navigating the real estate road avoiding pitfalls and potholes march 2015 ss

Polsinelli PC. In California, Polsinelli LLP

Navigating the Real Estate Road: Avoiding Pitfalls and Potholes

Philip W. Bledsoe William R. MeyerKelly D. Stohs Rita D’AgostinoEmil Hirsh


PRELIMINARY AGREEMENTSAND THEIR ENFORCEMENT

Presented By:Emil Hirsch

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TAKEAWAYS ON DEALING WITH NON-BINDING LETTERS OF INTENT

� Instead of calling the document an “Agreement” or a “Contract,” use the words “Proposal” or “Term Sheet” or “List of Proposed Points.”

� Use “proposed,” “subject to” and “preliminary” throughout the document.

� Refer to a binding agreement that may be executed in the future and also refer to the possibility that negotiations may fail.

� Do not include essential terms of an agreement such as price, date of delivery or closing date. However, keep in mind that failing to include essential terms may defeat the purpose of a letter of intent; therefore, each party must weigh the risks and benefits of including such information before making a decision.


TAKEAWAYS ON DEALING WITH NON-BINDING LETTERS OF INTENT

� One of the initial paragraphs of the letter of intent should clearly state that it is nonbinding and creates no binding obligations, including no duty to negotiate in good faith. For example:

“This document is only a list of proposed points that may or may not become part of an eventual contract. It is not based on any agreement between the parties. It is not intended to impose any obligation whatsoever on either party, including without limitation an obligation to bargain in good faith or in any way other than at arms’ length. The parties do not intend to be bound by any agreement until both agree to and sign a formal written contract, and neither party may reasonably rely on any promises inconsistent with this paragraph. This paragraph supersedes all other conflicting language.”


TYPE I – LOI CONTAINS A COMPLETE AGREEMENT

� TYPE I – the parties have reached complete agreement (including the agreement to be bound) on all issues perceived to require negotiation.̶ The only thing left to be done is a more elaborate formalization of

the agreement.


TYPE II – LOI CONTAINS ONLY A PARTIAL AGREEMENT

� TYPE II – the agreement expresses mutual commitment to a contract on agreed major terms while recognizing the existence of open terms that remain to be negotiated.


HOW DO COURTS TREAT THE ENFORCEABILITY OF TYPE I AND TYPE II PRELIMINARY AGREEMENTS?

� TYPE I – Courts readily enforce this type of preliminary agreement, because the second stage [informal memorialization] is not necessary; it is merely considered desirable.

� TYPE II – The existence of admittedly open terms does not necessarily preclude enforcement. Enforcement is ordered because the parties are allowed to have accepted and entered into a mutual commitment to negotiate together in good faith in an effort to reach a final agreement within the scope that has been settled in the preliminary agreement.


HOW DOES THE NATURE OF THE SPECIFICPERFORMANCE RELIEF AWARDED DIFFER

BETWEEN THE TWO TYPES OF AGREEMENTS?

� TYPE I – Full specific performance will be ordered so that for instance a defaulting seller will be ordered to transfer the underlying asset to the buyer.

� TYPE II – the specific performance may be limited to requiring the defaulting party to return to the “negotiating table,” i.e., the enforcement is the obligation to negotiate the open issues in an attempt to reach the alternative [i.e., ultimate] objective within the agreed framework. If a definitive agreement was prepared already but the drafting party refused to sign and tried to walk away from the transaction, the trial court will order to specific performance requiring the defendant to sign the definitive agreement.


WILLINGNESS OF COURTS TO ORDER SPECIFIC PERFORMANCE OF PRELIMINARY AGREEMENTS TO LEASE

Greater Leniency Towards Enforcement Of Agreements Or Options To Lease Which Contain Open Terms� Option contract between shopping center operators who

promised a department store a lease to become one of the contemplated center’s major tenants with rental and terms at least equal to that of any other major department store in the center.


THE LOI AND THE OBLIGATION TONEGOTIATE IN GOOD FAITH

� If your client’s intent is merely to prevent the other party from “shopping the deal” then make sure that the language of the LOI does not go beyond this.

� An implied covenant of good faith and fair dealing will be found only if an LOI is construed to be a binding agreement.

� A covenant of good faith negotiation can be expressly written into an LOI that is designed to be non-binding. Breach of such pre-contractual covenant to negotiate in good faith can be enforceable.


RESTRICTIVE COVENANTS IN COMMERCIAL LEASES

Presented By:Kelly Stohs


RESTRICTIVE COVENANTS

� Litigation regarding Restrictive Covenants– Disputes typically arise from definition or scope

� Impact of court’s finding that it is “ambiguous”

– Disputes often escalate quickly; polarize and entrench the parties� Injunction hearings = early mini-trial

� Allegations of “material breaches” or fraudulent inducement

� Damages difficult to prove; fights over liquidated damage provisions

– Threaten viability of smaller tenants

– Effect on reputation of the parties


LESSONS FROM THE LITIGATION

� Golden Rule: When drafting, be specific .– What is permitted? What is prohibited?

– Define Relevant Terms

� Litigation examples: – Does “sandwich” include burritos? Gyros?

– Do “groceries” include dry goods or home goods?

– Does “hardware store” include an appliance repair store that also sells tools?

– Is the “mission” of an alcoholic frozen drink bar “inconsistent” with the mission of a hospital?

– Be cognizant of how the same terms are used in other provisions in the contract; avoid inconsistencies


LESSONS FROM LITIGATION

� Beware of Restrictions based on Gross Sales

– Deceivingly objective

– Difficult to prove amount of product the alleged violator sells

� Beware of Restrictions based on Floor Area

� Identify Prohibited Competitors with Caution

� Do not only except existing tenants by name


LESSONS FROM LITIGATION

� Know the restrictive covenants

� Monitor business operations

– Waiver defense

– Estoppel defense

– For unanticipated changes in business, you may need to amend the restrictive covenant


DAMAGES IN REAL ESTATE LITIGATION

Presented By:Phil Bledsoe


Damages in Real Estate Litigation

� The best time to think about real estate damages is:

– A) After the Breach?

– B) Before the Deal is Done?



� Generally, the parties to a contract get to decide what can—or what cannot—be recovered.

� There can be significant state to state variations.



� Damages are just one of the available remedies.– Compensatory-Out of Pocket– Consequential– Liquidated

– But don’t forget about Specific Performance and Injunctive relief.



� Often requires a number of subtle considerations.

� Two examples:– Taking possession is not automatically a

termination in a defaulted lease.– The date of breach can really matter in a

sales contract.

� What the business goal is matters most.



� Duty to Mitigate-taking reasonable means to avoid or minimize the damages resulting from the breach.

� Was not always the rule in real estate litigation.

� Is now the rule generally.� The battles are about waiver.



� Duty to Mitigate waivers.

– A matter of negotiations, unless…– The state has said cannot be waived

�Some by court case�Some by statute



Mitigation questions:Does it require me to spend money?Does it apply to liquidated damage?How does it affect the guarantee?



� Two examples

– Ground lease case

– Extended negotiation case


Liquidated damages

Presented By:Bill Meyer


What are liquidated damages?

– An attempt by the parties to decide damages when actual damages are uncertain or will be difficult to quantify

– An agreement on damages before there is a dispute

– A fair pre-estimate of the likely loss that could occur as a result of a breach

– Most common in real estate, construction, and service contracts


What aren’t they?

� .

– Punitive, punishment

– Damages that are greater than the likely actual harm done by a breach

– Damages that are disproportionate to the actual harm


Purpose

– Certainty and predictability– don’t leave it up to a court!

– Protection against a delay in performance or lack of performance

– Potential limitation of liability- without liquidated damages you may be exposed to greater liability

– Hopefully provides a limitation of litigation over an issue


Considerations

– Be careful how you draft a liquidated damages clause� Upfront

– Try to account for likely damages as of the time you enter the contract– This requires you to think about what your damages are likely to be and then avoid the

temptation to ask for more– A liquidated damages clause does not automatically waive other damages so consider including

a waiver of consequential damages (i.e. lost rent, lost opportunity, etc.). You do not want to be subject to both

� When amending a contract– Make sure you do not amend your liquidated damages into being a penalty

� After a breach– Make sure liquidated damages are not more favorable than actual damages

– Know the laws in your state� State by state can vary, for example, in New York liquidated damage clauses cannot be at the election

of a party or they are deemed to represent an intent to penalize� Some states require a cap on liquidates damages, some states require liquidated damages to be the

sole remedy, some states require time to be of the essence

– Alternative: performance bonus for timely completion


What if your liquidated damage provision is unenforceable?

– Typically traditional damages are available. This can be good or bad

– Do you have a waiver of consequential damages? Check to see if your state will enforce it. Some states void a waiver of consequential damages if a liquidated damages provision is unenforceable; others do not


Final thoughts

– Make it fair

– Don’t ignore it when amending

– Don’t try to punish!


ATTORNEY FEE PROVISIONS IN REAL ESTATE CONTRACTS AND LEASES

Presented By:Kelly Stohs


ATTORNEY FEE PROVISIONS

THE AMERICAN RULE

A party is responsible for its own fees and not the opposing party’s fees

regardless of the outcome of the dispute.

2 EXCEPTIONS(1) statutory fee-shifting provisions

(2) contractual fee-shifting provisions


ATTORNEY FEE PROVISIONS

� Generally enforceable– Caution: most residential landlord/tenant acts prohibit AF

provisions

� Courts have less discretion under contract provision (than statutes)– But may decline to award fees where “inequitable” or

“unreasonable”

� However, Court may not go beyond terms of the contract. – Dispute must be the type intended to be covered by the AF provision.


3 TYPES OF AF PROVISIONS

1. ENFORCEMENT OR DEFAULT PROVISION(Enforcement by Party A when Party B defaults)

Example: “PARTY B agrees to pay all court costs and reasonable attorney’s fees which may be paid or incurred by PARTY A in enforcing the covenants, conditions, agreements, and obligations [in the event of a default by PARTY B under this Agreement].”

– Not limited to breach of contract� includes specific performance, declaratory judgment, rescission of

contract or enforcing contract through injunctive relief� May include successfully defending claims� But may exclude tort claims

– Multiple contracts for same transaction – specify if you want them construed together for AF purposes

– Beware of statutes that make 1-sided provision reciprocal (CA)



2. LITIGATION PROVISIONExample: “PARTY B agrees to pay all reasonable costs, expenses, and attorneys' fees incurred by PARTY A in any litigation between the parties arising out of or in connection with this Agreement or the construction or enforcement thereof.”

– If you want to include fees associated with mediation or arbitration, specify that.

– Make sure it’s broad enough to include torts– Broaden scope to include “any suits, disputes,

controversies, actions (including those for injunctive and declaratory relief), or litigation, relating to, arising out of, or based on the RE transaction, including on appeal.



3. PREVAILING PARTY PROVISIONExample: “In the event of any litigation arising out of this Agreement, the prevailing party shall be entitled to receive from the losing party an amount equal to the prevailing party's costs incurred in such litigation, including, without limitation, the prevailing party's costs and attorney's fees.”

– Includes successfully defending claims– Where claims and counterclaims, court considers

amount of recovery and avoidance of liability� Who received greater relief?� May be party who did not get money judgment� Where evenly divided, there may no prevailing party

– May include fees on appeal, in certain circumstances


PRACTICAL CONSIDERATIONS when drafting AF provisions

� Analyze scope of the AF provision carefully– Is your client more likely to sue or be sued?

� If more likely to sue: – Consider using an enforcement provision– Broaden to include torts or related actions arising out of

the transaction, appeals– Do not limit to lawsuits/judgments

� If more likely to be sued: Don’t include one or use prevailing party provision

� Consider applicable state statutes– If the provision is one-sided , does a statute make it reciprocal?

– If a residential lease, is the AF provision prohibited by RLTA?


AMOUNT OF FEES

� Only entitled to “reasonable” fees– Court has discretion to determine what is reasonable

– Caution: Award may be less than amount client actually incurred in litigation

– Where victories and losses are somewhat even, there may be no prevailing party

– Where AF provision specifies amount – may be unenforceable as penalty

� Drafting Tips� Try to reduce (but not eliminate) risk of reduction by court –

draft AF provision to include “actual” fees

� If specifying amount, make sure it has reasonable basis


Contact Information

� Philip W. Bledsoe

– [email protected]

� Kelly D. Stohs


� Emil Hirsch


� William R. Meyer


� Rita M. D’Agostino


Polsinelli PCwww.polsinelli.com


Polsinelli provides this material for informational purposes only. The material provided herein is general and is not intended to be legal advice. Nothing herein should be relied upon or used without consulting a lawyer to consider your specific circumstances, possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an attorney-client relationship.

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navigating the real estate road avoiding pitfalls and potholes march 2015 ss

Real Estate

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