Commercial Real Estate

massachusetts notary publicCourt Points Out Potential Problem with Standard Notary Acknowledgment Form

Could the the standard form notary acknowledgment clause used in virtually every recent Massachusetts deed, mortgage and other recorded instrument be defective in certain situations involving power of attorneys? That may be the result of a recent court decision by the First Circuit Bankruptcy Appellate Panel in Weiss v. Wells Fargo Bank (click for link to case).

The ruling is causing quite a bit of angst in the real estate conveyancing community. Since Revised Executive Order 455 – Standards of Conduct for Notaries Public was passed by Gov. Romney in 2004, notaries public and attorneys have been using the approved notary acknowledgment form providing that the document is signed “voluntarily for its stated purpose. ” In the Weiss case, however, the court held that the notary acknowledgment of an attorney-in-fact under a power of attorney was defective as it failed to indicate that the principal has signed under “his free act and deed.

The facts in the Weiss case are rather unique so it may have limited effect. But it should serve as a wake-up call for notaries public, attorneys and lenders that the better practice may be to use a notary public acknowledgment with the “free act and deed” language as was common before the 2004 notary rules.

Practice Pointer:  Going forward, I recommend that real estate attorneys, notaries public and lenders should consider using “free act and deed” language in notary public acknowledgments. See below for form language. 

Fact of the Case: Botched Notarization With Power of Attorney

In the Weiss case, a bankruptcy trustee for Chicopee homeowners attempted to use his “strong-arm” powers to void a refinance mortgage. The borrowers took out a refinance loan on their Chicopee home with Wachovia Mortgage. They signed a limited power of attorney to enable a one Shannon Obringer (who I assume was a bank employee) to sign the mortgage. The actual signing of the mortgage occurred in Pennsylvania by a Pennsylvania notary (I assume at Wachovia’s offices). You know this wasn’t going to end well….

The pre-printed notary acknowledgment form on the mortgage was the approved MA Executive Order form, which the notary partially completed as follows:

On this 11 day of June 2007, before me, the undersigned notary public, personally appeared Shawn G. Kelley and Annemarie Kelley by Shannon Obringer as Attorney in Fact, proved to me through satisfactory evidence of identification which was/were ________________ to be the person(s) whose name(s) is/are signed on the preceding document, and acknowledged to me that he/she/they signed it voluntarily for its stated purpose.

Although there was some ambiguity from the wording as to who actually appeared before the notary and the notary failed to fill out the identification form blank space, the Court held that these were not necessarily fatal. However, the Court ruled that the language in the notarization that it was signed “voluntarily for its stated purpose” was fatally defective because it did not sufficiently demonstrate that it was the borrowers’ “free act and deed” by the attorney-in-fact’s signature, as required by Massachusetts statutory and case law. The Court went on to void the mortgage in favor of the bankrupt debtor.

New Notary Public Acknowledgment 

Going forward, I would consider using a notarization acknowledgment with the older “free act and deed” language in power of attorney signing situations. The 2004 acknowledgment should be ok for typical individual notarizations. Of course, you should consult with your title company, lender and/or attorney before notarizing in any tricky situations.

If you have any questions about notarization after this court ruling, please contact me at rvetstein@vetsteinlawgroup.com or 508-620-5352.

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nail in the coffinWhy A Massachusetts Real Estate Nominee Trust Is Worthless and Useless

Since the concept of currency and debt was created, debtors have been playing a cat-and-mouse game with creditors in order to avoid satisfaction of their debts. A ruling last week by the Massachusetts Appeals Court in Citizens Bank v. Coleman (May 15, 2013) is notable because it put the kibosh on a formerly popular estate planning practice in Massachusetts where a husband conveys property into a real estate nominee trust held by his wife. The problem, of course, was that the husband was being chased by a creditor holding a $600,000+ judgment, so any action he took with his assets would ultimately come under the judicial microscope. And that’s exactly what happened in this case, as the Court unwound the transfer and ruled in the bank’s favor.

Old Debts Come Back to Haunt Developer

In the 1980’s, Martin Coleman, a real estate developer, purchased two multifamily rental properties in Waltham. Coleman furnished all the cash to acquire these properties. In 1986, Coleman married his wife, Pamela, who began managing the properties. She dealt with all issues relating to the tenants (including rent collection and filling vacancies) and superintended the maintenance, repairs, and payment of bills. In 1988, Coleman defaulted on a $6.2 million construction loan, which he had personally guaranteed.

In 1989, Coleman transferred, for $1.00, title to both rental properties into two real estate nominee trusts, with Pamela named as the sole beneficiary of each trust. Pamela continued to assist with the management of the properties, but Martin paid for all the property expenses.

In 1994, Federal Savings Bank obtained a $600,000 plus judgment against Mr. Coleman which was subsequently acquired by Citizens Bank. Citizens sued the Colemans, attempting to “reach and apply” Pamela’s interest in the two Waltham properties to satisfy the large judgment.

Interfamily Conveyance = Resulting Trust = Creditor Wins


The Appeals Court ultimately ruled that Mr. Coleman’s conveyance into the nominee trusts was a “resulting trust” — essentially a fraudulent transfer to avoid satisfaction of the large judgment. With respect to transfers between husband and wife, the law presumes they are not designed to avoid creditors. This presumption, however, can be overcome through evidence that the conveyance did not result in any change in behavior or financial responsibilities between husband and wife, as compared to before the transfer. In this case, the evidence showed that Mr. Coleman still held himself out as the owner of the rental properties, nothing changed as to the wife’s property management duties, and the conveyance was not truly part of a legitimate estate plan, as the Colemans contended. The Court ruled that Citizens Bank will be able to sell the two Waltham properties at auction to satisfy the judgment which is likely now seven figures.

Moral Of The Story: Trash the Nominee Trust

Real estate nominee trusts were all the rage in the 1980’s and into the 1990’s. A series of court rulings, however, exposed serious flaws with the asset protection security these trusts were supposed to provide. They are now out of favor, yet, they are still being used. Perhaps this case will put the proverbial nail in the nominee trust coffin. Memo to estate planners: They don’t work, so stop using them. Go with a limited liability company instead.

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RDV-profile-picture-larger-150x150.jpgRichard D. Vetstein is a Massachusetts real estate attorney who is frequently consulted by property owners looking to shelter their assets. Please contact him at info@vetsteinlawgroup.com or 508-620-5352.

 

 

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Case Highlights Importance of Rent Acceleration Clause In Commercial Leases

In a decision underscoring the importance of careful commercial lease drafting, the Massachusetts Supreme Judicial Court has ruled that a commercial landlord must wait out a 12 year lease term to recover unpaid rent from a tenant who abandoned the premises in year 2 of the lease. We lawyers call this a Pyrrhic victory: “a victory offset by staggering losses.” The case is 275 Washington Street Corp. vs. Hudson River Int’l, LLC (SJC-11217). 

Practice Pointer: This case is an important reminder for all residential and commercial landlords to have their leases reviewed to ensure that they can recover all available lost rental damages. Contact me at info@vetsteinlawgroup.com for a lease review.

Facts: Dental Practice Goes South Quickly

The landlord and tenant, a dental practice, entered into a 12-year lease beginning in 2006 for medical office space located at 221-227 Washington Street in downtown Boston. Barely a year later, the dental practice went under and closed. In May 2008, the dentist told the landlord that he would not be making any further lease payments.

Fortunately, the landlord found a new tenant. A new 10 year lease was signed, covering the remainder of the dentist’s term, but at a lower rent. The landlord sued the dentist for the rent differential — some $1 Million Dollars.

Standard Indemnification Clause

The lease contained a standard default indemnification clause found in many older standard lease forms:

The LESSEE shall indemnify the LESSOR against all loss of rent and other payments which the LESSOR may incur by reason of such termination during the residue of the term.  If the LESSEE shall default, after reasonable notice thereof, in the observance or performance of any conditions or covenant on LESSEE’s part to be observed or performed under or by virtue of any of the provisions in any article of this lease, the LESSOR, without being under any obligation to do so and without thereby waiving such default, may remedy such default for the account and at the expense of the LESSEE.

Common Law Rule: Put It In The Lease

The SJC pointed out long standing Massachusetts common law “where the contract is a commercial lease, our common law does not provide ‘benefit of the bargain’ damages in the event of termination of the lease following a breach. Once a landlord terminates a lease, the tenant is no longer obligated to pay the rent, and, unless the lease otherwise so provides, the landlord is not entitled to posttermination damages.” This may be contrary to common understanding, but it’s the reason why lawyers have developed rent acceleration and liquidated damages provisions for commercial leases.

Despite the urging of the Real Estate Bar Association, which filed a friend-of-the-court brief, the SJC saw no need to alter the harsh common law simply because this particular landlord’s lease failed to provide a proper rent acceleration clause. Justice Gants didn’t mince his words in cautioning commercial landlords to use proper lease provisions:

 A landlord left without an adequate remedy following breach of the lease by a tenant has only itself to blame for entering into a lease that fails to provide such a remedy. We shall not disrupt the settled expectations of leasing parties in order to protect a landlord from the consequences of failing to insist on an adequate remedy in the negotiation of a commercial lease. Nor shall we invite uncertainty as to the availability and scope of a landlord’s remedy for “benefit of the bargain” damages where the contours of such a remedy are not delineated in the lease but left to be determined under the common law.

Solution: Rent Acceleration/Liquidated Damages Clause

The lease in this case appears to be of an older variety and did not contain a rent acceleration/liquidated damage clause. Such a clause provides that upon a rent default, all unpaid rent is due through the end of the lease term as liquidated damages. All commercial leases should contain this type of rent acceleration clause, and I would also recommend a provision enabling the landlord to recoup the cost of expensive tenant build outs where a tenant has defaulted early in the lease term. Contact me at info@vetsteinlawgroup.com for a lease review.

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Richard D. Vetstein, Esq.Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. For more information, please contact him at 508-620-5352 or info@vetsteinlawgroup.com.

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massachusetts medical marijuanaAttorney General Strikes Down Wakefield Ban On Medical Marijuana Dispensaries

As I predicted months ago, Massachusetts towns cannot enact zoning by-laws prohibiting medical marijuana dispensaries from opening in town, as the Attorney General has just ruled in an advisory opinion involving the Town of Wakefield. In the same ruling, the Attorney General advised that towns do have the authority through its zoning powers to regulate the location, operating hours, and other zoning related aspects of these dispensaries. In a separate ruling involving the Town of Burlington, the AG ruled that towns may enact a temporary moratorium (through June 2014) on the opening of marijuana dispensaries.

The AG’s medical marijuana ruling for Wakefield can be read here. The AG’s medical marijuana ruling for Burlington can be read here.

Now it will be up to towns and cities to regulate where medical marijuana centers will be located within their borders — for example, near a hospital, in an industrial area or away from schools or residential areas.

This is the first legal ruling involving medical marijuana in the Commonwealth, and certainly won’t be the last. This hot-button issue will most definitely find its way to the courts, and I’ll be keeping you updated with any new developments.

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A Simple Email Disclaimer Cannot Hurt & Can Only Help

Boilerplate email disclaimers at the bottom of messages are so ubiquitous that most of us hardly notice them anymore. They certainly take up a lot of text space and can be annoying to some, but are they legally effective or just plain toothless?

In the real estate context, where Realtors and attorneys write in the language of contract everyday, I believe that a short and simple email disclaimer may help, and certainly cannot hurt, the sender (aside from annoying a snarky recipient or two). In this post, I will discuss a few common real estate situations where an email disclaimer could come into play, then give you the disclaimer that I use in my emails. Now I have my own disclaimer here: A court will determine each case individually, and there is no guarantee that any particular disclaimer will be effective in any given case.

Contract Negotiations

The most common situation where an email disclaimer could come into play is during real estate contract negotiations. For many agents and attorneys, e-mail has become the default mode of communication, replacing the telephone and the outdated fax. E-mail, however, can provide the “smoking gun” in litigation because it’s nearly impossible to delete permanently, and people tend to be more casual and less introspective before hitting “send.” And don’t get me started with texting, which is even worse.

Realtors must remember that under Massachusetts agency law they are agents with actual or apparent legal authority to bind their clients to the statements they make in emails and other forms of communication. Like the Miranda warnings given by the police, a real estate agents’ statements “can and will be used against them in a court of law.” The same is true for attorneys.

A case in point: In the recent well-publicized case of Feldberg v. Coxall, a Massachusetts judge ruled that a series of e-mail exchanges between the buyer and seller’s attorney, the last one attaching a revised, but unsigned, offer to purchase, could create a binding contract even though no formal written agreement was ever signed. This is also one of the first cases applying the new Massachusetts E-Sign law to preliminary negotiations in real estate deals. There have been cases in other jurisdictions holding that e-mails can result in a binding contract even though the parties may have assumed otherwise.

Practice Pointer:

“Emails sent or received shall neither constitute acceptance of conducting transactions via electronic means nor shall create a binding contract in the absence of a fully signed written agreement.”

This is the new email disclaimer that I’ve formulated after the Feldberg ruling. It does two things. First, it provides that only a fully signed contract can bind the parties. Second, it attempts to counter the presumption in the E-sign Act of conducting the transaction electronically via email. It has not been tested in court yet, but again, aside from taking up some pixel space, it can’t hurt. Now remember, this type of disclaimer would favor a selling/listing agent, but not necessarily a buyer’s agent, because the buyer’s agent would typically want to enforce preliminary negotiations. So, caveat emptor (buyer beware).

Practice Pointer: “Subject to final client review/approval”

Another best practice that Realtors and attorneys should get in the habit of doing is to write “subject to final client review and approval” or words to that effect in the midst of email contract negotiations and draft agreements being circulated. This could sway a court from determining that a binding deal was formed, and plus, it gives you an “out” in case a client has last minute changes.

Confidential Communications

Attorneys love to use long confidentiality disclaimers in their email. Do they work? Occasionally. Do they matter in real estate? I still think so.

First, the concept of legal confidentiality is limited to those situations governed by legal privilege. There is an attorney-client privilege between lawyers and their clients, obviously. While there is no legal privilege between a Realtor and his/her client as for communications solely between the agent and the client, the attorney client privilege will likely attach to emails and communications between and among the real estate agent, the attorney, and the client provided that legal advice is being given. But a particular email does not automatically get confidentiality protection simply because the attorney is copied on it. Some courts have pointed to email disclaimers as a factor in upholding the confidentiality. But there have been many court rulings where judges have discarded the disclaimers.

While attorneys should absolutely have a confidentiality email disclaimer, do Realtors need one? I say yes, because sometimes emails between attorney and client wind up in Realtors’ inboxes and sometimes they get forwarded on purpose or by mistake when they shouldn’t, and that could waive any privilege which is attached and become the “smoking gun.”

Practice Pointer:

I use this simple email disclaimer:

CONFIDENTIALITY: This e-mail message and any attachments are confidential and may be privileged.

The best practice, of course, is to cleanse and delete portions of any email with attorney-client or confidential information before forwarding. And of course, THINK BEFORE YOU HIT SEND!

**Thank you to Cambridge MA Realtor Charles Cherney for suggesting this topic!

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RDV-profile-picture-larger-150x150.jpgRichard D. Vetstein, Esq. is a nationally recognized real estate attorney who writes frequently about legal issues facing the real estate industry. He can be reached at info@vetsteinlawgroup.com.

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Ice slip drink

Blizzard Warning Issued For 2/7/13

This post will provide you with frequently asked questions concerning Massachusetts snow and ice removal law.

I am a homeowner and rental property owner. Am I legally required to clear snow and ice after a storm?

The law now in Massachusetts is that all Massachusetts property owners and landlords are legally responsible for the removal of snow and ice from their property. In 2010, the Massachusetts Supreme Judicial Court overruled 125 years of legal precedent which protected property owners from “natural accumulations of ice and snow,” and announced this new rule. My prior post on the case can be read here. The rule applies across the board, to homeowners, landlords, commercial business owners, restaurants, everyone.

I am a landlord. How long do I have to shovel snow and ice on my rental property?

There is no clear cut answer to this question, and juries and courts will ultimately decide what is reasonable. The City of Boston’s policy is to give businesses 3 hours to clean snow, and 6 hours to residents. My advice is to shovel and treat snow and ice early and often. Even a thin coating of black ice can cause someone to slip and fall and seriously hurt themselves. (Admit it if you’ve dumped on your rear end like I have!). If you are an out-of-town landlord, you must hire someone to shovel your snow.

My lease states that the tenant is responsible for snow shoveling. Will that protect me from liability?

Probably not. A person who is injured due to untreated snow or ice will likely sue both the property owner and the tenant. The property owner must ultimately ensure that the property is safe for visitors. The landlord may bring a claim for contribution/indemnification against the tenant.

L_ice_meltI live in Boston, and I heard I have to shovel the public sidewalk in front of my house after a storm. Is that true?

Yes. On top of their added responsibilities, property owners in several Massachusetts communities, including Boston, Cambridge, Newton, Lynn, and Worcester, are required by local ordinances to clear municipal sidewalks in front of their residences or businesses. The City of Boston mandates clean sidewalks within 6 hours of a storm; Worcester is 12 hours.

Will my homeowner’s or CGL insurance policy cover any injuries from slip and fall on snow/ice?

Yes, usually. The standard Massachusetts homeowners insurance policy and commercial general liability insurance policy (CGL) will have liability coverage for slip and falls on property. Make sure you have ample liability coverage of at least $500,000 to 1 Million. (You can never have enough insurance!). As with any insurance question, it’s best to contact your personal insurance agent.

If you have additional questions, please ask them in the comment forms below!

Resources: City of Cambridge Snow Removal Policy, City of Boston Know Snow Fact Page

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RDV-profile-picture-larger-150x150.jpgRichard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney who advises property owners and landlords as to liability issues. Please contact him at 508-620-5352 or at info@vetsteinlawgroup.com.

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Fate of New Long Wharf Waterfront Restaurant At Stake

A neighborhood fight to preserve prime public waterfront space at the tip of Boston’s Long Wharf will be heard by the Supreme Judicial Court (SJC) in November. Ten North End neighbors — termed the “North End Ten” —  have been battling the Boston Redevelopment Authority (BRA) and the Department of Environmental Protection (DEP) for six years over the city’s plan to lease the space to a restaurateur who wants to build “Doc’s Long Wharf,” a new pub style restaurant and bar at the scenic location. Residents argue that the state constitution requires a two-thirds vote of the Legislature before public open space can be converted to other uses.

The legal issues in the case are rather complicated, dealing with historic uses of Long Wharf and whether it was dedicated to public use as open space and is thus protected under Article 97 of the Massachusetts Constitution, requiring a two-thirds vote of the Legislature to effect a disposition or change in use of the land. The BRA’s original proposal was for a 220-seat pub that would have replaced the pavilion located beyond the Marriott Long Wharf hotel and Chart House restaurant. BRA officials have argued that the restaurant would help activate the waterfront. Residents argued it would create more noise and disturbance in a picturesque park area.

This case really exemplifies why Massachusetts and the City of Boston have a bad reputation for real estate permitting. If you ever been down to this area at the tip of Long Wharf, you know it’s screaming out for better use. Right now, it’s often inhabited by skateboarders and vagrants, annoying folks trying to soak in the beautiful views of Boston Harbor. I think that a nice restaurant with stunning harbor views and an outdoor patio area would be amazing and a great addition to the under-utilized end of that pier. Under the proposed Chapter 91 license, the proposed use would maintain public access along the wharf. It was the same situation with Rowes Wharf decades ago, and now look at that space. It is a model of waterfront mixed use development.

But 10 neighborhood activists disagree, and the travesty is that they can derail this project for years. Indeed, the lead plaintiff, Sanjoy Mahajan, lives a mile away from Long Wharf on Jackson Street. The other plaintiffs are scattered throughout North End proper, buffered from the proposed restaurant by the massive Marriott Long Wharf, the harbor and Christopher Columbus Park. These activists are not remotely affected by the proposed restaurant in terms of noise and the like. Notably, not one resident of Harbor Towers, the residential condominium closest to Long Wharf, have participated in this legal challenge.

I hope that even if the SJC rules that a 2/3rds legislative vote is required here, that our elected officials will not cave in to the whims of a few locals at the expense of the public at large.

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Richard D. Vetstein, Esq. is a Massachusetts real estate and zoning attorney. Mr. Vetstein frequently represents Boston residents and companies in zoning matters before City of Boston zoning and licensing boards.

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Insured Gets The Short End Of The Insurance Coverage Stick For Parking Lot & Building Flooding

The Massachusetts Supreme Judicial Court has not been too kind to insureds these days. For the second time in 2 months, the SJC has upheld the denial of a property owner’s claim in connection with flooding, this time in the commercial setting.  In Surabian Realty Co. v. NGM Insurance Co., the Court ruled that a commercial property owner’s claim for flooding caused by a blocked parking lot catch basin was not covered under an “all risk” commercial/business insurance policy.

Blocked Drain

Surabian Realty owned an office building in Foxborough. During heavy rains in 2009, rainwater stopped flowing down the parking lot drain. The drain had become clogged with debris. Rainwater then ponded in the lot and seeped under the door of the building, flooding its lower level. The flooding caused damage to the carpeting, baseboards, and walls, totaling approximately $34,000.

Surabian made a claim under its “all risk” commercial insurance policy which had a special indorsement for this type of situation, which provided, “The most we will pay for loss or damage caused by water that backs up or overflows from a sewer, drain or sump is $25,000 for any one occurrence.” The insurance company, however, denied  the claim on the grounds that the flooding was still excluded from coverage as it was caused by “surface water.”

Court Rules For Insurance Company (Again)

The SJC took an electron microscope to the policy language, parsing the language almost to a fault and unfairly (in my opinion) against the insured. The Court held:

“Construing these clauses in combination, we interpret the insurance contract, as amended by the indorsement, to exclude damage caused by flood waters that spread over the surface of the ground without having entered a drain, but to cover damage caused by water that backed up after entering a drain.”

So basically, the court said that the rainwater has to actually enter the drain, then backup, while a blocked drain that doesn’t allow water to fall down the pipe won’t be covered. Um, ok…. A better rationale would have been that the claim wasn’t covered because maintaining and keeping the drain free of debris was really the responsibility of the insured property owner, not a risk that the insurance company assumed. But I’m not the judge.

This is also the second instance in the last few months where the Court has relied upon the policy’s “anti-concurrent” clause which excluded coverage where  the damage results from the combination of a covered peril and an excluded peril.

Lessons For Property Owners

Aside from making sure catch basins are cleaned, the tough lesson for property owners here is that your supposed “all risk” insurance policy isn’t really “all risk” as you probably perceive it. It seems that these days a lot of insurance claims are denied or insureds are scared of even making a claim lest they get cancelled by the insurance company. It’s a tough predicament.

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate and commercial insurance coverage attorney. For more information, please contact him at 508-620-5352 or info@vetsteinlawgroup.com.

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Realtor Held Liable For Erroneous MLS Information

The Massachusetts Supreme Judicial Court has agreed to hear the case of DeWolfe v. Hingham Centre Ltd. which will consider two very important issues for the real estate community, especially agents. The first issue is the scope of a real estate agent’s duty to disclose and independently verify property information posted on the Multiple Listing Service (MLS). The second issue is whether the exculpatory clause found in the Greater Boston Real Estate Board’s standard form purchase and sale agreement legally prohibits a buyer’s misrepresentation claim against the real estate agent.

The case was originally decided by the Appeals Court, and I wrote a full post about it here. The original opinion can be read here.

In summary, the real estate agent, relying on what turned out to be erroneous information supplied by his client, listed a Norwell property on Multiple Listing Service (MLS) and newspaper advertising as “zoned Business B.” The property was not, in fact, zoned for business use; it was zoned residential, thereby prohibiting the hair salon the buyer wanted to open at the property. Despite the general disclaimer on the MLS system and in the purchase and sale agreement, the Appeals Court held that the Realtor could be held liable for misrepresentation and Chapter 93A violations due to providing this erroneous information.

This will be a very important case for the real estate brokerage industry, and we will be monitoring it. Oral arguments are expected to be held in late summer or early fall, with a final ruling coming a few months thereafter.

In the meantime, my advice remains the same:

  • Do not make any representations concerning zoning. Advise the buyer to go to the town/city planner or hire an attorney for a zoning opinion.
  • Never trust your client. I hate to say this, but when it comes to disclosures, it’s true.
  • Always independently verify information about the property from available public sources. Here, the agent could have simply gone down to the town planning office to verify whether the property was zoned commercial or residential. (The buyer or his attorney could have done so as well—this was a complete failure on all sides).
  • When it comes to zoning, which can be complex and variable, think twice before making blanket statements. Better to be 100% sure before going on record about whether certain uses are permissible. You can always get a zoning opinion from a local attorney.

*Hat tip to a new real estate blog on the scene, Disgruntled Neighbors by Attorney Andrew Goldstein, for bringing this to my attention.

~Rich

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Update (5/3/13): SJC Upholds Ruling, Landlords Should Add Rent Acceleration Clause to Leases

Commercial Landlord Must Wait Out 12 Year Lease Term To Recover For Tenant’s Early Termination

In a decision which underscores the importance of careful commercial lease drafting, the Massachusetts Appeals Court has ruled that under a standard form default indemnity provision in a commercial lease, a commercial landlord must wait out the end of a 12 year lease term to recover unpaid rent from a tenant who abandoned the premises in Year 2 of the lease. The practice pointer here is to always have a current acceleration/liquidated damages clause in your commercial lease. See below for some form language.

The case is 275 Washington Street Corp.. vs. Hudson River Int’l, LLC (Mass. Appeals Court March 9, 2012), and is embedded below.

Dental Practice Goes South Quickly

The landlord and tenant entered into a 12-year lease beginning April 13, 2006, and ending April 16, 2018. The premises, located at 221-227 Washington Street in downtown Boston, were intended for use as a dental practice. Within a year of the lease commencement, the dental practice went under and closed. In May 2008, the dentist told the landlord that he would not be making any further lease payments.

Fortunately, the landlord found a new tenant. A new 10 year lease was signed, covering the remainder of the dentist’s term, but at a lower rent. The landlord sued the tenant for the rent differential.

Standard Indemnification Clause

The lease contained a standard default indemnification clause found in many older standard lease forms such as this:

The LESSEE shall indemnify the LESSOR against all loss of rent and other payments which the LESSOR may incur by reason of such termination during the residue of the term.  If the LESSEE shall default, after reasonable notice thereof, in the observance or performance of any conditions or covenant on LESSEE’s part to be observed or performed under or by virtue of any of the provisions in any article of this lease, the LESSOR, without being under any obligation to do so and without thereby waiving such default, may remedy such default for the account and at the expense of the LESSEE.

Indemnity Provision Lacking

The problem is that under Massachusetts law, recovery under an indemnity clause of a lease cannot be had until the specified term of the lease has ended. The reasoning underlying this legal tenet is that such liability is ultimately “contingent upon events thereafter occurring, because the full amount which the lessee eventually must pay for the remainder of the term cannot be wholly ascertained until the period ends.” Although somewhat reluctant, the Court was bound to follow the law in this instance:

We are cognizant of the concerns raised by this long-established rule barring recovery until the end of the original lease, given the possible intervention of factors, presently unknown, that make the determination of damages uncertain at the present. We also recognize the possibility that this rule, which forces this landlord to wait until 2018 to determine post-termination damages, may in effect make it impossible for the landlord to recover its true damages from this corporate tenant or guarantor, because of the protections afforded by legal processes, such as dissolution or bankruptcy. However, given the present state of the law and the specific terms of the contract to which parties of equal bargaining power agreed, we are constrained, nonetheless, to deny recovery to the landlord under the indemnification clause of this lease.

Time To Change The Old Law?

The Appeals Court, especially the concurring opinion of Justice Kantrowitz, suggested that the time may be ripe for the Supreme Judicial Court to re-examine and modernize the law in this area. So look for this case to possibly go up on appeal.

Solution: Acceleration/Liquidated Damages Clause

The lease in this case did not contain the more current acceleration/liquidated damage clause which provides that upon a rent default, all unpaid rent is automatically due through the end of the lease term as liquidated damages. I recommend language such as this to prevent what happened to the landlord in this case:

If LESSEE shall default in the payment of the security deposit, rent, taxes, substantial invoice from LESSOR or LESSOR’s agent for goods and/or services or other sum herein specified, and such default shall continue for ten (10) days after written notice hereof, and, because both parties agree that nonpayment of said sums when due is a substantial breach of the lease, and, because the payment of rent in monthly installments is for the sole benefit and convenience of LESSEE, then in addition to the foregoing remedies the entire balance of rent which is due hereunder shall become immediately due and payable as liquidated damages. The Parties acknowledge and agree that (i) the liquidated damages hereunder is the best estimate of such damages which would accrue to Lessor in the event of Lessee’s default hereunder; (ii) said deposit represents damages and not a penalty against Lessee.

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. For more information, please contact him at 508-620-5352 or info@vetsteinlawgroup.com.

275 Washington Street Corp v. Hudson River International LLC (Mass. App. Ct.)

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Realtors: You Must Independently Verify Property Information

In DeWolfe v. Hingham Centre Ltd. (embedded below), the Massachusetts Appeals Court recently considered a Realtor’s duty to disclose and independently verify zoning information about a listing property.  The agent, relying on what turned out to be erroneous information supplied by his client, listed a Norwell property on Multiple Listing Service (MLS) and newspaper advertising as “zoned Business B.” The property was not in fact zoned for business use; it was zoned residential, thereby prohibiting the hair salon the buyer wanted to open at the property.

Despite the general disclaimer on the MLS system and in the purchase and sale agreement, the Court held that the Realtor could be held liable for misrepresentation and Chapter 93A violations due to providing this erroneous information.

The lesson to be learned for agents here is:

  • Never trust your client. I hate to say this, but when it comes to disclosures, it’s true.
  • Always independently verify information about the property from available public sources. Here, the agent could have simply gone down to the town planning office to verify whether the property was zoned commercial or residential. (The buyer or his attorney could have done so as well—this was a complete failure on all sides).
  • When it comes to zoning, which can be complex and variable, think twice before making blanket statements. Better to be 100% sure before going on record about whether certain uses are permissible. You can always get a zoning opinion from a local attorney.

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Richard D. Vetstein, Esq. is an experienced real estate attorney who often advises real estate agents on their duties and ethical obligations. Please contact him if you need legal assistance regarding a Massachusetts residential or commercial real estate transaction.

Dewolfe v. Hingham Realty

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26297-cooperation-handshakeSeller Couldn’t Sit Back & Watch Construction Project Unfold

Massachusetts appeals judges have been mighty busy this summer issuing real estate decisions. From the forced removal of condo buildings to toxic mold, to foreclosure eviction defense, it’s been no summer vacation in Massachusetts real estate law.

Handed down today is a case right from a first year law school property exam, Hurtubise v. McPherson, embedded below.

As most real estate professionals know, contracts for the sale of real estate must be in writing and signed by the party to be charged, i.e, the seller. This is a rule of law going back to English common law and is called the Statute of Frauds which can be found in the General Laws of Massachusetts, Chapter 259, Section 1. As with most black letter law, there are a few exceptions to the general rule, and this case is a textbook example of the “detrimental reliance” exception to the Statute of Frauds.

Hand-Shake Land Swap Agreement

Here are the facts of the case. Hurtubise and McPherson owned adjoining tracts of land in the town of Templeton. Hurtubise operated a storage business on his property. He wanted to build an additional storage shed along the border between his property and McPherson’s property. Hurtubise realized that he could not meet the setback requirements of the local zoning code unless he acquired land from McPherson. Hurtubise approached McPherson, explained his need, and proposed a land trade, offering to convey to McPherson a portion of the front of his (Hurtubise’s) property in exchange for the portion of McPherson’s land at which Hurtubise intended to erect the new storage shed. McPherson agreed to the proposal and the parties shook hands.

Hurtubise proceeded with his plans for construction of the new building. He obtained a building permit and began to excavate along the border of McPherson’s lot. During the seven to eight weeks of construction, Hurtubise saw McPherson at the site. McPherson never objected to the location of the new building. Hurtubise eventually constructed a 300 x 30-foot storage shed for $39,690.

After construction, McPherson objected and accused Hurtubise of taking more land than he initially had represented. McPherson informed Hurtubise that an exorbitant payment of $250,000 would resolve the dispute which Hurtubise refused to pay. McPherson then notified the town that Hurtubise’s new building encroached on his property. The town’s building commissioner revoked Hurtubise’s building permit and ordered him to cease occupancy of the storage shed. After McPherson threatened to demolish the building, Hurtubise brought suit to enforce the oral agreement.

Exception To Written Contract Rule

As mentioned above, to be enforceable, real estate contracts for the sale of property must be in writing and signed by the seller, at minimum. As Judge Mitchell Sikora wrote in the opinion, “however an equitable qualification puts some flexibility into the joints of the Statute.” An oral agreement for the sale of land can be valid if the party seeking enforcement, in reasonable reliance on the contract and on the continuing assent of the party against whom enforcement is sought, has so changed his position that injustice can be avoided only by specific enforcement. In non-legalese, this means that if you start a construction project and spend thousands of dollars upon the promise of a land deal, albeit not in writing, you may be able to enforce that promise.

Because Hurtubise just sat by idly and watched McPherson construct his shed at considerable cost without objection, the court ruled that he couldn’t then complain there wasn’t a written agreement, in an attempt to wriggle out of the land swap deal. The court then ordered Hurtubise to convey McPherson the land necessary to build the shed.

This case is one of the very few instances where a court has upheld an oral hand-shake real estate agreement. The take-away: make sure your real estate contracts are always in writing and signed!

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Richard D. Vetstein, Esq. is an experienced real estate litigation attorney who’s handled numerous real estate contract breach cases in Land Court and Superior Court. Please contact me if you are dealing with a Massachusetts real estate contract legal dispute.

Hurtubise v McPherson Case

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A Guest Post By Bryan Gitlin, Managing Partner, Cambridge Capital Advisors

Why Investors Are Actively Pursuing Net-Leased, Investment Grade Commercial Real Estate As A Safe Haven In Today’s Troubled Economic Environment.

The investment community is slowly continuing its recovery from the effects of the sub-prime mortgage crisis as well as the collapse of the CMBS market. At this time, public and private, institutional and non-institutional real estate investors have continued to actively invest in an asset class where the laws of supply and demand are creating CAP rate compression where real estate values across the board have largely depreciated. The genre of commercial assets that is being referred to is comprised of single tenant, net leased, investment grade properties.

Analysis Factors

In acquiring an asset of this nature, the investor typically purchases a fee simple interest in the property. The property, comprised of the land and the structure that sits on top of the land, is leased by a corporate tenant with an investment grade credit rating (S&P rated BBB- or better) on a long term basis. In analyzing the merits of a single tenant, net-lease deal an investor will research and underwrite the strength of the corporate credit that guarantees the lease payments, the terms of the lease and any lease options, the landlord and tenant responsibilities that are enunciated in the lease and the relative strength of the demographics and trade corridor where the property resides. In addition, the investor will look at the intrinsic value and location of the property, the rent that the tenant is paying per square foot and the sales data for the location if available. This analysis is critical in underwriting the viability of the tenant and their ability to successfully operate in the location over the duration of the lease term. The investor will also look at the capitalization rate as a function of determining the rate of return on the investor’s equity in the event that acquisition is made entirely with cash. An investor looking to utilize leverage will also search out financing options if higher returns are mandated by that investor’s acquisition criteria and may also depend upon the amount of equity the investor is looking to place.

Risk Factors

The obvious worst case scenario for an investor in a net lease deal would arise in the event that the tenant abandons the location. This scenario emphasizes the importance of underwriting the tenant’s credit worthiness as the tenant would still be responsible for paying rent through the balance of the term regardless of their occupancy of the real estate. Furthermore, the importance of evaluating the intrinsic value and location of the real estate in addition to the rent being paid by the tenant as a function of whether the rent is in line with the local market is critical in the event that the tenant is ever declared insolvent or adjudged bankrupt as the responsibility of re-letting the building would fall on the property owner. The risk assumed in this absolute worst case scenario is more than offset by conservatively underwriting the tenant and their credit in addition to the overall market demand for the real estate.

Benefits of Asset Class

Furthermore there are a number of reasons why investors looking for higher yields in today’s economic climate are looking to invest in this asset class. Where yields in the stock market, bond market, money market accounts and CD’s have clearly suffered, investors in single tenant net-leased, credit real estate are experiencing returns in the seven to twelve percent range depending upon how the real estate is financed. Considering the non-management intensive nature of ownership, the tax benefits of real estate ownership, and the principal reduction of the debt that is afforded by the tenant in the event that the acquisition is financed, these investments are highly preferential for a wide variety of cash return driven investors including those that are in the process of estate planning.

If you are interested in obtaining further information on investing in single tenant, net-leased, commercial real estate or would like a free consultation/valuation of your investment property, please contact Bryan Gitlin via email (click here) or by telephone at 617-964-1031.

Bryan Gitlin, J.D. has been actively involved in the acquisition, re-development, management, leasing and disposition of commercial real estate since 1998. A founding member of Cambridge Capital Advisors and seasoned investment broker, Mr. Gitlin’s concentration is the acquisition, disposition, underwriting and deal sourcing of investment properties with a primary focus on single-tenant net leased properties and shopping centers nationwide.

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