Build It And They Will [Sue]

Victor Metsch | Smith Gambrell & Russell | August 30, 2019

Virginia F. Kleist and Daniel Stern owned own lakefront properties within the Chautauqua Shores subdivision. All property owners were subject to covenants and restrictions that were filed in 1962, when the subdivision was developed. The covenants and restrictions give “each and every owner of land in [the subdivision] . . . the right to enforce the same by appropriate court proceedings.”

In December 2014, Stern purchased his property with plans to demolish the existing house and build a much larger house. When Kleist saw the site plans for the new house, she notified Stern by letter in early August 2015 that the site plan showed that the home he was about to construct was in violation of paragraph five of the covenants and restrictions, which required a 100-foot setback from the lake line for any building. That same month, Kleist filed suit to enjoin Stern from violating that covenant and restriction and to require him to remove any buildings that were in violation. By her amended complaint, Kleist alleged that the house would also violate the second and fourth paragraphs of the covenants and restrictions.

Stern, believing that he was in compliance with the covenants and restrictions, proceeded with the construction and the house was fully built. A nonjury trial was held and, at the close of Kleist’s proof, supreme court granted Stern’s motion for a directed verdict and dismissed the amended complaint.

Upon Stern’s motion for a directed verdict, the court was required to accept Kleist’s evidence as true and afford her every favorable inference that might reasonably be drawn from the facts as presented– and grant the motion only if there was no rational process by which the court could have found in Kleist’s favor.

The appeals court concluded that the trial court erred in granting the motion with respect to the claims in the amended complaint alleging violations of paragraphs four and five of the covenants and restrictions. The court modified the order by denying the motion in part and reinstating the amended complaint to the extent it alleged violations of those covenants and restrictions and  granted a new trial on those claims before a different justice.

The law has long favored free and unencumbered use of real property, and covenants restricting use are strictly construed against those seeking to enforce them. And a party seeking to enforce a restriction on land use must prove, by clear and convincing evidence, the scope, as well as the existence, of the restriction—because restrictive covenants will be enforced only when the intention of the parties is clear and the limitation is reasonable.

The appeals court disagreed with Kleist that she established by clear and convincing evidence that Stern’s house violated the second paragraph of the covenants and restrictions, which provided that only single family dwellings “not more than one and one-half stories in height . . . shall be placed on any lot.” That same covenant was addressed in a 2004 case in which the appeals court determined that supreme court incorrectly accepted the interpretation of the covenant “as prohibiting property owners from building homes of more than 1½ stories in design, regardless of their height.” The appeals court concluded that “[t]he words not more than one and one-half stories in height “are ambiguous in scope,” and because the defendants, who were seeking to enforce the covenant, “failed to present . . . clear and convincing proof with respect to what number of feet constitutes a story in height,’ the scope of the covenant [was] uncertain, doubtful, or debatable,’ thus rendering it unenforceable as applied to plaintiff’s residence.”

In this case Kleist also failed to show by clear and convincing evidence the scope and meaning of the covenant in the second paragraph. Kleist’s experts testified to three different interpretations of that covenant. One expert, who was familiar with restrictive covenants written for subdivisions in the area, opined that, for the most part, height restrictions are usually delineated in feet, and the relevant covenant was not so delineated. Instead, it was delineated in terms of “stories,” and there was no clear and convincing proof of what that meant.

The appeals court agreed with Kleist that she established by clear and convincing evidence that Stern’s house violated the fourth and fifth paragraphs of the covenants and restrictions. The fourth paragraph provides that “[n]o building shall be constructed on any lot so that any part thereof shall be closer than . . . ten (10) feet from the side . . . lot line.” Kleist’s expert testified that the building plans showed that the right side of the house was 8 feet 1 inch from the side, and the left side encroached on the setback by about a foot. The fifth paragraph provides that “[n]o building shall be constructed . . . closer than 100 feet from the lake line.” Kleist’s experts testified that the house had a covered porch within the setback and opined that it was part of the building and thus violated the setback.

Stern’s reliance on the fact that there were other properties within the subdivision with attached decks located in the setbacks was misplaced because enforcement of the setback was different than whether there was a violation of the setback.

Although the supreme court determined that there was a violation of at least one of the covenants and restrictions, it granted the motion on the ground that Kleist could not seek equitable relief because she did not seek such relief against other property owners within the subdivision regarding their alleged violations of the same covenants and restrictions. That was error because Kleist was entitled to ignore inoffensive violations of the restrictions without forfeiting her right to restrain others which she found offensive.

Moreover, supreme court’s reluctance to grant equitable relief where the house was already been built was not a valid basis for granting Stern’s motion—because he proceeded with construction of the house with knowledge of the restrictive covenants and of Kleist’s intention to enforce them.

Sweet News for Yum Yum Donuts: Lost Goodwill is Not an All or Nothing Proposition

Josh Cohen | California Construction Law Blog | August 12, 2019

Last month a California Court of Appeals clarified that a property owner facing eminent domain is only required to prove partial loss of goodwill, not total loss of goodwill, to be entitled to a trial on the amount of goodwill lost.

Yum Yum Donuts operated a shop in Los Angeles that was subject to eminent domain by the Los Angeles Metropolitan Transportation Authority (MTA) to make way for light railway track. At trial, Yum Yum sought loss of goodwill as part of its condemnation damages under Code of Civil Procedure section 1263.510.

At trial the MTA’s expert testified that Yum Yum could have reduced its goodwill loss if it relocated to one of three alternative locations rather than simply closing the shop. But the expert conceded that even if Yum Yum had relocated, it would have lost some goodwill.  Yum Yum refused to relocate, arguing that its relocation costs would render the move unprofitable.  The trial court found that Yum Yum’s failure to mitigate its damages barred Yum Yum from having a jury trial to recover any goodwill damages.

Yum Yum appealed, and the Court of Appeal reversed, finding that a condemnee is entitled to a jury trial on the amount of lost goodwill if it can establish that it will still lose some of its goodwill if it relocates.  Reviewing the legislative history the Court found section 1263.510 was intended to displace “judicial stinginess” about compensating condemnees.  The Court concluded the statute provides a two-step process; the trial court determines if the condemnee meets its burden of establishing that the condemnation caused loss of goodwill, that the loss is unavoidable and that the condemnee will not be obtaining double recovery.  If the condemnee meets this burden, it’s entitled to a jury trial on the amount of lost goodwill.

The Court remanded the matter for a jury trial as to the amount of goodwill lost by Yum Yum, but given that Yum Yum failed to mitigate its goodwill loss, the matter is hardly a slam dunk.

Risky Business: Thwarting Peril in Condominium Development

Joseph A. Cleves, Jr. | Taft Stettinius & Hollister LLP | May 1, 2019

Introduction

Many major metropolitan areas are seeing a rise in interest for luxury condominium developments because of booming demand. Historically, these ventures have been linked to elevated risk profiles. This is due, in part, to unreasonable expectations of end-users, coupled with the availability of an association to take on the burden of litigation. These inherent risks have pushed many developers away from the condominium structure. However, with increased demand, many are returning to these developments. The major parties in condominium projects can take certain steps to protect themselves from the common risks. This article will explore the options available to the proactive developers.

The Developer

Foremost, the developer should use a single asset entity to develop the project. This will allow the developer to isolate liability to the assets of the entity developing the project. By its very nature, the single asset entity will protect the developer’s other projects.

Marketing materials are a hotbed for liability. Many states impose statutory liability for misleading advertising literature for condominiums. Developers should ensure legal counsel has reviewed all marketing material together with relevant design documents. Developers should avoid broad and vague representations, which create a ripe area for claims. Maintain dimensions shown through the design and construction process. Represent only features known to be in the final product. Finally, be aware of a change to a design plan that can lead to an unintentional, but misleading statement.

To ensure adequate protection, the developer should carefully develop an insurance program for the condominium, and the design and construction processes. Insurance is a vital part of resolving claims during, and after, the construction process. It is not a product on which to pinch pennies.

Many claims arise because of mold, which can often be drastically overblown. To avoid exposure, the developer should be proactive. Educate employees and the condominium management company about indoor mold. Have a specific person with knowledge and authority in each organization to receive mold complaints and respond quickly. Document the process thoroughly in your business records.

Value engineering is attractive to all developers. Maximizing profits is a natural thing to pursue. However, a developer needs to carefully monitor value engineering decisions to ensure they will not hurt the project.

Keeping in mind the above recommendations can drastically reduce exposure for a developer, making condominium projects more profitable and attractive ventures.

The Design Professional

Design professionals are on the receiving end of many condominium lawsuits. This is partially because many developers will use a single purpose entity. This leaves the design professional as the only viable target once an issue occurs down the road. Many times, it is also unclear whether the complained of issue is a design or construction defect.

The design professional should carefully craft and document key construction features, such as waterproofing, drainage and structural components. These features are front and center as topics in litigation based on design claims. Documentation verifying compliance with design documents can keep the design professional from being dragged into litigation, without which the defect’s cause would be unclear. Attention to the selection of components for windows, sliding glass doors and any roofing systems will also pay dividends.

To ensure adequate design, peer review of all drawings and specifications can help catch potential issues early. The design professional can also obtain written verification from component manufacturers. They should attest that the components are strong enough to meet applicable building envelope and building code requirements.

Design professionals often hesitate to visit the site frequently. But as set forth above, this may be in the design professional’s best interest.

The Construction Manager

Like the developer, the construction manager should monitor value engineering decisions and ensure they will not hurt the project. Just as the design professional, the construction manager should memorialize construction progress through video and photography. This is especially vital for work that the contractors will cover during construction. The construction manager should also require checklists on likely fail points and complex areas of the structure. Detail is paramount. For example, the checklist should specify “all PHAD hold-downs in place and nailed with 16d commons” instead of “check framing.”

The construction manager should also require that major component manufacturers visit the job before substantial completion. This is the best way to ensure that the construction meets their pre-requisites for any warranties. The construction manager should also obtain written warranties on products or work before final payment to manufacturers or suppliers. Claims related to these components can be large. Having manufacturer approval will help alleviate defenses were the component to fail.

The construction manager should prepare a maintenance manual for the condo association that recommends periodic inspections of common areas and units respectively. This manual can be incorporated into the condominium documents.

The Drafter of Condominium Documents

Locating experienced legal counsel is critical for the preparation of the condominium documents. State laws can be nuanced; so experience matters. That being said, there are some broad considerations for any development.

First, the drafter should consider incorporating mold waivers and exclusions in condominium documents, as well as purchase contracts. As discussed above, mold is a large contributor to condominium claims. Moreover, many times the mold results from the actions of the unit owner, or association, not defective construction or design.

Second, requiring the condo association to perform inspections called for in a maintenance manual is a feature that will force proper upkeep. The condominium documentss should provide for a waiver and indemnity where the condo association and unit owners do not perform recommended maintenance. The condominium documents should also make mandatory an annual inspection of the common areas. Contracts should mandate participation by the construction manager, architect, developer and a condo association representative. This arrangement should continue until the applicable statute of repose expires.

Third, if state law permits, the condominium declaration should mandate a super majority of board members to begin a lawsuit. A 75% majority is a good and reasonable threshold. The documents should also require that a claimant show merit as a prerequisite to any legal action. If possible, the recommendation from a third-party professional can be required. This could come from an expert licensed in the pertinent discipline, or from a panel of knowledgeable individuals.

Fourth, the preparer should consider mandatory mediation/arbitration for dispute resolution. The prevailing party should recover for attorney fees, court costs and expert expenses. This will help ensure that claimants only assert viable and serious claims. The condo documents should also contain a waiver of the right to a jury trial.

Finally, requiring the developer’s consent before modifying these safeguards as long as it owns any units will solidify the protections. Afterward, the threshold of at least 75% of all unit owners should have to approve any modification to the safeguards described above.

Conclusion

Condominium projects will always be risky ventures but taking the precautions set forth above can minimize baseless claims that are otherwise encouraged by the inherent nature of condominiums.

Autonomous Vehicles and Ride Sharing Will Reshape Our Buildings, Our Cities, and Our Lives

Foley & Lardner | February 2018

When the first automobile hit roadways in the early 1900s, developers, planners, and city officials had to completely re-think the design and planning of cityscapes, both new and old. The era of narrow streets, communities defined by walking distance or streetcar line, and short-distance commuting gave way to massive boulevards, interstate highways, and the rise of suburbanization. These shifts in urban planning had the sole objective of utilizing the car to move as many people as quickly and safely as possible, without the limitations of public transit. But, because of this, cities themselves suffered, resulting in obsolete buildings being demolished, neighborhoods destroyed for highways, public transit being reduced or removed, and intimate communities ripped apart to shoehorn in 7-lane boulevards. Now, as autonomous cars, busses, and other next-generation technologies entering the mass-market, developers and city officials are again having to re-think how disruptive technologies will shape the way we live, work, and play in our cities.

Unlike urban planners of the past, cities and their planners are trying to integrate new technologies into their existing city-scape, rather than let that technology destroy the existing city and redefine how a city is built. Contrary to the change-and-destroy method of yesteryear, this means “future proofing” projects and city-wide masterplans. By future-proofing existing cities and future developments, planners and city officials hope to build structures that can accommodate and anticipate the changes in the way people commute and live in urban and suburban environments. This means designing buildings that can be retrofitted to convert parking structures to offices or living space, turning roadways to greenspace, or parking lots to parks and commercial spaces that add value to the urban and suburban fabric while still producing a return on investment for the city and developers alike.

As more people look to ride-sharing and car sharing services to meet their commuting and transit needs developers are anticipating a drop-off in personal car ownership and use of a personal car for day-to-day commuting. While current developments require parking space to accommodate commuters, the future might make these spaces obsolete. To avoid this predicted obsolescence, some developers are trying to figure out how they can repurpose these spaces for future use. This could mean the constructing of buildings with internal parking structures that can be converted to office, commercial, or residential space if demand for parking decreases in the future. This also means cities such as Los Angeles are studying how to repurpose their existing surface parking inventory which currently accounts for nearly 14% of the city’s footprint, or about 200 square miles of land, just for parking a car. Other cities are looking to for ways to possibly existing roadways into greenspace and repurpose existing automotive infrastructure for autonomous car staging or increasing pedestrian usage.

In San Francisco, the San Francisco Giants are looking at how they can incorporate the driverless futures into their Mission Rock project. In this 27-acre project, developers are attempting to designing future streets and street-frontage with a focus on prioritizing pedestrian pick-up and drop-off in the world of autonomous vehicles. Similarly, as e-commerce continues to rise in popularity and autonomous delivery trucks on the horizon, many apartment developments are building large storage and cold-storage areas into their footprint and delivery bays to accommodate this shift in consumer shopping.

Although developers and planners are focusing on future proofing their projects, it is not without risk. The cost to build a structure with future proofing in mind not only is more expensive, but in the scope of parking structures, it means fewer cars can fit compared to non-future proofed structure. But, the payoff later can make up for this cost. For instance, one convertible project design includes 117 spaces per floor to park cars, about 17 per floor fewer than if it were built using a conventional parking structure design. But, if this project is converted to office space or even residential living, the return on investment could be 2 to 3 times the return of keeping this a traditional parking structure.

Despite “As Is” Clause, Homebuyer Wins Misrepresentation Appeal Against Bank

Joe Forward | State Bar of Wisconsin | December 28, 2015

A bank is liable for a misrepresentation that induced a homebuyer to buy a foreclosure home with undisclosed water and mold damage, even though the sale contract said the buyer was purchasing the home “as is,” a state appeals court has ruled.

In 2012, Bank of America foreclosed on a home in Menomonee Falls and hired a real estate agent to resell it. The real estate agent learned that the property had severe water damage. The agent recommended the bank remediate to prevent mold.

The bank agreed and the agent solicited bids. However, the clean-up was not immediately completed, and mold remediation became necessary.

In May 2012, the agent told the bank that the mold remediation appeared complete. However, he subsequently told the bank that mold could still be seen in various rooms.

The bank then approved repair work for new drywall, new flooring and carpeting, and new painting. Upon completion, the agent told the bank the job was unsatisfactory.

But the bank did not take further action. It listed the house for sale at $144,900, and it generated immediate interest from potential buyers.

Catherine Fricano and her fiancé were among a dozen people who attended a house showing. Their real estate agent identified some discoloration in the basement that appeared to be mold, but did not see other signs of mold in other parts of the house.

The fiancée’s brother, who had experience buying and renovating foreclosed homes, came with the couple for a second look. He said he would offer to buy it if they didn’t.

The next day, Fricano offered to purchase the home for about $171,000. She increased the offer to 175,000 through a counteroffer. The bank accepted her offer. Fricano could back out if a home inspection revealed conditions that she deemed unacceptable.

The bank then asked her to sign a purchase addendum. It said that Fricano agreed to purchase the property in “as is” condition, which could include any “hidden defects or environmental conditions affecting the property, whether known or unknown, whether such defects or conditions were discoverable through inspection or not.”

The agreement also allowed the bank to negate and disclaim any representations, warranties, covenants, or guarantees with respect to water damage and mold and specifically said the bank did not guarantee the home was free of mold.

However, the addendum also said the bank had “little or no direct knowledge about the condition of the property.” Fricano’s agent said this language was common with foreclosures. Fricano signed the agreement and then had the home inspected.

The home inspector noted evidence of prior water leakage and substantial mold growth, including mold that was not removed in the basement. She pursued his recommendation to consult with an environmental professional, who surveyed the house and prepared a proposal for proper mold mitigation.

However, Fricano did not pursue the service. She closed on the property believing the mold growth was limited to the basement and not the livable areas of the home. Shortly after closing, Fricano learned that mold was “saturated” throughout the house.

As a result, the whole house was stripped to its studs and reconstructed after proper mold and water damage remediation. Fricano then filed a lawsuit against the bank under Wis. Stat. section 100.18(1), which covers fraudulent representations.

She pointed to the bank’s statement, in the addendum, that it had “little or no direct knowledge regarding the condition of the property.” The bank, she said, had lots of information that the whole house had been flooded and incurred significant damage.

At trial, the trial judge informed the jury that an “as is” clause does not relieve a seller from disclosing material adverse facts about a property, though it was Fricano’s burden to prove the bank had knowledge of the property’s condition and did not disclose it.

The jury awarded Fricano $50,000 in compensatory damages, ruling that the bank violated section 100.18(1). The court denied the bank’s motion for judgment notwithstanding the verdict and entered judgment for Fricano. The bank appealed.

The bank noted the “as is” clause and said a violation of section 100.18(1) requires a misrepresentation to a member of “the public,” but Fricano’s negotiating position with the bank, through offers and counteroffers, created a “particular relationship.”

But in Fricano v. Bank of America, 2015AP20 (Dec. 23, 2015), a three-judge panel for the District II Court of Appeals affirmed, upholding the jury verdict for Fricano.

Jury Verdict Affirmed

The panel noted that motions to change a jury’s verdict must be denied unless there is “no credible evidence to sustain a finding in favor of such party.” And trial courts that preside over trials are given substantial deference to make credibility determinations.

The panel concluded that an “as is” provision in a sales contract between buyer and seller does not relieve the seller from liability for material misrepresentations.

“We see no support for the Bank’s argument that the ‘as is’ provision, disclaimers, and waivers in the parties’ contract relieve it from Wis. Stat. § 100.18 (1) liability for its deceptive statement in the contract that it had little to no knowledge of the condition of the property,” wrote Chief Appeals Court Judge Lisa Neubauer.

The panel also ruled that Fricano was a member of the “public” when the bank made its misrepresentation, because the sides had not yet reached a contractual agreement.

“There was no contract between the parties when the Bank misrepresented its knowledge of the condition of the property,” Chief Judge Neubauer wrote.

“[W]e fail to understand how the fact that parties are in negotiations over terms takes the potential purchaser out of the realm of ‘the public.’”

The panel rejected the bank’s claim that Fricano lacked evidence to prove she was induced to purchase the home as a result of any misrepresentation by the bank.

Fricano had testified that she believed the bank could not tell her anything about the property because it was a foreclosure and the bank had not been living there.

“[T]here is more than sufficient credible evidence to believe that had the Bank not misrepresented its knowledge of the condition of the property, Fricano would not have gone forward,” wrote Neubauer, also rejecting the bank’s claim that Fricano had notice of possible defects through a home inspector and should have inquired further.

“The reasonableness of a person’s reliance on a misrepresentation is not a separate element of a Wis. Stat. § 100.18 (1) claim, but relevant only to the consideration of the third element: whether the representation materially induced the plaintiff’s loss.”

The panel also noted evidence of what the bank knew and how it acted: it knew there was severe water and mold damage and failed to properly remediate the problem.

“[T]he jury could have concluded that all of these actions were designed to make the property marketable for sale and are evidence that the Bank’s misrepresentation was intended to induce Fricano to purchase the property,” Judge Neubauer wrote.

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