Virginia Real Estate, Land Use & Construction Law

Lien Rights of Lenders and Landlords - Part II

John G. Kelly — Sun, 10 Mar 2013 17:26:51 -0500

In Part I of this blog post, we discussed the varied interests of the landlord and the tenant's lender in the tenant’s personal property located at the premises in the context of a commercial lease. Part II below will discuss suggested compromise solutions and a typical landlord waiver. Note that the article that is the basis for this post first appeared in the December, 2012 issue of Commercial Leasing Law & Strategy.

Landlord Waiver Agreement in Favor of Tenant’s Lender

As noted above, the tenant’s lenders will also want a security interest in the tenant’s personal property to secure the repayment of the tenant’s loan obligations, creating a conflict between the lien rights of the landlord and the lender. Because of this conflict, as a condition to the financing, a lender will typically request that the landlord execute a waiver of its security interest. Landlords may push back at this request, but will often to agree to at least subordinate their landlord’s lien rights to that of the lender’s security interest. The landlords recognize that financing is a critical need for their tenants, without which the tenant would not be able to operate its business and generate the revenues needed to pay the rent, so they typically agree to the waiver or the subordination of their lien rights for larger, creditworthy tenants. The landlord would obviously prefer the subordination over the waiver, as a secondary secured position could at least provide some limited recovery in a default situation. In any event, landlords would be wise to pay close attention to the form landlord waiver presented by the lender, as such forms often grant lender’s favorable rights with regard to the leased premises and place burdensome obligations on the landlord. The tenant is not typically a key party in the negotiation of the landlord waiver, as their main role is to serve as referee between their landlord and lender. However, the sophisticated tenant would be wise to include the form of their lender’s required waiver form as an exhibit to their lease agreement, to save time and expense later. Note that the landlord could likely pass its legal fees incurred in negotiation the landlord waiver onto its tenant. Five key landlord-friendly points that should be addressed in the landlord waiver/subordination document are set forth below.

First, the landlord should try to subordinate its landlord’s lien instead of an outright waiver. The true value of a secondary position may be questionable, but there could be some recovery and it is better for the landlord to be a secured creditor in the event of a bankruptcy.

Second, the landlord should try to retain control over the process of the lender removing the collateral. For example, the lender should only remove the collateral after business hours and from designated loading areas. The lender should also agree to pay for any damage caused by the removal, and indemnify landlord in case of third party claims resulting from the lender’s entry into the premises for such purposes. The landlord could also insist that the lender furnish evidence of insurance before entering onto the premises to remove the collateral.

Third, the parties need to make clear what equipment is part of the collateral. The landlord should agree that personal property remains personalty (and not part of the real estate) in exchange for the lender agreeing not to pursue its security interest against building systems such as plumbing and HVAC or other fixtures. The landlord could violate the terms of its own mortgage were it to waive its interest in these items. Further, the landlord will want to make sure that the tenant’s leasehold interest in the premises is not part of the collateral. Lease provisions dealing with the assignment of the lease by the tenant are typically very landlord-friendly and the landlord does not want the tenant to an “end run” around those provisions by including the lease itself as part of the collateral package consented to by the landlord in the waiver/subordination document.

Fourth, the lender will want notice of tenant’s default under the lease and an opportunity to cure on behalf of the tenant. This presents an administrative burden for the landlord, so the number and cause of notices should be limited, if possible, to notices which may result in a termination of the lease. With respect to giving the lender an opportunity to cure tenant’s default, the time period should be short and limited only to monetary defaults.

Fifth, the lender will request a period of time following the termination of the lease (perhaps up to sixty or ninety days) to take inventory and remove the collateral. Such a request by the lender may not be unreasonable, but the landlord should insist that the lender pay the amount which would otherwise be payable as rent under the lease during such period.

Conclusion

Subject to the terms of their lease agreements and the applicable state law, there are many kinds of lien rights available to landlords in the personal property of their tenants. Landlords would be wise to learn the lien laws of their respective states and draft their leases accordingly. At the same time, lenders for the tenants will object to these broad landlord’s liens as they will look to secure their loans against the same personal property. The resulting conflict is best resolved through a fair subordination of landlord’s lien agreement, which to save time, expense and aggravation later should be attached to the lease as a pre-approved form.

Lien Rights of Lenders and Landlords - Part I

John G. Kelly — Tue, 29 Jan 2013 11:10:59 -0500

Commercial real estate landlords and the lenders for their tenants have competing interests with respect to the tenant's personal property located at the demised premises. The landlord is looking to secure the tenant's rental obligations by taking a lien against the tenant's fixtures, inventory, and equipment located in the space, which may be particularly valuable in the case of retail and restaurant tenants, while the tenant’s lender providing premises fit-out and/or working capital financing desires a security interest in the same property . The landlord’s lien may be created either by contract under the terms of the lease or through operation of law, and allows the landlord to levy the property located at the demised premises of a tenant who has failed to pay rent. While the tenant would rather not allow either party to maintain a lien against its personal property, the tenant's action in this regard is often dictated by the requirements of its lender. While national retailers with strong credit typically have the leverage to insist on the waiver or subordination of their landlord’s lien rights, most smaller or regional tenants must navigate between their landlord's and lender's competing interests. Part I will discuss the varied interests of the landlord and the tenant's lender in the tenant’s personal property are discussed in this article, and Part II will discuss suggested compromise solutions and a typical landlord waiver. Note that the article that is the basis for this post first appeared in the December, 2012 issue of Commercial Leasing Law & Strategy.

Depending on the state, there are usually three ways that landlords obtain lien or other security interests in the tenant's personal property. The first method is not a lien, per se, but the traditional common law rights of distress and distraint, which enable a landlord to seize and sell a tenant’s personal property located at the premises in order to reimburse the landlord for the amount of unpaid rent and other liability. In Virginia, the landlord must file a sworn petition with the court which demonstrates the justifications for the attachment of the levy as set forth in the Code of Virginia, but the landlord must state that the tenant intends to flee, conceal itself from creditors or sell or destroy the property. If the court approves the petition, the sheriff will either take possession of the property or the tenant will be unable to sell, move, destroy or dispose of the property without facing legal consequences.

Second, in about half of the states, landlords have been given statutory landlord’s lien rights. The statutory lien rights differ from state to state as to timing, priority and limitations, but typically provide the landlord with a lien on all of the tenant’s personal property located within the demised premises as security for the tenant’s obligations under the lease. In many states, these statutory liens replace or supplement the common law remedies of distress and distraint. In some states, the statutory lien rights are limited to a specific amount or period of time and many states provide that the landlord's lien is subordinate to any perfected security interests in the tenant's personal property existing before such property was transferred to the premises. There is no uniform or model landlord’s lien law and reference must be made to the specific statutes in each applicable jurisdiction. For example, in the District of Columbia, the statutory lien terminates three months after the rent owed became due or upon the termination of any action seeking such unpaid rent brought by landlord within that three-month period. By comparison, the statutory landlord's lien in Virginia is quite strong, relating back to the commencement of the lease and superior to any other lien upon the tenant's property located at the premises, except for liens attaching prior to the commencement of the lease term and tax liens. Maryland has no statutory lien rights in favor of a landlord, so a landlord would have to pursue an action for distress with the ability to then lien the personal property if successful in obtaining a judgment. In all of the states, enforcement of the statutory landlord’s lien rights requires the landlord to file a court action and follow very detailed procedures designed to afford the tenant adequate due process prior to losing its property. While the statutory landlord’s lien provides additional security for the landlord, it is also a cumbersome progress that is expensive and time consuming, limited by statute and subject to avoidance in the event of a tenant bankruptcy.

The third way that a landlord may obtain a lien against the tenant’s personal property and fixtures is through a consensual security interest under Article 9 of the Uniform Commercial Code (the “UCC”). Since a written security agreement is required to create the security interest, the landlord must include language in the lease setting forth the security interest and adequately describing the collateral. The landlord must then perfect the security interest by filing a UCC financing statement in the appropriate state filing office, which financing statement may be filed without the tenant’s signature provided the filing is authorized by the tenant. Without the required filing, the landlord’s security interest would be unperfected and subordinate to any creditor who has a perfected security interest in the same personal property. After a tenant default, the landlord may foreclose on the property pursuant to the procedures set forth in the UCC without requirement of filing a court action or exercising other judicial process. The UCC security interest offers significant advantages over both the common law rights of distress and distraint and a statutory landlord’s lien because it provides the landlord with greater flexibility in enforcing the lien while giving the landlord the right to immediate possession and control over the tenant’s secured property without the need for judicial action, and is a much less burdensome process than enforcing a statutory landlord’s lien or pursuing an action for distress. Additionally, in the event of the tenant’s bankruptcy, a landlord maintaining a perfected UCC security interest would be treated as a secured creditor, subject to the automatic stay and other bankruptcy protections offered the tenant as debtor.

One caveat for landlords is that UCC financing statements are only valid for five years, so the landlord may want to implement a tracking system in order to safeguard against the failure to file the necessary continuation statements prior to their expiration.

Right to Self-Help in DC, MD and VA

John G. Kelly — Thu, 12 Jul 2012 15:31:24 -0500

Self-Help. Ok or Not?

“Self-help,” in a leasing context, typically refers to the landlord’s historical remedy of locking out a defaulting tenant and obtaining possession of the premises without going through judicial procedures. Traditionally under the common law, a landlord was subject to few limitations in choosing its remedies against a defaulting tenant, including the liberal use of self-help. However, modern jurisprudence provides tenants with much greater protection from eviction and also seeks to prevent possible violent landlord-tenant confrontations. Therefore, the majority of states have now abolished the traditional rule of self-help and permit landlords to evict tenants only through court proceedings. In connection with the move away from self-help, most states have established summary eviction proceedings, which in theory provide landlords a more efficient and expedient method of retaking possession than traditional civil litigation.

Even with respect to those states that continue to recognize a landlord’s right to self-help, many attorneys are very reluctant to recommend this remedy for their landlord clients given (i) the exposure for significant liability to the tenant if the tenant has a valid defense to the alleged default, (ii) the availability of summary ejectment proceedings and (iii) the often correct perception that courts take a dim or outright hostile view towards self-help. Note further, that in the minority of states that still permit a landlord to exercise self-help, for the most part this remedy is expressly limited to commercial landlords with residential tenants already being afforded much greater protection. For the commercial landlord or tenant operating in the District of Columbia, Virginia and Maryland, this article will focus on the widely differing treatment of self-help under the respective laws of these neighboring jurisdictions.

District of Columbia

The District of Columbia has followed the modern trend away from self-help. It is settled law that a commercial or residential landlord in Washington, D.C. cannot use self-help to evict a tenant. In Simpson v. Lee, 499 A.2d 889 (1985), the District of Columbia Court of Appeals held that neither the landlords of commercial or residential property can employ the common law right of self-help. In an earlier case, Mendes v. Johnson, 389 A.2d 781 (1978), the court reasoned that, when Congress created a summary judicial process to enable a landlord to reacquire possession of property, Congress necessarily abrogated the landlord’s right of self-help. Accordingly, the Mendes decision found that a landlord cannot unilaterally evict tenants by, for example, changing the locks or removing their personal possessions.

Virginia

In Virginia, the commercial landlord retains the traditional remedy of self-help with certain importation limitations. First, the lease must not specify otherwise, so the default and remedy provisions will require great scrutiny for the existing lease and careful drafting for the lease under negotiation. Second, the landlord must not create a breach of the peace or use unreasonable force. To avoid a breach of the peace, most landlords in Virginia exercising self-help choose to change the locks in the middle of the night while the tenant’s business is closed and the premises unoccupied. As in most states, self-help remedies have been eliminated for residential landlords pursuant to Virginia Code sections 55-225.1 and 55-248.36.

The leading Virginia case on commercial self-help remains Shorter v. Shelton, 183 Va. 819 (1945), where the Supreme Court of Virginia reaffirmed the landlord’s common law right of entry. Shorter v. Shelton makes clear, however, that no more force than is reasonably necessary is permitted, and that liability for the excessive use of force by a landlord is recognized.

Maryland.

Maryland is similar to Virginia in the approach to self-help, but Maryland courts have made very clear that they discourage the use of self-help and would prefer landlords exercise their judicial remedies. The lease must be clear that re-entry is an available remedy for the landlord without an express prohibition against self-help. The tenant must also be in default under the lease beyond any applicable notice and cure period. Finally, the retaking of possession by the landlord must be peaceful. Note that a residential landlord in Maryland may never employ self-help, but only pursue eviction through the judicial process.

The leading Maryland case on this subject remains K&K Management, Inc. v. Lee, 315 Md. 137 (1989), where the Court of Appeals of Maryland makes clear that re-entry is a proper remedy after a breach of a commercial lease, and that it is not necessary for the landlord to resort to legal process provided the repossession can be effected peacefully. The court in K&K Management provides, however, that “(w)e do not encourage resort to self-help, and, for all of the practical reasons which the instant action makes abundantly clear, the Bar usually counsels against it.”

Because of Maryland’s stated preference for the judicial process and discouragement of self-help, the commercial landlord choosing to move ahead with self-help must avoid any possible disturbance of the peace, no matter how trivial.

Conclusion.

Because of the potential liability for damage to the tenant’s property and interruption of the tenant’s business, landlords must tread very carefully in Virginia and Maryland, or other states recognizing variations of the traditional common law rule, before deciding to exercise self-help. In many cases, the practical considerations should control, with exercising every legal right afforded under the lease not always being the wisest decision for the pragmatic commercial landlord.

Many attorneys will never advise their commercial landlord clients to exercise self-help, given the risks of liability and the relative ease of modern summary ejectment. Other more aggressive attorneys will counsel their landlord clients to take a more aggressive approach, arguing that immediate repossession of the premises with the possibility to re-lease at market rates more than offsets the potential exposure to damages.

Instead of taking the view that self-help should never be utilized, it is best to analyze each situation on a case-by-case basis since self-help, when correctly applied, can be an effective option for the careful landlord. If the landlord does decide to exercise self-help, it is paramount that repossession be peaceful, witnessed and well documented with all of the tenant’s personal property inventoried and protected. Further, self-help should only take place during a time when there is no possibility for a contentious disturbance or breach of the peace. If the tenant resists in any fashion or arrives during the changing of the locks, the landlord is better served to back down as use of the formal judicial process could spare the landlord in the long run. No use of force, even minimal, should ever be used.

If you are a commercial landord or tenant and want to discuss these issues, please contact John G. Kelly at 703-284-7251 or at jkelly@beankinney.com

A Landlord's Duty to Mitigate. Part IV

John G. Kelly — Fri, 22 Jun 2012 10:46:32 -0500

In this series we have been examining a landlord's duty to mitigate their damages after a default by the tenant. Earlier we looked at the laws in the District of Columbia and Virginia. An examination of Maryland's law is below.

Maryland

Maryland courts traditionally followed the common law rule that a commercial landlord had no duty to mitigate damages, but recent decisions have modified the rule significantly and even left open the possibility that the traditional view may be in danger. In Wilson v. Ruhl, 356 A.2d 544 (Md. 1976), the Court of Appeals set forth a landlord’s option when a tenant wrongfully abandons a commercial lease prior to expiration as follows: (i) the landlord may accept the surrender, thereby terminating the tenant’s obligation to pay future rent; (ii) the landlord may re-enter for the account of the tenant, re-let, and hold the tenant liable for the deficiency; or (iii) the landlord may do nothing and hold the tenant liable for the entire amount of rent payable during the remaining term of the lease.

However, in Circuit City Stores, Inc. v. Rockville Pike Joint Ventures Limited Partnership, 829 A.2d 976 (Md. 2003), the Court of Appeals moved closer toward the modern rule by applying contract law principles to hold that the landlord must mitigate its damages upon the landlord’s termination of a lease because of a tenant default. The Circuit City opinion discussed how survival clauses, where a tenant is obligated to pay post-termination rent as damages, rely on contract law rather than real property law for the enforcement of such an obligation. Accordingly, because the right to collect post-termination was a contractual obligation, a landlord who terminates a lease or accepts a surrender must accept the contract law doctrine of the duty to mitigate damages. Further, the court did not expressly affirm the landlord’s common law right to do nothing, raising the possibility of a future adoption of the modern rule in Maryland.

Note that like Virginia, Maryland has also enacted a statute that imposes a duty of mitigation on residential landlords.

Both landlords and tenants need to be aware of applicable state law concerning a landlord's duty to mitigate when negotiating the default provisions of a commercial lease. Further, landlords need to understand the consequences of enforcing certain remedies such as terminating a lease or accepting a surrender after a tenant default. The laws of the states differ significantly and the parties could be exposed to unexpected consequences if they do not draft the remedies provisions with due consideration being given to the applicable law in such jurisdiction on tenants and landlords.

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John G. Kelly is an attorney with Bean Kinney & Korman in Arlington, Virginia. He represents national retailers and landlords located primarily in the Washington, D.C. metropolitan area.

A Landlord's Duty to Mitigate. Part III

John G. Kelly — Mon, 04 Jun 2012 15:13:36 -0500

This series focuses on a commercial landlord's duty to mitigate their damges after a default by a tenant. Earlier we discussed the District of Columbia's treatment of the duty to mitigate. A discussion with respect to the law of Virginia is below, with Maryland to follow shortly.

Virginia

A commercial landlord generally has no duty to mitigate under the law of the Commonwealth of Virginia. However, certain older Virginia cases have held that a landlord has a duty to mitigate damages by accepting or procuring a new tenant in the rare situation where a lessee fails to ever occupy or take possession of the leased premises. These cases have not imposed a duty to mitigate upon the abandonment of premises after a tenant has taken possession. In James v. Kibler's Admr., 94 Va. 165 (1896), the tenant failed to take possession and occupy under the terms of the lease. The court held that the landlord's measure of damages was the difference between what he had received under the violated lease, and what he would have received from the purchaser of the lease at either a private or public sale. The court also remarked that the landlord had a duty to minimize the amount of its damages.

The court in Crowder v. Virginia Bank of Commerce, 127 Va. 299 (1920), however, declined to extend the rule from James v. Kibler's Admr, to cover a tenant who had abandoned leased property after having taken possession. The court distinguished James from Crowder on the grounds that it dealt with a refusal to take possession, rather than an abandonment. The court held that upon a tenant's abandonment before the expiration of the term, a landlord will not be required to re-let the premises for the benefit of the tenant, but may, at its election, allow the premises to remain vacant and recover the rent from the tenant for the remainder of the term.

A more recent case, TenBraak v. Waffle Shops, Inc., 542 F2d 919 (4^th Cir. 1976) affirmed the older cases listed above. The court noted that the "remedies of a landlord in an action against his tenant are generally recognized, in the absence of express statutory or judicial modification, to be the same as the remedies permitted at common law." The opinion goes on to hold that the law of Virginia allows the lessor certain options when a tenant abandons the premises, the landlord can "re-enter and terminate the lease, it may reenter for the limited purpose of re-letting the premises without terminating the lease, or it may refuse to re-enter and institute an action for accrued rents."

A widely discussed 2007 U.S. District Court case, Laskin Road Associates, L.P. vs. Capitol Industries, Inc. (2007 U.S. Dist. Lexis 41276) applied the rule from Crowder to find that a commercial landlord had no duty to mitigate damages where a defaulting tenant remained on the premises. The court reasoned that if a commercial landlord had no duty to mitigate with respect to a wrongful abandonment, then clearly there is no duty to mitigate when a defaulting tenant was still in possession of the premises.

Note however, that Virginia has imposed a duty to mitigate damages by statute for residential leases.

A Landlord's Duty to Mitigate. Part II.

John G. Kelly — Mon, 30 Jan 2012 11:14:30 -0500

We will discuss the commercial landlord's duty to mitigate damages after a default by tenant in Washington, D.C., Virginia and Maryland. First, Washington, D.C. is as follows.

District of Columbia

The District of Columbia essentially follows the traditional common law approach. In the District of Columbia, a landlord has no duty to mitigate its damages after a tenant abandons its premises, provided the lease has no contractual provision reserving the landlord's right to re-enter and re-let while holding the tenant liable for deficiency or loss of rent upon tenant's default. If, however, the lease contains such a clause, then a landlord in the District has a duty to make reasonable efforts to mitigate damages upon re-entering the premises after abandonment. In a 1971 case, Simmons v. Federal Bar Bldg. Corp, 275 A.2d 545 (D.C.App. 1971), the District of Columbia Court of Appeals held that "it has long been the rule in this jurisdiction that in the absence of a contractual provision reserving the landlord's right to re-enter and re-let upon tenant's default while holding the tenant liable for any deficiency or loss of rent, the landlord is under no obligation to mitigate damages before the expiration of the lease even after an abandonment." The lease clause permitting the landlord to re-enter and re-let is construed as the landlord's assumption of a duty to use "reasonable efforts" to re-let. A more recent District Columbia Court of Appeals case on the subject, Hart v. Vermont Investment Limited Partnership, 667 A.2d 578 (D.C.App 1995), affirms that D.C. law provides a landlord with three options in the event of a wrongful abandonment in a lease without a re-entry clause. First, the landlord may accept the abandonment, terminate the lease, and terminate the tenant's obligation to pay future rent. The tenant remains liable for any damages specified in the lease as a penalty for its breach. Second, the landlord may re-let the premises and hold the tenant liable for any deficiency in the rent, without acquiescing in the abandonment. The landlord's third option is to allow the premises to remain vacant and to hold the tenant liable for the full rent. Hart also affirms the mitigation exception when the lease contains a re-entry clause as discussed above.

A Landlord's Duty to Mitigate. Part I.

John G. Kelly — Tue, 10 Jan 2012 13:30:39 -0500

A Landlord’s Duty to Mitigate in Washington, D.C., Maryland and Virginia

Under common law, a landlord had no duty to accept or procure a new tenant in order to mitigate damages (i.e., take reasonable action to avoid additional injury or loss) resulting from a tenant's breach of a lease, including with respect to an abandonment or refusal to occupy its premises. The rationale for this traditional view arose from the characterization of a lease as a conveyance of a real property interest, and not as a contract. In recent years, many states have enacted statutes applicable to residential landlords that impose a duty to mitigate damages. There is no clear consistency, however, in the law regarding a commercial landlord's duty to mitigate damages. The modem trend, followed in approximately half of the states, is to require commercial landlords to mitigate damages. This modern view characterizes the lease as a contract rather than a conveyance of real estate, and it is an established principle of contract law that parties to an agreement have a duty to mitigate their damages. There are certain exceptions to the historical common law view that a landlord has no duty to mitigate, which in different variations, are currently recognized by some of the "traditional view" states. One exception imposes a duty to mitigate once the landlord re-enters the premises following an abandonment by the tenant. There are different standards as to what constitutes re-entry. For example, merely accepting the keys to the premises or keeping the premises in good repair would not typically be considered a re-entry. A second exception imposes a duty to mitigate on a landlord if the lease contains the common "re-entry clause," which permits the re-entry of the premises following abandonment of the premises by the tenant. The District of Columbia, as discussed below, is among the jurisdictions that follow this exception.

Among the states that impose the duty to mitigate on commercial landlords, there is no consensus as to when, or how, that duty is met. Further, there is no consensus among the states as to whether the landlord or the tenant has the burden of proof regarding the landlords efforts to mitigate damages. Typically, the landlord does not need to re-let the premises in order to satisfy the duty to mitigate. Instead, the landlord must only exercise reasonable diligence by taking steps such as advertising and engaging the services of a broker.

It is an important reminder to note that in the states that do not impose a duty on a commercial landlord to mitigate damages following a default by tenant, the parties can agree to the contrary in the lease. The default law only comes into play absent clear language in the agreement. Even in some states that do impose a duty to mitigate, the landlord and tenant can usually agree to negate such a duty contractually provided there is no violation of public policy. Commercial landlords and tenants are thus better served by agreeing on the respective rights of each party in the lease document, and it is crucial that the parties negotiating and drafting the lease understand the governing law. The laws of the District of Columbia, Virginia and Maryland relating to the duty to mitigate will be discussed more fully in Parts II, III and IV to follow.

Note that the article that is the basis for this post first appeared in the October, 2011 issue of Commercial Leasing Law & Strategy.

Fixing the Construction Problem Apparently Does Eliminate Insurance Coverage

Timothy R. Hughes — Wed, 22 Jun 2011 13:37:47 -0500

A Virginia federal court has ruled that by proactively replacing defective drywall rather than waiting to get sued and found liable, a contractor was left without liability insurance coverage. This decision should send shivers down the spine of not just contractors, but also owners and developers.

The builder, Dragas Management, built 70 houses in the Tidewater Virginia area with Chinese drywall. After it received multiple reports of health symptoms and property damages, Dragas filed claims on multiple liability and umbrella insurance policies. It also stated in writing to the carriers that it was planning on beginning a remediation protocol and forwarded the same to the carriers. Four home owners filed suit against Dragas and later voluntarily dismissed the cases based on the remediation protocol.

Initially, both insurance companies denied coverage and one filed a declaratory judgment suit. Eventually, one carrier agreed to defend Dragas subject to a reservation of rights. Dragas in turn claimed it was entitled to coverage for its remediation costs. The carriers argued that because the liability policies obligated the insurers to pay damages for which the builder became legally obligated to pay, the builder’s voluntary remediation plan was not covered under the policies.

The recent decision is actually round three of this issue in the case. The trial court initially agreed with the insurance carriers and found that Dragas’ complaint seeking coverage failed to state a claim. In round two, Dragas’ amended complaint survived a motion to dismiss by alleging more facts surrounding the threats of litigation by the homeowners as justification for its remediation protocol. Third time being the charm, on summary judgment the court ruled that in fact there was no insurance coverage. The mere threat of litigation did not rise to the level of a “legal obligation to pay”, so there was no insurance coverage. As stated by my good friend Chris Hill at Construction Law Musings, apparently good deeds still go punished.

While this decision may be correct from a strict language reading, the policy and industry implications are just horrible. This result basically states that to keep your insurance coverage intact, you cannot fix the problem, mitigate damages, and remove the condition that may even be creating significant personal injuries to occupants as alleged in these drywall lawsuits. This would seem to be an arena where the General Assembly in Virginia can and should pass a statute that affords some level of cushion to builders for doing the right thing.

Virginia Clarifies Economic Loss Rule, and Why This Case May Matter

Timothy R. Hughes — Mon, 21 Mar 2011 04:59:55 -0500

A decision issued this month by the Supreme Court of Virginia, Kaltman v All American Pest, answers a question often debated by Virginia lawyers regarding the economic loss rule. The case also may contain a hidden Trojan horse to contract defenses that everyone should pay attention to.

As we have discussed here on several occasions, the economic loss rule is a critical concept in Virginia construction law. Stated simply, a party cannot sue under Virginia law for economic losses without establishing they have a contract. Another case and its progeny, Richmond v. McDevitt Street, ruled that a plaintiff cannot sue in tort for a duty assumed solely by contract.

In Kaltman, a worker failed to properly clean his equipment after a commercial job. The next day, he used the same equipment on a residential home, including on porous surfaces. The result was a high-powered commercial pesticide was used on home despite it being inappropriate for residential use. Despite multiple rounds of cleaning, the owners could not remove the pesticide smell from the home. The owners claimed personal injuries and property damage from their home being rendered uninhabitable by the smell.

The defendants request that the trial court dismiss the case based on the economic loss rule barring tort claims. The court agreed. On appeal, the Supreme Court reversed and found that the owners could allege an independent tort duty to protect against personal injury and property damage. While the court threw out the willful and wanton conduct allegations, it allowed both negligence and negligence per se to survive.

Why does it matter if you can sue in both contract and tort? I can think of several strategic and practical reasons:

The tort claims may more easily trigger insurance coverage;
The tort claims may escape the net of contractual notice of claims provisions; and
The tort claims may escape the restrictions of limitations of liability clauses.
The tort claims may allow broader damages more easily than contract claims.

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Agents and Sellers - Is There a New Way To Get Sued In Virginia?

Timothy R. Hughes — Thu, 17 Feb 2011 06:18:38 -0500

We delve into a more legal, technical and lengthy post this week for a good reason — a recent decision from a Virginia trial court (PDF of decision) points to a new avenue for claims by buyers of real estate in Virginia.

Virginia generally looks to the sales contract to evaluate liability. Sales contracts often have very limited warranty and disclosure obligations placing the buyer into the position of "caveat emptor," or let the buyer beware. Fraud claims have traditionally operated as a separate path to liability; however, fraud claims are notoriously difficult to allege prove. They require the buyer to allege claims with extreme specificity and prove them to the elevated standard of "clear and convincing evidence" rather than a simple preponderance. Fraud claims also exclude liability for statements of opinion or future performance.

A decision from Charlottesville, just reported this week by Virginia Lawyer's Weekly (VLW subscription only) allowed a new potential claim to survive the initial pleading stage. A buyer of a residence suffered flooding caused by a clogged drain of a neighboring property. The buyer learned that the drain had clogged and caused flooding of the residence several times before the purchase. The purchase contract contained a home inspection contingency, but the inspection did not reveal the problem. The sellers and agent did not disclose the problem.

The buyer sued the real estate agent who was also a partial owner and thus seller of the property. The buyer included claims for fraud, constructive fraud and also for a violation of the agent's statutory duty to disclose known property defects contained in Virginia Code § 54.1-2131(B). On motions, the court dismissed the fraud and constructive fraud claims finding there was no showing of active concealment of the flooding as opposed to mere lack of disclosure. The court permitted a count based on "Breach of Statutory Duty to Disclose Material Adverse Facts" based on the code section.

This case may present a novel situation in that the agent was also a partial owner and thus seller of the property. The statute does not create a specific cause of action. A prior 2004 case from Loudoun County (VLW subscription only) had ruled the statute does not allow a separate cause of action. Agents and sellers should beware of this case as it may provide a complete end run around the contract and traditional concepts of caveat emptor.

Originally posted at the Washington Business Journal, reprinted with permission.

Virginia Raises General District Court Jurisdictional Limits

Timothy R. Hughes — Wed, 16 Feb 2011 06:24:07 -0500

Virginia's General Assembly has passed a bill that, among other things, raises the upper limit of cases that may be filed in the General District Court. This increase will potentially make it easier to try certain matters more cost effectively moving forward.

General District Court is a court not of record with very limited discovery, i.e. no access to depositions or interrogatories and even only limited means of obtaining documents and witnesses via subpoena. While this naturally limits the parties' ability to evaluate the case and evidence, it dramatically reduces the potential legal fees associated with litigation. At the current time, General District Court has had concurrent jurisdiction with circuit court for matters that are between $4,500 and $15,000.

The bill passed by the General Assembly raises the upper limit on General District Court to $25,000. While this does not completely solve the challenges faced when trying to handle cases cost effectively, it certainly makes it easier to file suit on some smaller cases.

Class Action Lawsuit Against LEED and USGBC Evolves

Timothy R. Hughes — Thu, 10 Feb 2011 11:44:16 -0500

In October 2010, Henry Gifford filed a lawsuit against USGBC alleging misrepresentation claims against USGBC and some of its individual founders regarding its LEED rating system. The crux of the suit centers on Gifford’s claims that USGBC and the LEED green building rating system makes false promises about energy performance of LEED buildings. The original complaint named Rick Fedrizzi, Rob Watson and other individuals as defendants, included misrepresentation style claims, and also included monopolization anti-trust based claims.

On Monday, Gifford and the other plaintiffs filed an Amended Complaint. Unlike the original claims, which included class action claims, the new lawsuit focuses on false advertising and consumer protection act claims. The new complaint drops the anti-trust and class action claims. They also dropped the individual defendants.

Energy performance has been an open sore for LEED that critics have pointed to, from the New York Times poking at the energy performance of a courthouse in Ohio to the USGBC’s own regional case study showing the energy usage was wildly different in performance compared to design modeling in Illinois. USGBC had already pushed through LEED for New Construction 3.0 which shifted credit focus far more towards energy issues than version 2.2.

The plaintiffs may have a difficult time demonstrating that they individually were harmed and have standing to sue. That does not mean that disconnects between energy performance and modeling are not a threat to USGBC. Indeed, the marketplace may present a greater threat to USGBC and LEED maintaining its current preeminence.

The advent of green building codes such as IGCC and ASHRAE 189.1 certainly represent a significant potential shift that is coming. Energy Star is already available for owners interested in focusing on actual energy performance as opposed to design modeling. Actual energy performance of buildings will occupy a greater focus as energy prices inevitably go up in the future. Design and construction standards, certification systems, and codes that are directed towards improving energy performance in the built environment would seem to have a better chance at ultimately prevailing over theoretical modeling.

Originally published in the Washington Business Journal, reprinted by permission.

Richmond Hammers on Arlington HOT Lanes Lawsuit

Timothy R. Hughes — Fri, 28 Jan 2011 08:51:57 -0500

Arlington County has been widely criticized for its aggressive lawsuit over the proposed Interstate 395 HOT lanes expansion, which includes allegations that individual state and federal officials committed civil rights violations in approving the project. In a time of significant economic troubles and governmental budget challenges, the county has reportedly paid over $1 million in legal fees advancing this case.

The county may now be reaping an ugly harvest from the negativity it is sowing. Arlington County, with the support of the business community and in particular the Arlington Chamber of Commerce, is currently seeking renewal of a transient occupancy tax that charges Arlington hotel guests and uses those funds directly to promote tourism. In a hearing on the bill in front of the General Assembly’s House Committee on Finance chaired by Del. Timothy Hugo, R- Fairfax.

Del. Hugo reportedly punted on action on the bill until a representative of Arlington County would appear and defend the County’s action on the HOT lanes lawsuit.

The Washington Post quoted Del. Hugo yesterday as saying, "If they have so much money to spend on frivolous, intimidating, abusive lawsuits on private individuals," then the tax is not needed. The Post indicates further that Del. Hugo filed three budget amendments prohibiting state funding for the Columbia Pike Streetcar produce, reducing Arlington transportation funding, and requiring an audit of Arlington’s road maintenance funding.

The Chamber and others have tried to get Arlington to drop this suit. I have previously been strongly critical of the Arlington lawsuit, especially the civil rights claim stating they should have avoided the suit “instead of further killing Arlington’s credibility in Richmond.” That appears to be exactly what has happened but the County does not seem to appreciate this prescience. This lawsuit, particularly the civil rights claims, needs to end. Still, picking this bill as the target for Richmond’s ire seems like misplaced aggression.

Reprinted with permission from the Washington Business Journal

EPA Accepts Virginia's Plan for the Bay

Timothy R. Hughes — Fri, 07 Jan 2011 06:00:00 -0500

Last week EPA issued its "pollution diet" for the Chesapeake Bay. The total maximum daily load (TDML) of various materials is established by EPA in the diet and includes a 25% reduction in nitrogen, a 24% reduction in phosphorous, and a 20% reduction in sediment according to Engineering News Record (subscription only). The plan also includes annual total watershed limits.

This announcement was tied to EPA's express approval of Virginia's state Watershed Implementation Plan (WIP). A statement issued by Virginia Governor Bob McDonnell stated in part, "[T]he approved plan balances the important environmental protection concerns with the need to protect jobs in agriculture and farming. While we maintain our concern about aspects of the EPA watershed model and enforcement authority, as well as the significant additional public and private sector costs associated with plan implementation, we believe Virginia's plan will make a significant contribution to improving water quality in the Bay."

The efforts at EPA to regulate stormwater run-off from development has been a topic we have covered here previously. EPA regulatory junkies will already know that the agency announced in December its plans to move forward with standards regarding greenhouse gas emissions from fossil fuel power plans and petroleum refineries. Certain permitting requirements on stationary sources, in addition to GHG emission regulations of some vehicles, kicked in on January 2, 2011.

It is a tough balancing act between environmental regulation and the economy. The economic climate has battered the construction and development industry and while there are some modest signs of improvement, particularly locally, it is not a explosive market. Similarly, the Bay shows some signs of improvement according to the 2010 State of the Bay report issued by the Chesapeake Bay Foundation, but continues to by a "system dangerously out of balance". Hopefully we can manage the path between Scylla and Charybdis and get this right.

Reprinted with permission, originally published at the Washington Business Journal.

Image by ronzzo1

Competitors Challenging Land Use Approvals

Timothy R. Hughes — Thu, 16 Dec 2010 11:13:33 -0500

Real estate lawyers and developers know that overcoming NIMBYism is a huge challenge. We are finding that even after approval, you still may face other hurdles including neighbors or even your business competitors challenging or appealing your zoning or permit approval.

Virginia Lawyer’s Weekly recently reported that the Supreme Court of Virginia issued an “unusual order” ... “acting with uncommon speed” when it ordered a halt to two planned local government hearings in Prince William County in such a case.

Spectrum Healthcare obtained zoning and permit approval and started construction of a health care facility as part of a bid for a federal government contract. A competitor of Spectrum, CRA, lost out on the federal contract award and filed a bid protest. CRA separately requested a zoning interpretation from local officials that the use of the facility would violate local ordinances. The zoning administrator rejected CRA. CRA then tried to “appeal” that interpretation to the local Board of Supervisors and Board of Zoning Appeals (BZA).

Spectrum asked the local circuit court to step in and issue an injunction stopping the CRA appeals. The circuit court refused finding that Spectrum should first exhaust its administrative remedies. Spectrum then filed an expedited review request to the Supreme Court of Virginia. This request resulted in the rapid order from the court ordering a stay of the BZA and Board of Supervisors hearings pending the circuit court’s complete review.

The standard in Virginia is that only an “aggrieved person” may appeal a “determination” of a zoning administrator. Even beyond the Spectrum case, I have started to hear rumblings of other parties aggressively attacking zoning and permit decisions, including properties which are not adjoining or even nearby but which instead involve business competitors. We can expect this issue to continue to percolate, and possibly be the topic of legislation soon. Be warned that approval may not be the end of challenges.

(Full disclosure: My colleague, Raighne Delaney, represents Spectrum Healthcare in this case.)

Reprinted with permission from the Washington Business Journal.

The Lights are On!

Timothy R. Hughes — Thu, 16 Dec 2010 10:30:57 -0500

Apologies from the staff for things being a bit quiet here of late .... speaking for myself, I have been whipped by over-engagement. A whirlwind tour of seven different speaking gigs from mid-October through early December, a busy case load and other intervening factors have jointly conspired to make posting a tough reach lately.

It has been a blast lately though, from the Green Legal Matters seminar in New Orleans to speaking on social media, my first webinar, a fun AIA event, moderating a very interesting Bisnow sustainability panel, to wrapping up at Eco-build.

We return into action today shortly with a repost from the Washington Business Journal and you can expect more regular action here again moving forward!

GSA and WMATA Working On New Rent Cap Policy Flexibility

Tad Lunger — Tue, 30 Nov 2010 17:19:28 -0500

According to a good source, GSA and WMATA are working on a new policy to allow GSA to modify its rent caps for sites that meet certain transit oriented development criteria (i.e. sites within a certain proximity to Metro stations, etc.). As many of our readers know, GSA caps its rents as a result of negotiations with OMB per rules created to implement the Budget Enforcement Act of 1990. OMB (through Circular A-11) created a set of rules which are used to determine whether a federal lease is an "Operating" or "Capital" Lease. To make a long story short, GSA and OMB have agreed to rent caps to make it easy to stay within "Operating Lease" guidelines. The current Operating Lease rent caps are $34/SF in Maryland, $38/SF in Virginia, and $49/SF in the District of Columbia. With vacancies finally falling and rental rates starting to rise, the natural effect of these caps will be to push federal office space development away from mass transit locations, which yield the highest rental rates. Currently, big chunks of space for federal agencies just aren't normally available below these price caps where there are mass transit services available.

This clearly goes against the current policies for transit oriented development being advocated by the current administration, the EPA, HUD, pretty much all of our regional localities, and our state level transportation agencies. So enter the solution: GSA and WMATA are working together to achieve modify current guidelines to be in line with modern transit oriented development goals to allow GSA the flexibility to adjust rent caps upwards to allow large government employers to locate in areas where there is mas transit systems available to handle the commuter volumes they will create. Apparently, GSA and WMATA are about five months away from realizing this new policy. This has the possibility of having sweeping impacts to how and which localities and private interests can capture federal tenants/departments/agencies and the resultant collateral economic development benefits these opportunities provide. How these new transit oriented development guidelines/policies will define which sites are eligible for upward flexibility for rent caps remains to be seen, but we'll keep on top of it and keep you posted.

Nope, Not A Typo - GAR, Not FAR

Tad Lunger — Mon, 22 Nov 2010 18:00:00 -0500

Have you heard the DC Zoning Commission is looking into adopting a new set of GAR requirements? No, we're not talking about the kind of fish that eats every other kind of fish it can fit in its mouth, we're talking about Green Area Ratio ("GAR") requirements. According to the report prepared by DC zoning staff, the GAR concept is not a new concept, but is a Low Impact Development best management practices tool used in major cities in Europe such as Berlin and Malmo.

According to the USGBC, GAR "..is the ratio of the weighted value of specific landscape elements to land area... [and] is determined by calculating the area of specific enumerated landscape elements, multiplied by a factor assigned to each element, which is then divided by the lot area of the project." According to DC zoning staff, GAR "...is an environmental site sustainability metric intended to set requirements for landscape and site design that meets goals for stormwater runoff, air quality and urban heat island... [based on] allowing a user to pick among optional elements in order to meet an overall [minimum] GAR score." DC is proposing to include the GAR regulations within Subtitle B and Subtitles D through J with Subtitle B containing an explanation of the GAR system and the other land use subtitles containing zone specific permission, conditions, and requirements.

In a nutshell, what they are talking about doing is requiring property owner to meet a certain weighted score in relation to the amount of land area they have as a requisite to filing for building permits and approval will be a prerequisite to obtaining a certificate of occupancy. Submission requirements are outlined in proposed Section 1305, and of course you can get a variance if your site is particularly difficult per Section 1306. If you need to understand the specific details of what is being proposed, the text amendments and staff report are available here for your review, and the hearing is slated for December 20th before the DC Zoning Commission, with the Zoning Review Task Force considering it on November 27. Here's staff's slide presentation from October if you want a primer before you dive into the details.

Tenant Issues in Real Estate Leases Part II

John G. Kelly — Fri, 19 Nov 2010 14:21:55 -0500

Part I of this post focused on basic provisions found in commercial real estate leases such as assignment and subletting, use restrictions and the determination of the commencement date. Here in Part II, below, we will address other important issues from the tenant’s perspective including insurance, mutual waivers and defaults.

Tenant’s Insurance and Self-Insurance.

· Liability Insurance. Landlords typically carry their own liability insurance policies, so tenants should not be too concerned over the amount of tenant’s coverage limits. Instead, the tenant should check with their risk management department (or outside insurance agent) to determine the current and appropriate coverage amount. Tthe landlord and property manager will likely be required as additional insureds. The primary benefit to these parties is the insurer’s obligation to defend claims, which is not limited by the amount of the policy.

· Property Insurance. Most landlord form leases require tenants to fully insure the tenant’s furniture, equipment and other personal property. Unless there is a special reason that landlord wants this equipment insured, these clauses can often be revised in the negotiations to allow tenant to carry such insurance at its option or self-insure.

Release and Waiver of Subrogation. This is a legal issue that is often overlooked, but is very important from a risk management perspective.

· Release. In a good mutual clause, the landlord and tenant “release” each other from liability for damage to their respective property and agree that they will look solely to their insurance, regardless of negligence or fault. The rationale from the landlord’s perspective is that a leak in the roof that destroys valuable computer equipment owned by tenant is something that is more easily insured by the tenant, since the tenant better knows the value and the potential risk of loss. That said, a tenant should be able to obtain reciprocal provisions from the landlord for the benefit of the tenant, even in small leases. Typically, tenants are paying for the landlord’s insurance either as an element of rent in a gross lease or as a direct pass-through; accordingly, it is equitable for the tenants to receive the benefit of this insurance. Note, however, that most form leases only protect the landlord in this regard. A one-sided waiver of claims provision requires the tenant to look to its own insurance coverage, even if the casualty is the result of the landlord’s negligence.

· Waiver of Subrogation. Insurance policies provide that the insurer is “subrogated” to any claim its insured may have against third parties for damages to the property insured under the applicable policy. In the absence of a “waiver of subrogation”, if the tenant’s negligence caused fire damage in the landlord’s building, the landlord’s insurer could “step into the shoes” of the landlord and pursue a claim against the tenant for the damages through its right of subrogation. If the lease contains release language, the applicable party must obtain waiver of subrogation provisions in its policy; otherwise, the party risks validating their insurance coverage.

· Insurance Company Responses. Insurance companies often resist waiving subrogation even though they rarely use the right. Push hard and you will generally prevail.

Indemnity and Hold Harmless. The parties should agree to protect each other based on who can most easily and efficiently obtain the insurance protection.

· Indemnity. The term “indemnity” relates to one party “indemnifying” or protecting the other against claims of third parties.

· Hold Harmless. The term “hold harmless” is another term for “release”, pursuant to which one party agrees to release or hold harmless the other party with respect to claims between the parties. The term “hold harmless” is often mistakenly used when the parties intend to refer to indemnification.

· Objective. Similar to the discussion regarding release and waiver of subrogation above, the objective of indemnification provisions should be to allocate claims amongst the parties so that they are covered by appropriate insurance.

Default.

· Notice of Monetary Defaults. It is crucial that a tenant receive adequate notice of monetary defaults. Remedies for default are often severe, and it is not unreasonable to require the landlord to give the tenant an opportunity to cure before pursuing eviction. On the other hand, landlords typically will not want to have to give a default notice every month in order to collect the rent. A common compromise for smaller tenants is to limit the number of notices in any given 12 month period and perhaps the total number of notices during the lease term.

· Vacating. Most landlord form leases provide that deserting, vacating or abandoning the premises is an event of default, especially so in retail leases. Covenants to operate in retail leases cannot be specifically enforced in Virginia and are rarely found in anchor tenant leases or other leases involving sophisticated parties. A reasonable compromise that protects the interest of both parties is to provide the landlord with a right of termination in the event tenant vacates the premises or “goes dark” (in a retail context). From the tenant’s standpoint, you will want to negotiate a requirement that the premises be vacant for a minimum period and exclude vacancies due to fire, remodeling and similar circumstances. Also, if the tenant has made a substantial investment in improvements, the tenant may want to negotiate for reimbursement of its unamortized costs.

The Silver Line: Station #1 and the East Falls Church Plan

Tad Lunger — Fri, 19 Nov 2010 09:00:00 -0500

This is the second posting in my station by station land use analysis of Northern Virginia's new Silver Line. The first station (at the Silver Line's eastern terminus) is the East Falls Church Metro Station, which will serve as the transfer station from the Silver Line to the Orange Line.

The East Falls Church Plan is currently undergoing its public review process, and is a collaborative effort between the City of Falls Church, Arlington County, VDOT, WMATA and the community. It has been in the works for several years at this point and has been a hard plan for everybody to get behind, not because everyone doesn't want to prepare for the inevitable fact that the East Falls Church Metro Station will need to be able to handle the increased number of commuters funneled into the Orange Line from as far out as Loudoun County, but instead because they can't start from scratch, and are trying to provide a solution to a difficult set of existing circumstances.

The first thing you'll notice about the plan is that the station area is located in a predominantly single family home neighborhood. The second thing you'll notice about the plan is that the East Falls Church station area is cut up by a number of multiple lane highways and major arterial roads (click here for a full size vicinity map of the plan), including I-66, Lee Highway, Washington Boulevard and Sycamore Street, and their associated merging/ramp systems. This creates a number of complicated problems from the start - a single family community obviously does not want to have a ton of density dropped into the middle of its neighborhood, and because the neighborhood is already fractured by these major roadways, it makes it very difficult to connect density to the Metro Station. Separating density from mass transit clearly goes against what many consider one of the basic tenants of modern urban planning.

As you can see from the plan, the planned upgraded metro and transit station is not really centrally located within the plan. Instead, density is planned along Lee Highway on both sides of the I-66 overpass. The result has been a bit of an identity crisis about whether this is the Lee Highway "gateway plan" or whether this is in fact a new plan for the East Falls Church Metro Station, and no real defined sense of "place" when it comes to East Falls Church.

Setting all of those issues aside, the plan itself is pretty limited in scope, with only a little over a dozen sites planned for redevelopment (the redevelopment sites are shown here). The plan keeps most of the planned redevelopment sites to 5 to 6 stories, with a few sites on the Falls Church side of the line having the potential to creep up to 8 stories (click here for the Building Heights Plan). The plan is for a mix of uses, though given the location I imagine (here's the use plan) the market will demand more residential uses than commercial, and, except for the new planned transit station, there is not a lot of retail planned.

The plan for the upgraded station itself is really the highlight of the plan. The station (projected to be a 450,000 SF facility) is planned around a 30,000 to 38,000 SF public plaza that will be framed by retail to serve the surrounding neighborhoods, and will provide an additional 75 to 100 spaces of retail parking. Here's an elevation of what it might look like. A massing study was also prepared which helps give it some context, and can be viewed here.

Next stop: Tysons East.