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Coronavirus Contract Clauses –What Every Real Estate Investor Should Know About Signing 

Real Estate Contracts During the Coronavirus Pandemic

The Covid-19 health crisis has changed everything for the foreseeable future. How we socialize. How we do business. How we interact with our family. And even how we purchase real estate.  While I am confident that we will all get through this together and come out stronger, we can still carefully conduct business and do real estate deals while we social distance and quarantine. However, there are critical contract provisions that must be included in real estate contracts during this crisis to account for delays and contract performance hindered by the crisis. This clause is called force majeure clause (also known now as a Coronavirus clause) which accounts for what happens to the parties’ contractual obligations in the event of unforeseen events such as strike, war, or a pandemic such as the Coronavirus.

What is a force Majeure Clause / Coronavirus Clause?

A force majeure / Coronavirus clause addresses the parties’ obligations in the event that events such as strike, war, or a pandemic such as the Coronavirus interfere with a contract. Sometimes, force majeure clauses do not include pandemics so it is essential to make sure that the clause specifically calls out the Coronavirus pandemic. A comprehensive Coronavirus clause will provide that the parties’ obligations to each other are reasonably delayed / postponed if the Coronavirus interferes with their obligations, and such obligations may be completely discharged if the parties are not able to close the deal due to the outbreak.

How can the Coronavirus Interfere with Real Estate Deals?

The Coronavirus can interfere with a real estate deals in various ways. A common and reoccurring problem is that the title searches and due diligence are delayed due to town hall closures or reduced hours. Accordingly, a title search, municipal search, or zoning due diligence could take significantly longer. It is a good idea to determine whether the town hall of the subject property is closed, has reduced hours, or whatever the case may be, so the parties can plan an appropriate closing date.

Moreover, if environmental testing is required for the deal, such could also be delayed due to the virus. Many companies have reduced staff and are working from home. Similarly, surveys could take longer to complete if required on a particular deal.

The Coronavirus is also causing banks to change their loan packages or even to withdraw certain loans altogether. Accordingly, mortgages may take longer to be approved and processed due to the virus.

These are just some of the ways that the virus is impacting real estate deals. Of course, coordinating the closing can be challenging as many law firms are closed and are doing their best to close through the mail, or using very limited office hours.

Do Coronavirus Clauses Protect Buyers, Sellers, or Both?

The Coronavirus clause protects both buyers and sellers, but they primarily protect buyers. Of course, sellers may have to obtain a payoff statement for existing mortgages, resolve title issues, or do repairs, all which could be impacted by the Coronavirus. However, the buyer is typically the party that has much more to do before closing, including inspections, due diligence on public records, obtain a mortgage, and so forth. Moreover, the buyer has a deposit to lose while the seller is not putting up earnest money. Accordingly, the Coronavirus clause protects both parties but primarily the buyer.

Are All Coronavirus Clauses the Same?

Not all Coronavirus clauses are the same and depending whether you are the buyer or seller, you will have slightly different objectives using a Coronavirus clause. As a buyer, you want very broad protection, which includes delaying dates and allowing the termination of the contract if the Coronavirus significantly interferes with the closing. A seller should also want to include the Coronavirus clause, but only to allow the reasonable delay of dates; not termination, so the buyer is locked into the deal. Accordingly, buyers and sellers have slightly different objectives when including such a clause, which is why it is important to retain a good lawyer to negotiate your interests in transactions during the Coronavirus pandemic.

Do I need a Separate Provision for the Inspection and Mortgage Contingency Clauses to Address Delays Caused by Coronavirus?

A good Coronavirus provision will account for delays of the mortgage, inspection, due diligence, and any other contract dates, so typically you will not need a separate provision in the mortgage or inspection contingency clauses.

Should I use a Coronavirus Clause in Other Contracts Such as Leases, Management Agreements, etc.?

Yes. Force Majeure / Coronavirus clauses are not unique to real estate contracts and are important in other types of contracts. They may and should be used in any contract, including leases, management agreements, vendor agreements, buyouts, etc. However, as with real estate contracts, you may want a broader or narrower provision depending on which side of the table you are on. In summary, real estate deals can still occur during the Coronavirus pandemic. However, it is important to include a Coronavirus clause, be ready for possible delays, and be ready to close by mail, or possibly in masks and gloves at your lawyer’s office.

What is a Triple Net Lease and What Are the Basics that Investors Should Know?

A “Triple Net Lease” is a type of lease that every investor should be familiar with, particularly investors who focus on commercial real estate. An investor who owns a commercial building may find him or herself negotiating a triple net lease with a prospective lessee. In fact, an owner should insist on a triple net lease as this type of lease is advantageous to the owner. Alternatively, an investor may be a lessee on a long-term triple net lease for land or a large building. Outlined below is a summary of a triple let lease along with three important things that all investors should know about this type of lease.  

What is a Triple Net Lease?

The triple net lease is a type of lease, typically used in commercial buildings, that places responsibility on the tenant for three expenses in addition to the rent. These three additional expenses are the building maintenance, insurance and property taxes. This arrangement is typically preferable for the landlord since the tenant(s) will help defer the expenses of the building. Below are a few important things every investor should know about these types of leases.

1.The Maintenance, Insurance, and Property Taxes Can Change Every Year so the Triple Net Lease Should Account for This.

The taxes, maintenance, and insurance can go up or down each year. Clearly, as the landlord, you are more concerned about being protected if these expenses go up each year. Therefore, it is important, and also customary, to include a provision in the triple net lease that allows you to raise the Additional Rent (which is a common term for the triple net expenses of maintenance, insurance and taxes), which will allow you to raise the expenses that the tenants are responsible. For example, if your annual taxes are increased by the City, such a provision would allow you to raise the Additional Rent to account for the real estate tax increase. However, it is also customary for the Tenant to insist on a cap, or maximum, that such Additional Rent may be increased, so this may be a negotiation point at the outset of the lease. The take away is that all investors that use triple net leases should have a provision in their leases that protects them when the triple net expenses increase.

2.CAM Charges. What Are They? What Should Investors Know?

Common Area Maintenance Charges, or CAM charges, are utilized in triple net leases with multiple tenants. CAM Charges are one of the expenses in the Additional Rent charged to commercial tenants, and are composed of the tenants’ proportionate share of the work and maintenance performed in the common areas of the property. Each tenant is responsible for its pro rata share of the property’s total CAM charges, which is typically equal to the tenant’s rented square footage of the total, rentable square footage of the property.

A common example of a CAM charge is snow removal and salting for a shared parking lot. Since all the tenants and the customers and clients use the shared parking lot, it is a common maintenance expense, and all tenants will share the benefit in having a parking lot free from snow, ice, and other debris, and therefore share proportionately in this cost.

CAM Charges can include different things so it is important to understand them. Typically, CAM charges are defined in the Lease, but may or may not include items such as management service or HVAC repairs. All investors involved in triple net leases should understand that CAM charges may include different functions in addition to the standard snow removal, cleaning, and common area maintenance. As the landlord, it is beneficial to negotiate the management fees and HVAC repairs in CAM charges, if possible. As the tenant, clearly the opposite stance is in your best interest.

Moreover, CAM Charges can change from year to year so, as the Landlord, it is important to have a provision in the Lease that allows you to increase the CAM charges if the expenses increase.

3.Tenants Generally May Review Landlord’s Financials Re Additional Rent

A triple Net Lease is advantageous for a Landlord because it passes most of the maintenance and operating costs to the tenants. However, Landlords should also keep in mind that in most triple net leases, the Tenant has the right to review the Landlord’s financials relating to the taxes, insurance, and maintenance fees to make sure they are accurate and account for any reconciliations. Therefore, all owners of commercial properties with triple net leases with tenants should understand that they may need to allow the tenants to review their books from time to time.

What is a Due-on-sale Clause and Why Does it Matter to Investors?

Many investors have asked me a variety of questions concerning a clause that is common in mortgages and promissory notes called a “due-on-sale clause”. A due-on-sale clause is a clause in a mortgage and/or promissory note that provides that a default may be declared and the loan may be called due (repaid in full) upon sale or transfer of ownership of the property secured by the mortgage without the bank’s consent. In other words, the bank has the right to demand full payment of the note if the property is transferred without the bank’s permission (this does not include a traditional closing where the bank is paid off and the lien released at closing).

…you may need to transfer your investments… into a limited liability company (or companies).

Edward Schenkel

Why should a real estate investor understand be aware of the due-on-sale clause in a mortgage? For several reasons. First, as an investor, you will want to make sure you are protected by keeping the property in a limited liability company so you are shielded individually if there is a lawsuit. This means that you may need to transfer your investments, which are currently held in your name, into a limited liability company (or companies). If there is a due-on-sale clause, such transfer may technically violate the clause. Accordingly, you should be aware that if you transfer the properties in a company without the bank’s consent, there is a risk the bank could declare that this is an act of default and call the loan. However, this is low risk since the bank’s primary concern is receiving the monthly mortgage payment and that the property is not wasting away. Also, if the bank did complain, you could transfer it back. Still, to be safe, it is recommended you either purchase the property in a corporate entity or that you obtain the bank’s consent before transferring the property to your company, even if it is a sole member limited liability company where you are the sole member.

This means that you will have more bargaining power to discuss the terms you want in and out of the loan documents.

Edward Schenkel

Second, a good reason to understand the due-on-sale clause is so you can negotiate it out of future deals, or at least negotiate room to transfer to companies where you own an interest. As an investor progresses in his or her career, he or she may find a good deal that involves seller or alternative financing. This means that you will have more bargaining power to discuss the terms you want in and out of the loan documents. Being aware of this clause means that you can either take it out, allowing you to freely transfer the Property to your companies or partners, or draft a due-on-sale provision that is more flexible and suitable to your needs.

Five Commercial Real Estate Contract Provisions that Every Commercial Real Estate Investor Should Know

Commercial Real Estate can be a great investment. However, commercial deals are often more complicated than residential. Everything from the due diligence to the contracts are more involved. That is why any investor who is contemplating a commercial investment should understand all the nuances of these types of deal before getting started. This post will talk about some of the different types of real estate contact provisions in commercial deals that every investor should understand before getting started.

Due Diligence Clause

The clause must be carefully drafted… so it is important to consult with counsel before signing.

Edward Schenkel

Due Diligence is important in any real estate acquisition, residential or commercial. However, in commercial, due diligence encompasses many more things and is more complicated. Accordingly, it is essential that the due diligence provision in commercial contracts is drafted broadly to allow the investor to inspect more than just the physical condition of the property. An investor should be entitled to conduct due diligence on zoning, environmental (including phase 1 and phase 2 testing), tenant leases, owner contracts, and the financials of the property. The clause must be carefully drafted to allow you to get out of the deal if any of one these are not satisfactory so it is important to consult with counsel before signing.

Permitting Contingency Clause

…it is essential to have a contingency clause in the contract…

Edward Schenkel

Unlike residential acquisitions, you may have plans to add an addition to the commercial property, construct a new building on the parcel, or move a new anchor tenant to the property soon after the closing. These plans may require some sort of zoning permit from the City or Town for your plan to legally materialize. Accordingly, it is important to determine if such a permit is needed. If important to your investment, it is essential to have a contingency clause in the contract that makes it clear that the closing is contingent on obtaining the permit. If you do not include this clause, you may be obligated to purchase a property without the ability to bring your vision to reality.

Financing Contingency Clause

…it is imperative to describe all financing sources in the contingency…

Edwards Schenkel

As with a residential deal, Commercial real estate contracts should have a financing contingency provision if financing will be used. However, financing contingency provisions in commercial deals may be more involved as there is creative and nontraditional financing often utilized in commercial deals that are not typically used in residential transactions. Therefore, it is important that the financing contingency in commercial deals is carefully drafted to reflect the particular financing that is being used. For example, if there is a combination of two private lenders combined with owner financing, it is imperative to describe all financing sources in the contingency so that the deal is expressly contingency on obtaining all of the necessary financing.

Estoppel Certificates

…a provision that entitles the buyer to estoppel certificates is imperative.

Edward Schenkel

A commercial deal will often involve the sale of the property with tenants in place. Accordingly, it is essential for the Buyer to confirm that the leases are in full force and effect; that there is no default on the lease payments; and that both the tenant and current owner are in compliance with the lease and there are no violations. Estoppel Certificates will allow the Buyer to close with an assurance that the tenants are not behind on the rent. Accordingly, a provision that entitles the Buyer to estoppel certificates is imperative.

Seller Representations

The seller representation should be clear…

Edward Schenkel

Seller representations and warranties are important in any real estate transaction, but particularly in commercial because there are different issues involved such as potential environmental concerns and different zoning issues. The Seller representations should be clear, and specifically note whether they are to the best of Seller’s knowledge and which representations survive closing. Common Seller representations and warranties include that the property is in compliance with the zoning and building regulations; that there are is no environmental contamination; that the leases, contracts, and financials provided to the Buyer are complete and accurate; and that the Seller (if a company) has the authority to enter into the contract.

In summary, commercial real estate can be a great investment but it is important to know all of the different issues before signing a contract for a commercial deal. Please ask any questions you here about commercial real estate contracts. 

The Top 5 things That Every Investor Should Know About Buying Foreclosures

Buying foreclosures is a great way for real estate investors to get bargain prices on properties. However, there are certain things that every investor should be aware of before buying foreclosures.

1. Foreclosure Auctions can be more complicated than you think. There are additional steps after the winning bid before you can close. Buying Properties from Strict Foreclosure is Easier.

In Connecticut, there are two types of foreclosures. If there is equity, the court will order a foreclosure auction and the property is sold to the highest bidder. If there is no equity or the property is underwater, there will be a strict foreclosure, where the owner and interest holders prior in right to the bank will get a chance to redeem the note, and if none do, the bank then becomes the owner.

…it is easier to buy foreclosed properties that have been foreclosed through strict foreclosure.

Edward Schenkel

From a legal perspective, it is easier to buy foreclosed properties that have been foreclosed through strict foreclosure. When the bank takes title by strict foreclosure, the bank owns the property and can enter into a contract with you directly at hopefully a bargain price. Buying a property already owned by the bank is easier than going through the auction process.

If there is equity, the court will order an auction where anyone can bid, including lienholders, the owner, other investors, and so forth. At the auction, the highest bidder wins the auction. However, all investors should know that is not the end of it. The proposed bid has to be approved by the court as reasonable, giving other parties (including the owner) a chance to object to the bid. Usually the court approves it, but not always. Then you may have done a lot of work for nothing. If the court does not approve the bid, another auction will take place.

Both foreclosure sales and strict foreclosures are good opportunities to get good deals. Investors should know that buying foreclosures after strict foreclosure instead of at auctions is a much easier process, and perhaps less risky.

2. The Property will be Sold As Is and No Disclosures. The Inspection is critical.

…the inspection is critical when purchasing foreclosures.

Edward Schenkel

The inspection is always important and is particularly critical for buying foreclosed properties. The banks will typically not provide condition disclosures and even if they did they would not be worth that much since the bank does not have extensive knowledge about the condition of the property. Similarly, the bank will not make any warranties as to the condition of the property and will sell “as is.” Therefore, the inspection is critical when purchasing foreclosures. Make sure you use a good inspection company.

3. You will likely Not Get a Warranty Deed

…title insurance is critical when buying foreclosures.

Edward Schenkel

The bank is usually unwilling to provide you warranty deed, which provides you with certain warranties concerning the title of the property. You will likely receive a special warranty deed or a quit claim deed, which provide you as the buyer with less protection. Therefore, title insurance is critical when buying foreclosures.

4. The Tenants may have the Right to Continue to Occupy the Premises

…you may be stuck with the tenants in the foreclosed properties until the end of the lease term…

Edward Schenkel

If there are tenants in the building or house, they may have certain protections depending on whether the lease is written or oral, the duration of the lease, and when the lease was executed. In short, you may be stuck with the tenants in the foreclosed properties until the end of the lease term in certain scenarios. This is something you should look into with the help of counsel, especially if you are planning rehab.

5. Tax Liens and other Liens on the Property – Beware.

Make sure you look into this and factor it into your decision to purchase.

Edward Schenkel

When purchasing foreclosures, only liens subsequent in right to the bank’s mortgage are extinguished. Therefore, prior liens, particularly tax liens, may still remain on the property after the foreclosure. Make sure you look into this and factor it into your decision to purchase.

Your Builder or Contractor Made a Mistake – What Claims can you make?

Many clients have approached me inquiring about claims they can make against a builder or contractor that performs substandard work. Unfortunately, builders and contractors make mistakes all the time through human error, cutting corners, or hiring the wrong subcontractors for the job. When things go wrong, sometimes the work is not up to par with standards in the industry while other times there are blatant violations of the building, fire, or zoning code. Either way, defective work is very problematic for property owners, particular those who paid significant sums of money and do not get the results they bargained for. What types of claims can you make against a builder or contract who performs shoddy work?

1.Breach of Contract

As a preliminary point, it is a good idea to have a written construction contract with your builder or contractor to protect yourself. There are a number of essential provisions to include in such contract, however it is imperative to make sure the scope is properly defined both in the main body of the contract and by attaching an plans or specifications, if possible. Other important provisions include warranties and requiring the builder to maintain adequate insurance. It is a good idea to review the contract with an experienced attorney to make sure you are protected.

…a written contract will be vital in bringing a breach of contract claim…

Edward Schenkel

If there is defective work, a written contract will be vital in bringing a breach of contract claim, so you can claim the work is not in compliance with the contract. If the plans are made a part of the contract, failure to comply with the plans is likely a breach of contract in itself. Similarly, if certain materials are called out, failure to use these materials may be a breach in itself as well. Often, a provision is included requiring the builder or contractor to perform in accordance with industry standards. If there is defective work, arguably there is a breach of this provision as well.

2.Negligence

If a builder or contractor performs defective work, you also may be able to bring a negligence claim. You may be able to bring negligence claims against all of the subcontractors that performed the defective work, not just the general contractor. Suing all the subcontractors in a breach of contract claim is more complicated since you likely only have a contract with the general contractor or construction company.

A builder is held to be under a duty to exercise a degree of care…

Edward Schenkle

In order to bring a negligence claim, you must show that the builder owed a duty of care, that duty of care was breached by failing to meet the standard of care, and that the breach was a proximate (foreseeable) and direct cause of the damages. A builder is held to be under a duty to exercise a degree of care which a skilled builder of ordinary prudence would have exercised under the same circumstances. Therefore, you will need to prove the hired builder did perform as a builder of ordinary prudence would have performed. At trial, you will likely need to call experts in the industry to demonstrate that your builder did not perform prudently and therefore breached the duty of care.

3.Breach of Warranty

You may also be able to bring breach of warranty claim against your builder for defective work, both express and implied warranted. An express warranty may be included in the contract by a builder in a construction contract, typically by making a representation about the quality of the work and providing a period of time in which the builder will fix any problems at no cost to the client. Often, a builder will provide a warranty that the work is performed in a workmanlike manner, meaning that it is up to industry standards. If the work is not up to industry standards, you may have a claim for breach of express warranty.

…a breach of implied warranty is another claim you may be able to make against a builder…

Edward Schenkel

There are also statutes that create implied warranties in new construction contracts. There are four implied warranties in such contracts: (1) an implied warranty that the construction improvement is free from faulty materials; (2) an implied warranty that the construction improvement was constructed according to sound engineering standards; (3) an implied warranty to construct in a workmanlike manner; and (4) an implied warranty of habitability at the time of delivery or the time of completion of an improvement if not completed when deed is delivered. There are certain exceptions, however a breach of implied warranty is another claim you may be able to make against a builder for faulty work in new construction.

4.Misrepresentation

If the builder or contractor made a misrepresentation either in the contract or orally to you prior signing, you may also be able to make a claim for misrepresentation. For example, if a contractor represented it would include certain materials in the work performed and did not, this may amount to a claim of misrepresentation. A misrepresentation may also allow you to make another claim under the Connecticut Unfair Trade Practice Act, which allows recovery from businesses that engage in unethical, immoral, and/or unscrupulous conduct.

…you may be entitled to additional damages…

Edward Schenkel

As you can see, there a number of different types of claims you should think about if your builder or contractor performed defective work. It is a good idea to think about filing multiple claims in a lawsuit in case one of them fails for one reason or another. Moreover, you may be entitled to additional damages for certain types of claims v. others, which will be discussed in another post.

Do I Need an Operating Agreement For My Limited Liability Company?

I have many clients who are investors who ask for information about setting up a Limited Liability Company to hold the property, which is always recommended to protect yourself. However, most clients do not ask the appropriate next question – do I need an operating agreement? If you have a partner or partners, I would strongly recommend it. An operating agreement spells out who has the authority to do what, what type of action requires a unanimous vote, what capital contributions each partner is contributing, how the company will take on new members, along with a number of other items. Addressing this now can prevent problems in the future.

Addressing this now can prevent problems in the future.

Edward Schenkel

I have litigated cases concerning partners who are fighting over how to manage the property or whether to sell the property, and so forth. An operating agreement can prevent problems down the road and can help maintain a smoothly operated partnership.

When considering an operating agreement, here are some of the more important things to think about.

1. Do you want the real estate company to be “member managed” or “manager managed”

In Connecticut, a limited liability can be set up as a “member managed” company or “manager managed” company. A member managed company generally requires the members to vote on taking action. A manager membered company is essentially set up so that a manager is vested with authority to run the operation of the company and the other members are more or less passive investors.

An operating agreement can be used to specially dictate what authority each member has in the day to day operation (e.g can unilaterally approve expenditures under $100) and what type of actions require a majority or unanimous vote (e.g. expenditures over $1,000 or the decision to sell or buy property). Similarly, an operating agreement can provide how a manager’s authority is limited and what requires a unanimous or majority vote of the members. Whether to make the company manager or member managed depends on the company.

2. Breaking a tie vote if two members

I have set up a number of limited liability companies for two member companies. While having a less amount of members may have a number of benefits, such as making decisions faster than larger companies, there is one issue that the two members must decide – what happens if there is a tie vote? This is something that each two member (or even number member investment team for that matter) should think about. One suggestion is if there is an individual that both trust, that individual can serve as a tie breaking vote.

3. Taking on new members

Another decision an investment team should think about is how the company will decide to take on new members. Perhaps the members do not want to allow the possibility of new members and if so such should be stated clearly in the operating agreement. If the members do want to allow the possibility of taking on new members, this should be stated in the operating agreement. If they do want to allow the possibility, the members should state what is required to take on new members (e.g. majority vote; unanimous vote, etc). This will prevent problems down the road.

4. Conveying a member’s interest

Should each member be allowed to convey their interest without any restrictions? This could be problematic for a member who thought s/he would be working with other members. Therefore, it a good idea to clarify whether each member has the right to sell their interest without restriction or whether the other members should have the right of first refusal.

5.  Who is responsible for What / Who has Authority to do What.

Another very important thing to discuss is what members have the authority to do what. If every little action of the company required a majority or unanimous vote, it could make operating the company cumbersome. That is why it is a good idea to spell out what members can do without the other partners consent, typically the smaller stuff (e.g. contract with contractors for expenditures under $1,000, etc.) and what requires a unanimous consent (typically the larger stuff such as taking on a new mortgage or buying new real estate). The more detailed this part of the operating agreement, the less likely you will have problems down the road.

6. Duty not to compete?

Many investors have their hands in different things, many involving real estate. Sometimes, a partner can be a partner in a different real estate investment company. Do you and your partners want to have any restrictions on competition if a member owns interests in other companies? Maybe or maybe not. It is worth discussing with your partners.

My Neighbor Claims Part of My Land, Which I Have Owned For Decades, Belongs to Him. After Surveying the Land, He is Actually Right. What Can I Do? You May Have a Claim to Keep That Land Under The Legal Doctrine of Adverse Possession.

The following scenario happens more than you would expect. You find a home after years of looking and it is perfect. You purchase the home and start a family. You mow the lawn, plant trees, make a garden, and work hard to make sure that every inch of your property looks beautiful. Your property is separated from your neighbor’s lot by an old fence that was put up by the previous owners. You have never had the property surveyed and your neighbor has not either. You believe the fence was accurately erected along the boundary line and have no reason to question otherwise.

Many years later, your neighbor plans to sell her property to an eager purchaser. The purchaser decides to have a survey done of the property and is surprised to learn that the fence separating your properties was not erected along the boundary line, as you both had believed. In fact, the fence was actually erroneously erected twenty-five feet inward from the boundary line onto your neighbor’s property, which means that a twenty-five foot strip of land which you had thought was yours is actually part of your neighbor’s lot. You planted trees and a garden in this strip for years and spent many, many hours maintaining this area. You even constructed a play scape for your kids in this twenty-five foot strip area and watched your kids swing for years. However, after your neighbor provides you with a copy of the survey, you realize that the garden, trees, and play scape are all on your neighbor’s property, and she is now demanding that you remove everything and move the fence to accurately reflect the boundary line. This would result in you losing a 25 foot strip of your property! You sympathize with your neighbor, but you and your family love that strip of land and it has become an integral part of your Property over the years. What are your options? What can you do?

You may be able to legally acquire that strip of land…

Edward Schenkel

You may be able legally acquire that strip of land under a theory of a legal doctrine called Adverse Possession. Connecticut law recognizes Adverse Possession as a mechanism to acquire legal title to Property. If you can establish title of land by Adverse Possession, you will own the land the same as if you had acquired the land by deed from the owner. However, in order to establish title by adverse possession, you must establish the necessary elements by submitting evidence to the Court.

The use must also be exclusive, and shared dominion by you and your neighbor will likely defeat any claim that you acquired the land by adverse possession.186 Conn. 490, 498 (1982). First, the owner of the land must be ousted from possession and kept out uninterruptedly for fifteen years under a claim of right. This essentially means that the possession and use of the land must be without permission and you must treat the land as your own. Roche v. Fairfield, The following are the elements that you must satisfy to establish a claim that you have acquired land through adverse possession. The elements are established by statute and reiterated by case law in cases, including the Supreme Court case.

In order to make such a claim, you must file… Action to Quiet Title…

Edward Schenkel

The other elements that you must establish to claim title to land through the doctrine of adverse possession are that your use must be uninterrupted, open, visible, and exclusive, for a period of fifteen years. While each element has been articulated in more detail by the Courts, this generally means that your use of the land must be commonly known and must also be continual. The Courts will examine the specific facts of the case to determine whether your use was commonly known and continual, and look at things like maintenance, frequency of use, and other factors. In a case like the example above, a strong claim may be made that the use was commonly known and continual if the claimant maintained and used the property frequently.

Therefore, if you find yourself in a situation like the example discussed above, you need not forfeit your strip of land to your neighbor notwithstanding an erroneously placed fence if you can prove the elements of adverse possession. In order to make such a claim, you must file an action the Court called an Action to Quiet Title, which is a cause of action used to settle title disputes. If you can prove your case, you will receive an order from the court allowing you to acquire title to the strip of land and the integrity of your lot will be preserved.

The Town Has Denied My Building Permit and Will Not Let Me Develop My Undersized Lot. Are they Right? Actually, the Town May Be Wrong.

Over the years, more than a few clients have approached my firm with a similar dilemma: The Town will not permit the client to develop an undersized lot and they would like my opinion whether the Town is right or wrong. The answer? Sometimes the Town is right, often the Town is wrong.

The client is surprised when the town will not permit him/her to develop the lot.

Edward Schenkel

The clients’ stories behind the lots are usually similar. The lot is an undersized lot that does not conform to the minimum area requirement of the current zoning regulations. In other words, the lot’s size is too small to comply with the current zoning regulations. The lot has been owned by the client’s family for many years and it may have been passed down through generations. The client believed that s/he would have no problem developing the lot because it is an old lot that either predates zoning or it complied with the regulations before the minimum lot area was increased by amendment. The client is surprised when the town will not permit him/her to develop the lot. That leads them to my firm to ask what is going on.
Whether a client may develop an undersized lot that is non-conforming as to the minimum area depends on several factors. First, if the lot was created as part of an approved subdivision or re-subdivision plan, the lot should be treated as a legally non-conforming lot and it may be developed, notwithstanding any subsequent changes in the zoning or subdivision regulations. In other words, since the lot complied with the subdivision and zoning regulations at the time the subdivision plan was approved, the lot’s approved status is vested and should continue after the Town changed the zoning regulations to increase the minimum area requirements in that zone. Therefore, even though the lot does not comply with the minimum area of today’s current zoning regulations, the Town should allow the lot to be developed.

Equally as significant, Conn. Gen. Statute § 8-26a provides that the owner of such a lot may use the zoning regulations in effect at the time that the subdivision map was approved to develop the lot. This is significant and may be overlooked by the town’s Planning and Zoning Dep’t. Whether the town applies the current regulations or the regulations at the time that the subdivision map was approved may determine whether the lot may be developed. For example, the current zoning regulations may be much more restrictive in terms of setbacks, coverage requirements, height requirements, and so on, compared with the zoning regulations in place back when the subdivision map was approved. Therefore, it may be impossible to develop the lot under the current more restrictive regulations, but may be developed if the town applied the regulations in effect at the time that the subdivision map was approved.
If the undersized lot was not part of a subdivision map, whether the lot may be developed becomes more complicated and may depend on local zoning ordinances. The Connecticut General Statutes do not protect a vacant lot that is not part of a subdivision map in the same way that it protects lots that were part of approved subdivisions. In other words, if a vacant lot is part of an approved subdivision map, it has a vested right to be developed under the zoning regulations at the time the map was approved, notwithstanding any subsequent changes in the regulations. If the lot is not part of a subdivision map, for example if it predates zoning, there is no such protection from changes in the zoning regulations and you may not be able to develop it.

…if you cannot develop under the current regs, you are free to apply for a variance…

Edward Schenkel

However, the Town may have a zoning ordinance that does protect such undersized lots as legally non-conforming lots that may be developed under the current regulations, notwithstanding the fact that the lot was not part of a subdivision map. Many towns do have such regulations, but it is important to review the specific regulations to understand whether these lots may be developed. Significantly, since these lots are not part of an approved subdivision plan, they must be developed under the current zoning regulations, which may make development impossible if the current regulations are more restrictive than before. Of course, if you cannot develop under the current regs, you are free to apply for a variance (an exception to certain regulations), which will be the topic of another post.
In summary, whether you can develop a lot that does not conform to the minimum size requirements is a complicated issue and largely depends on the history of the lot. If the lot was part of a subdivision plan, you should be able to develop it and apply the zoning regulations in effect at the time the subdivision plan was approved. If you own an undersized lot that was not part of an approved subdivision plan, development becomes more challenging and whether you can develop it will depend on the current zoning regulations.
So if you have been told by your town that you cannot develop your lot because it is too small, they may be wrong. It is worth taking a close look at the history, statutes, and the regulations.

Essential Legal Issues In Purchasing Multi-Family Investment Properties

Investing in multi-family property is a great way to build wealth. Multi-families are also great first investments for new investors looking to make a smaller purchase to get their feet wet before buying something bigger. However, when buying a multi-family property there are a number of legal issues that every real estate investor should be aware of that do not arise when purchasing a condominium or single-family home. I have outlined three important issues to consider when purchasing a multi-family property.

1.ZONING: IS THE PROPERTY A LEGAL MULTI-FAMILY PROPERTY?

One of the first things I advise clients buying multi-families is that they need to understand whether the property is a legal multi-family. This comes in two forms: it must be either a permitted use under the current zoning regulations or a “legally non-conforming” property. If it is neither, then the purchaser may be in for serious problems down the road. That is why every investor should understand the zoning issues that can arise when purchasing multi-family property and how to navigate through them.
If the multi-family property is a permitted use under the zoning regulations, then you can rest comfortably that the property’s use does not violate the zoning regulations. However, what if the multi-family is in a zone where multi-family property is not a permitted use? Is it an illegal use and therefore a buyer should shy away from the purchase? Not necessarily.
The multi-family property may be a legally non-conforming use. In the world of land use law, a property may not be a permitted use under the current zoning regulations but multi-family may have been a permitted use in the past.

A property is considered legally non-conforming if the use complied with the zoning prior to the date that the town changed the zone…

Edward Schenkel

A property is considered legally non-conforming if the use complied with the zoning prior to the date that the town changed the zone to remove such use from the zone. For example, if a multi-family was a permitted use in the R2 Zone in 1999 and the town thereafter removed multi-family from the R2 zone, as long as the property was in use as a multi-family prior to the change of zoning it can continue as a multi-family property after the change of zoning as a “legally nonconforming” property.
However, it is possible that an owner illegally converted a property to a multi-family property in a zone that does not permit it. This would mean the property is an illegal multi-family and a property you do not want to purchase. This is why it is important to explore the zoning and the history of the property to make sure you do not purchase an illegal property. As long as the property is in a zone that permits multi-family or the property is legally – nonconforming, you can safely purchase the property. Make sure you ask your attorney these questions during your due diligence.

2.PROTECT YOURSELF: CREATE A LIMITED LIABILITY COMPANY (LLC) TO LIMIT YOUR LIABILITY

Buying a multi-family, or any property with tenants, is a transaction that comes with risks and potential exposure to liability that are not inherent in purchasing a residence for you and your family. For example, what if a tenant slips and falls and files a lawsuit against you arguing that her injuries are a result of you failing to comply with your obligations under the lease? What if a tenant accidentally starts a fire that spreads and causes damage to other homes in the surrounding neighborhood? These are examples of the inherent risks in buying multi-family properties. This is why it is imperative to do everything you can to minimize your liability if something goes wrong. One important thing you can do to limit your liability is to create a Limited Liability Company (LLC) and take title in the name of the LLC.
Taking title in the LLC instead of individually will limit your liability to the value of the real estate and will insulate you from personal liability (there are several narrow exceptions to this not discussed in this post). Since the LLC is the owner of the property, any lawsuit concerning the property properly names the company as the defendant and not you individually. Since the LLC’s only asset is the real estate, the maximum exposure from any lawsuit is the value of the real estate. In other words, any judgment obtained by a tenant, neighbor, or other potential plaintiff may only look to the company’s assets to satisfy the judgment which is the real estate. If the property was owned by you individually, a plaintiff could look to the real estate and other personal assets (bank accounts, other real estate, etc.) to satisfy the judgment.

You should think about creating an operating agreement which will delineate the authority of each member…

Edward Schenkel

Setting up the LLC may seem like a simple process but there are various things to consider. For example, if you are creating the LLC with more than one member, you should think about creating an operating agreement which will delineate the authority of each member; whether authority to manage the property will be vested in a manager; the process that more significant decisions are made (for example, will major decisions like whether to sell require a unanimous vote?); the process that the company should utilize in taking on new members; and how the company will decide a tie vote. Drafting a detailed operating agreement will prevent problems between members in the future.
In short, every investor should strongly consider setting up a LLC and taking title in the name of the company to minimize liability. If your LLC has more than one member, creating a detailed operating agreement will prevent problems between the members in the future.

3.TENANTS AND LEASES: DO YOUR DUE DILIGENCE

When buying any property with tenants, it is essential to do your due diligence with respect to the tenants and the leases. As an investor, you want to make sure that the tenants are current on the rent. You do not want to purchase the property only to learn that the tenants are six months behind on the rent and are vigorously fighting an eviction lawsuit. Therefore, it would be prudent to request that the seller sign a document called an estoppel certificate. This document will require the Seller to make a representation that the leases are in full force and effect and that the tenant is current on the rent. This will provide you some assurance that the tenants are not behind on the rent. Moreover, having estoppel certificates signed by the Seller will give you an additional cause of action for misrepresentation if in fact the tenants are not current on the rent.

…it would be prudent to request that the seller sign a document called an estoppel certificate…

Edward Schenkel

It is also prudent to review each lease with your attorney. You should be aware of the termination date of each lease and whether the tenant has the option to renew. If the leases are to terminate a month after closing, you should be prepared for the possibility of vacancies. Moreover, if the tenants have an option to renew, this may interfere with plans to lease to other tenants. Similarly, some leases have options to purchase or lease to own arrangements. This type of provision is problematic for any investor as the tenant would have the option to purchase the property after you closed. You would likely not want to move forward with the investment if there was such a provision in any of the leases. This is why it is imperative to review each lease thoroughly to make sure you know what you are getting into.
In summary, it is in your best interest as a real estate investor to carefully review each lease before purchasing an investment property. In addition, having the seller sign estoppel certificates will provide you additional protection in the event the tenants are in fact behind on the rent.