Spring/Summer 2011

3 MINUTES ON MASSACHUSETTS REAL ESTATE

Spring/Summer 2011

Attorney Kevin J. Joyce

617-542-8905 kjj@dohertylawoffices.net

www.permitlawyer.com

Mechanics Lien liability expanded for Commerical property owners

EFFECTIVE JULY 1, 2011 “DESIGN SERVICES” LIENS NOW VALID Under an amendment to the Mechanics Lien Statute signed into law and scheduled to go into effect July 1, 2011, professionals, such as architects and engineers, may now file a lien for “design services.” The definition and applicability of this “design services” definition is an important issue for property owners and developers, especially now in the context of the Trace decision.

This spring, contractor non-payment remedies against property owners were expanded in a Massachusetts Supreme Judicial Court decision holding that a contractor can maintain a lien against the fee interest of the property owner for unpaid work performed for the owner's tenant. Traditionally, a construction contractor has always been able to file a lien against the leasehold interest of a tenant for unpaid work performed under an agreement with that tenant. However, in Trace Construction, Inc. v. Dana Barros Sports Complex, LLC et al., the Court interpreted Section 2 of the Massachusetts Mechanics Lien Statute, G.L. c. 254 ("Statute"), as providing the contractor a right to maintain a lien against the property owner's fee interest because the owner had "consented" to the work being performed under the tenant-contractor agreement. In Trace, Dana Barros, formerly of the Boston Celtics, leased the land and commercial warehouse thereon for an initial term of five (5) years from the property owner. The Barros entity, Dana Barros Sports Complex, LLC, ("Barros"), as the commercial tenant, then entered an agreement with a contractor to perform work needed to convert the warehouse into the intended sports complex. At the end of the project, the contractor, and a subcontractor, had payment claims under the Barros agreement and filed liens under the respective sections of the Statute against both the lessee-tenant's leasehold interest and the lessor-owner's fee interest. At trial, the trial court agreed with the property owner that a lien, in this instance, may only be maintained against the leasehold interest and denied both the contractor and subcontractor lien rights against the owner. However, on appeal, the SJC reversed the trial court's decision regarding the contractor's right to file a lien, but not the subcontractor's rights given the more limited language in Section 4 of the Statute regarding subcontractor liens.

In holding for the contractor, the Court reviewed Section 2 of the Statute, which provides a contractor with lien rights. Section 2 states that "[a] person entering into a written contract with the owner of any interest in real property, or with any person acting for, on behalf of, or with the consent of such owner...." [emphasis added] may file a lien claim for unpaid improvements covered by G.L. c. 254. The specific facts of each case will determine whether the requisite "consent of such owner" is present. In this case, the lease itself restricted the use of the property, then a warehouse, to a "recreational center," which, among other lease provisions, made the occurrence of such construction work more than likely. Other lease provisions, and testimony at trial, further demonstrated both the owner's intent to have the tenant perform the improvements, as well as, the owner's awareness that such work was being performed without evidence of the owner's objection to the work. The lease provisions also stated the owner would own all the improvements created by Barros upon termination of the lease. All of these facts contributed to a finding that the "consent of such owner" was present to provide the contractor a right to file a lien against the owner's fee interest.

What this means for commercial property owners is a need for greater vigilance and management of tenant fit out work. Property owners should evaluate the Trace decision and consider steps to reduce risk if tenant fit out or other tenant construction is planned. For example, filing a labor and materials bond in accordance with G.L. c. 254, including lease terms that require any work obtain progress payment releases for work through the date of payment, and/or self performing the work are just some preliminary ideas property owners may consider to mitigate risk. This issue also comes on the heels of expanded exposure to lien claims, as discussed in the above 'alert' box, under a recent amendment authorizing design services to now be the subject of a lien. ***

The $6 million building Code violation: A concern for venue operators and owners

Property owners, managers and tenants, in particular those considered assembly or public use groups under the Massachusetts State Building Code, are now facing the risk of significant legal exposure under the Massachusetts Consumer Protection Act, G.L. c. 93A ("the Act") for violations of the Massachusetts State Building Code. In Klairmont, et al v. Gainsboro Restaurant, Inc., a bar patron fell down a stairwell and died. Litigation ensued, and at trial, the jury found for the defendants on the wrongful death and negligence claims, however, the jury also found the stairwell to be non-compliant with the Massachusetts State Building (780 CMR et. seq.) (the "Code"). Based upon the jury's finding of the stairwell's non-compliance, the trial judge issued a decision that the defendants were liable under the Act for maintaining the stairwell in violation of the Code, and after trebling the damages, the defendants were facing a judgment in excess of $6 million. The Act provides treble damages and attorneys fees as a remedy against a party engaging in "unfair and deceptive" practices. The trial judge's decision was based, in part, upon the regulations promulgated by the Attorney General to implement the Act. These particular regulations also define "unfair and deceptive" practices. The judge applied, in this case, a regulation that defines an "unfair and deceptive" practice as a violation of a state statute, regulation or law intended to protect the public health, safety or welfare. The stated intent of the Code (8 th Edition), as set forth in Section 104, is "...to establish the minimum requirements to safeguard the public health, safety and general welfare." Therefore, maintaining a violation of the Code, such as the non-compliant stairwell here, was held to be an "unfair and deceptive" practice. The Court further reasoned that the public interest in deterring activities that present a risk to the general public, such as a non-complaint stairwell in a public venue, outweighs other legal arguments presented by the defendants.

Bars, restaurants and other places of public assembly are now open to significant potential liability if this decision is followed. Arguably any violation of the Building Code, Sanitary Code, Fire Code or other regulatory codes designed to protect the public health and welfare, and applicable to many public venues, could give rise to a parton's 93A claim. One suggested way to mitigate exposure to such Code violations is to use the "Certificate of Inspection" required annually or bi-annually, depending on use and occupancy definition under the Code, as an opportunity to audit and mitigate Code compliance. These inspections will review the venue's compliance, primarily regarding safety regulations around egress, smoke detection, fire suppression systems and use and occupancy. Regular staff training on compliance and allowing staff to serve as 'eyes and ears' for compliance issues can also help. This issue has a significant impact for the industry and should be closely monitored. ***

HOME BUYERS BENEFIT FROM SIGNIFICANT AMENDMENTS TO MASSACHUSETTS HOMSTEAD ACT

UPDATE: TITLE TO HOMES BOUGHT IN FORECLOSURE NOW QUESTIONED In May, oral arguments were heard on Bevilacqua v. Rodriguez, which is the ‘other shoe’ waiting to drop after the U.S. Bank v. Ibanez decision featured in our last edition. The Ibanez decision created a national shockwave after the SJC held a foreclosing bank had no right to foreclose where the mortgage and note had not been properly assigned to the bank before foreclosing. Now in Bevilacqua, the Court will review whether a homeowner purchasing a home from a selling bank that had no right to foreclose under the Ibanez decision has good title. Stay tuned, a decision should be out by our next newsletter.

New homeowners making purchases this home buying season have something to be happy about other than low interest rates. This home buying season marks the first season under the new Homestead Act that went into effect this spring. As many of you know, the Homestead Act, appearing at M.G.L. c. 188 ("Statute"), has been in effect since the 19th century providing a homeowner's principal residence with protections against the reach of creditors in an amount that has increased over the years to its present $500,000 limit, provided the homestead declaration was properly recorded at the Register of Deeds. The Act has now significantly changed under Chapter 395 of the Acts of 2010, "An Act Relative to the Estate of Homestead" (the "Act"). The Act revised and renumbered the sections of the Massachusetts General Laws in Chapter 188, titled "Homesteads" to clarify and/or expand some provisions. Professionals in the real estate industry had been stating for some time prior to these amendments that the Statute was out dated and confusing. Perhaps among the most notable change created by these amendments is the creation of an "automatic homestead" in Section 4 (and defined in Section 1). Previously, the owner of the principal residence had to record a homestead declaration. Now under the Statute, as amended by the Act, the homeowner is entitled to an automatic homestead protection in the amount of $125,000 on the home.

A homeowner may still obtain the protection of the higher $500,000 limit by filing an actual 'homestead declaration,' however, if this recorded homestead is then invalidated, the "automatic" homestead of $125,000 would still apply automatically. The new "automatic homestead," and unlike a recorded homestead, will not protect equity in a principal residence where the homeowner has voluntarily incurred debt subject to a written agreement of up to $20,000 that is not secured against the property. The Statute also includes new "Definitions" section in what is now Section 1 of the Statute to define a number of key terms not previously well defined, if at all, under the previous version of the Statute.

The Act also has other new requirements applicable to homeowners closings during this home sales season. A new requirement, now appearing as Section 14 of c. 188, requires the closing attorney to disclose to the purchasing homeowner that a homestead declaration may be recorded to protect up to $500,000 in the home's value. Another new section to the statute, Section 13, also better defines and/or expands the protections afforded payments to a homeowner from a voluntary or involuntary sale, taking or in the event of insured loss, such as fire. Payments received from an insurance carrier, or other payments received upon the sale or loss of the property, are protected for time periods ranging from 1 to 2 years depending on the event giving rise to such payment. Many of the statutory exceptions to the immunity provided by a homestead declaration, which generally include mortgages, taxes, pre-existing liens, spousal/child support arrearage, still remain unchanged.

For those homeowners already with a recorded homestead, not much will change. The revised Statute expressly provides that a recorded homestead shall not be impaired by these statutory revisions. Going forward such homestead declarations filed before the Act will be subject to G.L. c. 188 as amended. With new statutory language also comes the opportunity for new case law defining the application of this language under certain facts. To the extent the language remains unchanged, the case law developed under the old statute shall still remain important to understanding proper application of the statute. ***

WILL NEW MASSACHUSETTS DEP POLICY RAISE THE STANDARD FOR ENVIRONMENTAL SITE REMEDIATION?

In May 2011, the Massachusetts Department of Environmental Protection closed the public comment period for its draft revisions to the policy guidance on Activity and Use Limitations ("AUL"), WCS-11-300, which updates the guidance originally issued in 1999 to clarify the use and implementation of AULs under the Massachusetts Contingency Plan ("MCP") regulations and G.L. c. 21E. Fortunately industry groups, such as REBA and others, closely monitored the pending revisions to this policy guidance statement and provided strong comments to DEP's efforts. The draft policy statement, issued in December 2010, incorporates 10 years of industry lessons and experience for needed and important changes in this area of regulation. However, the new guidance also expands the DEP's interpretation of the terms "current use" and "reasonably foreseeable use," both as used in G.L. c. 21E. By the terms of G.L. c 21E, a property owner is obligated to effect a permanent solution to any disposal of oil or other hazardous materials on the property so there will be "[n]o significant risk of harm" to any "current" and "reasonably foreseeable uses" of the property. AULs can help a property owner achieve the "No Risk of Significant Harm" standard by limiting the types of activity on and uses of the property where complete remediation of the property is not financially or logistically feasible. These limitations help sensitive populations avoid contamination pathway exposure when contamination will remain on site after an approved clean up.

Under the guidance issued in 1999, the DEP interpreted "reasonably foreseeable use" as "...reasonably foreseeable use(s) of the property determined by the owner." Under the 1999 guidance, foreseeability was also shaped by the past, current and owner's planned future uses as well as the surrounding property uses. Therefore, significant concern arose when the DEP eliminated this language from the 1999 guidance by replacing it with a definition of "reasonably foreseeable use" as "...any possible activity or use that could occur in the future." This broad and expansive interpretation of "reasonably foreseeable use" is based, in part, upon language in the MCP regulations. This revised draft guidance creates an almost unlimited universe of potential uses that would need to be considered in any remediation plan, requiring a property owner to either 1) completely remediate the property so it can be subject to unrestricted use, or 2) negotiate multiple AULs for the property, with all the maintenance, conveyance and audit obligations that come with AULs for uses or activities that may be "possible," but not realistic for any practical property owner. The logistics and cost implications to a property owner under this guidance are significant, and to some extent, remove the benefits created by AULs in relieving the need to fully remediate the property.

Other areas of concern with this draft guidance include a change that makes a "residential use" a foreseeable use for almost all property, with the exception of wetlands because residential development is restricted there. In literal application, this would mean even though, for example, a residential use is "forbidden" under the Boston Zoning Code at a certain property, the DEP use and activity restrictions for a residential use would still be applicable to that property even though, by zoning, no residential use can be built there. The third major area of concern is DEP's draft policy language that folds "planned uses" into what are considered "current uses" of the property. This expansion of the "current use" definition is significant because AULs cannot be used to achieve a "no significant risk" determination for what is a "current use" of the property. Therefore, this suggested modification to the policy guidance could further limit the effectiveness of an AUL.

While the policy guidance creates no substantive or procedural rights, it does embody how an office in the executive branch of government, here the DEP, will interpret and apply statutory and regulatory provisions it is empowered to enforce. If DEP is expanding the term "reasonably foreseeable use" beyond the scope or authority granted by the legislature, this action could be subject to legal challenge, if implemented. Fortunately, DEP has taken, and is now considering, thorough public comment prior to implementing this updated policy guidance. In this already difficult real estate market, developers and owner should closely monitor DEP and industry next steps on this issue. ***