VOL I, 2011

3 MINUTES ON MASSACHUSETTS REAL ESTATE

Vol. I 2011 By Attorney Kevin J. Joyce kjj@dohertylawoffices.net 617-542-8905

SJC: USE OF POST AUCTION MORTGAGE ASSIGNMENTS IS INCONSISTENT WITH MASSACUSETTS LAW

Massachusetts kicked off 2011 with the Supreme Judicial Court issuing a major decision that potentially could be used to invalidate foreclosure sales that used what is known in the industry as a "post-notice post-auction assignment." The Supreme Court decision affirmed a 2009 Land Court decision in US Bank National Bank Association v. Ibanez, which held that certain banks attempting to foreclose on certain properties failed to show the clear chain of mortgage assignments needed to vest these banks with the mortgage holder rights needed to foreclose on those properties. By affirming the Land Court holding, the SJC confirmed that post auction assignments are not acceptable in Massachusetts because this common industry practice is inconsistent with the well settled statutory requirements and common law principals for properly executing a foreclosure sale in Massachusetts. The SJC's reasoning was based, in part, upon requiring strict compliance with Massachusetts foreclosure requirements because mortgage holders in Massachusetts have the ability to foreclose on a defaulting mortgagor without judicial involvement or the need to actually prove that the default exists. Being vested with the rights of a mortgage holder through a valid assignment prior to issuing a notice to foreclose is primary among these Massachusetts foreclosure requirements. The mortgage holder is the proper party vested with authority to foreclose on real estate secured by that mortgage. A party cannot be property vested with such authority through a document executed after the foreclosure even where the assignment is given an effective date preceding the foreclosure because in Massachusetts the actual transfer of such rights takes place at the time of the assignment. Therefore, the assignment cannot be retroactively created.

Going forward, the decision provides some important guidance on how mortgage assignments should be properly handled in the future by stating, for example, that an assignment, to be proper, need not be in recordable form at the time of the foreclosure notice, however, recording the assignment prior to that notice is preferred. The decision also provided guidance for proper assignment where a securitized trust holds the bundled mortgages for investors. The guidance provided by the Court is crucial given the backlog of real estate now in and/or headed toward foreclosure. What is also important, and perhaps unanswered, is the status of property sold under a post auction assignment. Could the sale of that property be set aside? Short of action by the legislature to amend the relevant law by recognizing these sales as valid, property owners should consult with legal counsel. Confirmatory assignments were also recognized by the Court, and may be helpful to protect purchasers who believe the property was purchased with a clear chain of assignment. Such property owners may also want to speak with legal counsel about the applicability of a 'confirmatory deed' in such matters to avoid any potential cloud on title.

In the wake of this major SJC decision, the real estate and banking community should also stand by for a decision in another case that will address the legality of non-lawyers performing real estate closings in Massachusetts. In Real Estate Bar Association of Massachusetts, Inc. (REBA) v. National Real Estate Information Services, Inc. (NREIS), the Supreme Judicial Court is expected to rule on whether a non-lawyer "real estate signing professional" performing a closing constitutes the unlicensed "practice of law", where "witnessing" the executed closing documents is the only role of an attorney. Last fall, the SJC heard oral argument on the issue. At the heart of matter issue is a Massachusetts case from 1935 that held the conveyance of real estate constitutes the "practice of law" because it involves the transfer of a legal interest in property. This present case seeks to apply that 1935 holding to prevent the use of "real estate signing professionals". The use of an attorney "witness" has been compared to the "robo-sigining" ghost now haunting the real estate and mortgage industry by claiming the attorney "witness" is just a 'rubber stamp' never actually performing any needed substantive legal review closing documents and issues normally performed by an attorney. The need for an attorney to perform such substantive review has been asserted as an important legal and consumer protection issue that goes unaddressed when an attorney "witness" is used. A decision on this matter is expected in early 2011. ****

"FEED IN TARIFF" PRICING GAINS MORE CLARITY

As developers and property managers increasingly rely upon on site renewable energy production, the Federal Energy Regulatory Commission ("FERC") has provided some needed clarity on an issue central to such production "Feed in Tariffs" ("FIT")," which are the prices paid by utilities to small producers of renewable energies when utilities purchase power from those producers. In October, FERC provided important guidance to the industry by clarifying an earlier July 2010 FERC Order regarding state authority to regulate FIT pricing. The "October clarification" has opened a wider door for state regulation of FITs under the authority granted to Massachusetts and the other 49 states through the Public Utilities Policy Act of 1978 ("PUPA"). The "clarification" was seen as an important step for those renewable energy proponents who see FITs as an important way of supporting growth in the renewable energy industry.

So what does this clarification mean for those concerned about pricing for FITs? The FERC July 2010 Order is an important place to start. In the July Order, in response to a State of California petition regarding its regulatory authority, FERC affirmed that, under the Federal Power Act, any state regulatory action over wholesale power pricing was federally preempted because FERC has exclusive jurisdiction over such regulation. However, the July Order also outlined that such federal preemption does not apply to the state authority, under PUPA, to regulate renewable energy created by "qualified facilities" (by federal statute, generally a facility producing 80MG or less) where the state requires a certain level of power be acquired from such facilities, and provided that such pricing regulation does not exceed the cost avoided by the utility by not purchasing that power elsewhere, called the "avoided cost." Renewable energy advocates had long been pressing state leaders across the country, including here in Massachusetts, to regulate FIT for "qualified facilities." However, the practical application of the July Order was a significant limitation on state regulatory authority because most renewable energies from small producers are more expensive than the "avoided cost" that state regulation cannot exceed.

Perhaps recognizing the chilling effect of the July Order on the renewable energy industry, FERC issued in October 2010 the "October Clarification," opening the door to greater state authority over FITs. While FERC still has exclusive jurisdiction over wholesale prices, FERC clarified state energy pricing authority under PUPA by authorizing a "multi-tiered resource approach," that would create different levels of "avoided cost" for a utility (i.e. cost of wind power may be different than the cost for natural gas). The clarification also allowed states and utilities to expand the cost factors considered in compiling the amount of "avoided cost" that serves as a cap on state pricing authority. For example, a utility company's varying cost for buying energy for different contract durations may be considered. The "October Clarification" alleviated the hurdle to some state regulation of FITs. Congress also has renewed its efforts to support renewable energy growth with a House bill creating a national feed in tariff that includes a fixed rate of profit as a means of encouraging investing in renewable energy. FITs still has a number of unanswered issues as utilities, states and producers proceed under FERC's Order, and the issue, therefore, should be closely watched. ***

NEW MaSSACHUSETTS STATUTE MANDATES NEW CONTRACTOR PAYMENT TERMS OUTLAWS "PAY IF PAID" PROVISIONS

November was an important month for those in the real estate and construction industry. The new Massachusetts "prompt payment" act became effective November 8, 2010 and with it, new statutory requirements for the payment procedures on private real estate construction projects. Developers, bankers and builders must quickly understand this issue to avoid liability in time of tight funding pipelines.

The new "Act Promoting Fairness in Construction Contracts" was enacted under Chapter 293 of the Acts of 2010, and now appears as G.L. c. 149 29E. This new Massachusetts "prompt pay act," also expressly eliminated the existence of what are known as "pay when/if paid" clauses (subject to limited exceptions), which are basically conditions precedent to payment obligations under a construction contract that, in essence, shift the risk of non-payment to the party expecting payment, generally subcontractors and tiered subcontractors.

The new law will apply to all private construction projects where the prime contract (the contract between the project ownership entity and the general contractor/construction manager) is valued at $3 million or more. Further, the prime contract must be executed on or after November 8, 2010 for the new law to apply. Projects involving a public owner, such as the Commonwealth, are not subject to this law. Public projects are subject to other statutory provisions and issues ranging from sovereign immunity to legislative appropriation.

The key provisions in this new law that industry professionals should note involve billing interval periods, approval deadlines for payment applications, change orders, and a fixed period in which payment must be made. First, the billing cycle on the project must not exceed 30 days, which is standard in most projects and states. However, the new law does authorize the first billing cycle to be up to a maximum of 44 days (or 14 days longer than the billing cycles that will apply during the project).

Once a general contractor/construction manager submits a payment application to the owner, the owner must take action to approve, reject or approve in part and reject in part, the application within 15 days of the submission date. The Contractor and its tiered subcontractors are also bound to a time period in which to take similar action on payment applications. Generally, the contractor or subcontractor has an additional seven days to take action than the tier above it. For example, if the General Contractor has 22 days to review a subcontractor's payment application, the subcontractor would have 28 days to review the application of its first tier sub-subcontractors. The new "prompt pay act" also addresses change orders in mandating a 30 day turn around time for the reviewing action regarding changed work. Probably one of the biggest issues in the new law is the provision that failing to take action to approve or reject payment requests and/or change orders can result in those requests being deemed automatically approved.

Also, a project owner now has up to 45 days from the approval of a payment application to make payment to its contractor. This 45 day period is generally longer than the industry norm (generally 30 days) used in most industry templates. ***

MASSACHUSETTS LEGISLATURE RESPONDS TO REAL ESTATE CRISIS WITH PERMIT EXTENSION ACT

Developers and builders are now benefiting from the efforts on the state level to aid the ailing real estate and construction industry. The Massachusetts Legislature enacted Section 173 of Chapter 240 of the Acts of 2010 known as the "Permit Extension Act" as part of a larger bill addressing a number of economic assistance and recovery efforts. The Act was then signed into law by Governor Deval Patrick the day after it was passed by the Legislature.

The "Permit Extension Act" is exactly what it purports to be - a measure to extend the life of certain permits and approvals for real estate development and construction. By providing certain permits and/or approvals a longer life, projects can avoid the cost and time of obtaining a second round of regulatory approvals for a project that, subsequent to obtaining such approvals, was delayed by changing market conditions or financing requirements. The two year extension seeks to keep applicable regulatory approvals alive until the project's viability returns.

The two year extension period applies to city, regional and/or state issued permits and/or approvals that were "in effect or existence," as stated in the Act, during the "tolling period" ( defined by the Act as August 15, 2008 through August 15, 2010). So, if your project is subject to a building permit, zoning variance, or other "Approval," as defined in the Act, that was issued, valid or set to expire during the "tolling period", add two years on to the life span of that "Approval." For example, if you have a building permit that was set to expire on August 10, 2010, that permit will now have an expiration date of August 10, 2012 because the permit was valid during the "tolling period."

Developers and builders relying upon the Act should note that the Act is not all encompassing. There are several express exemptions for federally issued permits or approvals, certain approvals issued by the Division of Fisheries and Wildlife, and Housing Appeals Committee decisions regarding 40B permit applications (issued under Sections 20 and 23 of Ch. 40B). However, the underlying permits/approvals related to a "40B" project, such as the building permit, are subject to permissible extension. Enforcement orders issued by the government are not subject to an extension. Other issues to take into consideration when reviewing the impact of the Act on a project are the involvement of any sewer connection and the available sewer capacity during the extension period. If a developer intends to sell the property subject to such permits, the Act also has certain provisions with regard to the applicability of the extension that should be noted. The Act will relieve many projects of a significant regulatory burden that would otherwise be required for projects that were coming into the most difficult market in decades. However, developers and builders should not rely upon the Act blindly and should confirm the applicability of the extension to the type of approvals/permits obtained and any requirements or contingencies attached to the extension. ***