Strategies for Brownfields Redevelopment

Real estate developers and investors, and their environmental consultants, need strategies to deal with contaminated properties, especially as commercial and residential projects increasingly target previously developed parcels in urban areas and village centers.  Transit Oriented Development (TOD) and “smart growth” projects commonly reuse sites that have a history of environmental impairment, to accomplish Brownfields redevelopment.

For instance, Governor Patrick’s current plan for 10,000 new housing units per year prioritizes development of sites in urban areas and village centers.  Although those properties may be perfect for re-use, it is likely that the developer or contractor will encounter some amount of oil or hazardous materials prior to the acquisition or during construction, or both.

In the past, environmental contamination could stop a good redevelopment plan in its tracks.  However, current regulations and industry practices can be used to manage the risk and facilitate redevelopment. 

Here are some points from a talk I recently gave to Licensed Site Professionals (LSPs) and environmental consultants on Brownfields Redevelopment and Environmental Due Diligence:

1.                   Chapter 21E creates the “Eligible Person” and “Eligible Tenant” categories to provide liability protection for new owners and new tenants that did not cause or contribute to the contamination.  An Eligible Person can receive liability protection after cleaning up the property and an Eligible Tenant can receive protection if the contamination was previously reported to the Department of Environmental Protection (DEP).

2.                  If an Eligible Person needs liability protection before completing the cleanup, the Attorney General’s office can issue a “Brownfields Covenant Not to Sue”, to provide liability relief while the cleanup is underway.  In addition, the Covenant Not to Sue can be used to protect a prospective purchaser as well as a responsible party who caused the contamination as long as the cleanup revitalizes an area and provides public benefits.

3.                   Chapter 21E provides liability relief for a “Secured Lender” to protect banks while they are servicing a loan as well as after a foreclosure.  The Secured Lender must satisfy several conditions to maintain this status but they are not onerous on their face.  In addition, subsidized environmental insurance under the Brownfields Redevelopment Access to Capital (BRAC) program can provide an additional level of comfort for lenders, with Pollution Legal Liability and Cleanup Cost Cap policies.

4.         Similar liability relief is provided to municipal entities such as a redevelopment authority, community development corporation, and economic development and industrial corporations.  Thus, public projects can proceed with a level of comfort.

5.         The Brownfields Tax Credit program has provided up to a 50% credit of the response action costs to achieve a cleanup within economically distressed areas, of which there are many under the applicable State program.  However, Governor Patrick vetoed an extension of this program last year and lawmakers have until August 2013 to conclude action on a further extension.

6.         The Phase I Environmental Site Assessment (ASTM E1527-05) is often considered the industry standard for conducting environmental due diligence in real estate transactions.  However, the scope of E1527-05 does not cover many issues that are frequently of concern in a real estate deal, such as indoor air quality or vapor intrusion, asbestos material, wetlands, regulatory compliance, business environmental risk, and subsurface (soil, groundwater) sampling.  Thus, it is important for the developer and environmental professional to consider the appropriate scope of due diligence in cases where the relatively limited scope of ASTM E1527-05 may not be sufficient.  (Also note that E1527-05 is due to be reissued this year, so some of the provisions may change, including for the soil vapor pathway.)

7.         It will be important to follow DEP’s current proposed amendments to the Massachusetts Contingency Plan (MCP), to determine how the final regulations might affect Brownfields redevelopment.  The current draft includes changes regarding vapor intrusion, future construction on sites with remaining contamination, the close-out process (e.g., eliminating Response Action Outcome (RAO) in favor of Permanent Solutions with or without Conditions and Temporary Solutions), and the deed riders known as Activity and Use Limitations (AULs) restricting future use of a parcel.

Please contact me if you or a colleague has any questions regarding Brownfields Redevelopment, environmental contamination, or real estate or business transactions. 

Who is Liable in Business Transactions?

In real estate and other business transactions, information is typically conveyed to the buyer from the seller, broker and consultants.  If the information turns out to be incorrect, and the buyer had relied on it and suffered damages as a result, the parties may end up in litigation.  The big question becomes, who is liable to the buyer, if anyone? 

The Supreme Judicial Court recently ruled that a real estate broker may be liable for conveying incorrect information from a seller to a buyer.  In that case, the SJC ruled that a broker, like any person engaged “in the course of business,” may be liable for failing to exercise reasonable care in conveying information and making representations to a buyer.

In the case titled, DeWolfe vs. Hingham Centre, LTD., the seller incorrectly informed its broker that the property was zoned for business use when it was actually zoned “residential”.  The broker prepared a multiple listing service (MLS) listing for the property stating that it was zoned for business use and had written that “business” was the applicable zoning district.  After acquiring the property, the buyer learned that the property was zoned “residential” and that its planned business was not a permitted use. 

The buyer sued the broker and her real estate agency, alleging “negligent misrepresentation” and other claims.  The broker attempted to defend by asserting that she had merely conveyed zoning information that her client had provided to her, and that she was under no duty to confirm the zoning status of a property.

The SJC rejected the broker’s arguments, ruling that a broker has a duty to investigate before making representations as to the zoning classification of a property.  The broker has a duty to exercise “reasonable care” in making such representations.  If the broker’s misrepresentations were based on information provided by the seller or third-party, the fact-finder (a jury or judge) will determine whether it was reasonable under the circumstances to rely upon the seller’s information.

Stated another way, if it is reasonable under the circumstances for a broker to rely on information provided by the seller, the broker should not be liable for conveying such information to a buyer without conducting further investigation.  In contrast, if it is unreasonable under the circumstances for a broker to rely on information provided by the seller, the broker has a duty to investigate further before conveying such information to a buyer.

In the DeWolfe case, the SJC indicated that the broker’s reliance on the seller’s information was not reasonable:  the broker was experienced in selling properties in the town, the broker was not aware of any prior business use of the property, and the broker observed only houses and not businesses adjoining the property on either side.

The broker also attempted to defend on the basis of the “exculpatory clause” in the standard form Purchase and Sale Agreement.  That clause provided that the buyer had not relied on any representations not incorporated in the Agreement “or previously made in writing.”

The SJC ruled that the exculpatory clause did not immunize the broker because the buyer had relied on prior written representations of the broker (e.g., the MLS listing and the broker’s handwritten designation of the “business” zoning classification).

Although the DeWolfe case concerned a commercial real estate transaction, the SJC’s decision indicates that the doctrine of “negligent misrepresentation” applies to any person engaged “in the course of business”.  Thus, any business person who “failed to exercise reasonable care or competence in obtaining or communicating the information” conveyed to others may be liable if that information was false, justifiably relied upon, and resulted in economic loss to the other person.

Please contact me if you or a colleague has any questions regarding real estate or business transactions. 

Why Form an LLC or a Corporation?

We are often asked by business owners if they should organize as a Limited Liability Company (LLC) or a corporation.  Here are some of the considerations that we typically discuss with them:

1.         Liability Protection:  Both an LLC and corporation insulate the owners from the company’s debts and obligations provided that the formalities are followed.   This liability protection often is a chief reason to move beyond a sole proprietorship.  (I previously circulated a memo on avoiding personal liability.  Please contact me if you would like a copy.)

2.         Tax Treatment:  An LLC and an “S corporation” (a corporation that has elected to be taxed as a partnership) are both treated as pass-through entities for federal tax purposes.  That is, the tax occurs at the member or shareholder level, avoiding a double tax that would otherwise occur at the corporate level, such as for a “C corporation".  On the State level, Massachusetts imposes a minimum tax on S corporations as well as a separate tax if total receipts exceed a threshold (in 2012, $6 million or more).

(Keep in mind that tax law is complicated and the comments above are simply general guidance. Specific tax advice is needed for each business.) 

3.         Who Are the Owners:  An S corporation may have restrictions on the number and types of owners, whereas an LLC may provide more flexibility.  This may be a concern if there are corporate owners or many of them.

4.         Management and Control:  An LLC may be either manager-managed or member-managed, whereas an S corporation is governed by its board of directors as elected by the shareholders, with operations handled by the officers.  An LLC can provide flexibility insofar as a manager(s) can be delegated broad authority in the Operating Agreement to run day-to-day operations as well as take more significant actions, with members reserving control over certain significant decisions.

5.         The Business Plan:  A relatively straightforward, stand-alone business may use either form.  If various businesses are contemplated, each organized as its own entity, multiple tiers of LLCs or corporations may be used, and series LLCs may allow setting up multiple businesses within one LLC.  The consideration is to shelter each business from the liabilities of each other business.

6.         The Contributions and Rights of the Respective Owners:   Consideration is given to owners who may make different contributions (e.g., cash, services, property) or may be active participants or passive investors, or if distributions of cash are to be made on other than a pro rata basis. LLCs may allow different and flexible distributions of cash and corporations may allow for priority distributions through the use of preferred stock.

7.         Financing and Capital Structure:  If the financing will be relatively straightforward, either entity may work.  However, outside financing from angel or venture capital investors may dictate the choice of entity. 

8.         Employee Compensation:  Either entity may work for standard compensation plans.  Stock options may favor a corporate form, although an LLC can be structured to provide analogous interests. 

9.         Filing Fees:  The original and annual filing fees in Massachusetts are slightly lower for corporations than LLCs. 

These are just some of the considerations.  Please do not consider them “legal advice” because the specific details of each business should be discussed with experienced counsel.

Please contact me if you or a colleague has any questions regarding forming an LLC or corporation or other business matter.  Please forward or share this post or blog with a colleague if you would like.

2013 Housing Score: Builders 2, Towns 0

     The stars continue to align for builders in 2013. As if low interest rates, pent-up demand, and the Governor's plan for 10,000 new housing units per year were not enough of a tailwind, along comes the Supreme Judicial Court and issues not one but two decisions approving affordable housing developments. 

     The recent SJC decisions continue to recognize the importance of constructing affordable housing (rental or ownership) under the "comprehensive permit" law, Chapter 40B. The decisions also remind local boards to not deny a project based on unreasonable concerns, because improper reasons will be overturned.

      1.  On January 8, the SJC ruled that the Town of Lunenburg had improperly denied a 146-unit condominium project. The SJC rejected the Town's argument that the project would be inconsistent with the Town's master plan, because the Town had not actually created any affordable units under that plan.

     The SJC also held that the Town's affordable housing stock for purposes of Chapter 40B consists of subsidized units with long-term affordability ensured by a deed restriction. Thus, low-cost market rate housing does not qualify as "affordable housing" under Chapter 40B.

      2.  On January 14, the SJC held that the Town of Sunderland had improperly denied a 150-unit rental project. It was wrong for the Town to deny the project on the basis that the fire chief had alleged fire safety concerns (i.e., the Town did not have a ladder truck or a garage to store it in). The SJC determined that those concerns were not valid where the 3-story buildings would have an extensive, state-of-the-art sprinkler system, the Town had mutual aid from a neighboring town that owned a ladder truck, and the Town's zoning bylaw allowed taller buildings than those proposed by the applicant.

     Importantly, the SJC also ruled that the alleged "fiscal impact" of the project was not a lawful basis for denial. The Town had argued that the project would increase the school age population and necessitate an increase in the school budget; require hiring additional police officers and firefighters; and, create additional maintenance expenses for roads, sidewalks and drainage, all in excess of the tax revenue generated by the project.

     The SJC rejected the Town's argument, holding that a fiscal impact analysis is not permitted under Chapter 40B. The one limited exception is if the alleged inadequate municipal services were due solely to unusual topographical, environmental or other physical circumstances of the project, which did not exist in this case.

     As a final exclamation point, the SJC ruled that the Town had improperly charged the applicant a $10,000 "filing fee", ostensibly to pay for the Town's attorney for general legal representation. Such burdensome "application fees" were prohibited under the affordable housing regulations.

 

    3.  The affordable housing regulations of the Department of Housing and Community Development (DHCD) and the Housing Appeals Committee (HAC) support proactive municipal efforts to create housing (e.g., adoption of "smart growth" zoning overlay districts to create new housing "by right" under Chapter 40R, commitment of Community Preservation Act (CPA) funds to construct affordable housing, etc.). However, as the SJC recently indicated, the local efforts and plans will not be credited if they do not result in actual construction of affordable units.

     In December 2012, I circulated a memo on the Governor's housing plan and "5 Tips for Real Estate Development". Please contact me if you would like a copy.

     Please contact me if you or a colleague has any questions regarding comprehensive permits, Chapter 40B, real estate development, or construction issues.

Does a Buyer Inherit All of a Seller's Liabilities?

One important part of any business transaction is negotiating the rights being acquired, and the liabilities being assumed, by the purchaser.  Naturally, a buyer wants to broaden the rights while narrowing liabilities.  Although this may be possible in a corporate asset purchase, it may be difficult to do in other deals, such as a real estate deal with lease and tenant obligations, as the Appeals Court ruled in September 2012.

The Appeals Court held that the buyer of a commercial building that was subject to an existing lease and tenant could not cherry-pick the obligations of the lease that it agreed to assume, particularly where the tenant had not consented to the arrangement.  Thus, even though the buyer had executed an "assignment and assumption agreement" with the seller/landlord that purported to limit the buyer's future obligations, the Court rejected that agreement as an improper, unilateral alteration of the lease.  The Court imposed all of the underlying lease obligations on the buyer as the new landlord.

The case was titled, Bright Horizons Children's Centers, Inc. v. Sturtevant, Inc.  Sturtevant had purchased a building that was subject to an existing lease with the Bright Horizons tenant.  The lease obligated Sturtevant' seller, as landlord, to construct a building for Bright Horizons by a certain date or pay a rental credit for late delivery. 

 

At the time Sturtevant purchased the property, the building was already far behind schedule.  After further delays, Bright Horizons finished the building and then sought its costs and the rental credit from Sturtevant.  Sturtevant claimed that it had signed an assignment and assumption agreement with the seller which absolved Sturtevant of any construction-related lease obligations owed to Bright Horizons. 

At trial, the judge agreed with Sturtevant's argument.  However, on appeal, the Appeals Court rejected it, holding that Sturtevant and the seller were not allowed to alter Bright Horizon's rights under the lease simply by conveying the property and entering into an assignment and assumption agreement. 

The Court cited "black-letter law" on these issues:  "A deed transfer of real property, subject to a leasehold estate, operates as a matter of law as an assignment of the lease", so that "a successor lessor, who takes by deed real property subject to a pre-existing valid lease, stands in the shoes of and has the same rights and duties under the lease as had been held by its predecessor." 

 

Also, "one party to a contract cannot alter or modify the rights or duties of a counterparty by unilateral action." 

Sturtevant was not able to use its assignment and assumption agreement to carve out obligations that were otherwise contained in the lease (e.g., construction and rental credit responsibilities), which obligations transferred to Sturtevant when it acquired the property.  One important lesson from this case is the value of thorough factual and legal due diligence for a buyer before closing on a transaction, to make sure the full scope of liabilities is known and addressed.

Although the Court rejected the assignment and assumption agreement in this context, it noted that a buyer could lawfully cherry-pick obligations and liabilities that it would agree to assume in a corporate asset purchase.  In an asset purchase, the buyer and seller can negotiate which assets and liabilities will be transferred to the buyer, and which ones will remain with the seller. 

 

In July 2012, I circulated a memo concerning asset and stock purchase deals and "10 Terms for Your Term Sheet".  Please contact me if you would like to obtain a copy of that memo.

Please contact me if you or a colleague have any questions regarding assignment and assumption agreements, asset or stock purchase agreements, or the purchase or sale of a business or real estate.

Five Tips for Real Estate Development

According to a November 2012 editorial in Banker + Tradesman on housing development, "Now is the time for the private development community to step up and start building."

The Boston Foundation's 2012 Housing Report Card for the Greater Boston area documents the need to double or triple yearly housing production through 2020 (to 12,000 - 19,000 new units per year), with a likely shift in demand toward multi-unit condominiums and rental housing but with a significant number of single-family homes, too.  The Foundation predicts that the market will be shaped by young households "increasingly saddled with student debt" as well as the aging of the baby boom generation looking to downsize.  Both factors point to smaller housing units.

Governor Patrick's housing plan calls for 10,000 new units per year through 2020 with an emphasis on "transit-oriented development" (higher-density housing near village and urban centers or near trains, subways, or other public transportation).

The Boston Foundation concludes that, "More than ever, the Commonwealth should see housing development and housing affordability as both a moral obligation to its residents and an economic necessity for a prosperous future."  (my emphasis)

 

Now for some practical information:  Many real estate development projects were permitted but not built due to the economic recession.  For owners, engineers and consultants looking to start construction under those permits, or for buyers purchasing those projects or lenders advancing funds to develop them, it is important to confirm that construction is truly ready to begin.  Here are some considerations:

1.         The existing approvals need to be reviewed carefully to ensure that they have not expired and do not include pre-conditions that could delay the work.  Bear in mind that the 2012 Permit Extension Act provided an extension for many local and state permits that were in existence between August 15, 2008, and August 15, 2012.  (I circulated a memo regarding the Permit Extension Act in August 2012.  Please contact me if you would like a copy of it.)

2.         A strategy should be developed to address permits that may have expired or are close to expiring.  Note that the expiration date in some permits refers to completing work whereas in others it refers to starting work, which can be a big difference.  A strategy to deal with possible permit expiration could involve filing a request for an extension or renewal (with adequate documented reasons), appearing before the permit granting board, commencing some aspects of the work or otherwise exercising rights under the permit, or taking some other measures.

3.         Many permits contain requirements that must be met before work can begin.  Although some requirements may be inexpensive and easy to satisfy, some pre-construction conditions may be time consuming or costly.  For instance, if an additional study or plan was required, that could take significant time or money.  Similarly, time and money would be involved if a condition required the creation of an entity to perform future operation and maintenance (O+M) activities or required the grant of a conservation restriction or some other real estate conveyance.  Thus, the pre-conditions need to be evaluated carefully.

4.         The bylaws, ordinances and regulations should be reviewed to determine if there have been new amendments since the project was approved.  Although "grandfather" protection may exist under certain land use laws, that protection may not be absolute and may not extend to all laws and regulations.

5.         If the land or building is controlled through an option agreement or purchase and sale agreement with provisions for permitting or other due diligence, the agreement should be examined to ensure that all conditions to complete the transaction have been or will be satisfied.  For instance, if the agreement contains provisions for notice, extension, or achievement of certain milestones, it is important to confirm that those steps are taken.

 

After the tough real estate conditions over the past several years, it will be interesting to see if we meet the annual housing goals leading up to 2020.  With our "moral obligations" and "economic prosperity" on the line, let's hope that the market rate and affordable housing that our area needs is actually constructed.

Please contact me if you or a colleague has any questions regarding real estate development or construction issues. 

Are You Ready for Your Business Succession and Exit?

We are often asked to help a business through a transition involving a sale, acquisition or a succession within a family, with co-owners or with key employees. Given that these transitions may evolve over a long period of time, it is important for owners to plan “exit strategies” to maximize their business value and achieve their exit goals. Although the terms of each deal are unique, the following issues often come up and require negotiation among the parties:

1. Buy/Sell Agreement (aka Business Continuity Agreement): These provisions are important for business continuation because they specify the conditions for transferring the partners’ interests in a business, with the goal of identifying who can (and who can not) acquire the interests; the triggering events for the transfer (e.g., resignation, death, disability, bankruptcy, divorce, business disputes, etc.); and, the method to value the interests at the time of transfer.

In essence, the remaining owner(s) agree to purchase the interest of the departing owner pursuant to the terms of the agreement. Without such an agreement, a business could falter if there were problems with the withdrawing owner, an ex-spouse or heirs. An important component of a buy/sell agreement is the funding mechanism to buy out the interest and pay any estate taxes, to accomplish the transfer, such as “key person” life and disability insurance.

2. Earn Out Provision: The acquirer may want to pay part of the acquisition price over time, through an earn-out provision. Thus, some amount is paid when the deal closes and the balance is contingent on the company’s future performance. Certain target goals are set for several years in the future for such metrics as gross revenue, earnings, net income, new customers, etc. Of course, care must be taken to ensure that the targets are not made difficult to achieve or manipulated (e.g., reducing the marketing budget, increasing or inflating overhead expenses, making unexpected capital expenditures, poorly operating the business, customers preferring to deal with the prior owner, change to the company’s operations, etc.)

The seller can monitor the company’s future business if it negotiates a new role as an employee or consultant, with limitations on the buyer’s ability to replace the seller. Monitoring may also be achieved by retaining rights to audit the company’s books. A dispute resolution provision can be helpful so the parties know in advance how disputes will be settled.

3. Non-compete provision: A covenant not to compete may prevent the seller from competing with or diverting business away from the company. A non-compete provision may not trouble a retiring owner but it may concern a younger seller who is prepared for the next business venture. Non-compete agreements are enforceable in Massachusetts, especially those contained in an agreement to purchase a business. (However, new legislation has been discussed in Massachusetts in recent years to regulate non-compete agreements in the employment context.)

Although non-compete agreements are judged on a case-by-case basis, enforceability often turns on whether the agreement is supported by “consideration” at the time it was signed (such consideration is typically found in the purchase of a business); is tailored to protect a legitimate business interest, such as prohibiting the individual from soliciting the company’s customers, protecting trade secrets, and protecting good will; and, is reasonably limited in terms of its duration, geography, and scope.

Business succession raises additional issues concerning future management, business valuation, tax liabilities, legal structures, and the like. A proactive owner should consider these issues with trusted advisors (e.g., accountant, financial planner, insurance agent, attorney, etc.) in order to plan a rewarding exit.

Please contact me if you or a colleague has a question on business succession issues or this post..

Great News for Real Estate Owners: Your Permits are Extended!

Property owners and real estate developers will be pleased to know that their land use and environmental permits may be extended for four years under the “Jobs Bill” signed by the Governor on August 7, 2012. Thus, permitted projects that have been stalled due to the recession may remain viable.

The Massachusetts Legislature recently passed the “Economic Development Bill”, or “Jobs Bill”, which the Governor signed on August 7. Two sections of that Bill amended the original 2010 “Permit Extension Act,” to extend it by two years. The Permit Extension Act itself had granted an automatic 2-year extension to qualifying State and local permits that had been in effect between August 15, 2008 and August 15, 2010. Pursuant to the new Jobs Bill, a permit that was in existence between August 15, 2008 and August 15, 2012, would be extended for a total of four years.

Here is how the 2010 Permit Extension Act works in conjunction with the 2012 Jobs Bill:

The Act as amended states that, “Notwithstanding any general or special law to the contrary, an approval in effect or existence during the tolling period shall be extended for a period of 4 years, in addition to the lawful term of the approval.” The “tolling period” in which the permit needs to have been in effect is defined as “the period beginning August 15, 2008, and continuing through August 15, 2012.”

For instance, if a qualifying permit was in effect on January 1, 2009, the permit would be extended for four years beyond the original term of the permit. Similarly, if a permit existed as of the date of this post (August 9th, which is before the August 15, 2012 cut-off date), the permit would be extended for four years beyond its original expiration date.

Of course, there are limitations and conditions in the 2010 Permit Extension Act, and the Commonwealth issued a “Frequently Asked Questions” guidance document on the Act in 2010, both of which should be consulted to evaluate the specific workings of the statute.  It will also be important to see if the Commonwealth issues new guidance in the future pertaining to the 2012 amendments.

I previously wrote about the original Permit Extension Act in August and November 2010. I have included that 2010 information below in case you are interested.  Keep in mind that information from 2010 has been superseded by the 2012 Jobs Bill and amendments discussed above.

TEXT FROM AUGUST 2010

On August 5, 2010, the governor signed the "Permit Extension Act". This law is important for economic development because it will prevent (at least for two years) the expiration of real estate development permits that had already been granted for commercial, industrial and residential projects. This will provide relief for projects that have not been able to move forward due to poor financing and market conditions during the recession and therefore faced the expiration of hard earned permits.

In essence, any State or local permit “concerning the use or development of real property” in existence between August 15, 2008 and continuing through August 15, 2010 (the so-called “tolling period”) shall be extended for two years in addition to the lawful term of the approval. Approvals that are extended include those issued under the Zoning Act, Subdivision Control Law, Wetlands Protection Act, MEPA, and Chapter 91. Also included are approvals issued under “any local bylaw or ordinance”.

Permits that are not extended by the Act include “comprehensive permits” issued by a local zoning board of appeals under Chapter 40B, Federal permits and certain other approvals. There are certain other limitations in the Act.

TEXT FROM NOVEMBER 2010

Back in August 2010, I alerted clients and colleagues to the new “Permit Extension Act”, which provides a very valuable two-year extension to qualifying real estate development permits that were in effect or existence between August 15, 2008 and August 15, 2010. Last week, the Executive Office of Housing and Economic Development (EOHED) issued helpful guidance in the form of “Frequently Asked Questions” to assist regulatory agencies, property owners and consultants in implementing the Act.

The 2010 FAQ clarifies and confirms many aspects of the Act, such as:

a. The Act automatically extends the permit by operation of law, so that a permit holder and issuing agency are not required to take action to activate the extension. However, an issuing agency may issue an extension form to a permit holder who requests such a document.

b. The Act is not limited to state-issued permits; the two-year extension applies to all qualifying permits issued by any town, city, regional or state entity.

c. Permits related to pre-development activities, such as the clean-up of oil or hazardous materials, are not affected by the Act. Such pre-development activities are considered to be independent undertakings outside the context of a larger development project and, therefore, are not covered by the Act.

d. The Act extends building permits that were issued or in effect between August 15, 2008 and August 15, 2010.

e. MEPA certificates, decisions, and waivers are covered, so that qualifying certificates will have two additional years before a “lapse of time” will have occurred that would otherwise have triggered a Notice of Project Change or a new Environmental Notification Form.

f. Importantly, the Act revives and extends any permit or approval that may have expired during the qualifying period of August 15, 2008 through August 15, 2010. Thus, for instance, “a permit that expired on July 1, 2009, is now revived and set to expire on July 1, 2011.” Also, a permit is revived even if an extension had been previously denied by the agency.

g. The Act provides an additional two years to the original term of the permit even if it was not due to expire until after the qualifying period of August 15, 2008 through August 15, 2010. Thus, “if a permit or approval was due to expire on September 1, 2011, it will now automatically expire on September 1, 2013.”

h. However, a permit that had been revoked during the qualifying period is not extended, because the Act specifically preserves the issuing agency’s authority to suspend or revoke a permit. However, the agency must have an independent reason authorized by the terms of the permit in order to revoke or suspend the permit. The agency cannot attempt to avoid the two year extension by revoking or suspending the permit.

i. The Act does not protect a permit holder from enforcement actions to address noncompliance. The issuing agency’s enforcement authority is retained.

j. The Act does not extend mitigation that was required as a condition of the original permit. All conditions that applied to the permit continue to apply, so that the permit is subject to the same substantive terms as when it was originally issued. However, any interim deadlines established by the permit are extended for two years, according to the FAQ.

k. The FAQ indicates that a permit that was pending “adjudicatory appeal” during the qualifying period is not extended. In contrast, a permit pending “judicial appeal” would qualify for an extension if the court were to ultimately uphold the permit.

Of course, the complete text of the FAQ and the Act should be reviewed to evaluate the specific workings of the statute.

10 Terms for Your Term Sheet

Clients often ask what steps they need to take to buy or sell (or invest in) a business. Commonly, they need to finish hammering out the business terms with the other side and then prepare a Term Sheet (or a Letter of Intent (LOI), or Memorandum of Understanding (MOU)) to outline the principal business points.

The purpose of the Term Sheet is to create a road map for the transaction, so the parties know where they are headed as they enter into the deal. Although the “typical” Term Sheet is non-binding (more on that, below), it nonetheless is important to identify the key terms the parties have “agreed to agree” on if they ultimately go forward. The terms in the Term Sheet can be replaced with the final deal documents.

Here are “10 Terms for Your Term Sheet” for discussion with the other side along with other items unique to your deal:

1. Price and Consideration: This should identify what the parties are exchanging, for instance, a certain dollar amount in exchange for all or part of the company or a certain parcel of land or interest in a building. In addition, discuss whether the price will be paid in cash or some other property (e.g., stock in a company, real estate, services, etc.) and if financing is involved.

2. Structure of the Deal: If it is a business sale, confirm whether it is an asset purchase or a stock purchase. With an asset purchase, the buyer acquires certain assets while leaving other assets (and liabilities) with the seller. However, if it is a stock purchase, the buyer acquires the stock of the company (its assets as well as its liabilities). Naturally, when taking on broader liabilities, due diligence may become more important (see below). If it is a real estate deal, confirm the type of interest involved (e.g., fee simple, a phase of a condominium development, a lease, certain rights in a project, etc.).

3. Payment Terms: Discuss whether the buyer will pay a lump sum at closing or make payments in installments. If there are installment payments, discuss if they are conditioned on the company’s future performance, such as the company reaching certain financial milestones. (In May 2011, I circulated a Memo on business succession and exit planning. Please contact me if you would like a copy.)

4. Is Financing Involved?: If the buyer requires outside financing, discuss a financing contingency, obtaining appropriate commitment letters, complying with the lender’s closing conditions, and providing some amount of down payment or deposit. If the seller is providing the financing, discuss the interest rate, term, and collateral to protect the seller. For instance, collateral may be a pledge of the company stock or business property or some individual assets of the buyer.

5. Due Diligence: The buyer may want a reasonable time to evaluate the assets, liabilities, operations and financial condition of the business. (See Confidentiality, below.) This may necessitate access to the seller’s management and other representatives as well as financial data and other business information. If land or buildings are included in the deal, due diligence may include environmental, zoning, structural and other inquiry into the property.

6. Confidentiality: The buyer and its agents should anticipate that the seller may want them to sign a confidentiality and nondisclosure agreement related to the confidential business information that is provided during due diligence. Although the Term Sheet may be nonbinding, the Confidentiality provision may be identified as binding and surviving the expiration or earlier termination of the Term Sheet.

7. Assignment and Transfer Issues: The parties should attempt to identify the assets that need consent from a third-party to be transferred to the buyer. For instance, the transfer of real estate leases, customer or vendor contracts, and financing agreements may trigger third-party consent. In addition, consent may be required if there is a transfer of the company’s stock or controlling interest even if the company’s name on the underlying contract does not change.

8. Covenant Not to Compete: If the buyer wants the seller and its key employees to help run the business after the closing, the parties should reference employment agreements and consulting agreements that will need to be executed. If the buyer is prepared to run the business on its own, it may want to prevent the seller from competing for a certain period of time. In Massachusetts, noncompete agreements that are reasonable as to time, scope and geography are enforceable. (Please contact me if you would like a copy of the Memo I circulated in April 2012 on noncompete agreements.)

9. Exclusivity and “No Shop” Provision: Buyers often want to prevent the seller from using the offer to shop for a better deal. Thus, consider a provision preventing the seller from soliciting or negotiating alternative proposals during the due diligence and up to the binding agreement. Unlike other terms, this provision should be binding.

10. Post-Closing Obligations: The parties should specify the items they may need to complete after the closing, such as completing tax filings, obtaining approvals from third parties, consulting or employment agreements, and noncompete agreements

Although the terms of the Term Sheet limit the binding nature of the proposal, a buyer and seller can nonetheless agree to make all reasonable efforts to consummate the transaction in accordance with the terms they have outlined. If buyer’s due diligence is successful, the parties can proceed to drafting the final documents, such as the purchase agreement, assignments, and consents, and proceed to closing the transaction and performing any post-closing obligations.

The buyer and seller should give the Term Sheet serious consideration even though it might seem informal due to its nonbinding nature. The key terms that have been negotiated will likely be difficult to re-negotiate once the parties get to drafting the binding purchase agreement and final deal documents.

Please contact me if you or a colleague have any questions regarding the purchase or sale of a business or real estate.

Why is it so difficult to rebuild a home?

Property owners are often struck by how difficult it is to build or rebuild a home in Massachusetts, especially if the lot or building is “nonconforming” (e.g., the lot is too small or does not have enough frontage, the house is too close to the property line, there is too much lot coverage, etc.). Even if a home has existed for decades without any “problems”, it can be very difficult (and expensive) to obtain approvals for additions or rebuilding to create present day amenities like energy efficiency, larger space and improved views.


If a city or town has tightened its zoning code over the years, the home falls into the category of “preexisting nonconforming structure” with challenging permit requirements regulating alterations. All of a sudden, a “team” of professionals may be needed to help obtain the necessary approvals. (However, to paraphrase Seinfeld, not that hiring professionals is a bad thing!) Although “mansionization” grabs the media attention, even modest reconstructions can face this challenge.

The Legal Standards

The challenge originates primarily in the State Zoning Act, General Laws Chapter 40A, Section 6, which provides that a preexisting nonconforming single family structure may be altered or reconstructed provided that it “does not increase the nonconforming nature” of the structure. To determine if a home’s nonconforming nature would be increased, one needs to identify the existing nonconformity (e.g., area, setback, frontage, coverage, etc.) and then determine if the new home would intensify the nonconformity or create new ones.

If the municipality determines that the home’s nonconforming nature would be increased, the rebuilding is allowed only if it is not “substantially more detrimental” than the existing home to the neighborhood. This is often called the “Section 6 Finding”, after its location in Section 6 of the Zoning Act.

As you likely sense, these are vague, subjective standards. Ultimately, the determination is typically made by the volunteer members of the local zoning board of appeals, who are often subject (and receptive) to neighbors’ claims that they are “aggrieved” by the proposal. (One maxim applies here: very few neighbors like change.)

Adding to this challenge is the authority granted to each municipality to adopt its own local zoning code to customize provisions of the Zoning Act. For instance, each municipality is allowed to implement different procedures, standards, prohibitions, and voting requirements for the Section 6 Finding and determining whether an alteration is substantially more detrimental to the neighborhood.

What Is “Substantially More Detrimental” to the Neighborhood?

Prior court decisions may not be too helpful in clarifying these issues because the other decisions are often tailored to a municipality’s specific code and project. The Supreme Judicial Court (SJC) attempted to facilitate approval of certain “small scale” alterations in its 2008 decision titled “Bjorklund vs. Zoning Board of Appeals of Norwell”. However, the SJC’s list of small scale projects was so limited as to have little practical effect for owners proposing even modest additions or reconstructions. For example, the SJC’s list of small projects included adding one dormer, enclosing a porch or sunroom, constructing a 2-car garage, and installing a storage shed for gardening or pool equipment.

Some municipalities handle the Section 6 Finding as an “administrative finding”, usually by the zoning board of appeals (ZBA) based upon a simple majority vote. However, some municipalities have made the Finding subject to a discretionary “Special Permit”, with all the strict requirements imposed by Section 9 of the Zoning Act, such as written notice to all “interested parties”, legal advertisements in the newspaper, long time frames for opening the public hearing and issuing a decision, and, very importantly, a “supermajority” vote (e.g., four affirmative votes of a five member board).

In addition, a municipality may seek to impose a detailed list of “Special Permit criteria” to the statutory test of whether the proposal is substantially more detrimental to the neighborhood. Of course, because “substantial detriment” is not susceptible of a fixed measure, the public hearing often delves into amorphous issues like, is it too big, is it in harmony with the neighborhood, does it impact views, etc.

This complex process begs a simple question: If other homes in the neighborhood are roughly similar to the proposed house, is it possible for the new home to be “substantially more detrimental” to the neighborhood?

As if the discretionary Section 6 Finding was not challenging enough, some municipalities have also adopted a discretionary “site plan review” requirement (or, even more onerous, a “site plan special permit” requirement), or wetland regulations with strict “no build” zones, or sewage disposal restrictions more stringent than the State standards. These all have their own complexities, often necessitating a team to navigate them. However, apropos of Seinfeld, not that hiring a team of experts is a bad thing!

Please contact me if you or a colleague has a question on permit requirements for building a home or other real estate issues.

"Who you gonna sue" (or be sued by)?

In the Ghostbusters movie, the popular refrain was, “Who you gonna call?” In the business world, when a company’s expectations are not met, the inquiry is often, “Who you gonna sue?”

Fortunately, for providers of professional services, the Massachusetts Appeals Court recently confirmed that there are limits on who can sue a professional. Even with these limits, professionals need to watch out for third-parties (i.e., parties with whom they are not in contract) that may seek to rely on, and attempt to sue based on, the professional’s services. This is important for consultants, engineers, architects, contractors, brokers, accountants, planners, and other professional service providers.

Facts of the Case

The Appeals Court case is called, “Meridian at Windchime, Inc. v. Earth Tech, Inc.” A real estate developer attempted to sue a professional engineering firm that had been hired by a town as a consultant to inspect the developer’s road and utility work. Importantly, the engineer’s contract was with the town, not the developer.

The developer alleged that the engineer’s inspections were negligent because they failed to identify deficiencies with the infrastructure work performed by the developer’s construction contractor. When the deficiencies were discovered later on, the developer was required to replace the road at far greater cost than if the deficiencies were discovered earlier.

When the road contractor went out of business, the developer was faced with the question, “Who you gonna sue?” It chose the engineer, even though it did not have a contract with the engineer.

What the Appeals Court Said

The Appeals Court held that the developer was not allowed to sue the engineer because there was no direct contract between the developer and the engineer (i.e., no “breach of contract” claim), and there are limits to the liability of a professional to a third-party for negligent performance of a contract.

Under the principle of “reasonable reliance”, a professional employed to provide a service does not owe a duty of care to a third-party with whom the professional has no contractual relationship unless (i) it was “foreseeable and reasonable” for the third-party to rely on the services provided by the professional to its client, and (ii) the professional had “actual knowledge” that the third-party was relying on the professional’s services.

The Court held that there was no “reasonable reliance” because the developer had hired its own project engineer to provide services on the project, the underlying contract between the town and the engineer provided that the engineer would have no responsibility for the construction methods selected by the developer, and the engineer had informed the developer of the engineer’s limited role in the project.

Things For the Professional to Consider

• When entering into a contract for professional services, the professional should consider whether the work product might be obtained and relied upon by a third-party who is not the intended client. For instance, this scenario can arise if the professional is engaged to make submittals to local or state agencies (which could then make the document accessible to the public, members of which might claim “reliance” on the submittal). Another scenario is when a professional submits work product to a client or lender, who then shares it with a buyer, borrower, customer or other “user”.

• Consider adding provisions in the contract as well as statements in the work product to clearly announce that the services and work product are only for the client’s use, the document may not be used or relied upon by any third-party, and there are no intended third-party beneficiaries of the contract. Such a statement should be considered for each submission prepared by the professional even if the submissions are numerous or frequent (e.g., periodic inspection or status reports).

• If there is reason to believe that a third-party might seek to rely on the services or work product that the professional is providing to its client, the professional should consider informing the third-party that it can not and should not rely on the professional’s services without prior express approval.

• In contrast, if you are in the role of the “third-party” and want the legal right to rely on the work product of a professional with whom you are not in contract, you can attempt to obtain a statement from the professional, sometimes in the form of a “reliance letter”, confirming that you are authorized to rely on the work product just as the original client was able to rely on it.

Although these measures do not assure immunity from claims by third-parties, they might provide some level of protection against them.

Please contact me if you or a colleague has a question on contracts, performance, or real estate issues.

Is your property contaminated? How about your indoor air? (MassDEP's Guidance on Vapor Intrusion and Indoor Air)

Just in time for the recent Holiday season, the Massachusetts Department of Environmental Protection provided the real estate and environmental communities with a dubious present, the 102-page (plus five appendices) “Interim Final Vapor Intrusion Guidance” document on the scintillating (to some) topic of indoor air contamination caused by groundwater and soil contamination. The Guidance document will be important for building and landowners, developers, lenders, tenants and environmental consultants, particularly Licensed Site Professionals (LSP’s), with the misfortune of encountering (potential) indoor air contamination.

The DEP estimates that approximately 50 new sites are identified each year with the potential for vapor intrusion (i.e., the way contamination in soil and groundwater can enter a building and contaminate the indoor air). In addition, vapor intrusion concerns have been raised at former contaminated sites that were previously cleaned up and believed to be “closed” under the hazardous waste cleanup regulations. Additional expensive and time-consuming hazardous waste response actions have been required at some former sites based upon assertions that the prior cleanup did not properly evaluate the potential for vapor intrusion or for new building construction. As imagined, this uncertainty has been a serious concern for lenders, owners, developers and LSPs.

A title combining the words “Interim”, “Final”, and “Guidance” raises some questions as to the document’s legal and practical effect. According to DEP, the document is “final” insofar as it can be quoted and cited after a prior draft had previously been circulated. It is “interim” insofar as DEP says that it will issue formal revisions to its regulations by July 2012, which may supersede parts of the document and lead to additional revisions. Finally, according to DEP, the “Guidance” is not a regulation, rule or requirement, and should not be construed as mandatory. However, because the Guidance presents the technical recommendations and preferences of DEP, an owner, developer or LSP could be forgiven if they treated the document as a requirement subject to enforcement by DEP.

The Guidance outlines DEP’s recommendations for best practices that will meet the current regulatory requirements. The stated purposes are to clarify when to evaluate the pathway for vapor intrusion; provide guidance on conducting assessments to determine if the vapor intrusion pathway (i.e., migration route from the containment source to the sensitive receptor) is complete and conducting risk assessments if the pathway is complete; and, recommend mitigation strategies to address vapor intrusion.

In terms of evaluating the potential for vapor intrusion at sites where there is soil or groundwater contamination, the Guidance contains a multi-step flow chart including documentation of indoor air contamination or odors, the concentrations of contaminants within certain distances of an occupied building, specific building criteria (e.g., an earthen floor, significant cracks in the foundation, a groundwater sump, etc.), and the potential for contaminants moving along preferential migration pathways such as utility trenches.

The DEP recommends a multiple “Lines of Evidence” approach to determine if the vapor intrusion pathway from source to receptor is complete and likely to be of concern. The Lines of Evidence may include the concentration of contaminants in the soil, groundwater, soil gas below the building (sub-slab soil gas), and indoor air; the presence of preferential migration pathways for vapors; and, the presence of other outdoor and indoor sources for the contaminants (e.g., outdoor sources of pollution, household products, etc.).

In an effort to “simplify” the evaluation of the vapor intrusion pathway, DEP has developed Residential and Commercial/Industrial Threshold Values (TVs). These Threshold Values are used to determine whether measured indoor air concentrations are within the range of typical residential indoor air concentrations and typical exposure scenarios for commercial and industrial settings.

The Guidance addresses the common question of whether, and when, to conduct direct sampling of indoor air. The Guidance indicates that it is not common to sample indoor air for volatile organic compounds (VOCs) without first collecting other data on groundwater, soil, or soil gas that indicates that there might be an indoor air problem due to environmental contamination, at least for the purpose of satisfying hazardous waste cleanup regulations (i.e., there may be other reasons to sample the indoor air unrelated to the Massachusetts Contingency Plan, or MCP, at 310 CMR 40.0000). The Guidance recognizes that direct sampling of indoor air without gathering other site data can result in erroneous conclusions and unnecessary response actions to address conditions that are not related to the MCP. In addition, when sampling indoor air (if it is appropriate), efforts should be made to eliminate sources of contamination within or near the building that can affect the results, such as cigarette smoke, the use of sprays, solvents, paints, and other household products, and operations of nearby businesses, such as a dry cleaner.

The Guidance discusses the contentious issue of potential future building construction when there is a potential risk of vapor intrusion (if a building were to be constructed). Achieving closure of a vacant contaminated site that does not have a building can be difficult because actual building conditions cannot be directly measured and existing methodology may not explicitly address potential indoor air problems at a future building. The Guidance indicates that, if some amount of residual contamination will remain in the soil or groundwater, the potential for vapor intrusion should be considered in planning the future placement of a new building and preparing the building site.

The Guidance states DEP’s preference of using an Activity and Use Limitation (AUL), which is a deed rider recorded at the Registry of Deeds, to provide notice to interested parties of the contamination that remains and how to address it in the future. For instance, an AUL might specify the measures to be taken at the time of future building construction (e.g., installation of sub-slab depressurization (SSD) system and a vapor barrier) or might restrict construction activity to locations outside of areas with contamination, or specify that an LSP must evaluate the potential for vapor intrusion before a building is constructed.

The Guidance provides that engineering measures may be incorporated into the future construction plans to protect against vapor intrusion if a building will be constructed in an area where contamination remains that could lead to vapor intrusion. Depending on the concentration of the contaminants, a vapor barrier and an active SSD system either is not required (Category A site), or “should” be installed (Category B site), or presumably “would” be installed (Category C site). The Guidance provides criteria on whether post-construction confirmatory indoor air sampling is necessary and the procedure to determine if the SSD system can be terminated.

Among the various takeaways for owners, developers, and lenders is that LSPs and environmental professionals will have good reason to be cautious in addressing contaminated sites with the potential for vapor intrusion and indoor air contamination. This includes sites with existing buildings as well as vacant properties on which building and construction activities may occur in the future. The Guidance will likely lead to additional site investigations and sampling, which would likely be reflected in the cost and schedule of the work.

Please contact me if you or a colleague has a question on DEP’s Guidance or on other real estate or environmental issues.

Subcontractor's Mechanic's Lien Fails Due to Late Filing and Breach by General Contractor

I recently posted on recent changes to the Mechanic’s Lien Law that allow “design professionals” to create and enforce liens. Following up on the mechanic’s lien topic, on August 29, 2011, the Appeals Court ruled that a lien filed by a subcontractor was not allowed because prior nonperformance by the general contractor had released the project owner from any duty to make further payments under the original contract. The important point under the Mechanic’s Lien Law, G.L. c.254, §4, is that a payment “due or to become due” from the owner to the general contractor must exist at the time the subcontractor files its notice of contract.


The particular case (Maverick Construction Management Services, Inc. v. Fidelity & Deposit Company of Maryland, Inc.) concerned the reconstruction of an athletic field complex at Nichols College by the general contractor, Evergrass, Inc. Evergrass had subcontracted with Maverick Construction Services, Inc., to excavate the site, place subsurface materials and install a drainage system. Evergrass delivered the facility to the College in September 2005, just in time for the football season. However, serious drainage problems quickly developed that Fall. The cost of the repairs were later determined to far exceed the outstanding balance due under the general contract. Although the College never formally issued a notice of termination to Evergrass, the College broke off negotiations with Evergrass and subsequently hired a new general contractor to remove the deficient field and install a new one.

During the course of the unsuccessful negotiations between the College and Evergrass, Maverick filed its “notice of contract” under the Mechanic’s Lien Law to assert its unpaid subcontract balance. Maverick subsequently sued Evergrass for the unpaid subcontract balance and sued the College for enforcement of its lien.

The Superior Court’s rejected Maverick’s lien because no payment was “due or to become due” to Evergrass under the original contract at the time Maverick filed its notice of contract, which the Appeals Court affirmed. No amounts were due to Evergrass at the time the project was delivered to the College because, at that time, Evergrass’ breach of contract required remedial expenditures that far exceeded the general contract’s retainage balance. Because Maverick’s subcontractor lien was asserted after the project was delivered, when no amounts were “due or to become due” under the contract, Maverick’s subcontractor lien failed.

This case is another reminder to owners, contractors and subcontractors that the Mechanic’s Lien Law, G.L. c.254, contains numerous, detailed requirements that must be followed strictly in order to create and enforce a lien. Additionally, for subcontractors, it is important to understand the status of the general contractor’s contract with the owner in order to evaluate the viability of a possible lien.

Please contact me if you or a colleague has a question regarding creation or enforcement of a mechanic’s lien.

ARE YOU COVERED BY THE NEW DESIGN PROFESSIONAL'S LIEN LAW?

Property owners, contractors, lenders, architects, engineers, LSPs and surveyors should be aware of important new legislation allowing "design professionals" to place a lien against a property to secure payments due under a contract for professional services. The list of design professionals includes architects, professional engineers, licensed site professionals (LSPs), land surveyors and landscape architects who are licensed or registered in Massachusetts. (The list does not include professional wetland scientists, registered sanitarians or other environmental professionals.) This new law took effect on July 1, 2011.

The Mechanic's Lien Law, General Laws Chapter 254, has long provided a mechanism for building contractors, subcontractors and material suppliers to recover money due under a construction contract. Chapter 254 describes how the lien is created (file a notice of contract), perfected (file a lawsuit to enforce the lien), and enforced (sell the property and collect amounts due relative to other recorded security interests), along with many other critical details. However, prior to the July 1st amendments, architects, engineers, LSPs, and other design professionals typically did not have rights under the Mechanic's Lien Law.

Here are some considerations for design professionals (and building owners, developers, landlords and lenders) under the new law. Of course, the statute must be read in full to appreciate all of its considerations.

1.   There must be a written contract. If the written contract is not directly with the owner (e.g., a subcontract with the prime, or first tier, design professional), the owner must approve of the contract in writing.

2.   It must be a private project due to the continued exception for public property.

3.   The design professional must be licensed or registered in Massachusetts. The lien can be claimed by an individual professional or a corporate entity that is authorized to practice one of the professions.

4.   The design professional's lien can be created and enforced whether or not the building or improvement is commenced or completed and whether or not the professional services have been completed.

5.   The design professional may record its Notice of Contract at the Registry of Deeds (or Land Court district) at any time as long as it is before the end of the statutory deadlines (i.e., the earlier of 60 days after Notice of Substantial Completion or 90 days after last performing services), and provide notice of the recording to the owner.

6.   The design professional must record its Statement of Account within 30 days after the deadlines to record the Notice of Contract (see above).

7.   The design professional must file its lawsuit (a Verified Complaint) in court to enforce its lien within 90 days after filing its Statement of Account, and record the Complaint at the Registry within 30 days after it is filed.

8.   The design professional must prevail in its lawsuit and then move to enforce the judgment (e.g., force a sale and recover proceeds) if the matter has not been resolved.

9.   Owners, developers and lenders should consider requiring lien waivers from design professionals as well as design professional subcontractors, just as they require them from contractors, subcontractors and material suppliers.

10.   Owners and developers should consider modifying their construction contracts to require contractors to address liens created by design professionals and to provide indemnification and defense of such liens, just as those provisions may be required for liens created by contractors, subcontractors, and material suppliers.

Please contact me if you or a colleague has a questions on this e-mail or construction projects involving mechanic's liens for contractors or design professionals.

Liability of Commercial Landlords and owners for Unsafe Conditions

In a recent decision, the Massachusetts Supreme Judicial Court held that a commercial landlord has a statutory duty to correct an unsafe condition as long as the tenant provided written notice of the condition and the tenant did not cause the condition. A commercial landlord has that duty even if the lease provides that the tenant is responsible for repairs and replacement.

The statutory duty arises from General Laws Chapter 186, Section 19. The duty may not be waived in any lease or rental agreement; any such waiver “shall be void and unenforceable.”

Based on this new case, it is important that owners, landlords and property managers respond to written notices provided under the statute even if the tenant is responsible for repairs under the lease. It is also important that the lease provides that the landlord can recoup costs if it is called upon to make repairs.

The new case is Bishop v. TES Realty Trust, wherein the tenant provided the landlord with written notice (by certified mail, return receipt requested, per the statute) complaining about a leaking roof and skylights. The landlord repaired the roof but not the skylights. The tenant claimed that plaster fell from the roof by the skylight into her eye, causing her to fall and suffer injuries. In its defense, the landlord claimed that the statute did not apply to commercial landlords and that the lease obligated the tenant to make repairs. Unfortunately for commercial owners and landlords, the SJC disagreed.

In addition to the “statutory duty” at issue in Bishop, the SJC identified two instances under “common law” where a commercial landlord is liable for injuries arising from unsafe conditions on the landlord’s property: (1) the landlord contracted to make repairs and made them negligently, and (2) the defect that caused the injury was in a common area or other area appurtenant to the leased area over which the landlord had some control.

The Court had an interesting comment on lease provisions that impose a duty to repair on the tenant: “The statutory duty imposed by §19 applies only where the required notice of an unsafe condition has been provided to the landlord. Where the lease imposes on the tenant a duty to repair, the tenant is unlikely to provide such notice, and is more likely to repair the condition herself. Where a tenant with such a duty under the lease gives the required notice and the landlord remedies the unsafe condition, the landlord may bill the tenant for the cost of repair or, as expressly provided under the lease in the instant case, charge the cost of repair as additional rent. And if the application of §19 to commercial landlords does, in practice, devour the common-law rule or allow commercial tenants to shirk their responsibilities under a lease, commercial landlords may petition the Legislature to limit §19 to residential landlords, as the Legislature has done in many other statutes.”

Accordingly, owners, landlords and property managers should consider reviewing their leases to confirm that the provisions concerning tenant’s duty to repair, waiver of landlord obligations, and landlord’s ability to bill a tenant for the cost of repair or charge a repair cost as additional rent, comply with the holding in the Bishop case. Landlords and managers should also be prepared to evaluate written notices sent by tenants pursuant to G.L. c. 186, §19, to determine if an unsafe condition should be corrected by the landlord, and make those corrections if they are required by statute, even if the lease requires the tenant to make repairs.

Please contact me if you or a colleague has a question on the Bishop case or this e-mail.

Guidance on the new "Permit Extension Act"

Back in August, I alerted clients and colleagues to the new “Permit Extension Act”, which provides a very valuable two-year extension to qualifying real estate development permits that were in effect or existence between August 15, 2008 and August 15, 2010.  Three weeks ago, the Executive Office of Housing and Economic Development (EOHED) issued helpful guidance in the form of “Frequently Asked Questions” to assist local Conservation Commissions, the Department of Environmental Protection (DEP),  property owners, wetlands scientists and engineering consultants in implementing the Act.

The FAQ clarifies and confirms many aspects of the Act, such as:

 The Act automatically extends the permit by operation of law, so that a permit holder and issuing agency are not required to take action to activate the extension. However, an issuing agency may issue an extension form to a permit holder who requests such a document.

 The Act is not limited to state-issued permits; the two-year extension applies to all qualifying permits issued by any town, city, regional or state entity.

 Permits related to pre-development activities, such as the clean-up of oil or hazardous materials, are not affected by the Act. Such pre-development activities are considered to be independent undertakings outside the context of a larger development project and, therefore, are not covered by the Act.

 The Act extends building permits that were issued or in effect between August 15, 2008 and August 15, 2010.

 MEPA certificates, decisions, and waivers are covered, so that qualifying certificates will have two additional years before a “lapse of time” will have occurred that would otherwise have triggered a Notice of Project Change or a new Environmental Notification Form.

 Importantly, the Act revives and extends any permit or approval that may have expired during the qualifying period of August 15, 2008 through August 15, 2010. Thus, for instance, “a permit that expired on July 1, 2009, is now revived and set to expire on July 1, 2011.” Also, a permit is revived even if an extension had been previously denied by the agency.

 The Act provides an additional two years to the original term of the permit even if it was not due to expire until after the qualifying period of August 15, 2008 through August 15, 2010. Thus, “if a permit or approval was due to expire on September 1, 2011, it will now automatically expire on September 1, 2013.”

 However, a permit that had been revoked during the qualifying period is not extended, because the Act specifically preserves the issuing agency’s authority to suspend or revoke a permit. However, the agency must have an independent reason authorized by the terms of the permit in order to revoke or suspend the permit. The agency cannot attempt to avoid the two year extension by revoking or suspending the permit.

 The Act does not protect a permit holder from enforcement actions to address noncompliance. The issuing agency’s enforcement authority is retained.

 The Act does not extend mitigation that was required as a condition of the original permit. All conditions that applied to the permit continue to apply, so that the permit is subject to the same substantive terms as when it was originally issued. However, any interim deadlines established by the permit are extended for two years, according to the FAQ.

 The FAQ indicates that a permit that was pending “adjudicatory appeal” during the qualifying period is not extended. In contrast, a permit pending “judicial appeal” would qualify for an extension if the court were to ultimately uphold the permit.

Of course, the complete text of the FAQ and the Act should be reviewed to evaluate the specific workings of the statute.
Please contact me if you or a colleague has a question on the Permit Extension Act or any real estate development permits affected by the Act.

Property Owners, Consultants and Municipalities Should Follow Changing Stormwater Management Regulations

There has been a lot of activity on the federal, state and local levels concerning stormwater runoff and management, which property owners, municipalities and engineers should follow closely. Back in 2008, the Department of Environmental Protection (DEP) amended its wetland regulations to incorporate ten stormwater management standards for projects subject to wetlands jurisdiction. Among other things, those standards introduced “environmentally sensitive site design” and “low impact development (LID)” techniques to Notice of Intent applications and Order of Conditions permits, with which owners and consultants should become familiar.

In 2008 and 2009, the DEP also proposed a statewide stormwater permit which would have created stormwater regulations for upland areas that were not governed by wetland regulations. DEP’s proposal would have regulated private impervious surfaces greater than five acres throughout the state and greater than two acres within the Charles River Watershed. After receiving significant public comment on the proposed regulations, the DEP has not issued final regulations.

On the federal level, the Environmental Protection Agency (EPA) has taken several steps to regulate stormwater runoff and municipal storm sewer systems. In the Spring, EPA issued a draft general permit for stormwater discharges in the Charles River watershed towns of Bellingham, Franklin and Milford, with regulation of impervious areas larger than two acres and a particular focus on excessive phosphorous loadings that are believed to be contributing to water quality violations (e.g., algae blooms, degraded fish habitat, etc.). The public comment period on the draft permit ended on September 30, 2010. EPA is expected to issue a final permit decision after addressing the public comment. Presumably, EPA will look to apply the permit conditions to other towns and watersheds once it sees how the program works in the three towns.

Earlier this year, the EPA also issued a new draft “MS4 permit” (Municipal Separate Storm Sewer System) for 84 cities and towns in the North Coastal Region (north to Newbury, west to Wilmington, and south to Weymouth). Building on the prior permit from 2003, the municipalities are required to continue implementing minimum control measures and best management practices for stormwater runoff, including adopting by-laws and ordinances to control construction site runoff and post-construction runoff. The draft permit is designed to reduce the levels of phosphorous in the Charles River and pathogens in the Charles, Neponset and Shawsheen Rivers. Thus, owners and engineers should expect increased stormwater regulation at the local level, including emphasis on LID techniques. The public comment period on the North Coastal MS4 permit has closed and EPA’s website indicates that it anticipates issuing the final permit in 2010.

Two other stormwater programs should be followed: EPA’s Construction General Permit, which applies to construction activities greater than one acre, which expires in June of 2011. EPA is expected to issue a new general permit for construction in June 2011, to include new effluent limitations guideline (ELG) to control the discharge of pollutants from construction sites. It will be important to monitor and prepare for new changes to that permit.

Finally, the re-issued Remediation General Permit, concerning the discharge of treated groundwater to surface water, is in effect as of September 10, 2010. Operators that received coverage under the 2005 permit are required to take certain actions by December 9, 2010. Owners, operators and consultants need to pay attention to the new requirements in the new permit.

Affordable Housing under Chapter 40B Is Upheld By the Supreme Judicial Court:

In September, the Court issued an important decision limiting the conditions a local zoning board of appeals is allowed to impose on affordable housing under Chapter 40B. At the same time, the Court confirmed the ability of the State’s Housing Appeals Committee (HAC) to strike local conditions that do not comply with the affordable housing law. (The case is Zoning Board of Appeals of Amesbury vs. Housing Appeals Committee).


In the Amesbury case, the local board had imposed 94 conditions (some containing additional subconditions) on its “approval” of a 40-unit condominium development. The board’s conditions concerned project funding, regulatory documents, financial documents, and the timing of sale of affordable units in relation to market rate units. However, the Court ruled that a local board was not authorized to impose those types of conditions. A local board is limited to imposing conditions with respect to height, site plan, size or shape, or building materials as are consistent with the terms of Chapter 40B. The Court also ruled that the Housing Appeals Committee was allowed to strike improper local conditions even if the conditions did not render the project “uneconomic” as that term is used in Chapter 40B. These are important points for developers and contractors.

The New “Prompt Pay” Construction Law Goes Into Effect on November 8, 2010, Expediting Payment and Limiting “Pay if Paid” Clauses

Many construction contracts include “pay if paid” or “pay when paid” provisions, which condition payments to a subcontractor or supplier on payments first being made by the owner. A new “prompt pay” law in Massachusetts limits the use of such provisions on private construction contracts that exceed $3 million dollars (except for residential projects under five units).  The new law goes into effect on november 8, 2010.

The new “prompt pay” law, G.L. c. 149, §29E, also provides time deadlines for processing payment requests: applications for periodic progress payments must be accepted at least every 30 days; approval or rejection must occur within 15 days (otherwise the application shall be deemed approved); and, payment must be made within 45 days of approval. Any rejection of an application must be in writing, explain the basis for the rejection, and be certified as made in good faith. Deadlines are also established for processing change orders. Of course, the specific details of the various provisions are set forth in the statute.

“Pay if paid” or “pay when paid” clauses shall be void and unenforceable unless money is not paid because a subcontractor failed to perform or if the owner becomes insolvent and the contractor is pursuing “all reasonable legal remedies” to obtain payment from the person (e.g. pursing a lien under the Mechanics Lien law). The limitations on conditional payment provisions must be expressly stated in the contract. As a result, owners, contractors, subcontractors and designers should review their standard form contracts to comply with this and other aspects of the new law’s requirements.

Green Design, Green Construction and Sustainable Business Practices

Despite the challenging economy, “green” design and construction has expanded along with other sustainable business practices. In the construction area, LEED® (Leadership in Energy and Environmental Design) design standards remain common reference points in both the residential and commercial sectors (e.g., education, public, health care, non-profit, office). Experts predict that tens of billions of dollars will be spent on green construction in the next few years. (As for prime examples of sustainable business practices, see the significant investments being made by Wal-Mart and General Electric.)

Green design and green construction create several unique legal issues for owners and investors, architects, designers, and engineers, and contractors and subcontractors. Challenges include the lack of a regulatory body and definitive, universal standards for what constitutes “green”; owner, designer and contractor expectations that may not be in line with common contractual risk management provisions; innovative green products and methods that may not be durable, reliable or readily available; and, the key role of proper operation and maintenance (O&M) of a building’s systems beyond their initial installation. In view of these challenges, it is important for owners, designers and contractors to understand their respective rights and responsibilities on green projects, and to develop clear project scopes, risk management approaches, and contract provisions to address green issues.

Published reports have described claims and lawsuits concerning green design and construction, including claims alleging: failure to construct an environmentally sound building not meeting LEED® ratings or in breach of project plans, causing lost tax credits, loan defaults and other damages; poor quality and lack of availability (causing project delays) of specified green products; and, indoor air quality and energy and resource use not meeting promised levels. Hence, it is important to adopt specific contract provisions in an effort to manage green risk.

1. Owners, Operators and Investors: Owners should clearly identify their green expectations for the project beyond traditional design parameters. This could include provisions specific to indoor air quality, lighting, energy and water usage, or particular levels of LEED® certification (e.g., certified, silver, gold, platinum). Specific green materials or process methods should be identified if they are important to the owner’s goals.

The parties should agree on clear, enforceable standards, including defining certain terms, as a way to measure the designer’s and contractor’s performance on specified items. The individual responsible for each LEED® rating criteria and building element should be identified to avoid “finger pointing” later on. The owner should know the scope and cost of future O&M responsibilities for green elements so they can be budgeted and performed. Otherwise, the owner could risk losing LEED® certification, upsetting building systems, violating warranties or other problems.

The owner should check with its insurance carrier to ensure there is coverage for green materials and green systems if there is a partial or total loss. For instance, if there is a casualty and rebuilding is necessary, the owner may need insurance proceeds to incorporate sustainable products and systems on the restoration, which could be more expensive than traditional items. Also, the owner would want to meet at least the same level of environmental certification as the original installation, and perhaps a new level applicable at the time of loss. In considering the contractor’s insurance, the owner should ensure that the builder’s risk policy addresses green reconstruction and rebuilding if there is a covered loss.

2. Architects, Designers, and Engineers: The American Institute of Architects (AIA) advocates sustainable design in its ethical and contract provisions, where the architect is to consider and discuss with the owner environmentally responsible design alternatives. These types of provisions, as well as the qualifications of a LEED® Accredited Professional (LEED AP), may impose a higher standard of care on architects, designers and engineers working on green projects, with implications for possible claims of alleged negligent services.

Designers need to be mindful of design risk liability in the green area and measures to manage that risk. Such measures could include precautions to avoid inadvertent guaranty of a specific material or building performance, the effectiveness of certain energy or water consumption systems, indoor air quality, or obtaining LEED® certification, because such a guaranty could implicate the professional liability insurance policy (see below). For instance, it is important to not guaranty that a product will perform a certain way, or that a method will achieve a certain performance, or that a building will achieve a specific LEED® standard.

It is also important for designers to not assume liability for a contractor’s means and methods to achieve green goals or for the results of an owner’s failure to perform O&M on the building’s green systems. Designers should consider reviewing technical manufacturer’s data before specifying a sustainable product, and inform the owner of the various post-construction O&M requirements as well as the ramifications of not performing O&M. The designer should clearly identify the individual LEED® criteria for which it assumes design and reporting responsibility. Similarly, if another professional is handling certain green elements, the designer should consider specifically disclaiming that responsibility.

Of particular concern is not triggering an exclusion in the errors and omission (E&O) or professional liability insurance policy by signing LEED® credit templates and declarations. The designer should consider contract language providing that signing such forms is solely for the certification process and does not constitute a guaranty or warranty.

3. Contractors, Subcontractors and Builders: Many contractors have trained their staff in green techniques, with a large number of individuals obtaining the LEED AP qualification. This experience should help minimize claims pertaining to workmanship and defects on green projects.

Contract provisions should attempt to limit contractually assumed damages, including not assuming new, expanded liability pertaining to green construction. Contract provisions should address potential delay claims arising out of the difficulty in procuring specialized materials or equipment that may be unfamiliar to the contractor. Protection is needed in case a specified innovative material is not accessible, reliable or durable. The contractor should obtain specific instructions on the individual LEED® criteria for which the contractor is responsible, such as construction waste management or building or materials reuse. The contractor should provide that it will comply with those instructions and specifications, but be careful to not guaranty that it will provide specific LEED® points or certifications.

The contractor should consider due diligence on the qualifications of each subcontractor who will be charged with performing green elements. The contractor should also carefully document the O& M requirements for the owner and operator so they are aware of their responsibilities after construction. On the insurance side, endorsements to the builders risk policy should be considered to ensure replacement and rebuilding to specified green standards and using sustainable products if there is a covered loss.

Please contact me if you or a colleague has a question on green design or construction or the LEED® certification process.