Tag Archives: Real Estate Attorney

Contracting Diseases: Mishaps in contract drafting, limitation of liability edition

1 Aug

One of the problems I regularly encounter with new clients is that they have come to me too late to do the most good. This frequently happens in the area of drafting contracts relating to their business or project. Many people say they want a “simple” contract, or they think they know what they’re signing, or that they trust the other party to the deal, so they don’t need to overthink what they’re doing. A recent decision by a Federal Court in Indiana demonstrates how costly this kind of “penny-wise” thinking can be.

SAMS Hotel Group, LLC set out to build a new hotel. Unfortunately, the architecture firm the company retained to provide the design work for the project apparently did not employ or even consult with a registered professional structural engineer for the project. The county building officials later found structural design defects, which resulted in the condemnation of the structure and its ultimate demolition before the hotel ever opened its doors to the public.

SAMS sued its architect, Environs, Inc. The trial court held that Environs breached the applicable standard of care by failing to involve a structural engineer and for failing to timely inspect the project during construction. SAMS proved damages in the amount of $4.2 million.

Now the story turns truly tragic for the developer. Environs incorporated a clause in its contract with SAMS that sought to limit its liability:

The Owner [SAMS] agrees that to the fullest extent permitted by law, Environs/Architects/Planners, Inc. total liability to [SAMS] shall not exceed the amount of the total lump sum fee due to negligence, errors, omissions, strict liability, breach of contract, or breach of warranty.

SAMS, as the “Owner” under the applicable contract, paid Environs a lump sum fee of $70,000. The court enforced this limitation of liability provision and held that SAMS could recover only $70,000 of its $4.2 million loss, even though the source of Environs’ liability arose out of negligence rather than a breach of the parties’ contract. The United States Court of Appeals for the Seventh Circuit affirmed the trial court’s ruling. It noted, under Indiana law, that sophisticated parties aren’t entitled to protection from even the apparently unfair terms of the contracts they sign:

[T]he general rule of freedom of contract includes the freedom to make a bad bargain.

Parties are free to enter into any kind of contract they like, but just know that if you assume you are sophisticated enough not to need a lawyer’s assistance with your contract, the court just might agree with you and hold you to what you signed.

The complete order of the Federal District Court for the Southern District of Indiana can be read here.

The complete opinion of the Seventh Circuit Court of Appeals can be read here.

Matt Drewes contributed this article. Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s eight-member Community Association Representation Group and the firm’s Creditors’ Remedies Group, and practices in the areas of business and real estate litigation and transactions, employment law, construction litigation, community association law, debtor/creditor law, and insurance. He has been included in the annual list of Minnesota’s Rising Stars for several years, and has been quoted in print publications such as the Minneapolis StarTribune, Minnesota Lawyer, Habitat Magazine, and on various websites including Yahoo!Finance.com, Bankrate.com, MSN.com, HOALeader.com, and elsewhere on issues involving construction litigation, community associations, and real property issues. He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

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Minnesota Court of Appeals Holds Buyer Was Earnest About Real Estate Purchase Even Though It Didn’t Pay the Earnest Money Due Under the Purchase Agreement

7 Apr

In the case BOB Acres, LLC v. Schumacher Farms, LLC, decided on April 5, 2011, the Minnesota Court of Appeals held that, as long as the parties to a real estate purchase agreement clearly express the intent to buy and sell real property, the fact that the buyer did not provide the earnest money stated in the contract did not render the contract invalid.  Read it here.  It may at first seem remarkable that the Court of Appeals would hold that a party that did not provide the earnest money specified in the purchase agreement might still be able to enforce the agreement, but there were several factors involved.

The earnest money was a fairly nominal amount ($500 earnest money on a $70,000 contract for the purchase of 25 acres of undeveloped land).  This suggests that the earnest money was not a significant factor in the seller’s decision to sell the property to the buyer, but rather earnest money is provided simply to show the buyer’s good-faith intentions.

The Court also noted that the failure of a party to perform a material provision of the agreement could be a breach that permits the non-breaching party to discontinue performance, but the seller did not raise any objection to buyer’s failure to tender the earnest money until it had already announced that it no longer wished to be bound by the purchase agreement.  This resulted in a waiver by the seller of any right to object to certain breaches of the agreement by buyer, which might have allowed it not to go through with the sale if it hadn’t waived its rights.  The Court of Appeals explained that there is a difference between the issue of contract formation and contract performance.  As far as contract formation is concerned, the Court cited to a treatise on contract law (but apparently found no prior Minnesota case law on point) to hold that a promise is sufficient consideration for a promise.  In other words:  the buyer’s promise to buy the property (presumably for the purchase price stated in the agreement) was sufficient consideration for the seller’s promise to sell the property; the modest earnest money payment was simply incidental to the agreement.

Thomsen Nybeck represents both buyers and sellers, as well as lenders and other parties involved in real estate transactions of all types and sizes.  If you have a question about your next deal, contact one of our attorneys for advice about how to ensure you get the deal you intend.

Matt Drewes contributed to this post.  Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s nine-member Community Association Representation Group and the firm’s Creditors’ Remedies Group. and practices in the areas of business and real estate litigation and transactions, employment law, construction litigation, community association law, debtor/creditor law and insurance.  He has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years, and has been quoted on issues involving construction litigation, community associations and real property issues in the Minneapolis Star Tribune, Minnesota Lawyer, Yahoo!Finance.com, Bankrate.com, and elsewhere.  He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

Small Businesses May Catch a Break: Small Business Administration is Funding Commercial Loan Refinancing for Loans Maturing By End of 2012

25 Feb

Struggling small businesses may catch a break based upon a new, temporary program from the U.S. Small Business Administration.  Beginning February 28, 2011, the SBA will begin accepting refinancing applications under this new offering within its 504 loan program.  The program applies to commercial loans that will mature or otherwise have balloon payments due on or before December 31, 2012.

Historically, 504 loans have been used to foster long-term financing opportunities for small businesses by providing them with fixed rates and the flexibility of a low initial equity contribution (as low as 10%).  The businesses could then finance up to 90% of the cost of the proposed project or improvement by receiving an SBA guaranteed loan for up to 40% of the cost of the project.  This portion of the financing is funded by an SBA Certified Development Company and secured by a second mortgage.  The availability of subordinated financing reduces the risk and enhances the prospect of bringing in a private lender, which then funds up to 50% of the project cost and receives a first mortgage to secure its loan.

The new program will tweak the standard 504 loan protocol to suit the goal of refinancing those loans reaching maturity owed by stressed, but viable, businesses.  The borrower may refinance the lesser amount of 90% of the current appraised value of the property, or 100% of the existing loan, as well as certain costs associated with the refinancing.  You can read more about the loan program at the Costar Group’s website on its “Headlines” page, here.

There are signs of revitalization in the world of commercial real estate, and this new SBA program has the potential to further that growth, one small business at a time.  If you’re a business owner looking to expand, modernize, or simply to seek relief from the squeeze of an existing loan coming due, or if you’re a commercial lender, we at Thomsen Nybeck provide prompt, efficient and cost-effective legal services to both commercial lenders and borrowers.

Matt Drewes contributed this post.  Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s nine-member Community Association Representation Group and the firm’s Creditors’ Remedies Group., and practices in the areas of business and real estate litigation and transactions, construction litigation, community association law, debtor/creditor law, insurance and employment.  He has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years, and has been quoted on issues involving construction litigation, community associations and real property issues in the Minneapolis Star Tribune, Minnesota Lawyer, Yahoo!finance.com, Bankrate.com, and elsewhere.  He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

THAT’S NOT MY JOB

21 Dec

Expanding obligations of real estate agents and brokers in the REO market

With more bank owned property on the market, real estate agents are often requested to take on responsibility for managing issues they have not historically managed.  This is especially true for agents listing bank owned property.

Lenders and their affiliated asset managers have requested agents, in exchange for the listing, to perform tasks such as cleaning, maintaining and securing property.  In effect, they are sometimes put in the position of “managing” the property.  These properties can be in varying physical condition — some of the properties have been vandalized, while other properties are vacant and in general disrepair.  Problems can arise for the listing agents taking on these properties especially given the lender-owner and the asset manager are out-of-state and have no knowledge of the condition of the property.  The Listing agent becomes the “eyes” of the Lender and the individual who has the most knowledge about the property.

The listing of REO properties invariably means they are being accessed by agents and clients alike, regardless of what condition they are in.  If no maintenance or repairs of the property have been undertaken since the previous occupants left, there could be conditions or dangers which might  injure individuals viewing the property.  These conditions can be as minor as potential trip hazards or as severe as collapsing or missing stairs.  It is incumbent on Listing agents to make sure that conditions that could potentially cause harm are addressed or sufficient notice is given to individuals viewing the property are aware of the potential hazard.  Even more importantly, a Listing agent who observes potential dangers should inform their client (the REO owner / bank) of these potential pitfalls and make a determination regarding whether it remains safe to show the property.

While these activities are not typical real estate agent activities in a “traditional” listing, they nonetheless may be seen as a foreseeable obligation of an agent selling REO property.  If the property is in disrepair, the Listing agent may be charged with a duty to inform individuals who enter the home of the potential for harm, or to work with the seller to ensure that the property is not shown until such risks are remedied.  Listing agents rarely would have this responsibility in an occupied property, but REO properties present a new issue for consideration, as the absence of a residing owner, may increase the importance of the agent’s awareness of dangerous conditions, and may lead to this enhanced duty.

This is not to say that the agent must become the repairman and advance money out of pocket, but the agent needs to inform the seller when a property is not ready to be listed, or when a condition is found which may make continued showings imprudent.

The problems are not only restricted to Listing agents, as buyer’s agents could expose themselves to potential liability by bringing buyers to a property that contains dangerous conditions, particularly if such conditions are known or disclosed.   Buyer’s agents showing REO property to individuals may not be aware of conditions existing in the property but crafty lawyers may argue that the obligation of the buyer’s agent is to protect his client.  Such an argument might extend to provide that in an REO property the buyer’s agent should inquire of potentially dangerous conditions existing in the property.  There may be an argument that a buyer’s agent must engage in some level of “due diligence” to explore such risks.

Also, one needs to consider the potential for personal injury claims due to injury occurring while visiting the property to determine whether appropriate insurance coverage is in place to protect the agent and the brokerage from such claims.  The extent of such coverage will vary, depending upon the insurance policy.  Whether such claims are covered under the brokerage company’s errors and omissions policy or covered under its general liability policy should be explored.  Both of these policies should be reviewed to see if claims of this nature would be covered.  Without insurance coverage of some kind, the potential personal risk to an agent and brokerage company increases greatly.

What should agents do to protect themselves from potential liability?

First, the Listing agent should review the contracts they are signing with Lenders, before listing any REO Property.  Any and all existing REO listing contracts should be similarly reviewed.  Lenders’ contracts may include indemnification or hold harmless language to reduce the risk to the REO owner in lawsuits occurring as a result of the condition of the property.  Agents should clearly identify what level of responsibility they are undertaking for the lenders they are working for in listing such bank-owned property.  In the event the REO owner has incorporated indemnification or risk-shifting language to the real estate brokerage company or agent, the agent and broker should evaluate what risks that presents, in light of the issues above.

Second, the agents and brokerage company should make sure they have the appropriate insurance coverage to provide protection in the event of personal injury or other such liability claims.

Third, you should not take a listing involving a property that is in such poor condition as to increase the likelihood of a personal injury risk to those who access the property, unless a plan has been made to remedy such issues in a manner that is sufficient to properly reduce or eliminate the risk.  This should be done by letter or email so there is a document indicating that the agent gave notice to the Lender, properly identifying these conditions.

Fourth, in the event the property is listed and a dangerous or other potentially harmful condition is present, the Listing agent should make clear to any possible viewers of the property, that this condition exists and warn of the necessity to take precautions with respect to that issue so that the condition does not cause harm.  This notice should be in writing, so that there is proof the notice has been given.

Finally, real estate agents and especially Listing agents are not obligated to predict problems that may occur with showing bank owned property.  Known conditions should be identified and appropriate remedies or warnings should be made.  However, Listing agents and buyer’s agents are not responsible for predicting the future or speculating about potential dangers if they are not aware of any such risks.

Real estate agents listing or showing REO property need to appreciate that the property may be vacant and in disrepair due to a lack of maintenance. This lack of maintenance may cause dangerous conditions to the property which need to be identified by the agent and addressed by the Lender.  If the conditions are not addressed, the agent needs to make sure that individuals viewing the property are made aware and that precautions are undertaken to mark off the area.  Agents need to see their roles in the REO market as enhanced (greater responsibility than they may have in a traditional “occupied” home) so as to protect themselves from the potentially enhanced liability.

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This blog entry is written by Brad Boyd and David McGee, both of whom are Shareholders at Thomsen Nybeck. Brad is the chair of the firm’s Transactional Group, and his practice focuses primarily in Real Estate, Real Estate Brokerage, Business and Corporate law, and Wind Energy Law.  Brad provides legal advice, guidance, and representation related to risk management in a wide variety of real estate and business law matters.  He is counsel to the Minnesota Association of Realtors, many individual Realtors and brokerages, business clients and individuals.

David J. McGee is a shareholder and head of the litigation department of Thomsen & Nybeck, P.A. Mr. McGee practices in the area of real estate, construction and commercial litigation.  He is a lecturer and author of articles on construction defect, real estate and community association issues.  He is a qualified neutral in both arbitration and mediation.  He represents clients in arbitrations, mediations and district court actions, in both state and federal court.  He represents agents and brokers on behalf of several insurers in arbitrations, administrative proceedings, licensing agencies and in court.  Mr. McGee has been recognized by several publications, including Minneapolis-St. Paul Magazine and Minnesota Law and Politics as a Top Lawyer in the State of Minnesota.

Old Republic won’t underwrite Chase or GMAC REO property

7 Oct

Well this news may have a ripple effect.  Apparently problems with errors or mistakes in the foreclosure process may have lead to a decision by Old Republic Title (a large title insurance company) not to underwrite title insurance for the purchase of REO (bank-owned) property owned/foreclosed by J.P. Morgan Chase or GMAC Mortgage (now owned by Ally Bank).

Although this situation could resolve in the future, apparently Old Republic has issued its own internal edict that until the objectionable issues have been resolved, they won’t underwrite title policies for Chase or GMAC properties.  Since most home purchasers need financing from a lender, and since lenders typically require a title insurance policy with coverage for the lender, when a major underwriter like Old Republic stops underwriting Chase or GMAC properties, there may be a dramatic chilling effect, and it might deter other insurers from underwriting those deals as well.

For the sake of the flow and movement of the residential real estate market and to avoid further price deterioration and market stagnation, let’s hope these issues can be corrected in short order.  The problem appears to be significant enough for GMAC and Chase to temporarily halt foreclosures in 23 states until issues related to the foreclosure process are resolved.

You can find articles identifying more details about this issue at the New York Times, here: http://www.nytimes.com/2010/10/03/business/economy/03foreclose.html?_r=2&scp=1&sq=old%20republic%20national%20title&st=cse, and at CBS Moneywatch, here: http://moneywatch.bnet.com/saving-money/blog/home-equity/old-republic-title-wont-insure-chase-foreclosures/2868/.

This blog entry is written by Brad Boyd, a Shareholder at Thomsen Nybeck. Brad is the chair of the firm’s Transactional Group, and his practice focuses primarily in Real Estate, Real Estate Brokerage, Business and Corporate law, and Wind Energy Law.  Brad provides legal advice, guidance, and representation related to risk management in a wide variety of real estate and business law matters.  He is counsel to the Minnesota Association of Realtors, many individual Realtors and brokerages, business clients and individuals.

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If Only Tiger Woods Could Have Resolved His Issues Through ADR

2 Sep

Resolving a dispute is never easy, but there are options available that could mitigate some of the not-so-pleasant aspects of a trial and avoid litigation. Simply put, Alternative Dispute Resolution (ADR) is a means of resolving matters without formally litigating the case in front of a judge or jury. It allows parties to choose a method of resolution that they feel comfortable with and that is most appropriate for their situation (mediation, arbitration, collaborative law, etc.). Parties can use ADR to resolve disputes in a variety of areas, including family law, employment law, real estate or consumer and business settings among others.

The various forms of ADR can give the parties differing degrees of control over the outcome, with mediation and collaborative law providing the most and arbitration the least.  In mediation instead of letting a judge or jury decide their fate, the parties work with a trained “neutral” that they have selected and who will assist them in trying to come to an agreement. This gives the parties to the dispute the opportunity to be creative and work to find a resolution they can live with in the end.  Given that mediation and collaborative law involve the direct participation of the disputing parties, it can lead not only to increased satisfaction with the outcome but the parties may be more likely to comply with the agreement they have reached.  Because mediation and collaborative law are also a more “user-friendly” way to resolve a dispute, this may enable the parties to preserve their relationship with one another, which is especially important in family law situations.

Another advantage of mediation and collaborative law is that the parties can customize the settlement provisions of their dispute as long as the parties agree to those specific terms. The parties might, for example, agree to keep the dispute confidential and not make disparaging comments about each other in relation to the dispute and after the process is complete.

Since ADR is not a matter of public record nor is it open to the public, the process and the outcome of a dispute can stay confidential. This could be a big plus for companies trying to protect trade secrets, or anyone trying to keep his or her private life private and stay out of the media spotlight.

Another factor to consider is that ADR typically takes significantly less time. Backlogged courtrooms can have you waiting a year or more for your case to be heard.  Unlike a court hearing where the parties are assigned a date and time to show up and litigate their case,  the parties also have some say over the scheduling process for ADR.  Likewise, the parties can more quickly set a date with ADR and once a date has been selected the process can be completed in as little as one day. 

Rule 114.01 of the Minnesota General Rules of Practice requires ADR in civil cases.  In other words, all parties to a civil lawsuit must participate in some form of ADR in attempt to resolve their dispute.  It may make sense for parties to try ADR even before initiating a lawsuit in order to save on the emotional toll and often drawn out process of preparing for a trial.  In general, parties do not conduct discovery or take depositions as part of the ADR process.  The time and money savings from avoiding extensive discovery and depositions could make it worth trying to resolve a dispute earlier through ADR rather than later in court.

Although ADR isn’t the right fit for every individual or every case, it is a viable option to consider if you are involved in a dispute.  To determine whether litigation or some form of ADR is the best fit for your situation, you should talk with a lawyer.  To learn more about the ADR services that Thomsen & Nybeck, P.A. offers, you can visit http://www.tn-law.com/CM/PracticeAreaDescriptions/Alternative-Dispute-Resolution.asp.

This blog entry is written by Deb Newel, an Associate in the Litigation Practice Group at Thomsen & Nybeck, P.A.  Deb concentrates her practice primarily in the areas of general civil litigation, real estate litigation, insurance litigation, construction litigation and townhome and condominium law.

A Guide to Mechanic’s Liens for Property Owners, Subcontractors and Material Suppliers.

22 Feb

Mechanic’s liens in Minnesota exist to protect contractors, subcontractors and materials suppliers from going unpaid by giving them a lien on the property they helped improve.  Liens give the power to foreclose on property to ensure they are paid, and can provide protection against the bankruptcy of the person obligated to pay for the work.  In exchange for this powerful remedy, a potential mechanic’s lien claimant must comply with extremely technical requirements.  This posting will focus primarily on the rights of subcontractors, but they’re not the only ones who need to know what their lien rights may be.  Property owners may care about this as well.  You should understand when a subcontractor may place a lien on your home and when and how that mechanic’s lien can be foreclosed.  The rights of a general contractor are similar, but there are important differences that we will cover in a later post.

Subcontractors (the trades) and materials suppliers arguably face the greatest risk of nonpayment on a construction or remodeling project.  They rely on the owner to pay the prime contractor (or general contractor) and for the general contractor to use that money to pay them.  For them, the right to a mechanic’s lien is extremely important.  If you’ve been burned by non-payment one too many times, consider the following and talk to an attorney about getting a procedure in place to protect your lien rights.  Your collection costs can usually be recovered so there is no reason not to seek all possible protections even on relatively small claims.

Here are the steps to preserving and enforcing mechanic’s lien rights:

1.  When you start a project, gather the information you will need to protect and enforce your lien rights.  It is much easier to do this at the start of a project than after you’re not getting paid and people have become guarded and stop communicating.  Some things you will need to know are: the interest in the property held by the person or party arranging for the work to be performed (if it is a tenant this will be important); the Property owner’s name; and the street address of the property (as well as the legal description, if available). 

2.  Provide a “pre-lien” notice to the owner within 45 days from the date you start work.  A sub-contractor or material supplier who does not have a contract with the property owner may not claim a lien if it doesn’t give the appropriate notice to the property owner within 45 days of the date it first provided its service or materials.  There are certain exceptions, generally relating to large commercial projects, but it never hurts to provide the notice even when it’s not necessary.  The notice must be delivered to the property owner by personal service or by certified mail, and there is very specific statutory language that must be used.  There are even requirements about the size of print used. 

3.  Record or file the lien within 120 days after you complete your work.  A sub-contractor or supplier has 120 days from the last item of labor, skill or material contributed to the improvement.  To be safe, start counting from the last day you provided a significant amount or component of the work or materials required under your original contract.  Don’t assume tightening a screw, re-attaching some siding or even newly-added work will extend your rights.

4.  The devil is in the details.  The lien itself must contain certain information.  Also, it must not only be recorded in the real property records, but it must also be served on the property owner either by personal service or by certified mail.

5.  Do not delay.  If you serve and record your lien, but you still don’t get paid, you will have to bring a lawsuit to enforce the mechanic’s lien within one year from the date you contributed your last item of work or materials.  Before you start the suit, make sure you include all the parties who have a right to be included.  This will include the property owner, as well as all the other contractors, subcontractors, material suppliers and any others who have mechanic’s liens of their own, as well as any other party with an actual or claimed interest in the property.  

6.  It would be best to involve a competent attorney at the earliest step.  Mechanic’s lien law in Minnesota permits the recovery of attorneys’ fees spent enforcing the lien rights.

If you are owed money, but you don’t think you may have the right to a mechanic’s lien, you should still consider contacting an attorney.  You may fall into an exception for the required pre-lien notice.  You may also have certain other claims, and even small amounts, taken as a whole, may be worth pursuing.  If you own a home or property and are worried about how to handle mechanic’s liens or mechanic’s lien notices, there may be ways to resolve the issues and reduce your stress.  Regardless of your role or situation, if you have questions about a mechanic’s lien or other construction-related issue, contact Thomsen Nybeck.

Entry by Matt Drewes.

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