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. Meyer
Kelly D. Stohs Rita D’Agostino
Emil Hirsh

PRELIMINARY AGREEMENTS
AND THEIR ENFORCEMENT
Presented By:
Emil Hirsch

real challenges. real answers. sm
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 SPECIFIC
PERFORMANCE 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 TO
NEGOTIATE 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 PROVISION
Example: “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 PROVISION
Example: “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
– pbledsoe@polsinelli.com
Kelly D. Stohs
– kstohs@polsinelli.com
Emil Hirsch
– ehirsch@polsinelli.com
William R. Meyer
– wmeyer@polsinelli.com
Rita M. D’Agostino
– rdagostino@polsinelli.com
Polsinelli PC
www.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.
Polsinelli is very proud of the results we obtain for our clients, but you should know that past results do not guarantee future
results; that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision
and should not be based solely upon advertisements.
© 2015 Polsinelli PC. In California, Polsinelli LLP.
Polsinelli is a registered mark of Polsinelli PC
Polsinelli, a national law firm ranked among the Am Law 100 with over 740 attorneys located in 19 offices,
deliberately seeks constant improvement in all that we do. At its inception more than forty years ago, the firm
established a culture of openness and entrepreneurship that still pervades today. As the fastest growing U.S.
law firm for the past six years as ranked by The American Lawyer*, the firm’s growth has been fueled by the
recruitment of like-minded attorneys from top law firms across the country.
Polsinelli attorneys successfully build enduring client relationships by providing practical legal counsel infused
with business insight, and with a passion for assisting General Counsel and CEOs in achieving their objectives.
The firm focuses on healthcare, financial services, real estate, life sciences and technology, and energy and
business litigation, and has depth of experience in
100 service areas and 70 industries.
*The American Lawyer 2013 and 2014 reports
About Polsinelli

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

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

Recomendados

Más contenido relacionado

Was ist angesagt?

Was ist angesagt?(20)

Similar a Navigating the real estate road avoiding pitfalls and potholes march 2015 ss

Similar a Navigating the real estate road avoiding pitfalls and potholes march 2015 ss(20)

Más de Polsinelli PC

Más de Polsinelli PC(20)

Último

Último(20)

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