas of the subject real property, such as the developer or manager, to operate, insure, and maintain the common areas. In addition, the REA should outline each REA party’s responsibility for, and costs related to, maintaining common areas. These collected fees pay for expenses such as upkeep, insurance premiums for common areas, trash removal, cleaning, and lighting. Property owners are typically required to pay taxes relating to their own property and a portion of the taxes pertaining to common areas. In addition, each party is also required to maintain the appearance of the buildings on its property and maintain insurance on the buildings and improvements located on its property.
Term: REAs can be perpetual or for a limited timeframe as may be determined by the types of easements granted and the particular use of such easements. Perpetual easements such as access, stormwater, party wall, and utilities generally last as long as improvements exist on the benefitted tract. For limited timeframe easements, the parties should consider the appropriate time for expiration of easements, such as parking, accent lighting, construction, and the right to use an enclosed mall. For example, the burdened owner might want to consider including language in the REA that gives the burdened owner the right to force an abandonment of certain easements such as an accent lighting easement if the benefitted owner has not used the easement for extended periods of time. Furthermore, language in the REA may want to address
what occurs to certain easements if the intended use of the real property as set forth in the REA ceases to exist.
Signage: REAs can contain provisions pertaining to signage. These provisions address the size, location, lighting, and materials for signage and also provide access details for maintenance and repair. Typically, a common sign such as a monument sign will be located on one party’s property. As a result, the other REA parties will want the owner upon whose tract the sign is located to grant to other owners (and their tenants or designated parties) an easement to cross the burdened tract to access the sign and to maintain its panel on the sign. If a sign does not exist on the effective date of the REA, then there should be language included to address an owner wanting to erect its own monument or pylon sign on the tract of another owner, and the benefitted owner should obtain a construction and maintenance easement to construct and maintain the sign.
Utilities: REAs typically include provisions dealing with the installation, maintenance, relocation, and replacement of utilities on the subject real property, such as electric, gas, cable, water, and sewer. The REA parties grant each other and the applicable utility service providers the right to install, operate, maintain, and repair utility lines on each owner’s tract. The REA should address the burdened owner’s right to consent to the location of the utility facilities or placement of the utilities and should have the right to prohibit utility lines from being installed under its building. As with an access easement, the burdened owner will want to reserve the right to relocate a utility easement, which is a common occurrence, especially with outparcels and redeveloped parcels. The relocation of a utility easement will have the same concerns as the relocation of an access easement. The burdened owner should give the benefitted owner notice, not vacate the existing utility line until the new one is ready to use, and not make it more difficult for the benefitted owner to use the utility line. If an interruption of service is necessary to relocate the
utility line, the interruption should be scheduled with the benefitted parties so their business is not interrupted. If the benefitted owner is working on utility lines on the burdened owner’s tract, the benefitted owner should be required to provide liability insurance and indemnify the burdened owner against any liability claims. The benefitted owner should be required to pay all of the costs of the work and keep the burdened owner’s tract free of liens. The burdened owner will want to require the benefitted owner to perform the work as quickly as possible; to schedule the work with the burdened owner; and, unless it is an emergency, not to perform any utility work during the holiday, back-to-school, or other important shopping periods.
Mortgagee Protection: An REA should contain provisions for the benefit of the lender of any party to the REA. In the event of a default by one party to the REA, the nondefaulting party should be obligated to notify the defaulting party’s lender, if known, and allow such lender to cure the default. In addition, the REA should provide that a breach of any of the covenants or restrictions contained in the REA will not defeat or render invalid the lien of any lender made in good faith and for value as to the shopping center or any part thereof.
Use, Recapture Rights, and Rights of First Offer: Some REAs may require the subject real property to be used for a particular use or, in turn, may restrict certain uses on one parcel to benefit another parcel. If a major retailer that is a party to the REA fails to use its property for a particular use for a specified period of time, then the other parties to the REA may be given the right to purchase the major retailer’s property for its fair market value. The REA may also provide that, in the event either party desires to sell its property to a bona fide third party, the other party will have a “right of first offer” to purchase the selling party’s property. The specific terms and conditions of said right of first offer should be set forth in detail in the REA, which should include a mechanism to determine purchase price and timing of the exercise of such right of first offer.
Construction: Some REAs are executed at the onset of a project or construction phase of a development. In these cases, the parties will want to grant to one another a temporary easement for an adjacent owner to access the tract of an adjacent owner to construct foundations and walls on the tract of the benefitted owner. Such temporary easements may require the workers to be on the burdened tract and provide appurtenant easements pertaining to the construction standards, maintenance obligations, and operations of such project or development. If each owner is not only constructing a building on its tract, but also performing site work, the easement will include the right to install utility lines and grade the benefitted tract. If the developer is doing the site work and the parties are building their own buildings, the parties will want to grant an easement for the site work to the developer and a construction easement to the adjacent owners.
Amendments and Other Considerations: REAs include the mechanism to modify the REA, if necessary. Typically, the REA cannot be amended without the approval of all, or a majority of, the other REA parties. The REA must be clear, however, as to who has this approval right if one party’s property is subsequently subdivided into multiple properties or owned by multiple parties. The ability to grant easements is as important as the ability to not grant easements. The parties will want to establish that the other parties will not have the right to grant similar easements to anyone that is not an owner under the REA. As mentioned above, the parties will also want the right to close off access and parking occasionally to keep the public from gaining prescriptive rights in the burdened owner’s tract. The benefitted owner will want to obtain an agreement from the burdened owner not to install any landscaping, signs, or structures that will interfere with visibility of the benefitted owner’s sign. As with other easements where work is being performed by one owner on the tract of another owner, the burdened owner should require the benefitted owner
to indemnify the burdened owner and maintain liability insurance.
REAs are vital real property interests, and the intent of REA parties is that the rights and restrictions contained therein must not be subject to being extinguished by third parties (e.g., lenders). Accordingly, if a security instrument, such as a mortgage, happens to encumber any portion of the property that is intended to be governed by, or subject to, an REA at the time the REA is established, then such security instrument will need to be subordinated to the REA. Likewise, future security instruments encumbering the property must remain subject and subordinate to the REA. This may sound controversial because lenders abhor title encumbrances that are superior to their mortgage interests; however, lenders understand that that the rights in the REA in favor of the encumbered property are often critical to the property in which they have interests, so lenders are comfortable with not having priority over an REA. It helps to think about the concept in reverse. A mortgage lender (or property owner) would not want another lender with a mortgage on another portion of the shopping center to have the right to extinguish the REA if the other lender forecloses (or otherwise exercises its rights) due to a default by the other property owner. As a practice point, when
representing a party obtaining an interest in an existing shopping center that is encumbered by an REA (whether as a buyer or lender), it is important to have the rights under the REA be part of the property insured under the title policy.
REAs exist in real estate projects and developments for every type of use— retail, industrial, or office. In the retail context, you find them in a shopping center development. In an office context, you find them in office parks, and in the industrial context, you find them industrial parks. Because REAs are typically seen in a shopping center development, these written materials will focus on the effect of these documents on retail leases.
Similar to a COREA, DOE, OEA, declaration, master deed, or covenants, conditions, and restrictions, REAs are documents meant to run with the land and specify in detail (i) the promises that each owner of a parcel of land makes to an owner of an adjacent parcel, (ii) the obligations and duties of each owner of a parcel of land, and (iii) ways in which the development of such parcels will be restricted to accomplish the vision for the development.
REAs are meant to affect the land in perpetuity. Ideally, REAs will accomplish the long-term development goals
a. Definitions.
i. “Exclusive Use” shall mean the operation of a [insert use].
ii. “Competitor” shall mean a business not affili- ated with Tenant that uses its premises in the Retail Center primarily for the Exclusive Use; provided, however, it shall exclude the following:
A. Any business which engages in the Exclusive Use but is not specifically permitted to do so in its lease;
B. Any anchor store or any store containing a floor area in excess of [insert square footage];
C. Any business occupying its premises directly or as an assignee, subtenant, or licensee under:
1) A lease that was executed prior to the execu- tion of this Lease but that is in effect as of the date of execution of this Lease (an “Existing Lease”);
2) A renewal or extension of an Existing Lease;
3) A new lease that is executed by a business that leased or occupied premises in the Retail Center directly or indirectly under an Existing Lease (a “New Lease”); or
4) A renewal or extension of a New Lease.
D. Any store containing a floor area less than [insert square footage];
E. If the premises currently occupied by [insert name of existing tenant] shall cease to be used primarily for the Exclusive Use, [insert number] additional store[s] (which may be located any- where within the Retail Center) containing a floor area not exceeding [insert square footage]; and
F. Any business which devotes less than [insert number]% of the sales area of such premises to the Exclusive Use or on an annual basis, less than [insert number]% of the gross sales from such premises are generated by the Exclusive Use.
b. Exclusive Use Remedy. Notwithstanding anything contained herein to the contrary, if Landlord shall rent space in the Retail Center in the designated area shown on Exhibit [insert number] (the “Excluded Area”) to a Competi- tor (as defined below) for the Exclusive Use (as defined below) during the [insert period of time, i.e., first five years of the Term], then Tenant’s sole and exclusive remedy shall be a reduction in monthly Minimum Rent to [insert agreed-upon
amount] from the date Tenant notifies Landlord of such violation until such violation is cured. This rem- edy shall be exercised upon [insert number] days’ prior written notice that must be given to Landlord within [insert number] days after the Competitor opens for business in the Excluded Area.
c. Primary Use. The Premises shall not be deemed to be used primarily for the Exclusive Use unless:
i. More than [insert number]% of the sales area of the Premises is devoted to the Exclusive Use; and
ii. On an annual basis, more than [insert number]% of the gross sales from the Premises are generated by the Exclusive Use.
d. Exclusive Becomes Void. This Paragraph shall automatically become void if:
i. Tenant defaults under any provision of this Lease, including, but not limited to, the radius restriction set out in Paragraph [insert number] hereof;
ii. Tenant is not open and continuously, actively, and diligently using and occupying the entire Premises pursuant to the terms and conditions of this Lease;
iii. Tenant assigns its rights under this Lease in whole or in part or sublets all or any portion of the Premises;
iv. The Tenant’s average monthly gross sales over [insert number] consecutive months is an amount which is below $[insert amount];
v. A sale of Tenant, a transfer of corporate shares of Tenant, or a transfer of any partnership or mem- bership interest of Tenant occurs that would entitle Landlord to terminate this Lease pursuant to Para- graph [insert number] herein (regardless of whether Landlord actually exercises such right to terminate);
vi. The Premises ceases to be used primarily for the Exclusive Use; or
vii. Tenant fails to give Landlord the notice required by Paragraph (b) hereof within the time period pro- vided therein.
e. Primary Use. The Premises shall not be deemed to be used primarily for the Exclusive Use unless:
i. More than [insert number]% of the sales area of the Premises is devoted to the Exclusive Use; and
ii. On an annual basis, more than [insert number]% of the gross sales from the Premises are generated by the Exclusive Use.
of the developer/co-owner but also ensure compatibility of future tenants with the use of the major retailer/coowner that also has a vested interest in seeing the retail development succeed. Ultimately, a thriving retail center will drive traffic to the major retailer, and the foot traffic that the major retailer experiences will inevitably spill over into the physical locations of nearby tenants in the retail center.
The provisions of REAs address the mechanics of how the retail center will develop, how it will operate, and how the co-owners will divvy up the duties and obligations that come with owning the development.
Invariably, REAs will establish a general use for the development. For example, an REA for a shopping center might contain the following general use language: “No part of the Shopping Center shall be used for other than retail sales or services, offices, restaurants, information centers, or other commercial purposes.” In addition, REAs will set out a list of prohibited uses for the retail center. Although the list of prohibited uses can vary from one retail center to the next, these are the most common uses that are banned in a retail center:
• Any use that amounts to a public or private nuisance;
• Any use that allows noise or sound that is objectionable due to intermittence, beat, frequency, shrillness, or loudness;
• Any use that allows any obnoxious odor;
• Any use that produces an excessive quantity of dust, dirt, or fly ash (the parties may want to exclude the sale of soils, fertilizers, or other garden materials or building materials in containers if incident to the operating of a home improvement or general merchandise store; typically, a major retailer will want to carve this out from the list of prohibited uses);
• Any use that results in fire, explosion, or other damaging or dangerous hazard, including the storage, display or sale of
explosives or fireworks (depending on the major retailer, the parties may want to carve out that the sale of gasoline is an acceptable use);
• Any use allowing a trailer or mobile home, labor camp, junk yard, stock yard, or animal raising [the parties may want to carve out pet shops, dog grooming stores, or doggie “day cares” (or not) from this use];
• Any use allowing the drilling for or removal of subsurface substances;
• Any use allowing the dumping of garbage or refuse, other than in enclosed receptacles intended for such purpose;
• A cemetery, veterinary hospital, mortuary, or similar service establishment;
• A car washing establishment;
• A shop providing automobile body and fender repair work;
• Any use allowing automobile, truck, trailer, or recreational vehicle sales, leasing, or display that is not entirely conducted inside of a building;
• Any church, synagogue, temple, mosque, or other place of worship;
• Any fire sale, flea market, bankruptcy sale (unless pursuant to a court order), or auction operation;
• Any apartment, home, or other residential use or any hotel, motel, or other lodging facilities;
• Any theater, playhouse, cinema, or movie theater;
• Any bar or discotheque;
• Any school, training, educational, or day care facility, including, but not limited to, beauty schools, barber colleges, nursery schools, diet centers, reading rooms, places of instruction, or other operations catering primarily to students or trainees rather than to customers;
• Any sexually oriented business or cannabis establishment;
• A hospital or clinic; or
• A convenience store.
Potential tenants looking to lease in the retail center will want to review
the REA to make sure there is no outright ban for the expected use of their space. Prohibited uses are usually listed altogether in one paragraph and easy to locate. What can be more difficult to locate are uses that the major retailer might want to reserve for itself that may overlap with an exclusive for which the potential tenant wants an exclusive—say the sale of coffee or the sale of pizza. Typically, the way this gets handled is that the REA will be drafted so the major retailer promises to never have more than a certain percentage of its sales (for example, three percent) be attributed to the sale of pizza or coffee.
What can be a trickier situation is whether the major retailer—say a Walmart—will be allowed to have a small store within its location—such as Starbucks, Subway, an optometrist, or a nail salon, for example—that may compete with a future tenant. This is a major negotiating point that will have to be decided between the developer/ co-owner and the major retailer/coowner when drafting the REA. This is also an issue when a potential tenant is performing its due diligence on the retail center and reviewing the REA for such provisions that allow the major retailer to contain a possible competitor within its walls.
If you represent a developer/coowner of a retail center, one way to protect your client from unwanted litigation that asserts the violation of a tenant’s exclusive use is to do the following in your form lease:
Ensure your lease sets limits. The landlord’s form lease should impose the following limitations with respect to granting exclusives to any tenant:
• Limit the remedy for an exclusive violation to a lower amount of rent.
• Limit the term of the exclusive (i.e., set an “expiration date” for the exclusive).
• Limit the applicability of the exclusive to a certain area of the retail center.
• Limit the exclusive to the tenant’s “primary” use.
Give the landlord the ability to eliminate the exclusive. The landlord should be able to eliminate an existing tenant’s exclusive in the event any of the following occurs during the term of the tenant’s lease:
• Tenant’s gross sales fall below a certain amount.
• Tenant assigns or sublets a portion of or the entire premises.
• Tenant triggers an event of default under the lease.
• Tenant stops using the exclusive use.
• Tenant establishes a competing business nearby.
• Tenant fails to continuously operate its business.
• Tenant does not notify the landlord of a violation of the exclusive in a timely manner.
Except certain tenants that would otherwise be a competing business. For example:
• Rogue tenants.
• Anchor tenants.
• Existing tenants.
• An assignee or subtenant of an existing tenant.
• Small tenants.
• Tenants that replace an existing tenant but are smaller in size.
• Tenants who violate the exclusive use on an incidental basis.
A sample lease provision granting an exclusive use that protects landlord is provided on page 10.
How REAs Can Affect Where a Tenant Can Build
REAs provide the rules and mechanics for a developer/co-owner and a major retailer/co-owner to develop the property. Ideally, the REAs will provide the owners of the development with flexibility to develop the retail center as they please. However, potential tenants of the retail center often want the landlord to make assurances in the site plan that can restrict the landlord’s development.
If not addressed ahead of time by the parties, unresolved issues with the landlord’s site plan can be flashpoints for lease disputes.
With the site plan, a tenant typically wants a representation from the landlord that the final development will be the same as the proposed development, and the site plan is a complete and accurate depiction of all matters. In contrast, a landlord will want minimal detail and maximum leeway to change the site plan, if necessary.
Common areas of dispute are the following:
• Landlord makes material changes to the site plan without tenant’s consent;
• Landlord’s site plan ends up significantly reducing the amount of parking to tenant;
• Landlord’s development under the REA impedes the visibility that the tenant expected to have; and
• Changes to the common areas or other development move the tenant to an undesirable location or cause its existing location to be undesirable.
Therefore, the parties will usually agree that the landlord’s changes to the site plan will NOT:
• Be substantial;
• Reduce parking below a specified ratio;
• Affect the visibility of the premises or access to them;
• Put any other tenant’s store line in front of the premises; or
• Remove the tenant from a specified proximity to proposed anchor tenants, retail center entrances, or parking areas.
When negotiating a retail lease in a retail center that is the subject of an REA, the tenant will want the following designated on a site plan (that is dated and scaled):
1. The perimeter of the shopping center;
2. The common areas;
3. The number of spaces for tenants;
4. The parking ratio and angle of striping;
5. The location of pylons, monuments, planters, and other barriers;
6. The outparcels;
7. The parking areas reserved for the tenant or other tenants, or designated for employees;
8. The location of handicapped or loading-zone spaces;
9. The size of the spaces; and
10. Entrances and exits, curb cuts, loading areas, means of access to the premises, and the size and location of buildings.
Cases have been litigated over reneged promises pertaining to parking ratios and visibility of a tenant’s premises. The parties can typically avoid disagreements ahead of time by giving
the tenant an unobstructed vista on the site plan or a sight line easement on the site plan. Tenants will want the vista or sight line easement to be as large as possible, all the way to the nearest major thoroughfare. Landlords will want to limit the vista or sight line easement to areas directly in front of the premises, if possible.
Tenants will want to make sure their site plans show where all the signs will be located in the development and refer to their sign criteria set forth as an exhibit to the lease. This is important because a misplaced sign can impair visibility of the tenant’s premises.
The site plan should show outparcels, too. A building built on an outparcel may obstruct visibility of the tenant’s premises. In addition, the demand for parking by the owner of an outparcel may exceed the supply of the outparcel (i.e., restrictions imposed by building or zoning code). In situations like this, the developer/co-owner will typically negotiate with the buyer of the outparcel for a cross-parking arrangement. The problem with such an arrangement is that overflow parking from the outparcel may impair the parking reserved or intended for the tenant.
As a general rule, landlords should disclaim any promise that the site plan will not change during the term of the lease. And landlords should ensure that any promises they make to tenants regarding their physical requirements for the premises should not conflict with what is stated in the REA.
An important point of contention between a landlord and tenant is whether a tenant should be allowed to prevent a landlord from making alterations or improvements in the retail center pursuant to the REA that could hurt the tenant’s business. Whether a landlord can refuse to provide such a right to the tenant largely turns on the tenant’s size.
Anchor Tenants. Anchor tenants will have the most leverage in any lease negotiation with a landlord. Generally, such tenants have the clout to negotiate
a provision that allows them to prevent the landlord from amending the REA without its consent. As an example, an anchor tenant would certainly want the right to preclude the landlord from making revisions to the REA that would allow it to change the retail center from a “lifestyle” center to that of an “outlet” center.
Midsize Tenants. For midsize tenants, a landlord can offer that it must obtain the tenant’s consent for any changes to the REA that would “unreasonably adversely” affect the tenant’s rights or obligations under the lease. This consent would apply to any changes that unreasonably interfere with the tenant’s use or enjoyment of the retail center.
Small Tenants. For small tenants, a landlord can offer that it must obtain the tenant’s consent for any changes to the REA that would “materially adversely” impact the tenant’s rights or obligations under the lease, which is a tougher standard than “unreasonably adversely.” The landlord will want to ensure that it has the final determination regarding what is “materially adverse.” If possible, the landlord can state in the lease specific instances where the “materially adversely” standard is met. For example, such changes to the REA would have to be changes that affect visibility, access, or economic provisions of the lease. Furthermore, the landlord wants to ensure that the tenant’s consent cannot be unreasonably withheld, conditioned, or delayed.
A sample lease provision using the “materially adversely” standard is as follows:
Landlord shall not amend, modify, or terminate the [insert name of REA] without the prior written consent of Tenant if such amendment,
modification, or termination would materially adversely affect in Landlord’s sole opinion any rights or obligations of Tenant under the Lease. Tenant’s consent shall not be unreasonably withheld, conditioned, or delayed.
The lease should also consider the kind of changes that require the consent of the tenant before the landlord can amend the REA. Tenants will want landlords to require their consent for as broad a category of changes as the landlord will allow, but the landlord will want to narrow down the types of changes for which it will need to obtain the tenant’s consent. In fact, it would behoove the landlord to specifically list the specific changes that will require the tenant’s consent, such as changes that will affect the amount of parking directly in front of the tenant’s premises. Landlords would also be wise to provide the tenant a specific period of time to respond to any proposed changes to the REA. If the tenant does not respond prior to the expiration of the deadline to do so, then its rights to consent to such changes should be waived.
If the landlord deems it necessary to revise the terms of an REA, it is not limited to giving the tenant a consent right to such changes. In lieu of giving the tenant a consent right, it can offer other remedies, such as the right to receive rent abatement or the right to terminate the lease. The former remedy is less severe than the latter. If rent abatement is offered, the landlord should require the tenant to provide proof that such changes to the REA have decreased its sales prior to providing a rent abatement.
When parties negotiate a commercial lease, it behooves both landlord and tenant to ensure that the terms of the lease not conflict with the terms of the REA. Ensuring agreement between the two documents gives the tenant clarity and prevents a costly lawsuit to the landlord. Landlords do not want to add provisions to the lease that inadvertently violate the REA.
For example, assume the REA dictates where the retail center’s entrances and exits will be located. As part of lease negotiations, however, the landlord makes a concession to an important, midsize tenant that it will move the entrance close to the midsize tenant’s space—a location that would violate the terms of the REA.
Once the parties sign the lease and the issue is brought to the landlord later, the landlord is in an impossible situation. If the landlord moves the entrance close to the tenant’s space, a third party will sue the landlord for violating the REA. If the landlord moves the entrance to the location designated in the REA, then the tenant will sue the landlord for violating the lease.
The parties can protect themselves by doing three things.
First, the parties should ensure the terms of the lease and REAs are consistent with one another. If there is an inconsistency, the landlord should modify or delete the offending lease clause and notify the tenant of the reasons for doing so.
Second, the lease should contain language that alerts the tenant during its review of the lease that an REA encumbers the real property on which the premises will be located. The lease should state that it is “subject to” the terms and provisions of the REA, as it may be modified or amended. By including the “subject to” language, the parties ensure that the REA must be followed if the REA ever conflicts with the lease.
A sample provision could read as follows:
Landlord and [insert name of major retailer] (the “Anchor”) have entered into a [insert name of REA], dated [insert date]
(the “REA”). This Lease is in all respects subject to the terms and provisions of the REA and to all modifications, amendments, and revisions thereto.
A sophisticated tenant will demand that the landlord modify the lease
language to limit the landlord’s ability to enter into modifications, amendments, and revisions to the REA on its own. The landlord will likely have to agree to the following additional language: “Notwithstanding the foregoing, Landlord shall not enter into any modifications, amendments, or revisions of the REA if they would materially adversely increase Tenant’s obligations under this Lease.”
Third, the tenant can require that the tenant’s business comply with the REA. The tenant should be obligated to conduct its business in a way that will not cause it or the landlord to violate the REA. The lease should state that the tenant must maintain and conduct its business in strict compliance with the REA, as well as any laws, rules, regulations, and orders of insurance underwriters.
A sample provision could read as follows:
Tenant shall at all times maintain and conduct its business, so far as the same relates to Tenant’s use and occupancy of the Premises, in a lawful manner, and in strict compliance with any maintenance or easement agreement, including but not limited to the REA, all governmental laws, rules, regulations, and orders and provisions of insurance underwriters applicable to the business of Tenant conducted in and upon the Premises, including those with respect to storage, handling, discharge, and transport of any pollutant, contaminant, or hazardous, toxic, or dangerous substance.
A sample form of REA appears following this article.
Practitioners are well advised to understand the basic considerations of landlords and tenants in REAs and the provisions that should be included in such documents. n
AGREEMENT (“Agreement”) is made and entered into as of ______________, 202__, by and between ______________________________, a(n) __________ limited liability company (“Primary Lot Owner”), and _________________, a(n) ___________ limited liability company (“Outparcel Lot Owner”), with reference to the following facts:
WHEREAS, Primary Lot Owner is the owner of the real property consisting of a shopping center situated in the Township of ____________, County of __________, State of __________, consisting of the parcel legally described on Exhibit A attached hereto and made a part hereof (“Primary Lot”), and Outparcel Lot Owner is the Owner of the adjoining parcel of real property described on Exhibit B attached hereto and made a part hereof (“Outparcel Lot”). A depiction of the entire shopping center including the Primary Lot and the Outparcel Lot is attached hereto as Exhibit C.
WHEREAS, Primary Lot Owner and Outparcel Lot Owner desire to grant certain reciprocal easements upon the Primary Lot and the Outparcel Lot (individually, a “Parcel” and together, the “Parcels”), and to establish certain covenants, conditions, and restrictions with respect to the Parcels for their benefit and for the mutual and reciprocal benefit of the Parcels and the present and future owners and occupants thereof, on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the above premises and of the covenants herein contained, Primary Lot Owner and Outparcel Lot Owner hereby establish, declare, covenant, and agree that the Parcels and all present and future owners and occupants of the Parcels shall be and hereby are subject to the terms, covenants, easements, restrictions, and conditions hereinafter set forth in this Agreement so that said Parcels shall be maintained, kept, sold, and used in full compliance with and subject to this Agreement and, in connection therewith, Primary Lot Owner and Outparcel Lot Owner on their behalf and their successors and assigns covenant and agree as follows:
1. Definitions. For purposes hereof:
(a) The term “Owner” or “Owners” shall mean Primary Lot Owner and Outparcel Lot Owner and any and all successors or assigns of such persons as the owner or owners of fee simple title to all or any portion of the real property covered hereby, whether by sale, assignment, inheritance, operation of law, trustee’s sale, foreclosure, or otherwise, but not including the holder of any lien or encumbrance on such real property. Further, Owner shall include any tenant of the Outparcel Lot that has a recorded memorandum of lease evidencing such tenancy.
(b) The term “Parcel” or “Parcels” shall mean the Primary Lot and the Outparcel Lot, and any permitted future subdivision(s) of either.
(c) The term “Permittees” shall mean the respective occupant(s), employees, agents, contractors, customers, invitees, and licensees of (i) the Owner of such Parcel, and/or (ii) such tenant(s) or occupant(s).
(d) The term “Common Areas” shall mean those portions of the Parcels intended for the nonexclusive use of a Parcel, which may be either unimproved or improved such as (without limitation) parking areas, landscaped areas, ring roads, driveways, roadways, walkways,
light standards, curbing, paving, entrances, exits, and other similar nonexclusive exterior site improvements, including, without limitation, all portions of Mall Drive.
2. Easements.
2.1. Reciprocal Access Easements. The Owners grant to each other and the subsequent Owners of their respective Parcels an easement over and across all portions of each Parcel constituting a part of the Common Areas of such Parcels, as they exist from time to time, for nonexclusive right-of-way access and parking, for the purpose of pedestrian and vehicular ingress, egress, and parking over all access and entrance drives and parking areas of their respective Parcels.
2.2. Additional Utility Easements. The Owners agree to grant each other and the subsequent Owners of their respective Parcels an easement over and across all portions of each Parcel constituting a part of the Common Areas of such Parcels, as they exist from time to time, for utilities such as electricity, gas, water, cable, telephone, storm sewer, and sanitary sewer (collectively, the “Utilities” or individually, a “Utility”), provided that such Utilities and such easements shall not have a material adverse effect on the use or operation of the Parcels burdened by such easements. Each Owner shall be entitled, on reasonable notice to the Owner of the other Parcel, to enter upon such other Parcel at reasonable times and without unreasonable interference with the use and enjoyment of such Parcel, to maintain, repair and replace the Utilities, as necessary. Notwithstanding the foregoing, if repairs are required because of the negligence or willful misconduct of an Owner or Permittee, or if the event necessitating the repairs occurs on such Owner’s Parcel only, such repairs shall be the sole responsibility of such Owner, including utilities, lines, and connections, running beneath an Owner’s Parcel, and such Owner shall promptly commence such repairs and pursue such repairs diligently to completion. If the aforesaid portion of a Utility is damaged by fire or other casualty, such Utility shall be repaired and restored by the Owner of the Parcel with the damaged Utility unless all of the parties who use such Utility otherwise agree in writing. Notwithstanding anything herein to the contrary, the Primary Lot Owner shall have the right to expand, modify, renovate, or relocate the Utilities that are located on the Primary Lot, at the sole expense of the Primary Lot Owner, which expansion, modification, renovation, or relocation shall be done in a manner as not to materially disrupt the service provided by such Utility to the Outparcel Lot, and any such expansion, modification, renovation, or relocation shall only occur on the Primary Lot.
2.3. Drainage. Primary Lot Owner grants to Outparcel Lot Owner a nonexclusive easement and license, appurtenant to the Outparcel Lot, to tap into and use the storm sewer lines and related facilities located in the Common Areas of the Primary Lot for the purpose of draining any and all surface water runoff from the Outparcel Lot and the improvements which may, from time to time, be located on the Outparcel Lot.
2.4. Indemnification. Each Owner having rights with respect to an easement granted herein shall indemnify and hold the Owner whose Parcel is subject to the easement harmless from and against all claims, liabilities, and expenses (including reasonable attorney fees) relating to accidents, injuries, loss, or damage of or to any person or property arising from the negligent, intentional, or willful acts or omissions caused by the other Owner, its contractors, employees, agents, or others acting on behalf of such Owner, including, and without limitation, any breach of the Prohibited and Restricted Uses (as defined hereinafter) as provided on Exhibit D, which contains all of the restricted uses applicable to the Outparcel Lot.
2.5. Insurance. Each Owner shall maintain for its Parcel, or cause such Owner’s Permittee to maintain, at all times beginning on the date this Agreement is recorded, and ending no earlier than the expiration or earlier termination of this Agreement, a commercial general liability policy or its equivalent, including coverage for contractual liability for personal injury. Such insurance to be carried by each Owner shall have minimum limits of not less than $2,000,000.00 in respect of any one occurrence and $2,000,000.00 with respect to property damage occurring in, on, or about the Owner’s Parcel, and $5,000,000.00 general aggregate. Each Owner shall maintain workers’ compensation and employers’ liability insurance covering its employees as required by law in the State of __________ in an amount not less than $1,000,000.00 in respect of loss or damage to property, in the amount of not less than $1,000,000.00 per disease and in the amount of not less than $1,000,000.00 per disease aggregate. An Owner or such Owner’s Permittee shall have the right to satisfy its obligations regarding the foregoing insurance by way of self-insurance provided such Owner or such Owner’s Permittee maintains a tangible net worth of at least Fifty Million Dollars ($50,000,000.00). Upon the request of any other Owner, such self-insuring Owner or Permittee shall furnish a letter certifying that such party has elected to self-insure and shall provide financial statements, prepared in accordance with GAAP consistently applied, outlining such party’s then-current net worth. The foregoing insurance coverage amounts and self-insurance net worth requirement amounts may be adjusted from time to time to a commercially reasonable level as mutually agreed by the Owners.
2.6. Common Areas. The Owners shall have the right to block, close, alter, change, or remove the Common Areas located on their respective Parcels, so long as (a) the existing access drives depicted on Exhibit E attached hereto are not adversely changed and (b) the number of parking spaces remaining on the affected Parcel shall comply with all applicable laws and regulations.
2.7.
(a) The easements herein above granted shall be used and enjoyed by each Owner and its Permittees in such a manner so as not to unreasonably interfere with, obstruct, or delay the conduct and operations of the business of any other Owner or its Permittees at any time conducted on its Parcel, including, without limitation, public access to and from said business, and the receipt or delivery of merchandise in connection therewith. If
an Owner is required to perform an activity in the easement area, including any Common Areas, which may interfere with, obstruct, or delay the conduct and operations of the business of any other Owner or its Permittees at any time conducted on its Parcel, such Owner shall use its best efforts to diligently prosecute to completion any such activity.
(b) Once commenced, any work undertaken in reliance upon an easement granted herein shall be diligently prosecuted to completion so as to minimize any interference with the business of any other Owner and its Permittees. The Owner undertaking such work shall with due diligence
repair at its sole cost and expense any and all damage caused by such work and restore the affected portion of the Parcel upon which such work is performed to a condition that is equal to or better than the condition that existed prior to the commencement of such work. In addition, the Owner undertaking such work shall pay all costs and expenses associated therewith. Notwithstanding the foregoing or anything contained in this Agreement to the contrary, the Owner(s) of a Parcel and its/their Permittees shall in no event undertake any work described in this paragraph (except normal minor repairs in the ordinary course that do not interfere with the businesses) on another Parcel that is not of an emergency nature unless the Owner of that Parcel and its Permittee(s) consent in writing thereto, which consent shall not be unreasonably withheld or delayed.
3. Maintenance of Mall Drive and Mall Ring Road. The Primary Lot Owner will maintain or cause to be maintained the ring road (i.e., Mall Drive and Mall Ring Road as shown on the Site Plan attached hereto as Exhibit E), which provides access to the Outparcel Lot, in good order, condition, and repair and in full compliance with all applicable laws and regulations (including, without limitation, snow removal and customary repairs). At no time will the Primary Lot Owner be responsible for any maintenance, including, but not limited to, snow removal, striping, and resurfacing, on the Outparcel Lot, including Common Areas located thereon. The Outparcel Lot Owner will pay to the Owner of the Primary Lot a sum of ____________ and 00/100 Dollars ($______,000.00) annually for the maintenance of the ring road. The ring road maintenance expense will increase by two percent (2%) every five (5) years thereafter and shall be payable in equal monthly advance installments on or before the first day of each month. If the ring road maintenance expense is past due and not paid within ten (10) days after the Outparcel Lot Owner receives written notice thereof from the Primary Lot Owner, it shall thereafter bear interest at the rate of ten percent (10%) per annum until paid in full, or the maximum rate allowed by law, whichever is less.
. The Owner of the Primary Lot will operate and maintain or cause to be operated and maintained all Common Areas on the Parcels in good order, condition, and repair and in full compliance with all applicable laws and regulations with respect to the Common Areas. The Owner of the Outparcel Lot shall pay (or shall cause payment to be made to) the Owner of the Primary Lot a “Common Area Charge” in the amount of ______________ per annum to reimburse the Owner of the Primary Lot for the cost to maintain, operate, and repair the Common Areas. [In no event shall the Common Area Charge exceed __________Dollars ($________.___).] The Owner of the Outparcel Lot agrees to pay
to the Owner of the Primary Lot the Common Area Charge in twelve (12) equal monthly installments in advance of the first day of each calendar month. If the Common Area Charge is past due and not paid within five (5) days after the Owner of the Outparcel Lot’s written notice thereof, it shall be subject to a late payment fee equal to five percent (5%) of the amount due and shall thereafter bear interest at the rate of ten percent (10%) per annum until paid in full.
4. Further Subdivision. Subject to the satisfaction of all requirements imposed by, and the receipt of all approvals from, any governmental body to do so, the Primary Lot or the Outparcel Lot may be subdivided or otherwise reconfigured by its Owner; provided, however, that any such subdivision or reconfiguration shall not materially and adversely impede and impair access to the Outparcel Lot. The Owner of any subdivided or reconfigured parcel shall immediately become and remain subject to the duties, obligations, and liabilities with respect to the other subdivided or reconfigured parcels within the Parcel so subdivided or reconfigured and, with respect to the other Parcel(s), shall have the rights and benefits of this Agreement as though such reconfigured parcel had been originally described herein. Further, the Owner of each such subdivided or reconfigured parcel shall be relieved of any further obligation hereunder with respect to that portion of the Parcel so subdivided or reconfigured not owned by it and shall continue to be obligated to the other Owners hereunder only with respect to that portion of the original Parcel it retains.
5. No Rights in Public; No Implied Easements. Nothing contained herein shall be construed as creating any rights in the general public or as dedicating for public use any portion of any Parcel. No easements, except those expressly set forth in Section 2, shall be implied by this Agreement.
6. Exclusives, Prohibited Uses, and Restrictions. The Parcels shall be subject to the exclusives, prohibited uses and restrictions (collectively “Prohibited and Restricted Uses”) set forth in Exhibit D, provided that (i) the Prohibited and Restricted Uses contained in the leases referenced in Exhibit D shall only apply so long as the leases containing such Prohibited and Restricted Uses remain in full force and effect and (ii) only the Owner of the Parcel containing the Lease with the applicable Prohibited and Restricted Uses and the Declarant shall be entitled to enforce such Prohibited and Restricted Uses.
7. Remedies. In the event of a breach or threatened breach by any Owner or its Permittees of any of the terms, covenants, restrictions, or conditions hereof, the other Owner(s) shall be entitled forthwith to full and adequate relief by injunction and/ or all such other available legal and equitable remedies from the consequences of such breach, including payment of any amounts due and/or specific performance. Notwithstanding the foregoing to the contrary, no breach hereunder shall entitle any Owner to cancel, rescind, or otherwise terminate this Agreement. No breach hereunder shall defeat or render invalid the lien of any mortgage upon any Parcel made in good faith for value, but the easements, covenants, conditions, and restrictions hereof shall be binding upon and effective against any Owner of such Parcel covered hereby whose title thereto is acquired by
foreclosure, trustee’s sale, or otherwise. If any Owner fails to fulfill any obligation in the manner required by this Agreement (herein a “Defaulting Owner”), any other Owner (the “Innocent Owner”) may notify such Defaulting Owner of such default (the “Default Notice”), specifying with particularity the manner in which such Defaulting Owner has defaulted. If such breach is not corrected within thirty (30) days after receipt of the Default Notice (or if such breach is such that it cannot be corrected within thirty (30) days, if the Defaulting Owner does not commence the correction of such breach promptly and diligently prosecute the correction to completion thereafter) (“Defaulting Owner Cure Period”), then any Innocent Owner shall thereafter have the right (but not the obligation) to remedy the default specified in the Default Notice and seek and recover its costs of doing so from the Defaulting Owner. In such circumstances, the Defaulting Owner shall reimburse the Innocent Owner for all actual, reasonable, and properly documented expenses incurred by the Innocent Owner to rectify such default within fifteen (15) days after the Defaulting Owner receives written documentation detailing each of the expenditures incurred and paid by such Innocent Owner (“Default Expenses”). If the Default Expenses are not paid within fifteen (15) days of receipt by the Defaulting Owner, (i) the amount of the Default Expenses shall bear interest at the rate of ten percent (10%) per annum from the date such expenditures were paid by the Innocent Owner, until the date paid by the Defaulting Owner; and (ii) the Innocent Owner rectifying such default shall thereafter be authorized to file a lien in the amount of the Default Expenses and any accrued interest on the Defaulting Owner’s Parcel from and after the end of the Defaulting Owner Cure Period (which lien shall be subordinate to any mortgage or deed of trust on such Parcel unless notice of such lien has been recorded in __________ County, __________, prior to the recording of such mortgage or deed of trust). It is the intent of the parties that such lien shall be inferior and subordinate to the lien of any valid mortgage or deed of trust now existing or which may hereafter be placed on said property securing the payment of a loan made by an entity whose deposits are insured or guaranteed by an agency of the United States Government, unless the lien is filed prior to the recording of the mortgage or deed of trust. The parties agree that the respective Permittees of the Outparcel Lot Owner and the Primary Lot Owner are each intended as a third-party beneficiary of this Agreement, shall have the same rights and remedies as an Owner with respect to any default by any other Owner under this Agreement, and may enforce this Agreement in the same manner as that Owner. Any person authorized by this Agreement to enforce the remedies provided for in this paragraph shall also be entitled to recover from the Defaulting Owner expenses it incurs to prepare, record, and release any lien for Default Expenses.
8. Term. This Agreement shall be effective commencing on the date of recordation of this Agreement in __________County, __________, and shall remain in full force and effect thereafter for twenty-five (25) years, unless this Agreement is modified, amended, canceled, or terminated by a fully executed and written instrument signed by all of the then record Owners of all Parcels and recorded in __________ County, __________. At the conclusion of the twentyfive (25) year period, this Agreement shall be automatically renewed for successive five (5) year periods unless all of the Owners agree in
writing to terminate this Agreement by a written and recorded instrument as stated above.
9. Miscellaneous
(a) Attorney Fees. In the event a party institutes any legal action or proceeding for the enforcement of any right or obligation herein contained, the prevailing party after a final adjudication shall be entitled to recover its costs and reasonable attorney fees incurred in the preparation and prosecution of such action or proceeding.
(b) Amendment. This Agreement may be modified or amended, in whole or in part, or terminated, only by the written consent of all record Owners of the Parcels.
(c) No Waiver. No waiver of any default of any obligation by any party hereto shall be implied from any omission by the other party to take any action with respect to such default.
(d) Covenants to Run with Land. It is intended that each of the easements, covenants, conditions, restrictions, rights and obligations set forth herein are perpetual and shall be appurtenant to and shall run with the land and create equitable servitudes in favor of the real property benefited thereby; shall bind every person having any fee, leasehold, or other interest therein; and shall inure to the benefit of the respective parties and their successors, assigns, heirs, and personal representatives.
(e) Grantee’s Acceptance. The grantee of any Parcel or any portion thereof, by acceptance of a deed conveying title thereto or the execution of a contract for the purchase thereof, whether from an original party or from a subsequent Owner of such Parcel, shall accept such deed or contract upon and subject to each and all of the easements, covenants, conditions, restrictions, and obligations contained herein. By such acceptance, any such grantee shall, for himself and his successors, assigns, heirs, and personal representatives, covenant, consent, and agree to and with the other party to keep, observe, comply with, and perform the obligations and agreements set forth herein with respect to the property so acquired by such grantee.
(f) Entire Agreement. This Agreement contains the complete understanding and agreement of the parties hereto with respect to all matters referred to herein, and all prior representations, negotiations, and understandings are superseded hereby.
(g) Notices. Notices or other communication hereunder shall be in writing and shall be sent by certified or registered mail, return receipt requested, or by other national overnight courier company, or personal delivery. Notice shall be deemed given upon receipt or refusal to accept delivery. Each party may change from time to time their respective address for notice hereunder by like notice to the other party. The notice addresses of the parties are as follows:
If to the Primary Lot Owner:
With a copy to:
If to the Outparcel Lot Owner:
(h) Governing Law. The laws of __________ shall govern the interpretation, validity, performance, and enforcement of this Agreement.
(i) Estoppel Certificate. Any Owner may, at any time and from time to time, in connection with the sale, leasing, or transfer of the Owner’s Parcel or in connection with the financing or refinancing of the Owner’s Parcel by bona fide mortgage, deed of trust, or saleleaseback made in good faith and for value, deliver written notice to the other Owners requesting such Owners to execute certificates certifying that to the best knowledge of the other Owners (a) the requesting Owner is not in default in the performance of its obligations under this Agreement, or, if in default, to describe therein with specificity the nature and amount of any and all defaults; (b) confirming that this Agreement has not been amended (or if so, identifying the amendments), and is in full force and effect; and (c) confirming that there are no amounts owed by or liens filed with respect to such Owner or such Owner’s Parcel. Each Owner receiving such request shall execute and return such certification within twenty (20) days following the receipt of such request. Failure by an Owner to so execute and return such certificate within the specified period shall be deemed an admission on such Owner’s part that the Owner requesting the certificate is current and not in default in the performance of such Owner’s obligations under this Agreement.
(j) Conflict. In the event any provision of this Agreement conflicts with any previously recorded covenants, conditions, and restrictions as between the Owners of the Primary Lot and the Outparcel Lot only, the provisions of this Agreement shall prevail. In the event any provision of this Agreement conflicts with any existing shopping center rules and regulations applicable to the Outparcel Lot, the provisions of this Agreement shall prevail.
(k) Counterparts. This Agreement may be executed in multiple counterparts, each of which shall constitute an original, but all of which taken together shall constitute one agreement. Electronic signatures of any Owner shall be deemed their original signatures for all purposes hereunder, and electronic delivery of executed signatures, such as electronic signatures sent via facsimile or electronic mail in “portable document format” (.pdf), or similar form, shall be deemed effective as if they were originals. As used herein, electronic signatures shall have the meaning set forth in Section 2(8) of the Uniform Electronic Transactions Act (1999) (UETA). The Owners acknowledge that electronic signatures made by the parties hereto shall be binding and enforceable pursuant to the Global and National Commerce Act, Title 15, United States Code, Sections 7001 et seq.; the UETA; and any applicable state laws.
The Section of Real Property, Trust and Estate Law is now accepting entries for the 2024 Law Student Writing Contest. This contest is open to all J.D. and LL.M students currently attending an ABA-accredited law school. It is designed to encourage and reward law student writing on real property or trust and estate law subjects of general and current interest.
1st Place $2,500 award
2nd Place $1,500 award
3rd Place $1,000 award
n Free round-trip economy-class airfare and accommodations to attend the RPTE National CLE Conference. This is an excellent opportunity to meet RPTE Leadership and other attorneys who practice real property or trust and estate law. (First place only.)
n A full-tuition scholarship to the University of Miami School of Law’s Heckerling Graduate Program in Estate Planning OR Robert Traurig-Greenberg Traurig Graduate Program in Real Property Development for the 2024-2025 or 20252026 academic year.* (First place only.)
n Consideration for publication in The Real Property, Trust and Estate Law Journal, the Section’s law review journal.
n One-year free RPTE membership.
n Name and essay title will be published in the eReport, the Section’s electronic newsletter, and Probate & Property, the Section’s flagship magazine.
Contest deadline: May 31, 2024
Visit the RPTE Law School Writing Competition webpage at ambar.org/rptewriting.
*Students must apply and be admitted to the graduate program of their choice to be considered for the scholarship. Applicants to the Heckerling Graduate Program in Estate Planning must hold a J.D. degree from an ABA accredited law school and must have completed the equivalent of both a J.D. trusts and estates and federal income tax course. Applicants to the Robert Traurig-Greenberg Traurig Graduate Program in Real Property Development must hold a degree from an ABA accredited law school or a foreign equivalent non-US school.
NITIES: Challenge to attempted severance of commercial units is not subject to statute of limitations for amendments to declaration. The City Bella on Lyndale (Cooperative), a common interest community created in 2004, included structures of mixed residential and commercial use. When the Cooperative discovered that the arrangement could prevent members of the community from being able to deduct their share of mortgage interest and real estate taxes under Internal Revenue Service regulations, it decided to transfer the commercial property out of the community to a separate entity, City Bella Commercial, LLC (Commercial). Efforts to accomplish that goal included drafting a warranty deed purporting to effectuate the transfer. In 2007, the Cooperative recorded an amended declaration that did not include the commercial property. In 2020, after completing a $2.1-million-dollar repair project, the Cooperative discovered that the attempted severance of the Commercial was never properly completed and sought contribution from the Commercial. The Commercial refused, and both parties sought declaratory relief. The trial court granted summary judgment in favor of the Commercial based on the 2007 amendment reflecting severance and the statute’s two-year limitation on bringing actions challenging the validity of amendments to the declaration. Minn. Stat. § 515B.2-118. The appellate court affirmed, agreeing that the statute barred the Cooperative’s action, but stating that was true
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.
regardless of the validity of the 2007 severance attempt. The supreme court reversed. The plain language of the statute applies the two-year limitation to challenges to the validity of amended declarations but does not purport to cover severance actions per se, which was the tenor of the Cooperative’s action—whether the severance was effective. Although amended declarations are part of the severance process, they are not the sole component. City Bella Commercial, L.L.C. v. City Bella on Lyndale, 994 N.W.2d 27 (Minn. 2023).
FORECLOSURE: Foreclosure sale after bankruptcy has closed is void when notice of foreclosure was given while bankruptcy was open. After homeowners defaulted on their condominium assessments, they filed for bankruptcy. The homeowners’ association recorded a notice of foreclosure while the bankruptcy was ongoing.
After the bankruptcy proceeding closed, the unit was sold at foreclosure. Thereafter, Wells Fargo brought a quiet title action against the homeowners’ association and the foreclosure purchaser to establish that its deed of trust on the unit survived the foreclosure. The district court granted summary judgment to the association and the purchaser. The Ninth Circuit Court of Appeals reversed, finding that even if Wells Fargo was neither the debtor nor the trustee, it had prudential standing to challenge a violation of the automatic stay. The court went on to invalidate the foreclosure sale. Section 362(a)(4) of the Bankruptcy Code provides that a 90-day stay automatically applies to “any act to create, perfect or enforce any lien against property of the estate.” 11 U.S.C. § 362(a)(4). Not only is a sale conducted during the stay void, but so is a sale occurring after the bankruptcy has closed when the notice of sale was given during the proceeding while the property was part of the bankruptcy estate. Therefore, Wells Fargo’s deed of trust survived the sale. Wells Fargo Bank, N.A. v. Springs at Centennial Ranch Homeowners Ass’n, 2023 U.S. App. LEXIS 27822, 2023 WL 6890086 (9th Cir. Oct. 19, 2023).
LANDLORD-TENANT: Tenant is not entitled to rent setoff for breach of implied warranty of habitability when she did not notify landlord of defects. A residential tenant stopped paying rent and owed $5,000 in arrears when the landlord brought suit for eviction. Although the tenant did not contest that she stopped paying rent, she asserted that the premises were not habitable on account of noise from a commercial tenant next door, lack of heat, and a broken lock on the back door. The trial court found that although the commercial tenant was loud during operating hours, which
interfered with the residential tenant’s sleep, she was aware of the business when she decided to rent the unit.
Although, for a period of time, the unit lacked heat and the doors were not secure, the tenant failed to give notice to the landlord of the conditions, as required by statute. The trial court granted eviction and declined to award a setoff for a breach of the warranty of habitability. The supreme court affirmed, confirming that under the statute, a tenant may withhold rent when a landlord fails to comply with the duty to provide a habitable dwelling. But this is so only if the tenant gives the landlord notice of defects and allows a reasonable time for the landlord to repair. Here, the tenant admitted that she never notified the landlord. Thus, she was not entitled to any setoff in the rent. Buckley v. Teneva, 2023 Vt. Unpub. LEXIS 119 (Vt. Nov. 13, 2023).
Covenant limiting use of property to residential purposes does not bar short-term rentals, but prohibition on short-term leases does. In 1984, a vacation community on a Tennessee lake was created subject to a Declaration of Covenants, Conditions & Restrictions (CCRs), which stated that “each Lot shall be used for residential and no other purposes” and that “no gainful profession, occupation, trade or other nonresidential use shall be conducted in any Lot.” The term “lot” was defined as property for “use as a residence by a single family.” The declaration additionally included a process for amending the CCRs. The plaintiff purchased the property in the development in 2015, doing so with the intent to lease it on a short-term basis. He soon began leasing his property to third parties for various periods from two to 28 days. In 2018, the owners amended the CCRs to require that leases be a minimum of 30 days. After continuous violations, the homeowners’ association sent the plaintiff a notice, which the plaintiff responded to by suing the homeowners association for declaratory and injunctive relief from its efforts to limit his rentals. The trial court denied the
plaintiff’s motion for summary judgment and granted the homeowners’ association’s motion for the same based in part on the precedent that residential use restrictions prohibited short-term rentals. The appellate court affirmed in all respects. The supreme court, noting the issue to be one of first impression, reversed. The court engaged in an extensive discussion of precedent from numerous jurisdictions as well as a detailed examination of many dictionary sources to determine the best definitions of “used” and “residence” or “residential.” Not finding a decisive resolution in these sources, the court expressly joined the courts from other states, which have found residentialpurpose covenants ambiguous because the term “residential” could refer to both long- and short-term stays and thus have interpreted them not to prohibit short-term rentals. Therefore, the plaintiff was not limited by the 1984 CCRs. The supreme court noted, however, the original covenants were amended in 2018 under a provision in the original CCRs reserving the right to impose additional restrictions and obligations on the land. Amendments are generally permissible unless they are arbitrary and capricious, and they are presumed valid. A party arguing against their validity carries the burden of showing the amendments were without reasoning or judgment. Here, the plaintiff failed, the court rejecting his sole argument that the amendments operated retroactively because they did not seek to impose any sanction for prior violations. The amendments’ ban on short-term rentals was thus enforceable. Pandharipande v. FSD Corp., 679 S.W.3d 610 (Tenn. 2023).
Cause of action for quiet title accrues when owner has actual notice of another’s claimed interest. In 2005, the Pivas conveyed a conservation easement to the Forest Service, giving the right to permit public use of a strip of land “to be utilized as a trail.” A letter sent by the Pivas in 2005 stated that shortly after the conveyance, the Pivas met with the Forest Service to express concerns
about the Forest Service’s plans for the trail. Almost a decade later, in a 2014 email, the Pivas wrote that since the meeting nothing had changed in the trail plan. In 2019, the Pivas brought a quiet title action. The Forest Service moved for summary judgment on the grounds that the 12-year statute of limitations had run. The district granted the motion, and the Ninth Circuit Court of Appeals affirmed. The court agreed with the trial court that it was undisputed that, as early as 2005, the Pivas had actual notice of both the Forest Service’s claimed interest in the trail easement and its intent to construct a trail for public use across the easement, such that it was then that the cause of action accrued. Sawtooth Mt. Ranch, LLC v. U.S. Forest Serv., 2023 U.S. App. LEXIS 30521 (9th Cir. Nov. 16, 2023).
TAX LIENS: Unclaimed surplus from tax sale does not escheat to city, but must be paid to junior lienholder. The City of Richmond concluded a tax sale pursuant to a statutory lien, Va. Code § 58.1-3340, generating $50,000. The city awarded itself $19,563 (taxes, interest, penalties) and $9,316 (costs and legal fees), leaving a surplus of $21,171. There were two junior liens: $14,000 held by the heirs of a judgment creditor (Jones) and $100,000 held by Caldwell Trust. The city paid the Caldwell Trust $7,171 and kept the $14,000 in escrow for the Jones heirs. Va. Code § 58.13967 provides that a claimant has two years to assert a claim against the sale proceeds. After two years had elapsed and the Jones heirs had not claimed any of the proceeds, the city escheated the $14,000. The Caldwell Trust sued the city for the $14,000, alleging a violation of the state constitution and the Fifth Amendment. The trial court ruled for the city, but the supreme court reversed. Although the statute, by its terms, allowed the escheat of the $14,000, it was nonetheless in violation of the state constitution. A judgment lien gives a right to have the claim satisfied by seizure of the land of the judgment debtor, chargeable on the surplus sale proceeds from a judicial sale. The junior interest is subordinate to any superior liens,
such as the Jones lien, but no superior liens were asserted and thus all were extinguished by section 58.1-3967. The fully compensated city had no property interest whatsoever in the unclaimed surplus, such that keeping the surplus for itself instead of awarding it to the junior lienholder violated the state constitution. McKeithen v. City of Richmond, 893 S.E. 2d 369 (Va. 2023).
TAX LIENS: Mortgagee can challenge compliance with statutory mailing requirements even when notice was not returned as undeliverable. In May 2018, the County of Saratoga commenced an in rem tax foreclosure proceeding against real property to satisfy a $9,000 lien. The County allegedly mailed, by both certified and first-class mail, a copy of the petition, notice of foreclosure, and notice of commencement of the tax foreclosure proceeding to the mortgagee, Nutter, at the address that was listed in the mortgage. Although neither the certified letter nor first-class mailing was returned as undeliverable, Nutter’s compliance specialist responsible for receiving tax foreclosure notices stated that no such documents were received. In December 2018, a default judgment in the county’s favor was entered and a deed conveying title of the property to the county was executed. The county thereupon sold the property at auction for $142,500, and the property was resold several months later for $155,000. Later in 2019, a judgment of foreclosure and sale was entered as to the same property in favor of Nutter in a separate foreclosure action that had been commenced against the mortgagors in 2015. Nutter then filed an action to vacate the December 2018 tax claim default judgment and the deeds conveying the property. Nutter moved for summary judgment on the ground that the county “failed to serve [it with] the tax foreclosure petition.” The county cross-moved for summary judgment to dismiss the complaint, submitting affidavits of mailing by both certified and first-class mail—listing Nutter’s address—and the certified mail receipt, as well as an affidavit stating that
neither the certified nor the first-class mailing was returned. In response, Nutter noted that there was no postmark on the certified mail receipt and argued that this meant that the certified letter was not, in fact, brought to the post office. Nutter also submitted a tracking history showing that the certified mail was delivered to an unknown P.O. Box, rather than to Nutter’s address. All of these facts, Nutter argued, created a question of fact as to compliance with the mailing requirements of the statute. The trial court granted judgment to the county. On appeal, the intermediate appellate court concluded that the evidence of certified and first-class mailing to the plaintiff’s address, along with proof that the mailings were not returned, established compliance with the statute and that “the presumption of service” set forth in the statute could be rebutted only by “proof establishing that both the certified mailing and the ordinary first-class mailing were returned.” R.P.T.L. § 1125. The court of appeals reversed and remanded. It explained that even though the statute does not require receipt of the notice, the absence of return of the notice is not the only cognizable issue relating to the validity of the notice. Instead, for the notice to be valid, it must comply with the mailing requirements of the statute. Disagreeing with the appellate court, the court explained that the statute does not contain a “presumption of service,” and for that reason, it does not bar an interested party from submitting evidence that calls into question compliance with the mailing requirements. An interested party may introduce evidence showing deficiencies in the mailings. The court found this interpretation consistent not only with the statutory language, but also with the objectives and purposes of the legislature in enacting the current version of the statute, i.e., to impose more stringent notice requirements. Giving the statute a liberal construction “in the owner’s favor,” the court ruled that an interested party is permitted to establish that a taxing authority failed to comply with the notice requirements set forth in R.P.T.L. §1125(1)(b), even
when the taxing authority submits proof that notice that was allegedly sent by both certified and first-class mail and was not returned. Nutter & Co. v. Cnty. of Saratoga, 209 N.E.3d 1255 (N.Y. 2023).
Judicial redemption from tax sale is available only for an owner of the land. In the 1950s, Janice Morrison grew up in a house built by her parents on Lot 25, but her parents built an addition, a driveway, and a fence on neighboring Lot 24. In 2013, the Mays purchased Lot 25 after a mortgage foreclosure and, in the same year, Morrison purchased Lot 24 from the state via a tax sale. The purchasers did not obtain surveys, and they were not aware of the encroachments when they bought. Later, the Mays told Morrison that she was trespassing on their property. Morrison filed suit against the Mays, seeking injunctive relief. The trial court held the Mays, through their counterclaim against Morrison, had judicially redeemed the tax deed and were entitled to possession and title to Lot 24. The court did order the Mays to reimburse Morrison the money Morrison paid for the tax purchase as well as interest on those funds. Morrison appealed. The supreme court reversed and remanded. It explained that there are two methods of redeeming property from a tax sale. “Statutory redemption” requires the payment of specified sums of money to the probate judge of the county in which the parcel is located. Ala. Code § 40-10-120. “Judicial redemption” involves the filing of an original civil action against a tax-sale purchaser (or the filing of a counterclaim in an ejectment action brought by that purchaser). Ala. Code §§ 40-1082 and 40-10-83. Although the right to statutory redemption expires three years after the date of the tax sale, judicial redemption has no time limit, provided that the claim is brought by an owner of land who has retained either actual or constructive possession. Here, the Mays could not statutorily redeem the property because more than three years had passed since the sale, and they did not follow the prescribed
procedures. Because judicial redemption is available only to “owners” and the facts showed the Mays had never owned or held title to Lot 24, they had no right to judicially redeem. Morrison v. May, 2023 Ala. LEXIS 111, 2023 WL 6528473 (Ala. Oct. 6, 2023).
Mortgagee’s title insurance policy does not cover loss from foreclosure of HOA’s superpriority lien. Deutsche Bank National Trust Company held a first deed of trust on a condominium unit. Fidelity National Title Insurance issued a lender’s title policy on the property. After the homeowners became delinquent in paying their HOA assessments, the HOA conducted a nonjudicial foreclosure, resulting in the sale of the property. Deutsche Bank’s action to quiet title against the purchaser failed, the court finding that the HOA’s foreclosure operated to extinguish Deutsche Bank’s deed of trust under the superpriority lien statute. Nev. Rev. Stat. § 116.3116. At the same time Deutsche Bank commenced the quiet title action, it filed a claim under its title policy, seeking defense of the title and indemnification. The policy insured against any losses “sustained or incurred by the insured by reason of… [a]ny defect in or lien or encumbrance on the title” or “the priority of any lien or encumbrance over the lien of the insured mortgage.” The policy also incorporated specific endorsements:
(1) California Land Title Association (CLTA) 115.2(2) insured against losses sustained by reason of the loss of priority of any lien for charges and assessments in favor of an HOA; (2) CLTA 100(1)(a) provided coverage for losses sustained by reason of CC&Rs that cut off, subordinate, or otherwise impair the insured lien; and (3) CLTA 100(2)(a) covered losses sustained by reason of future violations of CC&Rs, provided they cause impairment or loss of the lien or title to the property. The policy stated that notwithstanding the expressed terms, coverage applied only to claims existing as of the date of the policy. Fidelity refused coverage, asserting that the creation and enforcement of the superpriority lien occurred after
the date of the policy and therefore was outside the coverage. The trial court held for Fidelity, and the supreme court affirmed. It explained that the recording of the CC&Rs by the HOA gave record notice and served to perfect an inchoate lien for assessments, thereby establishing superpriority status for up to nine months of assessments. Nonetheless, under the superpriority lien statute, the lien does not become an existing, enforceable lien until assessments are due and unpaid. Here, that happened seven years after the date of the policy. Moreover, to the extent that the deed of trust lost its priority, that loss was not because of the HOA’s lien, but because of the statute. Nev. Rev. Stat. § 116.3116. Because the policy clearly did not cover the loss of priority, Fidelity also had no duty to defend the title. Deutsche Bank Nat’l Trust Co. v. Fid. Nat’l Title Ins. Co., 536 P. 3d 915 (Nev. 2023).
WATER LAW: Challengers to agency’s interbasin transfer of surface water who allege only speculative reductions in water flow lack standing. In 2004, the Department of Natural Resources (DNR) declared a moratorium on new surface water appropriations for various river basins that were subject to five natural resource districts (NRDs). The Platte Diversion Project (PRD) filed an excess flow permit application with the DNR seeking to divert certain excess flow and facilitate an interbasin transfer. The proposed interbasin transfer was made expressly subject to the condition that it would be perpetually junior in status to other water users. Several entities filed objections, and the PRD moved to dismiss the objections, asserting the entities all lacked standing. Following a hearing, the DNR dismissed all challenges on that basis. The entities filed a successful petition to bypass the appellate court and take the matter directly to the supreme court. The supreme court affirmed, starting with the explanation that a party has standing if it has a legal or equitable interest in the controversy. That interest must be a personal stake in the outcome such that invocation of the court’s jurisdiction
and exercise of remedial powers on that party’s behalf is justified. Commonlaw standards are used to determine standing unless the legislature has provided for different standards tailored to specific circumstances. Common-law standing generally focuses on whether the litigant has suffered or will suffer an injury in fact that is traceable to the challenged action. The regulations here contained “textual hooks”—“interested person,” “legally protectable interest,” and “legally cognizable” impact—that implicated common-law standing principles. None of the appellants satisfied the common-law requirements, as some failed to plead particularized harm to a direct interest, and others failed to show injury in fact. They all failed to allege how the proposed diversion would alter the streamflows to such a degree that operations would be affected. The court instructed that merely claiming harm from less water being available in the stream was not enough. The express condition in the permit also made the claimed harms only speculative. Importantly, the court concluded that although any diversion of a limited resource necessarily results in marginally less availability of that resource for others, that reality is not specific harm for standing purposes. In Re Application A-19594, 995 N.W.2d 655 (Neb. 2023).
LANDLORD-TENANT: In Ending Evictions: The Lived Case For Replacing the Violence of Eviction with the Humanity of a Safety Net, 32 J. Affordable Housing & Comm. Dev. L. 49 (2023), Sam Gilman argues that many of the government responses to the onslaught of evictions that took place during the COVID-19 pandemic can and should be made permanent. He views the status quo legal process for evictions throughout the country to be catastrophically harmful to landlords, evicted families, and society. Gilman is a co-founder of the Community Economic Defense Project based in Colorado, where he has helped develop strategies for eviction assistance there and elsewhere. Focusing on four locations (Philadelphia,
Pennsylvania, Houston, Texas, and the states of Colorado and Massachusetts), he outlines what was done during the pandemic and lists the most positive aspects of each location as part of a model foundation proposal. He shows that the negative financial effects of evictions are most significantly felt by Black and Brown minorities, as they are predominantly on the lower levels of the socioeconomic ladder. He claims that the eviction problem, although deeply associated with the legal and economic issues permeating the affordable housing crisis and America’s history of housing discrimination, needs to and can somehow reach its own solutions. Though laudable and certainly aspirational, the article leaves one concerned as to whether the many specifics needed for an eviction-free society can realistically be attained. He believes that emergency response to the pandemic must morph into an alternative arrangement for the new post-pandemic norm. This is particularly imperative as current evictions
are now exceeding pre-pandemic levels. Some of that excess is linked to investors buying foreclosure properties during the pandemic and turning those into rental units that have followed the steady trend of marketplace rent increases that are far outpacing income increases for average renters. Gilman acknowledges the presence of valid arguments favoring evictions from the viewpoints of other involved parties such as small-time mortgagees, financial institutions, local government departments, and private service providers. Yet, in his view, those interests and other counterarguments are minimalized, rightfully so at least in the context of tenants’ historically lowly status, with little power over their housing circumstances. The most evident support for his argument is that the multi-billiondollar allocations of rental assistance alongside moratoria on evictions resulted in 1.36 million fewer evictions in 2021. The author recognizes that universal emergency rental assistance may create moral hazards and drive up inflation
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which may ultimately drive up rental prices further. But, in his assessment, the costs of homelessness and displacement far exceed the costs of multi-month rental assistance. It is not clear where the billions in aid can come from on a sustained basis nor what regulations can be established to standardize national legal assistance for tenancies under distress. Even as there are broad differences among state law approaches to eviction and a general lack of federal oversight, the article succeeds in portraying eviction assistance as something that needs to be emphasized at a higher level than is currently present.
Strikes: Authorizing Documents of Rescission for Fraud in North Carolina, 27 N.C. Bank. Inst. 63 (2023), Jon Schlotterback shows how lenders can attempt to fix the problem of an unintentional release of a mortgage. When a security instrument is accidentally released or satisfied of record, statutes in some states allow either the releasing party or the secured lender to file a “document of rescission” to reinstate the secured lender’s security instrument, thereby restoring both the lien and its original priority position. Based on a study of the law in North Carolina and surrounding states, however, the author shows that these “oops” statutes and their interpreting cases are far from uniform and can provide varying levels of protection. The article explains the current law on how the document of rescission statutes or their equivalents work in North Carolina and surrounding states. As it stands, these document of rescission statutes do not cover fraudulent releases. The main point of the article is to advocate for an amendment to these statutes to cover fraud, asserting that this would benefit owners and lenders alike.
RECORDING: Prof. Laura M. Padilla, in Real Estate Trends: Title and Blockchain Technology, 10 Belmont L. Rev. 234 (2023), gives an insightful analysis of the emerging blockchain technology and its promise to revolutionize recordkeeping for real property titles. After a brief history of the traditional method
of memorializing recording transfers—recording and title registries—as compared to blockchain technology, she shows that many of the problems with using the traditional name indexes stem from human error, which is largely eliminated by blockchain technology. She does admit that many problems of recording, from mis-indexing and out-of-order recordings, could be avoided or resolved through the uniform adoption of tract indexes, facilitated by the universal adoption of e-recording and digital documents and that may be the predicate for block chain technology. What may be the biggest impediment to its widespread adoption is the associated cost.
TAKINGS: Cedar Point Nursery v. Hassid, 141 S. Ct. 2063 (U.S. 2021), established a new rule in takings law: when the government enacts a regulation allowing a temporary invasion of a property owner’s land, it constitutes a per se taking under the Fifth Amendment, necessitating just compensation. In a student-authored article, Rent Regulations After Cedar Point, 123 Colum. L. Rev. 475 (2023), Abigail Flanigan discusses the implications of the Supreme Court case on the constitutionality of rent regulations and distinguishes between the maximalist and minimalist approaches in interpreting Cedar Point and its exceptions. The maximalist approach suggests that Cedar Point could render rent control laws like New York’s 2019 Housing Stability and Tenant Protection Act (HSTPA), 2019 N.Y. Laws ch. 36, unconstitutional by appropriating the landlord’s right to exclude, an essential property right. This approach raises questions about just compensation, considering the fair market value of the property and the costs incurred by the property owner because of regulation. In contrast, the minimalist approach analyzes potential exceptions like the general public exception and background principles exception, which may support the constitutionality of rent control laws. The general public exception applies to regulations allowing access to properties generally open to the public, distinguishing them from regulations granting access to private property. The background principles exception suggests
that certain longstanding background restrictions on property rights are not considered takings. Flanigan contends that the maximalist approach contradicts established legal precedents and poses a threat to anti-discrimination housing laws. She asserts that although the maximalist approach could restrict the state’s ability to regulate housing markets, the minimalist approach may uphold the constitutionality of rent regulations within certain bounds. The difference in recent circuit decisions suggests an ongoing dispute on how Cedar Point applies to rent regulation and landlord-tenant relationships. The Second Circuit, in 74 Pinehurst LLC v. New York, 59 F.4th 557 (2d Cir. 2022), rejected the argument that the HSTPA effected a physical taking of landlords’ property and adopted a version of the “general public” exception. The Eighth Circuit, however, in Heights Apartments, LLC v. Walz, 30 F.4th 720 (8th Cir. 2022), signaled a willingness to take a maximalist approach, suggesting a plausible physical takings claim by property owners challenging a state eviction moratorium. Although the Supreme Court may eventually address this issue, Flanigan advocates for a broad interpretation of the Cedar Point exceptions when courts grapple with constitutional challenges related to rent regulation legislation. The article offers a useful framework for finding some coherence from surface dissonance from these courts.
CALIFORNIA enacts law to require transferee mortgage servicers to honor agreements made with original servicer on the use of insurance proceeds for repair after disaster. The requirements apply when a government has proclaimed a state or local emergency. 2023 Cal. Stats. ch. 873.
NEW YORK enacts provisions to address theft of real property. The provisions amend various statutes and authorize courts to stay actions to recover possession or quiet title and warrants of eviction based on a good faith investigation of title theft or fraud in the financing of a transaction. After the
commencement of a criminal or civil action charging deed theft or fraud, courts are required to stay all proceedings to recover property or quiet title. The amendments create a rebuttable presumption that a deed is fraudulent upon the conviction of deed theft. A rebuttable presumption of notice of fraud also arises when encumbered property is transferred without an accompanying statement by the mortgagee that the transferee is assuming the mortgage or when the mortgage is satisfied. The amendments authorize the district attorney or office of attorney general to file a notice of pendency in any action charging criminal title theft. 2023 N.Y. Laws 630.
NORTH CAROLINA enacts law to give professional land surveyors right to enter private lands. Entry is authorized for the purpose of locating property corners, boundary lines, rights-of-way, and easements. An exception exists for land containing critical infrastructure that is completely enclosed by a fence or other physical barriers with an indication that entry is forbidden. Entry authorized by the act shall not constitute trespass. The surveyor is required to make reasonable efforts to notify adjoining landowners upon whose land it is necessary to enter. Although surveyors are not liable to landowners except for the destruction or damage to property, a surveyor also has no action against landowners except for damage willfully or deliberately caused. 2023 N.C. Sess. Laws 142.
TENNESSEE amends residential landlord-tenant law to require more notice of termination to tenants 55 and older. A landlord of a property that provides federally subsidized housing for older persons must give 60 days’ notice of termination before evicting when the tenant has paid the rent due and is not in arrears and the termination and eviction are to allow for new property development, which means renovating to provide market-rate housing or to use the property for a purpose other than providing housing to older tenants. 2023 Tenn. Pub. Acts 400. n
Specific testamentary gifts are a very important component of a will. They help clients pass important family heirlooms as well as transfer assets of high value. A specific gift can invoke a complicated and tedious process for the estate planner and for executors. Specific gifts of tangible personal property require precise descriptions with sufficient detail so that a person completely unfamiliar with the testator’s property may determine exactly what property is being gifted.
The necessity for specific detail is enhanced when gifts of similar nature are being gifted to multiple beneficiaries. For example, assume a client has 10 rings and she wishes to give them to 10 different grandchildren. Each ring would require a description with sufficient specificity to ensure that the executor transfers the correct ring to the correct grandchild.
Traditionally, the estate planner needs to include lengthy and tediouslydrafted descriptions in the will. But could an estate planner alleviate the uncertainty surrounding specific gift descriptions through the insertion of photographs of the property being described? An insertion of a photograph of the item, coupled with the description, would provide an additional layer of assurance to the testator that the gift will take effect as intended.
This article discusses the viability of this technique and the steps estate planners should take if they elect to try this untested technique.
Before discussing the procedure of photo insertion, it is important to review the basic types of specific gifts and the traditional methods of description. Once we have a common basis
Gerry W. Beyer is the Governor Preston E. Smith Regent’s Professor of Law at Texas Tech University School of Law in Lubbock, Texas. Scout S.
of understanding and appreciate the type of gift for which the photo tech nique could be effectively utilized, we can explore this possibility in detail.
Specific Gifts. A specific bequest is a gift of personal property (tangible or intan gible) that is identified in the will in sufficient detail that it is clear at the time of will execu tion what item the beneficiary will receive. For example, “I leave my 2020 Subaru Forester [VIN number] to [beneficiary]” and “I leave the gold Rolex pocket watch I inherited from my grandfather that has the initials OFB engraved on the back to [beneficiary].”
For tangible personal property, descriptors such as size, color, weight, composition, manufacturer, model number, serial number, and similar characteristics are needed. For example, instead of giving “my gold ring,” provide a description such as “my 18K white gold ladies ring with a 2.50ct round brilliant ‘Thacker Signature Diamond,’ F in color and SI1 in clarity, EGL certified #54628194 and 24 round brilliant cut diamonds at 0.37ct total weight, G in color and VS2 in clarity weighing 8.30 grams.”
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Specific gifts of a general nature raise additional concerns that the estate planner needs to address when preparing the testator’s will as described below. The photo technique is less likely to resolve these important issues.
Assume that the testator states, “I leave my car to [beneficiary],” and then dies owning several cars. Which car does the beneficiary receive? Is it the car that the testator owned at the time of will execution if the testator still owns it? Is it the newest car? Is it the most or least valuable car (Lamborghini vs. Gremlin)? Thus, if a testator desires to make this type of gift, express instructions are needed to resolve the situation, such as allowing the beneficiary to select a particular
car, indicating that the gift is the car with the highest or lowest fair market value, or describing another method to determine which item the beneficiary receives.
Under the same assumption, what happens if the testator either does not own a car or owns a car along with other vehicles? Does the term “car” include an SUV, truck, RV, or motorcycle? A dispute may arise regarding whether the term “car” is ambiguous and how “far” from a traditional car the term encompasses. It would seem easy to include an SUV, a bit harder to include a truck, and more of a stretch to include an RV or motorcycle. Similarly, consider, “I leave all my books to [beneficiary].” Would the beneficiary be entitled to the testator’s collection of magazines or graphic novels (comic books)? The testator needs to explain how to resolve these situations.
The photo insertion technique is best suited to specific gifts of tangible personal property rather than specific gifts of a general nature. The insertion of a photo along with the description of a specific item is a simple method that has the potential to be incredibly effective. It is an easy technique that enhances an estate planner’s ability to provide adequate detail for identification. It is often said that a picture is worth a thousand words, “meaning that complex and sometimes multiple ideas
can be conveyed by a single still image, which conveys its meaning or essence more effectively than a mere verbal description.” See Wikipedia, A Picture Is Worth a Thousand Words, https:// en.wikipedia.org/wiki/A_picture_is_ worth_a_thousand_words, (Apr. 10, 2023) (explaining the interesting history surrounding this phrase). This is especially true when applied to descriptions of specific gift descriptions in a will. Even the most eloquent writers cannot reproduce the specificity and clarity a photograph can provide. Photos serve as a visual aid and are more difficult to misconstrue or misinterpret, unlike a written description.
directly following the corresponding description of the gifted item.
Each inserted photo should be numbered. This number can be included physically in the background when the photograph is taken or can later be inserted digitally. After the photograph has been assigned a number, the corresponding number for the photograph should be referenced directly in the item’s description. The photo of the item should directly follow the written description. It is important to keep the description and the photo as close together as possible so no confusion or error of correspondence arises.
photographed. Ensure the metric is correctly scaled and the units of measurement can be easily read.
• Take special care to number the items and photos as they are taken. With the possibility of multiple images taken of multiple items, it is imperative the items and images are numbered as they are produced to alleviate any future confusion.
Below are some best practices to consider when taking the photo to be used in the will.
• Use a high-quality camera or smartphone. The higher the resolution, the greater the detail that will be captured. Ensure the area in which the photo will be taken is well lit. Unnecessary shadows or glares could diminish the quality of the image and make identification of similar items difficult.
The technique of photo insertion is straightforward in practice. The will drafter may take a photograph of the item using a digital camera or a smartphone. The cameras built into smartphones are often of great quality and can produce a high-resolution image. After the photo is taken, it can then be resized to fit neatly in the ensure that only the gifted item is displayed. After the photo has been appropriately resized and cropped, the photo can then be electronically inserted into the will. The photo should be inserted
Use a solid background behind or underneath the item. A solid color that is unlike the colors of the photographed item allows the display of an item’s components and details without the conflict of its surroundings.
Take multiple photographs with different angles of an item. This can be especially useful when dealing with an estate containing multiple items of a similar nature. For example, a wide shot of an entire ring, coupled with a close-up shot of the serial number engraved on the inside of the band will be very useful in identification.
• If necessary, include a ruler or alternative metric to demonstrate the size of the item being
• Save all photos to an alternative source, i.e., one that is different from the internal storage of the camera or phone used to take the photo. After downloading the photographs from the camera’s memory card or from the smartphone, save digital copies. Create a separate folder within the client’s file, and save all the images separately. Saving each photo with the client’s name and the correct assigned number will make a quick account of all photos and strengthen organization.
Use of this technique is relatively untested, both legally and practically. In this section, we focus on issues directly related to the will itself. In the next section, we will discuss how photos are being used in similar legal situations that should bolster acceptance in a will context.
Description. The possibility of the insertion of the wrong image or a formatting malfunction within the will itself could present serious issues in probate. An estate planner should take special care to ensure that all photos and descriptions correspond to the correct gift. A description of one item coupled with a photograph of another could cause an issue in the allocation of the gift and could ultimately result in litigation. A specific gift description with a written description referencing one item and an included photo referencing another item would result in uncertainty of the testator’s intent. Would the written description prevail? Or would the included photo take precedence? Unless
it was clear that the picture was associated with a different specific gift, it is likely the photo would prevail, as it is more difficult to dispute or misconstrue the identity of a specific gift depicted in a photo than a written description. Could extrinsic evidence be allowed to determine which one should be given deference? Could a default rule be established to limit confusion? It is likely that extrinsic evidence could be permitted in the determination of whether the photograph or written description should be prioritized.
Image Alteration. Another factor to consider with the photo insertion technique is protection against editing or photo alteration. Although the photograph will be directly inserted into the will by the estate planner and authenticated by the testator when executed, future conflict could require proof of the validity of a photo. One way to aid in protection could be including a watermark within the photo. There are many online services that create watermarks for little to no cost. A unique watermark could be inserted in the photo prior to it being inserted into the will. If a will contained images with an original and unique watermark, any claims of an alternative photo being the true original could be disputed due to lack of a watermark inclusion. Photographs inserted in the will could also be protected with a certificate of authenticity. The estate planner or the testator could issue certificates for each image included within the will to substantiate the authenticity of the inserted photos.
Copyright Infringement. Publication of another’s property by photo could warrant need for permission. It could be necessary to obtain a written release if the property that appears in the photograph is subject to copyright. A will becomes public record when probated and the probate could act as an impermissible publication of an artwork, painting, photograph, or other tangible item. In such cases, the photo technique is not advisable unless the client obtains a written release from the copyright holder.
The technique of photo insertion within legal documents is just starting to receive significant publicity and discussion. Technology advancement has increased considerably in recent years. Its speed and level of progression has proven difficult to adapt to for many professions. Rapid advancements have left little time for consideration of the effect and consequences new technology could bring. There is limited evidence of the insertion of photos within legal documents and almost no discussion of the practice. Yet, this has not stopped attorneys and judges from utilizing the photo insertion technique. As of now, no appellate case or litigation could be located regarding the insertion of a photograph for a specific gift in a will. There have been, however, instances outside of the estate planning area with successful photo insertion in legal documents.
Pleadings. In Gordon v. DreamWorks Animation SKG, Inc., 935 F. Supp. 2d 306 (D. Mass. 2013), animator and illustrator Jayme Gordon filed a copyright infringement complaint against DreamWorks Animation SKG, Inc. and DreamWorks Animation LLC (collectively referred to herein as “DreamWorks”), and Paramount Pictures Corp., alleging DreamWorks had stolen his characters and the story on which the animated film Kung Fu Panda was based. His original complaint contains dozens of pictures of the plaintiff’s copyrighted work, as well as from the multimillion-dollar Kung Fu Panda movies and licensed products. Like an image would be used in a specific gift description, the inclusion of the implicated work was used to identify the images Mr. Gordon was referencing as having been stolen. In this case, the insertion of an image was allowed for purposes of identification. The same logic could be applied to photo insertion in a will.
In re Apple Inc., FTC File No. 1123108, Docket No. C-4444 (F.T.C. Mar. 25, 2014), https://www.ftc.gov/system/files/ documents/cases/140327applecmpt. pdf, is another example of successful photo insertion in a pleading. The
FTC filed an administrative complaint claiming Apple software allowed children, while playing in apps, to purchase in-game bonuses, which were then charged to their parents. The FTC alleged that Apple was using in-app purchases in apps that were marketed to children as young as four. The complaint resulted in an unprecedented settlement under which Apple will reimburse over $32 million to parents who were charged for in-app purchases without their consent. In the complaint, FTC used images of screenshots of a children’s game in the app store. The screenshots were used to demonstrate this misleading nature of a “FREE” app for children that contained several inapp purchase options of which children were taking advantage. The inclusion of the implicated work was used to strengthen the point being made by the FTC. The image insertion was used in support of the written argument. The same logic could be applied to will insertion when coupled with a written description of the gifted item.
Briefs. There are many examples of photographs being inserted into legal briefs. One commentator has stated, “When done in a careful, meticulous, professional manner, the visual approach to brief writing is the answer to a busy trial judge’s prayer. Instead of volumes of attachments at the end of a brief, the most important images are right there embedded in the text, where they are the most helpful. . . . And as brain research shows, they are more quickly and accurately processed than words. For example, no matter how artful, describing a scene in words will never create a sharp mental image for the reader. This problem is completely avoided with a picture in the brief.” William S. Bailey, “Show the Brief”: Lawyers Can Be Better Communicators by Bringing Visuals to Their Briefs, www.ABAJournal. com, Nov. 30, 2022.
Court Opinions. Appellate court justices are increasingly including photos in their opinions. For example, in Carnival Cruise Lines, Inc v. Shute, 499 U.S. 585 (1991), cruise ship passengers brought action against the cruise line seeking damages for injuries
sustained in slip and fall. The motion for dismissal by the cruise line was sustained due to the forum selection clause. The Supreme Court held that the forum selection clause in the ticket, requiring all litigation be brought in Florida, was reasonable and enforceable. In Justice Stevens’s dissent (joined by Justice Marshall), he included a photo of the actual ticket passengers received when they purchased the cruise vacation. In his argument, he discussed the physical characteristics of the size of font used on the back of the ticket by directly referencing the photo included in his opinion. The same practice could be applied to photo insertion in a will, especially as to reference of the physical characteristics of the item being gifted.
Although the insertion of photos in the above cases are not directly tied to wills, they serve as examples of successful photograph inclusion within legal documents. There appears to be no current legislation or case law related to photo insertion in wills. This revolutionary technique is sure to raise concerns, however, and enabling legislation may be needed.
The potential roadblock to successful use of photos in wills is the definition
of the term “will” used in states across the country. Almost all of the relevant code provisions of states require a will to be “in writing,” be it a physical writing or an electronic one. What is a “writing”? The generic definition in Black’s Law Dictionary presents a hurdle for the use of photographs to be considered a “writing” as it defines a writing as “[a]ny intentional recording of words in a visual form, whether in handwriting, printing, typewriting, or any other tangible form that may be viewed or heard with or without mechanical aids. This includes hard-copy documents, electronic documents on computer media, audio and videotapes, e-mails, and any other media on which words can be recorded.” Writing, Black’s Law Dictionary (11th ed. 2019) (emphasis added). This definition places emphasis on the notion that a “writing” requires the use and recording of words. Would a photograph be considered “words”? A beneficiary of a specific gift with a clear photo in the will but with an insufficient written description would argue “yes,” while the residuary beneficiary would claim the gift fails for indefiniteness and that the picture is not “in writing” and thus cannot be considered.
Dating all the way back to at least 1882, courts have utilized photographs, when taken together with the written document, to determine the wishes of the testator. See Garrett v. Wheeless, 69 Ga. 466 (1882) (considering the totality of circumstances, the court held that where a will was found alongside a picture of the only purported legatee, this was enough to remove any uncertainty about the testator’s identification of the legatee). It is not such a huge step to believe that courts will approve of the insertion of photographs in descriptions of specific testamentary gifts of personal property.
This technique could simplify and clarify specific gift bequests in a way estate planning has never seen before.
While the practice currently has no legislative regulation or support, it could potentially become an essential technique when preparing wills. Below is a concise list of the key techniques you should employ if you elect to insert photographs of specific testamentary gifts of personal property.
• Before taking the photo, ensure the background, lighting, necessary equipment, and the item itself are in order.
• Take the photograph of the item using a high-quality digital camera or smartphone.
• Resize or crop the image appropriately to ensure it will fit well within the confines of the will.
• Consider employing techniques like watermarks or certificates of authentication to strengthen the photo’s authenticity.
• Obtain any necessary permissions to place copyrighted images on the public record.
• Take special care to ensure the correct photo is inserted directly following the description of the item being gifted. Reference the photo directly by number in the written description. The number referenced must directly coordinate with the image inserted below the description of the specific gift. Have the client confirm all photographs are inserted with the correct written descriptions before will execution.
Important Warning: Given the untested nature of the photo insertion technique, the estate planner should not rely on the photo as the sole means of identifying a specific gift. Instead, the picture should complement an accurate text-based description. Using a photo in this case has the potential of providing significant benefits to the estate planner, executor, and beneficiary with little downside risk. It appears that the worst the court would do is to ignore the photo and rely only on the text-based description. n
Financial statements and valuation reports tell stories— stories about the business that is the subject of the financial statements. Unlike a novel, whose plot reveals itself as you read, many of the stories in financial statements are hidden and you must dig below the surface to find them before you can use them. It’s easier for people to remember and understand numbers as part of stories, rather than just the numbers themselves.
This article will discuss the key financial statements for a business and ways to use them to uncover the full stories that they tell, as well as describe how they are used in valuation reports. An individual’s financial statements are very similar and are built on parallel accounting principles.
Stephen J. Bigge, CPA/PFS, is a partner at Keebler & Associates, LLP. Timothy K. Bronza is the president of Business Valuation Analysts, LLC. Abigail R. Earthman is a partner at Perkins Coie LLP. Bruce A. Tannahill is a director of advanced sales with a large mutual life insurance company.
The stories provide information about the company’s financial health: How is it doing? Is it likely to continue in business or is it at risk of failing? The stories help you understand the entity’s operations and its primary market: How does it produce income? Who are its customers? What kind of expenses does it incur? You can often approximate the financial fitness of one entity by comparing its financial statements to the statements of other entities.
Together, financial statements and a valuation report can tell the story of a business. For the story to be effective, the financial statements and valuation report must be consistent. Otherwise, the story will fall apart.
Lawyers should understand the basics of financial statements so that they can ask questions of the certified public accountant (CPA) and appraiser about what stories were told through the financial statements. The financial statements can help you understand a company’s financial health: Is it a viable going concern? Can it continue without major changes?
By delving into the financial statement details, you get an
By Stephen J. Bigge, Timothy K. Bronza, Abigail R. Earthman, and Bruce A. Tannahill
overview of how the company operates: where it gets its money, where it derives its profits, and how it spends its money. Combining financial data with information obtained from the company’s management should provide a good overall picture of the company.
There are three key financial statements, also referred to as the accounting trinity:
• Balance sheet,
• Income statement, and
• Statement of cash flows. We’ll look at the purpose of each financial statement and include an example of each.
A balance sheet presents an entity’s assets, liabilities, and owner’s equity at a specific point in time, often the end of a month, quarter, or year. See Figures 1 and 2. The relationship among the assets, liabilities, and owner’s equity may be expressed as an equation: Assets = Liabilities + Owner’s Equity. Balance sheets are often displayed in a table with the assets on the left side and liabilities and owner’s equity combined on the right side.
Types of Assets. There are two general types of assets: current assets and longterm assets. Current assets are expected to be turned into cash (or cash equivalents) or be consumed in one year or less. These assets include cash, receivables, inventory, and prepaid expenses (expected to be used within one year).
Long-term assets are expected to be retained by the business for more than one year. Examples are land, buildings and improvements, machinery and equipment, investments, and notes not expected to be received within one year.
Marketable securities can be either current assets or long-term assets, depending on the nature of how they’re being held and the intentions for those marketable securities.
Intangible assets have value to the entity but do not have physical form. Examples include patents, copyrights, trademarks, and goodwill. Goodwill may be described as a basket of intangible assets that cannot be sold or exchanged in the marketplace and can be identified only with the business as a whole. Goodwill is recorded only when an entire
business is purchased because goodwill represents “going-concern” value and cannot be separated from the business as a whole.
Types of Liabilities. Current liabilities are debts expected to be paid within one year or less. Common current liabilities include accounts payable, accrued payroll expenses, accrued tax liabilities, and unearned revenues. A common form of unearned revenues is rent that has been received for periods extending beyond the balance sheet date. For example, if a tenant paid rent for January on December 30, the payment would appear as unearned revenues on a December 31 balance sheet because the tenant’s occupancy of the property in January has not yet occurred.
Long-term liabilities are those not expected to be paid within one year, such as notes payable, mortgages payable, and bonds payable. Amounts due on a note, mortgage, or bond within one year should be reported as current liabilities.
Types of Owner’s Equity. The financial statement presentation for owner’s equity differs between corporations and other types of entities (sole proprietorships, partnerships, and LLCs).
Noncorporations (sole proprietorships, partnerships, LLCs) generally break down their owner’s equity into the capital account and the draw account.
• The capital account reflects contributions by the owners to the entity and the accumulated net earnings and losses. A company may have two different types of equity:
o Preferred equity provides a liquidation preference, guaranteed rate of return based on the amount of capital contributed, or both. It may or may not have voting rights.
o Common equity generally controls the entity through the voting rights.
• The draw account reflects the cumulative distributions made to the owners.
For corporations (C corporations and S corporations), owner’s equity is broken down into contributed capital, retained earnings, and treasury stock. Unlike noncorporate entities, separate accounts are maintained for contributed capital and retained earnings.
• Contributed capital reflects contributions by the shareholders to the entity.
o Par value is the value set in the corporate charter as the minimum price at the initial offering.
o Additional paid-in capital (“capital surplus”) is the excess of the actual price paid over the par value when the shares were issued.
• Retained earnings are the corporation’s cumulative earnings less dividends paid.
• Treasury stock is the value of the corporation’s own stock it has repurchased.
Key Balance Sheet Concepts. When reviewing a balance sheet, there are several key concepts to keep in mind:
• Balance sheets are usually reported at cost.
• Fixed assets are reported at their depreciated value (cost minus accumulated depreciation).
• Intangibles are reported at their net amortized value (cost minus accumulated amortization).
• Certain assets must be reported at their “net realizable value” (i.e., how much the entity could get for the asset if the entity were to liquidate):
o Accounts receivable.
o Inventory.
• Under the “conservatism principle,” assets are slow to be recorded and quick to be written down, while liabilities are quick to be recorded and slow to be written off.
Assets such as fixed assets and intangibles that are shown at a net value may be shown either at their cost value less the accumulated depreciation or amortization or simply at their net value.
An income statement (sometimes called a “profit-and-loss statement” or “P&L statement”) shows the entity’s economic performance over a period of time, such as from January 1, 2023, to December 31, 2023. This differs from a balance sheet, which is a snapshot of the entity’s financial position on a specific date. An income statement is usually a good indicator of where the entity is headed financially.
An income statement reports the entity’s revenues, cost of revenues or cost of
goods sold (COGS), expenses, and other items. Two equations show the relationship among the income statement components:
Revenues – Cost of Revenues =
Revenues represent gross income from the entity’s continuing operations. Revenues are generally recognized when earned, not when cash is received. This is known as the accrual basis of accounting. Most entities use the accrual basis of accounting, but most individuals use the cash basis of accounting. For tax purposes,
individuals must use the cash basis.
Cost of revenues or COGS represents expenses directly related to producing the goods, services, or both that are sold. These expenses often include:
• Direct materials.
• Direct labor.
• Allocable indirect expenses (overhead):
o Wages and salaries paid to material handlers and maintenance people.
o Rent paid on equipment leased to produce products.
o Depreciation on assets used in production.
o Utilities paid that are related to production.
Expenses not directly connected to
producing goods or services are many times shown separately and often include:
• Selling expenses, including salaries and wages of sales and marketing staff or research and development staff.
• Marketing expenses.
• Research and development costs (may also be included in cost of revenues or as a separate type of expense).
• Administrative expenses (executive management salary and legal and professional costs).
• Head office building.
Other income and expense items not directly related to the entity’s primary business are shown separately. These frequently include interest income, interest expense, gains and losses, and income taxes. Figure 3 presents an example of an income statement.
Key Income Statement Concepts. Key concepts to keep in mind when reviewing an income statement are:
• Income and expenses are generally reported in the period incurred, not when paid (the accrual method of accounting).
• The “conservatism principle” requires adjusting revenues downward if the company expects that the full amount will not be received.
• Expenses are usually quick to be recognized if the company expects that they will be incurred.
• Cost of revenues or COGS includes only expenses directly related to the production of income.
• “Other items” (e.g., gains and losses from sales of assets, interest income, interest expense) are reported after net operating income because they are not part of the entity’s ongoing operations.
A statement of cash flows (sometimes called a “cash flow statement”) measures an entity’s cash inflows and outflows over a period of time (e.g., January 1, 2023, to December 31, 2023). As with the income statement, it’s most often measured annually and quarterly.
The statement of cash flows reconciles the beginning and ending balances of the cash account and is normally used
to see how the entity is managing its cash receipts and disbursements. Although it measures the entity’s activity over a period of time like an income statement, the statement measures cash rather than income and so can produce very different results. Cash flow may not equate to profitabil-
and
may not result in cash flow.
For estate planning purposes, the statement of cash flows may be useful to analyze if there is sufficient cash flow and liquidity to settle obligations created as part of the estate plan.
The statement of cash flows shows the results of cash flows from three different sources:
• Operating activities,
• Investing activities, and
• Financing activities.
Cash flow from operating activities starts with the net income shown on the income statement and adjusts it for certain items. The following items are added back:
• Depreciation and amortization.
• Losses from the sale of assets.
• Decreases in most current assets (e.g., inventory and receivables).
• Increases in most current liabilities. The following items are subtracted:
• Gains from the sale of assets.
• Increases in most current assets (e.g., inventory and receivables).
• Decreases in most current liabilities.
Figure 4 shows an example of a statement of cash flows from operating activities.
Cash flow from investing activities measures the cash inflows and outflows from sales and purchases of long-term investments, such as capital assets. Long-term investment purchases decrease cash flows, and sales of long-term investments increase cash flows. Figure 5 presents the portion of the statement of cash flows reflecting investing activities.
Cash flow from financing activities measures inflows from issuing or acquiring new debt, new stock, or both and outflows from paying dividends and long-term debt. Items that increase cash flow:
• Issuing or acquiring long-term debt.
• Issuing more stock. Items decreasing cash flow:
• Repaying long-term debt.
• Paying dividends.
• Purchasing treasury stock.
Figure 6 presents an example of the portion of the statement of cash flows from financing activities.
Figure 7 presents the hierarchy of financial information by source. It provides users of the financial information guidance on the assurance, quality, and reliability of the statements.
“Level of assurance” refers to the level of confidence provided by a certified public accountant, based on the extent of the CPA’s testing and examination of the financial information.
“Type of assurance” identifies that the confidence in the information presented
is positive or negative or no assurance is being provided. Positive assurance involves a CPA providing an opinion that indicates the financial statements fairly represent the financial results and financial position in all material respects. Negative assurance involves a CPA indicating that nothing has come to the attention of the CPA during the scope of services that the financial statements do not fairly represent the financial results and financial position of the entity. No assurance indicates that a CPA’s scope of services is such that no assurance is provided or a CPA is not associated with the financial information of the company.
The ultimate responsibility for the accuracy of the financial statements is with the company’s management, not the outside CPA. Many small companies don’t have the accounting infrastructure or the need to prepare audited or reviewed financial statements.
See the sidebar toward the end of this article for a description of the different types of audited, reviewed, and compiled financial statements that may be prepared by a CPA.
Financial statements tell a company’s story, albeit in numerical form. A well-prepared valuation report connects the story of the company to the details of the numbers. A valuation driven solely by a story falls apart without solid financial (quantitative) support. Similarly, a valuation driven solely by the numbers falls apart without solid qualitative support.
It is important for the appraiser to keep the intended audiences in mind. Usually, the audiences include the estate planning attorney, a tax controversy lawyer, an IRS estate and gift tax examining attorney, an appellate conferee, and a Tax Court judge. This audience tends to be more verbally oriented than quantitatively oriented, making the story more important.
When material financial information isn’t explained, or isn’t explained well, the attorney is likely to raise inquiries and ask probing questions to vet the information.
Analyzing a company’s financial statements is central to identifying strengths and weaknesses (assessing risk). Although past results don’t predict future
performance, analyzing past results provides a proxy for the future and a basis for the appraiser’s judgments about future results (assessing growth prospects). This is especially the case when the company doesn’t have the ability to provide forecasts and budgets. Financial statement analysis most often involves a comparison of the company against other companies in their industry.
An appraiser’s financial statement analysis involves several steps:
1. Prepare comparative historical financial statements (income statement and balance sheet), typically for five years.
2. Apply normalizing adjustments, controlling interest adjustments, or both.
3. Prepare a trend analysis for both revenue and earnings.
4. Prepare common size analysis to historical adjusted financial statements.
5. Prepare an analysis of financial ratios, inclusive of liquidity, activity, profitability, and coverage or leverage ratios.
6. Assess the risk and growth prospects of the subject company and its industry peers.
7. Incorporate the conclusions formed from financial statement analysis consistently throughout the valuation methodology.
The importance of financial statement analysis in appraisals has long been emphasized by the IRS and other official entities.
The IRS’s detailed valuation guidance came in Revenue Ruling 59-60 (1959-1 C.B. 237), which set out valuation guidelines. The agency recommends the appraiser obtain two or more years of balance sheets, a balance sheet as of the month end preceding the appraisal date, and detailed income statements for the preceding five years. The ruling notes the variety of information shown on balance sheets and income statements and emphasizes the importance of comparing the financial statements over a period of years. When the IRS receives an
appraisal, the first thing it looks for is how the appraisal conforms to Rev. Rul. 59-60. Any deviation from that ruling or standard practice may be flagged for further scrutiny.
The Valuation Training for Appeals Officers Coursebook (Training 6126-002, Rev. 05-97) notes that analyzing financial statements tell a great deal about a business’s strengths and weaknesses. It recommends that the analysis include a comparison of certain key ratios with either a standard for the industry or selected comparable companies.
Internal Revenue Manual 4.48.4, Engineering Program, Business Valuations Guidelines (July 1, 2006) states that historical financial statements should be analyzed and adjusted as necessary to
reflect the appropriate asset value, income, cash flows, or benefit stream, as applicable, to be consistent with the appraiser’s valuation methodologies.
The Uniform Standards of Professional Appraisal Practice (USPAP) were developed following the 1980s savings and loan crisis. USPAP sets out recommended procedures and ethical standards for appraisers and is updated every two years. The Appraisal Subcommittee of the Federal Financial Institutions Examination Council, created by Congress in 1989, works with the Appraisal Standards Board of The Appraisal Foundation to monitor state supervision of appraisers. USPAP is not binding for federal tax valuation but is binding on the appraisers who are members of member appraisal organizations
of the Appraisal Foundation. Tax Court judges often refer to these standards. For appraisers, USPAP serves a function similar to that served by generally accepted accounting principles (GAAP) for accountants. Standards Rule 9-4, Approaches to Value, subsection (b)(iii), states that an appraiser must analyze the effect on value of past results, current operations, and future prospects of the business enterprise when necessary for credible results. This is the essential goal of financial statement analysis.
Appraisers adjust financial statements to present the financial statements to reflect normal operating conditions or to value business interests that possess control of an entity. The adjustments may affect the income statement, balance sheet, or both, and are classified as either (1) normalizing or (2) controlling adjustments.
Normalizing Adjustments. Normalizing adjustments attempt to account for items shown in the historical financial statements by eliminating unusual and nonrecurring items that distort historical operating results or financial position. For example, income from the forgiveness of Paycheck Protection Plan loans is expected (and hoped) to be a one-time event. Other examples of common normalizing adjustments include:
• Segregating nonoperating assets or liabilities from those related to the business’s operations.
• Accounting for excess operating assets.
• Using the applicable accounting principles.
• Reflecting taxes imposed on the business’s operations.
Controlling Adjustments. Appraisers apply controlling adjustments when valuing a majority (more than 50% of the voting equity) interest in an entity. These adjustments reflect a majority or controlling owner’s ability to control or influence the amount paid in dealings with related parties or for expenses that are personal and unrelated to the business. Controlling adjustments are not appropriate for the valuation of a minority interest. Common controlling adjustments include:
• Adjusting owner compensation up
or down to market compensation.
• Non-arm’s-length transactions.
• Discretionary expenses.
• Rental expenses paid to related parties.
• Other related-party or non-arm’slength transactions.
If material omissions or deficiencies are present in the financial statements (e.g., not having the statement of cash flows), it’s up to the appraiser’s discretion to determine the effect of the deficiencies and determine whether a reliable opinion of value can be provided. If the appraiser concludes that such an opinion cannot be provided, the appraiser has a professional responsibility to withdraw from the engagement. The appraiser should clearly and prominently disclose any material omissions or deficiencies related to the financial data that are relied upon for the opinion of value.
Once normalizing and controlling adjustments have been made, the next step in discovering the story of the financial information of the business is to analyze the financial statements. The analysis varies with the business, but commonly includes trend analysis, common size analysis, and financial ratio analysis.
Trend Analysis. Identifying trends can be helpful to ascertain how a business is performing. Trend analysis frequently involves reviewing historical results (e.g., gross revenues, gross profits, net profits, etc.) over a period of time. After identifying trends, the appraiser can investigate the reasons behind the trends and determine how the trends affect the business value. There should be a logical explanation for the variations in historical income statements and balance sheets in the narrative and the report.
Common Size Analysis. Common size analysis reviews comparative balance sheets and comparative income statements over time, seeking to identify trends and variations that require explanations. For the balance sheet, each balance sheet account is presented as a percentage of total assets. On the income statement, each income statement account is presented as a percentage of total revenues.
Common size analysis should also involve comparing prior budgets (if available) against historical financial information to judge the reliability of the current budget. Finally, the appraiser should review the strategic plan and discuss the future outlook of the company with its management with an eye for how the prospective financial information compares with historical financial information.
This appraisal should include a qualitative analysis of variations, not just the financial information itself.
Financial Ratio Analysis. Financial ratio analysis compares the financial ratios of the subject company against financial ratios of the company’s industry peer group. The industry metrics are obtained either from public guideline companies or from reliable sources that compile data on private companies. Optimally, financial ratio analysis will consider liquidity, activity, profitability, and coverage or leverage ratios.
Liquidity Ratios. Liquidity ratios measure a company’s ability to meet its current obligations. Generally, the higher the ratio, the better the company’s financial health. Common liquidity ratios are:
• Current ratio Current assets divided by current liabilities. This ratio shows the company’s ability to meet its current obligations.
• Quick (“acid test”) ratio. Cash equivalents plus accounts receivable divided by current liabilities. The quick ratio uses only those current assets that can be accessed quickly, excluding current assets such as inventory and prepaid expenses. Because it uses only the most liquid assets, the quick ratio is a more conservative measure than the current ratio.
Activity Ratios. Activity ratios measure how efficiently a company utilizes its assets. Common activity ratios include:
• Accounts receivable turnover ratio. Revenues divided by accounts receivable. This shows how long the company takes to collect its accounts receivable. The shorter the period, the better.
• Inventory turnover ratio. Cost of goods
CPAs issue three different types of reports on financial statements. The CPA’s level of assurance varies depending on the type of report they have been engaged to provide.
Audited financial statements are financial statements prepared by the entity and examined by a CPA. The goal of auditing financial statements is to determine whether the statements fairly present the entity’s results, financial position, and cash flows, in accordance with GAAP. The auditor will:
• Test and evaluate the company’s internal controls by reviewing the policies and procedures established to provide reasonable assurance of the veracity of the financial information to determine their effectiveness and the reliability of the financial statements,
• Evaluate the company’s assumptions reflected in the financial statements, and
• Test the amounts and information in the financial statements to the company’s records, and request confirmation from third parties for financial information of a material amount.
The auditor does not examine all transactions, instead relying on a combination of adequate planning, evaluation of internal control testing , and judgment to determine the amount of evidence required before forming an opinion on the financial statements.
After completing an examination of the company’s financial records and statements, the auditor will issue an opinion on the financial statements. There are four types of opinions:
• Unqualified (clean) opinion. States that the financial statements fairly present the company’s financial condition, position, and operations in accordance with GAAP.
• Qualified opinion. Issued if the financial statements do not follow all of the elements of GAAP that apply, the auditor was not able to verify certain material information, or the audit was limited. The opinion will state the reason for the qualified opinion.
• Adverse opinion. Issued if the auditor believes the financial statements aren’t presented fairly in accordance with GAAP. The opinion will normally outline the reasons for the adverse opinion.
• Disclaimer. The auditor does not express any opinion on the financial statements. Disclaimer opinions may be
sold divided by inventory. A low ratio may indicate weak sales or excess inventory, but a high ratio can indicate strong sales or low inventory.
• Working capital turnover ratio. Revenue divided by net working capital (current assets minus current liabilities). The higher the ratio, the more efficient the company is at using its working capital to generate revenue.
issued if the company significantly limited the scope of the audit, the auditor has significant doubt that the company can continue as a going concern, or there exists an absence of reliable financial information.
Reviewed financial statements are financial statements prepared by the company, followed by a CPA performing analytical procedures and making inquiries of the company’s management and others to determine whether any material modifications to the financial statements are necessary to bring them into compliance with GAAP.
As with an audit, after completing a review of the financial statements, the CPA will issue a report stating the CPA’s conclusion about the reviewed financial statements. Importantly, in contrast to an audit (where the CPA provides positive assurance that the financial statements are fairly stated in conformity with GAAP), the review provides negative assurance, i.e., nothing has come to the CPA’s attention that the financial statements are not in conformance with GAAP. The conclusion may be one of three types:
• Unmodified. The CPA is not aware of any material modifications required for the financial statements to be in accordance with GAAP.
• Modified. The CPA determines that the financial statements are materially misstated and explains this conclusion in one of two ways.
o Qualified conclusion. The effects of the required modifications are material but not pervasive in the financial statements.
o Adverse conclusion. The effects of the required modifications are both material and pervasive to the financial statements.
Compiled financial statements simply present the financial statements based on information provided by the company, without the CPA performing any analytical procedures or making any inquiries about the financial statements. The CPA’s objective is to assist management in presenting financial information in the form of financial statements. The CPA’s report accompanying the compiled statements doesn’t express any opinion on the statements and in thus does not provide any assurance related to the financial statements.
• Total asset turnover ratio. Revenues divided by total assets. The higher the ratio, the more effective the company is at utilizing its assets.
Profitability Ratios. Profitability ratios measure a company’s operating performance. Common profitability ratios include:
• Operating margin. Operating income divided by revenue. The operating margin identifies the percentage of
revenue remaining after deducting operating expenses. The higher the operating margin, the more funds are available to pay nonoperating expenses.
• Net profit margin. Net income divided by revenue. The net profit margin shows the percentage of revenue left after paying both operating and nonoperating expenses.
• EBITDA margin. EBITDA (earnings
before interest, taxes, depreciation, and amortization) divided by revenue. EBITDA approximates operating cash flow by subtracting the noncash expenses of depreciation and amortization from earnings before interest and taxes. The EBITDA margin compares EBITDA to revenue. The result identifies operating profitability and cash flow and makes it easier to compare the profitability of companies with different financial structures.
• Return on assets, pre-tax. Earnings before interest and taxes (EBIT) divided by total assets. This ratio shows how efficiently the company generates profits from its assets.
• Return on equity pre-tax. EBIT divided by owner’s equity. This ratio focuses on how efficiently the company uses its equity, rather than its assets. The use of a measure of return on equity removes the effect of the company’s use of debt to finance its operations.
Coverage and Leverage Ratios. Coverage and leverage ratios measure a company’s risk related to its reliance on debt to sustain its operations. Common coverage and leverage ratios include:
• Interest coverage. EBIT divided by interest expense. This ratio shows the company’s ability to pay interest due on its debt from its operating earnings.
• Debt to total assets. Interest-bearing debt divided by total assets. This ratio measures how much of a company’s assets are financed by interest-bearing debt and can
provide insight into the company’s financial stability. The higher the ratio, the greater the company’s financial risk.
• Total liabilities to total assets.
Total liabilities divided by total assets. This ratio uses all liabilities, including accounts payable, accrued salary, and retirement plan obligations, which are excluded from the debt to total assets ratio. The higher the ratio, the greater the company’s financial risk.
Using the Ratio Analysis. Frequently, companies outperform their industry metrics in some areas, underperform in others, and are comparable in still others. The appraiser should analyze the company in its totality, address the company’s strengths and weaknesses financially, and then conclude how well it compares against the industry metrics. One of three conclusions should be reached: (1) the company is superior financially to the industry peer group, (2) the company is comparable financially to the industry peer group, or (3) the company is inferior to the industry peer group. This sets the stage for a comparison of the capital market evidence used to support the opinion of value.
A company’s financial statements tell a story of the company’s financial performance and financial position. The valuation narrative should reflect the appraiser’s financial statement analysis and assessment of the company’s risk and growth prospects. Those should be extended to other aspects of the
valuation analysis and be consistent throughout that analysis.
A good valuation will provide a seamless explanation of past financial results that leads to well-substantiated assessments about the company’s future performance, providing the foundation for the valuation.
Valuation revolves around three fundamentals: (i) level of earnings—trying to ascertain that through financial statement analysis, (ii) risk associated with the earnings, and (iii) growth prospects. A good framework to use when looking at valuations involves going back to those three fundamentals that really drive value. The conclusions related to these fundamentals should be woven into the valuation narrative.
Learning about financial statements and valuation is an art—it’s really learning a whole new vocabulary. The more fluently lawyers can use that vocabulary with the appraiser and CPA, the more effective those conversations will be. Without that general background, an attorney can’t have the initial conversation to tell the appraiser, “I like what you’re doing here, but I think you missed adequate consideration of this concept that can affect the overall valuation.” Attorneys who are well positioned to ask probing questions are going to elicit thoughtful responses from appraisers. Appraisers must be independent and objective and make judgment calls, but discussions with knowledgeable attorneys will make an appraiser’s work product much more effective and meaningful, well positioned to realize accepted-as-filed outcomes or, in the event of an examination, quick and favorable resolution. n
CONTRACTUAL WILLS: Agreement creating contractual wills must be valid as a postnuptial agreement. In 1989, Doris and Nathan entered into an agreement to execute wills that would, when both spouses were dead, benefit equally the couple’s children, who were the children of previous marriages of both spouses. In 2015, Nathan executed a will giving his entire estate to Doris if she survived and, if she did not, to her children. Nathan’s children prevailed in their summary judgment motion requesting a determination of the validity of the agreement. Doris’s children appealed, and the intermediate Tennessee appellate court reversed and remanded in Etheredge v. Estate of Etheredge, 2023 WL 5367681 (Tenn. Ct. App. Aug. 22, 2023). The court held that the contract was a postnuptial agreement which is valid only if “knowledgably entered into.” Because the trial court had upheld the validity of the agreement solely on the existence of consideration for its creation, the matter must be remanded for a determination of whether it was actually entered into knowledgeably.
DEEDS: Deed purporting to create tenancy by the entirety construed to create joint tenancy. A father executed a deed purporting to convey residential real estate to himself and his son, Eric, as tenants by the entirety and “unto the survivor of them.” After the father’s death, the probate court interpreted the deed to create a joint tenancy with the right of survivorship. The father’s estate appealed and the District of Columbia Court of Appeals affirmed in In re Estate of Hamilton, 299
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.
A.3d 542 (D.C. 2023). The court held that the case was governed by precedents dealing with attempts to create tenancies by the entirety between two persons who might be able to marry. Those precedents looked to the intent of the grantors of the deeds, decided that the grantor intended to create a joint tenancy with the right of survivorship, and governed this case. In addition, the words of the deed giving the property to the survivor’s personal representatives and assigns are further evidence of the grantor’s intent.
LIFE ESTATES: Damage caused by a remainder beneficiary during the life tenancy may be considered in partition action. After the surrender of the life estate by the grantor, two of the three remainder persons petitioned for partition and asked that the distribution of proceeds reflect the damage the third remainder person, who lived for a time with the grantor, caused to the property. The court granted the petition but ordered that the proceeds of the sale be distributed equally among the remainder persons, holding that only the life tenant is liable for waste committed during the tenancy. On appeal, the intermediate Massachusetts court in Lodigiani v. Pare, 217 N.E.3d 640 (Mass. App. Ct. 2023), reversed, holding that the court has the discretion in distributing the proceeds to consider damage caused by a remainder person. The court expressly did not reach the question of when the life tenant can be held responsible for the acts of others and remanded
the case for determination of whether and how discretion should be exercised.
Clause not violated where beneficiary seeks to enforce fiduciary duty in good faith. The testator’s daughter brought an action seeking to have the decedent’s executor remove a bank account belonging to the beneficiary from the estate and to deduct on the estate tax return the outstanding value of mortgages on real property held in the decedent’s revocable trust and included in the gross estate. The daughter prevailed in the trial court, which also dismissed the testator’s son’s allegation that the daughter had violated the identical no-contest clauses in the will and trust by challenging the actions of the executor and trustee. The Supreme Court of Connecticut affirmed in Salce v. Cardello, 301 A.3d 1031 (Conn. 2023). In an elaborate opinion extensively citing precedents from other states, the court held that actions enforcing a fiduciary’s duties do not violate a no-contest clause so long as enforcement is undertaken in good faith. One justice dissented on the grounds that the policy of allowing beneficiaries to enforce the supervision of fiduciaries does not prevail over the policy of enforcing the testator’s and settlor’s intent.
beneficiary of lapsed pet trust must be decided by extrinsic evidence. The decedent’s will created a trust for the decedent’s dog with the remainder to charities to be selected by the trustees. The residuary clause gave the residue to the trustees of the pet trust. The dog predeceased the testator. Some of the decedent’s heirs opposed probate of the will, and the trial court granted summary judgment for the executor, holding that the remainder to charity took effect under the doctrine of acceleration of remainders. In Matter of Estate of Jablonski, 214 N.E.3d 1051 (Mass. 2023), the Massachusetts Supreme Judicial Court held that the trust had lapsed because under the
pet trust statute, Mass. Gen. Laws ch. 203E, § 408, the trust must terminate at the death of the animal or animals it was created to benefit. The remainder could not be accelerated because the testator’s failure to name a specific charity to receive the remainder creates an “ambiguity” regarding the decedent’s intent if the pet did not survive to be the beneficiary of the trust. Because extrinsic evidence is necessary to resolve the ambiguity, summary judgment was improper, and the court remanded the case.
PRETERMITTED CHILDREN: Devise to class including children prevents pretermission. Oklahoma law, 84 Okla. Stat. tit. 2021 § 132, provides that when a testator omits to provide in the testator’s will for any of the testator’s children or the issue of deceased children, the omitted persons are entitled to the share of the estate they would receive had the testator died intestate unless it appears that the omission was intentional. The testator’s children were not mentioned by name in the testator’s will and objected to probate, asserting the statutory provision applied to them. The district court ruled it did not. The children appealed and the intermediate appellate court affirmed in Matter of Estate of Shepherd, 534 P.3d 1061 (Okla. Civ. App. 2023). The court agreed with the district court that a devise in the will to “all relatives” included the children and therefore the statute did not apply.
SIGNATURE ON WILL: Electronic signature generated by DocVerify is not signature on the will. The decedent executed a document purporting to be the decedent’s will by using DocVerify to affix an electronic signature to the document while in a video conference with the attorney who drafted the will, another witness, and a notary public authorized to perform remote notarization who managed the DocVerify process. The will was denied probate, and on appeal the Pennsylvania Superior Court affirmed in In re Estate of Kittler, 303 A.3d 463 (Pa. Super. Ct. 2023), holding that an electronic signature, even though it is an image of the decedent’s signature, does not meet the statutory requirement under 20 Pa. Cons. Stat. § 2502 that the testator signs the will. The court cited both the statutory requirement that undefined terms be construed according to “their common and approved usage”
under which “sign” means to affix by hand and the statutory exclusion of wills and trusts from the sorts that documents that may be signed electronically under 73 Pa. Cons. Stat § 2260.104.
TRUST CREATION: Trust created using void power of attorney is void ab initio. A parent executed a power of attorney appointing his child as his agent. The parent later allegedly orally revoked the power of attorney and executed a new one naming another of the parent’s children as agent. Before the time at which the child claims to have learned of the revocation, the child as agent created an irrevocable trust for the parent’s benefit and transferred a substantial amount of the parent’s assets to the child as trustee of the newly created trust. The child began a declaratory judgment action for a declaration that the trust was valid. The trial court held that the power of attorney was void because it was improperly executed and that the trust was therefore void. The child appealed and the intermediate appellate court reversed, citing Pa. Cons. Stat. § 5608, which grants immunity to persons accepting a power of attorney without actual knowledge of its revocation. In In re Koepfinger, 302 A.3d 630 (Pa. 2023), the Pennsylvania Supreme Court reversed, holding that because the power of attorney was void, the creation of a trust by exercising authority purportedly granted by the power of attorney was also void.
LIENS: Spouse’s separate share of proceeds from sale of residence cannot be taken to satisfy the decedent’s IRS lien. A husband and wife owned a house in Ohio as joint tenants with rights of survivorship. The husband died unexpectedly and left his wife destitute, unable to pay the two mortgages or federal tax debt. The bank moved to foreclose on the property, the IRS filed a tax lien, and the wife filed for and received innocent spouse relief. The wife sold the home before the foreclosure, and the proceeds went to pay the mortgages and the IRS lien. After receiving the innocent spouse relief, she only owed the IRS a few thousand dollars and
requested a refund for overpayment. The IRS denied her claim. The Tax Court in O’Nan v. Comm’r, T.C. Memo 2023-117, held that the IRS owed her a refund for overpayment. After receiving innocent spouse relief, the wife’s tax debt should be viewed as married filing separately. Accordingly, the tax lien against the wife was much smaller than the tax lien against the husband. The Tax Court ordered the IRS to refund the proceeds in excess of the wife’s separate tax debt. The court held that the entirety of the husband’s one-half share in the home had been exhausted by payment of the two mortgages and that all proceeds paid to the IRS came from the wife’s separate share.
ALABAMA—WILL FORMALITIES: In Strict Adherence to the Wills Act Formalities in Alabama: When Did Dead Hand Control Die?, 46 J. Legal Pro. 341 (2022), Callie Shearer explains how strict adherence to the Alabama Wills Act can sometimes lead to unjust outcomes. Instead of strict adherence, Shearer proposes embracing the harmless error rule and recognizing holographic wills in Alabama to protect the testator’s wishes.
CHARITABLE GIFTS: In Laws Governing Restrictions on Charitable Gifts: The Consequences of Codification, 70 UCLA L. Rev. Discourse 424 (2023), Nancy McLaughlin discusses how the adoption of the Uniform Trust Code and Uniform Prudent Management of Institutional Funds Act resulted in unintended negative consequences for laws governing charitable gifts. McLaughlin outlines these issues and proposes possible solutions.
CHOICE OF LAW: In Alien Powers: Powers of Appointment, “Dogma,” and the Pure Theory of Jurisdiction-Selecting Choice of Law, 97 Tul. L. Rev. 1047 (2023), James Spica discusses the difficulties when trusts are subject to different state laws and the current issues with choice-of-law rules, specifically Restatement § 274(a) and UPAA § 103(2). Spica suggests adjusting Restatement § 274(a) to better align with the preferences for choice-of-law rules.
COMMUNITY PROPERTY: In Community Property and Conflict of Laws: A Cacophony of Cases, 97 Tul. L. Rev. 657 (2023), Karen Boxx highlights the complexity of conflict-of-law issues in cases involving marital property in different states. Instead of traditional choice-oflaw jurisprudence, which has proven inadequate, Boxx suggests courts use a case-by-case approach, considering specific interests, policies, and their effects before making a ruling.
CONFLICT OF LAWS: In Life and Death Matters in Conflict of Laws, 97 Tul. L. Rev. 703 (2023), Alyssa DiRusso explains the complexities of deciding when someone is legally dead because of new advancements in medicine and inconsistencies among state laws. DiRusso emphasizes a need for a clear and consistent way to determine death and provides potential solutions.
DIRECTED TRUSTS: In Directed Trusts and the Conflicts of Laws, 97 Tul. L. Rev. 957 (2023), Jeffrey Schoenblum explains how many settlors are dissatisfied with traditional trust laws. These dissatisfied settlers have leveraged conflict of laws to establish directed trusts in other states while still living in their home states.
DISPOSITION OF REMAINS: In Ashes to Ashes and Dust to a Coral Reef? Modern Disposition of Remains, 50 Est. Plan. 04, Alyx Durachta and Lauren Wolven investigate a range of options for final resting arrangements, highlighting new approaches such as incorporating cremains into artificial reef formations.
DNA TESTING: In Genealogy Sites and Adoptions—Connecting Families or Ruining Them?, 38 Touro L. Rev. 1399, Taylor Bialek examines the impact of genealogy sites on fundamental constitutional rights like the right to privacy and the right to parent and direct a child’s upbringing. The current lack of regulation in genealogy sites poses many risks to these constitutional rights, and Bialek offers possible solutions.
TION: In S(OLD) Multilevel Marketing
Organizations and Elder Financial Exploitation, 30 Elder L. J. 451 (2023), Christopher Opie explores the heightened risk of financial abuse for seniors involved in multilevel marketing companies. Further, Opie proposes improvements in Adult Protective Services statutes and recommends enhanced education for law enforcement, lawyers, and case workers to raise awareness of legal solutions available to elder individuals involved in MLMs.
Gary R. Gehlbach explains planning strategies estate planners should consider, anticipating that “[o]n Jan. 1, 2026, the federal lifetime estate and gift tax exemption will be cut in half (adjusted for inflation)” in To Gift or Not to Gift, Ill. B.J. Sept. 2023, at 38.
GRANTOR TRUSTS: In Can the Surviving Spouse Own a Grantor Trust?, 50 Est. Plan. 08 (2023), Howard Zaritsky, Karen Boxx, Steven Gorin, and Ann Wilson question the grantor status of a spouse after the death of the first grantor. Although some suggest that a married couple can create a joint grantor trust where the surviving spouse automatically becomes the deemed owner, the authors argue that a comprehensive reading of regulations requires each spouse to be deemed the owner “only of the portion of the trust attributable to their contribution.” Thus, a surviving spouse will not automatically transition to a “deemed owner” of the entire trust for income tax purposes unless he or she contributed all the trust assets.
GUARDIANSHIPS: In Guardians of the Elderly: Not Always So Heroic, and Sometimes, Unnecessary and Abusive, 30 Elder L. J. 383 (2023), Kellen Dykstra explores how guardianships can be misused to exploit the elderly. Dykstra proposes legal and administrative procedure changes to help prevent abusive guardianships, such as standardized laws across states, raising certification requirements for guardians, and enhancing court oversight.
HEIR HUNTERS: In Sticky Omitted Choice-of-Law Clauses: The Case of Heir Hunters, 97 Tul. L. Rev. 847 (2023), David Horton explores the assumption that
contracts evolve over time and drafters usually only keep the useful clauses while deleting the others. But some scholars challenge this assumption showing that contract terms or gaps can be “sticky” or resistant to change. Horton examines the puzzling absence of choice-of-law clauses in heir-hunting contracts and proposes possible explanations and how these reasons provide insight into the “sticky” contract terms.
HEIRS PROPERTY: In Splitting Heirs: How Heirs’ Property Continues the Legacy of Challenges to the Accumulation of Wealth for Black Americans, 32 U. Fla. J. L. & Pub. Pol’y 573 (2022), Ryan Cook explores the challenges posed by heirs’ property that often lead to cycles of poverty in Southern Black American communities. Cook analyzes the effect of the Uniform Partition of Heirs Property Act and discusses additional actions to offer much-needed protection in the community.
In Don’t Let Death Be Your Deadline to Get a Will Before It’s Too Late: Expand Holographic Wills Law to Incentivize Will-Making, 30 Elder L. J. 349 (2023), Angela Vallario investigates the reasons behind the lack of wills among Americans and suggests two main ways to encourage will creation. First, she advocates for educating people about why a will is essential. Second, she urges jurisdictions to expand holographic will legislation, making the process more accessible.
In Amending the Illinois Power of Attorney Act: Co-Agents for Health Care Power of Attorney, 72 De Paul L. Rev. 731 (2023), Isabella Loverde explores the benefits of co-agency and urges the Illinois General Assembly to amend the Act to permit the appointment of co-agents for health care powers of attorney.
In The Declining Appeal of Inherited Retirement Accounts, 42 Va. Tax Rev. 267 (2023), Richard Kaplan discusses recent legislation and regulations that have greatly restricted a non-spousal beneficiary’s ability to manage inherited
retirement accounts and explores some planning strategies considering those changes.
MISSOURI—ULTIMATE DEAD
HAND CONTROL: In Missouri’s Ultimate Dead Hand Control: The Development and Relationship between Donative Arbitration Provisions and No-Contest Clauses in Wills & Trusts, 2 J. Disp. Resol. 129 (2023), Hunter Hummell suggests using nocontest clauses and arbitration clauses in wills as a tool to mitigate conflicts. Furthermore, Hummell reviews recent developments and the enforceability of these clauses to serve the client’s interests in preventing litigation.
PARTY AUTONOMY: In Rethinking Party Autonomy in Trust Law, 97 Tul. L. Rev. 1097 (2023), Stewart Sterk questions why individuals should be able to choose the law governing their trusts and avoid their home state’s regulations. Sterk argues that the choice-of-law doctrine needs to be reevaluated to prioritize the settlor’s home state interests and the protection of third parties with claims to trust assets.
PUBLIC POLICY DOCTRINE: In Trust Law’s Public Policy Doctrine: Major Policy Fault Lines, Aggressive Home Rule Legislation, and Implications for Conflicts Reform, 97 Tul. L. Rev. 1147 (2023), Reid Weisbord highlights the tension between settlor intent and public policy doctrine in conflict of law disputes for trust law. Weisbord examines recent developments in public policy doctrine, including “(1) the validity of self-settled asset protection trusts, (2) the use of trusts by applicants for government assistance, and (3) the enforceability of trustee exculpation provisions.”
RETIREMENT: In The Great American Retirement Fraud, 30 Elder L. J. 265 (2023), Michael Doran argues that the retirementreform project starting in 1996 continues to be a “policy scam.” Instead, he suggests a substantial retirement policy reform by reducing subsidies for wealthier individuals, converting tax deductions and credits for lower-income earners into government-funded support for retirement like Social Security, and maintaining the current system for middle-income earners.
SETTLOR’S CHOICE OF LAW: In Trusts and the Choice of Law: What Role for the Settlor’s Choice and the Place of Administration, 97 Tul. L. Rev. 805 (2023), Thomas Gallanis has a timely analysis of the central question: to what extent should a settlor be permitted to select favorable trust law? As billions of dollars are moving into states that supply favorable trust laws, this analysis provides advice for the American Law Institute drafting of the Restatement (Third) of Conflict of Laws and the Uniform Law Commission’s drafting of a uniform act on the conflict of laws in trusts and estates.
STEP UP BASIS: Les Raatz explores strategies to increase basis while limiting exposure to creditors or spendthrifts in Need a Step Up in Basis, 50 Est. Plan. 18 (2023).
SUCCESSION: In Situs and Domicile in Choice of Law for Succession Issues, 97 Tul. L. Rev. 1181 (2023), Christopher Whytock challenges the traditional choice-of-law rule for real property succession issues. He favors a unified approach by proposing an extension of the decedent’s domicile law to encompass both personal and real property succession issues.
TENANCY BY THE ENTIRETY: In Tenancy by the Entirety Property and Transfers to Trusts, 36 J. Am. Acad. Matrim. L. 33 (2023), Julie Cheslik explores the risk to creditor protection when tenancy by the entirety property is transferred to a trust. She examines the laws in many of the tenancy by the entirety jurisdictions in the United States that continue to shield spouses from one partner’s creditors, even if they transfer property to a trust.
TRUSTEE FEES: Jay E. Harker explains that “[a] corporate trustee may be marginally more expensive than leaving the management of a trust to an individual trustee, but the extra cost may not be worth the risk of a total meltdown of the estate plan due to trustee mismanagement or inexperience” in Busting the Myth About Corporate Trustee Fees, Ill. B.J., Sept. 2023, at 34.
TRUSTS: In Validity in Wills and Trusts: Conflict Rules in Search of a Theory, 97 Tul. L. Rev. 887 (2023), Ronald Scalise explores the increasingly common conflict-of-laws issues in trusts and estates. He specifically addresses the complex issue of determining the validity of wills by looking at formalities, capacity, and free consent. Further, Scalise suggests the urgent need to rethink conflict-of-law rules to align with modern society. This article serves as a theoretical basis for evaluating and updating the current conflict rules.
WYOMING—TRUSTS: In The Magnificent Seven: Key Advantages of Wyoming as a Trust Jurisdiction, 46 Wyo. L. 14 (2023), Tassma Powers explains how Wyoming is a lesser-known but top-tier trust jurisdiction and highlights seven unique features that make it a preferred trust jurisdiction.
CALIFORNIA adopts the Uniform Directed Trust Act. 2023 Cal. Legis. Serv. Ch. 721.
CALIFORNIA mandates greater oversight of conservators. 2023 Cal. Legis. Serv. Ch. 705.
CALIFORNIA prohibits a health care agent from committing the principal to a mental health facility and consenting to convulsive treatment, psychosurgery, sterilization, and abortion. 2023 Cal. Legis. Serv. Ch. 171.
CALIFORNIA provides for the creation of an online notarization platform providing for online notarizations using audio-video communication.
MICHIGAN enacts the Uniform Power of Attorney Act. 2023 Mich. Legis. Serv. P.A. 187.
NORTH CAROLINA revises allowances for the surviving spouse and children. 2023 N.C. Laws S.L. 2023-120. n
Aconfluence of difficult circumstances has made borrowing from large banks more and more difficult. Interest rates continue to rise. In July 2023, the Federal Reserve raised its benchmark short-term rate for the 11th time in 17 months as part of its ongoing effort to curb inflation, resulting in an aggregate increase of 5.25 percent. Interest rates have not been this high in nearly 23 years. Office occupancy continues to decline at unprecedented rates since the onset of the COVID-19 pandemic and shows no credible sign of returning to anything close to pre-pandemic levels, notwithstanding return-to-office initiatives. As a result, office real estate values are declining and, with interest rates on the rise, the prospect of refinancing many
David L. Zive is of counsel at Ballard Spahr in Philadelphia and is a member of Ballard’s multidisciplinary Distressed Assets and Opportunities team.office loans as they mature appears very grim. In the face of economic uncertainty, banks are not lending; or, if they are, they have become more selective about which loans to make and, perhaps more critically for many borrowers, which loans to extend at maturity.
Financial distress in the current economic climate is inevitable, and that distress is not limited to office real estate borrowers. For lenders, recognizing the signs of distress can make the difference between receiving payment in full and taking a significant loss. For borrowers, recognizing the signs of distress can make the difference between retaining a business as a going concern and losing it all. Understanding strategies borrowers and lenders might deploy in the face of economic distress to remediate loan defaults has been and will continue to be critical as long as the factors underlying this distress persist.
Loan defaults tend to surface during times of economic distress. There are three basic types of loan defaults: payment defaults, performance defaults, and defaults of representations and warranties. A payment default occurs when a borrower fails to make one or more payments when due under the loan documents. The most common payment default is failure to meet the debt service obligations, whether principal, interest, or otherwise. A performance default occurs when a borrower fails to comply with the affirmative or negative covenants set forth in the loan documents. Common performance defaults include failure to comply with financial covenants, failure to comply with restrictions on additional liens and indebtedness, and failure to provide financial reporting. A breach of a representation or warranty occurs when the lender discovers, after making the loan, that statements made by a borrower at the time the loan was
made, and supporting the lender’s willingness to make the loan, were not or are no longer true.
Some defaults, such as payment defaults or financial reporting defaults, are immediately apparent. Other defaults, such as financial covenant defaults and failure to comply with restrictions on additional liens and indebtedness, do not surface without periodic reporting by the borrower or without inspections by the lender. Even in the absence of a default that is immediately apparent, lenders take notice (and borrowers should realize that lenders take notice) when borrowers take actions that are indicative of economic distress. Signs of economic distress include borrowers who become unresponsive to phone calls, emails, and other communications from the lender; borrowers who report material (and seemingly sudden) management and operational changes; borrowers who engage a restructuring consultant
or counsel; entry of judgments, notices of garnishment, and imposition of tax liens against borrowers and their assets; borrowers who experience cash flow pressures (i.e., borrowers who are overdrawn, seek overdrafts, cannot make payroll, or requests over-advances); and borrowers whose industry is experiencing widespread economic distress and even bankruptcy.
The existence of a default enables the lender to exercise a variety of rights and remedies under the loan documents and applicable law. Initially, in response to a default, a lender will issue a notice of default, but only after all applicable notice requirements have been satisfied and cure periods have lapsed. Then, unless included in the notice of default, the lender may issue a notice of acceleration and demand for payment in full. Following the occurrence of a default, and certainly after accelerating the loan, the lender has a variety of remedies at its disposal. The
lender may suspend or terminate an outstanding line of credit or exercise rights of setoff against funds and other assets in the lender’s possession or control, as well as commence litigation to collect the loan from the borrower, any guarantors, and other obligors; foreclose on collateral securing the loan; and attach other assets of the borrower, any guarantors, and other obligors.
Just because the lender is entitled to exercise rights and remedies under the loan documents and applicable law in response to a default does not necessarily mean the lender will immediately do so. Rather than incur the time and expense, through litigation, of chasing the borrower and related obligors, as well as collateral and other assets, in response to the default, many lenders will attempt to work with the borrower to remediate the default—this process is often referred to as the “workout.”
Before discussing any workout strategy, some lenders will insist that the
borrower and related obligors execute a bilateral pre-negotiation agreement. A pre-negotiation agreement preserves the integrity of workout discussions and negotiations by requiring that all parties acknowledge that such discussions and negotiations remain confidential and will be inadmissible in any litigation that might ensue if the workout is unsuccessful. Although useful, the negotiation of a pre-negotiation agreement can be protracted and expensive and, as a result, leave the parties battling over the terms of the pre-negotiation agreement before addressing the existing defaults and workout action plan. Other lenders will issue a unilateral letter to preserve the integrity of workout discussions and negotiations and, thereby, focus more immediately on the existing defaults and workout action plan.
The workout will most often take the form of a unilateral consent, waiver, or reservation of rights letter, or a bilateral forbearance agreement or amendment or modification agreement. The form the workout will take will depend largely upon what the borrower and the lender each seek to accomplish in the workout.
A consent is used by the lender to confirm the lender’s agreement that future action that would otherwise be a default under the loan documents will not, in fact, constitute a default. For example, when the borrower knows that a proposed corporate restructuring or sale of assets will trigger a default under the loan documents, the borrower should request that the lender consent to the transaction, in advance. A consent, therefore, is essentially an amendment or modification to the loan documents that prevents the default from occurring.
A waiver is used to erase past defaults under the loan documents. There are two types of waivers. An express waiver is a waiver that is indicated by the lender’s actions. For example, a borrower that has breached a financial covenant may require a waiver from the lender before the borrower’s accountant will release a clean audit. An express waiver is limited in
To effectively guard against an inadvertent waiver, the lender should secure a forbearance agreement rather than issue one or more reservation of rights letters.
scope and extends only to the specified default, does not extend to a default that may occur in the future (even if of the same type), and has no effect on the lender’s exercise of remedies with respect to any other default and does not affect the borrower’s other obligations under the loan documents.
An implied or inadvertent waiver is a waiver that is indicated by the lender’s conduct, which can take the form of action or inaction (or silence). For example, a lender who routinely disregards the borrower’s habit of routinely making debt service payments after the due date may be deemed by a court to have inadvertently waived the default and, thereby, relinquished the right to enforce the borrower’s obligation to make payments in accordance with the payment terms under the loan documents. An implied or inadvertent waiver is often found to exist when a repetitive pattern of defaults and waivers occurs over some period of time, creating a course of conduct that becomes the new norm. The waiver is inferred because the lender’s conduct—what the lender did or did not do—allowed the borrower to reasonably believe that the lender would not exercise remedies in the future based on the same default.
A reservation of rights letter is used by the lender to protect itself from the risk of an inadvertent waiver during
a period of inaction. For example, even though the borrower may have breached a financial covenant, the lender may not want to accelerate the loan or exercise other remedies while the lender discusses the underlying issues with the borrower. At the same time, the lender does not want to relinquish its right to do so in the future if discussions with the borrower don’t go anywhere. In such circumstances, the lender should use a reservation of rights letter to protect and preserve its rights to exercise remedies with respect to existing defaults by expressly confirming that the lender’s silence does not constitute an inadvertent waiver of those defaults.
A reservation of rights letter can be an effective tool to preserve the lender’s rights and remedies with respect to existing defaults, but it is not a bilateral agreement between the borrower and the lender. At some point, if the period of inaction continues for too long, a court may find that the lender inadvertently waived those existing defaults by creating a course of conduct with the borrower that is inconsistent with the preservation of rights and remedies with respect to existing defaults. This often happens when the lender issues a reservation of rights letter, and then does nothing. It also happens when the lender issues serial reservation of rights letters, which create a course of conduct that suggests the lender will continue to take no action (and continue to issue one reservation of rights letter after another with respect to the same, repeated defaults), and continue to do nothing. In order to effectively guard against an inadvertent waiver, the lender should secure a forbearance agreement rather than issue one or more reservation of rights letters.
A forbearance agreement is a bilateral agreement between the lender and the borrower. By contrast, a reservation of rights letter is unilateral, usually in the form of a letter issued by the lender to the borrower. In a forbearance agreement, the period of inaction is often referred to as the “forbearance period.” By expressly preserving existing defaults for the
duration of the forbearance period, the lender avoids triggering an inadvertent waiver of its rights and remedies with respect to existing defaults. Typically, the borrower and lender use the forbearance period to develop an effective workout strategy or action plan for the period following the forbearance period. This might involve the engagement of a workout consultant or a broker to sell the lender’s collateral or the other assets, or it might give the borrower time to provide financial reporting, secure an appraisal of the lender’s collateral, or accomplish other tasks required by the lender to develop a workout strategy or action plan. Or it might simply give the borrower the time it needs to complete tasks that will move the workout along, such as secure replacement financing, complete an audit, or file tax returns. The lender preserves existing defaults as leverage to compel the borrower to take actions necessary to remediate existing defaults and modify the loan or even to pay down or pay off the loan. In addition, a forbearance agreement will often include more aggressive terms than those contained in the existing loan documents and even an amendment, such as an onerous interest rate, a forbearance fee, and waiver of the automatic stay under the Bankruptcy Code.
At the expiration of the forbearance period, defaults addressed by the forbearance agreement, unless cured or waived, become actionable once again. They are no longer subject to the agreement to forbear. New or additional defaults that might occur during the forbearance period are actionable in accordance with the loan documents. They are not subject to the agreement to forbear.
By itself, a forbearance affects past compliance. If the default is cured or waived (directly or indirectly) as a result of the proposed forbearance agreement, then a forbearance is not appropriate. For example, if the only default is the borrower’s failure to repay the loan at maturity, and the proposed forbearance agreement extends the maturity date, the transaction is not a “forbearance” because there is no existing default
subject to the lender’s agreement to forbear during the forbearance period. In that case, the lender should not forbear. Instead, the lender should amend the loan documents to reflect the new, extended maturity date.
An amendment should be used to document modifications to the loan documents that implement the workout under circumstances when a waiver, alone, is insufficient or forbearance does not apply. Although an amendment can implement the same terms as a forbearance, and with the same effect, an amendment does so without preserving existing defaults.
By itself, an amendment affects future compliance. For example, an amendment would be used to modify an expired maturity date to a new, extended maturity date; to modify financial covenants to targets the borrower can meet; or to implement new covenants that require the borrower to engage a restructuring consultant or a broker to sell the lender’s collateral in order to pay down or pay off the loan. An amendment eliminates existing defaults, either by an express waiver contained in the amendment or
by an inadvertent waiver because the lender will be deemed to have waived an existing default if the lender amends a loan without expressly preserving that default. In addition to specific modifications to the loan terms, common amendment (and forbearance) terms include the borrower’s acknowledgment of the indebtedness and the borrower’s reaffirmation of the loan, loan documents, liens, and collateral, as well as a general release in favor of the lender.
Workouts can be difficult. Certainly, in the face of looming economic uncertainty, lenders will be as concerned about recognizing losses as borrowers, guarantors, and other obligors will be concerned about their personal exposure. Understanding the borrower’s distress and what, if anything can be done about it, in the short and long term, will be a necessary first step in the development of any effective action plan. Implementing that plan in a workout will require patience, cooperation, and a realistic understanding of what needs to be done and, perhaps more importantly, what can be done under current circumstances. n
By Dale M. Krause
It is no secret that the US population is aging. The oldest members of the Baby Boomer generation began turning 75 in the year 2021, with about 70 million peers to follow. The senior population is growing and, due to advances in medical science, living longer than previous generations. Therefore, it is now more likely than ever that seniors will require skilled long-term care in their lifetimes. In fact, according to the US Department of Health and Human Services’ Projections of Risk of Needing Long-Term Services and Supports at Age 65 and Older (Jan. 2021), https://tinyurl.com/5fxpb2td, over 50% of individuals turning 65 today are expected to require long-term care at some point.
Although long-term care is an inevitability for most people, many fail to understand the financial burden that follows placement in a nursing home. According to the 2021 Genworth Cost of Care Survey, https://tinyurl.com/5a2hv2yn, the average cost of a semiprivate room in a nursing home is $7,908 per month. With the average stay in a nursing home being over two years, it is not surprising that long-term care can wipe out a person’s entire life savings, leaving nothing behind for their loved ones.
Dale M. Krause, J.D., LL.M., is the president and CEO of Krause Financial.This financial reality is what makes long-term care an issue for estate planning and elder law attorneys. As attorneys, we take specific measures to ensure a client’s assets are protected and distributed in accordance with their wishes after death. But what about protecting their assets while they are alive? Entering the nursing home is arguably the biggest threat to your client’s estate plan. Clients who do not have the proper plans in place to minimize the financial effect of long-term care are truly at risk of losing everything. Fortunately, attorneys can provide a solution, even if the client is already in a nursing home.
Now that more seniors are entering nursing homes, conversations surrounding Medicaid have increased significantly. Medicaid is a joint state and federal program meant to provide financial assistance for medical care to those in need. Concerning long-term care, Medicaid covers a person’s stay in a nursing home (or another Medicaidapproved facility), including room and board, pharmacy, and incidentals. This makes qualifying for Medicaid desirable for individuals who failed to plan in advance for a long-term care event through mechanisms such as long-term care insurance.
In order to qualify for Medicaid, an individual must meet specific nonfinancial and financial requirements. Regarding the nonfinancial stipulations, the individual applying for care must be age 65 or older, blind, or disabled and must also be a US citizen or a qualified noncitizen. The individual must also be a resident of a Medicaidapproved facility, as previously noted. In short, Medicaid benefits are reserved for those in need of the medical care provided by nursing homes. Some states employ “waiver” programs that extend long-term care Medicaid benefits beyond skilled nursing homes, including assisted living facilities and at-home medical care programs.
Medicaid’s financial requirements are much more intricate than the nonfinancial requirements, and they differ
depending on the marital status of the applicant. To add a layer of complexity, the financial requirements also vary from state to state. These requirements fall into two major categories: income and assets. Too much of either will prevent a person from qualifying for benefits.
To be eligible for Medicaid, an individual’s income must be less than the private-pay rate of the facility at which the individual is seeking residence and care. This means the individual’s monthly income from all sources— including Social Security, pension, etc.—must be less than the monthly nursing home bill. A few states apply a separate restriction where the applicant’s income cannot exceed an amount other than the nursing home bill.
In the case of a married couple, the spouse in the nursing home (known as the institutionalized spouse) is subject to the rules for an individual previously noted. The income of the spouse living at home (known as the community spouse) is not considered when determining the eligibility of the institutionalized spouse. As such, the community spouse is not subject to income limitations or restrictions.
Although the community spouse is not subject to income limitations, there is a floor on the amount of income the community spouse can receive. This is known as the Monthly Maintenance Needs Allowance (MMNA)—a provision set forth by the Medicaid program that ensures the community spouse has enough income to support herself in the community once the institutionalized spouse begins receiving Medicaid benefits. This requirement is often referred to as an “anti-impoverishment provision” intended to protect the community spouse. If the community spouse’s income is less than the MMNA, the spouse will receive a shift in income from the institutionalized spouse. As of January 1, 2024, this MMNA is between $2,465 and $3,853.50, according to the 2024 SSI and Spousal Impoverishment Standards. Letter from Daniel Tsai, Dir., Ctr. for Medicaid & CHIP Serv., Updated 2024 SSI and Spousal Impoverishment Standards (November 14, 2023), http://
tinyurl.com/yeyub55f.
In addition to being income eligible, the applicant must also be within certain asset limits. Assets are divided into two categories: exempt and countable. Exempt assets are not considered when determining an applicant’s Medicaid eligibility. Some of the most common exempt assets include the primary residence, one vehicle, prepaid funerals, personal effects, and household items. The institutionalized individual or the community spouse can retain these items without jeopardizing benefits.
Exempt assets stand in contrast to countable assets, which include any resource or property not listed as an exempt asset that holds value and could become liquid. Common countable assets include checking or savings accounts, CDs, stocks, bonds, mutual funds, nonhomestead real estate, second vehicles, and virtually any other investment that could be readily converted to cash.
The classification of retirement accounts (including, but not limited to, traditional IRAs, 401(k) accounts, and Roth IRAs) varies greatly by state. In select states, retirement accounts are considered exempt assets for both the community spouse and institutionalized spouse. Some states exempt retirement accounts only for the community spouse. Other states will treat them as exempt only if the owner is taking the owner’s required minimum distributions (RMDs). This means that the owner can have a retirement account of any value, and it will not prevent the owner from qualifying for Medicaid benefits, although the RMDs will count as income to the owner. Ultimately, however, most states consider retirement accounts as countable assets to the owner.
Although the Medicaid rules regarding countable and exempt assets render an institutionalized individual effectively impoverished, there is a carve-out that allows the Medicaid applicant to retain assets with a limited value, referred to as the Individual Resource Allowance. In most states, the Individual Resource Allowance is $2,000. This means a Medicaid applicant can retain
Crisis planning involves the legal rearranging of one’s assets to spend down the value of those assets for Medicaid purposes, while still achieving an economic benefit for the client in the nursing home.
no more than $2,000 in countable assets and remain eligible for benefits. If the applicant is single, this is all the applicant may keep. If the applicant is married, the community spouse can retain a separate amount known as the Community Spouse Resource Allowance (CSRA). This allowance varies by state but is generally between $30,828 and $154,140 as of January 1, 2024.
Beyond asset limitations, the Medicaid program also employs restrictions on giving assets away. Medicaid rules stipulate that if an applicant or a spouse has made an ineligible transfer of assets within the last five years—the lookback period—the applicant will be subject to a period of ineligibility—the penalty period—when the applicant is otherwise eligible for Medicaid.
The lookback period is the five-year period before an individual applies for Medicaid. At the time of application, the caseworker will look back over the last five years to determine if the applicant divested any assets. If the applicant or spouse made any ineligible transfers within this timeframe, the applicant will be ineligible for benefits for a certain period of time based on the total amount divested.
A divestment is a transfer of assets for less than fair market value. Many people also refer to transfers of this nature as gifts. Actions that qualify as divestments include giving money or items to loved ones, transferring assets to an irrevocable trust, or selling items, like a vehicle, for less than their fair market values.
The penalty period is the period of ineligibility applicants are subject to when they have made divestments during the five-year lookback period. The
penalty period begins once the applicant is deemed “otherwise eligible” for Medicaid benefits, aside from the ineligible transfer. The length of the penalty period is based on two figures: the total amount of divested assets and a statespecific divestment penalty divisor. The primary problem is many clients may not be aware of these rules and could be divesting assets without realizing the consequences divestment may have on their long-term care needs.
Unsurprisingly, most individuals are not automatically eligible for benefits. Countable assets in excess of the applicable limit must be eliminated, or “spent down,” for the person to qualify. In many cases, this can be accomplished by paying off a mortgage or other debt or purchasing or improving exempt assets. Most families, however, typically spend this money on the nursing home bill until they have depleted their life savings.
The concept of crisis planning provides a solution and is a growing practice area for estate planning and elder law attorneys. Crisis planning involves the legal rearranging of one’s assets to spend down the value of those assets for Medicaid purposes, yet still achieving an economic benefit for the client in the nursing home. The ultimate goal is asset preservation for those who would otherwise lose everything paying this bill.
Some crisis planning strategies vary by state, but one of the most common planning strategies that is applicable in nearly every state is the use of a Medicaid Compliant Annuity (MCA). An MCA is a single-premium immediate annuity
(SPIA). In this case, the institutionalized individual or the community spouse establishes the contract with an insurance company that provides regular payments in exchange for a lump-sum premium. In short, the client uses an annuity to convert assets into a future stream of income without any cash value.
An MCA must comply with the Deficit Reduction Act of 2005. Pub. L. No. 109-171 (S. 1932), 120 Stat. 4, https:// tinyurl.com/4uh7ar7h. The annuity contract must be irrevocable and non-assignable, provide equal monthly payments, have a term that is equal to or less than the owner’s Medicaid life expectancy, and designate the state Medicaid agency as the primary or contingent death beneficiary. Life expectancy is typically determined by the Actuarial Life Table published by the Social Security Administration. Most cases require the state Medicaid agency be designated the primary death beneficiary on an MCA. Exceptions exist in cases where the owner has a minor or disabled child, or in situations where the person in the nursing home purchases the MCA and has a community spouse at home. An MCA can be funded with either qualified or nonqualified assets, making it a desirable option for those who own a retirement account in a state where the value of that account is considered a countable asset.
The benefit of using an MCA in the case of a retirement account is avoiding tax consequences associated with liquidating the account. Rather than creating a taxable event through liquidation, the funds may be transferred, tax-free, to the annuity. The funds are then taxed as payments are made over the term of the annuity. All payments received within a calendar year will be taxable to the owner. This allows the owner to eliminate the IRA as an asset for Medicaid purposes, spread the tax liability over several years, and accelerate the owner’s eligibility for benefits.
When a client requires long-term care and the family receives the first nursing home bill, the family is likely in shock. Not only is there an emotional
element the family must work through, but the high cost of care and the complexities of the Medicaid system often cause families to become overwhelmed. Crisis planning with MCAs, however, helps to ease the financial part of this burden, allowing for relief from the nursing home bill and the preservation of certain assets in the process.
In addition to providing peace of mind to individuals experiencing a long-term care event, crisis planning also provides a tangible economic benefit to clients and their families. When using an MCA, however, properly structuring the annuity is crucial to a positive outcome. There are two main strategies involved when using an MCA, and they differ depending on the marital status of the institutionalized person.
When working with a married couple, the primary goal is to set aside assets to be used for the benefit of the community spouse. Although the Medicaid program provides a separate and distinct resource allowance for the community spouse, it may not be enough. Using an MCA allows the community spouse to set aside funds that would otherwise be used to pay the nursing home yet still qualify the institutionalized individual for Medicaid benefits.
Any countable assets in excess of the community spouse resource allowance are funded into an MCA owned by and made payable to the community spouse. The community spouse has flexibility in choosing an annuity term (i.e., the length of time in which the annuity pays back the initial investment and interest to the owner), so long as it is equal to or shorter than their Medicaid life expectancy. Depending on the annuity provider the attorney is working with, annuities with terms as short as two months are available in nearly every state. The shorter the term, the higher the monthly income to the community spouse will be, and the longer the term, the lower the monthly income will be.
Generally, attorneys should recommend a term that provides an amount of monthly income compatible with the
community spouse’s current and future potential expenses. For example, should a community spouse be in poor health, a shorter term may be more appropriate to provide enough monthly income for medical and care expenses, and to reduce the likelihood of passing away before the annuity ends due to Medicaid’s primary beneficiary requirement. A longer term may be more appropriate in cases where the community spouse is in good health, the annuity premium is a higher dollar amount, or retirement accounts are involved, to reap the benefits of prolonged taxation.
Planning for a single person is often a vastly different strategy. First, an individual’s asset limit is significantly less than that of a community spouse in most states. Second, the individual’s income is directly subject to paying a portion of the nursing home bill, with the Medicaid program picking up the remaining costs. Therefore, any income generated from an annuity owned by an institutionalized single individual goes to the nursing home.
In these cases, the common strategy is to intentionally create a penalty period of ineligibility by divesting approximately half of the individual’s funds to an irrevocable trust or other
giftee. The goal of this strategy is to create a wealth transfer to the client’s intended heirs in the form of a divestment, triggering a penalty period. The client then uses the remaining assets to purchase an MCA, which will help the client privately pay for care during the penalty period. The MCA term is structured to be congruent with the penalty period, so the annuity contract is terminated when the penalty period ends. Meanwhile, the divested funds are protected from recovery by the state Medicaid agency.
This plan comes with a few caveats. For starters, if the individual passes away before the end of the penalty period and annuity term, the individual will not have gained any economic benefit since the individual will have been privately paying for care during that time. Additionally, some states enforce income restrictions that render this strategy not viable. Generally, however, this strategy allows single institutionalized individuals to save approximately half of their assets by way of the wealth transfer, as opposed to spending down nearly their entire nest egg on the nursing home bill alone.
Ideally, clients would choose to engage in more proactive long-term care planning strategies, whether that be through long-term care insurance, proper irrevocable trust planning, or other means. But many clients choose not to create a proactive plan for several reasons, including believing they will never require care or deeming the cost of a proactive plan to be unaffordable.
It is crucial, however, that they have other options available should they find themselves in a crisis Medicaid situation in the future. After all, it is long-term care that is truly unaffordable for most. These costs loom as one of the biggest financial threats to a client’s estate plan, and with asset preservation being one of the primary goals of estate planning and elder law attorneys, having a backup plan, like crisis planning, is crucial to properly serving your clients. n
Intangible assets are an increasingly important consideration in property tax appeal cases, where the goal is establishing a property’s taxable interest, which is often required to be the “fee simple” interest. What constitutes a fee simple interest for purposes of appraising real estate is not the same as the older Black’s Law definition of the term. Real estate appraisers created a new definition for fee simple interest in the 1980s to little fanfare. The older definition referred to the alienability of the interest and any restrictions on its transferability. The new definition of fee simple was concerned with whether the interest in real estate was “unencumbered by any other interest or estate.” This definition was meant to address whether the real estate should be valued based upon any existing lease
Barry
J. Cunningham, PhD, ASA, MAI,AI-GRS, is a principal in Property Tax Research, LLC, in New Hampshire, a national research and consulting firm. H. James Stedronsky practices law in Connecticut, focusing on property tax disputes.
By Barry J. Cunningham and H. James Stedronskyor whether it should be valued based on market rates and terms. Appraisers also created another term to reflect an interest in real estate conveyed subject to a lease: the leased fee estate. This definition was established as a defined term in The Appraisal of Real Estate’s 1987 edition. “Leased Fee” is not a legal term but was created to tell those reading an appraisal that a property is being valued based on an existing lease as opposed to income based on market rates and terms.
In the years between 1987 and roughly 2009, comparatively few court cases were fought about property rights. Then, in about 2009, dark store theory exploded onto the scene. A dark store appraisal undervalues a well-located and thriving retail property by comparing it to the sales of poorly located retail property that those same retailers vacated. Dark store appraisers do this by claiming that it’s a property rights debate and that the only sales one can rely on are “unencumbered” or vacated properties. In the process, they ignore the glaring fact that the empty retail
property was vacated precisely because it was poorly located. The heyday of dark store theory was 2009–2019. After some early successes against ill-prepared parties, dark store theory is now losing most cases. The next frontier, one that is legitimate, is the matter of intangible assets—that is, assets that exceed the value of a real property’s fee simple interest.
This article seeks to address four topics. First, it will define what is meant by the term “intangible” assets as they relate to sales of going concerns where real estate has the most significant value. Second, it will explore the history of methods and directives from governmental, accounting, business appraisal, and real estate appraiser circles that have been applied to this issue. Third, it will show how intangible assets affect real estate values. Finally, this article will discuss how courts may address this issue, particularly when state statutory law is unclear as to the standard of valuation for purposes of taxation. Tax appeal cases are often framed by real estate
appraisers who lack any education in intangible asset valuation. The goal here is to help the reader understand that intangible assets are more prevalent than one may believe and, once understood, not that difficult to identify.
Real estate appraisers use the term “going concern” to label business properties that transfer as a “bundle” of property interests containing real property as well as tangible and intangible personal property. Appraisal Inst., The Appraisal of Real Estate at 663 (2020). Hotels and senior housing are good examples. Business appraisers, on the other hand, refer to these property types as “real estate centered entities,” or RECEs. Shannon P. Pratt, Valuing a Business at 729–30 (2022). The Dictionary of Real Estate Appraisal, published by the Appraisal Institute, adopted the definition of intangible assets—nonmonetary assets without substance—from the American Society of Appraisers (ASA), the International Valuation Standards (IVS), and accounting standards. Appraisal Inst., The Dictionary of Real Estate Appraisal at 97 (7th ed. 2022). In Understanding Business Valuation, Trugman defines intangible assets as a “bundle of rights” having at least one of these elements: (1) they can be reasonably described; (2) they can be purchased or developed internally; (3) you can point to when they were created; and (4) they are transferable, as in they can be bought, sold, licensed, or rented. Gary R. Trugman, Understanding Business Valuation at 745–46 (2022). For example, consider a common and generally accepted hotel operating expense that contributes to business value, the management fee. Eric E. Belfrage, Business Value Allocation in Lodging Valuation, 69 Appraisal J. 277 (2001). It can be described as the cost for organizing operations and is generally developed internally and is created when the hotel begins operations. Such management value is clearly not a part of the real estate. This is highlighted by the fact that, in some instances, an owner of the real estate might lease the hotel to a thirdparty manager. In business valuation, a determination would be made as to how a
portion of the value of the RECE should be attributed to intangible property or business interest as opposed to an interest in real estate. This is an important part of the education of a business appraiser but is not addressed in the training of real estate appraisers.
The federal tax code, 26 U.S.C. § 1060, requires that the purchase price of a going concern be allocated among various property types. It defines asset classes. Real estate and tangible personal property are categorized as asset Class V. Class VI property consists of licenses, leases, trademarks, and contracts. Class VII is goodwill. The latest accounting standards under FASB 805, entitled Working Draft of AICPA Accounting and Valuation Guide: Business Combinations, pose a three-part test for what constitutes a business: Is it a substantive process? Is there an integrated set of assets generating income? Is there a workforce that results in income? AICPA, Working Draft of AICPA Accounting and Valuation Guide: Business Combinations at 25, 29 (Sept. 15, 2022). For example, they identify leasing and management personnel as an “organizing workforce . . . performing a substantive process” (id. at 38) and management and leasing as “critical to producing rental income” (id. at 39). Absent a workforce, there is no substantive process, and no income is generated.
For tax appeals regarding going concerns or RECEs, intangible assets can take one or both of two forms: businesses and contracts. At its core, a business consists of three elements: (1) people and (2) the processes they employ to (3) generate income. Consider a hotel. The real estate, as it is commonly defined by appraisers and in most state statutes, is the land and the “sticks and bricks.” When a hotel owner signs a franchise agreement with a national franchisor, the owner is now effectively encumbering the real estate. Contracts, leases, and licenses are the second form of intangible asset affecting the value of the underlying real estate. Contracts are intangible assets and are personal property. Whether
they add value over and above the value of the underlying real estate can be debated, but they are technically personal property. Intangible assets often take the form of both businesses and contracts, whether leases, franchise agreements, or employment agreements.
It needs to be emphasized that these various definitions are definitions used by appraisers; they do not necessarily reflect the legal definitions in state courts. Often courts will adopt the definitions used by appraisers, as they have largely done with the term “fee simple.” Nonetheless, the appraiser must consult with the attorney as to how the courts in the subject state define these terms. If there is no law on point, then the attorney and appraiser can argue that the court should adopt their working definition. Courts very often give great deference to definitions as used in professionally authoritative texts. Importantly, there are also unspoken premises used by appraisers. Does fee simple mean starting the analysis as if vacant or does it mean stabilized? Because appraisers never say, one has to look to the data they use to understand their underlying premise.
Hotels are good examples of where an intangible property interest may directly affect the real estate value. But first we need to separate real estate from the business that functions inside it. As mentioned, the fee simple interest of the real estate alone is defined in The Dictionary of Real Estate Appraisal as “absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by governmental powers of taxation, eminent domain, police power, and escheat.” Supra at 73 (emphasis added). Under the plain meaning of this definition, a property that is unencumbered by any estate is a property that has no tenants or occupants of any kind. It is an empty or vacant building. Under this definitional premise, to properly value the fee simple interest, the appraiser must deduct from the stabilized net operating income the
cost of reaching stabilization. A stabilized property benefits from people and the systems and processes they employ to procure, in this case, tenants. It is rare that an appraiser does this, though this is not a substantial intangible—maybe 5 percent to 10 percent.
Note the importance of an underlying assumption. If one assumes the property is vacant, isn’t that dark store theory? It is not. If the hotel property is well-located, it will quickly be encumbered by a franchise and stabilized occupancy will be reached shortly, if not immediately. The cost of stabilizing will have little effect on its valuation. This is different from comparing a well-located hotel to the sale of poorly located hotels, now vacant. Notice the distinction: It is not whether a property is vacant—it is whether the property is well-located. Dark store theory is about ignoring location differences and is only disguised as a property rights debate. For a solid review of this issue, the reader is referred to Stephen F. Fanning, Larry T. Wright & Rick J. Muenks, Highest and Best Use and Property Rights—Does It Make a Difference?, 86 Appraisal J. 171 (2018).
The hotel’s “business” is the workforce that functions inside the real estate, employing systems and processes to generate income. With most hotels, the success of that business operation—producing income via overnight stays using people and processes—is governed by a franchise contract. In an apartment complex, big box retail, or office property, the business of producing income is governed largely by leases and management contracts. For a convenience store in the business of selling products and gas, the business is usually governed by a franchise or management contract. In all these instances, if you take away the people and their processes, no income or lease providing income is generated.
Intangible assets can create intangible value over and above the value of the underlying real estate solely as the result of an above-market contract. Consider national pharmacies. They would buy land and build a pharmacy for $3 million. The total development cost
includes all costs for land and building and even a return for making the effort. From standard appraisal theory, cost equals value in a stable to modestly rising market. In this example, the property’s fee simple value would be $3 million. But the pharmacy would then commit to an above-market rent and sell the leased fee estate for, say, $4.5 million. Ask real estate appraisers what they would call that difference in value between that $3 million and $4.5 million. Some will say “the $4.5 million is the leased fee estate; the $3 million is the fee simple estate.” I’ll say, “that’s true, but what is the actual name for the difference, the $1.5 million?” Real estate appraisers simply were not educated to the fact that the difference is intangible value attributed to the lease. Unencumbered by that lease, appraisers would agree that the property would sell for $3 million. In essence, the pharmacy business that functions inside the real estate steals money from the business in the form of higher rent to procure a higher sale price. And the higher proceeds went to financing a more rapid expansion.
Building on the pharmacy example above, one can see, first and foremost, that the cost approach is very helpful. A cost approach is dispassionate as it is directed purely toward real estate value
and does not involve the messy context of the sales or income approaches to value. The potential weakness of the cost approach is quantifying accrued depreciation: the reduction in value from wear and tear over time. But this should not stop one from using this approach. For the attorney who has lived through a court case arguing the finer distinctions of this sale or that sale or this rental property or that one, the cost approach is a much easier argument for the court. And, until accrued depreciation exceeds 25–40 percent, courts understand it and many prefer it.
A second point is the determination of market rent. To the extent the appraiser can provide a reliable and valid rent forecast for the underlying real estate, the cost approach can bolster an income approach. The overwhelming challenge to an income approach is that truly comparable rental data are difficult to find. What often happens when good comparable rents are not available is that the appraiser will use rentals that are less comparable physically or, especially, as to location. Then, the comparative analysis misses the true importance of location differences.
The challenge to the sales comparison approach is that most sales are of the leased fee estate—a property encumbered by some lease or franchise agreement and the sales price reflects the contract rent or franchised income. Hotels generally sell as a going concern (RECE) encumbered or governed by a franchise agreement. Surprisingly, it is rare that the parties make an allocation to real estate for the purpose of determining the conveyance tax. The real estate records do not reflect how much of the price reflects the value of the intangible and tangible personal property. Unless one has the income statements leading up to the sale, it can be difficult to reliably quantify an adjustment for intangible assets. For the prepared lawyer, the cross examination can sink the other side’s case.
When it comes to separating intangible value in a hotel, there is a long history of debates among appraisers.
Those debates center on which lineitem expenses are related to business income versus real estate income. Courts have gotten bogged down on these debates unnecessarily. The key is to develop a reasonable income model for the entire going concern (RECE) and then parse the net income as it relates to real estate, tangible personal property, and intangible assets. By starting at the net income level, it avoids all these debates about income and expenses. In fact, it no longer matters which line-item expense went to what. It is assumed that when an owner “invests” in a franchise agreement that the owner will receive a return greater than the expense of the franchise. This return on the franchise “investment” generally comes from a higher average daily rate, a higher occupancy, or, at least, a more predictable income stream posing lower risk.
By beginning your analysis with net income, the valuation of the real estate interest is a less complex proposition. A court will understand that some (probably, most) of that net income supports real estate, but some income supports the value of the in-place personal property. It is then a simple step to capitalize that income related to real estate. The capitalized value of remainder income, what business appraisers might call the excess or residual earnings, is attributed to intangible assets, the business. Robert F. Reilly & Robert P. Schweihs, Guide to Intangible Asset Valuation (2016). A deeper discussion of this is covered in Barry J. Cunningham, Property Rights and the Real Estate Appraiser, 42 Bus. Valuation Rev. 11 (2023).
This discussion raises two important points worth revisiting: jurisdiction and valuation premise. When one relies on the plain meaning of the fee simple definition, that the estate is “unencumbered,” it leads to debates about what is meant by “unencumbered.” Is the property vacant and available, or does it mean that the property is stabilized? These differing positions pose the contradiction between “unencumbered”
and leases or an engaged workforce. Some argue that there is no distinction between the inanimate real estate and the business and leases that encumber it. They argue that they are so inextricably linked that they are one and the same. But these are mainly arguments stemming from an audience who misunderstands the intangible nature of a business or contracts. To its credit, The Appraisal of Real Estate states, “a lease never increases the market value of real property rights to the fee simple. Any potential value increment in excess of a fee simple estate is attributable to the particular lease contract, and even though the rights may legally ‘run with the land,’ they constitute contract rather than property rights.” Supra at 415. It is no different for the contracted workforce.
Intangible value from a business or from a contract can be associated with real estate, but they are not in the nature of real estate. Everyone instinctively knows that if all the workers in a hotel decide to not show up for work, the hotel is worth less. Likewise, if that hotel is Joe’s Hotel rather than a national franchise, it is worth less, and the lower value has nothing to do with the actual sticks and bricks. All we are doing here is clarifying the nature of the components, in this case, of a hotel.
The best solution for all sides of this issue is to establish statutes regarding exactly what is taxed and what is not. Without clarifying statutes, should the assessor assume fee simple is subject to being fully stabilized? Should the assessor assume the plain meaning of “unencumbered”? Most state statutes do not answer these questions, but many states do have wording that ties fee simple estate to their standard of taxation. Even when the statutes don’t, this point may be clarified in court cases, where most, if not all, appraisers and attorneys convince the court to adopt their definition of fee simple estate, unencumbered. Whether explicitly or by default, fee simple unencumbered underlies most value disputes.
In the absence of statutory clarity, case law can inform parties. For
example, the Florida Supreme Court’s Disney decision in 2020 established the notion that intangible assets reside in amusement parks. This makes sense. Joe’s Amusement Park would have less cachet and be forced to charge less than Disney Resorts. By contrast, the Ohio Supreme Court ruled that unencumbered did not mean vacant, but that appraised values for tax purposes should be based on market income stabilized. Rancho Cincinnati Rivers, LLC v. Warren Cnty. Bd. of Revision, 165 Ohio St. 3d 227 (2021). It essentially held a stabilized premise if, in fact, the property was fully occupied. New Hampshire has several court decisions admonishing the parties to use the cost approach in big box retail cases. In most court cases, though, the experts were real estate appraisers, not business appraisers, and so the debates and framing of the issues were commensurately limiting. In any event, jurisdictions can iron out these disputes by simply clarifying in law what interests are to be taxed and whether actual rents or market rents are to be considered in the income and expense analysis of value.
This article has examined the history of property rights as an unknowing proxy for intangible assets. The varying definitions of intangible assets and summaries as they relate to real estate and associated businesses or contracts were discussed. A business is simply people using systems and processes to procure income. Contracts can be leases, employment agreements, franchise agreements, or licenses. The authors have seen examples of how intangible assets reside in RECEs and how to identify them. In the end, if the reader’s jurisdiction has addressed these issues, state law will already determine how one frames a case. If not, the appraiser and attorney will, it is hoped, with proper analysis and advocacy, shape the law. Finally, the experts one hires should have a working knowledge of business valuation for these types of cases. n
In the 2002 film Minority Report, directed by Steven Spielberg, the character played by Tom Cruise enters a futuristic Gap clothing store. He is greeted by a hologram that recognizes him and asks about his satisfaction with his last purchase. This scene showcases the potential of personalized advertising and customer interaction in the future.
On the other hand, the Netflix series Altered Carbon, created by Laeta Kalogridis and based on the 2002 novel by Richard K. Morgan, presents a different perspective on future advertising. In this series, the character portrayed by Chris Conner experiences graphic interactive advertisements projected directly into his mind as he walks down a street. These intrusive ads cease only when a friendly cop tags him with a “broadcast blocker,” illustrating the potential downsides of overly immersive advertising technologies.
Today, the world of internet search is very much like the store scene in Minority Report and the street scene in Altered Carbon. Without broadcast blockers, we cannot safely navigate through the vast collection of information that is available online. Everywhere, algorithms determine what you are shown whether you are searching on Google, YouTube, Instagram, or Facebook. We accept algorithms that make recommendations when we are watching Netflix videos, but do we want them when we are searching for answers on the internet?
Technology—Property Editor: Seth Rowland (www.linkedin.com/in/ sethrowland) has been building document workflow automation solutions since 1996 and is an associate member of 3545 Consulting® (3545consulting.com).
Technology—Property provides information on current technology and microcomputer software of interest in the real property area. The editors of Probate & Property welcome information and suggestions from readers.
So, what is an algorithm? Strictly defined, an algorithm is a process or set of rules to be followed by a computer in doing calculations or solving problems. When you initiate a search in Google, an algorithm or process is called to determine what sites or web pages on the internet are likely to contain the answer to your question. Historically this has been done by matching keywords in your search with keywords found on the web page. Based on an algorithm, the pages are ranked and ordered with the most responsive pages at the top.
Over the past decade, Google and content providers have modified algorithms ostensibly to give you what you want by adding in other factors such as information about the user making the request. Your identity, location, and demographics, including race, gender, age, and education, are combined with your perceived bias, prior searches, and prior purchases to determine what you will feel is responsive to your request. Search engine providers charge money to advertisers who wish to get information to particular users, using an auction-based system where advertisers bid on particular classes of users to get their advertisement placed at the highest position. Increasingly, the line
between paid advertisement and information has blurred (hence the term “click-bait”). The search engine and content providers have prioritized search to take account of all these factors to anticipate what you are looking for before you even finish typing the question.
Today, it is quite common that two people who run an identical search on Google will get different results. Internet search and content providers curate what information you receive. In my own experience, every video on my YouTube home page addresses politics (that agree with my persuasion), concerns the war in Ukraine (an area of particular interest), or describes advanced cooking techniques (I attended a boot camp at the Culinary Institute of America). Recently, I started doing searches on border collies (my dog Lupin is a border collie), and now every other video on my home page shows a border collie dog doing tricks or herding sheep.
This works if you are seeking to be entertained. If you are a lawyer looking for information that will serve your client’s interest, however, the curation of search results can be problematic. Lawyers need objective search results. Without objectivity, lawyers will be blindsided in their advocacy for their clients. The promise of the internet is an entire world at your fingertips. But if you only see what some algorithm predicts you want to see, you are traveling blind.
There is a need to escape the bubble of your search history. In that spirit, this article will look at some techniques for getting out of the bubble of predictivity. Some are simple, but others require more dedication. The goal is to remove the blinders and be able
to see everything. This article does not address the legal-specific search engines such as LexisNexis, Westlaw, Casetext, and Justia. To my knowledge, these search platforms do not take into account the demographics of the user, except to the extent that a user’s ability or willingness to pay may govern what information they have access to. Moreover, they are limited to certain categories of information (i.e., legal opinions, statutes, and regulations). You may still wish to begin your search on the open internet (to refine your questions) or end your search on the open internet to see if you missed anything.
To remove the blinders, start with your browser. If you are using Google Chrome, run it in Guest Mode. When you start Chrome, it asks you to log in to get access to your preferences. If you want curated entertainment, log in. But if you want to get objective results based on your questions, log out or click on the Guest Mode button in the lower right corner. Alternatively, run in Incognito Mode by clicking on the three dots in the upper right corner and choose “New Incognito Window.” You should also go into settings, under Privacy and Security, and choose “clear browsing data.” I would recommend doing a complete purge every week; choose Time Range = “All time.”
If you use the Microsoft Edge browser, it will already know who you are because it is tied to the Windows operating system. There is a similar option to run without cookies. Click on the three dots in the upper right side of your browser and choose “New InPrivate Window.” Further down on that same menu is a Settings option. Under “Cookies and Site Permissions,” there is an option to remove all cookies and site data, but you will have to first click on “See all cookies and site date” and then click on “Remove all.”
These changes may remove some of the blinders, but they do not guarantee complete anonymity. Your computer broadcasts an Internet Protocol (IP) address. This can be used to identify you to the website you are on, including
Google Search. Moreover, the second you log in to any website, all bets are off; you are a known commodity and full blinders are back on.
One option is to assume an alias or persona. It is a little bit like being a spy. If you appear one way, you will get the information that the providers assume you want. As you would craft a specialized search, craft the personae. Play devil’s advocate and make two personae who are polar opposites. Check out the results. In Google, you could set up an alternative Gmail address that you use for certain types of searches.
You may still be revealed by your IP address. To address this issue, you might consider using a Virtual Private Network (VPN) service. There are several vendors, including Norton Secure VPN, Total VPN, and NordVPN. For a small monthly fee, these services obscure your IP address and replace it with the IP address of one of the VPN provider’s computers. Be aware that VPNs are often used to hide shady activity by shady users. Your new IP address will have a search history and reputation that matches those of all the other users of the VPN service. And so, some of the algorithms may flag you as one of those users and skew your search results.
If you are concerned that the algorithms will skew your search results, you might consider an alternative browser to Google, Microsoft Edge, or Apple’s Safari engine. Other search engines are developed open source or generate revenue from subscriptions. They may have an economic model that doesn’t depend on invading your privacy and altering search results to search up advertising and paid content.
Opera (opera.com) has a reputation for being privacy-friendly—meaning it is easier to configure ad blockers that work and to travel incognito.
DuckDuckGo (DDG) has a free engine that limits advertising to the actual search terms, the way Google used to do it. It hides your search history from
your internet search provider because all searches are run in-app on the DDG website. For an extra fee, DDG will remove advertising completely. Ironically, DDG has been criticized because its search results are not personalized.
Brave (Brave.com) search engine is a newcomer, launched in 2019. It offers the ultimate in private browsing, including VPN technology that hides who you are and your IP address. It also has an interesting approach to advertisements. Users are compensated in cryptocurrency with BAT tokens for clicking on advertising links.
A new option for search is presented by large language model (LLM) search engines like Chat GPT (openai.com/ chatgpt), Google’s Bard (bard.google. com), Search Generative Experience, and Brave Search (brave.com/leo/). LLM uses plain English, instead of keywords, to drive a search. In this way, you can craft a search more precisely. As an added benefit, the search can include, in addition to the user question or prompt, a system message that contains instructions on how to answer the question.
You can expressly ask the AI engine to be biased in a particular way. It can be asked to be creative—in which case you may get some inventive answers— or it can be accurate, in which case it will fact-check each word for a high probability of truth. In OpenAI, the engine used by Microsoft, the accuracy versus inventiveness is represented as a temperature, with cold being the accurate end of the spectrum and hot being the inventive end of the spectrum.
When applied to legal research, if you are writing a legal brief, you can set the temperature to cold or precise when you propose your questions to the AI and ask it to give specific legal citations to supporting cases. On the other hand, if you are drafting a closing argument to a jury, you might set the temperature to hot or creative to get more expansive rhetoric. You can provide the AI engine context by specifying who will be making the closing argument. In this
example, if you are a prosecutor, you will want a different result than if you are acting as defense counsel. With AI you can tweak the algorithm to do what you want.
As an aside, I fed the first paragraph of this article into ChatGPT to see if it could improve the introduction with facts I could not easily find. You can see the result where ChatGPT clarified my movie and television references with factual information about the movie’s origin and corrections about the facts of the particular scenes referenced.
One way to wrestle control from the algorithms is to join or subscribe to a curator who has the bias or specialty that you are seeking. Such a person, site, or community can provide useful information rapidly and can also expose rhetoric, propaganda, and other false information. If you find a website and want to understand its bias, you can go to Media Bias/Fact Check (mediabiasfactcheck.com) and see its rating for the source on different bias spectrums.
A website called AllSides (allsides. com) purports to offer balanced news from left, center, and right. Articles are color-coded from blue (left), purple (center,) and red (right). As a paid subscriber, you can run searches and have your results color-coded.
I was introduced to Reddit (www.
reddit.com) by my 25-year-old nephew and Discord (discord.com) by my son. Instead of focusing on the publishers, information on these sites is organized around topics and affinity groups known as “communities.” Each community has its own URL for ease of access. Most visitors can comment on a post. If a user wants to add a new post, however, they need to satisfy the posting rules of the group. The posts often include links to articles of interest, which are then critiqued. It can be a community-based fact-checking. In this way, information is curated based on the bias of the community. By joining several communities, you may get the level of balance or bias that you are seeking. Be warned, some of the communities are pretty freewheeling.
Many content creators who publish on YouTube or elsewhere also have paid content sites hosted on Substack (substack.com) or Patreon (patreon.com). On these publishing platforms, content creators charge for regular access to their news and opinions. The content creators become your curator. On Substack and Patreon, you discover a content creator and then subscribe to their content. Some offer freebies with an upsell; others require payment to get unlimited access. The content is biased in that it reflects the outlook of the content creator and any commercial sponsors, but it is not biased around who you are.
There are times when the news is too good to be true or so outrageous that it must be wrong. Sources that reputedly get everything wrong sometimes get it right. Several sites review the facts and rate news claims for accuracy. Among the top websites are Snopes (snopes. com), FactCheck.org (factcheck.org), PolitiFact (politifact.com), and TruthOrFiction (truthorfiction.com). These sites focus on the topic and present facts in support of and against the truth of a claim.
These days, many stories will lead with a picture. Anyone who has studied photojournalism knows that the way you frame a picture can indicate bias and can be a source of misrepresentation. Moreover, pictures can be altered, reframed, and mislabeled. With a little effort, you can fact-check pictures with TinEye (tineye.com). If you can get the URL that includes the name of the image file, TinEye will show you every article and website that has used the picture. Many an image that purports to be a tank battle in Ukraine turns out to be a picture from Operation Desert Storm in Iraq.
In the old days, lawyers would go to libraries, government agencies, and document repositories to conduct factual research. Today, lawyers, especially young ones, are becoming more dependent on the open internet to carry out factual research needed to build cases, review transactions, or ferret out possible liability traps.
A lawyer who uses the open Internet for factual research must find all the facts he needs. A search limited by a predictive algorithm that takes into account extrinsic factors about the user can lead to a nightmare scenario. Picture a lawyer standing in front of a court, in a board meeting, or even meeting with a client with only half of the information. And then picture the opposing counsel standing up and having the information that your lawyer never saw on the open internet search. If you are going to use the open internet for factual research, you must remove the blinders. n
Your client is a developer and tells you she applied to the county for a permit for a mixed-use commercial and residential project. The county said that her development complied with the county zoning ordinance but that she must first obtain a Section 404 dredge and fill permit because the US Army Corps of Engineers (the Corps) made a jurisdictional determination that her development is located in “waters of the United States.” Your client asks for your advice.
The Section 404 Dredge and Fill Permit and What It Means Wetlands are transitional areas between aquatic ecosystems and uplands that include salt and freshwater marshes, swamps, wet meadows, bogs, fens, and potholes. Wetlands cover 5.5 percent of the land in the 48 contiguous states. Most are freshwater.
Wetlands are an integral part of the aquatic environment. They reduce flood peaks by storing and conveying stormwater and temporarily retaining pollutants during rainstorms. They are important to groundwater recharge and essential to wetland-dependent fish and wildlife. They are attractive locations for development because they are near water, and their flat surfaces reduce infrastructure costs. Wetlands are regulated by federal and state governments.
Section 404 of the federal Clean Water Act provides that the Corps “may issue permits … for the discharge of dredged or fill material into the navigable waters at specified disposal sites.” 33 U.S.C. § 1344. Your client needs a dredge and fill permit because her development requires dredging and filling, which is typical in wetlands development. There are no
Land Use Update
Editor: Daniel R. Mandelker, Stamper Professor of Law Emeritus, Washington University School of Law, St. Louis, Missouri.statutory criteria for deciding when a dredge and fill permit should be issued.
The Corps shares administration of the Section 404 program with the Environmental Protection Agency (EPA). The Corps issues the Section 404 permits. EPA develops and interprets additional policy, guidance, and environmental criteria for evaluating permit applications and has a rarely-exercised statutory permit veto authority.
The first issue your client must consider is whether the Corps correctly decided that her property is located in wetlands. Both EPA and the Corps define wetlands as “areas that are inundated or saturated by surface or groundwater at a frequency and duration sufficient to support, and that under normal circumstances do support, a prevalence of vegetation typically adapted for life in saturated soil conditions.” 40 C.F.R. § 120.2(c)(1). Your client can appeal the jurisdictional determination, but an appeal is costly and time-consuming and may not be successful.
If your client does not appeal the jurisdictional determination, she can apply for a general permit that is available nationally for activities substantially similar in nature and that cause only minimal individual or cumulative environmental effects. 33 C.F.R. § 323.2(h). An individual permit is not required. Almost all Section 404 permits are general permits, but your client’s project probably does not qualify because it is a major land development that needs an individual permit.
Corps regulations contain “evaluation factors” the Corps uses “as appropriate” to decide whether it should issue a Section 404 individual permit. 33 C.F.R.
§ 336.1(c). These factors include water quality, the unnecessary alteration or destruction of wetlands, endangered species, and fish and wildlife. An EPA regulation additionally requires all general and individual permits to comply with other federal environmental and similar laws, including the Endangered Species Act and the National Environmental Policy Act. 40 C.F.R. § 230.10(b). The Corps grants thousands of individual permits a year, usually with remedial conditions.
A Corps regulation gives some effect to local land use plans and regulations: “Where officially adopted state, regional, or local land use classifications, determinations, or policies are applicable, they normally will be presumed to reflect local views and will be considered in addition to other national factors.” 33 C.F.R. § 336.1(c)(11)(ii). Though somewhat ambiguous, this regulation apparently means that the Corps will usually accept “local land use classifications, determinations, and policies” but that they are just one factor the Corps considers in its decision. Compliance with county zoning does not necessarily mean that the Corps will grant your client a Section 404 permit.
An EPA regulation provides an additional requirement. The Corps can issue a dredge or fill permit only if there is no “practicable alternative to the proposed discharge which would have less adverse impact on the aquatic ecosystem, so long as the alternative does not have other significant adverse environmental consequences.” 40 C.F.R. § 230.10(a)(1). An alternative is “practicable” only “if it is available and capable of being done after taking into consideration cost, existing technology, and logistics in light of overall project purposes.” Id. § 230.10(a)(2). The regulation does not explain how the Corps should apply these factors, although technology usually is not important. Practicable alternatives “identified and evaluated” in a “planning process” shall be considered “as part of the consideration of alternatives.” Id. § 230.10(a)(5).
Alternatives analysis is front-loaded, powerful, and costly. Off-site alternatives usually are not practicable, such as an off-site location for the mixed-use development your client proposes. Alternatives usually are on-site with required project modifications that minimize environmental effects, such as a smaller parking lot to avoid the loss of wetlands or a different on-site location for development. Well-presented projects are approved, but getting agreement depends on the level of detail, the geographic scope of a proposed project, and the size of alternatives. See my article, Practicable Alternatives for Wetlands Development Under the Clean Water Act, 48 Env’t L. Rep. 10894 (2018).
The Corps must consider two additional requirements once it makes the practicable alternatives decision. One is a “public interest” requirement, which usually is not a problem. For most permit applications, a presumption exists that “a permit will be granted unless the district engineer determines that it would be contrary to the public interest.” 33 C.F.R. § 320.4(a)(1). The Corps makes the public interest decision through a balancing process that requires “consideration” of several factors, including conservation, economics, and wetlands. The Corps will “normally accept” decisions by state, local, and tribal governments on “land use matters” unless there are “significant issues of overriding national importance.” Id. § 320.4(a)(2). The public interest regulation also includes “general criteria” that have additional factors the Corps must consider, such as the “beneficial and detrimental effects on the public and private uses to which the area is suited,” and includes a somewhat different practicable alternatives requirement. Id
EPA guidelines prohibit Section 404 permits “which will cause or contribute to significant degradation of the waters of the United States.” 40 C.F.R. § 230.10(c). This requirement presents a problem only for large projects with complex issues, such as your client’s project.
The Clean Water Act applies only to “navigable waters,” defined as “waters of the United States.” 33 U.S.C. §1362(7). The regulations
use this definition. 40 C.F.R. §328.1. How courts interpret the statutory term decides when wetlands trigger the Section 404 permit program. The Supreme Court had struggled with the jurisdictional issue for some time. See, e.g., Rapanos v. United States, 547 U.S. 715 (2006).
Sackett v. EPA (II), 598 U.S. 651 (2023), resolved the controversy. In a questionable narrow decision, it substantially reduced the jurisdiction of the Clean Water Act. Accepting the Rapanos plurality opinion, the Court adopted a water-based interpretation that held that the statute applies only to wetlands that are “as a practical matter indistinguishable from waters of the United States,” such that it is “difficult to determine where the ‘water’ ends and the ‘wetland’ begins.” Wetlands must have “a continuous surface connection to bodies that are ‘waters of the United States’ in their own right, so that there is no clear demarcation between ‘waters’ and wetlands.” Isolated wetlands “separate from traditional navigable waters” are not included, a major exclusion. “Neighboring” wetlands are no longer included as “adjacent” wetlands.
The Court rejected as “particularly implausible” an EPA rule providing that adjacent wetlands are included if they possess a “significant nexus” to traditional navigable waters, a rule proposed by Justice Kennedy in his Rapanos concurring opinion. The Court held that the rule was inconsistent with the text and structure of the statute and clashed with the “background principles” of statutory construction. By substantially extending the statute’s jurisdiction, the EPA rule usurped the recognized residual authority of states to regulate wetlands. The Court also claimed that the significant nexus rule failed constitutional vagueness by giving little notice to landowners of their statutory obligations.
After the Court decided the Sackett decision, EPA and the Corps of Engineers issued a revised rule to implement it. 88 Fed. Reg. 61694-01 (2023). The rule defines “waters of the United States” as wetlands adjacent to “[r]elatively permanent, standing or continuously flowing bodies of water identified in … this section
and with a continuous surface connection to those waters.” 40 C.F.R. § 120.2(a)(4)(ii). The revised rule deletes the “significant nexus” test and redefines “adjacent” as having a “continuous surface connection.” Id. § 120.2(c)(5). “Neighboring” wetlands are no longer included. Your client may need a new jurisdictional determination that decides whether her project is covered by the statute.
Narrowed federal jurisdiction means that state wetlands laws have a larger role in wetlands protection. Every state regulates wetlands to some degree, and state programs are diverse. Some states regulate wetlands by considering the effect of a federal permit on wetlands when they decide whether to issue the state water quality certification approval that federal permits require. Other states have a statute that requires a state agency permit for development in wetlands or, like the federal law, for dredging and filling.
Statutory approval criteria for state permits may require consideration of the “public interest” or the “policy” of a wetlands law. The North Carolina statute is an example of a more specific statute that requires the state agency to consider the “significant adverse effect” of development on specified environmental resources. N.C. Gen. Stat. § 113-229(e). The permit may include “conditions as may be reasonably necessary to protect the public interest with respect to the factors enumerated” in the statute.
Id. See Environmental Law Institute, State Wetland Protection: Status, Trends & Model Approaches (2008), http://tinyurl. com/2p8ssmtu.
Sackett diminished federal jurisdiction over wetlands development, but when it applies, the Section 404 program often triggers a permit approval process that is complicated, costly, and lengthy. Many developers avoid wetlands to evade this process, and your client may make this decision. Simplification and clarification of the statute and its regulations are required to identify the issues important to wetlands protection that should be considered in a simplified permit process. n
I didn’t learn what it meant to prioritize until I was in my 40s. I understood the dictionary definition—to treat something as more important than other things— but not how one was able to make time for those important things. There was too much work to do, and there were not enough hours in the day.
I didn’t consider work to be my biggest priority, but I worked all the time because the work was never done and my clients and colleagues were counting on me. Eventually, it wore on me. It grew to resentment. I wasn’t taking ownership of my work habits in part because I hadn’t yet identified my goals and didn’t know what I was working towards and what the personal sacrifice was for.
Several years into practice, I worked with a career coach, and she not only helped me find clarity in identifying my goals but also gave me my first lesson in how to prioritize. She asked me what I was doing that (1) furthered my goals, (2) brought me personal satisfaction, or (3) neither furthered my goals nor brought personal satisfaction. And then she told me to stop doing the things that fell into the third category.
At the time, my goals were career-oriented. Through the process, I realized that what I wanted was to manage my own client relationships and be the architect of their planning. Though I had not aspired to be a law firm partner, the role of a partner is what I had described. Being able to identify this as my goal was the key to being able to understand what I was doing that furthered that goal, and what I was doing that did not. Prioritizing the things that furthered my goal and saving valuable time and energy by not doing things that weren’t, helped me to build my own practice.
And then I had kids. It was important to me to be an active and engaged parent, and I knew my kids were counting on me in big ways. This priority was easy to identify, but between being a parent and a partner, it was hard to find the hours in my day to sleep, let alone work out, enjoy time with friends, or otherwise embrace my personal well-being.
And then we had a pandemic—my oldest was about to turn
Contributing Author: Marissa Dungey is a co-founder of Dungey Dougherty PLLC, the co-chair of the Business Planning Group and Vice-Chair of TE CLE for RPTE, an ACTEC fellow, and an adjunct law professor.
three and my youngest not quite one—and it was fast becoming the busiest year-end of my career. I pushed through even as sleep became all but nonexistent. By the time the year was over, I had so de-prioritized my health and personal well-being that I knew I had to rethink what I was doing. I needed to find a sustainable way to keep doing work that I loved while continuing to be an active and involved parent, which meant I needed to start prioritizing my well-being.
We’ve all heard that a person cannot have it all. Men are told parenting is women’s work. Women are told to “lean in” to their career or “lean out” for their family, but you can’t have both at the same time. It’s in my nature to challenge assumptions and authority, and being told I can’t be an active parent while maintaining a successful high-end practice and embracing my personal well-being didn’t sit well with me. I was determined to find a way and what I found is that the trail had already been blazed. There are plenty of people (men and women) who do have it all at the same time. They don’t talk about it enough. (To be fair, they probably don’t have time for that!)
I recently spoke on a webinar panel for RPTE’s Career Development and Well-being Committee titled “Prioritizing Well-being while Managing a Practice—Tips from Law Firm Partners” with other attorneys who manage a practice, are parents, and prioritize their personal well-being. Reflecting on my own experience and hearing from my co-panelists, here are some of the tips we shared on how we make it work:
Unfortunately, the legal industry is not known for prioritizing personal well-being. It’s more commonly known for stress, depression, and substance abuse. There is no more important tip that our panel could offer than to embrace personal well-being.
Personal well-being is important not just to health and vibrancy in later years, but also to having a long career and the financial security that comes with it. Your clients and your family don’t just need you now. They need you in the future, so your personal well-being is good for them, too.
It goes beyond taking care of yourself with healthy eating and exercise. Embracing your personal well-being can
also mean finding time for the things that bring you personal satisfaction or joy. Spend time with friends, volunteer, coach, get involved in your community, or be a thought leader. Above all, give yourself grace—it’s a work in progress for all of us.
Once you’ve identified your goals, success is (literally) defined as achieving your goals. Don’t measure your success or your ability to succeed by assumptions pervasive in the legal industry. Here are a few such assumptions I can debunk:
1. To be successful, you have to work long hours. FALSE. It’s quality not quantity. If you’re good at what you do, you can be successful. One of my favorite anecdotes from the panel was from a copanelist who worked a reduced schedule early in her career at a big law firm to balance the demands of parenthood. Not only did she become a partner, but she currently heads the US trusts and estates practice group in her AM Law 200 law firm. Working closer to a 40-hour week (rather than the 60-70 hours necessary to meet billing targets at a big firm) is not, and should not be treated as, part-time.
2. To have sophisticated clients, you have to work at a big law firm. FALSE. If you have a reputation for doing good work and being responsive, sophisticated clients will want to work with you. I speak from personal experience, having opened my own law firm three years ago (started with two attorneys, and now there are eight attorneys) and we get more referrals for ultra-high-net-worth clients with complex needs than we have the capacity to take on.
3. You have to choose between having a career and being an active parent. FALSE. It’s important to acknowledge that this is just as big an issue for male attorneys as for female attorneys. The perpetuation of gender bias in all legal
jobs pushes women away from their careers as much as it pushes their male counterparts away from an active parenting role.
Defining your success starts with identifying your goals, and your goals should be reflective of what you want for your career, not what the legal industry suggests we all want.
One thing I cannot challenge is that there are only 24 hours in a day because there just are. What I learned about prioritizing is that if something really is a priority, then it has to be allocated some portion of the day. If you start with 24 hours, after taking time for sleep and other activities that promote your personal well-being, and time to engage with family, there will still be time left in the day for work. Work may need to take priority on a particular day, but if it takes priority every day, there will be no time left for other things. Be intentional about your day and if something is truly a priority, give it the time.
One of the greatest benefits of managing a practice is the flexibility to be in
control of your day. Take advantage of technology. Because of it, I can be home most evenings with my kids for dinner and homework and still fit in an extra couple of hours after they go to sleep. For me, it’s also a benefit to my practice. In my field, many of my clients struggle to find time together during the day to connect on their personal planning and appreciate the ability to have a Zoom call outside of traditional working hours. Thanks to technology, we don’t need to work exclusively during traditional work hours—work when it works for you and your practice.
The tips set out above may not be achievable at every law firm or legal industry job today. If you find that it’s not working where you are, advocate for what you need. If advocating within your organization doesn’t give you the ability to achieve your goals, you have a marketable skill and it may be time to explore other opportunities. Build out your network of peers so that you can talk with them both to help frame your goals and to learn about other organizations and individuals who may be more supportive. You don’t need to leave the practice of law if that’s the work you want to be doing. Being involved in RPTE was a light for me. The Section is full of professionals who have successful practices and prioritize volunteering and thought leadership.
Learning to identify and prioritize the things that matter to you starts with introspection to determine what your goals are and what is important to you. I consider time our most valuable resource. Not doing things that don’t further your goals or provide personal satisfaction (i.e., saying no, delegating, or outsourcing) will give you more time in the day for things that you want to be doing. Make a schedule to be intentional about your day. Start with 24 hours and work backwards allocating time to your priorities. It won’t be a perfect system because emergencies happen at work and at home, and you’ll need to be able to adapt and give yourself grace. You can have it all, at the same time, when it’s on your terms. n
I recently reconnected with a friend who was in a serious dating relationship when we last spoke. I asked him how the relationship was going, and he said that he called it off because they couldn’t agree on the definition of “next.”
I began writing this issue’s column on a Saturday during football season. If I shared that my favorite professional football team is playing their archrivals “next Sunday,” I suspect readers would understand the game was in eight days, not tomorrow. According to dictionary. cambridge.org, “next” means the first thing or person immediately after the present thing or person.
But how do we reconcile this with the common understanding in this scenario? You are driving a car on the highway. A passenger is navigating and tells you to take the next exit. Is that the next one you come to or the one after that? The answer may be the unspoken rule that the first exit (Sunday) you come to is “this” exit (Sunday), and the one after that is the next one. Why? Because it is the one immediately after the present one.
This brings us to the point of this issue’s column—the interpretation of law. Do we focus solely on the ordinary meaning of the legal text or consider non-textual sources? This translates into whether we focus on what the words mean to ordinary readers (textualism) versus what the words mean to the legislators who passed the law (intentionalism).
Seeking to interpret through the text alone is the essence of textualism. The emphasis of textualism is on the ordinary public meaning of words at the
The Last Word Editor: Mark R. Parthemer, Glenmede, 222 Lakeview Avenue, Suite 1160, West Palm Beach, FL 33401, mark. parthemer@glenmede.com.
time of enactment. See, e.g., Bostock v. Clayton Cnty., 140 S. Ct. 1731, 1738 (2020) (Gorsuch, J.) (looking for the “ordinary public meaning” of Title VII’s prohibition on discrimination because of “sex”); New Prime Inc. v. Oliveira, 139 S. Ct. 532, 539 (2019) (Gorsuch, J.) (looking for the ordinary meaning of “contract of employment”).
We can examine how the law understands post-positive modifiers attached to certain antecedents. For example, “The general saw the first shot through the binoculars.” What does “through the binoculars” modify? Did the general observe via binoculars the first shot, or did the general observe the first shot to pierce the binoculars?
Canons of construction provide rules helpful for reliably interpreting statutes. In this case, it would be the series-qualifier canon. And this was a matter of critical importance in a recent Supreme Court case. In Facebook, Inc. v. Duguid, 592 U.S. 395 (2021), an issue arose on the interpretation of a provision of the Telephone Consumer Protection Act. The relevant part of the statute reads “to store or produce telephone numbers to be called, using a random or sequential number generator.” 47 U.S.C. § 227(a)(1). The parties agreed that “using a random or sequential number generator” modified “produce”; the issue was whether it also modified “store.”
For users who opt-in, Facebook has a technology that will send an alert when there is an attempt to log into one’s account from an unknown device or browser. Duguid received several notifications, even though he never had a Facebook account. Unable to stop the notifications, he brought a putative class action suit against Facebook. Like watching the ball in a tennis match go back and forth, the lower court ruled in favor of Facebook, the Court of Appeals
reversed, and the Supreme Court reversed the reversal.
The Court’s holding strongly relied on the series-qualifier canon. Eight justices joined in the opinion. Justice Sonia Sotomayor wrote the following:
Under conventional rules of grammar, “[w]hen there is a straightforward, parallel construction that involves all nouns or verbs in a series,” a modifier at the end of the list “normally applies to the entire series.”
592 U.S. at 402, quoting A. Scalia & B. Garner, Reading Law: The Interpretation of Legal Texts 147 (2012) (Scalia & Garner).
Standing alone, Justice Alito concurred in the judgment but disagreed with the reliance on this canon. He expressed concern that judges throughout the system would begin applying the canon in a toorule-like fashion, ignoring how common understanding informs the way we read words. Id. at 413. He may not be wrong.
For anyone interested in studying this subject’s nuance in greater detail, I strongly recommend Adam G. Crews, The So-Called Series-Qualifier Canon, 116 Nw. U. L. Rev. Online 198 (2021). Crews, citing a law review article written by now Harvard Law professor and then Columbia Law professor John Manning, proclaimed Justice Scalia as one of the clearest and most influential voices for modern textualism, and described textualism’s goal as identifying an objectified intent —the intent that a reasonable person would gather from the text of the law, versus the subjective intent, such as the intent of the legislature. Id. at 202, citing John F. Manning, Textualism as a Nondelegation Doctrine, 97 Colum. L. Rev. 673 (1997). Textualism and a reliance on canons have taken root in the current Supreme Court. No one can know in advance where this may lead. n
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The American Bar Association’s 36th Annual RPTE National CLE Conference
This premier American Bar Association’s Real Property, Trust and Estate Law Section Conference will take place in Washington, D.C., May 8–11, 2024. The American Bar Association’s 36th Annual RPTE National CLE Conference is renowned for its exceptional business connection opportunities, innovative programming, and trending legal topics. We cannot forget about the latenight fun if you choose!
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