Virginia Real Estate, Land Use & Construction Law : Virginia Construction Lawyers & Attorneys : Bean Kinney & Korman Law Firm : VA Real Estate, Land Use & Zoning

It has been widely reported that Northrop Grumman has chosen a building located in the Fairview Park area of Fairfax County to relocate approximately 300 employees from Los Angeles. Certainly this decision bodes well for the Northern Virginia region as a whole, as proximity to Washington, D.C., the Pentagon and the Northern Virginia technology centers offers many advantages. In recent years, other corporate giants such as Hilton, CSC, and Volkswagen of America have all relocated to Northern Virginia. After deciding on Virginia instead of Maryland, Northrop Grumman focused on sites in Arlington and Fairfax Counties before ultimately selecting the Fairview Park property. State and local government incentive programs were considerable.

One very interesting aspect of this transaction is that Northrop Grumman elected to purchase the building instead of entering into a lease as was widely expected. There are two main business issues at play. First, clearly they are taking advantage of current conditions in the commercial real estate sector to buy the property at a significantly lower price than what the property sold for less then three years ago. Published reports in The Wall Street Journal and elsewhere indicate that Northrop will purchase the building from ING Office Fund for approximately $78,000,000.  Note that the building was purchased in 2007 from Verizon Communications Inc. for $105,000,000. Second, under proposed financial reforms and accounting changes scheduled to take effect in 2013, companies are to report leases as a long-term liability instead of an annual operating expense. It has been widely reported that the accounting change was a factor in Northrop’s decision. 

The effect to the commercial real estate market if more companies elect to purchase instead of lease could be seismic. Lease terms could become shorter than what is now typical, and more purchase and sale transactions could be the norm. Expect this issue to be the focus of many in the months to come.

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The Virginia Supreme Court recently gave us yet another example of a breach of contract case that couldn’t rise to a fraud in the inducement claim in Station #2, LLC v. Lynch, et al., Record No. 091410.

In Station #2, the Lynches owned a three-story building in the City of Roanoke. They sold the top two floors to 237 Granby LLC in order to convert the floors to condos. The Lynches then leased the ground floor to Station #2 so it could operate a restaurant with live music and other entertainment. The lease between the Lynches and Station #2 required Station #2 to install soundproofing material in the void space between Station #2’s ceiling and the lower level of 237 Granby’s condos. 237 Granby’s agent agreed to allow Station #2 access to the void space, but the company hired by the agent to renovate and develop the condos closed off the void space before Station #2 could soundproof.

After repeated noise ordinance citations, the City of Norfolk ordered Station #2 to stop all musical performances, causing a steep decline in the restaurant’s business. Station #2 threatened to withhold rent until it was allowed access to install the soundproofing, and the Lynches responded by locking Station #2 out of the building.

Station #2 filed suit, alleging among other things breach of contract and fraud in the inducement against 237 Granby’s agent and statutory conspiracy against the agent and the Lynches. The thrust of these claims was 237 Granby’s refusal to honor the agreement to allow access to the void space. The defendants filed a demurrer based on the economic loss rule and an interesting statute of frauds argument.

Regarding the fraud claim, the Court reiterated that fraud requires a false representation of a material fact, and that mere failure to perform a promise is insufficient unless the promisor had no intention of performing at the time he made the promise. Unfortunately for Station #2, its complaint did not allege that 237 Granby’s agent had no intent to perform at the time it promised to allow access to the void space. Instead, the complaint merely claimed that the agent and the Lynches agreed to prevent Station #2 from soundproofing the void space. The only duty alleged – providing access to the void space – was a mere contractual duty that could not give rise to fraud in the inducement. In resolving this issue, the Court unfortunately sidestepped the more interesting question – whether a person who fraudulently induces someone into entering into a contract can be liable for fraud in the inducement if that person is not a party to the ultimate contract.

Regarding Station #2’s statutory conspiracy count, the Court refused to allow mere breach of contract to constitute an “unlawful act” that could form the underpinning for a conspiracy. Had Station #2 sufficiently alleged fraud in the inducement, it may have been able to also proceed with its statutory conspiracy claim.

Regarding the statute of frauds, the defendants claimed that installing soundproofing in the void space was the equivalent of creating a party wall, i.e. accessing and occupying real property. According to the defendants, Station #2 was required to have an easement, and the agreement for an easement would have had to have been in writing. The Court rejected this argument, pointing out that Station #2 did not need continuing access to and use of the void space. Instead, Station #2 needed only permission – a license – to enter the void space and install the soundproofing, and that permission could be given orally.

Stay posted until next time when we contrast Station #2 with a recent Circuit Court opinion that reached the opposite conclusion and allowed a fraud in the inducement claim to go forward.
 

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Frequent readers will know that we have talked about Chinese drywall litigation and issues quite a bit here.  One of the ugliest cases was a builder who proactively repaired drywall issues having its initial complaint against its insurers who did not provide a defense thrown out on motion to dismiss.  The court originally found that the complaint failed to state a claim because the builder had not been sued and in essence the builder voluntarily made repair efforts in violation of the insurance policies.

Happily for Dragas, the court gave it leave to amend and it did so, alleging more facts regarding the threats of claims by home owners.  Dragas' claim has now officially survived a motion to dismiss.  While this is far from a victory, it does provide a bit of comfort to builders that they are not simply stuck with no path forward for coverage unless sued. 

Common sense and good policy certainly suggest that builders should be encouraged to solve problems rather than let them fester and worsen in the hope that they eventually get sued and an insurance policy is triggered.  Virginia law, however, is driven by contract and statutory interpretation rather than equitable consideration of good policy by courts.  Insurance coverage on construction projects is highly complex and poorly understood.  Look forward to us engaging in further discussion of this important issue moving forward.

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The Arlington County Board will be deciding whether to approve a series of amendments to Arlington's Comprehensive Plan relating to Crystal City at their hearing at the end of September, after several years of evaluation on how best to react to the loss of approximately 17,000 jobs and over 4 million square feet of occupied office space due to the recommendations of the Base Realignment and Closure Commission (BRAC).  Specifically, the County Board will decide whether to adopt the new Crystal City Sector Plan 2050, and modify the General Land Use Plan and the Master Transportation Plan.

With Long Bridge Park and the Pentagon to the north, the airport and the river to the east, Aurora Highlands and Pentagon City to the west and Alexandria/Potomac Yards to the South, existing metro and VRE access, Crystal City seems well poised to make a comeback.  Here is an exhibit showing Crystal City's existing conditions.  The plan specifically outlines which sites are expected to be redeveloped, which sites have potential for redevelopment, and which sites are expected to remain for the life of the plan (click here for the comparison). Much like the Tyson's Corner Plan, Crystal City's 260 acres are broken up into proposed "districts" (shown here), including the Northwest Gateway, Northeast Gateway, Central Business, Entertainment, South End and West Side Districts, each with their own respective district-level focus.

The areas planned for the highest densities are basically limited to certain principle areas, including the sites in proximity to the planned multimodal transit hub facility and also those sites a the center of the Entertainment District.  The "Base Densities" referenced in the plans show what the existing GLUP designations contemplate for density, and are shown on the Base Density Map.  The plan models a 61% increase in density for Crystal City over the life of the plan, but rather than calling out specific densities caps for specific sites, density under the Crystal City Sector Plan will be controlled by bulk restrictions, shown on plans for height, setbacks, bulk angles, tower coverage, massing, etc.  Land use is set forth on the plan's new Land Use Map, and required on-street retail space is shown on the Retail Frontage Map.

Of particular interest in the plan is the "...addition of a dedicated surface transit-way to Crystal City's existing [transit] system...," that will include a streetcar or trolley system.  The recommended alignment for this system is shown here, as well as a new eastern entrance to the Crystal City Metro Station.  A multi-modal transfer hub facility (shown here) is planned to connect metro, VRE, bus and trolley systems at the location of the existing entrance to the Crystal City Metro Station.

One of the most unique things about Crystal City has always been the Crystal City Underground which connects a lot of Crystal City for pedestrians via a network of tunnels, underground and interior  spaces.   While the plan guides how retail, pedestrian systems and planned open space will make use of these existing features, most of the Underground is contemplated as remaining in place.

The Crystal City Sector is also going to be one of the proving grounds for Arlington's currently developing Community Energy Plan, with carbon reduction and sustainability as some of the major plan objectives, as well as incorporating the proposed streetcar/trolley system's energy needs in Crystal City's district energy plans.

All said, it is a fairly extensive and unique plan, and I don't think a simple blog posting can do it justice.  For those of you that want all the details, here's a link to the entire proposed plan and the staff report for the September hearing.

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Associated Builders & Contractors Virginia Chapter (ABC-VA) has officially opened its quite impressive new headquarters location.  The building project was managed by J.J. McCarthy as owner's representative, head of its green building committee.  The project featured numerous ABC member contractors and design professionals, including BE&K Building Group as general contractor and Morgan Gick McBeath & Associates, P.C. as architects. 

The project is in the running for a LEED gold rating at this point which is truly remarkable given that it is built as the first property in an office park well outside of Dulles Airport.  Forget about going for sustainable sites credits, surrounding density, and available subway transportation lines that provide so many easy points for urban setting LEED projects.

The project incorporates a lot of interesting features (outlined complete with photos in this detailed presentation), some of them quite cutting edge, including:

1. Using pervious concrete for the parking area, eliminating storm drains and piping and reducing heat island effect;
2. Using rapidly renewable resources, including not just bamboo flooring but also bamboo cabinets;
3. Use of low VOC carpets and paint;
4. Dramatic reduction of energy usage (17%), including use of LED lighting, T-5 lighting, motion sensors, daylighting, solar hot water heating, and exterior glare and heat load reduction via sun shields;
5. Dramatic reduction of water usage (44%), including dual flush toilets and waterless urinals;
6. Extensive use of recycled materials;
7. Installation of a white roof;
8. Extensive diversion of waste from landfills by recycling (estimated at 90% of waste from the project recycled).

The project highlights how a shared vision and team philosophy amongst the owner, contractor and design professionals can really translate to dramatic success.  Handling a project as mutual members of an organization for that organization helps create that environment, but those shared values and an attitude of mutual respect and success can be fostered on other projects.  ABC-VA deserves tremendous kudos for pushing its vision of sustainable construction as well, this project really is worth visiting to check out in person.

Photo by

Eric Taylor

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A recent blog post at ENR reviewed recent reports on the spending of transportation related stimulus funding.  The post analyzed a report by the House Transporation and Infrastructure Committee detailing where all the states stand on stimulus spending.  Readers may recall that back in March we discussed Virginia's lagging in spending its stimulus dollars.

Simply stated, the lagging definitely continues. While I generally avoid editorializing and engaging in much opining here as opposed to reporting and analyzing, this topic truly deserves a rant.

Virginia has huge transportation problems, centrally focusing on lack of funding.  These problems are most clear in Northern Virginia and the Tidewater areas.  The Commonwealth has failed to pass comprehensive transportation funding since the mid-1980's.  Several years ago, the General Assembly passed a highly complex and very ugly budgetting compromise that allowed pre-existing, non-elected regional transportation authorities the power to require transportation related taxes.  This structure was thrown out by the Supreme Court of Virginia as unconstitutional under the state constitution and that was pretty much the end of meangingful dialogue and action on transportation funding.

Against this backdrop, we have the ARRA making hundreds of millions of dollars available to spend on pressing transportation needs.  Virginia had oodles of specific projects already identified, prioritized and many with complete designs already available simply waiting funding.  We have had a complete vacuum of construction projects due to the economy making this a once in a generation bidding opportunity on pricing and also removing scheduling issues for many contractors and subcontractors who would jump to have this work and stay alive.  Against this backdrop, we can report as follows:

1. Virginia has 100% of the stimulus funding out to bid
2. Virginia has only 64.4% under contract
3. Only 44.6% of the funding is associated with projects which are "underway"

The Committee ranked Virginia 50 out of 51 jurisdictions, but in the "underway" category we were actually dead last (by more than 5% by the way).  We know that more than half of the stimulus fund projects have not even started, and it is a good bet that of those "underway", there is still a significant pile of unspent money on projects that have started but are not completed.

With such a huge transportation problem previously document and identified in Virginia, how was it that the District of Columbia was able to contract 98.6% of their funds and have 80.1% of the funding of projects underway compared to Virginia?  Let alone Maryland who sits at 97.8% of the funds under contract and 90.9% underway?  Looking on the bright side, I guess we can still take heart that the stimulus funding will continue to flow steadily (and apparently slowly) over the next year or two on these transportation jobs.

Image by technicool

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In the recent case of TC MidAtlantic Development, Inc. v. Commonwealth of Virginia, Record No. 091271, the Virginia Supreme Court was faced with the issue of properly pleading compliance with conditions precedent in a public contract. Despite the tongue-twisting nature of this issue, the crux of the case came down to simple timing.

In May 2004, TC MidAtlantic and the Virginia Department of General Services (“DGS”) entered into a contract to perform work on the Washington and Finance Buildings in Richmond, Virginia. Irreconcilable differences arose between TC MidAtlantic and DGS, with DGS ultimately sending TC MidAtlantic a letter dated February 16, 2007 terminating the contract. That letter also informed TC MidAtlantic that it was entitled to file any claims pursuant to Section 47 of the contract. Section 47 stated:

Contractual claims…shall be submitted, in writing, no later than sixty (60) days after final payment; however, written notice of the Contractor’s intent to file such claim must be given at the time of the occurrence or beginning of the Work upon which the claim is based. The filing of a timely notice is a prerequisite to recovery under this Section…. All claims shall be submitted along with all practically available supporting evidence and documentation.

TC MidAtlantic filed a complaint in the Circuit Court for the City of Richmond on April 24, 2007. The trial court concluded that DGS’s February 16, 2007 letter initiated the sixty-day period for TC MidAtlantic to submit a written claim, and that its April 24, 2007 complaint came too late to comply with Section 47.

On appeal, TC MidAtlantic argued that it sufficiently pled compliance with Section 47, pointing to paragraphs in its complaint alleging that it made written demands on DGS for payment and performance. The Virginia Supreme Court pointed out that the complaint never specifically alleged that TC MidAtlantic submitted a claim within the 60-day window or in a timely fashion, as required by Section 47. TC MidAtlantic also tried to escape the 60-day requirement by unsuccessfully characterizing the February 16, 2007 letter as a “final written decision” on its claim, arguing that it then had six months from February 16, 2007 to file suit. The Court likewise rejected that argument, and went out of its way in a footnote to say that TC MidAtlantic did not appeal the trial court's conclusion that the letter initated the claim procedure.

Most frustrating of all, TC MidAtlantic had filed a motion to reconsider with the trial court, attaching March 23, 2007 letters and supporting schedules showing amounts owed under its claim. But the Virginia Supreme Court concluded that TC MidAtlantic forgot to ask leave to amend its complaint to allege that the March 23, 2007 letters complied with the condition precedent of Section 47’s notice requirement. The Court instead held TC MidAtlantic to the original wording of its complaint, including the argument that the February 16, 2007 letter was a “final written decision” rather than the initiation of Section 47’s claim procedure.

The lessons to take from this case are:

1. If you are confronted with a party who insists on including a contractual provision that will shorten the time frame in which you must give notice of a claim or file suit, be realistic about the deadlines you agree to, and stick to them.
2. The second a dispute arises, get the contract out and read it carefully to ensure that you comply with all notice and claim provisions.
3. And if your case involves a condition precedent with notice or claim provisions, don’t forget to acknowledge the condition precedent in your pleadings, assert that you complied, and attach exhibits demonstrating exactly how you complied. 

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Part II – Review of your Form Purchase Agreement

In this Part II, we continue our review of some important items to review in your form purchase and sale agreements.

Interstate Land Sales Act

            The Interstate Land Sales Full Disclosure Act (ISLA) is a federal law originally enacted to protect buyers of out-of-state home-site lots, but has since been held to also apply to sales of preconstruction condominiums and single-family homes.

            A thorough discussion of ISLA is beyond the scope of this article, but be aware that ISLA is the flavor of the month for unhappy purchasers of preconstruction who are attempting to get out of their contractual commitments, It's important that developers fully comply with ISLA or take advantage of one of its statutory exemptions. Due to ISLA's onerous, costly and time-consuming registration requirements, most developers take advantage of certain exemptions under ISLA.

            One of the most commonly used exemptions for larger projects is the Improved-Lot Exemption (often referred to as the “24-month exemption”), which generally provides that a developer doesn't need to register its project under ISLA if the developer provides a contractual commitment to complete construction within two years after the date the purchaser signs the purchase agreement subject to delays for force majeure (French for greater force).

            The 24-month exemption is problematic because the law is unsettled as to what remedies need to be offered to purchasers in the event construction isnt completed within the two-year period. Courts in some states have agreed with HUD's position requiring that developers offer purchasers the right to specific performance in order to qualify for the 24-month exemption.

            It's clear that developers need flexibility in response to changing market conditions. They typically don't want to be obligated to construct within tight deadlines. A poorly drafted purchase agreement may result in a developer losing its exemption under the 24-month exemption.

            If the development is found not to qualify for the 24-month exemption, then a purchaser would have the right to terminate without penalty subject to ISLA's other terms and conditions. Your form purchase agreement could expressly provide that the seller will complete construction of the property and cause settlement to occur within two years after the date of the agreement, but if settlement doesn’t occur within this deadline, purchasers will have the option of requesting a return of their deposit or they can settle on the unit when it is completed.

            Virginia courts have accepted this language as giving purchasers the rights needed to properly exempt the development from ISLA registration.

Complete agreement

            Lastly, please make sure the purchase agreement is dated and fully signed by all parties, with all blanks to the document completed and all exhibits attached. It is surprising how many executed purchase agreements are incomplete.

            Additionally, the seller should make sure it has complied with all the requirements set forth under its organizational documents — be it a corporation, a partnership or a limited liability company — and that it is in good standing in Virginia.

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I attended the meeting last Wednesday night regarding the impact of Arlington County's Community Energy Plan on the Arlington development community, held by the County's lead consultant, Peter Garforth, of Garforth International, Jay Fissette, the Chairman of the Arlington County Board, and numerous industry representatives.  I initially blogged about this several months ago (see the post "From Ad Hoc Incentives to a Comprehensive Community Energy Plan") when the Arlington Community Energy and Sustainability Task Force began to develop a forty year energy plan for Arlington County.  It is now unofficially official that the end goal of the task force is to create a new, additional component to the County's Comprehensive Plan to be implemented during the various local land use/special exception processes.  It will therefore have major impacts on the development and capital projects industries, as well as a number of utility companies.

The plan is modeled after a number of plans already implemented and apparently successful elsewhere, such as Copenhagen and the City of Guelph, which have been able to identify and align both short-term and long-term energy goals.  We are told the currently unreleased draft plan considers the following:

• Concepts for "district energy" systems,
• Reshaping infrastructure for localization of systems,
• Use of cogeneration systems,
• Goals to reduce the County's carbon footprint (possibly up to as much as 50%),
• Continuation of an emphasis on efficient building design,
• Smart/monitored metering, and
• Public and private investments.

It also sounds like they contemplate this new shared infrastructure possibly being owned, operated and maintained by an independent, third party entity.  Clearly, shared systems and involving a third party entity/owner will make development substantially more complicated from a lot of different perspectives.  Hopefully, however, adequate time is given to consider what kind of incentives/benefits may be available to help private entities hedge or offset some of the risks until these practices become normalized.

I've asked for a copy of the PowerPoint presentation Peter made which outlines a number of these points and I'll post it as soon as I get it.

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Law and negotiation go hand in hand and understanding the psychology surrounding negotiation is critical to successfully representing clients.  I have long been fascinated by the wrangling of the parties over the shape of the table in discussions to negotiate the end of the Viet Nam war.  As stated eloquently in Time Magazine:

For ten weeks of often absurd haggling, the parties in Paris—the U.S., South Viet Nam, North Viet Nam and the National Liberation Front—have argued about whether the table at which to discuss a settlement of the Viet Nam war should be square, oblong, rectangular, oval or any number of imaginative mutations. Last week, after studying nearly two dozen designs, the negotiators at last agreed on the shape of the table: it will be round. A few days later, they sat down as a group for the first time to get on with the deadly serious business of seeking a peace settlement.

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