REAL ESTATE TITLE INSURANCE & ENVIRONMENTAL LAW

October 2006
REAL ESTATE
TITLE INSURANCE &
ENVIRONMENTAL LAW
A Special Supplement To The Connecticut Law Tribune
AVOIDING
TROUBLED
TRANSACTIONS
A New Remedy Cures
Longtime Inequity
How to ferret out
Law concerning joint tenancy
forgery and fraud
disputes has changed
p.3
p.2
Environmental Insurance
Coverage Evolves
Coverage now based on loss
experience and risk tolerance
p.4

---

2
REAL ESTATE, TITLE INSURANCE & ENVIRONMENTAL LAW
OCTOBER 2006
A WORD TO THE WISE
Troubled Transactions: Avoid Real Estate Fraud
Reduce the chances for fraud or forgery by observing ‘red flags’
By EDWARD M. ROSENBLATT
enhanced coverage.
• “Flips”—seller has owned the property
less than a year.
Recent years have witnessed an increase in During The Closing
We have become
the incidence of fraud and forgery in real
Although it has been observed primarily in
• Unencumbered properties—large or
accustomed to
estate transactions. Rising property values in
the breach, make sure you comply with C.G.S.
valuable parcels with no apparent
Connecticut have made this an even bigger
§49-10b, requiring written notification to
mortgages.
obtaining photo
issue for attorneys, title insurance compa-
mortgagees who are about to receive a
nies, and honest parties to transac-
payoff. If you are the party respon-
That last red flag is especially important in
identification of
tions. Some illegal activities simply
sible for giving the notification,
light of recent Connecticut cases concerning
borrowers, largely
cannot be avoided, despite adher-
and the payoff is not made, you
borrowers forging releases on high value prop-
ence to the normal standard of
could face liability for failure
erties. They are extracting equity that is not
because lenders
care and vigilance. The following
to take all steps necessary to
there. Be sure to verify payment with the mort-
are some procedural suggestions
reduce damages suffered by
gagee if a party comes to the closing with a
have required it for
and red flags to be on the lookout
any of the parties.
recent release or if a mortgage appears to have
some time. But the
for to reduce the chances of
If you have a title-related
been recently released but not replaced.
being involved in a troubled
issue or dispute at your closing,
At the closing, go over the owner’s affidavit
increasing number
transaction. Let’s take them in
contact your title insurance
with the party signing it. You might be sur-
chronological order, as you face
counsel immediately.
prised how many potential issues this discus-
of forgeries and
them in your practice.
We have become accustomed
sion can reveal, such as: existing boundary
identity thefts has
to obtaining photo identification
agreements and disputes; potential mechanic’s
Before The Closing
of borrowers, largely because
lienors; claims of encroachment; the status of
made it important
Take the time to
lenders have required it for
tenants; and party wall and driveway agree-
review the title
some time.
But
ments. It is better to have this information at
to also obtain
search report
the increasing
the closing than to deal with it later.
photo and/or other
yourself. No mat-
number of forg-
If the affidavit sets forth the names of par-
ter how competent
eries and iden-
ties who have provided services or materials in
identification of
or thorough your
tity thefts has
the last 90 days, you need to deal with the
paralegals or assis-
made it impor-
mechanic’s lien issue. Paid receipts from con-
sellers. This reduces
tants are (and we know they are!), you are
tant to also obtain photo and/or other identifi-
tractors are no substitute for required lien
the chances of
responsible for the title-related decisions your
cation of sellers. This reduces the chances of
waivers or subordinations. Contact your title
office makes. You may find an item that
sellers forging releases and deeds to property
insurance company when this happens. Do not
sellers forging
requires special action, either on your part or
they do not own, by posing as the owners.
delete the mechanic’s lien exception without
by another of the attorneys involved in the
When it comes to detecting forgery, there
the insurer guidance.
releases and deeds
transaction.
are no hard and fast rules that apply. However,
to property.
Use whatever influence you have to get all of
the following “red flag warnings” may indicate
After The Closing
the parties to attend the closing, rather than
a possible forgery and merit further follow up,
Most real estate attorneys do not need this
pre-sign documents or use powers of attorney.
especially if more than one red flag appears in
reminder, but just in case:
If notarized documents are pre-signed, contact
the same transaction:
after the closing, do
the notary and confirm not only the execution
not just send your
of the documents, but the measures taken to
• 100-percent financed transactions.
documents out for
confirm identities of the signatories.
recording, do a title
If a power of attorney will be used, make a
• Unwillingness of a principal to come in
bringdown. If
this
personal contact with the principal in every
to sign.
gives rise to any issues,
case to make sure he or she is still alive and has
call your title insurer
not revoked the power. If the principal is com-
• No one from your office ever directly
and all counsel to the
petent and in the country, there is no reason to
communicates with one or more
transaction immediately.
rely upon a power of attorney more than six
principals to the transaction.
Use your title insur-
months old.
ance company’s release
• Use of a notary not designated or
tracking program to track
The Title Insurance Policy
known by your office or the lender.
down and record releases
Make sure you allow your client the refi-
of mortgages you are pay-
nance discount rate on the title insurance pre-
• Deposits or other portions of the
ing off. This takes the bur-
mium whenever applicable. Class action litiga-
purchase price paid outside of closing
den off of you and your
tion is pending in Connecticut on this issue.
or otherwise not accounted for.
overworked staff
and
Check with your title insurance company for
assures that nothing will fall
its policy on the discount.
• Principals who, because of language
through the cracks. It also
Remember that the standard owner’s affi-
barrier, age, illness or other reasons, do
reduces the number of
davit will permit you to omit the survey excep-
not understand the transaction.
tion in the lender’s policy, but not in the
checks to the town clerks
owner’s. Your title insurance company may
• Transactions involving a sale price
that sit in your file for years
allow you to omit the survey exception in the
significantly below market value.
and prevent a good reconcili-
owner’s policy when the policy includes
ation of your clients’ funds account.
• Transactions between principals
Yes, real estate transactions are already cum-
without a real estate agent or an attorney.
bersome and overloaded with paperwork. But
Edward M. Rosenblatt is vice president
taking these few steps in your closings is far
and counsel for the Trumbull branch of
• Little or no funds from the buyer.
easier (and less expensive) than dealing with
Fidelity National Title Insurance Company,
the larger problems that an avoidable forgery
and is a former chair of the CBA's
Real Property Section.
• Unverifiable power of attorney.
or fraud can bring.
■

---

OCTOBER 2006
REAL ESTATE, TITLE INSURANCE & ENVIRONMENTAL LAW
3
A New Remedy Cures A Longtime Inequity
Connecticut statutory and common law concerning joint tenancy disputes has changed
By CHERRON PAYNE
orders the equal division of the proceeds
lized to resolve joint tenancy disputes, the
from the sale of the real property. From an
minority interest holder may be unjustly
Connecticut law has always challenged
equity standpoint, there is a concern
enriched by receiving the benefit of the pro-
the joint tenancy of real property. State
because the parties who possess the joint
ceeds of a much larger interest than the
Bank & Trust Co. v. Nolan, 103 Conn. 308,
tenancy may not equally possess the
minority owner invested. In addition to the
317 A.2d 483 (1925). A joint tenancy of real
real property.
Often there is one
owner of the minimal interest being
property is a type of ownership by two or
dominant party in a joint tenancy
unjustly enriched, the majority interest
more individuals in which each generally
ownership; both parties may have
holder will be divested of the total benefits
owns an undivided interest in the whole
a rather equitable initial invest-
of their full investment in the property.
property.
ment, but one party may even-
Thus, the legislature addressed the issues
Pursuant to C.G.S. §47-14a, the interest
tually invest more money in
surrounding the partition remedies of joint
of the grantees under a joint tenancy con-
the overall maintenance of
tenancy disputes in the spring of 2004 when
veyance may be held in equal or unequal
the property, such as repairs
Public Act 04-93 was passed, P.A. 04-93
shares. However, in many joint tenancies of
and taxes. Thus, one joint
(Senate Bill No. 290), amending C.G.S. §52-
real property, the property is conveyed as an
tenant becomes the domi-
500(a). This amendment allows a court
undivided equal interest.
nant party, creating an
hearing in a partition action to determine
When there is a dispute between or
imbalance in the joint ten-
whether there is an unequal interest in a
among joint tenants, the typical statutory
ancy relationship.
joint tenancy relationship. If an unequal
remedy is a partition action or a partition
Because of these issues,
interest is established, there is an option to
sale of the property. However, there is now
there has been a movement
order that the minimal interest be pur-
a challenge to the partition remedy, most
towards more equitable
chased, rather than forcing a sale—particu-
likely due to the issue of undivided equal
remedies concerning joint
larly when a sale would not promote the
interest—which is inherent in most joint
tenancy disputes, and the
interest of the owners.
Since a partition action or partition sale is
tenancies—along with the imposition of an
legislature and courts are
impractical sale of the property.
often utilized to resolve joint tenancy dis-
attempting to cure the
Equitable Solutions
The partition action orders the division
inequities in the resolution
Another reason courts are now ordering
putes, the minority interest holder may be
of the real property.
The partition sale
of these disputes. One par-
more equitable solutions for joint tenancy
unjustly enriched by receiving the benefit of
ticular concern of the legis-
disputes is that the partition action and the
partition sale are no longer the primary
Cherron Payne is a corporate attorney for
lature and courts may be
the proceeds of a much larger interest than
the global headquarters of Environmental
unjust enrichment.
cures for such disagreements. Courts are
the minority owner invested.
Systems Products Holdings Inc., located in
Since a partition action or
East Granby.
partition sale is often uti-
■ See COURTS on PAGE 5
GZA GeoEnvironmental, Inc.
Geotechnical and Environmental Consulting
For the Real Estate, Medical, Educational, Insurance,
Transportation, Energy, Marine, Manufacturing,
and Biotech Industries

Expert Testimony
GZA GeoEnvironmental, Inc.
EH&S Compliance
Mold Mitigation
is pleased to announce…
Foundation Design
Environmental Risk Limited (ERL)
Due Diligence & Audits
has joined our team
Remediation
Air, Water, Waste
Permitting
RCRA/CERCLA Services
Our newest Vice Presidents,
Wetlands
ERL’s founding Principals
Brownfields
David I. Brandwein, Esq. Gordon T. Brookman, Mitchell M. Wurmbrand, C.C.M.
P.E., L.E.P., L.S.P.

120 Mountain Avenue 26 Sherman Court
Bloomfield, CT 06002 Fairfield, CT 06824
Ph: 860-286-8900
Ph: 203-256-8016
Fax: 860-243-9055
Fax: 203-256-8193
www.gza.com
Solutions Service Satisfaction

---

4
REAL ESTATE, TITLE INSURANCE & ENVIRONMENTAL LAW
OCTOBER 2006
REALLOCATING RISKS
Environmental Insurance Coverage Evolves
Expansion and contraction of coverage based on carrier loss experience and risk tolerance
By THOMAS M. ARMSTRONG
with minimal environmental risk or protection
ronmental carriers have expanded their market: AIG,
against a governmental reopening of a closed remedi-
the largest environmental carrier, is offering mold,
This article provides an overview of environmental ation. Policies are available with lender endorsements underground and aboveground storage tanks, and
insurance and offers practical suggestions on the
to facilitate borrowing.
FIN 47 (FASB Interpretation No. 47) coverage.
suitability of various policies to address specific envi-
Several environmental carriers provide mold and
ronmental issues.
Five years ago, environmental
Cap Cost (Stop Loss). This policy provides coverage
underground tank endorsements to their Pollution
insurance was touted as a solution to minimize expo-
for polluted sites where the insured seeks protection
Legal Liability policies. However, the market for micro-
sure to environmental liability. Policies were devel-
against catastrophic remedial cost overruns. A higher
bial (e.g., mold) coverage appears to be increasing
oped to:
level of environmental investigation is
among insureds with large real estate holdings, such as
required for this policy as the carrier
Real Estate Investment Trusts, property managers, and
• replace personal environmental indemnities;
must be able to review and confirm
large condominium associations.
• provide additional security for lenders;
the recommended remedial tech-
Most environmental carriers offer an underground
• facilitate mergers and acquisitions;
nology and cost estimates of the
storage tank (UST) endorsement to provide coverage
• quantify environmental costs; and
insured’s engineer.
for tanks without known releases. Some carriers are
• encourage development of Brownfield
Due to high premiums,
extending coverage to aboveground storage tanks
properties.
typically in excess of $100K
(ASTs) and seeking to market their product to petro-
for 3- and 5-year policies, the
leum distributors and other multi-tank owners. In
Today, environmental insurance continues to
estimated remedial costs
Connecticut,
however,
the existence of
the
fulfill the above objectives. However, environmen-
should substantially exceed
Underground Storage Tank Fund suggests that these
tal carriers have both expanded into new coverage
$1M for this policy to be feasi-
programs have better application for owners of ASTs
areas and reduced some existing coverages. These
ble. The self-insured limit is
and USTs not covered by the Fund, such as owners of
changes appear to be based on loss experience and
determined by adding a percentage
heating oil tanks.
risk tolerance of individual environmental carri-
(e.g., 15 percent) to the esti-
The use of environmental insurance has also
ers, as there is a considerable variety of
mated cost of the
increased to respond to financial reporting required
policies available among the hand-
cleanup.
This
by FIN 47. This FASB (Financial Accounting
ful of carriers underwriting most
percentage will
Standards Board) Interpretation requires businesses
of the environmental coverage.
vary based on
to value identified conditions associated with “asset
The absence or denial of coverage
the carrier’s loss
retirement obligation” such as remediation cleanups,
from one carrier does not pre-
experience with
tank closures, corrective action, and other contractual
clude the availability of coverage
the media (e.g.
and enforcement environmental obligations. Some
from another carrier.
soils,
ground-
carriers are promoting environmental insurance as a
water) and con-
tool to quantify the uncertainty of environmental
Policies And Premiums
fidence in the
exposure, thereby allowing a company to estimate
Negotiable. Environmental car-
r e m e d i a t i o n
adequately its asset retirement obligation.
riers will require placement of
technology.
insurance through surplus lines
The absence or denial of
A substantial
Transfer Act. The Connecticut Transfer Act, C.G.S.
brokers, who are familiar with
increase in the
§22a-134 et seq.—and similar remediation triggers—
environmental coverage from
the rights and limitations of spe-
minimum pre-
limit, but do not preclude, the availability of environ-
cialty lines of coverage. Neither
mium has
mental coverage. Generally, when a program such as
one carrier does not preclude
policy terms nor premiums are
resulted in a
the Transfer Act will trigger a claim under the policy,
established by the carrier with
shift of this pol-
the carrier will be reluctant to provide coverage. Thus,
the availability of coverage
the state insurance agency and
icy application
coverage is likely to be denied under the Pollution
are therefore subject to negotia-
to the higher
Legal Liability policy for on-site remediation.
from another carrier.
tion. These manuscript policies
r e m e d i a t i o n
On the other hand, Cap Cost coverage may be
contribute to the variety of cov-
cost sites. In
available from some carriers because the trigger of
erages available to insureds and the need to describe
evaluating coverage, an insured should initially make
coverage is based on remediation costs that exceed
policies collectively in general terms. Individual poli-
three inquiries: 1) is the policy available; 2) what is the
the insured’s self-retention limit. If the costs of
cies will differ.
minimum premium; and 3) what is the level of envi-
remediation can be adequately estimated, the fact
ronmental investigation required for approval? The
that the site is subject to the Act should not influence
Pollution Legal Liability.
This policy provides
answers are likely to provide clear direction on
coverage.
broad coverage for on-site and off-site bodily injury,
whether this type of coverage is feasible.
property damage, remediation, and legal defense
Other Connecticut Programs. The availability of
expenses where the pollution condition is first discov-
Secured Lender. Historically, secured lender cover-
environmental insurance has limited application for
ered or claim is first made during the policy period.
age was available to individual borrowers or through
an insured protected as an “innocent landowner”
In most instances, known pollution conditions will be
participating lenders to their borrowers. In the event
under C.G.S.§22a-452d, since the innocent land-
excluded from coverage. There are exceptions, how-
of a loan default, the policy provided for the insured
owner is not immunized against either the imposition
ever; for example, off-site coverage may be approved if
(lender) to receive the lesser of the outstanding loan
of a lien against property or claims of non-govern-
there is a reasonable certainty that the pollution con-
balance or estimated cleanup costs. The lender was
mental third parties. However, Connecticut’s
dition will remain on-site. Phase I and II environ-
not required to foreclose on the secured polluted
covenant not-to-sue for prospective purchasers and
mental investigations are required by the carriers.
property.
owners, C.G.S.§22a-133aa et seq., has even more lim-
Policies are typically written for up to ten years for
These policies typically carried lower premiums
ited application, since the covenant requires that a
coverage of $1M and higher. The primary use for this
because payout required a loan default and a pollu-
party agree to remediate contamination, thereby
policy is where the insured seeks coverage for a site
tion condition. Loss experience and other factors have
exposing the carrier to potential claims.
resulted in most carriers shifting this market to their
In less than a decade, environmental insurance has
Pollution Legal Liability policies with lender endorse-
both expanded and contracted based on market
Thomas M. Armstrong has more than twenty-five
ments. However, Zurich NA remains the principal
demands of insureds and loss experience of carriers.
years of legal experience in his practice field with
a significant concentration in environmental, land
carrier in the “historical” secured lender market.
There continues to be a viable, competitive market for
use, litigation, worker safety and arbitration
businesses seeking to reallocate their environmental
practice areas.
Emerging Environmental Coverage. Some envi-
risks through the use of insurance.
■

---

OCTOBER 2006
REAL ESTATE, TITLE INSURANCE & ENVIRONMENTAL LAW
5
Courts Seek More
Eliminating The Home From The Equation
Equitable Division Real estate boom affects individual net worth,personal estate
By MICHAEL P. SPIRO
the QPRT, the property is transferred to the remainder
Of Joint Tenancies
beneficiaries of the QPRT (usually, the grantor’s children).
If the grantor of the QPRT does not outlive the term of the
According to a report published by the U.S. Census
Bureau, equity in a personal residence comprised 33.7
QPRT, the residence will be included in the grantor’s estate
■ From A NEW REMEDY on PAGE 3
percent of the average net worth of American families in
and its disposition will be governed by the terms of the
seeking a more equitable division of joint tenancies, one that
the year 2000. The recent real estate boom continued for at
grantor’s will.
will reflect the actual ownership interest in the property and
least five years thereafter, and the extent to which individ-
So long as the grantor survives the term of the QPRT, a
that is more practical than a sale of the property.
ual net worth has been impacted by valuable real estate has
QPRT allows the grantor to remove an appreciating asset
The most evident indicator of change is the evolution of
increased exponentially. As a result, many estate planners
from his or her estate and only pay gift tax on the value of
Connecticut common law. In August 2005, a Connecticut
have found that removing the personal residence from an
the remainder interest, a fraction of the asset’s then-current
appellate court case became a catalyst for change in the
individual’s estate is one of the most effective ways to avoid
value. As a result, any gift tax due on the transfer will be
remedies for joint tenancy disputes. On appeal, the court
and/or minimize the estate tax.
lower than the estate tax that would be due on the residence
in Fernandes v. Rodriguez decided that the trial court erred;
One of the most popular means of removing an indi-
at the grantor’s death.
the court ordered that the case be remanded to the trial
vidual’s personal residence from his or her estate, while still
court to assign the value of the property in congruence
allowing him or her to remain living in the home, is
Personal Residence Trust
with the parties’ actual interests. Fernandes v. Rodriguez, 90
through a Qualified Personal Residence Trust (QPRT).
The primary downside of a traditional QPRT is that in
Conn. App. 601, 624 (2005).
While the QPRT is a valuable technique, another—and
order for a QPRT to be an effective technique, the grantor
The court found that the parties in Fernandes did not pos-
possibly even more beneficial—means of removing a tax-
must outlive the term of the QPRT. If the grantor dies dur-
sess equal interest in the real property but did establish that
payer’s residence from his or her estate is via the sale of a
ing the term of the QPRT, the residence will be included in
one party possessed a majority interest in the real property
remainder interest in the property.
the grantor’s estate, and the grantor will have paid both gift
and the other party possessed a minimal interest in the real
In a typical QPRT, the grantor of the QPRT transfers
tax and estate tax on it (though a credit will be allowed for
property. The ownership interest in the property was so
ownership of the residence to the QPRT, retaining the right
gift tax already paid). The sale of remainder interest, if
imbalanced that the court held that one of the joint tenants
to live in the home—and dispose of the home by will—for
structured using a Personal Residence Trust (PRT), allows a
possessed a 95 percent interest in the property and the other
a term of years. The grantor is treated as making a gift of
taxpayer to avoid this issue.
joint tenant owned only 5 percent in the property. Therefore,
the remainder interest in the residence equal to the value of
A remainder sale transaction works very similarly to a
the parties were directed to apportion the rental value of the
the residence less the value of the grantor’s retained inter-
QPRT with one important difference: rather than making a
property in accordance with their equitable interests.
est. The transfer to the QPRT is generally a taxable gift, and
gift of the remainder interest in the residence to a trust, the
In conclusion, the legislature has addressed the
does not qualify for the $12,000 Annual Exclusion.
grantor sells her remainder interest to the ultimate benefi-
inequities that are often inherent in joint tenancy disputes
During the term of the QPRT, the grantor has an unre-
ciaries.
and has implemented more equitable remedies into statu-
stricted right to live in the property. At the termination of
The use of a sale rather than a gift can eliminate gift tax
tory law. In addition, the courts have adopted these reme-
on the transaction. It also allows the grantor to live in the
dies and are utilizing more equitable remedies in the adju-
Michael P. Spiro is an attorney in the corporate law and taxa-
residence rent-free for the remainder of his or her life with-
dication of joint tenancy disputes.
■
tion practice groups at Flaster/Greenberg of Cherry Hill, N.J.
out having it included in his or her estate at death.
■
Your Worldwide Resource For Real Estate
T A X - F R E E 10 3 1 E X C H A N G E
S p e c i a l i z i n g i n L o c a l , N a t i o n a l o r I n t e r n a t i o n a l M o v e s
• Residential • Commercial • Investments • REO
T
Buyer and Seller Representation / Relocation Specialist
URN
(203) 248-8086 • (800) 520-8086
to the EXPERTS
www.remax-royal-hamden-ct.com
Over 40 Years Experience
When you choose OREXCO, a wholly-owned
subsidiary of the nation’s highest rated title
RE/MAX Royal Real Estate
insurance company, you have the confidence of
Each Office Independently
Steven M. Miller, Thomas Townsley,
Owned and Operated
knowing our financial strength preserves the
Broker/Owner
Realtor
integrity and security of your transaction.
We look forward to serving as the Qualified
Intermediary in your next 1031 Exchange.
N E W S P A P E R S
For a Free Brochure Call
Bringing you in-depth
Lynne Bagby
and award-winning
866.663.1031Toll Free
617.742.4000
legal news from
Lbagby@orexco1031.com
Connecticut and
®
Western Massachusetts
Subscribe Today! (860) 527-7900
www.orexco1031.com
or email: lawtribune@amlaw.com

---

6
REAL ESTATE, TITLE INSURANCE & ENVIRONMENTAL LAW
OCTOBER 2006
NEGOTIATE, DON’T LITIGATE
Boilerplate Provisions Can Heat
Lease Disputes To Boiling Point
‘Cut and paste’ lease provisions may determine where a lawsuit is to be filed, what constitutes a breach, and what remedies are available
By JEFFREY N. BROWN
premises by the tenant and those uses that
the landlord cannot allow other tenants to
Frequently,commercial lease issues are brought to the undertake. General, broad descriptions can
attention of a litigation lawyer only after a dispute
result in litigation later on, as can uses that
between the landlord and the tenant has erupted.
are too narrow in their scope.
Oftentimes, the dispute involves the “boilerplate” pro-
visions that do not raise much interest during the draft-
Duty To Repair
ing phase because they are not considered to be eco-
Another area for post-closing confusion
nomic deal points.
arises when there is a major repair that needs to
This lack of interest in boilerplate provisions is a
be made to the leased premises. Again, the
mistake because it is much easier to resolve concerns
focus here is that the parties must clearly
regarding those provisions—which become very
describe who has the duty to make the needed
important in the litigation context—while the parties
repairs, the landlord or the tenant. It is
are amicably moving toward closing a deal, rather than
incumbent upon the parties to state
during the pendency of a lawsuit. Many times, disputes
expressly whether the landlord or the tenant has a
could have been either avoided or minimized had the
duty to keep the premises in repair, and specify the
parties clarified certain important issues while they
scope of that duty.
were negotiating and drafting. This article discusses
several leasing issues that should be carefully consid-
Time To Cure
ered while the parties are still on friendly terms.
Standard or pre-printed commercial leases
Once the parties begin negotiating and drafting the
often have cure periods that are confusing. The
actual lease, the best advice to minimize future litiga-
most common default under a commercial lease is
tion is “clarity, clarity, clarity.” Many lease disputes arise
the tenant’s failure to pay rent. Yet, many commercial
because the parties do not focus on how a court, years
leases provide 30 or more days for the tenant to cure
later, will interpret particular lease provisions. When
such a default before the landlord can assert that the
the landlord and tenant are amicable, disputes can
lease has been breached. The question is whether the
often be resolved through reasonable discussions.
landlord must wait both the cure period under
When they are not, the parties then begin to take a care-
the lease and the additional statutory cure period pro-
ful look at the language of the lease. It is far better to
vided by state laws. Again, drafting clarity with respect
reduce the number of potential disputes by taking more
to this provision may avoid needless disputes later on.
care initially with respect to the important provisions
of the lease.
Liquidated Damages
A liquidated damages provision is an attempt
by the parties to a contract to approximate the dam-
Use Provisions
ages that would be incurred by a party when the other
One such type of provision that results in consider-
party breaches a particular provision. Examples of
able litigation is the “use” provision. Either the landlord
liquidated damages provisions include:
or the tenant can utilize the “use” provision to gain a
marketing or negotiating advantage during the lease
150 percent of rent if it is received late;
term. The landlord can rely upon the provision to stop
200 percent of rent if the tenant no longer oper-
a tenant from expanding its scope of business into
ates its business at the site;
another tenant’s realm, to terminate the lease, and to
Rent increased by a percentage of sales at a tenant’s
obtain money damages.
other location because the tenant violated a “radius
Tenants, too, can and do utilize “use” provisions in
restriction.”
their favor. If the tenants are given exclusive rights for a
particular use in the center or office building owned by
The parties agree that the breaching party will pay
the landlord, then the tenants can prevent the landlord
the specified amount identified in the contract. The
from leasing to competitors. Tenants can also utilize a
benefit of such a provision is that in situations in which
landlord’s breach of the “use” provision to excuse them-
damages are difficult to calculate, the parties have
selves from having to pay any further rent to the land-
already agreed upon a number. However, if the parties
lord.
do not follow the rules when drafting the provision,
Although a lease consists of both real property and
then a court may find that the provision is nothing
landlord can take to protect itself against mechanic’s
contract components, it is generally interpreted under
more than a penalty and, therefore, unenforceable.
liens. A landlord may require the tenant to provide a
the rules of contract construction. Therefore, to avoid
Care must be taken to avoid charging an unreasonable
payment bond equal to the construction contract price
future disputes, the parties should clearly and expressly
amount upon a lease default. If there is no reasonable
before the work begins. A landlord may require that the
designate both the permitted uses of the leased
relationship between the amount and the potential
contract between the tenant and its contractor specifi-
damages caused by a breach of the applicable lease pro-
cally acknowledge that mechanic’s liens will not be
vision, the court may very well hold that the provision
effective against the landlord.
If the landlord is paying for the cost of the tenant
Jeffrey N. Brown is a litigation partner specializing
is not enforceable.
in complex real estate litigation at Pircher, Nichols &
improvements, the landlord should require that the
Meeks, a law firm that represents real estate clients
Tenant Improvements
tenant provide applicable mechanic’s lien releases
nationwide through its offices in Los Angeles
Where improvements by the tenant are required or
before payments are made to the contractor, subcon-
and Chicago.
anticipated in the lease, there are certain measures a
tractors, and suppliers. The landlord may wish to con-

---

OCTOBER 2006
REAL ESTATE, TITLE INSURANCE & ENVIRONMENTAL LAW
7
sider requiring the tenant to provide monthly lien releases
date.
even where the landlord is not paying for the improve-
Unfortunately, the LOI is not always clear in that regard.
Court Declines
ments, if the improvements are of a sufficiently large scale.
If the deal falls through, the party who liked the terms may
Another means of protection is an increase in the security
attempt to enforce the LOI as a binding contract, while the
deposit until the improvements are completed and the
other party may contend that the LOI was nothing more
landlord receives appropriate releases.
than an incomplete and unenforceable series of deal
Asbestos Case
points. Be upfront and be clear. If the parties do not want
Alternate Dispute Resolution
a binding contract, then use the correct terminology. Add
By MARK SHERMAN
Some states provide a summary court procedure for
that “this letter is not intended to be and is not a contrac-
Associated Press Writer
terminating leases and gaining possession of the premises
tually binding agreement.” Add that “neither party will be
in the event of a tenant’s default. Typically, this type of
bound unless and until the formal lease agreement has
lawsuit is used against tenants who fail to pay rent. The
been executed by both parties.”
The Supreme Court recently declined to consider
whether W.R. Grace & Co. must pay $54 million to
parties should weigh the perceived benefits of avoiding a
Further, avoid taking steps after the LOI is signed that
clean up asbestos in the Montana mining town of Libby.
jury, such as streamlining the process and avoiding triers
could lead a judge to find that the parties entered into a
The case pits Grace—which operated a vermiculite
of fact who are more likely to make decisions based upon
contract. As an example, do not allow the tenant to begin
mine in Libby for 27 years—against the Environmental
emotion, against factors such as the added expense in hav-
tenant improvements until an actual lease is signed.
Protection Agency, which oversees the federal Superfund
ing to pay the fees of an arbitrator or referee. Where there
On the other hand, if the parties want a simple binding
program for the nation’s worst hazardous waste sites.
exists a procedure for summary eviction, it is unlikely that
agreement that they will convert into a more detailed lease
Grace argued in court papers that the EPA had no
the landlord will want to opt out of that expedited
agreement, then they should specify that the LOI is bind-
authority to hand the company the entire bill—as well as the
process. However, the landlord may decide it is better to
ing. Examples of provisions that should be considered in
responsibility for future costs—for eliminating asbestos-
have a combination of dispute resolution procedures,
such circumstances include:
contaminated soil in Libby. The U.S. Court of Appeals for
retaining its right to the summary process for eviction,
the 9th Circuit and a federal district judge sided with the
but requiring the tenant to proceed by arbitration or judi-
• The LOI constitutes the landlord’s offer to lease the
EPA, which sued Grace in 2001 to recover cleanup costs.
cial reference if the tenant has its own claim against the
premises and the tenant’s acceptance of the terms of the
“The situation confronting the EPA in Libby is truly
landlord.
LOI; or
extraordinary,” the appeals court wrote in its opinion in
• The LOI is intended to be a binding agreement of the
December. “We cannot escape the fact that people are sick
Pre-Lease Considerations: Letters Of Intent
terms of the lease.
and dying as a result of this continuing exposure.”
Before the parties even sign a formal lease, they often
Grace said others appeals courts have ruled that compa-
(sometimes through their brokers) negotiate and then sign
In either event, have a lawyer review the LOI before it is
nies can’t be forced to pay the entire cost of cleaning a pol-
a letter of intent, also called an “LOI.” The misunderstand-
signed to confirm that the LOI will be interpreted to be
luted site without being allowed to challenge whether the
ing between the parties can begin at this early stage of the
what it is intended to be.
cleanup was necessary to contain or remove contamination.
relationship if the parties do not each have the same inten-
Not surprisingly, much can be learned in hindsight. A
Solicitor General Paul Clement, the Bush administra-
tion.
key to litigation avoidance is to project into the future and
tion’s Supreme Court lawyer, urged justices not to take the
The basic question is whether the LOI is simply an
focus on those provisions that are more likely to result in
case. The EPA was within its bounds to seek to have Grace
unenforceable and non-binding list of deal points that, it
disputes between the parties. Recognize that the “boiler-
pay for the cleanup, Clement said.
is hoped, will evolve into a binding lease agreement; or
plate” provisions that are often “cut and pasted” from one
EPA Administrator Stephen L. Johnson estimated last
whether the LOI is a mini-lease, binding between the par-
lease to another can be the most important provisions in
year that it would take another five to six years to finish
ties even though the parties intend to enter into a more
determining where a lawsuit is to be filed, what constitutes
cleaning contaminated sites in Libby, in Montana’s north-
formal and detailed definitive lease agreement at a later
a breach, and what remedies are available.
■
west corner.
■
M a k e T h e
W r i t e
Connections
roviding experienced and practical
Contribute an article on
P environmental services to
businesses and professionals.
substantive law to The
• Land Use
Law Tribune.
Next: Personal Injury
Copy Deadline: Nov. 3
(860) 240-1038
(860) 240-1011
(860) 240-1016
Contact: Kathleen Colket, Managing Editor
(860) 278-1150
(203) 777-8008
(860) 527–7900 x 640; email: kcolket@alm.com
Inquire about our editorial calendar for 2006

---

www.ctlawtribune.com
• Track case digests by judge or subject
• E-mail Alerts you define by practice area
• FREE full text cases to download
• Breaking news alerts
• Search articles by subject or person
Free
30-Day
Trial
Register Today

---