All posts by siteadmin

|

Exempt Organizations: Tax Reform Provisions to Watch

By Nancy Ortmeyer Kuhn, Chair of Jackson & Campbell’s Tax Group

The Ways and Means Committee of the U.S. House of Representatives released its long-awaited tax bill on November 2, 2017.  The bill is entitled Tax Cuts and Jobs Act, H.R. 1  (“TCJA”).  Note that there is nothing in the title referencing “tax simplification”.  The full text of the bill is 429 pages.  Of interest to nonprofit organizations are the following provisions:

  • A tax exempt organization will pay a 20% excise tax on any executive compensation in excess of $1 million. The excise tax applies only to the top five executives, and includes all remuneration and benefits, other than amounts that are excludable from the executive’s gross income such as donations to a qualified retirement plan.  (TCJA §3803)   This 20% excise tax applies to all organizations described under §501(a), along with political organizations exempt under §527, §115 state and local governmental entities, and farmers’ cooperatives.
  • The Johnson Amendment would be partially repealed, and §501(c)(3) religious organizations would be free to express partisan political statements during the ordinary course of the religious organization’s activities, assuming its expenses in making those statements are de minimis. (TCJA §5201)  Note that this applies only to religious organizations.  All other §501(c)(3) organizations are still prohibited from engaging in any partisan political activities and/or partisan political speech.
  • Private foundations will now be subject to a 1.4% investment tax, rather than the 1% or 2% investment tax under §4940. This is one of a very few provisions that would simplify current law. (TCJA §5101)  The 1.4% tax would also be collected from certain private colleges and universities on their net investment income.  (TCJA §5103)
  • Private foundations would be exempt from the excess business holding excise tax for any of its 100% subsidiaries (by voting stock) that annually distribute all net operating income to the private foundation. The foundations that are eligible for this exemption are limited to those that have independent executives and boards of directors.  Thus, the exemption would not apply to foundations where the majority of the members of the board of directors are substantial contributors or executives of the foundation.  (TCJA §5104)
  • Donor advised funds would be subject to additional reporting requirements regarding their policies on inactive donor advised funds as well as a requirement to report the average amount of grants made from their donor advised funds. (TCJA §5202)
  • The bill clarifies that the unrelated business income tax applies to all tax-exempt organizations recognized under §501(a), along with §115 state and local entities such as public pension plans. (TCJA §5001)
  • Any net income that a tax-exempt organization realizes from research would now be subject to the unrelated business income tax, unless the research is publicly available. (TCJA §5002) Previously, net income from research performed by colleges, universities, hospitals or performed for government entities was also generally exempt from UBIT regardless of whether the research was publicly available.

Whether any of these provisions will be passed by Congress and signed into law as currently stated is unknown.  Several of the provisions are controversial, such as the partial repeal of the Johnson Amendment.  Combining politics and religion is generally not a good idea, and it could be subject to a constitutional challenge as a violation of the separation of church and state.  Other revenue raisers, such as taxing net research revenue and imposing a net investment tax on certain private colleges and universities, may come under attack as well.  The 20% tax on excess compensation of nonprofit executives may receive less scrutiny, since those excise taxes could more easily be avoided through tax planning initiatives.  Stay tuned!

| Susan Knell Bumbalo

Susan Knell Bumbalo article published in DRI’s For the Defense

Susan Knell Bumbalo, an attorney in our Insurance Coverage group, wrote an article entitled “Examining Insurers’ Obligations to Their Insureds Post-Verdict“, which appears in this month’s edition of DRI’s For the Defense.  The article addresses insurer’s duty to appeal and issues associated with various issues that arise when insureds/insurers face an adverse jury verdict.  The article is a good roadmap and summary of the issues that need to be addressed when addressing appeals.  For the Defense is DRI’s premier monthly magazine that reaches over 20,000 practitioners.

| Roy L. Kaufmann

Roy L. Kaufmann Testifies before the D.C. City Council on proposed TOPA legislation

Roy L. Kaufmann, from the Firm’s Real Estate Group, testified before the D.C. City Council’s Committee on Housing and Neighborhood Revitalization on behalf of the D.C. Land Title Association.  He testified on a proposed legislation to amend the Tenant Opportunity to Purchase Act (TOPA) called the TOPA Accessory Dwelling Act of 2017. REDLINE of DCLTA-requested revisions vs. current law 9-8-17.

A video of Mr. Kaufmann’s testimony can be viewed on the City Council’s website. His testimony begins at the 4:00 mark.

| Roy L. Kaufmann

New Emergency and Proposed Inclusionary Zoning Regulations

The Department of Housing and Community Development (DHCD), which oversees the Inclusionary Zoning program in DC, has new proposed regulations relating to Inclusionary Zoning.  The nature of these Emergency and Proposed regulations, can be found here.  Although the regulations are called “proposed”, they are effective.  Public comment ends on September 30.  If you care to make any comments, you may submit them to iz.input@dc.gov .

 

Congratulations to our Best Lawyers in America © 2018!

Jackson & Campbell would like to congratulate our Best Lawyers in America © for 2018

  • Arthur D. Burger, Ethics and Professional Responsibility Law
  • David H. Cox Litigation – Real Estate; Real Estate Law
  • William E. Davis, Litigation – Trusts & Estates; Trusts & Estates
  • Roy L. Kaufmann, Real Estate Law
  • James P. Schaller, Commercial Litigation; Ethics and Professional Responsibility Law
| Roy L. Kaufmann

Wire Theft – Third Major Money Wiring Theft in DC Area. Stop, review your procedures and alert your staff today!

I have become personally aware of THREE wire thefts affecting title companies in the immediate DC metro area.  One, wherein fraudsters got away with over $1,500,000, was the subject of a recent lawsuit. This is affecting local title companies – people you know.
The fraudsters are getting into the title company email systems. They know when a closing is about to take place, and at the perfect moment, they send buyers false instructions on where to send money. The instructions can look like they are coming from the title company; therefore, they look legitimate.  The buyer’s (or lender’s) funds are diverted. In one case, the fraudster sent the false instructions to the real estate agent who, unwittingly, forwarded the false instructions to the buyer without vetting them.  The buyer, relying upon the real estate agent’s instructions sent the money to a fraudster.   In another situation, the real estate agent’s email was hacked. Again, at the right moment, an email came from the real estate agent’s account (or an account with almost the same name, with slightly different spelling), directing the title company to send the funds to a “new” account opened by Seller. The title company was alert and did not fall victim.
Or, the fraudster pretends to be the seller and sends the title company an email or fax with wiring instructions.  Again, the communication looks legitimate and the title company becomes complicit in sending the proceeds to the wrong account.
Develop and announce today to your staff protocols for accepting and sending wiring instructions.  At the very least, warn your processors and staff that ANY changes in wiring instructions have to be approved by a higher-up in the organization – that wiring instructions are sent and received only pursuant to a particular protocol – that lenders and clients are warned repeatedly not to accept wiring instructions from the title company unless a certain protocol is followed. Most title companies have this refrain in all email signature lines, but that may not be enough.
It is incumbent upon everyone to check with your underwriter, DCLTA, information technology personnel, E & O and bond agents and carriers,  and others to take actions to prevent false wiring instructions.
Jackson & Campbell, P.C. stands by to assist, but preventive measures here are key.
| Arthur D. Burger

Arthur D. Burger Begins Membership on Editorial Board of ABA/BNA Manual on Professional Conduct

Arthur D. Burger, Chair of J&C’s Professional Responsibility Practice Group and renowned ethics lawyer, just completed a three-year term as a member of the 10-person ABA Committee on Ethics and Professional Responsibility and now begins his service as an appointed member of the Editorial Board of the ABA/BNA Manual on Professional Conduct.  The Manual is recognized as a preeminent authority in the field legal ethics, and is frequently cited in court decisions, ethics opinions and law review articles.  Mr. Burger continues his primary mission of actively representing law firms and lawyers in matters relating to professional ethics and duties, and also serving as an expert witness.

Upcoming Event: How Women Lead

How Women Lead

Featuring Flora D. Darpino, 39th U.S. Army Judge Advocate General
Lunch and an intimate conversation about leadership with the first woman to serve as the Army’s most senior attorney, Lieutenant General (Retired) Flora D. Darpino
Hosted by
The Women’s Initiative of Jackson & Campbell, P.C.
in conjunction with
The Women’s Bar Association of the District of Columbia
Tuesday, September 12, 2017
12:00 pm – 2:00 pm
Jackson & Campbell

Lafayette Centre Mall Level,  Building 3

1155 21st Street NW
Washington, DC 20036
 
Doors open at 11:30 am
 Space is extremely limited! To reserve your spot please email marketing@jackscamp.com

Questions? Contact Kamaria Salau at marketing@jackscamp.com

| Mitchell B. Weitzman

Right of First Refusal Must Be In Writing

The United States District Court for the District of Columbia restated the fundamental principle that in order for a right of first refusal to be enforceable, it must be in writing under the Statute of Frauds.  A tenant under a restaurant lease sued its landlord when the latter sold the real property in which the leased premises was located without first notifying the tenant, claiming that during negotiations for the lease, the landlord promised the tenant a right of first refusal in connection with any sale of the property.  The tenant claimed that because of this promise, it did not require a lease provision granting this right of first refusal.

The court noted that the lease, like most commercial leases, contained an integration clause, which stated “this Lease contains the final and entire agreement between the parties hereto, and they shall not be bound by any terms, conditions, oral statements, warranties or representations not herein contained.”   The court applied the writing requirement set forth in the Statute of Frauds, enacted in the District of Columbia as D.C. Code § 28-3502, extending to contracts relating to real estate, which exists to guard against perjury and fraud claims involving real estate.  The court cited a District of Columbia Court of Appeals decision holding that a promise to grant a right of first refusal must be in writing to be enforceable.

The court discussed the three exceptions to the writing requirement, ie., where a defendant’s own fraud is responsible for the lack of a writing, “equitable estoppel,” and where both parties admit the contract or obligation, holding that the tenant failed to establish grounds under each.   The integration clause in the lease played a central role in the decision, with the court citing prior authority for the proposition that if a party attached great importance to a particular term, e.g., the right of first refusal, he would have insisted upon its inclusion in the final contract, and its absence was evidence of abandonment or excision of any prior representations concerning such term – in turn precluding a finding of fraud.  In addition, the court held that the tenant could not establish equitable estoppel, because it took no action in reliance upon the alleged promise, other than mere execution of the lease document.  Finally, the landlord did not admit a contractual obligation to grant a right of first refusal.

BONFIRE, LLC v. MICHAEL R. ZACHARIA,  D.D.C. No. 16-1538 (Decided on April 25, 2017).

| David A. Rahnis

Headstrong HOA Board Member Puts Himself in Harm’s Way Over Fair Housing Issues

In a recent case decided by the D.C. Court of Appeals, the court heard a matter involving the intersection between community association governance and fair housing law.  In this case, Wilfred Welsh, a board member of the Chaplin Woods Homeowners Association (the “HOA”), sued fellow HOA members Beverly McNeil and Alvin Elliott (the “McNeils”), claiming that the McNeil’s violated the HOA’s bylaws by renting out their townhouse for use as a residence by a group of recovering alcoholics and substance abusers.  The terms of the rental agreement did not meet certain requirements of the HOA’s bylaws, primarily because the lease did not name the persons who would occupy the premises.  Mr. Welsh initially sued the McNeils in Superior Court for leasing in violation of the bylaws and without the approval of the HOA’s board of directors.  In response, the McNeils brought counterclaims under the Federal Fair Housing Act and the District of Columbia Human Rights Act (the “Acts”), claiming that Welsh violated the Acts by opposing their request for a reasonable accommodation.  Most importantly, Mr. Welsh continued to pursue his claim even though the HOA’s board of directors ultimately voted to approve the McNeils’ rental agreement and the President of the HOA notified the McNeils of such approval in writing.

The court found that board approval effectively waived the HOA’s claim against the McNeils for leasing the townhouse in violation of the bylaws, a waiver that bound the entire Association, including Mr. Welsh.  The court ruled that the McNeils, as landlords, have standing to pursue claims under the Acts against Mr. Welsh, as an individual attempting to prevent them from renting property to tenants with disabilities.  The court found that, even if Mr. Welsh lacked the independent ability to grant or deny a reasonable accommodation request, and even though the HOA board ultimately consented to the lease, Mr. Welsh’s allegedly discriminatory actions to personally enforce the HOA’s bylaws could be a violation of the Acts.  The court remanded the case for further proceedings.  The Welsh case highlights the need for community association board members to act thoughtfully and collectively when addressing requests for reasonable accommodations.

Wilfred Welsh v. Beverly McNeil and Alvin Elliott, D.C.C.A. Nos. 15-CV-524 and 15-CV-559 (Decided on June 29, 2017).

|

Charitable Conservation Easements

RP Golf, LLC, lost its appeal and its claim of a $16.4 million charitable tax deduction for its donation of a conservation easement on its two golf courses.  On June 26, 2017, the Eighth Circuit affirmed the U.S. Tax Court’s opinion, holding that not all of the detailed requirements for charitable conservation easements had been complied with in a timely manner. RP Golf, LLC v. Commissioner,  —F.3d — (8th Cir. 2017), aff’g T.C. Memo. 2016-80.

The IRS and reviewing courts have been taking an increasingly detailed look at charitable conservation easements, and have seized upon any defect in the structure of the easement to deny the rather sizable deductions.  The Internal Revenue Code, in §170(h), as amplified by Treasury Regulations §1.170A-14, set forth very precise requirements for the structure of conservation easements that taxpayers must meet, in order for said easements to qualify for a charitable deduction.

RP Golf, LLC, which owns two golf courses in Missouri, obtained mortgages to finance the original purchase of the property and thus had outstanding bank liens in 2003, when it donated the easements to a local charity.  A qualified conservation easement must be donated exclusively for a conservation purpose and protected in perpetuity.  The Treasury Regulations specify that any property subject to a mortgage is subject to additional requirements. The mortgagee must subordinate its rights in the property to the rights of the charitable organization, so that the charity can enforce the conservation purposes of the gift in perpetuity.  RP Golf met the subordination requirement, but only shortly after it conveyed the property to the charity.  It appears to have been an after-thought.  The Court held that even though the subordination did occur subsequently and no harm was done by the late subordination, that did not satisfy the strict requirements of the Treasury Regulations. Thus the $16.4 million charitable deduction was denied.

Given the very specific and numerous requirements for charitable conservation easements set forth in the Treasury Regulations, it is recommended that charitable donors obtain legal advice to ensure that all requirements are adequately and timely fulfilled.  Please contact Nancy Ortmeyer Kuhn, head of Jackson & Campbell’s Tax Practice Group, with any questions on this topic.

|

The United States as a Tax Haven for Non-Citizens:  QDOT’s to the Rescue

Now that Switzerland and other off-shore locations are not as attractive to those wishing to safeguard their funds, the United States has emerged as a tax haven, of sorts, with several states providing friendly incentives for investors who are not U.S. citizens. However, foreign investors need to be aware of their potential liability for estate taxes.  U.S. property owned by an individual who is not a U.S. citizen is subject to U.S. estate tax at a rate of approximately 40% upon the death of that individual unless there is pre- or post-death tax planning.

Real estate located in the United States owned by a non-resident and noncitizen and his or her non-citizen spouse, is generally subject to estate taxes immediately upon the death of the first spouse. Unlike U.S. citizens, the unlimited marital deduction is not available when the surviving spouse is not a citizen of the U.S. and so the property does not automatically pass to the surviving spouse tax-free.  However, the U.S. property may be transferred to a Qualified Domestic Trust (“QDOT”) after the death of the first spouse, as long as it is done prior to the filing date for the estate tax return.  The surviving spouse would then gain the advantage of the unlimited spousal deduction, and the estate taxes would be deferred until the death of the surviving spouse. At that time, the 40% tax would be due, unless the surviving spouse qualifies for relief from one of the tax treaties in place between the U.S. and a limited number of foreign countries.

United States property consists of more than just real estate.  Other property within that classification is stock of a U.S. corporation, including U.S. mutual funds.  Also, a single member limited liability company (“LLC”) is disregarded for U.S. tax purposes, and so the situs of the property is determinative, not the location of the limited liability company.

The trustee of a QDOT is required to be a U.S. citizen or a U.S. corporation.  If the QDOT holds property worth more than $2 million, then the U.S. trustee must be a U.S. bank or a bond must be posted to cover the estate tax ultimately due.  The U.S. trustee is the withholding agent upon any taxable event, and is personally liable for those taxes.  If a distribution of corpus from the trust is made to the surviving spouse, that is a taxable event and estate taxes must be paid with the timely filing of Form 706-QDT.  The limited exceptions include distributions of trust income and distributions in cases of hardship to the surviving spouse.

While the United States is an attractive haven for individuals who wish to protect assets, it is imperative that the investments are made with full knowledge of the rather complex estate taxing regime.  Although a QDOT may be established post-death, it is just a deferment of the estate tax.  It is important for foreign investors to understand the risks and rewards of U.S. investments.

Please contact Nancy Ortmeyer Kuhn, head of our Tax Practice Group, with any questions.

|

Court Provides Guide For Defining Property In A Takings Case

St. Croix has a regulation that prohibits the owners of two neighboring properties along the St. Croix River from being separately sold or built upon unless each property has at least an acre of developable land. The Murrs owned two such parcels, each with less than an acre available to be developed. The Murrs wanted to sell one of the lots, but were refused under the regulation. The Murrs alleged that the refusal amounted to an unconstitutional taking. The Wisconsin Court of Appeals disagreed, holding that, looking at the properties together, the Murrs did not suffer a taking. The U.S. Supreme Court, in a 5-3 decision by Justice Kennedy, affirmed. The Court agreed that the parcels had to be looked at as a whole, instead of just looking at the one lot the Murrs wanted to sell, saying that “a number of factors” had to be considered in determining the property at issue for a takings case, including state and local law, the physical properties of the land, the prospective value of the regulated land, and local customs, rejecting any formalistic approach. Chief Justice Roberts, joined by Justices Alito and Thomas, dissented, arguing that state law alone should define the property in question. Justice Thomas separately dissented, arguing for a “fresh look” at the Court’s Takings jurisprudence. A link to the opinion in Murr v. Wisconsin is here.

|

Court Rules That District Courts Can Hear Mixed Cases Dismissed For Lack Of Jurisdiction, Over Justice Gorsuch’s First Dissent

In Perry v. Merit Systems Protection Board, the Court had to determine which federal court could hear an appeal from the Board’s decision that it lacked jurisdiction to hear a federal employee’s case. When Perry was fired from his job with the U.S. Census Bureau, he claimed discrimination (making his case a “mixed” one), but then signed a settlement agreeing to a suspension and retirement. He appealed the settlement to the Board, alleging that the settlement was coerced. The Board disagreed, and decided that it lacked jurisdiction to hear his appeal because his settlement was voluntary. In cases where the employee raised statutory defenses, the Federal Circuit heard appeals from the Board, under deferential review, but district courts heard appeals in mixed cases on a de novo review. Perry appealed to the D.C. Circuit, which held that the Federal Circuit had jurisdiction. The Court, in a 7-2 decision by Justice Ginsburg, held that the district court has jurisdiction to hear appeals of mixed cases dismissed for lack of jurisdiction, deciding that the reason for the dismissal did not change the nature of the case. Justice Gorsuch, joined by Justice Thomas, in his first dissent, argued that the statute’s plain language required that the Federal Circuit hear such appeals, and that the Court’s decision would create more problems than it solved. A link to the opinion is here.

|

Court Applies Five-Year Limitations Period to SEC Disgorgement Actions

In Kokesh v. Securities and Exchange Commission, the SEC sought to force Kokesh to disgorge millions he had misappropriated from various businesses from 1995 to 2009. While the Supreme Court had long held that a five-year limitations period applied to any SEC “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture,” the district court held that the limitation did not apply to a disgorgement request since that was not a “penalty,” and thus ordered disgorgement of all the money. The Tenth Circuit affirmed, and the Court, in a unanimous opinion (including Justice Gorsuch) by Justice Sotomayor, reversed, holding that disgorgement met the definition of a “penalty” subject to the five-year limitations period. Since disgorgement addresses a wrong to the public, not an individual (the proceeds being deposited into the court which has free reign to distribute the funds as it sees fit), and disgorgement’s purpose is punitive, to discourage others from similar acts, it met the definition of a penalty as applied by the Court in prior cases. Thus, Kokesh could at most be forced to disgorge monies he misappropriated since 2004, five years before the SEC initiated suit. A link to the opinion is here. 

|

Supreme Court Limits Government’s Power to Seize Personal Property

The Comprehensive Forfeiture Act mandates forfeiture of “any property constituting, or derived from, any proceeds the person obtained, directly or indirectly, as the result of” certain drug crimes. After brothers Tony and Terry Honeycutt were indicted for such drug crimes for selling a particular chemical through a hardware store Tony owned, Tony pled guilty and agreed to forfeit the bulk of the amount garnered in the drug sales, which constituted the store’s profits from the sales. Terry was merely a salaried employee at the store. Upon being found guilty after a trial, the government requested a forfeiture judgment against him for more proceeds from the store, with his liability being deemed joint and several with Tony’s. The district court denied the request because Terry had no interest in the store, but the Sixth Circuit reversed. The Court, in an 8-0 opinion from Justice Sotomayor resolving a split among the Circuits, reversed, holding that the Act’s scope was limited to property actually acquired by the criminal defendant. Since Terry did not own the store, no further forfeiture against the store’s proceeds could be reached. The terms “directly or indirectly” did not remove the requirement that the defendant obtain the property in question. The Court further held that the Act’s text was incompatible with the concept of joint and several liability, as the Act specifically targets specific tainted property. A link to the opinion in Honeycutt v. United States is here.

|

An ERISA Church Pension Plan Need Not Be Established by a Church

Originally, the Employee Retirement Income Security Act exempted “church plans” from a variety of rules designed to ensure solvency, and defined those plans as having been “established and maintained . . . for its employees . . . by a church.” Later, Congress amended this exception to include “a plan maintained by an organization . . . the principal purpose . . . of which is the administration or funding of [such] plan . . . for the employees of a church . . . if such organization is controlled by or associated with a church.” In Advocate Health Care Network v. Stapleton, three courts of appeals ruled that certain church-affiliated nonprofits who ran healthcare facilities did not qualify for the reformulated church plan exception because none were established by a church. The Court, in an 8-0 decision by Justice Kagan, reversed, holding that a plan maintained by a principal-purpose organization qualifies for the exception regardless of who established it. The Court held that the natural language of the amendment meant that such a plan “maintained” by such an organization supplanted for a plan both “maintained” and “established” by a church. Justice Sotomayor filed a concurrence, noting that while she agreed with the ruling, she was “troubled” with the outcome, as it broadened the number of unregulated church plans to groups that Congress may not have intended. A link to the ruling is here.

|

Court Affirms Virginia Court’s Application Of Juvenile Punishment Standards

In Graham v. Florida, 560 U.S. 48 (2010), the Court held that juvenile defendants convicted of nonhomicide offenses could not be sentenced to life without parole. Virginia had already abolished parole and instead replaced it with a “geriatric release” program which allowed older inmates to receive conditional release. In Virginia v. LeBlanc, LeBlanc was sentenced to life in prison for raping a 62 year-old woman when he was 16 years of age. LeBlanc argued that his sentence violated Graham. The Virginia Supreme Court had held in Angel v. Commonwealth, 281 Va. 248 (2011) that the geriatric release program complied with the holding in Graham. LeBlanc sought relief in the federal courts under the Antiterrorism and Effective Death Penalty Act of 1996, and the district court and Fourth Circuit held that the Virginia Supreme Court’s holding in Angel was “contrary to, or involved an unreasonable application of,” the Graham holding, and thus was “objectively unreasonable, not merely wrong,” and thus void in effect. The Court, in a per curiam opinion, reversed, holding that because there were “reasonable arguments on both sides” as to whether the geriatric release program complied with Graham, the Virginia Supreme Court’s holding was entitled to deference under the Act. Justice Ginsburg filed a concurrence noting her understanding that the geriatric release program provided a meaningful opportunity for release as required under Graham, and could not deny release for any reason whatsoever as the Fourth Circuit believed. A link to the opinion is here.

|

Patent Holders May Not Use Federal Law To Issue Injunctions Against Applicants For Biosimilar Products

The Biologics Price Competition and Innovation Act of 2009 provides an abbreviated process for the FDA to approve drugs that are biosimilar to already licensed biological products. The Act, in part, requires an applicant for a biosimilar product to provide its application and manufacturing information to the patent holder within 20 days of the date the FDA notifies the applicant that it has accepted the application for review. If the applicant fails to so act, the Act allows the patent holder to immediately bring an infringement action. Also, The Act requires the applicant to give the patent holder notice before marketing the biosimilar product, which, if not done, permits the patent holder to file a declaratory judgment action. In Sandoz Inc. v. Amgen Inc., Sandoz sought FDA approval to market a biosimilar product to one that Amgen claimed patents over. Sandoz told Amgen it would not provide its application or manufacturing information, and invited Amgen to file suit. Sandoz also told Amgen of its intention to market the product before getting licensure from the FDA. Amgen sued, and requested injunctions to enforce both requirements. The Court, in an 8-0 decision by Justice Thomas, held that the Act did not allow for such injunctions, but that the courts below should consider whether such injunctions were available under state law. The Court also held that providing notice to market a product prior to obtaining licensure was permissible under the Act. Justice Breyer, in a concurrence, suggested that the FDA might be permitted to come to a different interpretation of these requirements. A link to the opinion is here.

|

Court Again Limits Ability To Appeal Denial Of Class Certification

Consumers who purchased Xbox 360s sued Microsoft both individually and as a class. The district court struck the class allegations, refusing to certify the class. The Ninth Circuit refused to hear the appeal of that ruling under Fed. R. Civ. P. 23(f), which allows such interlocutory appeals only by permission of the court of appeals. Instead of pursuing their individual claims, the consumers stipulated to a voluntary dismissal of their claims with prejudice, and then appealed the dismissal to challenge the class certification ruling. The Ninth Circuit held that it could entertain the appeal. A five-member majority opinion authored by Justice Ginsburg reversed, holding that the consumers’ approach was an improper end-around to Rule 23(f)’s narrow allowance for such interlocutory appeals. The majority noted that such voluntary dismissal appeals only invited more protracted litigation than so-called “death-knell theory,” which permitted such interlocutory appeals where the denial of class certification was the death-knell to the case. The Court rejected that theory in 1978, and saw no need now to further extend the ability of the appellate courts to hear such appeals. Justice Thomas, joined by Chief Justice Roberts and Justice Alito, agreed that the appeals were improper, but on the basis that once the consumers agreed to a voluntary dismissal, there was no case or controversy to appeal under Article III of the Constitution. A link to the opinion in Microsoft Corp. v. Baker is here.

|

Court Again Limits Forum-Shopping In Suits Against Nationwide Companies

In Bristol-Myers Squibb Co. v. Superior Court of Cal., San Francisco City, a number of users of the drug Plavix sued the maker in California for alleged health problems caused by the drug, despite the fact that hardly any of the users lived in that state, and Bristol-Myers being incorporated in Delaware and headquartered in New York. None of the plaintiffs claimed to have bought Plavix in California, or suffered damage there. The California Supreme Court held that its courts had jurisdiction over the claims, but the Court, in an 8-1 decision by Justice Alito, reversed. Since there was no “affiliation between the forum and the underlying controversy,” or even a single action occurring in the state, California’s courts had no specific jurisdiction over the case. Bristol-Myers’ decision to contract with a California company to distribute Plavix nationally did not provide personal jurisdiction in the state either. The plaintiffs would either have to sue in their home state(s), or where Bristol-Myers was incorporated or headquartered. Justice Sotomayor dissented, arguing that there was nothing unfair in her view for a “massive corporation” to be sued in any State for its nationwide course of conduct. A link to the opinion is here.

|

Supreme Court: Posting To Facebook Is A First Amendment Right

A North Carolina law made it a felony for a registered sex offender “to access a commercial social networking Web site where the sex offender knows that the site permits minor children to become members or to create or maintain personal Web pages.” When a sex offender posted on Facebook about getting a traffic ticket dismissed, he was convicted and given a suspended sentence. The North Carolina Supreme Court affirmed the conviction, including the constitutionality of the statute. The Court, in an opinion by Justice Kennedy, reversed and remanded, holding that the law violated the First Amendment because it was not narrowly tailored to serve a significant governmental interest. The Court called the statute “unprecedented in the scope of First Amendment speech it burdens,” given how it effectively blocked sex offenders from receiving the legitimate benefits available from social media. Justice Alito, joined by Chief Justice Roberts and Justice Thomas, concurred in the judgment, agreeing that the statute violated the First Amendment, but complaining that the majority opinion contained too much “undisciplined dicta” that might prevent States from limiting sex offenders access to, for example, teen dating sites. A link to the opinion in Packingham v. North Carolina is here.

|

September 11 Detainees Denied A Bivens Action For Their Detention

In Ziglar v. Abbasi, the Court was asked to extend the implied cause of action theories under Bivens v. Six Unknown Fed. Narcotics Agents, 403 U.S. 388 (1971) to alleged constitutional violations six men claimed to have suffered during detention shortly after the September 11 terrorist attacks. The Second Circuit permitted the claims to go forward against certain executive officials, like former Attorney General John Ashcroft, as well as the wardens of the Brooklyn prison that held the men. The Court, in a 4-2 opinion (three justices recused) by Justice Kennedy, reversed, holding that Bivens would not be extended to these claims, which the Court said were markedly different from the three kinds of Bivens actions the Court had approved before. The Court further held that the “special factors” present in the detention cases weighed toward a need for Congress to create such a cause of action, not the courts. Justice Kennedy, along with Chief Justice Roberts and Justice Alito, would have further held that the officials were all entitled to qualified immunity against the claims. Justice Thomas, in concurrence, argued that the qualified immunity issue should be considered within the common law in 1871 instead of the modern gloss the Court has used. Justice Breyer, joined by Justice Ginsburg, dissented, arguing that these causes of action were well within the scope of Bivens, and worried that the Court’s decision would “shrink” its breadth. A link to the opinion is here.

|

Supreme Court Clarifies Expert Psychiatric Assistance In Indigent Defendant Cases

The Court had previously held in Ake v. Oklahoma, 470 U.S. 68 (1985), that when an indigent defendant’s mental condition is relevant to his criminal culpability, the State must provide that defendant with access to a mental health expert who is sufficiently available to the defense, and independent from the prosecution, to conduct a psychiatric examination and “assist in evaluation, preparation, and presentation of the defense.” One month after that decision, James McWilliams was charged with rape and murder. He was deemed competent to stand trial, and convicted of capital murder. During the sentencing phase, the trial court ordered that McWilliams be given a psychiatric evaluation by Dr. John Goff, who found that while McWilliams was “attempting to appear emotionally disturbed,” had some neuropsychological problems. Dr. Goff provided his evaluation two days before the sentencing hearing, and defense counsel asked for more time to evaluate it. That request was denied, and the defense offered no evidence of mitigation. McWilliams was sentenced to death, and the appeals courts all found that he had received the assistance required under Ake. The Court, in a 5-4 decision by Justice Breyer, reversed, holding that while McWilliams received the examination, he was not provided the proper evaluation, preparation, or presentation services required under Ake when the trial court refused to allow the defense more time to analyze Dr. Goff’s report and engage him to assist in the defense. Justice Alito, joined by Chief Justice Roberts and Justices Thomas and Gorsuch, dissented, arguing that the only question before the Court was whether Ake clearly established that the psychiatric expert was to be a member of the defense team instead of a neutral expert, and that the Court had actually declined review of the issue the majority decided, accusing the majority of making an “unseemly maneuver.” A link to the opinion in McWilliams v. Dunn is here.

|

SCOTUS: Disparaging Trademarks Have First Amendment Protection

The Lanham Act has a provision prohibiting the registration of trademarks that “disparage . . . or bring . . . into contemp[t] or disrepute” and “persons, living or dead.” Simon Tam, lead singer of the Japanese rock band “The Slants” sued when the band’s name was denied registration. The Federal Circuit held that the disparagement clause was facially unconstitutional under the First Amendment’s Free Speech Clause, and the Court, in an opinion by Justice Alito, affirmed. While disagreeing with Tam’s argument that “persons” could be read narrowly to only mean natural or juristic persons, the Court unanimously agreed that the clause was an unconstitutional abridgement of speech. The Court also rejected the argument that trademarked speech was somehow converted to government speech. Justice Alito, joined by Chief Justice Roberts and Justices Thomas and Breyer, went on to reject the government’s arguments to uphold the clause under a number of alternative theories. Justice Kennedy, in a concurrence joined by Justices Ginsburg, Sotomayor, and Kagan, argued that the First Amendment considerations rendered the government’s other arguments “unnecessary.” Justice Thomas filed a separate concurrence to argue that strict scrutiny should have applied to the disparagement clause. A link to the decision in Matal v. Tam is here. 

|

Supreme Court Rejects Gender-Based Differentiation In Immigration Law

The Immigration and Naturalization Act provided that a child born abroad to a father who was a U.S. citizen and a mother who was not was eligible for U.S. citizenship if the father had spent ten years in the U.S., with at least five of those years after turning 14. If the mother was the U.S. citizen, however, the mother need only reside in the U.S. for one year after turning 14 to garner the same result. The Court, in an 8-0 opinion by Justice Ginsburg, held that this gender-based difference violated the Fifth Amendment’s guarantee of equal protection, and was based on rationales that did not meet heightened scrutiny. The Act’s antiquated and stereotypical assumptions about unwed citizen fathers being presumptively out of the picture no longer carried any weight, and rejected the Government’s alternative arguments in support of treating fathers differently than mothers in this regard. However, Luis Ramon Morales-Santana, whose U.S. citizen father left the country just days short of turning 19, thus failing to meet the five-year period, did not get the result he wanted: the Court held that the remedial course Congress would have taken if it knew of the constitutional infirmity would be to enforce the five-year period on citizen fathers and mother alike. Justice Thomas, joined by Justice Alito, concurred in the judgment, arguing that since Morales-Santana could not get the relief he wanted, there was no need to rule on the constitutional issue. A link to the opinion in Sessions v. Morales-Santana is here.

|

Justice Gorsuch’s First Majority Opinion Is A Win For Debt Purchasers

In Henson v. Santander Consumer USA, Inc., Justice Gorsuch authored the unanimous decision in a decidedly conversational tone, holding that an entity that purchases another’s debt and then seeks to collect that debt is not a “debt collector” under the Fair Debt Collection Practices Act, and thus is not beholden to that Act’s strictures for debt collection. The Act defines a “debt collector” as anyone who “regularly collects or attempts to collect . . . debts owed to or due . . . another.” In this case, Santander purchased a series of defaulted loans from CitiFinancial and sought collection against the debtors. The debtors filed suit, alleging that Santander violated the restrictions of the Act. Resolving a split among the Circuits, the opinion sided with the Fourth Circuit that the plain language of the Act excluded a debt buyer like Santander, which was collecting for itself and not “another,” and rejected the debtors’ argument that new practices in modern debt collection warranted overriding Congress’ plain language. A link to the opinion is here.

| David A. Rahnis

Emotional Support Animals in Cooperative Apartment and Condo Communities: What Every Association and Owner Should Know

Please note: This article has been updated and can be found here.

An emotional support animal (commonly referred to as an “ESA”) is a companion animal (typically a dog or cat) that provides therapeutic benefit to an individual with a mental or psychiatric disability. An ESA is not the same thing as a “pet”. Rather, for a resident of a Coop or Condo who is living with a mental or psychiatric disability, an ESA may provide him or her with the opportunity to live independently.

Residents of Coops and Condos who are not familiar with ESAs may express concern when one of their neighbors requests approval to own an ESA, particularly in buildings with a longstanding “No Pets” or “Service Animals Only” policy in place. Likewise, Boards are often unsure how to react to ESA requests, particularly in light of the various concerns expressed by residents. ESAs are becoming more common and the purpose of this article is to clarify the rights and responsibilities that may be triggered by an ESA request within the Condo and Coop environment.

Note that, unlike “Service Animals”, ESAs are not required to receive any special training. Service animals are dogs that are specially trained to perform tasks for people with disabilities (e.g., guiding a person who is visually impaired). Under the Americans with Disabilities Act (ADA), service animals are granted special access to places of public accommodation, such as government buildings and public transit. However, courts have consistently refused to hold that only certified animals may be reasonable accommodations. Instead, determining the reasonable accommodation requires a fact-specific analysis of whether the animal lessens the effects of the specific person’s disability. See Bronk v. Ineichen, 54 F.3d 425 (7th Cir. 1995) and Green v. Housing Authority of Clackamas County, 994 F.Supp. 1253 (Or. 1998).

Building’s Governing Documents

Whenever a resident requests an ESA, as an initial matter, the Board should review the community’s governing documents, including all applicable Rules and Regulations. Typically, these Rules will include a short statement addressing animals, such as: “Except for Service Animals, no animals of any kind are to be kept in apartments or brought into the building by any person.” Unfortunately, the typical animal clause does little to address the possibility of ESAs. Therefore, Condos and Coops must commonly turn to applicable case law and statutory authorities to provide guidance in handling ESA requests.

Guidance from Statutes and Cases

If a Condo or Coop resident seeking an ESA has a verifiable disability, the ESA will generally be viewed as a “reasonable accommodation” under the Federal Fair Housing Amendments Act of 1988 (“FHAA”). In such case, the ESA will be permitted even though the community has a “no pets” rule. The FHAA generally states that if a reasonable accommodation will enable a disabled person to equally enjoy the use of his or her apartment or the common areas, the building owner must provide the accommodation as long as doing so will not constitute an undue financial or administrative burden for the landlord, or fundamentally alter the nature of the housing. See 42 U.S.C. § 3604(f)(3)(B).

Determining whether the ESA constitutes a reasonable accommodation requires a multipart analysis. The elements of a reasonable accommodation claim are that (1) the plaintiff is disabled, (2) the defendant knew or should have known of this disability, (3) the plaintiff made a request for a reasonable accommodation that may be necessary to give the plaintiff an equal opportunity to use and enjoy the dwelling, and (4) this request was denied by the defendant. See, e.g., United States v. Cal. Mobile Home Park Mgmt. Co., 107 F.3d 1374, 1380 (9th Cir. 1997).

As part of this reasonable accommodation analysis, an ESA applicant would need to show that he or she suffers from a mental or physical impairment that substantially impacts a major life activity. The impairment prong of this test is broad and has been interpreted to include psychiatric disorders such as depression, anxiety disorders, post-traumatic stress disorder, and bi-polar disorder. Courts have held that sleeping, eating, concentrating, and interacting with others are major life activities in addition to those specifically listed in the HUD regulations. See 24 C.F.R.100.201 (listing working and caring for one’s self in addition to others). From a practical standpoint, this requirement can be satisfied if the resident obtains a note from a physician or other medical professional indicating that he or she has a disability and that the reasonable accommodation (the ESA) alleviates or mitigates some of the symptoms of that disability. The burden is on the resident to initially request the reasonable accommodation of an ESA. However, the individual is not obligated to actually disclose the specific form of his or her disability.

Likewise, the “necessity” aspect of the reasonable accommodation analysis does not require strict necessity. The applicable standard is that the ESA, at a minimum, “affirmatively enhance a disabled [person’s] quality of life by ameliorating the effects of the disability.” See, e.g., Bronk, 54 F.3d at 429 (7th Cir. 1995). Therefore, if a resident suffers from an anxiety disorder and the ESA makes the disorder more manageable for the individual that may very well satisfy the reasonable accommodation test.

Nevertheless, courts have held that it is still necessary to establish some “nexus” between the animal and the disability. In Nason v. Stone Hill Realty Association (an early decision on ESAs), a disabled tenant took in her mother’s cat after her mother died. The manager of the apartment told her to remove the cat. Nason, who had multiple sclerosis, submitted a letter from physician that “suggested that there would be serious negative consequences for her health if she was compelled to remove the cat.” The court found that Nason did not show “a substantial likelihood that maintaining possession of the cat [was] necessary due to her handicap.” Specifically, although the affidavit provided by Nason’s doctor indicated that removal of the cat would result in “increased symptoms of depression, weakness, spasticity and fatigue,” it “[did] not demonstrate that such symptoms [were] treatable solely by maintaining the cat or whether another more reasonable accommodation [was] available to address Nason’s symptoms.” See Nason v. Stone Hill Realty Assn., 1996 WL 1186942 at *1 (Mass. Super. May 6, 1996).

In addition, the federal statutes may be interpreted to mean that building owners are not required to modify a “no pets” policy if a resident’s ESA would pose a significant risk to the safety or property of others. 24 C.F.R. §100.202(d) states as follows: “Nothing in this subpart requires that a dwelling be made available to an individual whose tenancy would constitute a direct threat to the health or safety of other individuals or whose tenancy would result in substantial physical damage to the property of others.” However, mere speculation of a safety threat will not suffice for purposes of denying a Condo or Coop resident the use of an ESA.

Conclusions and Recommendations

An emotional support animal, in many cases, will constitute a reasonable accommodation under the FHAA. ESAs can provide therapeutic benefit to an individual with a mental or psychiatric disability. However, the right to maintain an ESA is not wholly unchecked. The Condo or Coop resident must request the reasonable accommodation of an ESA and demonstrate disability. In addition, there needs to be a relationship or nexus between the animal and amelioration of the effects of the resident’s disability. Finally, animals that pose a significant risk to the safety or property of others in the community may not qualify for treatment as ESAs. In all instances, Condo and Coop Boards should review their governing documents to determine how pets, service animals and ESAs are handled. If the existing governing documents do not adequately address these issues, the community should consider updating its governing documents in compliance with the applicable laws.

Emotional Support Animals in Cooperative Apartment and Condo Communities: What Every Association and Owner Should Know

By DAVID A. RAHNIS

An emotional support animal (commonly referred to as an “ESA”) is a companion animal (typically a dog or cat) that provides therapeutic benefit to an individual with a mental or psychiatric disability.  An ESA is not the same thing as a “pet”.  Rather, for a resident of a Coop or Condo who is living with a mental or psychiatric disability, an ESA may provide him or her with the opportunity to live independently.

Residents of Coops and Condos who are not familiar with ESAs may express concern when one of their neighbors requests approval to own an ESA, particularly in buildings with a longstanding “No Pets” or “Service Animals Only” policy in place.  Likewise, Boards are often unsure how to react to ESA requests, particularly in light of the various concerns expressed by residents.  ESAs are becoming more common and the purpose of this article is to clarify the rights and responsibilities that may be triggered by an ESA request within the Condo and Coop environment.

Note that, unlike “Service Animals”, ESAs are not required to receive any special training.  Service animals are dogs that are specially trained to perform tasks for people with disabilities (e.g., guiding a person who is visually impaired).  Under the Americans with Disabilities Act (ADA), service animals are granted special access to places of public accommodation, such as government buildings and public transit.  However, courts have consistently refused to hold that only certified animals may be reasonable accommodations.  Instead, determining the reasonable accommodation requires a fact-specific analysis of whether the animal lessens the effects of the specific person’s disability.  See Bronk v. Ineichen, 54 F.3d 425 (7th Cir. 1995) and Green v. Housing Authority of Clackamas County, 994 F.Supp. 1253 (Or. 1998).

 

Building’s Governing Documents

Whenever a resident requests an ESA, as an initial matter, the Board should review the community’s governing documents, including all applicable Rules and Regulations.  Typically, these Rules will include a short statement addressing animals, such as: “Except for Service Animals, no animals of any kind are to be kept in apartments or brought into the building by any person.”  Unfortunately, the typical animal clause does little to address the possibility of ESAs.  Therefore, Condos and Coops must commonly turn to applicable case law and statutory authorities to provide guidance in handling ESA requests.

Guidance from Statutes and Cases

If a Condo or Coop resident seeking an ESA has a verifiable disability, the ESA will generally be viewed as a “reasonable accommodation” under the Federal Fair Housing Amendments Act of 1988 (“FHAA”).  In such case, the ESA will be permitted even though the community has a “no pets” rule.  The FHAA generally states that if a reasonable accommodation will enable a disabled person to equally enjoy the use of his or her apartment or the common areas, the building owner must provide the accommodation as long as doing so will not constitute an undue financial or administrative burden for the landlord, or fundamentally alter the nature of the housing.  See 42 U.S.C. § 3604(f)(3)(B).

Determining whether the ESA constitutes a reasonable accommodation requires a multipart analysis.  The elements of a reasonable accommodation claim are that (1) the plaintiff is disabled, (2) the defendant knew or should have known of this disability, (3) the plaintiff made a request for a reasonable accommodation that may be necessary to give the plaintiff an equal opportunity to use and enjoy the dwelling, and (4) this request was denied by the defendant.  See, e.g., United States v. Cal. Mobile Home Park Mgmt. Co., 107 F.3d 1374, 1380 (9th Cir. 1997).

As part of this reasonable accommodation analysis, an ESA applicant would need to show that he or she suffers from a mental or physical impairment that substantially impacts a major life activity.  The impairment prong of this test is broad and has been interpreted to include psychiatric disorders such as depression, anxiety disorders, post-traumatic stress disorder, and bi-polar disorder.  Courts have held that sleeping, eating, concentrating, and interacting with others are major life activities in addition to those specifically listed in the HUD regulations.  See 24 C.F.R.100.201 (listing working and caring for one’s self in addition to others).  From a practical standpoint, this requirement can be satisfied if the resident obtains a note from a physician or other medical professional indicating that he or she has a disability and that the reasonable accommodation (the ESA) alleviates or mitigates some of the symptoms of that disability.  The burden is on the resident to initially request the reasonable accommodation of an ESA.  However, the individual is not obligated to actually disclose the specific form of his or her disability.

Likewise, the “necessity” aspect of the reasonable accommodation analysis does not require strict necessity.  The applicable standard is that the ESA, at a minimum, “affirmatively enhance a disabled [person’s] quality of life by ameliorating the effects of the disability.”  See, e.g., Bronk, 54 F.3d at 429 (7th Cir. 1995).  Therefore, if a resident suffers from an anxiety disorder and the ESA makes the disorder more manageable for the individual that may very well satisfy the reasonable accommodation test.

Nevertheless, courts have held that it is still necessary to establish some “nexus” between the animal and the disability.  In Nason v. Stone Hill Realty Association (an early decision on ESAs), a disabled tenant took in her mother’s cat after her mother died.  The manager of the apartment told her to remove the cat. Nason, who had multiple sclerosis, submitted a letter from physician that “suggested that there would be serious negative consequences for her health if she was compelled to remove the cat.”  The court found that Nason did not show “a substantial likelihood that maintaining possession of the cat [was] necessary due to her handicap.” Specifically, although the affidavit provided by Nason’s doctor indicated that removal of the cat would result in “increased symptoms of depression, weakness, spasticity and fatigue,” it “[did] not demonstrate that such symptoms [were] treatable solely by maintaining the cat or whether another more reasonable accommodation [was] available to address Nason’s symptoms.” See Nason v. Stone Hill Realty Assn., 1996 WL 1186942 at *1 (Mass. Super. May 6, 1996).

In addition, the federal statutes may be interpreted to mean that building owners are not required to modify a “no pets” policy if a resident’s ESA would pose a significant risk to the safety or property of others.  24 C.F.R. §100.202(d) states as follows: “Nothing in this subpart requires that a dwelling be made available to an individual whose tenancy would constitute a direct threat to the health or safety of other individuals or whose tenancy would result in substantial physical damage to the property of others.”  However, mere speculation of a safety threat will not suffice for purposes of denying a Condo or Coop resident the use of an ESA.

 Conclusions and Recommendations

An emotional support animal, in many cases, will constitute a reasonable accommodation under the FHAA.  ESAs can provide therapeutic benefit to an individual with a mental or psychiatric disability.  However, the right to maintain an ESA is not wholly unchecked.  The Condo or Coop resident must request the reasonable accommodation of an ESA and demonstrate disability.  In addition, there needs to be a relationship or nexus between the animal and amelioration of the effects of the resident’s disability.  Finally, animals that pose a significant risk to the safety or property of others in the community may not qualify for treatment as ESAs.  In all instances, Condo and Coop Boards should review their governing documents to determine how pets, service animals and ESAs are handled.  If the existing governing documents do not adequately address these issues, the community should consider updating its governing documents in compliance with the applicable laws.

| Roy L. Kaufmann

Commercial Tenant’s Lease – Estoppel and Attornment Considerations

A standard provision of commercial lease agreements is an agreement by the Tenant to execute estoppel certificates, and to attorn to a lender.

An estoppel certificate is a statement from the tenant to either a lender or a prospective purchaser that clarifies:

  • what property is leased (often includes square footage)
  • the length term of the lease
  • that the lease has or has not been modified
  • whether there are any renewal options
  • whether there is any first right to purchase, expand the demised premises
  • the dollar amount of the rent
  • the dollar amount of the security deposit
  • whether there has been any subletting or assignment of the lease
  • the percentage of real estate taxes or Common Area Maintenance (“CAM”) charges paid
  • Whether there are any outstanding claims by the Tenant against the Landlord or set offs

When a tenant is asked to sign an estoppel certificate, careful attention must be paid to make sure that the recitals are accurate.  Remember, if you fail to assert any claims you might have against the landlord, you will not be able to assert those claims against the addressee of the estoppel certificate.

Unless the lease is recorded, if a lender forecloses on commercial property, the lender usually has the option to terminate the lease and seek possession.  Whether the lender decides to do this or not depends on the circumstances.  If, for example, the foreclosing lender (or the purchaser at a foreclosure auction) decides that it would be better to empty the building to enhance resale or new construction possibilities, the tenants might be instructed to vacate.

Astute tenants, especially tenants occupying all or much of the building, at the time of initial lease negotiations, would want to include a requirement that the current lender execute a “non-disturbance agreement” saying that, if the lender does foreclose, it will not disturb the tenant’s lease, as long as the tenant is in good standing.  A tenant would also prefer to record the lease (or a shorter form of the lease called a “Memorandum of Lease”) at the D.C. Recorder of Deed or at the Virginia or Maryland courthouses, so that, if the property is refinanced, the new lender’s mortgage is subordinate to your recorded lease.  This would eliminate the successor lender’s ability to terminate the lease.

While a landlord may or may not be willing to secure a non-disturbance agreement from the lender for the benefit of the tenant, landlords usually do not permit recordation of a lease so that future purchases or refinances do not have complications.

A  lender’s agreement not to disturb may be conditioned upon certain waivers by the tenant.  Leases often require the tenants quickly execute all-encompassing “Subordination, Non-Disturbance, and Attornment Agreements (“SNDA”). The terms of the SNDA may not even be set forth in the lease and the document may compromise tenants significantly.   As the name of the document implies, the tenant is agreeing that the mortgage being taken out by the landlord is senior to the lease (and could result in the lease being terminated in the event of a foreclosure, that the lender agrees not to use its right to terminate the lease under certain scenarios, and that the tenant agrees to accept the lender as the new landlord, in the event of a foreclosure.

At the time of lease negotiations, the tenant might try to seek carve-outs from the SNDA provisions in the lease, such as:

  • The foreclosing lender is still responsible for the tenant’s security deposit
  • The lender’s rights to anything other than collection of rent only spring into effect when there is an actual foreclosure
  • The lease continues in full force and effect as long as the tenant was current in its rent when the foreclosure occurred
  • Set-offs or claims that the tenant may have against the landlord may be preserved against the lender as long as they are reported to the lender, in writing, within 10 days after the tenant receives notification of a foreclosure or other default from  the lender
  • Landlord defaults must be cured with the same amount of time as tenant defaults

It is likely that landlords will balk at some of the foregoing requests for inclusion in the lease. It depends entirely upon the relative leverage of the landlord and tenant.

SNDA’s also usually provide that no lease amendment is binding upon the lender unless the lender has signed off on the amendment.  Tenants should insist on that sign-off if there are any changes, extensions or other agreements benefiting the tenants.  Similarly, tenants should put the lenders on notice of any defaults by the landlord.