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

For those of you out there who are following whether commercial real estate can be taxed at a different rate than residential property, FFW Enterprises v. Fairfax County, et al. has been slated for the Supreme Court's September arguments docket.  Like most other states, in the Commonwealth of Virginia the Constitution contains a "Uniformity Clause" which was intended to prevent the General Assembly from allowing the taxation of different classifications of real property in an inequitable manner.  Specifically, Article X, Section 1 of the Constitution of Virginia provides:

"...All taxes shall be levied and collected under general laws and shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax, except that the General Assembly may provide for differences in the rate of taxation to be imposed upon real estate by a city or town within all or parts of areas added to its territorial limits..."

The core of the dispute is whether Fairfax County may tax only commercial property owners, such as FFW Enterprises, without taxing residential property owners, to fund transportation projects.  The General Assembly, through Section 58.1-3221.3 of the Code of Virginia, granted authority to Northern Virginia localities to levy special taxes for  transportation projects, and in combination with this authority, Fairfax County created a special tax to fund portions of the Silver Line metro project using Section 33.1-431 of the Code of Virginia.   In a nutshell, Fairfax County taxed commercial property owners a special transportation surcharge and exempted residential property owners from having to do so to fund metro improvements.

Last summer, the Circuit Court of Fairfax County (see here for opinion) held that the Uniformity Clause does not prohibit localities from "...provid[ing] for differences in the rate of taxation to be imposed upon real estate..." so long as these differences are not imposed upon the "same class of subjects."  However, in 1947 pursuant to City of Hampton v. Ins. Co. of North America, the Supreme Court has already held that the test to determine the constitutionality of such a tax is:

"[Alre there others, who are benefited as much or more than those smarting under the tax imposition, who go unwhipped of its burden?"

FFW Enterprises plead just that, asserting that residential property owners will benefit as much from the construction of the Silver Line as commercial property owners in Fairfax, however commercial property owners will bear the sole brunt of the costs and taxes.  Nonetheless, the Circuit Court of Fairfax County found FFW Enterprises failed to establish this, and that the 1947 standard is no longer relevant or applicable.  These questions will now be put to the Supreme Court in just a few weeks - we'll keep you posted.

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This year's proposed Constitutional Amendments are now up for review prior to being voted on during the November 2, 2010 General Election this fall.  There are three proposed amendments on the table:

1. Property Tax Relief,
2. Veteran Property Tax Exemptions, and
3. Increasing the Revenue Stabilization Fund

The first proposed amendment, while technically a real estate tax amendment, facilitates aging in place policies.  Currently, the General Assembly can give localities the authority to grant exemptions from real estate taxes to persons 65 years of age or older, or for persons permanently and totally disabled, for their residence where the normal tax bill would amount to "an extraordinary tax burden" in relation to their income and financial worth.  The amendment now proposed, however, would allow localities to remove the requirement about the "extraordinary tax burden" and gives the General Assembly the authority to allow localities to determine their own income or financial worth limitations for tax exemptions.  If approved,  the senior citizen vote would then be open for bidding in localities across Virginia.

The second proposed amendment relates to the first, which contemplates allowing localities to extend the same real estate tax exemptions to veterans.   As proposed, the amendment would require the General Assembly to pass a law exempting from local taxation the principal residence owned and occupied by any veteran with a one hundred percent service-connected, permanent, and total disability. Also, the veteran's surviving spouse could continue to claim the exemption so long as he or she does not remarry and continues to occupy the home as his or her principal residence.  I'm not sure what would qualify as a "permanent, total disability" but I would expect subsequently enacted legislation would clarify and define these terms.

The third proposed amendment, from the fiscal responsibility front, allows the General Assembly to increase the size of its rainy day fund, entitled the "Revenue Stabilization Fund," from 10% to 15% of its revenues derived from annual income taxes and retail sales taxes.  Note that the fund will not be required to be 15% of these revenue, the amendment merely raises the limit of the fund to a maximum of 15% of these revenues.  If the fund exceeds the 15% maximum limit, the excess is required to be transferred to the general fund.

If you're dying to read the amendments yourself before heading to the voting booth this fall, click here for the actual text amendments.

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Last month, we looked at Station #2, where the Virginia Supreme Court refused to turn a breach of contract allegations into a fraud claim. Contrast that with Nathan, et al. v. Long & Foster, Real Estate, Inc., et al., in which the Circuit Court for the City of Roanoke has allowed a fraud in the inducement claim to go forward.

Geeta Nathan and Santam Singh were looking to buy a home in Roanoke, and worked with Barbara Michelsen, a Long & Foster real estate agent. They signed a Purchase Agreement to buy a home for $260,000, and the agreement listed Michelsen as the selling agent.

Under the Purchase Agreement, Long & Foster and Michelsen hired Donald Field to conduct radon testing of the home. Michelsen told Field to test for radon only on the first floor, and to ignore any readings in the basement. The testing revealed excessive levels of radon for the basement. Field mailed and faxed the results to Long & Foster and Michelsen.

In the meantime, the seller had signed a disclosure statement dated March 25, 2006, checking “yes” beside the question “Has the property been tested for radon gas?” However, Field did not conduct the testing until April 6, 2006. The seller and Michelsen had also signed a radon acknowledgment form that said they had “no knowledge concerning the testing of this property for radon or the presence or absence of radon in this property.”

Before closing, Nathan and Singh asked Michelsen about the radon test results, explaining concerns about radon and that a child would be living in the house. Michelsen assured them that everything was fine, and gave them a copy of the test results for the first floor only. Nathan and Singh closed on the house the same day.

Some time later, Nathan and Singh contacted Field when they were making repairs in the basement, and Field asked them whether the radon problem had been taken care of. Nathan and Singh had further radon testing done, and found elevated levels of radon. Not only did Nathan and Singh have to pay the costs of fixing the radon problem, but their house also diminished in value due to the fact that they would have to disclose the prior radon levels.

Nathan and Singh sued Long & Foster and Michelsen for breach of contract and fraud in the inducement. Long and Foster and Michelsen agreed that the breach of contract claim was properly pled, and Nathan and Singh agreed that they could not state a fraud claim against Long & Foster. That left the issue of whether Nathan and Singh could go after Michelsen for fraud in the inducement.

Michelsen argued that any duty to disclose the radon levels was contractual, not tort-based. She also argued that she complied with her obligations to disclose and was therefore protected by Virginia Code Section 55-523 of the Virginia Residential Property Disclosure Act (“VRPDA”).

Judge Dorsey wasn’t buying either of these arguments. Judge Dorsey found that Michelsen, as a real estate agent first employed by Nathan and Singh to be their agent, had a fiduciary duty that included the duty to disclose a complete set of the radon test results. Unlike the facts in Station #2, this duty was more than a mere contractual duty and could support fraud in the inducement. Judge Dorsey also ruled that because Michelsen and the seller never properly advised Nathan and Singh of the radon issue, Michelsen was not entitled to the protection of the VRPDA.
 

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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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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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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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Part I – Builders Review of Purchase Agreement

           Virginia has experienced several years now of a declining residential real estate market, marked by periods of low sales, high inventory and declining prices. Note that recently the prices and inventory have stabilized, but certainly activity has slowed again now that the federal tax credits for homebuyers has expired. Given the current state of the residential real estate market, many buyers experience remorse and attempt to terminate their purchase agreements and receive a full refund of their deposit from the seller.

            Unfortunately for home builders, many of their "form" purchase agreements were drafted before the current downturn — at a time when sellers held all of the negotiating advantages — and the resulting agreements were so one-sided in favor of the sellers that some Virginia courts have held them to be unenforceable.   While there are many steps you can take to protect yourself in the event existing purchasers are insisting on a return of their deposit, it also would be prudent to take preventive steps now to make sure your form contracts fully comply with Virginia law to protect you going forward.

            Briefly listed here are the most commonly cited reasons used by disgruntled purchasers in their attempts to terminate their executed agreements, with suggested contract provisions for each of these scenarios.   Part I of this post will address lack of mutuality and provisions relating to the deposit, and Part II will address the Interstate Land Sales Act and other minor issues. Please feel free to contact me for a more detailed discussion of these important issues.

Lack of mutuality

            Many dissatisfied buyers argue they have the right to terminate their agreements with a full refund of their deposit because the signed agreement lacks “mutuality.” Mutuality, in this context, simply means that a valid contract requires promises and obligations from both buyer

and seller.  

            A buyer's typical remedy upon a default by a seller is to either sue for damages or ask for specific performance. This way, when developers attempt to limit buyers' remedies they run the risk of making the contract unenforceable. Developers need to be careful that their form purchase agreements don't go too far in taking away the rights of buyers and limiting any obligations on behalf of sellers.

             In fact, a Virginia court recently held a purchase agreement to be unenforceable for lack of mutuality because the buyer had no right to sue for specific performance. The buyer's sole remedy was a refund of the deposit. It is interesting to note that in its decision, the court suggests that the contract would have likely been deemed enforceable if it had provided for interest to be earned on the deposit.

            Some suggest that your form purchase agreement should not expressly limit the buyer's remedies after default by the seller. In Virginia, if a real estate contract is silent regarding the buyer's remedies, then the buyer has all of the remedies allowed under law including the right to sue for specific performance.

            For preconstruction sales, however, you should provide for specific performance only when the property is constructed. Also, as mentioned above, as an alternative you may want to consider providing for interest to be earned on the deposit.

Deposit as damages

            Your purchase agreement should make expressly clear that in the event of a default by a purchaser, the seller's right to retain the deposit is in the form of liquidated damages and not as any form of penalty. Damages considered to be a penalty will likely not be held to be enforceable.  We can offer suggested language for the provision dealing with seller's remedies after a default by purchaser. 

         We will continue this discussion in Part II next week.

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The area considered to be inclusive of Fort Myer Heights is basically the down-hill slope from Arlington's Courthouse Sector on the hill above of Route 50 north of Fort Myer, bounded to the north by Clarendon Boulevard and to the south by Route 50, Courthouse Road to the west and Pierce Street to the east.  What makes this area interesting, however, is the plan adopted by Arlington County to try and preserve the area's dwindling stock of aging garden-style apartments, which many find valuable from a historical perspective and others find valuable because of the affordability of these units (whether committed affordable units or as market affordable units).  The County has been unable to prevent the redevelopment of a number of sites in this area because planned densities are not sufficient to induce developers from entering special exception processes, and have instead chosen to move forward with by-right townhouse and condominium projects, effectively omitting the County from the redevelopment process.

In an effort to stem the flow of this trend, the County identified which blocks in the plan area had been assembled and when they were originally constructed to determine which sites were at the highest risk of redevelopment.  Recognizing the likelihood of being left out of the redevelopment process and the inability to preserve certain units without having to buy them, through the Fort Myer Heights North Plan, the County has attempted to incentivize certain strategic sites with higher densities in order to preserve the existing nature and affordability of the area.  To do this, the Concept Plan identifies the northern portion of the plan area as a Conservation Area and identifies the southern portion of the plan area as a Revitalization Area being "...a location for a strategic blend of conservation and redevelopment..."  Also, in case you are interested, the plan has prioritized which sites are the most historically important.

For sites in the Conservation Area, the idea is to not allow any additional density beyond what is allowed by-right, and instead to allow the transfer of development rights (or "TDRs") for historic preservation, affordable housing and open space purposes (for more on TDRs click here and here), pursuant to a series of specific formulas set forth in the plan.  Receiving Sites for TDRs may either be located within the Revitalization Area or outside of the plan area.  Note that there a number of ongoing, perpetual duties to maintain and rehabilitate historic buildings required to allow the transfer of density off of these sites.

Targeted redevelopment is permitted in the Revitalization Area, but to maintain the nature of the plan area it is limited to residential and neighborhood retail uses.  New construction may be permitted at targeted sites up to 3.24 FAR (and may exceed this cap under certain circumstances) through the County's unique 4.1 Site Plan process if the community benefits outlined in the plan are achieved (here's the Density Plan that sets forth the location of these sites) subject to certain height limitations.  Note, however, that the plan contemplates that as much as 20% of any transferred GFA could be required to be committed affordable housing.  It is unclear how this would be reconciled with a Receiving Site going through the 4.1 Site Plan process, which would still be subject to the County's Affordable Dwelling Unit Ordinance requirements.  In the Fort Myer Heights North Special District, it looks like these contributions will be expected to be cumulative.

Sound like a plan that is adequately incentivized?  By way of comparison, here's the massing for the existing conditions, the by-right scenario, and the 3.24 FAR scenario.

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Back in December, I discussed the Florida Supreme Court’s decision in Stop the Beach Renourishment, and guessed that the United States Supreme Court would affirm the Florida court’s decision, but duck the novel constitutional question of whether there could be a “judicial taking.” I ended up being a little more than half right. The United States Supreme Court did affirm 8-0, but were hardly unanimous about what to do with the concept of a “judicial taking.”

Justice Scalia, writing for Justices Thomas, Roberts and Alito, concluded that there could be such a thing as a “judicial taking” “if a court declares that what was once an established right of private property no longer exists.” However, they concluded that the Florida Supreme Court’s decision did nothing to abolish property rights. Instead, the decision merely clarified that the property rights were not implicated by the project due to the doctrine of avulsion. Basically, Florida law allowed the State to fill in its own seabed, and the State still owned the suddenly exposed land, even though the State itself caused the avulsion.

As I thought would be the case, the other four justices did not want to reach the issue of whether there could be a “judicial taking.” Justices Kennedy and Sotomayor concluded that the “judicial taking” analysis was unnecessary because the Florida decision did not terminate property rights. They suggested that if a true “judicial taking” case were to come along, the Court could tackle the issue then, and should perhaps look to the Due Process Clause.

Justices Breyer and Ginsburg agreed that there was no taking, but felt it was “better left to another day” to determine the issues of when a federal court could review whether a state court decision amounted to a taking, and if so, what the proper test would be. Unlike Justices Kennedy and Sotomayor, Justices Breyer and Ginsburg did not hint at what kind of analysis they might use.

So the question becomes – what impact will this case have on cleaning up after the BP oil spill crisis? Perhaps there was no better time than now to re-affirm the government’s right to protect our beaches.
 

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We are very pleased to have another colleague writing for us today.  Jon Kinney is a highly regarded land use and real estate law expert with our firm.  Jon brings us commentary on changes coming to Arlington County's planning for the East Falls Church area in Northern Virginia.

In anticipation of the opening of Metro’s Silver Line, the Arlington County Board established the East Falls Church Planning Task Force to consider key planning issues in East Falls Church, including height and density, land uses, urban design, affordable housing, transportation improvements, open space and environmental sustainability in the East Falls Church area.  The East Falls Church Planning Task Force completed its comprehensive review of the East Falls Church study area this week and forwarded its recommendations to the Arlington County Planning Commission and the Arlington County Board which are both scheduled to take up the issue in a few weeks.

The Task Force recommendations include:

• Mixed use development. The Task Force is encouraging a balance between residential, retail, office and hotel uses in East Falls Church. Building heights are generally limited to four to six stories with the exception of the site immediately next to the Metro station where nine stories are permitted provided heights are maintained at four stories along Washington Boulevard.
• Transition to surrounding single family area. Future development should be designed to respond to the existence of single family and townhouse neighborhoods in the immediate area.
• Open Spaces. The Task Force recommendations include creating a new public space at the heart of East Falls Church at Lee Highway on the western side of Route 66 and a large pedestrian plaza as part of any development of the Metro station site.
• Bicycle and Pedestrian connections to the Metro. An important element of the work of the Task Force was enhancing the pedestrian and bicycle network to the Metro station. East Falls Church is one of the most heavily used bicycle-oriented Metro stations and efforts were made to meet current and future bicycle demand.
• Elimination of commuter parking. An import aspect of the Task Force’s recommendation is the elimination of commuter parking in any future development of the Metro station site.

The Task Force also made decisions regarding affordable housing, quality architectural design and more efficient use of transit at the Metro rail station.  The actual heights and densities in the plan differ only slightly from the existing Arlington County Land Use Plan; in a few cases the recommendation provide less height and/or density than currently permitted.

An important feature of the Plan is an attempt to create a western pedestrian Metro rail entrance in order to bridge the gap in the community caused by the construction of I-66. The Task Force is proposing four separate options to provide pedestrian access from the west side of I-66 to an expanded Metro platform in the middle of I-66  (please see graphic below). The cost associated with this proposal may delay it’s implementation at least until the redevelopment of the Metro site.

Representation of both the Virginia Department of Transportation (VDOT) and Metro were on the Task Force. VDOT indicated that it has no plans to sell and/or ground lease its land next to the Metro station. Because VDOT owns most of the land located at the East Falls Church Metro station, no major development can occur on this site without their agreement.

Copies of the East Falls Church Task Force recommendations are available on the County’s website.

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It’s no secret that Virginia law usually sides with the landlord more than the tenant. It’s also no secret that Virginia courts tend to let cases go to the jury more than other jurisdictions. So what happens when a Virginia tenant brings claims of misrepresentation and negligent repairs against his landlord?

In Sales v. Kecoughtan Housing Company, Ltd. et al., Judge Lerner of the City of Hampton Circuit Court stopped the tenant in his tracks by sustaining the landlord’s demurrer. The Virginia Supreme Court recently reversed, sending the case back to the trial court.

Mr. Sales entered into a rental agreement with Kecoughtan Housing Company, which hired Mr. Abbitt to manage the apartments where Sales lived. After several months, Sales told Abbitt that there was mold in his apartment and asked to have the mold repaired. Abbitt, as Kecoughtan’s agent, went into the apartment to make the repairs, but actually only painted over the mold. Afterwards, Abbitt told Sales that the mold had been fixed and that the apartment was fine. Sales kept living in the apartment and continued to pay rent. A few months later, mold started growing in Sales’ eyes and infested and destroyed his personal property. Sales then sued Kecoughtan and Abbitt for defective repair, fraud and constructive fraud.

As to the negligent repair claim, Kecoughtan and Abbitt argued that they had no duty to make repairs, and that there was no showing that Abbitt’s repairs created any danger that caused Sales’ injury. The Virginia Supreme Court rejected these arguments, resting on the fact that although a landlord has no common law duty to make repairs after delivering possession of the premises to the tenant, once the landlord undertakes the repairs and enters the premises, the landlord must use reasonable care to make those repairs.

As to Sales’ actual and constructive fraud claims, Kecoughtan and Abbitt argued that the representations that the mold had been repaired and that the apartment was habitable were matters of opinion, not statements of fact. The Court rejected this argument as well, finding that the representations were statements of the apartment’s present quality or character, constituting statements of fact rather than mere opinions.

The lesson to be learned is – finish what you start. To all of the landlords and property managers out there, when a tenant asks you to make a repair, find out exactly what you are getting yourself into before you agree to go inside!
 

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In this Part II, we continue the discussion of Subordination, Non-Disturbance and Attornment Agreements, and suggest ways tenants can protect themselves in the current marketplace.

In past more landlord-friendly markets, landlords strongly resisted giving anything but large tenants (perhaps those leasing 25,000 square feet or more) with excellent financials an executed Subordination, Non-Disturbance and Attornment Agreement at lease execution. Mid-size tenants may have instead received assurances that landlords would use commercially reasonable efforts to obtain an SNDA post-execution on the lender’s standard form, and smaller tenants would get nothing other than the automatic subordination provision in the lease. Now, however, not providing an SNDA for even the small tenant taking a few thousand square feet can often be a deal killer. As discussed above, provided its lender would agree to an SNDA, the landlord does not have a strong argument either way. The landlord’s main complaint is the extra time and cost of negotiation and the administrative hassle of facilitating the SNDA between lender and tenant. The landlord should be aware of its lender’s position on SNDAs and the applicable provisions of its loan agreement before receiving the request from tenant. To make sure this will not be a material issue during lease negotiations, and to save transactional time and costs, it is prudent to set forth the agreement regarding the SNDA in the Letter of Intent, especially if the prospective tenant is concerned about the landlord’s financial position.

One caveat for tenants: you must give close scrutiny to the initial draft of the SDNA supplied by the lender. Many form SNDAs amend the lease to take rights away from tenant to the lender’s benefit. So while the non- disturbance section of the SNDA is a great benefit to the tenant, other provisions can be problematic if not deleted.

Other than SNDAs, tenants also should consider other forms of protection if they are concerned about the financial footing of their landlord. The landlord has a duty to perform maintenance on the building and, in many cases, is obligated to build expensive tenant improvements. To mitigate the risk of a landlord not being able to fund tenant improvement costs, the tenant could demand security for the tenant improvements cost such as an acceptable letter of credit, or the tenant and landlord could agree to deposit the tenant improvement budget in an escrow account so that the funds will be available even if the landlord were to become insolvent. With respect to general maintenance obligations that the landlord fails to perform, a very strong creditworthy tenant could ask for certain off-set rights, allowing the tenant to perform building repair and maintenance themselves and deduct it from rental payments to the landlord.

In today’s economic climate, tenants would be wise to take advantage of these tools to protect themselves.

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I know most people out there who follow land use in the DC metro area are pretty familiar with the Columbia Pike Revitalization Plan and the Columbia Pike Form Based Code.  Then, like many others, you've probably wondered what will happen to the trolley system once Columbia Pike hits the Arlington County line?  Well, instead of continuing to head west down the corridor, it abruptly bangs a left at the county line, and heads south up the hill to Skyline (here is a transit plan showing approximate station locations and here is an aerial transit plan overlay).

Actually, this is in conformance with the transit plans that have been in place for several years now, so it is no great shock to see this concept on the "Preferred Plan" which is the latest culmination of two prior land use plans presented to the community last month and updated and posted yesterday on Fairfax County's website.  Not surprisingly, the highest densities are planned along the proposed street car system, which culminates at the existing high density sites at Skyline.  As you can see on the Preferred Plan, however, the system only tracks the eastern periphery of this first portion of the Community Business Center plan area (the "CPC"), leaving much of the planned area geographically disconnected from the trolley system, and in particular the Columbia Pike corridor.

So rather than seeing higher densities planned along the Columbia Pike Corridor as might be the intuitive preconception, right now the idea is to concentrate higher densities in Land Unit C between Leesburg Pike and South Jefferson Street, with street car stations straddling both the north and south sides of Leesburg Pike on Jefferson Street.  Adjacent to the conceptual transit center and and station north of Leesburg Pike is where the highest density mixed use sites and the high density retail nodes are proposed to be located under this portion of the CPC.

While this is a revitalization plan for the Baileys Crossroads area rather than an extension of the Columbia Pike Revitalization Plan into Fairfax, it does seem, at least initially, counter-intuitive to connect the old Skyline density to the planned Columbia Pike transit corridor.  But life is not perfect, and Fairfax has to deal with the existing, built densities at Skyline, and probably needs to take advantage of the new transit system now  to alleviate some of the immediate conditions at Skyline.  I just wonder if it would not be more wise to take a longer view and realign the density and transit capability up Columbia Pike rather than focus on connecting the aging density at Skyline.  I also have to admit though, it is pretty exciting to think of Pentagon City and Skyline being connected by a street car system.

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Given the current commercial real estate market and the difficulties faced by many lenders, it is no surprise that many tenants are more concerned than ever about their landlord’s financing. In particular, even if the property is mostly leased and producing a steady income stream, tenants are concerned that highly leveraged landlords will have difficulty refinancing given declining property values and the challenging lending environment. Because of these factors, tenants are paying more attention than ever to their rights in the event of foreclosure by insisting that their landlord and landlord’s lender enter into a subordination, non-disturbance and attornment agreement (an “SNDA”).

Part I of this post will give a brief overview of how SNDAs can protect both tenants and lenders, and Part II will suggest other ways tenants can protect themselves in the current marketplace.

Unlike the lease agreement, which is a two-party agreement between landlord and tenant, the SNDA is a three-party agreement by and among landlord, tenant and landlord’s lender. The SNDA provides protection for both the tenant and the lender, with the landlord playing the role of necessary but reluctant middleman.

The SNDA has three main parts: subordination, non- disturbance and attornment.

• By subordinating the lease to the mortgage, the tenant agrees that the lease will be junior to the lien of the mortgage. If the lease had priority, then it would survive foreclosure of the mortgage. Most form leases, even without an SNDA, provide that the lease is automatically subordinate to the lien of present and future mortgages from institutional lenders.

• Attornment means that the tenant agrees to recognize the lender, or the foreclosure purchaser, as its new landlord after the sale and will continue to pay rent and honor its obligations under the lease. Together with the subordination language, most landlords’ form leases provide for attornment at the lender’s election. The attornment section of the SNDA protects the lender.

• Lastly, the non-disturbance portion provides that in exchange for tenant’s attornment, the lender, or the foreclosure purchaser, will not terminate the lease or disturb tenant’s physical occupancy and possession of the premises. The non-disturbance section of the SNDA protects the tenant.

Without an SNDA, the rights and obligations of the tenant and the lender in foreclosure will depend on the language in the lease and whether the mortgage or the lease has priority. The priority issue is a common source of dispute, which depends on the laws of the state where the property is located. Some states provide that, absent an SNDA, a foreclosure automatically extinguishes subordinate leases. The laws of other states hold that the lender can pick and choose which leases are extinguished by foreclosure. In most cases, the foreclosing lender would not want its income-producing leases to be wiped out, but there are always exceptions. For example, the lender may want to terminate a lease with below market rents, or may want to remove smaller leases or undesirable uses. Attornment provisions in the lease can further complicate matters. Without an SNDA, there could be a multitude of other ambiguous post-foreclosure issues between the tenant and lender involving tenant improvements, deposits and future liabilities. Usually, it is to the advantage of both tenants and lenders to reach agreement beforehand with respect to a possible post-foreclosure relationship than to rely simply on murky common law principles and limited state law.

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Back to another of the cases highlighted in Case Watch: Upcoming Virginia Supreme Court Opinions. In Schefer v. City County of the City of Falls Church, the Virginia Supreme Court was confronted with a 2006 amendment to a Falls Church ordinance that specified different building height requirements for one-family dwellings in the same zoning district.

Schefer owned twelve lots in Falls Church, all of which were zoned R1-B, a medium-density residential district. The minimum lot area requirement for one-family dwellings in the R1-B district is 7,500 square feet. Schefer’s lots were less than the minimum of 7,500 square feet, but had been lawfully created prior to that requirement, and were designated as “substandard lots.” For substandard lots, the maximum building height for “residential use” on all R1-B lots was the less of 35 feet or two and a half stories.

In 2006, Falls Church adopted Zoning Ordinance 1799, amending permissible height and yard set-back requirements for one-family dwellings of substandard lots. Ordinance 1799 created a formula for calculating the allowable building height of one-family dwellings on substandard lots within residential zoning districts, resulting in an allowable building height between 25 and 35 feet depending on the size of the lot. The maximum height for one-family dwellings on standard lots in R1-B districts remained 35 feet.

When Schefer discovered that Zoning Ordinance 1799 changed the maximum building height for one of his lots to just over 28 feet, he filed suit against Falls Church, claiming that Ordinance 1799 violated Virginia Code Section 15.2-2282’s uniformity requirement and the Equal Protection Clause.

The Court had no problem rejecting Schefer’s arguments and siding with Falls Church. Looking at the plain language of Section 15.2-2282, the Court pointed out this section is taken verbatim from the Standard State Zoning Enabling Act, except for the addition of the word “uses.” In full, Section 15.2-2282 reads:

All zoning regulations shall be uniform for each class or kind of buildings and uses throughout each district, but the regulations in one district may differ from those in other districts.

To make his argument under Section 15.2-2282, Schefer claimed that one-family dwellings constituted “buildings and uses” that required identical building height requirements. The Court rejected that argument, concluding that this case turned on two kinds of uses – residential use on standard lots and residential use on substandard lots.

The Court gave very short shrift to Schefer’s equal protection argument. Before reaching this issue, the Court noted that Section 15.2-2282’s purpose is to ensure that zoning regulations are not discriminatory, acting as a “statutory reaffirmation” of equal protection. Under its equal protection analysis, Ordinance 1799 was presumptively reasonable, with Schefer carrying the initial burden to show it was unreasonable. Schefer tried to avoid shouldering this burden by arguing that Ordinance 1799 was facially discriminatory, but the Court refused to allow him to escape his burden of proof because there was nothing inherently suspect about Ordinance 1799 and it did not infringe on the exercise of any fundamental right.

Two more highlighted cases remain. In TIR Connail Properties, L.C. v. 2401 Wilson, LLC, we have yet to see whether the Virginia Supreme Court will say that the plaintiff should have been allowed to sue using its trade name, and what the Court will do about the scope of use of discovery deposition testimony. In Advanced Towing Company, LLC, et al. v. Fairfax County Board of Supervisors, we’ll find out whether the Court agrees with the trial court regarding the Dillon Rule and the doctrine of ultra vires. Stay posted!
 

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In the first part of this posting, we reviewed the deed in lieu process, and how it can be a viable alternative for both the lender and the borrower in situations of serious default where modifications or workouts are impossible. In this second part, we will discuss briefly some important tax and bankruptcy considerations.

Tax Issues

A borrower considering the possibility of foreclosure or a deed-in-lieu of foreclosure should be aware that these events can lead to income taxation of capital gain or cancellation of indebtedness income. The tax results depend in large part on whether the loan is a “recourse” loan or a “non-recourse” loan.  A non-recourse loan is one where the lender’s sole option for recovering on the loan is to take back the property. If the lender can pursue the borrower personally for any shortfall by obtaining a deficiency judgment, then it is a recourse loan.

In the case of a non-recourse loan, the conveyance is taxed as if it were sold for the greater of the outstanding debt or the sales price.  The nature of the gain and the deductibility of any loss depends on the holding period and the nature of the property. 

In the case of a recourse loan, in addition to the potential income and gain resulting from the sale for value, there also may be cancellation of indebtedness income if the debt exceeds the value of the property. Cancellation of indebtedness income is taxed at ordinary income rates, but there are several temporary exceptions. For example, you can exclude cancellation of indebtedness income if the debt is discharged in bankruptcy, to the extent the borrower is insolvent, or in certain situations related to qualified real property business indebtedness. Note that the exception for real property business indebtedness is generally available for rental real estate and other income-producing property, but typically is not available for property held for sale such as a residential development.

Lastly, note that for non-commercial properties, the Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence.

Bankruptcy Issues

If the borrower afterwards files for bankruptcy, then in certain circumstances the conveyance of the property back to the lender could be disallowed. The two main issues to be concerned about with respect to bankruptcy after a deed-in-lieu are preferential transfers and fraudulent conveyances.

Section 548 of the Bankruptcy Code provides that fraudulent conveyances may be set aside if made within the statutorily proscribed timeframes. To be deemed fraudulent, a transfer must be made for less than the reasonable equivalent value and if the borrower meets certain tests of insolvency.

Under Section 547 of the Bankruptcy Code, preferential transfers within ninety days of the date of bankruptcy filing may be set aside. Further, preferential transfers from insiders who had reasonable cause to believe the debtor was insolvent may be set aside if it is made between ninety days and one years prior to the date of filing of the bankruptcy petition. A preferential transfer is a transfer from an insolvent debtor that is made for the benefit of a creditor, providing the creditor to receive more than it would have received in a Chapter 7 liquidation if the transfer had not been made. To prevent the transfer from being voided by the bankruptcy trustee, the lender must show that the lender did not receive more than it would have been entitled to under a Chapter 7 liquidation because the fair market value of the property conveyed is less than the outstanding indebtedness owed to the lender. 

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The Virginia Supreme Court was busy last week, issuing eighteen opinions, two of which – Bailey v. Town of Saltville and Schefer v. City County of the City of Falls Church – were highlighted in the post late last year, Case Watch: Upcoming Virginia Supreme Court Opinions.

Bailey looked at whether a 1909 agreement and a deed concerning a railroad right of way conveyed only an easement or a fee simple interest. In 1909, James and Kate White recorded an agreement and a deed conveying a right of way to Norfolk and Western Railway Company. The agreement's stated purpose was to resolve a dispute over the width of Norfolk and Western’s right of way, and said that the Whites were conveying an eighty-foot wide right of way through their farm. The deed, executed the same day as the agreement, said that the Whites were granting and conveying a strip or parcel of land, described by metes and bounds, with a total acreage of 20.59 acres, setting out survey calls with bearings and distances for the centerline of the track. The deed ended with a covenant that the Whites “will warrant generally the land hereby conveyed.”

In 1993, Norfolk and Western abandoned the railroad line. In 1994, Norfolk and Western donated the railroad corridor to the Town of Saltville by way of quitclaim deed. In 2002, Bailey acquired title to a portion of the farm through which the old railroad line passed. In 2004, Saltville began removing the railroad tracks from the corridor. In response, Bailey posted “no trespassing” signs and denied Saltville entry to the corridor, prompting the town to file suit.

The Virginia Supreme Court began with the basic rule of giving the words used in the deed and agreement their natural and ordinary meaning. It also cited the rule that when two documents are executed at the same time and refer to the same topic, the documents are part of one transaction and are construed as if the provisions were from one whole document. To determine the intent of the parties, the Court looked at the deed’s language, including the language that described the conveyance of “all that certain strip or parcel of land” and warranting generally “the land hereby conveyed.” The Court sided with the Town of Saltville, concluding that the Whites had transferred complete ownership -- a fee simple interest, not a mere easement -- to Norfolk & Western.

The lesson to be learned from this case is – Say What You Mean! In any deed, be sure to spell out exactly what kind of interest you intend to convey. If you mean to convey a fee simple interest, then say so. If you mean to convey only an easement, then say so. [Don’t forget the lessons from Details, Details, Details: What it takes to convey an easement in Virginia and Details, Details, Details, continued: When 1 + 1 still equals 1!]

Also remember that if you are executing other documents along with a deed, make sure that all of the documents are consistent in spelling out exactly what the parties mean to do. The confusion in this case stemmed from the parties having executed two different documents, neither of which spelled out fully what the parties intended. Don’t leave the decision of what you intended to the court. It is much more time effective and much less expensive for you to say right in the documents exactly what you mean!

Bailey wasn’t the only easement related case decided on April 15. The Virginia Supreme Court issued two other opinions regarding easements. In Hafner v. Hansen, the Court concluded that there was no easement by prescription for an unrecorded underground sewer line. Although the neighbor continuously used the sewer line, the line was not so open and obvious that the owner should have known about it and objected to its use.

In Snead v. C&S Properties Holding Company Ltd, the owner installed a chain-link fence, trees and shrubs, signage and rip-rap along an easement. The trial court refused to issue an injunction because there was still enough room for a car to pass, allowing the holder of the easement access to his property. The Virginia Supreme Court reversed, saying that an injunction barring encroachment on the full width of the easement was the right outcome.

Stay tuned for the outcome of the second case, Schefer v. City Council of the City of Falls Church, in a post coming soon!
 

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We are very pleased to have a post today from one of our colleagues here at Bean, Kinney & Korman that focuses his practice on real estate related matters, John Kelly.  We are looking forward to John's contributions here on the blog moving forward and believe John may become a regular mainstay here shortly!

Given the present economic climate, it is no surprise that many real estate developers are having difficulty paying back their lenders. The lender may agree to waive the existing defaults and restructure the loan by modifying the terms of the loan or adding additional collateral or the lender may instead proceed immediately to foreclosure. After conducting its distressed loan due diligence, however, the lender may determine that neither extreme is the right choice. Restructuring the loan may be impractical given that economic circumstances make foreclosure inevitable, but the lender may want to avoid the expense and time needed to foreclose. This post will discuss in detail the compromise position where the borrower averts foreclosure by agreeing to convey the property back to the lender via a deed-in-lieu-of-foreclosure, typically in exchange for the cancellation of the indebtedness. This will be a two part series, with the first part discussing the key aspects of a deed-in-lieu transaction, and the second part of this post will review in brief the related tax and bankruptcy issues.

The main advantage offered to both the borrower and lender is that a deed in lieu avoids the cost, time and negative stigma of a drawn-out and contested foreclosure action. For the lender, they can quickly and efficiently take over the operation of the project and preserve existing leases and contracts. For the borrower, they can obtain a release of their personal liability.

To preserve the validity of the transfer of the property to the lender, it is very important that the conveyance was made voluntarily and for adequate consideration. Lenders will want to protect themselves from the borrower later arguing that they were subject to duress, undue pressure or fraud in an effort to overturn the transaction. With regard to adequate consideration, the lender typically will not accept the conveyance unless the fair market value of the property is close to the amount of the indebtedness and the property can be obtained for less than the total cost of a foreclosure. To make clear that the transfer was voluntarily, the borrower should first submit a written offer to the lender offering to convey the property to the lender with outlining the terms and conditions of the offer. The lender should in turn reply to the borrower’s offer in writing, providing a list of conditions under which it will accept a deed in lieu. With respect to the adequacy of the consideration, the lender and borrower should self-servingly provide in an agreement that the current value of the property is equal to or less than the outstanding indebtedness. Lastly, as part of its due diligence, the lender should order an appraisal of the property, along with a title search and environmental study.

Usually, the agreement would also preserve the lender’s first lien on the property. This give the lender the right to later proceed with a regular foreclosure in order to wipe out any junior lienholders and clear title as needed. To preserve this right, the agreement should make clear the intent of the parties for the lien to remain separate even though the lender would then be the owner of the property as well as the holder of the mortgage lien. Another method of dealing with these anti-merger concerns is to have the lender take title to the property in a related entity.

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We've got two new provisions to the Code of Virginia as of this last legislative session which create a perpetual, non-reverting fund to facilitate the remediation of property impacted by the use of "Defective Drywall" in residential construction.  This fund will be administered by the Virginia Resources Authority and the Department of Housing and Community Development ("DHCD"). 

According to the bill's summary, the DHCD will "...develop guidelines for the distribution of loans or grants from the Fund to particular recipients. The grants and loans may be used to pay the reasonable and necessary costs associated with: (i) the remediation of a contaminated property to remove hazardous substances, hazardous wastes, or solid wastes, ( ii) the stabilization or restoration of such structures, or (iii) the demolition and removal of the existing structures or other work necessary to remediate or reuse the real property" due to the effects of "Defective Drywall." Kind of makes you nostalgic for underground storage tanks, doesn't it?

So what is considered "Defective Drywall?"  Well, it's defined at length in the bill's definitions section, so I won't bore you with all the details, but basically it must have been installed during new construction or renovation between 2001 and 2008 and meet the technical requirements of the definition (i.e. sufficient strontium, sulfur or hydrogen sulfide levels, etc.). 

Who can receive loans and/or grants from the fund?  Eligible entities for grants appear to only include local governments (who appear to be able to then use these grants to create incentives for remediation), while loans may also be made to local governments, public authorities, corporations, partnerships, or individuals for the remediation purposes.  The Virginia Resources Authority will get to determine the rates.

So the legislation is in place creating the fund.  What I've learned about government funds though, is that the most important question about any fund is: Is it funded?  Well, I don't know yet.  But I did shoot the bill's patron,  Delegate Oder, an email to see if he could shed any light on how the fund will actually operate for us - we'll let you know when we hear back.

Want to know more about Chinese and other defective drywall from a product liability standpoint?  Check out Tim Hughes' string of posts here.

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Back in November 2009, I highlighted five cases in which the Virginia Supreme Court granted appeals in Case Watch:  Upcoming Virginia Supreme Court Opinions.  The Virginia Supreme Court has recently published the opinion in the first of those cases, W&W Partnership v. Prince William County Board of Zoning Appeals, et al, Record No. 090328.

In this case, the Woodsides owned a piece of property that was over 46 acres. In 1940, they conveyed 1.44 acres to the Commonwealth of Virginia to extend Route 234, a public road, through their property. Route 234 bisected the property, leaving just over 5 acres to the north and about 40 acres to the south. The deed conveying the 1.44 acres contained a metes and bounds description of only the strip of land conveyed to the Commonwealth.

In 2000, the Woodsides conveyed their property to a church, which in turn conveyed the property to W&W Partnership. W&W subdivided and conveyed a portion of the 40 acres to the south of Route 234, leaving W&W with 15.3 acres total – 10.3 acres to the south, and 5.17 acres to the north. W&W sought a separate address and GPIN from Prince William County, claiming that the 5.17 acres of land constituted a separate, legally nonconforming lot created in 1940 by the Woodsides’ conveyance to the Commonwealth. The County denied this request, claiming that the Woodsides’ remaining property continued as one parcel with two noncontiguous pieces. Both the BZA and the Circuit Court sided with the County.

The Virginia Supreme Court followed the law set out in Chesterfield County v. Stigall, 262 Va. 697, 554 S.E.2d 49 (2001), which held that creation of a new lot

is a legal separation of property because it results from an action by the owner and involves, at a minimum, a change in the legal description of the property, either by a meets and bounds or by plat, which is duly recorded in the appropriate land records.

Stigall’s facts were very similar to the Woodsides’ situation, with a public road that bisected a lot and created two unequal sections. However, the Commonwealth acquired a portion of the property by way of eminent domain instead of voluntary conveyance in Stigall. The Court rejected W&W’s argument that this made any difference, holding that

the mere act of conveying property to the Commonwealth did not legally separate the noncontiguous portions of the Woodsides’ remaining property. Such legal separation of property must be shown by proof that the owner, at a minimum, duly recorded a change in the legal description of the property either by metes and bounds or by plat.

As I stressed in Details, Details, Details:  What it Takes to Convey an Easement in Virginia, this case yet again highlights that it’s all in the details. As with any real estate transactions, be sure to: (1) explain the parties’ intent precisely and specifically; (2) give details right in the deed – in this case by specific metes and bounds or by plat – and if you are relying on a separate document such as a plat, be sure to specify the plat in the deed itself and incorporate the plat by reference right in the deed; and (3) record all pertinent documents and attachments in the land records as soon as possible.
 

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In what appears to be an effort to allow localities to provide additional incentives to redevelop certain areas or sites, both houses of the General Assembly have voted to modify Section 15.2-2316.2 of the Code of Virginia, better known as the "TDR Statute" (inclusive of Section 15.2-2316.1 as well).  Previously, transferable development rights ("TDRs") severed from a "sending" site or area could only be equal to the TDRs permitted to be attached to the "receiving" site.  The modification now allows TDRs transferred to receiving sites to be greater than those severed from the sending sites. 

I have to admit, you can read this modification to mean a number of things.  If localities are smart, they could really use this modification to their advantage.  Read one way, this could allow localities an additional method to encourage owners of transferable development rights to transfer their density to sites that are less favorable from a business standpoint but more favorable from a planning standpoint.  It arguably provides localities with the ability to prioritize which sites should receive density through what amounts to a receiving site bonus density program.   It also could potentially allow the regulation and/or balancing of the TDR market because the locality now has what appears to be the additional ability to control market demand of TDRs (i.e. if the market has 15,000 SF of density available for sale, and only 8,000 SF worth of receiving site density permitted, market price for TDRs will be lower than if the ratio is reversed). Localities arguably now have more ability to control the supply and demand for TDRs.

As anyone in the land use racket can see, this is a significant amendment to the TDR Statute, and, as always, the political nuances of who will eventually benefit in any given locality will be interesting to follow.  It is certainly another tool in the planning toolbox localities should not ignore, and of which owners and developers should be aware.   If you want to read more about TDRs, click here.

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Can you imagine going to your local zoning office, asking for a formal determination from the Zoning Administrator as to whether you are permitted to build a building on your property, receiving a formal written determination that you may do so legally, providing the written opinion to your bank who then provides the financing, then paying for and constructing the building, only to be notified thereafter by the locality that they have either changed their mind or have decided to rezone your property without your consent in the interim?  You complain that you were told by the locality that you could build the building, but all you get is "Sorry, we've decided you can't do that after all."

Does that stick in your craw?  It should, and local officials flopping or waffling over their prior decisions happens, to some degree or another, more frequently than some might think in localities all over our Commonwealth.  Well, you can stop clearing your throat and loosening your tie because the General Assembly voted this past Monday (House 92 to 4, Senate 40 to 0) to make Zoning Administrators more accountable for the decisions they make - decisions on which private citizens must rely.  HB 1250 passed, and it modifies Section 15.2-2307 of the Code of Virginia to provide that formal determinations made by Zoning Administrators, after the requisite appeal or modification period has run, shall be considered "significant affirmative government acts" (aka "SAGAs") if a private party has relied upon a SAGA to the requisite extent.

Our colleagues at Sands Anderson down in Richmond and Beth Wellington blogged earlier this week that allowing private citizens to rely on a formal opinion by the Zoning Administrator (that person holding the statutorily designated office to make such determinations), might somehow allow private property owners to rezone their property "in the dark," or gain some other advantage outside of the public eye.  Yes, it is true that a Zoning Administrator has the sole authority to make a formal, binding determination of what a parcel of land's current zoning classification allows; however, that is in fact the total extent of that authority.  A Zoning Administrator may not grant, through a formal determination, additional rights to use land beyond what is permitted by its current zoning classification. 

The other concerns raised about the bill seem to relate to lack of public notice to other potentially interested parties that such a SAGA is being made (i.e. a Zoning Administrator may issue a formal determination to a property owner without giving other potentially interested parties any notice).  What if you are a co-owner not reflected in any public record, a lender, or an adjoining property owner that would be affected detrimentally by an incorrect determination?  You would have no way of knowing that a determination had been made and that the clock on your appeal window is ticking away.   In fact, realistically, it is very unlikely you would know anything until your appeal period had lapsed (typically only 30 to 60 days, depending on the facts).

Some of the other statutorily listed SAGAs require some kind of legally advertised public review process; however, these are only those SAGAs that are the culmination of processes that allow property owners to do things beyond what they may do by-right, such as variances, special exceptions, etc.  Other by-right SAGAs do not require public review, such as subdivision approvals, plans of development, etc.  Clearly, a zoning determination may not permit something illegal, but who would know until it was too late?  Are we heading toward publishing legal notices that a zoning determination has been made?  How would this jibe with the "A Thing Decided Doctrine" relating to oral determinations made by Zoning Administrators?

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In 2002, Brenda Kersey received a $71,397 mortgage loan to purchase a home in Richmond, Virginia. The loan was a Federal Housing Administration (“FHA”) loan governed by FHA regulations. PHH Mortgage Corporation was the holder of the note in connection with Ms. Kersey’s loan.

Like so many unfortunate homeowners, Brenda Kersey fell behind on her mortgage payments. PHH appointed the Professional Foreclosure Corporation of Virginia (“PFC”) as substitute trustee on the Deed of Trust securing the mortgage and instructed PFC to foreclose on Ms. Kersey’s home. PFC scheduled a foreclosure sale without having or attempting to arrange a face-to-face meeting between PHH and Ms. Kersey.

The deed of trust allowed foreclosure only if the holder of the note complies with FHA regulations. One of those regulations is 24 C.F.R. Section 203.604 (b), which states in part:

The mortgagee must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid. If default occurs in a repayment plan arranged other than during a personal interview, the mortgagee must have a face-to-face meeting with the mortgagor, or make a reasonable attempt to arrange such a meeting within 30 days after such default and at least 30 days before foreclosure is commenced….

Based on PFC’s failure to schedule a face-to-face interview before initiating foreclosure, Ms. Kersey filed a complaint in the Circuit Court for Richmond City seeking a declaratory judgment that PHH failed to comply with the deed of trust sufficiently to go forward with the foreclosure. PHH removed the matter to the United States District Court for the Eastern District of Virginia, Richmond Division, and moved to dismiss the action under Rule 12(b)(6) for failure to state a claim.

In a memorandum opinion in Kersey v. PHH Mortgage Corporation, Judge Williams refused to dismiss Ms. Kersey’s complaint, concluding that there was a “distinct and ripe controversy” as to whether PHH owed Ms. Kersey a face-to-face interview prior to foreclosing on her home.

PHH’s first argued that Section 203.604 and the National Housing Act (“NHA”) do not grant a plaintiff a private cause of action. Judge Williams dispensed with this argument by concluding that Ms. Kersey was not bringing a claim under the NHA and Section 203.604, but rather was seeking a declaratory judgment based on a state law breach of contract claim. Interestingly, Judge Williams hinted to PHH that perhaps it could assert that Ms. Kersey’s failure to make timely payments constituted the first material breach between the parties that would have relieved PHH from the obligatory face-to-face meeting.

PHH’s second argument was that it fell under an exception found in Section 203.604 (c), that a

face-to-face meeting is not required … if [t]he mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either.

PHH has loan origination branches, but no servicing branches, within 200 miles of Ms. Kersey’s property, and pointed to an interpretation of this exception on HUD’s website that Section 203.604 relates only to mortgagors living within a 200-mile radius of a servicing office. Judge Williams refused to be swayed by the interpretation on HUD’s website, finding the exception in Section 203.604 (c) to be unambiguous. According to Judge Williams, a lender could escape the face-to-face meeting requirement only if the following are not located within 200 miles of the mortgaged property:

1. the mortgagee;
2. the mortgagee’s mortgage servicer;
3. a branch office of the mortgagee;
4. a branch office of the mortgagee’s mortgage servicer.

Judge Williams found that PHH could not therefore escape its face-to-face obligation when Ms. Kersey’s complaint alleged that PHH maintains “branch offices” within 200 miles of the mortgaged property.

It will be interesting to see if PHH ultimately prevails by alleging that Ms. Kersey committed the first material breach when she fell behind on her payments.  However, stepping back from the legal analysis for a moment, maybe there is a point to these face-to-face meetings, even if they are time consuming.  In the right situation, such a meeting could enable lenders and borrowers to come up with a mutual plan to avoid painful and costly foreclosure proceedings. 

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The Supreme Court of Virginia issued an opinion last Friday in the case of Virginia Home for Boys and Girls v. Phillips  that reads like a law school examination question.  The court ruled that a man had no claim against an estate because he had no written contract and no independent verification.  

The basic principles are easy.  The statute of frauds in Virginia generally provides that all contracts for the sale of real estate must be in writing.  The so-called "Dead Man's Statute" provides that in cases where the opponent is incapable of testifying, no judgment shall be rendered if it is founded solely on uncorroborated testimony.  Both of these statutes make it incredibly difficult for a party to make a claim against an estate based on oral contracts, particularly claims involving real estate.

Despite these principles, the claimant in this case actually won at the trial court.  Part performance of the agreement can eliminate the requirement for a written contract.  Phillips claimed an agreement in 1977 that the estate should go to him if he helped on their farm and took over their operations.  The trial court was convinced based on the long history of changes in lifestyle, decades of assistance around the decedent's farm, and refusing to take more lucrative jobs in order to live by his agreement that Phillips story was on the level.  Unfortunately for Phillips, the Supreme Court of Virginia reversed and found there was no independent corroboration.

This case provides a couple important take-aways:

• All contracts involving real estate should be in writing
• Do not expect limited exceptions to basic rules to save your case, especially in Virginia
• Any arrangements that are effective upon death should be confirmed in writing
• Any business ownership transfer issues should be in writing or you risk estate planning arrangments trumping the oral business deal

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Andrew McRoberts reported on Thursday that the Virginia Association of Counties released its Model Transfer of Development Rights Ordinance for Virginia Localities.  Andrew was part of a working group that worked with a number of stakeholders to develop this model ordinance so that it may be used as a guide for localities in Virginia unfamiliar with the concept, application and practice of using transferable development rights, or "TDRs."

TDRs have been used in various places throughout the country for some time now.  Even in Virginia, the County Manager form of Government (as is the case in Arlington County), has been permitted to allow TDRs in its zoning ordinance since 2005.  In a nutshell, TDRs are simply the right to separate the density from one site and convey the density to another site.  This is typically done by identifying which sites can be a "sending site" or a "receiving site" in a locality's comprehensive plan and/or its zoning ordinance.  In Arlington County, for instance, TDRs have been implemented vis-a-vis its unique special exception process (the 4.1 Site Plan Process), and have also been enabled for its Clarendon Sector Plan.

TDRs are an excellent tool which provide useful flexibility for both localities and private interests.  This tool can allow localities to preserve important historical sites and other sites of interest while still allowing private landowners to sell the density off of a site, thus preserving their property rights. It also lets localities encourage redevelopment in areas that don't need extra height or density without having to provide valuable incentives that might otherwise cost localities money (i.e. tax credits, etc.).

The Model Transfer of Development Rights Ordinance for Virginia Localities was drafted to reflect the 2009 updates to Code of Virginia Sections 15.2-2316.1 and 15.2-2316.2, which "...[allow] severance of development rights without their immediate reattachment to another property... [and] provide for local taxation of the severed rights as a separate property interest during the time they are unattached to a specific land parcel."  The model provides example ordinance provisions and definitions, explanatory commentary for the model provisions, and even model legal documents for use when transferring density. 

Being able to transfer density has lead to some pretty interesting transactions and land use/zoning solutions for us here at Bean Kinney, and I am excited to see this very useful tool implemented in other localities in the Commonwealth.

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With the General Assembly set to convene and prefiling ending on January 13th, I thought it would be worth while to take a look at the legislative proposals submitted thus far to see if anything  jumped out at me this year from the land use side of things.  Suprisingly, this session looks kind of light so far (everyone must be focusing on the budget bills...).

From the local government side, it looks like HB 33 proposes requiring additional disclosures by local governments when seeking bond approvals from voters.  It appears the idea is that public notices would have to include not only the amount of debt to be assumed, but now also the anticipated number of years to amortize and the total debt service payable on the principal amount of the bonds proposed to be issued.  More information for voters - how can you vote against this one?

Also, HB 51 proposes to allow localities' governing bodies the option to prepare their own amendments to comprehensive plans rather than having to request the local planning commission to do so.  HJ 11 proposes the necessary constitutional amendment to allow localities to establish their own income or financial worth limitations for granting local property tax relief to seniors (65 year-olds) and permanently disabled individuals.

On the transportation side, it looks like this will be a season of transportation reform.  The big one, HJ 5, according to LIS, proposes an amendment to the Constitution of Virginia to require the General Assembly to maintain permanent and separate Transportation Funds, that revenues dedicated to Transportation Funds actually have to be deposited into the Transportation Funds, and limits the use of Transportation Funds to only transportation related purposes, unless the General Assembly secures a 2/3 plus one majority to borrow from the Transportation Funds.  Borrowed funds would have to be repayed, with interest, within a specified period of time.

Transportation programs are also proposed to now be subject to performance audits by the Auditor of Public Accounts per HB 42.  These audits would include cost saving assessments, and organizational structure/efficiency and effectiveness analysis of transportation agencies by private management consulting firms.

Also, HB 25 proposes to amend the requirements of the Statewide Transportation Plan, and for evaluation of selection of transportation improvement projects, to include as an objective identifying quantifiable measures and achievable goals relating to reduce greenhouse gas emissions.  HB 55 puts forward limiting assessments on localities for VRE service to no more than a locality collects through its motor vehicle fuel sales tax while HB 19 attempts to allow the Potomac-Rappahannock Transportation Commission to charge higher fares to VRE passengers from localities who are not that are not embraced by the Potomac-Rappahannock Transportation District.

And finally, from the conflicts of interest camp, members of the General Assembly, per SB 4, would have to disclose any money paid to him/her, or immediate family, in excess of $10,000 by a state or local government or advisory agency.  Former Section 30-111 explicitly allowed members and their family members to exclude what they were paid by various governmental agencies/commissions on their Statement of Economic Interest conflict of interest disclosure form.  I wonder why?

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In 2004, 515 Granby, LLC proposed a $180.5 million condo development. With 34 stories and 327 units, Granby Towers would be the tallest building in Norfolk and would revitalize the northern part of the city. The following year, the federal government threatened to condemn the property, causing just enough of a delay for the ebbing economic tide to overtake the Granby Tower project and thwart 515 Granby’s ability to secure financing.

Fortunately for 515 Granby, the prime contract with Turner Construction Company had the following language:

This Agreement and any liability and obligations of the Owner…shall be subject to and expressly conditioned upon the closing by the Owner, and the initial funding by its lender, of the construction loan… and Owner shall have no obligation or liability to Construction Manager for any costs for the Construction Phase under this Agreement unless such construction loan closing is completed.

Turner and its subcontractors, who were owed over $13 million for construction on the project, challenged this language in a two-day evidentiary hearing in the Circuit Court for the City of Norfolk. In a letter opinion issued by Judge Martin, Judge Martin rejected this challenge, finding that 515 Granby “made great efforts to secure financing for the project,” but was unable to do so due to the current conditions of the credit market. Judge Martin concluded that 515 Granby would have had to pay Turner only if and when it had received initial funding of the construction loan.  For an in-depth look at the court's reasoning, and what you can do if you face such a contractual provision, go to Yes, Virginia, Contract Terms Do Matter:  Financing Term Offers Owner an Escape Hatch, by my colleague, Tim Hughes, guest blogging on Construction Law Musings. 

Fortunately for Turner, its subcontracts contained the following language:

The obligation of Turner to make a payment under this Agreement, whether a progress or final payment, or for extras or change orders or delays to the Work, is subject to the express condition precedent of payment therefor by the Owner.

One of the subcontractors, Suburban Grading & Utilities, claimed this language was unenforceable. In a second letter opinion, Judge Martin upheld this provision as well, noting that the Supreme Court of Virginia finds “pay if paid” clauses enforceable “where the language of the contract in question is clear on its face.” This language was an unambiguous “pay if paid” clause that Judge Martin had no choice but to uphold, leaving Suburban to eat the costs of $575,928 for labor and materials and another $245,662 for dewatering.  For a great and very timely discussion of this opinion and advice about "pay if paid" clauses, I urge you to read Chris Hill's Construction Law Musings post, Pay if Paid, Pay Attention Subs.

Don’t go away thinking there will be no winners in this debacle! The federal government has since conveniently renewed its desire to condemn the property in order to expand the federal courthouse next door.  It offered a paltry $6.1 million to seize the Granby Tower property, an offer that no one is jumping at yet.  If you’re interested in reading more on this very likely end to the Granby Towers saga, take a look at Harry Minium and Tim McGlone’s recent article in The Virginian-Pilot.  
 

Image by:  Hyunsoo Leo Kim/The Virginian-Pilot 

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In the recent case of Burdette v. Brush Mountain Estates, LLC, the Virginia Supreme Court tackled head on what it takes to convey an easement. Burdette acquired two parcels of land by deed, which stated that the conveyance was “made subject to all easements, reservations, restrictions and conditions of record affecting the hereinabove described property,” and referred to a boundary line adjustment plat that was recorded in the land records. The plat depicted a fifty-foot easement traversing both parcels and this notation” ‘50’ PRIVATE EASEMENT FOR INGRESS, EGRESS AND PUBLIC UTILITY FOR THE BENEFIT OF [Brush Mountain’s property], IS HEREBY CONVEYED.”

Brush Mountain owned an adjacent parcel to the east of Burdette’s property. Brush Mountain submitted a request to rezone its parcel. To develop its property, Brush Mountain would need to rely on the easement for access. When Burdette discovered Brush Mountain’s plans, Burdette filed a complaint for declaratory judgment against Brush Mountain, contesting the existence of the easement.

In analyzing whether an easement must be conveyed by a deed or will, the Court began with Virginia Code Section 55-2, which states “No estate of inheritance or freehold or for a term of more than five years in lands shall be conveyed unless by deed or will.” In holding that an easement is not an estate in land, the Court concluded that Section 55-2 was not applicable.

The Court then turned to the language in the deeds and the plat, siding with Burdette that those documents did not contain the necessary words to convey an easement. First, the “subject to” language in the deed was merely boiler plate and did not specify a particular plat. Second, the plat did not show the full extent of the burden imposed by the easement because the easement spilled over into property not included in the survey and was identified only in a note. Third, Brush Mountain was in essence a stranger to the deeds.

The moral of the story is that, if you want to convey an easement, be as clear as possible about your intent. Details matter! Specify the plat directly on the face of the deed. Incorporate the plat, and show the full extent of the easement on the plat. And include all related parties in the deed.
 

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In case you missed it, Arlington County's Rosslyn-Ballston corridor made the NY Times on Thursday.  The article, entitled "An Oasis of Stability Amid a Downturn", provides how well Arlington County is weathering the current real estate market as compared to other locations of the country.   The article cites Arlington's 8.6% office vacancy rate against the national average of 18.3% (and the second lowest retail vacancy rate out of the 23 major markets surveyed), and attributes these relatively low vacancy rates to the corridor's well-planned, transit-oriented mix of uses and proximity to the nation's capitol, public transit/Metro system, and the County's ability to attract and retain a number of federal agencies and universities in the County.

It is true that the major key to Arlington's success has been its proximity to the federal government, and that it is a natural location for expansion of density outside of the District of Columbia (Arlington actually being originally planned as part of DC), but it is great to read about the truly excellent foresight the County has exercised over the years to ensure this potential was not lost and directed to other localities in the region.  Arlington really is a unique market that deserves special attention, particularly during economic downturns.  In fact, Arlington experienced similar resilience during the Great Depression.

I am very happy to see Arlington get the recognition it deserves.  One quote hit the nail on the head: "'[t]here’s a lot of tremendous economic fundamentals in place' in the corridor..." 

And to top it all off, Virginia was just named the "Best State for Business" by Forbes.com. for the fourth year in a row.

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A quick “congrats” to Jim Pritchett who has been named Executive Director of Alexandria’s relatively new Housing Development Corporation. The Alexandria Housing Development Corporation (AHDC) is a non-profit developer and owner of affordable housing, primarily focused on projects located in the City of Alexandria, Virginia. 

The creation of AHDC was pursuant to a request from then-Councilman William Euille and Councilwoman Joyce Woodson to Alexandria city staff for a plan of action to address the City's affordable housing needs.  In April of 2003, Mildrilyn Davis, Director of the Office of Housing, and Phil Sunderland, City Manager, responded with a memorandum detailing the establishment of a new non-profit housing corporation. This plan anticipated city involvement in the creation and initial establishment of the corporation, but without direct oversight of its activities.  In January of 2004, the City Council named five incorporators to form the corporation and oversee its initial setup and AHDC was incorporated in May of that same year. 

AHDC is preparing to celebrate the Grand Opening of The Station at Potomac Yard on October 17th.  This unique project is a mixed use development that includes 64 units of affordable and workforce housing, Alexandria's newest fire station, and some retail space that is available on the first floor. 

Good luck to Jim and the rest of the AHDC team.

For more information about this project and AHDC here’s the link to their website.

Thanks to Larry Adams, the project's architect from LeMay Erickson, for allowing us to post the above rendering.  Here's a link to the architect's website:  LeMay Erickson Willcox Architects

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As the economy has languished, many property sellers and landlords have experienced extensions of property listings. In many cases, these extensions have actually exceeded the terms of the listing agreements with their brokers. This situation can raise some complex questions of exactly what listing terms remain in place and what commission, if any, the real estate broker can recover.

A recent case in the United States for the Eastern District of Virginia, Grubb & Ellis v.  Potomac Medical Building, LLC, gives some guidance on these questions. The case ended in a bench trial and resulting forty page memorandum opinion, so the case is certainly long on facts and detail. There are a few important take-away points, especially when one takes into account the context of litigation in the "Rocket Docket":

• The original listing agreement permitted only written extensions - while there were continued dealings between the parties, the court found there was no extension of the original listing in large part because there was no written extension
  
• The broker’s continuing efforts to lease the property did not create a new listing agreement
• While the initial broker brought the eventual tenant to the table, that tenant was not willing to close on the landlord's terms so the broker was not the "procuring cause"

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