Thursday, September 30, 2010

Leasing Practice Point: Signage and Advertising

September 30, 2010

Article By: Dorothea W. Dickerman, Ilene A. Baily and Sarah H. Cohn

Tenant signage and advertising rights generally are among the least understood and most poorly negotiated points, yet they are among the greatest sources of landlord and tenant disputes in today's commercial, industrial and retail leases.

Many landlords are surprised to learn of the general rule that a tenant has a right – provided there is no lease provision to the contrary – to place signage on the outer walls of its demised premises and with very few limitations (except as may be provided in applicable law or covenants and restrictions governing the particular property or municipality).

The reason for this broad entitlement is that the law generally does not distinguish between the exterior and interior portions of the leased premises – these issues are typically dealt with by contract. This, however, is precisely why choice of language in leasing is critical, and explains one reason why most multitenant leases define and delimit the leased premises so as to either exclude completely, or severely limit, the use of exterior walls and roofs.

Broad exclusionary language (e.g., "no sign shall be placed anywhere on the premises without the prior written consent of landlord, which consent shall be in landlord's sole and absolute discretion") is wonderful for a landlord, and depending on the size or reputation of the tenant, may be entirely appropriate for a particular leasing situation. For a landlord, control over signage can be critical to controlling the aesthetic character of a particular project and in keeping other tenants happy. The above language is, nonetheless, becoming the exception rather than the rule.

In addition to landlord considerations, many new or recently approved projects have limitations placed upon them by municipalities – design review boards, signage packages, and other approval hurdles all enter into the equation. However, from a tenant perspective, failure to adequately address and/or provide for signage and/or advertising can be detrimental if not fatal to the success of a business, particularly a new business. There is no one simple, catch-all provision to be included in every lease that will address each situation.

That said, there is a relatively simple list of items that landlords and tenants should at least consider, if not directly address, in any lease where signage and advertising are at issue. These include: placement of signs (whether it be on the exterior of buildings, including roof parapets, or simply outside demised premises); size and structure of signage; co-location of signage with other tenants and a mechanism for resolving any disputes (critical in a multitenant context); ability to handle franchise requirements (in the case of national businesses such as restaurants and other similar services); advertising or placement on business directories within lobbies or other common areas (and who pays for any updates); window displays (sale advertisements and the like, particularly in the retail and restaurant context); and the issue moving signs upon the departure (thorough lease expiration or otherwise) of tenants with perhaps more advantageous signage locations and terms.

What all of this means is that parties should keep the issue of signage and advertising paramount in their negotiation strategy, as early as the letter of intent stage and certainly at the point of lease negotiation. A project, and individual tenants, can thrive or fail based upon what should be a simple issue. But the precise language used in leases, and managing expectations on both sides, is critical in this context.

The relative negotiating positions of the parties will certainly determine to a large extent the final agreement, but it is clear that as with most lease issues, virtually everything is negotiable. It is also the case that, particularly in the context of multiuse projects and urban developments, the nuances of this issue can become as important as more traditional concerns.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Monday, September 27, 2010

Lease Insurance Clause for Green Buildings and LEED Certification

September 27, 2010

The following insurance clause is one prepared from a landlord's perspective. Although some lease agreements obligate the tenants to pay their proportionate share of the insurance costs by lumping them into the common area maintenance charge provisions of the lease, other lease agreements carve out insurance and require tenants to pay their proportionate share of premiums in a separate clause. In either instance, if the building is green-certified, the landlord should assure that this clause requires the tenant to pay its proportionate share of the premiums for broad coverage that will permit the reconstruction of the damaged or destroyed building to a level of green certification that is equivalent to its original level of green certification. The clause below requires the tenant to pay its pro rata share of a very broad level of coverage; however, it does not obligate the landlord to maintain this coverage. Of course, this clause addresses only casualty coverage and does not address all liability or other insurance for which a tenant must reimburse the landlord under a lease agreement.

(a) Casualty Insurance. The Tenant shall pay the Landlord, as additional rent, either upon demand or, in the Landlord's discretion, as provided in subparagraph (b) below, the Tenant's Proportionate Share of the Landlord's premiums for Property Insurance (Special Form). This coverage may include such coverage and endorsements as the Landlord shall determine in its discretion, including, without limitation, rent insurance, water damage insurance, building ordinance coverage, vandalism and malicious mischief insurance, flood insurance and war and terrorism insurance, as well as any other coverage that may reason-ably be required by a mortgagee of the Landlord. The Tenant acknowledges that the Building on the Property, of which the Premises is a part, has been certified as [insert rating] under the U.S. Green Building Council's Leadership in Energy and Environmental Design ("LEED") system. Without limiting any of the foregoing, the coverage obtained by the Landlord may include, without limitation, coverage and endorsements that will cover the cost to reconstruct the Building in a manner that shall enable the Building to be certified as [insert rating] under the LEED system; or if the LEED system no longer exists, a similar rating under a then existing equivalent rating system. Such coverage may include, without limitation, the following risks and/or losses: (i) the additional cost of upgrades due to a change in applicable green building standards; (ii) losses associated with the loss of a LEED certification, including government tax benefits, utility credits, and other financial incentives; (iii) additional debris removal costs associated with recycling in lieu of landfill disposal; (iv) the cost to hire a LEED accredited professional, or a then similarly qualified professional, to oversee Building design and construction; (v) the added expense to retain a qualified engineer to properly commission the Building in order to ensure that the Building's systems are designed, installed, and tested to ensure their performance according to the design intent, their proper alignment with one another and their operation at peak performance; (vi) registration and re-certification fees to re-certify the Building as [insert rating] under the LEED system, or if the LEED sys-tem no longer exists, a similar rating under a then-existing equivalent rating system; (vii) additional business interruption loss during the extended period required for re-certification as [insert rating] under the LEED system, or if the LEED system no longer exists, a similar rating under a then-existing equivalent system; (viii) the cost to reconstruct a vegetative roof; (ix) the cost to obtain and reconstruct any alternative energy producing system existing at the time of the casualty; (x) the cost of air testing as well as the cost to flush out the reconstructed space/Building with 100% fresh air; (xi) the cost of obtaining alternative energy during the interim construction period; (xii) the loss of income if alternative energy producing equipment was sending surplus power to the public utility power grid; and (xiii) additional soft cost expenses such as additional interest expense, additional legal, accounting, and architectural expenses, and lost rental value for the added period of construction attributable to green development requirements. This insurance may (A) name only the Landlord and the Landlord's mortgagee, if any, as the insured and provide that any loss shall be payable to the Landlord and the Landlord's mortgagee, if any, as their respective interests may appear; (B) be in an amount equal to the full replacement cost of all buildings, improvements, alterations, additions, and replacements now or hereafter on or at the Property; (C) provide that no act of the Tenant shall impede the right of the Landlord or the Landlord's mortgagee, if any, to receive and collect the insurance proceeds; and (D) provide that the right of the Landlord and the Landlord's mortgagee, if any, shall not be diminished because of any additional insurance carried by the Tenant for the Tenant's own account.

(b) Insurance Escrow. At the option of the Landlord, which the Landlord may exercise at any time, and from time to time, during the Lease Term, the Tenant shall pay the Landlord the Tenant's Proportionate Share of all insurance premiums for the insurance coverages referred to in subparagraph (a) above, on the first day of each month in advance, in a sum equal to 1 /12th of the Tenant's Proportionate Share of all insurance premiums then due and payable. Additional rent based upon insurance premiums payable for the first and last years of the Lease Term, shall be adjusted and prorated, so that the Landlord shall be responsible for the Landlord's prorated share for the period prior to and subsequent to the Lease Term, and the Tenant shall pay the Landlord its prorated share for the Lease Term.

This clause is an example of a pro-landlord and casualty insurance provision, and it underscores the need for careful review by the tenant's lawyer. First, the tenant's lawyer may want to make a minimum level of coverage mandatory, subject to a cost analysis, because the tenant will have to pay a share of the premiums. In addition, both the landlord and the tenant need to align carefully the risk of loss clause with the insurance provisions of the lease. Although the tenant may have an interest in requiring the landlord to rebuild to a particular green-certified level, before committing to do so, the landlord needs to ensure that the actual insurance for which the tenant will reimburse the landlord is sufficient to permit the landlord to achieve compliance without coming out of pocket. As a result, while the lease can structure the landlord's insurance requirements in a permissive fashion, the rebuilding requirements of the lease will dictate the coverage that the landlord actually should procure—and for which the tenant should reimburse the landlord if the lease requires this reimbursement. In addition, depending on which party has responsibility for restoring the interior space of the building, the landlord and the tenant may be in a role reversal relative to the required insurance and rebuilding standards.

Conclusion

Although the current economic crisis has significantly reduced development generally, as the real estate industry moves out of this crisis, there will be an increasing need for real estate develop-ers to distinguish their product. As a result, green-certified buildings may well become more commonplace in the industry. As the sustainable development model becomes more popular, even limited efforts, such as solar panels and other forms of alternative fuel production, will require a more careful analysis of the risks and related insurance needs. Just as the insurance industry responded to the increased risks associated with Brownfield redevelopment, it is likely that insurers will provide an increasing number of products that meet the demands of sustainable development. Real estate lawyers will have to understand the risks inherent in green development and be able to evaluate the insurance products that are available to address those risks.

Thursday, September 23, 2010

Landlord Strategies for Handling Rent Relief Requests

September 22, 2010

By Yvonne A. Jones, CCIM, CPM

The ongoing recession has had a profound impact on commercial real estate throughout the United States: More and more landlords and tenants are struggling to survive. As a result, most property managers have noticed a significant uptick in the number of tenant negotiations they are working on at the properties they manage. While these tenants seek to reduce their costs, landlords must find ways to preserve their cash flow and maintain occupancy to ensure long-term financial stability.

Landlords can employ a variety of strategies to provide tenants with relief. The most common are discussed below.

Rent Reduction. The landlord can reduce the tenant’s rent for a portion or all of the term left on the lease. The usual forms of rent reduction are to reduce the base rent, operating expenses, or both. In regard to retail, it is common to convert base rent to percentage rent.

Rent Deferral. In this case, the landlord can defer a portion of the tenant’s rent but would require them to repay the rent deferred at a later time, either in a lump sum or by increasing subsequent payments. A variation of rent deferral could be to cap or set a base year to operating expenses for a short or extended period of time.

Rent Abatement. If a tenant is significantly past due on rent payments, a landlord may agree to forgive a certain amount of the past due rent if the tenant remains current thereafter.

Loan Conversion. Rather than abating past due rent, a landlord may agree to convert the past due rent into a loan payable over time. The tenant would, however, continue to pay the current rent. The loan is then evidenced by a promissory note that is cross-defaulted with the lease.

It is important to note that many strategies for restructuring leases have the potential of creating significant tax consequences and, therefore, both the landlord and tenant should consult with their tax advisers.
Due Diligence

When considering a tenant’s request for rent relief, it is important to perform due diligence. The first step is to request and review the tenant’s current and prior years’ financial statements, and for retail tenants, their gross sales receipts. To the extent possible, the information received from the tenant should be certified as being complete and accurate. The next step is to conduct an evaluation of current asking rents, common area expenses, and real estate taxes at comparable properties. Finally, a thorough review of the existing lease terms should be reviewed and scrutinized to see what opportunities there are to tighten up language for the benefit of the landlord.

As a general rule, tenants in default should not be entitled to rent relief. However, the reality is that you are likely negotiating a rent reduction with a tenant because they already are, or will soon be, in default. Regardless of the tenant’s current default status, any document granting a rent modification should be expressly conditioned on the tenant not being in default. Furthermore, the same document should stipulate that the rent reduction automatically will terminate and revert back to the original rent schedule if the tenant does not pay the future payments on time. Reinstatement of the contract rent and acceleration of unpaid, but accrued, rent at the contract rate is important because it provides the landlord with an initial remedy to enforce against a tenant before the landlord has to resort to the remedies allowed by a tenant default in the original lease.

Rent relief also should be viewed as a temporary concession over a short period of time -– typically 24 months or less. The economic downturn will end, and by establishing a relatively short period for rent relief, landlords can protect the long-term value of their asset. Any document should, therefore, also include a provision that at the end of the reduced term, the rental rates either revert back to the rental stream identified in the original lease agreement, or will be renegotiated by the landlord and tenant based on the fair market rents at that time.

As further consideration, the landlord should view the tenant’s request for rent relief as an opportunity to “tighten up” certain nonfinancial terms of the lease agreement. For example, in the case of a retailer, the landlord may request the elimination or modification of the exclusive use, co-tenancy, and/or sales reporting clauses. Looser language concerning any of these clauses will allow the landlord more flexibility in leasing current and future vacancies and/or give them better insight into the operating performance of the retailer.

Other key clauses to consider negotiating include the following.

1. Guarantees –- If there is currently no personal or corporate guaranty in the existing lease, the landlord could ask for a guaranty to further secure the future rental stream.

2. Estoppels –- The landlord could include estoppel and release language in rent relief documents that would release a landlord from any claims up to the date the rent relief document is executed.

3. Assignment/Subletting –- The tenant should not be allowed to have the rent relief assumed by a tenant they may assign or sublet their space to, even if it is a subsidiary or affiliate. The rental stream should revert back to what it was in the original lease agreement.

4. Right to Recapture -– The landlord could include a right to recapture the space from the tenant for any reason during the rent relief period.

5. Confidentiality Provision –- The landlord may want to include a provision in the rent relief document prohibiting the tenant from discussing with other tenants at the property or in the market area the terms of their agreement with the landlord. While this is difficult to enforce and/or prove breach, it is worth asking for and trying to enforce.

6. Agreed Order of Possession –- Landlords may be able to shorten the judicial process to recover possession or monetary damages for breach of the lease by obtaining an “Agreed Order of Possession.” While this will not prevent the need for an unlawful detainer action, it may shorten the time between filing and enforcement.

7. Lease Termination –- Sometimes the best course of action for the landlord is to let the tenant out of its lease. If the tenant is in trouble and it has no assets for the landlord to go after, pursuing the tenant in court may be throwing good money after bad. In such cases, it makes sense to arrange for an organized exit where, for example, the landlord has the right to terminate the lease upon a limited period of prior notice, for example, 30 days. Such agreements should be carefully worded and explain that the selection of a replacement tenant is at the sole discretion of the landlord. Additionally, the landlord should be under no obligation to actually find a replacement tenant.

High unemployment, lack of significant job growth, and limited capital are all working together to recalibrate the real estate market. A skilled and knowledgeable property manager who can work with landlords, tenants, and even lenders will be extremely valuable during this time.

Monday, September 20, 2010

The New 2010 Building Owners and Managers Association (BOMA) Method for Measuring Office Building Area

September 16, 2010

By: Richard M. Shapiro

The Building Owners and Managers Association (BOMA) recently released a new standard for measuring an office building's rentable area. The new standard (ANSI/BOMA Z65.1-2010) includes a number of changes from the prior (1996) standard and additions which reflect the recognition that there are a wide range of space configurations and architectural conditions in contemporary office developments. It also provides an alternative standard for determining the rentable area of an office building. The new standard is available for purchase only in electronic form at http://www.boma.org/.

The new standard's most important change is the addition of a standard for calculating a single load factor for an entire building as an alternative to the 1996 standard which only provided for the calculation of load factors on a floor-by-floor basis. Building owners may now choose between a slightly modified version of the 1996 floor-by-floor method (now known as Method A - Legacy Method), which establishes a load factor for each floor of the building which is then applied to the occupant area on that floor to determine rentable area, and the new, building-wide, single-load factor method (known as Method B - Single Load Factor), which is applied consistently throughout the building, regardless of whether a particular floor is subdivided or occupied by a full-floor tenant.

Lease forms should be reviewed to determine that they correctly reference the BOMA standard being used to measure rentable area in an office building. For buildings to which the 2010 standards are applied, it is no longer sufficient to reference the latest version of the BOMA/ANSI standard, it is also necessary to specify which of Method A or Method B applies.

Use of the new Method B avoids the need to re-calculate the rentable area for each floor and for the building as a whole as the use of the floor changes over time. This is accomplished by designating a new class of space, "base building circulation," which is assumed to exist on all floors of the building, even those that are fully occupied by one tenant. Base building circulation is defined as the minimum path on a multi-occupant floor which is assumed to exist in order to provide access to and egress from the areas one would expect to have access to, such as occupant areas, stairs, elevators, rest rooms, janitors' closets, required areas of refuge and building service and amenity areas such as lobbies and building conference rooms. Base building circulation may not represent the actual layout of the floor; in some cases it will be a hypothetical measurement. The building owner has the discretion to determine the extent of the base building circulation but it should reflect applicable legal requirements and also take into consideration the architectural features of the particular building, so that the width of corridors may be more than that required by codes if such is, or would be, the building standard. If and to the extent that a corridor on a multi-occupant floor is longer or wider than base building circulation, then the additional area is included in the occupant area of the occupant(s) served. If an occupant actually occupies some or even all of the base building circulation, as would be the case with a full floor tenant, the occupant area for such occupant ignores the base building circulation area occupied, since the base building circulation is accounted for in the load used to calculate rentable area. Once determined, base building circulation remains fixed over time. Note Method A and Method B are intended to be alternatives, once one is used, the other cannot be, and once applied to a building, the method used should not be changed.

Due to the dearth of new office building development, there have been few opportunities for application of the new method and it is not clear whether it will receive market acceptance.

Other significant changes in the 2010 standard are the use of different terms for certain concepts from those in the 1996 standard and revision of the definition of other terms that are continued in use. For example the term "common area" is no longer used and is replaced by the concepts of "building amenity area," which is the portion of the building that provides an amenity, such as a building conference room or fitness center, intended for use by all building occupants, and "building service area," such as lobbies, enclosed loading docks and mechanical rooms. Building service area is excluded from the calculation of one of the ratios (R/U) used to establish the load. The concept of "gross building area" is replaced with that of "interior gross area" with a somewhat different definition. BOMA recently published another standard, "Gross Areas of a Building: Standard Methods of Measurement (ANSI/BOMA Z65.3 - 2009," for determining gross building area for use in other contexts, such as construction cost benchmarking.

The term "occupant area" replaces "office area" and "store area." As with the prior definition of office area, occupant area is the space where an occupant normally houses its personnel, FF&E and goods. There is now a separate category for "occupant storage area," the area that is not fully finished and is useable for storage only and not usually located on the same floor as occupant areas. Occupant storage areas are also deducted from the interior gross area (formerly, the "gross measured area"), so that the "load" of non-rentable space is not allocated to such areas and so that they therefore do not dilute the load as applied to the other occupant areas.

Among other changes in the new standard are the recognition that unenclosed circulation areas in buildings in warm climates that function in the same manner as enclosed corridors in buildings in temperate climates should be included in building service area, whereas the prior standard excluded them as exterior areas. The discharge corridor from the vertical core to the building perimeter is now clearly a building service area rather than part of the major vertical penetration. Major vertical circulation, which is taken into account in determining the load, now excludes voids, which are now also excluded from interior gross area.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Tuesday, September 14, 2010

New York enacts construction worker misclassification law

By: Thomas A. Linthorst

On August 27, New York Governor David A. Paterson signed into law the New York State Construction Industry Fair Play Act (the Act), designed to curtail worker misclassifications in the construction industry. The Act resulted from findings that nearly one in four construction workers in New York are misclassified as independent contractors or are paid “off the books.” The Act, which goes into effect on October 26, 2010, amends the New York Labor Law, the New York Unemployment Insurance Law, and the New York Workers’ Compensation Law by creating a rebuttable presumption that all construction workers are employees under those laws. The Act also imposes notice requirements and subjects contractors to civil and criminal penalties for willful misclassification of workers.

Scope of the Act

The Act applies to general contractors and subcontractors who are permitted by law to do business within New York State and who engage in construction, regardless of the contractor’s corporate form. The Act defines construction as “constructing, reconstructing, altering, maintaining, moving, rehabilitating, repairing, renovating or demolition of any building, structure, or improvement, or relating to the excavation of or other development or improvement to land.”

Employment Presumption

Under the Act, any person performing work for a contractor covered by the Act will be deemed an employee of the contractor unless the worker (i) is free from the contractor’s control and direction in performing the job, both under his or her contract and in fact; (ii) performs services that are outside the contractor’s usual course of business; and (iii) is customarily engaged in an independently established trade, occupation, profession, or business that is similar to the service to be performed for the contractor. Only if all of these criteria are met will the construction worker be considered an independent contractor and not an employee of the contractor.

The Act also creates a “separate business entity” exception that allows a sole proprietor, partnership, corporation, or person to be considered independent from the contractor if it meets the following 12-part test set forth in the Act. To qualify as a separate business entity, the entity must meet the following criteria:

1. Be performing the service free from the direction or control over the means and manner of providing the service, subject only to the right of the contractor for whom the service is provided to specify the desired result
2. Not be subject to cancellation or dissolution upon severance of the relationship with the contractor
3. Have a substantial investment of capital in the business entity beyond ordinary tools and equipment and a personal vehicle
4. Own the capital goods and gain the benefits and bear the losses of the business venture
5. Make its services available to the general public or the business community on a continuing basis
6. Include services rendered on a federal income tax schedule as an independent business or profession
7. Perform services for the contractor under the business entity’s name
8. Obtain and pay for a license or permit in the business entity’s name when such are required
9. Furnish the tools and equipment necessary to provide the service
10. Hire its own employees without contractor approval, pay the employees without reimbursement from the contractor, and report the employees’ income to the Internal Revenue Service
11. Not be represented by the contractor as an employee of the contractor to the contractor’s customers
12. Have the right to perform similar services for others on whatever basis and whenever it chooses

A business meeting the “separate business entity” definition will not be considered an employee of the contractor, but will itself be deemed a contractor under the Act, and will be required to comply with all of the provisions of the Act applicable to contractors with respect to its own engagement of workers.

Posting

The Act mandates that contractors post at the worksite a statement from the Commissioner of Labor that explains workers’ rights, penalties proscribed for misclassifications, tax responsibilities for independent contractors, rights of employees to unemployment insurance benefits, workers’ compensation, minimum wage, and other federal and state workplace protections.

The notice, which will be available on the New York State Department of Labor’s website (http://www.labor.ny.gov) within 30 days of the Act’s effective date, must be posted in a prominent place, in English and Spanish and/or other languages as appropriate, and must contain contact information for individuals to file complaints or inquire with the Commissioner about employment classification status. The notice must be constructed of materials capable of withstanding adverse weather conditions. Contractors violating the notice requirements of the Act are subject to civil penalty of up to $1,500 for a first violation, and up to $5,000 for a subsequent violation within a five-year period.

Worker Misclassification Penalties

Contractors that willfully misclassify an individual as an independent contractor are subject to a civil penalty of up to $2,500 per misclassified employee for a first violation and up to $5,000 per misclassified employee for each subsequent violation within a five-year period. In addition to civil penalties, willful violators may be charged with a criminal misdemeanor offense. Upon conviction of a first offense, violators face a fine of up to $25,000 or imprisonment of up to 30 days. Upon conviction of a subsequent offense, violators face a fine of up to $50,000 or imprisonment of up to 60 days. Other penalties may also apply under the state’s unemployment insurance; workers’ compensation insurance; or business, corporate, or personal income tax laws.

Further, if the contractor is a corporation, any officer of the corporation or shareholder who owns or controls at least 10% of the outstanding stock of such corporation who knowingly permits the corporation to willfully violate the law may also be subject to civil and criminal penalties. In the event of a criminal conviction, the Act provides for debarment from public works contracts for one to five years.

Retaliation

The Act prohibits employers from retaliating against any employee for exercising any rights granted under the Act, including, but not limited to, making complaints to an employer or causing any proceeding to be initiated under the Act. Any employer that engages in retaliatory actions can be subjected to a private cause of action, to the penalties described above, or both.

Implications

This Act applies a stringent standard to worker classification in New York’s construction industry. Because the Act redefines how construction workers are classified and imposes stiff penalties for willful construction worker misclassification, construction firms should immediately review their existing worker classifications, develop strategies to comply with these new standards, and address potential risks associated with misclassified workers.

Wednesday, September 8, 2010

New York Appellate Court Rules that Indemnification Clauses of Contracts Must Meet the "Exacting" Test to Entitle a Prevailing Party to Attorney’s Fees

August 2010

Article by Proskauer's Real Estate Practice Group

In a decision that will have a reverberating effect on how indemnification language will be negotiated and drafted in New York contracts and undoubtedly influence a party's choice as to whether to pursue costly litigation, the Appellate Division of the First Department of New York recently unanimously held in Gotham Partners, L.P. v High Riv. Ltd. Partnership (2010 NY Slip Op 06149) that, unless an indemnification clause of a contract is "unmistakably clear" and meets the "exacting" test set forth nearly 20 years ago in Hooper Associates v AGS Computers (74 NY2d 487), the winning side of a dispute between two parties to a contract will not be entitled to attorney's fees, regardless of the contracting parties' original intent.

Typically under American law, parties to litigation are responsible for paying their own legal fees. Contracting parties, however, regularly negotiate and draft indemnification clauses to include language that is intended to entitle one contracting party to reimbursement of its attorney's fees and damages from the other – regardless of whether the fees were incurred from defense of a third-party claim or its prevailing in a dispute between the contracting parties. Such universal indemnification clauses have become boilerplate language, regularly inserted into virtually every form of American contract from real estate transactions to the sale of goods.

The Appellate Division of the First Department of New York held in Gotham Partners, L.P., however, that the use of such boilerplate language is not sufficient to entitle a prevailing party to attorney's fees unless it is "unmistakably clear" that the indemnification covers the fees of the winning side of a dispute between two parties to the original contract. Reminding that New York State is inherently and "distinctly inhospitable" to the use of indemnification clauses to recoup attorney's fees, the Panel held that "for an indemnification clause to serve as an attorney's fees provision with respect to disputes between the parties to the contract, the provision must unequivocally be meant [and interpreted] to cover claims between the contracting parties rather than third-party claims." Otherwise, even if an indemnification clause can be interpreted to entitle a party to attorney's fees that indemnification clause will be void as it applies to the fees of a prevailing party to a suit between two original contracting parties.

The panel's decision will have a lasting effect on literally thousands of existing contracts in New York and will influence parties' negotiation of such clauses in the future. No longer are parties able to negotiate and craft indemnification clauses "with an eye to extracting the essence of a right to attorney's fees for the winning side." At least for now, "a contract provision employing the language of a third-party claim for indemnification may not be [crafted] to encompass an award of attorney's fees to the prevailing party based on the other party's breach of the contract," regardless of the parties' original intent.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Tuesday, September 7, 2010

Form-Based Zoning Codes: Coming Soon to a Neighborhood Near You

Form-Based Zoning Codes: Coming Soon to a Neighborhood Near You

September, 2010

Article by Preston Lloyd, Jr.

Throughout the country, local governments regulate the use of land in a similar fashion: by mapping out a plan that governs the separation of uses of physical space in the community, and then implementing the plan on a case-by-case basis according to use-specific zoning ordinances. These designations focus on whether a proposed use fits into segregated categories, such as residential or commercial, and prescribe set-backs, height limits, acceptable densities, and pre-approved business uses. However, a New Urbanist variant on this regulatory structure, known as "form-based code," is gaining momentum as an alternative to traditional zoning codes and ordinances. Jurisdictions throughout the country - including several in Virginia1 - are experimenting with new zoning code provisions that emphasize the physical form of the built environment, in sharp contrast to prior ordinances that merely considered the property's use.

Form-based codes seek to achieve a community vision for high-quality public spaces defined by a variety of building types and uses in a given area.2 These provisions should not be confused with design guidelines, which attempt to control how buildings look. Rather, form-based codes regulate the key aspects of urban form in a prescriptive way (i.e. state what you want) rather than a proscriptive one (i.e. state what you don't want). For example, the City of Portsmouth's form-based code incorporates "a regulating plan, building form standards, street standards, use regulations as needed, descriptive building and/or lot types, and other elements required to implement the principles of functional and vital urbanism and practical management of growth."3 In addition, the 92-page code makes liberal use of matrices, color diagrams and detailed illustrations of the desired development patterns.

A major advantage of form-based codes is the streamlined administrative approval process, making land use regulations more predictable for both developers and property owners. The development of a precise and objective code - one that eradicates the politics and uncertainty inherent in most traditional approval processes - requires considerable community engagement, often through charrettes or some other visioning method. This past May, Portsmouth concluded a comprehensive revision of its entire zoning code that involved a dedicated development team, outside consultants and over two years of continuous community outreach and engagement. Those jurisdictions willing to undertake such an endeavor are betting that the quality and quantity of new development will make the investment worthwhile. Under the new Portsmouth zoning code, one developer anticipated that the approval time necessary for his proposed development would shrink from "several months" to "a few weeks."4

In contrast to Portsmouth's comprehensive code revision, some Hampton Roads jurisdictions employ form-based zoning only in strategic growth areas. Norfolk revised portions of its zoning ordinance by incorporating form-based elements in an effort to revive the downtown Granby Street corridor and neighboring areas. The form-based provisions apply to property within a specially designated district that contains formerly segregated uses such as retail, high density residential and office towers. Similarly, Virginia Beach drafted a new zoning ordinance for its Oceanfront district to promote mixed-use development.5 In doing so, Virginia Beach abandoned lot-size restrictions and slashed parking-lot requirements, opting for a more walkable and urban vision for the district. These changes seek to encourage independent development by multiple property owners, obviating the need for large land assemblies and the megaprojects that historically were built on such parcels.

As more communities consider a holistic, community-based approach to development, form-based codes should continue to proliferate. These codes may benefit property owners and developers in several ways, such as creating a more streamlined approval process, with less oversight and discretion by review bodies, a less politicized planning process and a reduced risk of takings challenges. On the other hand, when applied to existing urban areas, issues such as vested rights of property owners, sunk-costs by developers, and the considerable time, patience, resources and political skill required to build consensus within a diverse community may pose short-term disincentives to the adoption of form-based code. Over the long term, however, form-based codes offer the promise of abandoning a scheme of costly, ad-hoc bureaucratic oversight in favor of a civic-oriented, clearly delineated system of land use regulation that benefits regulators, developers and property owners.

Footnotes

1. In Virginia, jurisdictions such as Arlington County, Orange County, the Town of Crozet, and the Cities of Portsmouth, Norfolk, Richmond and Virginia Beach, have amended or are considering amending significant portions of their zoning ordinances to incorporate aspects of Form-Based Code.
2. See generally Form-Based Codes Institute, Resources, available at http://www.formbasedcodes.org/
3. City of Portsmouth, Department of Planning, Homepage for Form-Based Codes, available at http://www.portsmouthva.gov/planning/desinationptown3.aspx.
4. See Dave Foster, Portsmouth Looks Ahead With New Zoning Rules, VIRGINIAN PILOT, Feb. 10, 2010, at http://hamptonroads.com/print/541422.
5. See Deirdre Fernandes, Beach Dumping Zoning Rules for Growth, VIRGINIAN PILOT, Jan. 18, 2010, at http://hamptonroads.com/print/537845.

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