City of Easton Ordinance Targets Foreclosures, Abandoned and Blighted Properties

The City of Easton (PA) has enacted an abandoned property ordinance  (pdf) to combat neighborhood deterioration, targeting property foreclosures, and abandoned and blighted properties.  It creates an array of new tools for the City to eliminate nuisance conditions, promote neighborhood stability, and protect property values. The new tools include:

• creating a registration system for properties that are in default of a mortgage, foreclosed, abandoned or blighted;
• requiring owner and mortgagee inspections of properties that are in default of a mortgage;
• requiring owners who do not live within a 30-mile radius of the City to designate a local property manager;
• imposing an escalating annual registration fee for properties in default of a mortgage, abandoned or blighted;
• imposing new property maintenance standards in addition to existing city property maintenance codes, including duties on mortgagees;
• requiring owners and mortgagees to maintain such properties in a secure manner to prevent access by unauthorized persons;
• creating additional authority for the city to lien properties for costs incurred by the city to assure compliance with maintenance standards;
• imposing substantial fines (not less than $1,500) for violations, including a failure to: register the property, pay any fees within 30 days after they are due, or maintain or secure such properties.

The new ordinance was prompted by the large number of foreclosures and property vacancies induced by the implosion of the market for securitized mortgages and collateralized debt obligations and the resulting Great Recession.  Following abandonment by owners, foreclosing banks frequently refuse to take responsibility for property maintenance.  The National League of Cities has recognized this as a nationwide problem.  Property owners, property mangers, and mortgagees for properties located within the City of Easton would be well-advised to familiarize themselves with these new requirements.

EPA Guidance to Commercial and Industrial Lessees for CERCLA Liability Protection for Historic Contamination

The United States Environmental Protection Agency (EPA) recently issued revised guidance clarifying its position that commercial and industrial tenants can protect themselves from contamination liability under the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, or "Superfund") by relying on an “all appropriate inquiry” of the ownership and uses of the property, timely performed by the landlord, or by timely performing the all appropriate inquiry themselves. Under EPA’s prior guidance, it was unclear that these statutory defenses were available to tenants. CERCLA imposes strict, joint, and several liability on designated persons, including owners and operators of facilities, where there has been a release or threatened release of hazardous substances. Although the mere execution of a lease does not necessarily impose CERCLA sec. 107 liability, tenants leasing contaminated properties may fall within the “operator” liability designation even if the contamination occurred prior to the tenant’s use of the property. Tenants are also listed in the CERCLA sec. 101(40) definition of "bona fide prospective purchaser" ("BFPP"). CERCLA provides a liability defense to BFPPs who can meet certain requirements, including the making of an "all appropriate inquiry", ordinarily a Phase I environmental site assessment, prior to purchasing or leasing the property. This defense can protect against CERCLA liability at a site that has historical environmental contamination that was not caused by the tenant. Subject to certain conditions, the BFPP defense applies even when the inquiry reveals historical environmental contamination on the property to be purchased or leased.

Under EPA’s revised guidance, a tenant can have derivative BFPP protection by relying on the landlord’s all appropriate inquiry or by performing the all appropriate inquiry itself prior to commencing operations if the landlord failed to timely undertake it or has acted in a way to invalidate this protection. The new guidance indicates how EPA will exercise its enforcement discretion under CERCLA. It is important to note that EPA may still take enforcement action against a tenant if it is potentially liable for reasons other than its status as a tenant or where the owner is not in compliance with state or federal regulatory requirements or cleanup orders.

A prospective lessee of commercial or industrial property should determine if the owner or landlord of the property timely performed an all appropriate inquiry prior to its purchase of the property, where the inquiry, purchase and lease occurred after January 11, 2002. If not, the tenant may want to consider performing a Phase I environmental site assessment prior to entering into a lease to obtain protection from CERCLA liability claims.

A link to EPA’s guidance document is here: "Revised Enforcement Guidance Regarding the Treatment of Tenants Under the CERCLA Bona Fide Prospective Purchaser Provision"

"Murder on Main Street" - The duty of sellers to disclose "property defects" to their buyers

[Update:  As we predicted, the Superior Court opinion in this matter has been vacated and reargument has been granted. 2012 Pa. Super. LEXIS 30 (2012)]

The house with four bedrooms, 2-1/2 baths, two car garage and a white picket fence seemed to be the young couple's dream home, and - from all appearances - it was.  Or was it?  Not if you overheard the whispers of the neighbors.  Or read the front page of the local newspaper from over a year ago.

In Milliken v. Jacono, 2011 Pa. Super. 254, __ A.3d __ (2011), the Pennsylvania Superior Court held that sellers of residential real estate and their agents should have told their buyer that a previous owner had murdered his wife in the house, and then committed suicide.  [The full opinion of the Court can be found at http://lawyersusaonline.com/wp-files/pdfs-3/milliken-v-jacono.pdf.  The case seems certain to provoke litigation concerning the extent of a seller's obligation to disclose non-physical property defects unless the Pennsylvania legislature steps in and joins the many other states which have addressed the question of stigmatized property with statutory language.

While property can be sold by its sellers in an "as is condition", i.e., with all of its faults, the era of "caveat emptor" (or "buyer beware") is largely gone.  This case certainly advances the trend toward requiring disclosures.  With very limited exceptions, sellers of residential real estate in Pennsylvania are required by the Real Estate Seller Disclosure Law to disclose to their prospective purchasers "any material defects with the property known to the seller." The statute lists 16 subjects of mandatory disclosure, 12 of which relate to the physical condition of the property such as its roof, plumbing, heating, air conditioning, and the presence of insect infestation or hazardous substances.  (Other questions relate to the seller’s expertise in "areas related to the construction and conditions of the property and its improvements", the duration of seller’s possession, and legal matters such as title, condominium, and use limitations).  Sellers are required to deliver to their prospective buyers a written, signed, and dated disclosure statement before an agreement of sale is signed.

To assist the real estate industry in complying with this law, the General Assembly directed the Pennsylvania State Real Estate Commission to prepare a form for these disclosures.  The Commission did so, but in addition to the specific disclosures required by the statute, it included in its form a final question for each seller: "Are you aware of any material defects to the property, dwelling or fixtures which are not disclosed elsewhere on this form?"  The form defines a "material defect" as "a problem with the property or any portion of it that would have a significant adverse impact on the value of the residential real property or that involves an unreasonable risk to people on the land." [The Commission's form is at http://www.pacode.com/secure/data/049/chapter35/s35.335a.html.] The statutory emphasis on the physical conditions of property - and the omission of any reference to non-physical, non-legal matters - was accepted by many lawyers and real estate agents as not requiring disclosure of other property characteristics that might affect value, including those which fall within the real estate agent’s mantra, "location, location, location."

But in holding otherwise, the Superior Court stated that the failure to disclose not only violated the requirements of the disclosure law, but constituted common law fraud because of the affirmative misrepresentation that there were no other "problems" with the property.  To prove the "materiality" of the failure to disclose, the buyer was prepared to introduce testimony from two real estate appraisers that the crimes had diminished the value of the property by ten to fifteen percent.  Notably, the Court chastised the sellers and the real estate agents for making inquiries to the Pennsylvania Real Estate Commission and the Pennsylvania Association of Realtors for advice in deciding whether they were required to disclose the murder/suicide to the buyers (both said "no"), stating "Instead of expending this effort, they would have been better served by simply acting in good faith and disclosing this fact."  This language is of particular concern to attorneys, suggesting as it does that if a question regarding disclosure is important enough to require legal consultation, then disclosure is required.

The Court did acknowledge there would be concerns that it was "proceeding down a slippery slope." In her dissenting opinion, Judge Kate Ford Elliott walked us down that slope by questioning whether a seller must disclose lesser crimes such as burglaries, or the proximity of sex offenders, or that there is a sewage plant across the way that can be smelled on humid days.  She even raises the circumstance of a house erected on ancient Indian burial grounds.  Such a seller might be advised to bring Ghostbusters through the home before putting it on the market so as to remove the "defect." Or find the buyers who will say, "I ain’t afraid of no ghosts."

The concerns associated with the sale of stigmatized properties are prevalent enough that the National Association of REALTORS® has produced an entire "Field Guide" on the subject for the guidance of its members.  See http://www.realtor.org/library/library/fg703.  The association defines "stigmatized property" as one which ‘‘has been psychologically impacted by an event, which occurred or was suspected to have occurred on the property, such event being one that has no physical impact of any kind."

We will be not be surprised if this decision is reversed on a motion to reconsider, or on appeal to the Pennsylvania Supreme Court.  Moreover, not only is the Pennsylvania real estate sales industry certain to press for a legislative "bright line" concerning a seller’s obligation, but also for immunity to sellers and their agents for failure to disclose non-physical "defects".

The Perils of Natural Gas Well Drilling / "Fracking" Leases in Pennsylvania's Marcellus Shale

The New York Times' exposé of the problems with natural gas/hydraulic fracturing continues with an illuminating article, "Learning Too Late of the Perils in Gas Well Leases."  As the article says, "Americans have signed millions of leases allowing companies to drill for oil and natural gas on their land in recent years. But some of these landowners — often in rural areas, and eager for quick payouts — are finding out too late what is, and what is not, in the fine print."   While some landowners have been paid significant sums under these leases, others are discovering they are paying a costly price for "permitting industrial activity in their backyard."  Problems caused by the fine print in such leases can include: (1) the refusal by the gas company to compensate for damages to water supplies, livestock or crops; (2) noise and light pollution, 24 hours/7 days a week; (3) losing control over the use of the property, as most leases grant gas companies broad rights to determine where they can cut down trees, store chemicals, build roads and drill wells; (4) industrial waste disposal on the property; (5) enduring indefinite extensions without additional landowner approval. Another article in the series, "Rush to Drill for Natural Gas Creates Conflicts With Mortgages" , describes the mortgage problems that such leases can create.  Some banks refuse to issue mortgages on properties subject to these leases.  Many mortgages require permission from the lender before they sign a lease; signing without permission can put a homeowner in instant default. Many gas well drilling leases will permit the gas company to operate in ways that violate rules in the mortgage.

An archive of more than 1,000 Pennsylvania gas leases can be viewed online on the New York Times website here. The archive can be used to compare lease terms and evaluate costs and benefits. An archive of documents relating to the problems with mortgages caused by gas leases is available here.

According to John Quigley, former Secretary of Pennsylvania's Department of Conservation and Natural Resources, "at least seven million acres -- 25 percent of the state’s land area -- has been leased for drilling. About 4,000 Marcellus wells have been drilled in Pennsylvania so far, and over the next several decades, tens of thousands -- maybe hundreds of thousands -- of wells will be drilled."

Landowners who have signed -- or who are asked to sign -- natural gas well drilling leases should be aware of these potential problems, and have the leases and other real estate documents reviewed by counsel.

Appeals Court Rejects Attempt to Void Zoning Hearings Due to Environmental Advisory Council Involvement

UPDATE: May 5, 2011  In an order issued today, the Pennsylvania Supreme Court denied HYK Construction Company, Inc.'s petition for allowance of appeal of the Commonwealth Court's ruling. 

In an important decision for Pennsylvania's Environmental Advisory Councils (EACs), Pennsylvania's Commonwealth Court rejected a developer's attempt to void conditional use zoning hearings before a Board of Supervisors due to the involvement of the Township's EAC .

The November 19, 2010 decision in HYK Construction Company v. Smithfield Township (2047 CD 2009), involved an application to construct and operate a concrete batch plant. The EAC participated in the hearings, along with some 75 neighbors and residents.  The developer objected to the EAC's involvement, claiming that it showed that the township was biased and had a conflict of interest. After the Supervisors denied the developer's objections and allowed the EAC to participate, the developer filed a lawsuit in the Court of Common Pleas against the Township and the EAC.  The lawsuit sought an injunction to disqualify the Supervisors, prevent the EAC from participating, and to order the matter heard by an independent hearing examiner.  The EAC and Township argued that there was no conflict in the EAC's role in the hearings and that the Common Pleas Court lacked jurisdiction to hear the case.  The Common Pleas Court held that it had jurisdiction and granted relief to the developer. 

On appeal, the Commonwealth Court reversed the lower court's decision and ordered the developer's lawsuit dismissed. The Commonwealth Court determined that the Court of Common Pleas lacked jurisdiction to hear the case. The Court decided that such claims of bias and conflict had to be raised as part of the zoning proceedings and could not be the subject of a separate lawsuit. In addition, it held that it was improper for the lower court to hear the case without including all of the other parties to the conditional use hearing, and in a "clear violation of the Appllants' due process rights",  the lower court had improperly conducted a private, off-the-record investigation to determine bias. With respect to the EAC involvement, the Court stated that: "While EAC is funded by the Township and was granted party status by the Board, EAC is a separate and distinct entity from the Board. The requisite walls of division are in place to overcome any appearance of impropriety."

Finally, the Court rebuked the developer for its attempt to avoid the ordinary hearing and review process of the Pennsylvania Municipalities Planning Code:  "We believe HYK's equity action represents an improper attempt to circumvent the mandatory statutory review process. To allow equity jurisdiction to usurp the power of the Board would create infinite challenges to interlocutory determinations and defeat or, at the very least, disrupt the Commonwealth's structure for review of zoning decisions by local boards and governing bodies. If the courts became involved every time a party makes an allegation of bias, the courts — rather than the Board — would be reviewing conditional use applications... [W]e can find no justification for the trial court's exercise of equity jurisdiction in this matter."

NOTE: Charles W. Elliott represented the Smithfield Township Environmental Advisory Council in this case.

Buyer Beware: Real Estate Developer "Resale Fees" Coming to Pennsylvania?

Update: The Pennsylvania General Assembly responded to this problem by enacting the Private Transfer Fee Obligation Act, 68 Pa. C.S. §8101, P.L. 40, No. 8, effective June 24, 2011.  The Act prohibits the fees described below. Buyers who are confronted with instruments that purport to impose such transfer fees should consult with counsel. The Act is reproduced here.

Home buyers should be on the alert for a new type of cost to buy real estate: the "resale fee", "that allows the developer to collect 1 percent of the sales price from the seller every time the property changes hands — for the next 99 years." 

You should read the illuminating story in the New York Times which describes the practice (also called "private transfer fee") and its pitfalls. 

Listen to the sales pitch, in a press release issued by Freehold Capital Partners:

"Freehold Capital Partners...is pleased to announce that it has partnered with a major developer on a real estate project in Pennsylvania. The project's estimated final improved value is $250,000,000.00. By working with Freehold to structure a one percent Capital Recovery Fee, the project developer can spread development costs over time, and, in consequence, reduce the initial sales price. The fee runs for the expected useful life of the improvements, and then expires. According to Ph.D. land economist Dr. Tom McPeak, "a lower initial price will result in lower acquisition costs, reduced carrying costs, and reallocation of the savings," thus making homeownership more affordable. (See "The Economics of Private Transfer Fee Covenants"). Buyers who buy for less can then sell for less, passing on the savings to future owners."

Proponents sometimes attempt to gain acceptance of the fee by claiming that a portion of the fee will be allocated to "community benefits".  The press release continues: "A portion of the future income stream created by Freehold is allocated to non-profits that benefit the community. Through this program, long-term funding is created for clean air, clean water, green space, literacy, affordable housing and similar endeavors that help build better communities and enhance the quality of life in and around our projects."

Finally, the press release assures us that imposing this fee on every sale for 99 years is a matter of fairness to the first time buyer: "A Capital Recovery Fee represents an attractive alternative to the traditional practice of putting 100% of the burden for long-term improvements (such as roads, water lines, lift stations, etc.) onto the shoulders of first time buyers." 

Of course, the "traditional practice" has worked well since the beginning of modern real estate development. Moreover, it did not burden real estate buyers with the risk that when it comes time to sell their homes the one percent additional fee will be a cost that will force them to reduce their sale price to compete with sellers whose properties are not subject to the fee. 

The fees are sometimes buried in the fine print of closing documents or, even worse, hidden in a lengthy "covenants and conditions" document that is not presented at closing and requires no signature, but whose terms "run with the land" and bind all owners of the property. Unpaid fees would almost certainly result in liens on the property. 

Even worse, companies advocating these resale fees are pitching Wall Street to "securitize" these fees, in a manner similar to the subprime loan securitization debacle which helped bring the U.S. economy to its knees. 

The Department of Housing and Urban Development recently determined that the fees violated its regulations and that HUD would not insure mortgages on properties that included them. The Federal Housing Finance Agency is considering a proposal to prohibit the transfer fees on all mortgages financed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The FHFA proposal is now open for public comment until October 15, 2010. Although seventeen states have prohibited or restricted the practice, at the time of this post Pennsylvania has not yet acted. 

Buyers of real estate should ensure that they are advised by competent counsel who can identify these problems.  The closing documents should be carefully reviewed. Recorded declarations of covenants and conditions, although they may not be closing documents, can nevertheless bind owners of the property. It is important that buyers understand these covenants and conditions and be advised of their consequences. 

Water, water, everywhere. Stormwater floods my property!

Stormwater is inundating my yard and getting into my basement.  Can I hold anyone responsible?

With the assistance of other professionals, lawyers experienced in handling stormwater management and other environmental matters can generally ascertain what the problem is, what causes it, and how it can be solved. While the immutable forces of gravity and weather are of course to "blame," typically some human activity is materially contributing to the problem. If so, those responsible may be held legally liable.

Judicial opinions often say that "water must flow as it is wont to flow," because it is "descendible by its very nature." The owner of higher ground has an easement in lower land for the discharge of all waters that naturally rise in or flow or fall upon the higher ground. Not only is an owner of higher land under no liability for damages to an owner of lower land caused by water which flows naturally from one level to another, but he can improve his land by regrading it or erecting buildings thereon, without legal responsibility for any consequent diversion of surface waters from his property to that of adjoining owners. This is the general rule.

But all general rules have exceptions. In determining whether some person can be held legally accountable, a careful factual investigation and legal analysis are usually required. For example, a property owner may be diverting stormwater from its natural channel onto another's land, unnecessarily increasing the volume and/or velocity of stormwater, or creating an artificial channel which collects and discharges stormwater in greatly increased quantities. These activities can give rise to liability. In such instances, it is necessary to evaluate whether a "legal injury" has occurred. Soil erosion or property damage resulting from flooding or increased stormwater constitutes a legal injury, as does interference with the right of a property owner "to reasonably use and enjoy his property" caused by stormwater.

How long the problem has existed, the frequency of the problem, and the amount of rainfall necessary to trigger it, are important factors. Also important is whether any new development on higher land has materially increased impervious coverage (e.g., parking lots, roof tops, new streets).  It is possible that stormwater management systems have been constructed on higher land, which are exacerbating rather than alleviating the problem.

The question may also arise whether a local government is responsible. This raises additional questions and may depend on legislative "immunity" from liability. If a municipality is making street improvements or engaging in some other public works project after which a stormwater problem appears, there may very well be a basis for liability. On the other hand, if all a municipality has done is approve new land developments with stormwater management systems which prove inadequate, typically there is no liability on the part of the municipality. Under these circumstances, the municipality may be holding funds of the developer which can be used to correct or improve these systems.

Property owners experiencing stormwater problems are well-advised to contact counsel experienced in environmental matters. 

PA DEP Proposes Major Revisions to Act 2 Requirements for Remediation of Contaminated Properties

The Pa. Department of Environmental Protection has proposed new major revisions to Pennsylvania's Act 2, Land Recycling Program requirements for the cleanup of contaminated real estate.  In a December 15, 2009 presentation to the Environmental Quality Board, DEP proposed to modify statewide cleanup standards for contaminated sites. Under the proposal, Pennsylvania would adopt the cleanup standards under the current EPA Risk Assessment Guidance for Superfund (January 2009) and would revise the tables of numeric values for Statewide health standards.  The proposal would also ensure a regular review of the requirements every three years for possible revisions to the tables of numeric cleanup values for substances regulated under Act 2. Under the new proposal, cleanup standards for 215 pollutants would be made higher; the standards for 170 other pollutants would be made lower. In addition, 26 new substances would be added to the regulations. The DEP Powerpoint presentation to the EQB has additional details. For further information, the entire proposal, including an Executive Summary, preamble to the proposed regulation, and the revised Land Recycling Program Annex A and tables are available here: Proposed Rulemaking: Administration of the Land Recycling Program

Landlords beware: How not to evict a tenant!

 Q.     If a tenant doesn’t pay rent, should a landlord change the locks on the apartment, or cut off utilities such as heat, electric and water, or take the tenant’s property out of the apartment and sell it to pay the rent? 

A.     No.  Our advice is to use only legal proceedings to collect rent and evict a tenant.  A landlord should not change locks, cut off utilities, or remove property. This is referred to as “self-help.”  

Until fairly recently, landlords often used “self-help” to get rid of defaulting tenants quickly and cheaply.  Typically, leases provide that in the event a tenant fails to pay rent, the landlord has both of the following remedies: (a) at the option of the landlord, the lease would terminate and the landlord could evict the tenant; and (b) the landlord could seize (distrain) the personal property of the tenant and sell it to pay the rent. Even if these remedies are in a lease, they should not be exercised.  A landlord may reason that “this is my property and if I want to get rid of a tenant because he hasn’t paid rent to me for months, that’s my right.”  The landlord is correct only if he uses legal process. The landlord is not correct if he uses self-help.  

The landlord should file a landlord-tenant complaint (typically in “small claims” court before a district judge) for the unpaid rent and, if successful, get an “order for possession” from the court.  This order becomes the basis for a sheriff, constable, or other law enforcement officer to evict your tenant.  Even if a landlord has obtained an order for possession, he should not evict the tenant on his own. 

In fact, if the landlord tries to evict a tenant on his own and without a court order, he violates numerous tenant rights.  Under some circumstances, the landlord may actually be committing a crime.  The violations may require the landlord not only to pay the tenant his actual damages, but three times that amount.  The landlord may be ordered to pay the tenant “punitive damages”: an amount which a judge or jury decides is necessary to punish the landlord so that he never uses self-help again.  The landlord may also be required to pay the tenant’s legal fees.  Attorneys have considerable incentives to bring these lawsuits against landlords.