January 31, 2014
Cold Temperatures in a Slow Economy: Insurance Claims from Frozen Pipes in Unoccupied Buildings
NBC News reported Wednesday that home insurance claims for damage resulting from frozen pipes are so high that insurers are hiring temporary adjusters to handle increased claims:
“We anticipate a large spike in frozen pipe claims,” said Peter Foley, the [American Insurance Association’s] vice president for claims. “In Washington, D.C., some of my colleagues have already had them in their own homes.”
What State Farm describes as a “catastrophe” comes while many families & communities struggle to make ends meet under the current economic conditions. These insurance claims can run as high as $15,000 in residential dwellings. A commercial property or multi-family housing can sustain even greater damages.
In many communities in Virginia, homes and commercial buildings remain vacant this winter because the local real estate market has not yet come back or the properties are only used seasonally. Frozen pipe damage is compounded in vacant buildings because:
- Few occupants take precautions to protect pipes from bursting before they move out of a building.
- Usually no one checks up on an unoccupied building when it is extremely cold. If there is a landlord, property manager, bank or other institutional investor, they aren’t likely to give a vacant building individual attention.
- No one is there to observe the damage as it develops, so greater drywall, carpet, mold, and other damage can occur.
These types of problems tend to result in litigation between the owners, banks, neighbors and insurance companies. This blog post explores three recent cases:
Hiring a Property Manager: Panda East Restaurant, Massachusetts
From 1987-2006, Issac Chow owned and operated the Panda East restaurant in Northampton, MA. Mr. Chow also purchased a house in Hadley, MA, for his employees to live in. While the restaurant was in business, Richard Lau managed both the restaurant and the house. When Panda East went out of business, all of its employees moved out of the house. Chow instructed Lau to keep the heat on in the Hadley house during the winter of 2006-07. Unfortunately, that winter the house suffered damage from burst frozen pipes. An inspector determined that the heat had been turned off. The flooding ruined carpets, furniture and drywall throughout the house.
Mr. Chow brought suit against Merrimack Mutual Fire Insurance Company in Massachusetts. On appeal, the Court could not determine what Chow did, if anything, to engage Lau as property manager for the house after the restaurant closed down. Since the employment relationship between Chow and Lau was unclear, the Court could not determine who was negligent. Chow v. Merrimack Mut. Fire Ins. Co., 83 Mass. App. Ct. 622 (2013). The Panda East case shows that:
- Cold winters are a time bomb to an unoccupied house (or other building) not winterized to prevent frozen pipes.
- Owners must consider retaining a manager or house-sitter for properties that “go dark.”
- Written property management agreements work better than verbal directions. A contract document can clearly define the scope of the manager’s responsibility.
Homeowner’s Negligence: Potomac, Maryland
In addition to suing the insurance company, some lawyers try to sue public utilities for damages arising from frozen pipes in an abandoned home. Izatullo Khosmukhamedov and Zoulfia Issaeva brought a lawsuit against Potomac Electric Power Co. (PEPCO) for leaving the electricity on in their unoccupied house, which later suffered damage from burst frozen pipes.
These Plaintiffs primarily lived in Moscow, Russia. This couple owned a second home in Potomac, Maryland. Apparently, they grew tired of paying the heating and electric bills. After a stay in October 2008, they sought to turn all of these services off. In the following winter, the pipes in the house froze, burst and caused extensive damage. They made no effort to winterize, heat the property, turn off the water main or drain the pipes. In their lawsuit, they argued that PEPCO failed to completely turn-off the electricity, thus allowing the well water pump to push water into the house, intensifying the damage.
The Federal judge in Maryland dismissed their claims on summary judgment before trial, observing that:
It is well-settled, both in Maryland and other jurisdictions, that a property owner can reasonably foresee the danger that water pipes may freeze in the winter and breaches the duty of ordinary care by failing to adequately heat and/or drain them.
Koshmukhamedov v. PEPCO, No. 8:11-cv-00449-AW (D. Md. Feb. 19, 2013)
Judge Williams dismissed Plaintiffs’ claim against PEPCO. This case illustrates skepticism shown to Plaintiffs in frozen pipe cases where they failed to take reasonable precautions.
Most residential property insurance policies specifically exclude coverage if the property goes unoccupied. In a related case, this couple also sued their property insurer, State Farm. The same judge decided that the home was “unoccupied” and thus excluded from coverage by the terms of the policy. Koshmukhamedov v. State Farm Fire & Cas. Co., 946 F. Supp. 2d 443 (D. Md. May 28. 2013)
Insurance Claims in Foreclosure: Holiday Inn Express, Burnet, Texas
On our road trip, dear reader, we first warmed ourselves up with an a la carte dim sum brunch in Massachusetts. For lunch, we had a backfin crabcake in Maryland. The last stop on our trip takes us to a beef brisket dinner in central Texas. Our final case study shows how cashflow and property damage can compound problems for a business owner facing foreclosure. This double whammy presents special challenges to the bank and property insurer as well.
In late 2009, a Holiday Inn Express franchisee stopped making its mortgage payments to the bank that had lent the money for the purchase of the hotel building in Burnet, Texas. On January 9, 2010, the hotel suffered extensive damage from frozen pipes. On January 28, 2010, the bank sent the owner a foreclosure notice. A few days later, the property insurer sent the owner and bank a payment check. This was not cashed due to the disputes between the bank and owner. The owner and the insurance company could not agree on a proper estimate for the damage from the frozen pipes.
On March 2, 2010, the bank foreclosed on the property and purchased it at the sale. The hotelier then sued the bank, insurance company and the subsequent purchaser. The former owner sued the insurance company for not fully compensating for the damage he alleged to be $133,681.62. The Court of Appeals of Texas focused on relevant language in the insurance company’s contract with the owner and the Bank’s loan documents for the hotel. Lenders typically require borrowers to maintain adequate insurance on the property. That way, the loan is adequately secured in the event that damage and default occur around the same time. Usually, a lender’s rights to the security under the loan documents are limited to the principal, interest and other indebtedness owed. A claim for insurance proceeds comes into play to the extent the foreclosure sale price does not satisfy the sums of money owed to the bank.
In Virginia, the foreclosure trustee must file an accounting with the commissioner of accounts that reconciles the indebtedness, sale price and other credits and debits that the bank is entitled to under the loan documents and law. Each state has its own foreclosure procedures.
The Texas Court of Appeals explained that the Bank was only entitled to any portion of the insurance claim proceeds necessary to satisfy any deficiency after the foreclosure. It appears that the Court sought to avoid a windfall to any party seeking to muscle the proceeds during the chaotic foreclosure period. Peacock Hospitality, Inc. d/b/a Holiday Inn Express-Burnet, 419 S.W.3d 649 (Ct. App. Tex. Nov. 27, 2013)
Neither foreclosures nor frozen pipe damage occur in a vacuum. An exceptionally focused owner might take measures to prevent catastrophic damage to a distressed property in an attempt to fetch the highest possible foreclosure sale price. When a property is in financial distress, its owners and lenders must also attend to any signficant insurance claims that may become an element of the foreclosure accounting.
Conclusion:
These three cases illustrate why, as attorney Jim Autry says, “An abandoned building is more of a liability than an asset.” Frozen pipes present a serious threat to the value and habitability of unoccupied homes and commercial buildings. Except for a few “hot” areas, much of Virginia (and the country at large) has a significant inventory of uninhabited homes and commercial properties. This winter’s cold spells present unique challenges to property managers, water utilities, banks, owners and insurance companies. When a family or business must negotiate with more than one of these parties to resolve legal issues surrounding a distressed property, an experienced attorney can provide critical counseling and representation.
photo credit:
Ryan D Riley via photopin cc (for demonstrative purposes only and does not depict any of the actual properties described in this article)
January 28, 2014
Divorce, Family Homes and Elliot in the Morning
On my Friday morning commute, I heard a guest on the radio show, Elliot in the Morning talking about his parents’ divorce, marriages and the legal fate of a family home. I rarely partake of EITM, but this time I stopped to listen (relevant portions of recording between minute marks 8:20-16:30 on YouTube).
Tommy Johnagin on Elliot in the Morning: Comedian Tommy Johnagin explained that when he was seven, his mother divorced his previous stepfather and married Johnagin’s current stepfather (none of this takes place in Virginia). The families lived in a small town. The current stepfather previously built a home with his own hands for himself and his ex-wife. When the current stepfather and his ex-wife divorced, the ex-wife got the house. Johnagin’s mother’s previous husband then married her current husband’s ex-wife (confused yet?). So Johnagin’s previous stepfather is now living in the home built with the sweat of the current stepfather’s brow. Johnagin commented to Elliot Segal: “I don’t even understand how this works.” In this portion of the interview, I was impressed with how Johnagin weaved some earthy insights into family life with funny personal narrative, such a recent chance encounter with the previous stepfather in the checkout line at the local Wal-mart.
What are the ways a family home can possibly reach this kind of outcome in divorce? Although the facts are different, the Supreme Court of Virginia published a January 10, 2014 opinion, Shebelskie vs. Brown, that discusses a possible route.
Betty & Larry Brown in the Virginia Court System: Betty and Larry Brown completed a divorce in Florida. One of their homes was Windemere, a landmark Tudor mansion in Richmond. (V.L.W. subscribers see July 22, 2013, “A Partition Suit Blows Up,” Virginia Lawyers Weekly) Sometimes, when an out-of-state divorce requires divvying up Virginia property, the parties will file an Equitable Distribution action in Virginia and the house matter will be referred to a court-appointed Commissioner. For reasons not discussed in the court opinion, this phase of the Brown divorce did not proceed this way. Instead, Larry filed a partition suit in Richmond, seeking an order that Windemere be sold.
In Virginia, when co-owners of real estate cannot agree on what to do with real estate, one party may file with the court a request for Partition and a Judicial Sale. See, Va. Code section 8.01-81, et sec. Partition traditionally involves dividing the parcel equitably into smaller parcels. When the land cannot conveniently be divided into smaller chunks because that would destroy the value of any improvements, the Court will usually grant a sale of the entire property. The monetary proceeds of the sale are then divided. Lawyers try to use partition suits as a last resort because they are a very expensive way to sell a house and more likely to lead to further title litigation. The deputy clerk called the Browns’ names week after week on the Richmond Circuit Court motions’ docket. The Court ordered a Judicial Sale. Finally, Betty obtained confirmation from the Court that she could go to closing on the house to buy-out Larry. The facts suggest that spousal support owed by Larry would end up helping to pay for the buy-out.
In the trial court, the parties litigated over attorneys’ fees and awards of sanctions issued by the judge against some of the attorneys. On appeal, the Supreme Court of Virginia reversed the sanctions award. (I invite my trial lawyer readers to take a look at the Court’s interpretation of the term, “motion” in the sanctions statute)
The Stepfather’s House, Revisited: How does the house that one man built for himself and his family end up in the possession of his ex-wife and his current wife’s ex-husband? Most likely, the home was part of the marital estate in the divorce and went to the ex-wife either in a settlement or by court order.
In a way, Tommy Johnagin’s current stepfather should be flattered that both his ex-wife and her subsequent husband desired the house he built. As a builder, he can construct another one.
In the interview, Johnagin commented that he felt content with the stepfather he got in the step-parent “lottery.” In the end, a good stepfather makes a bigger difference in someone’s life than title to a mansion or an appellate court victory.
photo credit: » Zitona « via photopin cc
January 24, 2014
Title Litigation: Centenarian Deed Decides Methane Royalty Rights
On January 10, 2014, the Supreme Court of Virginia decided CNX Gas Company, LLC v. Rasnake, interpreting disputed language in a 95-year-old deed. The Court determined who owned the mineral rights in a parcel of land in Russell County in Southwest Virginia. The contested deed contained both (a) words conveying a parcel and (b) limiting language that excepted certain property from the transaction. Ultimately, the words of conveyance prevailed over the words of limitation! The opinion is a useful collection of some of the rules about how to prepare, interpret or litigate a deed.
In 1887, Jacob & Mary Fuller conveyed the coal in a 414 acre tract in Russell County to Joseph Doran and W.A. Dick. In 1918, W.T. Fuller conveyed to Unice Nuckles a 75 acre portion of the Fuller family tract except that, “[t]his sale is not ment (sic) to convey any coals or minerals. The same being sold and deeded to other parties heretofore.”
Over 90 years later, CNX Gas Company holds a lease from the successor to Ms. Nuckles for the mineral rights (excluding coal) in the 75 acre tract. CNX produces coalbed methane from the parcel. Coalbed methane is a natural gas extracted from coal mines and sold as energy. The opinion does not discuss how methane is a “mineral.” The parties likely stipulated to that based on authorities not mentioned. The successors to W.T. Fuller sue CNX over the non-coal mineral rights. To resolve the dispute, the Court has to decide what the above-quoted language meant. Have the non-coal mineral rights been legally conveyed or not? Royalties to the coalbed methane hang in the balance.
When I initially read these facts, I wondered if perhaps I was missing something. Did the 1887 deed say something about non-coal minerals? Was there some other deed prior to 1918 conveying the minerals? Perhaps there was an unrecorded deed known to the parties in 1918. Since the opinion states the parties stipulated to the facts, the title examination must have revealed the answer to both questions to be “no.”
The Supreme Court of Virginia applied the following legal rules to resolve the title dispute:
- Is the language capable of being understood by reasonable persons in more than one way? One could assume the answer to be “yes,” since the issue found its way to the highest court in the Commonwealth. But lawyers have a reputation for torturing unambiguous language, so the question is appropriate. The Supreme Court found the deed ambiguous.
- Which interpretation favors the grantee (recipient)? Since the Grantors (usually sellers) are the ones who sign the deed conveying the property, it is only fair to assume that they chose their language carefully.
- Can the language of the deed be considered holistically? Since W.T. Fuller included all of those phrases in the deed, it is reasonable to harmonize them rather than pick and choose certain sections that favor one side over the other.
- Is the limiting language clear and unequivocal? A deed must have, among other things, words of conveyance, which generally describe the lot or parcel of land transferred. A deed may also include other language limiting or reserving certain interests excepted from the transfer, such as certain mineral rights. Unless the limiting language contrary to the general grant is expressed clearly and unequivocally, it will not be upheld in court.
The Supreme Court of Virginia applied these rules to find that the only “coals or minerals” not included in CNX’s leasehold interest are the coal rights conveyed to Joseph Doran and W.A. Dick in 1887. The Court entered judgment upholding CNX’s rights to extract the coalbed methane from the 75 acre tract. Words of conveyance prevailed.
P.S. – There is one other principle that the Court could have mentioned: when interpreting legal documents, the specific prevails over the general. Since the 1914 deed made reference to previous conveyances of natural resource rights, the plaintiffs’ stipulation to the absence of any other deeds locked them in.
January 13, 2014
Reel Property: Hitchcock’s Skin Game
A working-class family is wrongfully evicted from their rental homes and may lose their jobs. A neighboring landowner and his shrewd agent try to stop the sharp-dealing landlord from destroying property values with industrial air pollution. Can they successfully escalate conflict without unintended fallout?
This is the subject of Alfred Hitchcock’s early film, “The Skin Game” (1931). The Skin Game is based on a play by John Galsworthy, a British lawyer who found a second career as a writer. Mr. Hillcrist (C.V. France) is an old-money landowner at odds with Mr. Hornblower (Edmund Gwenn), a nouveau-riche industrialist. Hillcrist objects to Hornblower’s purchase of neighboring pristine countryside for the construction of new smoke-belching factories. The two battle over competing visions for the Deepwater community in a series of increasingly sharp business practices. The Hillcrests’ agent, Mr. Dawker (Edward Chapman) plays an easily overlooked role in this dark comedy.
Jocelyn Codner observes in her blog, The Hitchcock Haul, that The Skin Game speaks to contemporary controversies surrounding land use, fracking and class warfare. Contemporary audiences may identify with the film in additional ways. The Skin Game’s audience remembers the horrors of global war. Worldwide recession brought high unemployment. Fear and desperation hide in the film’s shadowy scenes. These emotions unfold in total war between the neighboring landowners with tragic, unintended consequences. Tenants’ and neighbors’ rights versus job creation.
The aggressive business practices in the movie are frequent, rash and ill-considered. I found myself counting all of the legal claims and defenses that could potentially be brought in Court (this post makes no effort to interpret the facts under 1931 British law). Spoilers follow, but they are 83 years in the making!
- Violation of Covenants. In order to build new factories, Mr. Hornblower violated a covenant he made to Hillcrist when he turned out long-standing residential tenants. In Virginia, that would likely unfold as a contested unlawful detainer (eviction) action. Since the parties did not end up in Court, I assume that the Hillcrists failed to make the covenant legally enforceable.
- Bid Rigging. A mutually coveted parcel of land goes to a public auction. Ominously, the auction house’s lawyer reads the conditions of sale so softly that only the front row can hear. The Hornblowers and Hillcrists bid in concert with their own secret bidding agents to confuse their opponent and hike the price. Hornblower wins. Hitchcock uses quick camera work and multiple angles to build suspense and simulate confusion.
- Fraud. Hornblower’s daughter-in-law Chloe (Phyllis Konstam) has a secret past that includes employment by men to help them secure divorces premised upon adultery. This doesn’t come up much in the era of non-fault divorce, but giving false testimony for hire is sanctionable.
- Conspiracy. The Hillcrists’ estate agent, Mr. Dawker discovers Chloe’s past from her former client. Mrs. Hillcrist and Mr. Dawker decide to use the secret to extort Mr. Hornblower into selling them the contested parcel at a loss. The parties anticipated that disclosure of the secret would destroy Chloe’s marriage with the young Hornblower. The consideration of a sale from Hornblower to Hillcrist consisted of both (a) a written contract for cash and (b) a secret unwritten agreement not to reveal Chloe’s past.
- Breach of Contract: Upon pressure by the young Hornblower, Mr. Dawker violates the secret unwritten non-disclosure agreement and likely his fiduciary duties to the Hillcrists.
- Professionalism. In contemporary transactions, one would expect Mr. Dawker to be a licensed real estate agent. His role in the bid rigging and the conspiracy would potentially expose him to disciplinary action by the Real Estate Board.
- Assault. In a fit of rage, Mr. Hornblower throws his hands on Mr. Hillcrist’s neck.
- Defense of Unclean Hands: Although the evicted tenants temporarily get their cottage back, this victory falls flat because of the greater tragedy which brings Mr. Hillcrist remorse. Unclean hands foul the initial nobility of their cause.
Was there a moment when a more trusted advisor, be it a realtor, attorney, or friend, could have helped Hillcrest settle the dispute? The loud passions of the warring families obscure Mr. Dawker’s fateful role as agent in the “Skin Game.” In the final scene, loggers chop down one of the Hillcrists’ oldest trees. What goes around, comes around.
January 2, 2014
Can My Landlord Evict My Business Without Going to Court First? – Part II – Complications to Landlord Self-Help
In Virginia, landlords have a right to evict commercial tenants without going to Court first. This does not make it likely or wise. Even in jurisdictions where self-help is legal, it is unusual to see landlords piling up their tenants’ business property on the curb. There are several reasons why:
1. Lease Terms: Any self-help must comply with the terms of the lease agreement. The laws of Virginia and its neighbors vary regarding a landlord’s remedies upon the tenant’s default. Many commercial leases are forms adapted from use in other jurisdictions. These forms may be a challenge to interpret under Virginia law. Even terms drafted with an eye to the law of the jurisdiction may not contemplate the exercise of the self-help remedies desired by the landlord’s agents. The terms of some lease agreements eliminate the right of self-help eviction entirely. Many other leases do not clearly define the landlord’s rights to exercise self-help. When parties negotiate the lease agreement, tenants typically request that any detailed landlord self-help eviction terms be edited out. The landlord often finds himself reserving, in a general way, its common law remedies, including self-help, without defining how they may be exercised. When the issue comes up upon default, both parties experience uncertainty regarding how a court would view the landlord’s threatened action.
2. Possibility of Property Damage: The landlord may be averse to taking possession of the property in a way that may damage the tenant’s property or involve physical confrontation with the tenant’s personnel. The landlord may desire an award or settlement for the balance of the lease. Property damage counterclaims complicate collection efforts.
3. Forcible Entry Claims: In certain situations landlords and tenants may be punished criminally under forcible entry, detainer or trespass for aggressive action taken with respect to the premises and business property in dispute.
4. Bankruptcy Stay: If the tenant is in bankruptcy, then an automatic stay likely prohibits self-help. The dispute between the landlord and the debtor-tenant over rights to possess the space is addressed in federal bankruptcy court.
5. Sublease: The landlord-tenant relationship may be complicated by a subletting arrangement. A sub-landlord and the master-landlord may disagree regarding their respective rights to possess the sub-leasehold. Disagreements between the property manager and the sub-landlord may delay action.
6. Institutional Landlords: The organizational structure of the landlord may play a role. When the same individual is the owner and property manager of the building, that person will likely exercise broader discretion than in a more institutional context.
These issues do not necessarily preclude the use of self-help. A risk-adverse landlord may view going to court to gain possession as a desirable alternative.
What should a tenant do if the landlord is threatening to take possession prior to going to court? The simplest options are to (a) avoid falling into default or (b) plan a move-out in advance if a default appears imminent. In certain situations, the circumstances of the business or relationship with the landlord may be too complex or attenuated for that. The tenant may have business operations or valuable property to protect. In any case, careful consideration of the lease terms and cogent communication with the landlord are essential. Where property and income are at stake, potential risks associated with changing locks and removing property are too great for either side to view landlord self-help as the logical first step towards resolving a dispute. In these situations, a tenant is best served by interacting with the landlord through experienced brokers and lawyers.
photo credit: vasilennka via photopin cc
December 31, 2013
Can My Landlord Evict My Business Without Going to Court First? – Part I
Part I – Landlord Self Help in Virginia
Suppose a company leases commercial property to run its business. Due to economic conditions, the tenant struggles to pay rent. The landlord has declared the tenant in default, or is threatening to do so. One of the remedies asserted by the landlord is “self-help” such as changing the locks and removing the business’ property from the premises. Can the landlord do that? What strategies and considerations are available to the tenant in such a situation?
When a tenant of a commercial property falls into default under the lease, or such default is imminent, knowing what options the landlord has moving forward is essential. The tenant making present use of the leased premises needs to know the landlord’s potential legal remedies so it can craft its own plan for the immediate future and to provide a framework for negotiations. In Virginia, and other jurisdictions where landlord self-help is permitted, threats such as changing the locks or otherwise barring the tenant from re-entry, removal of the property from the premises and placing it elsewhere may be the most urgent concern to a struggling commercial tenant. Understanding the respective rights of the landlord and tenant are crucial to planning continuity of business operations and safeguarding company property.
In Virginia, a landlord in a residential lease has no right of self-help eviction. However, the right of self-help remains an option for non-residential leaseholds. The commercial landlord is limited to using reasonable force in taking possession of the property upon default. The landlord may not “Breach the Peace” in taking possession. In other words, confrontation threatening physical harm is not permitted. Self-help may be attractive to the landlord in order to make an urgent transition to a new tenant without having to go to Court, take the case to trial and have the sheriff come out to the property.
While the remedy of self-help is legal in Virginia in non-residential matters, there are several considerations that make landlords reluctant to pursue it. In Part II, I will discuss several reasons why landlords usually avoid trying self-help eviction.
December 27, 2013
Client Relationships for the Custom Home Builder in 2014
In the past year or so, demand outpaced supply in the Northern Virginia real estate market. Many home builders and tradesmen went out of business in 2008-2009, creating a shortage of home builders. For home buyers, a custom home offers the prospect of owning a made-to-order dream home. For the builder, the custom home business brings rewards as well. These include the pricing of a premium product and working closely with buyers to help them fulfill their dreams. These dreams bear the legal complexity of contracting for the sale of something that does not yet exist. For the buyer, this is the biggest consumer purchase of their life. They rightly take pride of ownership in the project. This blog post identifies a few key issues from the perspective of the custom builder for the New Year:
- Liability Shield. You stand behind your work and want to keep your customers happy. This is how business grows. At the same time, you owe it to yourself and your family to protect your personal assets and credit. Customers expect that they will be doing business with a company. By incorporating or forming an LLC prior to making contracts, custom builders can exercise reasonable control of the exposure of their own credit and assets. Communications and agreements with customers should clarify the seller’s identity.
- Choosing the Customer. Prospective customers are likely talking to other builders or realtors. If a prospect reminds you too much of a previous problem customer, she may not be a good fit for your business. The wrong customer may distract you away from your more deserving customers and prospects. Consult with legal counsel if anti-discrimination or fair credit laws may apply.
- Written Agreements. Use an attorney-prepared written contract prepared for the particular type of project and state law. It may not be necessary to have a “new” form for each job. However, a realtor form for the sale of homes in Maryland won’t work well for a custom home in Virginia.
- Customer Service. Always have someone available to handle customer inquiries, at least during normal business hours. Buyers of custom homes tend to visit the site frequently and have questions. They feel a tremendous amount of financial and emotional investment in the project.
- Project Control. Don’t allow the consumer to directly supervise your subcontractors on the job site. An excited buyer may want to go outside his contract with you and hire his own tradesman to install items on property they don’t yet own. No car dealer would allow a shopper to take an auto to a body shop for a custom paint job during an extended test drive. The custom home builders do themselves and the customer a favor by anointing a manager or site supervisor to “face” with the client.
- Happy Endings. Take walk through inspections, punch lists and closings as an opportunity to communicate with the buyer and wrap things up effectively.
Home builders unfairly have a reputation for being unresponsive or inflexible with their customers. More often, custom builders struggle with being too accommodating with the demands of buyers. Most of all, custom home buyers expect the builder to provide them with personal leadership and advice. Attention to the legal aspects of your customer relationships is a critical element of entrepreneurial creativity and leadership.
December 23, 2013
Navigating the Walk Through Part II – Inspection Contingencies in Real Estate Contracts
Check Your Contract for Your Inspection Rights & Duties:
Many real estate contracts impose a right or duty to inspect and approve the development of a property before going to closing. Many contracts for custom homes or commercial developments contemplate that the parties will walk through the property prior to consummating the purchase. If you have a right under a contract, failure to exercise that right may potentially waive a future claim for a defect that reasonable exercise of the right of inspection would have discovered.
If the contract provision discusses preparation of a punch-list or inspection report based upon the inspection, both parties are well advised to take notes (on old-fashioned pads of paper or discretely using the camera in your phone or tablet) for later use in negotiating the inspection report.
If the transaction involves loans, the bank will require an independent appraisal. A shrewd investor takes heed of a professional appraisal, but does not allow it to substitute for her own review. Appraisals usually focus on a comparative analysis of the property with other properties with similar general characteristics, and do not look at the property from the perspective of having to live or work in it on a long term basis.
Home Inspection Industry in Virginia:
Many real estate purchasers use hired professional inspectors to help spot issues during walk-throughs. Most contracts for purchase of a home advise buyers of the opportunity to seek out the counsel of various types of professionals that may aid the inspection process.
Note that in Virginia, a home inspector does not have to be board-certified to do business as one. Currently, the Commonwealth of Virginia provides home inspectors with the opportunity to certify themselves. Home inspectors not certified by the state are forbidden from holding themselves out as certified if they are not, but they may continue to lawfully market their services as a home inspector.
In the purchase of a residential property, a Virginia certified home inspector or an inspector who is a licensed Virginia contractor, is likely to possess the basic qualifications. Various professional organizations, such as the American Society of Home Inspectors, provide members with credentialing opportunities as well. Bear in mind that these professionals can only advise you of what you see and prepare a report. What actions to take based on this information is subject to negotiation between the buyer and seller.
Repair Addenda:
The home inspection process may result in a list of items that the seller agrees to fix by a certain date. When the seller informs the buyer that the repairs are complete, this shifts responsibility somewhat back to the buyer to confirm that the changes are acceptable. In the event of a dispute, the Court will likely ascribe weight to those contracts and lists signed off on by the parties.
Reality TV Home Buying vs. Preparing for a Real Future:
Today’s investors and professionals have greater access to information about real estate than ever before. Whether you are going to use the property for business, personal or public purposes, you don’t need years of specialized experience to know what to look for in a walk through – only you know what questions you need answered.
Your own goals will provide you with a starting point for preparing a walk-through checklist. The issues to focus on in the walk-through are different for each situation, but the important thing is to have a plan of what to look for based on the matters at issue. Furthermore, a walk-through will provide you with certainty and a firm basis for negotiating the outcomes desirable to your business. Your family will live with the visceral effect of entering the property every day. Make the most of your walk-through before you buy, sell or lease your investment.
December 19, 2013
Navigating the Walk Through – Part I
From the moment the first person piled up rocks or rough-hewn timber to distinguish his farmland from the neighbors’, real estate has been visually-oriented. In the business of real estate, the walk-through of the premises provides you with an eyes-wide-open basis for due diligence and negotiation in sales, leases and dispute resolution. In the age of internet videos, Smartphone photography, Google maps, engineer drawings and online public land records, it is possible to learn much about a property without actually visiting it. However, real estate professionals still swear to the value of a real walk-through when your property is going through a transition. A photograph or video recording of a property may identify a desirable asset or potential problem without the time consuming task of driving to a location and talking a look. However, any kind of recording, photograph, drawing or description is at best a useful abstract of the property at a specific moment in time. If an entrepreneur desires to lease or purchase a property for purposes of operation of a unique business activity there, it is unlikely that a set of records could illustrate whether the property can fit her creative purpose. It is difficult to communicate with another party regarding a unique property concern without looking first.
Many buyers, tenants and lenders are drawn towards relying upon the representations of other people when entering into contracts. Business relationships do need trust in order to bear fruit. However, if someone insists that you make a decision without significant investigation, slow things down. The general rule in Virginia is caveat emptor –let the buyer beware. The law expects folks to be reasonably wary when it comes to entering into contracts. Further, once a party begins to conduct an investigation of matters underlying a contractual decision, the burden is on him or her to complete that investigation to the extent warranted by the situation. Of course, if the other party knowingly conceals a problem with real estate, the purchaser may have a basis to void the contract. After the fact, the burden of proving any kind of deceit would fall on the party suffering the harm. Generally speaking, the law expects parties entering into real estate contracts to do so reasonably self-informed about the subject property and the terms of the contract itself.
Part II of this post will explore the inspection process in more detail.
