News and Insights on Connecticut Real Estate Law


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Wednesday, October 1, 2008

How Not to Draft (or Interpret) a Real Estate Contract

Lawyers are criticized for many things, and their writing is one of the most popular. Legal documents of all kinds often read as if they were prepared by an attorney from a Charles Dickens novel. My wife and I recently had our wills redone by a good friend of mine, and I told him that I had a hard time figuring out what the documents meant, and I’m an attorney! Of course, we also get our share of criticism for the cost of drafting the documents, with many comments suggesting that we charge by the letter, the word or page. Many of us try to make our documents simpler, but it just never seems to catch on.
 
So it was with some amusement, and then disbelief, that I read a recent decision by the Connecticut Appellate Court entitled WE 470 Murdock, LLC v. Cosmos Real Estate, LLC, 109 Conn. App. 605 (2008). This case involved a large commercial real estate transaction gone bad. Two parties entered into a purchase and sale agreement for the property, but they were not able to complete the closing because one of the owners was not a party to the contract and ultimately refused to sell. The buyer was not able to sue to force the sale to go through (specific performance) because not all the owners had signed the contract. So the buyer’s only option was to terminate the contact because the seller could not deliver clear title.
 
In many contracts, when a buyer terminates because of inability to deliver clear title, the buyer is entitled to recoup some out of pocket costs. In this contract the buyer was entitled to get its deposit back plus “any expenses actually incurred by the buyer for attorney’s fees, nonrefundable fees of lending institutions, title search costs and inspection fees (the total cost of which shall not exceed the cost of fee title insurance based upon the amount of the purchase price.” The parties agreed that the amount of the title insurance would be $4,650, but disagreed how the limit applied. The seller said this was a limit on all the expenses, while the buyer said it only limited the amount of inspection fees because that was the category that immediately preceding the limitation. This was an important point because the buyer claimed its expenses exceeded $100,000.
 
The court ruled that the language of the contract was clear and did not require any consideration of the parties’ intent. It said that the “parenthetical places a limit on the ‘total cost,’” but that the “the logical and sensible conclusion is that the use of that term in the parenthetical is limited to the total costs of the inspection fees.” According to the court, “interpreting the provision so that the parenthetical modifies the entire preceding list results in an illogical result that obviates the need for an enumerated list.”
 
Does that make sense to anyone else? How does it obviate the need for a list? In drafting contracts we often include lists which are not exclusive. I do not have access to the court transcripts, testimony or other records, so I don’t know what other evidence of the parties’ intent might have been provided to the court. But why would the parties’ limit the cost of only one item? If the seller was concerned about writing a blank check for reimbursing expenses, I would think that the seller would want a limit on the total costs, not just one item. Inspection fees are not typically the biggest cost in these transactions, so I don’t know why anyone would be especially concerned about that amount.
 
I suppose the language could have been drafted a little clearer. There is room for more clarity in all legal writing, although it typically requires more words. For example, a good way is to use a defined term, such as “Buyer’s Expenses.” Buyer’s Expenses would be defined as all the buyer’s reimbursable costs, and then it would be subject to the limit. Or maybe it would have been sufficient to say “the total cost of all of the foregoing expenses shall not exceed …” Every contract needs a few “foregoings” and “thereafters”. Frankly I thought the language was pretty clear as is.


Tuesday, September 16, 2008

The Information Age Comes to the Real Estate Business

The tenth anniversary of the founding of Google seems like a good time to reflect on how the world wide web has transformed the real estate business by making so much information available at the click of a mouse. In the old days if you needed information about a piece of property, whether it was title, zoning, or assessment, you had to travel to the town hall to obtain it (or pay someone else to go). Since everything is filed by town in Connecticut, and not by county, that meant traveling to one of the 168 towns. For example, if you wanted to research the zoning of a property, you had to go to the town hall to review the zoning map and the zoning regulations. In addition, if you needed information from a state agency, such as the Department of Environmental Protection, you had to travel to the offices of that agency, generally in Hartford.
 
Now a tremendous amount of information needed by real estate professionals is available on the web. The websites of Connecticut towns are no longer just for finding out the town hall hours. For example, many towns now have copies of their zoning regulations post on their websites. So if you need to research the zoning status of a property, there is no need to travel to the town hall. The same is true of real estate tax and assessment information. 
 
Of course, not all information is available on the web. If you need something in writing, such as a receipt or a certificate of zoning compliance, then you are still going to need to make a trip to the town hall. In addition, most towns do not have electronic real estate records. Many towns now have computerized indexes to the land records, which make conducting title searches much easier. The electronic records are usually completely up to date. These indexes are not, however, available through the internet. Some towns have started putting land records on the web, but most towns have not done this.
 
In order to find a town’s website, simply do a search under the name of the town with Connecticut after it. The town’s website will generally come up on the first page of results.
 
Even more impressive are the websites of the state agencies in Connecticut. They all have a wealth of information and are very user friendly. For example, on the Department of Environmental Protection website, www.ctdep.gov, you can obtain information on topics such as the Connecticut Transfer Act or underground tanks. All of the laws and regulations enforced by the DEP are there also, as well as up to date forms. The Connecticut Secretary of State website (www.sos.gov) was recently updated and is much easier to use than the old site. Anyone can research corporations, LLC’s and other firms, search UCC records, and obtain forms. Be careful to use correct spelling when using these sites, because if you are looking for the name of a company it may not find the records without the correct spelling.
 
All of this great information is not limited to Connecticut. Information from other states is also readily available. I recently represented a client who purchased a business in
Vermont. I was to find information on the corporate status of the business, UCC filings, and business taxes, all through research on the web. 
 
The web is changing all businesses, and real estate is no different. The amount of information about real estate is tremendous and it is growing all the time. When you need information about real estate in Connecticut, or anywhere else, the web is definitely the place to start. 

Thursday, September 4, 2008

Attorney Fraud in Real Estate Transactions: Taking Steps to Ensure that it Stops Now.

The Connecticut real estate bar has received a lot negative publicity over the last several years as a result of the actions of a few attorneys. These individuals have breached their fiduciary duties to their clients and the public trust by stealing money from their clients. In most cases this is done through residential real estate transactions, although there have been instances of theft and fraud involving estates and other legal representation. The number of instances of attorney thefts and the number of attorneys involved are both very small. This statistic is, however, not very relevant or comforting because the dollars can be very large, the financial effect on the clients is always devastating, and any number of thefts by attorneys is too many. Just one theft by an attorney can result in lost savings for a number of individuals.
 
As I mentioned, most attorney thefts occur in connection with real estate transactions. The attorney who decided to engage in this behavior generally accomplishes the theft by not paying off the seller’s mortgage and keeps the money for his own use. He (although almost all attorney thefts are done by men) eventually pays off the mortgage with the funds from another transaction. It is similar to a check kiting scheme.
 
If you have purchased a home, and you purchased an owner’s policy of title insurance, then you are protected. An owner’s policy protects you because the title insurance company will have to pay off any mortgages that were taken out before the date you purchased your home. It is a much bigger concern for the seller of a home, because the seller remains obligated for the unpaid mortgage. The fact that the seller’s attorney did not use the proceeds from the sale of the house to pay off the mortgage does not release the seller from responsibility for the mortgage. Refinances are also an area where this kind of fraud may happen because the attorney keeps the funds instead of paying off the old mortgage.
 
The good news, however, is that the vast majority of Connecticut attorneys are honest people and clients have nothing to be concerned about. In addition, attorneys, title insurance companies, and bar associations have all implemented new procedures to prevent this kind of fraud. First, the Statewide Grievance Committee, a part of the Connecticut Judicial Department, has implemented a new policy of random accounting of attorneys’ trust accounts. Under this policy all attorneys must submit to a comprehensive audit of their accounts or they will face disciplinary action and possible loss of their law license. The audits will reveal any improper actions by attorneys. Title insurance companies also conduct annual audits of attorneys. Second, title insurance companies doing business in Connecticut and local bar associations have adopted new requirements for attorneys to ensure that mortgages are paid off immediately as part of every closing. The new policies require that both attorneys be involved in the mortgage payoffs so that there is a system of checks and balances. No attorney will be able to hide the fact that he has not paid off his client’s mortgage.
 
As I mentioned before, even one instance of attorney fraud is unacceptable. As a result, attorneys in Connecticut are working hard to ensure that it is eliminated. The measures being taken will see that this happens.

Monday, June 16, 2008

Conveyance Tax Rates Extended by Special Session

In a special session on June 11, the Connecticut legislature extended the existing municipal conveyance tax rate which was set to expire on July 1. Therefore, there will be no change to any existing conveyance tax rates.

 

 

 


Monday, May 12, 2008

Limited liability companies: The entity of choice for Connecticut businesses.

There is no question that limited liability companies (LLCs) have become the dominant vehicle for new businesses being formed in the State of Connecticut. In fact, in 2006 formation of new LLCs outnumbered corporations by six to one! LLCs have become extremely popular because they combine the major advantages of two other types of entities: the limited liability of corporations and the pass-through tax treatment of partnerships.  Limited liability companies are easy to set up and maintain, and very flexible in structure.  There is virtually no limit on the different types of ownership and management structures that can be established.  LLCs also benefit from pass-through tax status, meaning that there is no tax at the entity level and all income and loss is reported on the owner’s tax return. As a result, income tax filings are much simpler. LLCs with only one owner do not have to file a separate tax return for the LLC, but instead report everything on Schedule C of their personal tax returns.
 
Since its introduction in 1993 the LLC has also become the entity of choice for real estate ownership and development. The low cost and flexibility of the LLC allows real owners to set up a new company for each property, and even for separate parcels within the same development. This allows the owner to protect his or her personal assets from liabilities associated with the real estate business. And it has the added advantage of insulating each property or project from liabilities associated with other projects or properties.
 
Limited liability companies can now be set up with one member, two members, or many members. The ownership can be as simple or as complicated as complex as the parties desire to structure it. There is virtually no limit on the different types of ownership structures. The management of the LLC can also be set up in a variety of ways. There can be one person in charge of the business, or all of the owners can be involved, or anything in between.  
 
There are still some situations in which the use of a corporation or other entity may be preferable to a limited liability company. And although setting up a LLC requires fewer documents and formalities than a corporation, there are still key documents that need to be prepared and executed. For this reason it is important to consult with an experienced attorney before setting up any new business, including a real estate business.

Wednesday, April 2, 2008

Proposed Act Concerning Environmental Disclosures

For many years, the law in Connecticut on disclosures in real estate transactions was “caveat emptor,” Latin for “buyer beware.” A seller of real estate, whether residential, commercial or both, had no obligation to disclose an aspects of the condition of the property. A seller could be liable for making a misrepresentation regarding the condition of the property, and courts often stretched to find misrepresentations in order to protect innocent buyers. One example is the multiple listing service. Courts have routinely held that the information in this service constitutes a representation as to the condition of the property. The Connecticut legislature finally obliterated “buyer beware,” at least in residential closings, by adopting legislation requiring that each seller deliver something called a Residential Property Condition Disclosure Report. This is a multiple page document which requires the seller to disclose many aspects of the condition of the property. If the seller doesn’t deliver the report, the seller must credit the buyer $300 at closing. Although the report is not intended to be a warranty of the condition of the property, if the seller fails to disclose anything the seller faces liability for non-disclosure.
 
Now the Connecticut legislature is taking disclosure obligations to a new level. A bill now making the rounds would require any seller of residential property to disclose to the buyer if the property is located within 300 feet of an “environmentally hazardous site.” There are eight different categories of environmentally hazardous sites, including proposed superfund sites. This would put a tremendous burden on any seller. What seller, real estate broker or even lawyer would know how to find this out? And how do you measure the distance without having a survey done? Do you get out there with a tape measure? 
 
If the seller’s property is within 300 feet of an environmentally hazardous site and the seller follows the letter of the law and delivers the required disclosure, the buyer can then terminate the contract within seven business days after receiving the disclosure. This could have a tremendous adverse effect on the seller, because the seller might have already signed a contract to buy a new home. If the sale of his or her existing house falls through, the seller in most cases is not going to be able to close on the new property and may forfeit his or her deposit.
 
The Real Property Section of the Connecticut Bar Association recently voted to oppose this legislation. Let’s hope our legislature realizes it causes more problems than it creates and focuses on more pressing matters.

Friday, March 28, 2008

2007 Changes to the Connecticut Transfer Act

 
The following text is excerpted from a recent letter from Kim Maiorano of the Remediation Division, Bureau of Water Protection and Land Reuse at the Connecticut Department of Environmental Protection. It provides an excellent summary of the changes made to the Connecticut Transfer Act, also known as the Property Transfer Law, by the 2007 Connecticut General Assembly and the DEP’s current requirements.
 
“Please note that significant changes were made to the Property Transfer Law during the 2007 Regular Session of the General Assembly. Public Act 07-81 (effective October 1, 2007) and Public Act 07-233 (effective July 1, 2007) made changes to CGS §22a-134 and 134a.
 
The Property Transfer Law now provides for automatic delegation to a licensed environmental professional (LEP) to oversee the investigation of the parcel and verify that the establishment has been remediated in accordance with the State Remediation Standard Regulations, §22a-133k-l through 3 (RSRs). This delegation is automatic unless within 75 days of the date of this letter, you are notified in writing that the Commissioner’s review and approval of the investigation and remediation is required. Please be aware that although the Form III is considered complete, the ECAF may still be under technical review and you may be required to provide additional information (i.e., receptor survey, well monitoring analyses, etc.) in order for the Commissioner to determine if the Commissioner’s oversight of the remediation activities is necessary.
 
In accordance with CGS §22a-133a(g)(l) and (h), as amended by Public Act 07-233, you must submit to the Commissioner within 75 days of the date of this letter, a schedule for the investigation of the parcel and remediation of the establishment. The schedule shall include the name of the licensed environmental professional that will be retained to oversee such activities at the establishment, and shall provide that you (as certifying party) will do the following:
 
1.         The parcel will be investigated in accordance with prevailing standards and guidelines, and the investigation will be completed within 2 years of the date of this letter.
 
2.         The final investigation report, approved in writing by an LEP, will be submitted to the Commissioner within 2 years of the date of this letter. The “Completion of Investigation Transmittal Form” shall be used to submit the required documentation to the Commissioner.
 
3.         Public notice of remediation will be posted prior to the initiation of remediation in accordance with CGS §22a-134a(i).  Since a forty five (45) day comment period is required pursuant to the RSRs, the public notice of remediation should be published far enough in advance of the submittal of the Remedial Action Plan (RAP) to allow adequate time for any comments on the proposed remediation and any response to such comments to be incorporated into the Remedial Action Plan. A copy of the public notice will be submitted to DEP immediately following publication of said notice.
 
4.         Remediation of the establishment will be initiated within 3 years of the date of this letter.
 
5.         A Remedial Action Plan, approved in writing by an LEP, will be submitted to the Commissioner within 3 years of the date of this letter. The “Remedial Action Plan Transmittal Form” shall be used to submit the required RAP to the Commissioner.
 
6.         Annual progress reports concerning the remediation and monitoring of the establishment will be submitted to the Commissioner on an annual basis starting by the fourth year from the date of this letter and every 12 months thereafter. Such annual progress reports must provide detailed report on remediation activities conducted within the previous 12 months, and any information indicating risks to human health or the environment may be higher than previously known.
 
The Department must be notified in writing within 30 days should there be any change in the selection of the licensed environmental professional.
 
Unless an alternative schedule has been approved in writing by the Commissioner, you shall investigate the parcel and remediate the establishment in accordance with the proposed schedule. When remediation of the entire establishment is complete, you, as the certifying party, shall obtain and submit to the Commissioner a final verification by an LEP (unless DEP notifies you in writing that the Commissioner will review and approve the investigation and remediation). The final verification shall be on a form prescribed by the Commissioner,
 
You should note that pursuant to CGS §22a-134a(g)(1), as amended by Public Acts 07-81 and 07-233, the Commissioner may determine at any time that the Commissioner’s review and written approval of the investigation and remediation at the parcel is necessary. Nothing in this determination shall affect the authority of the Commissioner under any other statute or regulation, including, hut not limited to, any authority to issue an order to any party associated with the transfer, to institute any other proceeding, or take any other action to prevent or abate pollution, to recover costs and natural resource damages; and to impose penalties for violations of law.
 
If at any time the Commissioner determines that the actions at the parcel have not fully characterized the extent and degree of pollution or have not successfully abated or prevented pollution, the Commissioner may institute any proceeding, or take any action to require further investigation or further action to prevent or abate pollution. In addition nothing in this letter shall relieve any person of his or her obligations under applicable federal, state and local law.”
 

Friday, March 14, 2008

Beware of aggressive assessors!

I recently learned from a client who purchased a home in Fairfield County that at least one area town has developed a new way to uncover homes which are not properly assessed. After the individuals purchased the house, they were sent an additional tax bill based upon an increased assessment. They spoke with the town, and were informed that the town increased the assessment because the house had a finished basement which had never been reported to the town. According to my client, the finished basement had never been reported to the town because the prior owner had completed the work himself and had never taken out a building permit. Now for the $64,000 question: how did the town discover this? The town had recently started reviewing the data on the multiple listing service (MLS) and compared it to the assessment data. The house was advertised as having a finished basement, but there was no finished basement noted on the assessor’s card. This is very sneaky but nonetheless there are some valuable lessons to be learned. First, before buying a house, it is important to research the house fully. This includes reviewing the assessor’s records and comparing them to the information on the MLS. This will help to avoid any nasty real estate tax surprises down the road. Second, unlike New York where the practice is common, in Connecticut it is not customary for an attorney, home inspector or appraiser to review the records of the building and zoning departments. It certainly, however, is a prudent idea. Such a review will help determine if there is any gap in the required permits.

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