- January 2006 -
So, You Want To Be a
Developer?
Part I
By W. Theodore Brooks, Esq.
Virtually
everyone who has been involved in real estate development knows full
well “the thrill of victory and the agony of defeat.”
Most projects produce so many skirmishes and battles that the developer
frequently feels like an embattled 19th century military figure. Why is
this?
Generally speaking, it is because most people, including governmental
officials, are naturally disposed to be resistant to change. Another
cause is sometimes founded on the developer’s failure to effectively
account for legitimate “community objectives” and plan the project from
start to finish in light of those objectives. In this context I am not
referring to those critical public information and public relations
aspects of a project but rather the technical, substantive and
procedural requirements within the purview of the municipality’s plan
approval process.
This article addresses the earliest stages of a real estate development
and has application to both residential and commercial projects. An
article dealing with later stages in the process will follow in a later
edition of RECON News.
Even prior to identifying potential properties for development, the
developer should check the “lay of the land” in the community. This step
should include assessing the development climate, reviewing existing and
planned projects together with at least a preliminary review of the
municipality’s land use ordinances and plan approval processes and
timelines.
This can be accomplished by talking to builders, other developers,
realtors, elected officials and municipal staff persons such as planning
directors, building inspectors and zoning officers. Giving short shrift
to this early stage can result in unnecessarily long delays in the
approval process, and the expenditure of lots of unproductive time and
effort. All of which adds costs to the project.
Next, identify property that is most suitable to the type of project you
intend to develop. Frequently this involves one- on-one negotiations
with a property owner if you have identified property that is not
currently listed for sale. (Even if it is not currently listed, you need
to inquire as to whether it had been so you can avoid being part of a
claim by a realtor for a commission.) If you have engaged a realtor to
represent you in the identification of the property and its acquisition,
then you need to define what role you will play in the negotiations or
you can delegate all of the negotiation responsibilities to the realtor.
Clear guidelines and directions must be given to the realtor so that
tight reins can be applied to negotiation authority. Remember that
non-monetary terms of the agreement can be just as important as the
monetary consideration.
The goal is to either enter into an option which will enable you to
conduct thorough due diligence (more later on due diligence) before
making the decision on whether or not to conclude the purchase or enter
into an agreement of sale containing all of the contingencies that you
need to have satisfied in order to close on the purchase. The option is
the preferred way to go. In most situations, whether the option or
agreement of sale is used as the vehicle, some amount of monetary
consideration will need to be paid which will be credited against the
purchase price or forfeited to the seller if the purchase does not
occur. It is a good idea when using the option to insist that all of the
terms and conditions of what will become the ultimate agreement of sale
are either contained within the option document or incorporated by
reference by having a copy of the agreement of sale attached to the
option as an exhibit.
It is quite critical for you to establish a realistic timetable for
accomplishing the various activities that constitute due diligence and
plan approvals and to build the critical dates into the option or the
agreement of sale. This is one place where the benefit of your early
research and investigation of the municipality’s plan approval processes
and procedures will surface. You should be able to build a realistic
timetable into the option or agreement. Most municipalities will require
the landowner to participate in the process or at least sign-off on the
plan and therefore it is important for you to obtain the seller’s
agreement to cooperate (including attendance at municipal meetings or
hearings) in all aspects of plan approval.
Other critical elements of the agreement of sale include environmental
representations and warranties, mineral rights, type of deed to be
tendered (general or special warranty), procedures for title review and
objections, due diligence activities, insurance responsibilities,
remedies for defaults and other standard provisions customarily
included.
Part II of this article will address the choice of entity to acquire the
property and complete the development, specific due diligence
activities, the plan approval process, the physical development of the
property and the marketing of the finished product.
W. Theodore Brooks is Co-Chair of the firm’s RECON Industry Group.
For more information on this topic, please contact Ted at 412.594.5514
or via e-mail at
tbrooks@tuckerlaw.com.
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By Matthew M. Hoffman,
Esq.
FACTUAL
AND PROCEDURAL BACKGROUND
In 1992, the Wilson Area School District entered into a general
construction contract for a new high school building with Franklin E.
Skepton as general contractor. Safeco Insurance Company issued a
performance bond on behalf of Skepton, naming the school district as the
oblige. The school district accepted the performance bond as part of its
contractual relationship with Skepton. Under the terms of the bond,
Safeco’s liability was limited to claims asserted within one year of
completion and acceptance of the project.
Construction was completed in 1994. In 2001, the school district sued
Skepton, Safeco and other defendants for alleged defects in the high
school building. Safeco moved for summary judgment. Safeco argued that
the school district’s action was untimely because of the one-year
limitations provision in the bond. In response, the school district
argued that the doctrine of nullem tempus occurrit regi (“time doesn’t
run against the king”) prevented the application of any limitations
period.
The court granted summary judgment in favor of Safeco. In rejecting the
school district’s contention, the court concluded that, by accepting the
bond containing the limitations provision, the school district
contractually waived the doctrine of nullem tempus occurrit regi.
SUMMARY
“Nullem tempus occurrit regi” (“time doesn’t run against the king”)
permits political subdivisions of the Commonwealth to circumvent the
applicable statute of limitations on certain types of claims. The
rationale for the doctrine is to preserve public rights, revenues and
property from injury and loss. The privilege of nullem tempus applies to
political subdivisions, such as school districts, whenever they are
seeking to enforce strictly public rights.
Relying on this doctrine, the Wilson Area School District contended that
the limitations period contained within the performance bond was a
nullity. However, the court concluded: “Unquestionably, the school
district could defeat the assertion that the action is time-barred if
the limitation period had its origin in a statute. However, in the
instant case the limitation period is contractual. The doctrine of
‘nullem tempus occurrit republicaee’ is waivable by the sovereign.”
The court observed Safeco sought to limit its exposure by contractually
incorporating a one-year limitation on claims and, by doing so, to avoid
the invocation by the school district of the nullem tempus doctrine. The
school district agreed to the contractual provision. The court concluded
that each entity gained something by the agreement: Safeco limited the
duration of its exposure and the school district saved costs presumably
because a bond of unlimited duration would have been more expensive than
one of limited duration. Accepting the school district’s invocation of
the nullem tempus doctrine would nullify the parties’ contractual
agreement. Accordingly, since the school district’s suit was brought
beyond the one-year limitation set forth in the performance bond, the
school district’s claims were untimely and dismissed.
PRACTICAL ADVICE
Claims arising from the construction of school facilities commonly are
the context in which school districts can successfully rely upon the
nullem tempus doctrine. In this regard, there are various contractual
documents through which a school district might unwittingly surrender
the protection of the privilege.
As demonstrated by the Wilson Area School District case, it is typical
for performance bonds to include a limitations period of one year. To
preserve the nullem tempus privilege, bonds containing such limitations
should not be accepted. The bid specifications may include an acceptable
form of such a bond or specify that such bonds may not include any
limitation period.
Similarly, standardized construction documents, such as those published
by the American Institute of Architects, typically contain limitations
provisions. For example, AIA Document A201-1997 (General Conditions of
the Contract for Construction) contains an article entitled
“Commencement of Statutory Limitation Period.” As to claims between the
owner and the contractor, this provision states that “[as] to acts or
failures to act occurring prior to the relevant date of Substantial
Completion, any applicable statute of limitations shall commence to run
and any alleged cause of action shall be deemed to have accrued in any
and all events not later than such date of Substantial Completion.” As
in the Wilson Area School District case, this provision, if not deleted
through supplementary conditions, would defeat the assertion of the
nullem tempus privilege.
Accordingly, any agreements entered into by school districts in relation
to construction should be thoroughly reviewed for limitation provisions
that could operate as a waiver of the nullem tempus doctrine. Otherwise,
the period in which claims may be asserted by school districts under
those documents could be shorter than the law otherwise would allow.
Contractors and surety companies should not be quick to rely on this
decision, though. It would be wise to await the treatment of this issue
by the appellate courts. The nullem tempus privilege was created to
protect the property and rights of the citizenry. There is a sound
argument that such protections may not be waived by any act of the
governing body. Documents, statements and other physical evidence should
be maintained as if proceeding on any other public project - even
following the end of a contractually created limitations period.
The fallout from the Wilson Area School District matter highlights the
need for open communication before the initiation of a construction
project. School districts are faced with the possibility that the nullem
tempus doctrine might be deemed a waivable privilege. Sureties and
contractors see an opportunity to achieve some degree of finality with
public projects. Both sides face uncertainty and risk that must be
addressed during the negotiation and bidding process. School districts
must be prepared to address demands from sureties and contractors that
the nullem tempus doctrine be waived, at least to a degree (perhaps a
compromise limitations period beyond the one year prescribed by most
bonds.) Contractors and sureties must also recognize the reluctance the
appellate courts and the legislature will have permitting a public
entity to waive a long-standing protection that has been crafted to
safeguard public property and money. By working together, owners,
contractors and sureties can eliminate, or at least reduce, the
uncertainty the Wilson Area School District case has created.
Matthew M. Hoffman is a shareholder in the firm’s RECON Industry
Group. For more information on this topic, please contact Matt at
412.594.3910 or via e-mail at
mhoffman@tuckerlaw.com.
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Implied Easements:
The Unwary Trap For A Developer
By Kenneth W. Lee, Esq.
Developer A
has a large piece of property which he desires to subdivide and develop
into multiple single lots. For reasons of costs and efficiency, he has
the entire property designed for the proposed development, but only has
enough financing to actually develop the eastern half. When Developer A
seeks subdivision approval for the eastern half, he submits the plans
which show the lots on the entire property but indicates the eastern
portion by a large black outline which outlined area is indicated as
being the only area submitted for approval. The “outlined” area is
approved and the plans with the outline recorded.
Developer A completes actual development of the eastern half, but has
few, if any prospects for the western half. Years go by and the western
half sits undeveloped.
One day a prospective purchaser, Mr. Doe approaches Developer A to
inquire about purchasing four lots in the western half which lots per
the original plans adjoin a proposed road called Elm Street, but the
lots on Elm Street were not approved as part of the eastern subdivision.
The deal is made and the subdivision for Mr. Doe’s four lots approved
with the deed referring to the original plan as well as to Elm Street.
Over the years Developer A sells the western half to Developer B, who
sells it to Developer C, who finally decides to develop the western
half. Developer C’s subdivision plans indicate that rather than
constructing Elm Street, that section of Elm Street will become part of
several new lots which would adjoin Doe’s property. Mr. Doe objects and
demands that Elm Street be installed as indicated in the previously
unapproved western subdivision.
Under the theory of “implied or constructive” easements, Developer C
does not have to install Elm Street, but Developer C may not interfere
with Doe’s right-of-way in Elm Street which he acquired. Though
Developer C may be the owner of the land for the proposed Elm Street, he
may not construct anything thereon except Elm Street. By referring to
the original plans in the deed to Mr. Doe, Mr. Doe acquired a
right-of-way to the proposed Elm Street with which no one is permitted
to interfere even though the western half was not approved as a
subdivision.
Obviously, these “piecemeal” conveyances have severe consequences for
future developers if the original or future developer is not aware of
the law of implied easements. To prevent this type of situation, it is
recommended that (1) only the area to be actually developed be plotted
on a plan and submitted for subdivision approval even if the other
property might be developed in the future and (2) if acquiring land for
development, all maps of previous subdivisions not only for the land
being acquired but any adjoining property be thoroughly reviewed at
least prior to preparation of a subdivision plan if not prior to
purchase so as to avoid costly revisions, engineering, time and law
suits.
Kenneth W. Lee is Co-Chair of the firm’s RECON Industry Group. For
more information on this topic, please contact Ken at 717-234-4121 or
via e-mail at klee@tuckerlaw.com.
^
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Phase II Environmental
Site Assessment
By Bradley S.
Tupi, Esq.
In the
previous edition of this newsletter, we described the Phase I
Environmental Site Assessment. A Phase I is a methodical review of a
property’s history and a professional inspection of its current
condition in order to determine whether there are reasons to suspect
contamination. The Phase I is typically conducted by an environmental
consultant hired by a prospective purchaser to identify environmental
liabilities before the closing, when the purchaser still has the
opportunity to walk away from the deal. But a Phase I, by definition,
does not include subsurface sampling of soil or groundwater, so it
cannot confirm whether contamination is actually present, or ascertain
the nature or extent of any contamination. Therefore, when a Phase I
identifies potential environmental liabilities on the property in
question, the purchaser may perform a Phase II investigation to
determine whether the suspected contamination exists and, if it does,
whether it is serious enough to affect the purchase. A Phase II
investigation is the next step in the environmental due diligence
continuum. This article will address some of the legal and practical
issues surrounding a Phase II investigation.
Unlike a Phase I Environmental Site Assessment, which follows a fairly
well-established protocol, every Phase II investigation is different,
because the plan for a Phase II is tailored to the particular
environmental concerns on a particular property. The scope and cost of a
Phase I has become fairly standardized. By contrast, the scope and cost
of a Phase II can vary widely, depending on:
-
Size of
the property;
-
Number of
soil borings and groundwater wells;
-
Number of
samples taken for analysis;
-
Number of
chemical constituents analyzed for; and
-
Purchase
price of the property.
To
illustrate, a Phase II investigation of a one-acre parcel once occupied
by a gas station may cost only $10,000. The size of the property is
small, so the number of borings and wells will be limited.
Correspondingly, the number of samples sent to the lab will be limited.
And because the suspected contaminant is known (gasoline), the lab will
analyze the samples for a limited range of chemical constituents
associated with gasoline contamination. The relatively small market
value of the property will also tend to limit the amount of money the
purchaser is reasonably willing to spend for the investigation.
By contrast, a Phase II investigation of a large industrial site may be
very expensive. The site may have been home to a variety of processes
using many different chemical compounds. For the purchaser (and
purchaser’s lender) to become comfortable with the subsurface
environmental conditions, the Phase II investigation may require dozens
of wells and soil borings. From each, samples will be taken at various
depths. Each sample may be analyzed for many different compounds, such
as volatile organics (VOCs), semi-volatile organics (SVOCs), metals, and
other substances, depending on the kinds of compounds used during the
site’s industrial history. The expense of such an investigation is
justified by the high purchase price and the potentially staggering
cleanup costs, should contamination be found.
The Major Goals of a Phase II Investigation
These examples illustrate the major purposes of the Phase II
investigation. First, the prospective purchaser wants to determine
whether the property is free from contamination. If a sensibly designed
Phase II investigation fails to detect hazardous substances exceeding
state cleanup standards, then the buyer (and lender) may proceed with
the transaction, assured that the chances of a major environmental
liability are limited.
No environmental investigation is fool-proof. Even a carefully planned
and executed Phase II investigation might miss an area of contamination.
So a second objective in conducting the Phase II investigation is to
provide the purchaser with a legal defense in the event that EPA or DEP
demands that the purchaser clean up contamination that was present
before the purchase but is not discovered until afterwards. The
Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA) imposes strict liability on owners of contaminated properties,
regardless whether the owner caused the contamination or not. One of the
few exceptions to this liability is the “innocent purchaser defense.”
This defense is available to a purchaser who demonstrates that he
neither knew, nor had any reason to know, that the property was
contaminated at the time of acquisition, despite conducting “all
appropriate inquiry” into the property’s environmental history. The
purchaser conducts a Phase II investigation in the hope that if it is
“clean,” he buys the property, and then contamination is discovered, he
may be deemed an “innocent purchaser” and absolved from CERCLA
liability.
If a Phase II investigation does discover contamination, this discovery
will not necessarily abort the contemplated transaction. The
contamination may be limited to a small area so that cleanup will be
relatively easy. So the third major purpose of the Phase II
investigation is to determine the nature and extent of the
contamination. This involves questions such as:
-
What are
the contaminants?
-
Are the
contaminants in soil? Groundwater? Both?
-
Do the
contaminants’ concentrations exceed regulatory maximums?
-
What is
the horizontal extent of the contamination?
-
What is
the vertical extent of the contamination?
Reliable
answers to these questions will serve the fourth major purpose of the
Phase II investigation, which is to enable the purchaser to make a
reasoned business decision. An accurate picture of environmental
conditions hopefully will allow the environmental professional to
estimate the cost of dealing with the contamination. That estimate, in
turn, will permit the purchaser to decide whether the cost of
environmental remediation is too steep, in which case the purchaser
might decide to look for another property. Or the purchaser might try to
renegotiate the terms of the deal, asking the seller to bear some or all
of the expected cleanup costs. Either way, the ideal Phase II will
develop enough data to quantify the likely environmental costs so the
parties can account for them in the financial terms of the transaction
(and so the lender financing the deal is comfortable enough to proceed).
Practical Advice
Environmental due diligence involves a complex mix of legal, financial
and geotechnical considerations. It is not a cookie-cutter process. To
the contrary, particularly where due diligence proceeds to Phase II,
success requires the judgment of seasoned counsel and skilled
consultants. The process also takes time. A Phase II investigation may
involve several rounds of sampling, as each round may suggest the need
for another soil boring or groundwater well. To achieve the most
favorable results from the due diligence process, the prospective
purchaser (and his lender) should start early in the transaction and
work with experienced professionals.
Bradley S. Tupi is in charge of Tucker Arensberg’s environmental
practice. He has worked with clients and consultants in conducting
environmental due diligence in dozens of real estate transactions. For
more information, please contact Brad at 412.594.5545 or via e-mail a
btupi@tuckerlaw.com.
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In each issue, we introduce a member of the
RECON Industry Group.
In this issue, we spotlight...
GARY P. HUNT
Gary P.
Hunt, Managing Shareholder of the firm, is a commercial litigation
attorney who has been practicing for more than 25 years.
He has been lead counsel in complex design, engineering and construction
disputes, utility and natural resource litigation, trade secret
litigation, lender liability and other financial institution litigation,
employment litigation, major construction and environmental litigation,
RICO litigation and class action litigation.
He is a member of the Pennsylvania Bar Association and has been elected
to The Academy of Trial Lawyers of Allegheny County, which is the
premier trial lawyers organization in Western Pennsylvania. He serves on
the Allegheny County Bar Association Board of Governors, and received
the Allegheny County Bar Foundation 2003 Jane F. Hepting Individual Pro
Bono award. He also is the Vice Chair and Chair-Elect of the YMCA of
Greater Pittsburgh.
He has served as an arbitrator for the American Arbitration Association
in construction law disputes, and as a Special Master for the Court of
Common Pleas of Allegheny County. He graduated from the University of
Notre Dame and the University of Pittsburgh Law School, cum laude, where
he was also a member of the Law Review and was named a member of the
Order of the Coif. Mr. Hunt has an AV rating in the Martindale-Hubbell
Law Directory, which is the highest rating for legal ability and ethical
standards awarded by this national directory of lawyers. He is the
Solicitor for his residence community.
