Good News Keeps Coming …

good-newsWow. I think the (seemingly mythical) “turnaround” in the commercial real estate market is actually going to stick this time! After many years of up and down and sideways market conditions, GOOD news about the Orlando/Orange County/Central Florida commercial real estate market is being consistently observed and reported. For example, see this article entitled “9 things that may surprise you about Orange County real estate” by Anjali Fluker, writer for the Orlando Business Journal. Local market indicators are the best they’ve been in at least 5 years, new construction and new commercial activity is booming throughout the area (have you seen the construction (and traffic) on International Drive lately? It’s insane!) and deals are being made! Here in Winter Park things are very active along the 17-92/Lee Road/Denning Drive corridors, which I think is fantastic. I WILL be checking out the new Trader Joe’s on 17-92 as soon as it opens! On a larger scale, my clients who attended the recent ReCon/ICSC convention in Las Vegas came back with pleasantly optimistic reports. Sure, everyone in real estate has been burned enough the past several years that they remain at least slightly wary, but that’s good business judgment in all market conditions and is also healthy for the industry. Nobody I know wants another real estate “bubble” to blow up in our faces. But, despite all the false starts and cautionary tales of the past few years, we finally seem to be in the midst of a consistent, upwardly trending, pattern of recovery. Thankfully, it feels good to read the commercial real estate news again, in the OBJ Commercial Real Estate News and other publications.

Confused By Documentary Stamp Tax and Intangibles Tax? Everyone Else Is, Too!

DocstampLast week I attended a Continuing Legal Education (CLE) seminar on Florida’s documentary stamp tax and non-recurring intangibles tax and I left feeling as though I knew less about about them than when I walked in. Now, of course, that’s not entirely true – a lot of good information was conveyed and I did learn things I didn’t know before. However, it did leave me keenly aware that Florida’s documentary stamp tax and intangibles tax are confusing even to the experts who study them closely.

I don’t really know why they’re so confused. The general rules are pretty simple: (1) any instrument that conveys any interest in real property for consideration is subject to Florida’s documentary stamp tax; and (2) any obligation to pay money that is secured by Florida real property is subject to Florida’s non-recurring intangibles tax.

With regard to documentary stamp tax, deeds, easements and options are just a few of the instruments that convey real property interests that are subject to the doc stamp tax so the list of instruments subject to tax is probably broader than most people realize. But, other than figuring out if a conveyance of a real property interest is occurring it’s all pretty simple.

Well, except that some conveyances are made for no consideration, such as gifts of property, transfers between spouses for estate planning purposes, transfers due to divorce, and so on. And sometimes even if you don’t think there’s any consideration the State has defined certain situations where consideration is “deemed” to have been given even if no money changes hands, so the definition of “consideration” can be confusing. But, really, other than figuring out if a conveyance of a real property interest is occurring and whether consideration is being given or is deemed to have been given, it’s all pretty simple.

Well, except that there’s also a long list of specific exemptions – situations where you would think tax would be due but the State says it’s not. And some of the exemptions aren’t very clear. But, really, other than figuring out if a conveyance of a real property interest is occurring and whether consideration is being given or is deemed to have been given and whether any random exemptions apply, it’s all pretty simple.

Oh, I forgot. Documentary stamp tax is also due on obligations to pay money (such as a promissory note) executed or delivered in the State of Florida. Executed OR delivered. In state. So a borrower and lender can take one step over the state line, sign a note, and no tax is due? Or take a boat out into international waters? True! As long as it is signed AND delivered outside of the State of Florida. So let’s just always do that, right, because we’ll save money, right? Not so fast. The tax is capped at $2,450 if it’s not secured by real estate so travelling out of state is generally not worth the trouble and expense because the cap makes it cheaper to just pay the tax in most cases. Why $2,450? The State is smart enough to have calculated the average cost that a person is willing to tolerate paying before going to all the effort to travel out of state with their banker just to execute and deliver a note. Pretty clever, huh?

[Update Feb. 13, 2014 – Question posed to me: What about an out of state lender with an out of state borrower who wants to sign a note while he’s here on vacation? With no other connection to the State of Florida except that he’s vacationing here. Tax is due because the note was executed in-state. Crazy!]

 Ok, I lied. I understand exactly why everyone is so confused. It’s because, sometimes, Florida’s documentary stamp tax makes no sense whatsoever!

At least Florida’s intangibles tax is pretty easy to understand. If you have an obligation to pay money secured by Florida real property the intangibles tax is due. Period. End of story. I think.

And so it goes. Just call your trusted commercial real estate attorney (hey, maybe that’s me!) if you have questions about Florida’s documentary stamp tax or non-recurring intangibles tax. It’s confusing enough that occasionally he or she (or I) may not have the answer immediately and might have to do a little research to get you the right answer, we might even have to call the Department of Revenue to figure it out, but it will be worth it (a) to save tax where tax can be saved, and (b) to avoid a Florida Department of Revenue inquiry if tax should be paid, but isn’t.

As always, thanks for reading. Please send your questions and comments and SHARE this article with others!

BH

Reps and Warranties in Orlando Real Estate Contracts

warranty

What are Reps and warranties in real estate contracts

The “Reps and Warranties,” as they’re commonly referred to, are a more important part of a commercial real estate contract than most Buyers and Sellers realize. Many Buyers and Sellers regard the reps and warranties merely as part of the “boilerplate” legalese inserted by attorneys (a) to justify their fee, and (b) to complicate things for the sake of complicating things. That’s just not true. A large part of what your attorney should be doing for his or her client when drafting a contract (or reviewing a contract prepared by someone else) is to include provisions that protect the client from unnecessary risk and that benefit the client by putting him or her in a more advantageous position. The Reps and Warranties section is one place in the contract where the attorney can make these things happen.

First, some explanation on how reps and warranties differ and whether that even matters. A “representation” is a statement of present or past fact made to induce someone to enter into a contract. For example, “the Seller is not in default under any indenture, mortgage, deed of trust, loan agreement, or other agreement to which Seller is a party and which would have an adverse effect on any portion of the Property.” A “warranty” is a promise that a particular fact is true. For example, “the Property is and will continue to be, from the date hereof through the time of closing hereunder, free from all mechanics’ liens and any rights to mechanics’ liens.”

The difference between representations and warranties

Now, what’s the difference? Case law and legal articles about reps and warranties that are directed at attorneys do distinguish between the two, in a legal sense, because the remedies available for fraudulent misrepresentation versus a breach of a warranty differ significantly. If a representation is made that the representing party (usually the Seller) knows to be false that the receiving party (usually the Buyer), believing it to be true, relies upon to their detriment, a claim can be made for fraudulent misrepresentation and the damaged party may be able to sue to rescind the contract, obtain restitution and possibly even receive punitive damages. Pretty serious stuff. In our example above, if the Buyer incurs due diligence and other costs in reliance on the Seller’s statement before learning that the Seller is actually in default under their mortgage and the Seller’s lender is foreclosing on the property, the Buyer could potentially sue to recover their costs and terminate the contract. In our other example, however, if it is discovered that there is a mechanics’ lien on the property the Seller likely would just have to take whatever action necessary to remove the lien, such as paying the contractor in full. In other words, they would have to make the warranty true but would not necessarily be at risk of the Buyer terminating the contract or suing for damages.

From a practical perspective, however, I’m not sure this all matters a lot to Sellers and Buyers entering into a real estate contract. For one, the representations and warranties are usually lumped together as the “Representations and Warranties” rather than being specifically identified as one or the other, and sometimes they are even grouped together in a long list of items that may be identified as “Representations, Warranties, Covenants and Conditions.” It can be hard to decide what is what and, depending on how they are worded, many of the statements could be interpreted to be more than one thing – a representation, a warranty and maybe even a covenant. In other words, it may ultimately depend on a court’s ruling as to whether a particular statement is a rep or a warranty or whatever and to determine the appropriate remedy.

Risk allocation in real estate contracts

More importantly, as far as Buyers and Sellers are concerned, this is really all about (a) risk allocation (more so from the Seller’s perspective,) and (b) information gathering (more so from the Buyer’s perspective.) Typically, a sophisticated Seller will want to limit their risk by making as few representations and warranties as possible and, instead, forcing the Buyer to bear the burden of learning all they can about the property on their own. An extreme example of this would be an absolute, “as-is, where is” contract in which the Seller makes no representations or warranties about the property. On the other hand, a sophisticated Buyer will want to have as much assurance as possible that the Seller really does own the property and that the contract is enforceable against the Seller. The Buyer will also want to get a jump-start on their due diligence by gathering as much information as possible about the property from the Seller and limit their risk by availing themselves of certain remedies if they are misled or if the Seller fails to make good on their warranties.

Boilerplate reps and warranties

Most often, as in most things, the end-result is something in the middle. The Seller will make the reps and warranties it can truthfully and comfortably make within their own risk tolerance, while the Buyer will require certain basic representations that, if false, would be “deal-killers” from the their perspective and will also seek to gain as much information about the condition of the property as it can before expending funds on its own due diligence. Achieving this type of risk allocation while protecting the client, be it the Buyer or Seller, is one of the attorney’s primary roles in drafting the commercial real estate contract or reviewing any contract prepared by the other party. Don’t disregard the reps and warranties as mere “boilerplate.” There’s a lot more going on there than you may realize.

Exclusive Use and Non-Compete Clauses in Commercial Leases

Orlando Real Estate Lawyer Offers Caution When Using Exclusive Use Clauses

Picture of a commercial lease signingWhether you’re a shopping center landlord or a would-be commercial tenant, consider – but use caution – adding an “exclusive use” clause or a “non-compete” clause to your commercial property lease in Orlando. These terms are sometimes used interchangeably but make more sense to me defined as follows:

“Exclusive use”

Exclusive use provisions are typically requested by the tenant and are intended to prohibit the landlord from leasing space in the shopping center to businesses similar to the tenant’s. The obvious reason is that the tenant wants to limit to the greatest extent it can competition from competing businesses. Thus, the landlord grants to the tenant the right to some “exclusive use” within the shopping center.

“Non-compete” clause

A non-compete provision is typically requested by the landlord and can limit the activities of the tenant in at least two ways. First, the provision can be used to prevent the tenant from selling products or services that compete with other tenants in the shopping center who may have exclusive use provisions in their leases that would be violated if such activities were allowed. Second, particularly where the tenant is going to be paying percentage rent (i.e. a portion of the rent is based on the amount of the tenant’s sales), the provision can be used to prevent the tenant from establishing a competing business or franchise within a certain geographic area that may cannibalize sales from the subject property, thereby reducing the percentage rent payable to the landlord. Thus, the tenant agrees that it will forego certain activities so as not to compete with other tenant’s sales or, in the percentage rent scenario, its own sales.

These provisions are sometimes difficult to negotiate (depending on the relative bargaining power of the parties) and are difficult to enforce in the event of a violation unless they are very clearly drafted by an Orlando real estate lawyer. For example, the use or service that is at issue is often hard to define, making it the subject of a potentially protracted negotiation on the front end or a potentially disputed matter later on. For instance, let’s say that you want to lease space to operate a cupcake shop. You certainly wouldn’t want a competing cupcake shop next door, but what about a chocolate shop? An ice cream store? Do you have the negotiating power to require the landlord to exclude all businesses selling desserts of any kind? Probably not, but you get the idea. The important point is that it’s an issue that has to be addressed when the lease is negotiated and the more clearly the use or service is defined the easier it is to categorize excluded or permitted competing uses.

The same issue arises in the context of non-compete provisions. Suppose you enter into a lease for the operation of a yogurt shop, you are paying percentage rent and your lease prohibits you from opening a competing store within two miles. The landlord certainly wouldn’t want you to open a competing yogurt shop close by, but could you open an ice cream shop? Snow cones? Italian ice? The same analysis could apply to electronics (which could include computers, computer games, computer parts, computer accessories, etc.), spa services (which could include spa treatments, skin treatments, manicures, pedicures, massages, maybe even a hair salon that offered some of these services) or any other broad category of uses or services. The answer depends on what was negotiated before the lease was signed. In the event of a violation and resulting litigation, the Court may ultimately have to decide what was intended to be excluded and what was intended to be permitted. Not a position you want to be in.

Another difficult issue to address is what happens when a violation occurs. How do you calculate damages if the damages are the amount of sales lost to a competing business if sales are also dependent on numerous other factors? If the landlord violates the exclusive use provision and allows a competing use, should the tenant’s rent be reduced? By how much? Should the tenant be entitled to terminate the lease and move elsewhere? Could the tenant obtain an injunction against the other tenant to stop the competing use? Could that tenant then sue the landlord? Sure they could. Almost anybody can sue almost anybody!

These and other concerns should be addressed and negotiated before the lease is ever signed. By involving your attorney early in the lease negotiation process you can improve your chances of obtaining an exclusive use provision or non-compete clause that you can live with, at minimum, or that protects your interests and maximizes your business prospects long term, at best. In addition, a clearly drafted exclusive use provision minimizes confusion and conflict when the question arises as to whether a particular use is excluded or permitted or an alleged violation occurs.