structuring complex easement agreements in...

Structuring Complex Easement Agreements

in Commercial Real Estate Deals Negotiating Use Rights and Restrictions for Air Space,

Mixed-Use Developments, Retail Complexes and More

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THURSDAY, FEBRUARY 26, 2015

Presenting a live 90-minute webinar with interactive Q&A

David M. Van Atta, Partner, Hanna & Van Atta, Palo Alto, Calif.

Roger D. Winston, Partner, Ballard Spahr LLP, Washington D.C. and Bethesda, Maryland.

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STRUCTURING COMPLEX EASEMENT AGREEMENTS

IN COMMERCIAL REAL ESTATE DEALS

Negotiating Use Rights and Restrictions for Air Space,

Mixed-Use Developments, Retail Complexes and More

Strafford Publications February 26, 2015

David M. Van Atta Hanna & Van Atta

525 University Ave, Suite 600 Palo Alto, CA 94301

Phone: (650) 321-5700 dvanatta@hanvan.com http://www.hanvan.com

Roger D. Winston Ballard Spahr LLP

1909 K Street NW, 12th Floor Washington, DC 20006 Phone: (202) 661-7660

4800 Montgomery Lane, 7th Floor Bethesda, MD 20814-3401

Phone: (301) 664-6201

WinstonR@ballardspahr.com> http://www.ballardspahr.com

Sample Mixed Use Project I. Overview of easement issues in a hypothetical commercial mixed-use project .

A. Lisman Towers (general description) – Sample Project.

EASEMENT IN SUMMARY

What are easements and how are they generally established in Mixed Use Mixed Ownership

Projects?

Easements are commonly defined as a non-possessory interest in another person's land as a

property interest that allows the holder of the easement to use property that he or she does

not own or possess.

Most commonly, granted by a written easement document made by the owner of the land for the benefit of the grantee of the easement.

However - this is not always the case. For mixed use – multiple ownership properties documents may provide for a variety of complicated easement rights but the granting of those rights to various parties still needs to be documented in a fundamental way, usually in the form of granting deeds that incorporate the referenced and described easements with some formality. In our context, almost all of the easement rights are appurtenant to the grantee’s real property interests in the mixed use project.

Identification of Easements.

Easements the Mixed Use Mixed Ownership context can be written into the documents; or can be shown on maps or plans for the project, or both. The easements can be jointly used by all of the owners, or exclusively used by one owner, or by some but not all. Major business issues regarding shared easements in general:

1. Who are the beneficiaries (dominant parties) of each easement?

2. Which easements should be in gross and which should be appurtenant?

3.Cost allocation for maintenance, repair, replacement. Possibilities: a. Square footage. b. Usage (e.g., electricity, water). c. Fixed percentage (possibly subject to adjustment based on periodic third-party review).

Mixed Use/Mixed Ownership Legal Structures Description of methods of creating Mixed Use – Mixed Ownership Projects:

A. Two basic methods generally used for the legal structure of mixed use mixed ownership projects: (1) Subdivided/Ownership parcels or airspace shown on tract maps or other maps

(2) Condominium regimes. B. With either legal arrangement, various easements will be required to be stated either in a reciprocal easement Agreement (“REA”); or in the condominium project’s declaration of condominium or declaration of covenants conditions and restrictions (often referred to as “CC&R’s”) as may be required to form a condominium project in the particular state.

Mixed Use Project Easements

Easements Typically Required for Mixed Use Developments :

1. Ingress and Egress

2. Support

3. Utility Facilities, Conduits, Chases, and Infrastructure

4. Elevators and stairways

5. Sprinklers and Life Safety

6. Lobbies, Podiums, Patio Areas, Open Space Areas

7. Parking garages; parking lots; ramps and access

8. Loading docks

9. Roof Access

10. Maintenance and Repair Easements

11. Construction Easements

12. Other Shared Use Areas

Sample Mixed Use Project

Structuring Mixed-Use Projects

Structuring Options: • Horizontal or vertical subdivision

• Condominium

• Master Condominium with one or more sub-condominium regimes

Horizontal or Vertical Subdivision: • Full Subdivision

• Ownership Lot Separations

• Minor Subdivision • Tax Lots

All can result in separately conveyable and financeable properties, but well-conceived covenants and easements are necessary for an integrated mixed-use project. Vertical legal

descriptions can be a challenge.

Structuring Mixed-Use Projects

Condominium Regime

• Statutory mechanism and well grounded legal authority for creating separately conveyable and financeable units.

• Condominiums are commonly accepted and understood, but may have to comply with statutory limitations, which often relate to developer control, assessments and operations.

Master condominium with one or more sub-condominium regimes

• For sale residential condominium

• Shelf condominium

• Secondary mortgage market requirements

Issues to Consider

• Easements and Operating Agreements • Use Restrictions • Architectural controls • Nuisance covenants • Shared areas

• Common expenses • Maintenance, repair and replacement • Governance • Estoppels • Parking • Insurance • Development Agreement

Leasing Issues • Landlord Lease Obligations • CAM Changes • Parking • Exclusives

• Lease termination or change in leasehold use

Documenting Mixed-Use Projects

Before drafting, it is critical to have a solid understanding of the project. • Communication with the project team

• Review the site plan in detail

• Ask specific questions of the development team

Project Goals and Objectives • Flexibility and control

• Scheduling factors

• Balancing conflicting interests of purchasers, tenants and other stakeholders

Condominium Documents • Basic condominium documents

Declaration, Bylaws, Plats and Plans • Be sure documents actually describe the type of condominium being created

• Identity of the declarant

• Consistency between description of units and common elements in document narratives

and plats and plans

• Recording condominium documents before improvements within units are constructed

• Easements

Reciprocal Easement Agreement (“REA”)

• Purpose

• Parties

Selected Issues in Drafting Mixed-Use REA’s

• Consistency in defined terms in project documents and leases

• Mixed-use project budgets for shared areas

• Methods of allocating shared area costs

• Management

• Construction

• Supplementary declarations or “mini-REA’s”

Example of Mixed-Use Condominium Plat

Case Study: Pike & Rose

Example of Mixed-Use Condo Created Pre-Construction

Example of Retail/Residential Vertical Subdivision with Residential Condominium

Example of Retail/Residential Vertical Subdivision

with Residential Condominium

Example of Air Space/tax lots/ownership lots with REA

Mixed Use Project - Documenting Issues

Operational Issues for Mixed Use/Mixed Ownership Projects.

Documenting Mixed Use projects with multiple owners – several operational issues – what basic documents usually provide:

1. Description of various components and easements.

a. Describe ownership/use parcels or units and the various easement rights of owners.

b. Exhibits and diagrams often used, but confirm legal sufficiency.

c. Importance of legal counsel to be involved in design and mapping stages early to provide advice as to legal structure.

d. Autonomous parcels/units are desirable, but not always attainable.

Mixed Use Project Documenting Issues

2. Addressing how the mixed use regime will operate – whether subdivided/ownership parcels or airspace or condominium regime.

a. Who is to manage, operate and maintain the various shared components and facilities?

b. How will operational costs be allocated and shared?

c. How are decisions made for maintenance, repair and replacement of common facilities? Will there be an association for the project?

d. How are payments of common charges to be enforced? Lien rights?

(i) Does having condominium set up impact how this will be undertaken? Some state laws provide for specific process and procedures for condominium operations.

(ii) Does an efficient means exist for enforcing non-condominium assessments.

(iii) For instance, California excludes the “one action rule” that applies to enforcing mortgage liens if the project is under the California Common Interest Development Act.

Mixed Use Project

Documenting Issues

3.. Use restrictions and limitations are often stated in some detail, but use restrictions generally must be commercially reasonable.

4. Issues as to alterations of components and easement areas: who gets to review and approve what?

5. Insurance coverage Issues.

6. Restoration if damages or destruction

7. Condemnation issues.

8. Amendments and Duration of Declaration.

9. Lender rights and requirements.

II. How to document the easements? Either REA or combination of separate easements. A. Granting clause

1. Common law rule: Grantor and Grantee of an easement cannot be the same party.

2. Consider drafting the REA to provide that easements affecting each

portion of the property automatically spring into existence upon the

conveyance by original developer of such portion to another party.

3. To be safe, do whatever the title insurer requires to be able to insure the

easements as part of the insured property. The title insurer may require the

granting clause of the deed to include language such as, "together with,

and subject to, those easements set forth in the REA recorded as document

no. __________."

B. Description of each easement.

1. Legal description prepared by surveyor.

2. Reference to architectural drawings attached to the easement.

3. Generic description (e.g., with easement for emergency egress, refer to

"all stairwells and exits located in the building").

C. Statement whether each easement is appurtenant or in gross. 1. Easements to utility companies are in gross.

2. Easements that benefit specific properties are appurtenant. D. Role of an owners' association vs. benevolent dictator. 1. Manage, maintain, repair, replace easement improvements. 2. Resolve disputes.

3. Assess costs to owners. 4. Enforce assessments. E. Flexibility. 1. Amendment procedures. 2. Right of servient owner to relocate easement.

3. Provide for periodic review of formulae for allocating costs, based on actual, historical use of the easement.

III. Specific issues applicable to all easements.

A. Permitted users of the easement: consider customers, invitees, agents, contractors. B. Limit personal liability of a party for breach of the easement agreement to acts/omissions occurring during that party's period of ownership of the benefited/burdened lands, as the case may be. C. Exclusivity vs. nonexclusivity. D. Rights reserved to servient land owner. At common law, the servient owner may make any use of the servient property so long as it does not materially and adversely interfere with the rights of the dominant owner. E. Issues arising with easements in gross: 1. Assignability of easement. 2. Change in use of easement. 3. Example: beneficiary of a 10-foot wide water main easement grants rights to a cable TV company to put its improvements within the easement.

4. Example: beneficiary of roof easement entering into agreement with wireless provider for cell tower with payments to the beneficiary.

F. Duration of easement. In many jurisdictions, an easement is construed to be perpetual unless the easement document states otherwise. G. Relocation of easement by servient owner.

1. Common law: not allowed without servient owner's consent.

2. Restatement (Third) of Property (Servitudes) 4.8(3) states:

Unless expressly denied by the terms of an easement, as defined in § 1.2, the owner

of the servient estate is entitled to make reasonable changes in the location or dimensions of an easement, at the servient owner’s expense, to permit normal use or development of the servient estate, but only if the changes do not

(a) significantly lessen the utility of the easement, (b) increase the burdens on the owner of the easement in its use and enjoyment, or (c) frustrate the purpose for which the easement was created. Section 4.8(3) has been adopted by only a handful of states.

H. Overburdening the easement. 1. Extension of the easement to benefit additional lands: generally this is considered overburdening unless the right to extend has been reserved in the easement

document.

In the diagram below, suppose that Lot 2 owner granted the easement over the shaded area to Lot 1 owner, and that subsequently, Lot 2 owner acquires Lot 3. Does the benefit of the easement extend to Lot 3?

2. Change in the degree of use. Example: road serving a pasture (Picture A) eventually becomes a major arterial serving a 21-lot commercial development (Picture B). Generally this is not allowed unless the increase in the burden was reasonably foreseeable at the time of entry into the easement document.

3. Change in the kind of use. Example: beneficiary of an easement for a

telephone transmission line assigns its rights to a cable TV company. I. Standard of maintenance should be specified, e.g., "the parking lot shall be maintained to the standard followed in first-class shopping centers in Polk County, Iowa." J. Insurance/indemnification.

K. Mortgagee consent. Have all holders of all recorded preexisting mortgages and encumbrances consented to, and subordinated their rights in the mortgaged or encumbered property, to the easement? 1. If they haven’t, they will not be bound by the easement, and foreclosure of the mortgage or encumbrance may terminate the easement document as it applies to the mortgaged/encumbered parcel.

2. If they haven’t, the grant of easement may be an event of default under the mortgage or encumbrance.

L. Flexibility.

1. Amendment. a. In an easement with multiple beneficiaries,

provide for amendment of the easement based on consent of a specified percentage of servient and dominant owners. b. But: consider limiting, or prohibiting, the termination of any essential easement without the consent of the servient owner who is benefited by such easement.

2. Division of servient parcel: if the servient parcel is later subdivided, that the portion of the burdened parcel that does not include the easement property should be automatically released from any of the obligations imposed by the easement on the servient owner. 3. Provide for disputes re: usage of the easement to be determined by outside expert or by arbitration.

M. Remedies

1. Alternative Dispute provisions - mediation and arbitration.

2. Judicial remedies - Declaratory relief and injunctions.

IV. Specific issues related to certain specialized easements.

A. Air rights easements. 1. Horizontal subdivision regime requires easement for subjacent support to provide for support of improvements constructed in the airspace. a. Costs of maintenance, repair, replacement of the pillars,

load-bearing walls, other means of support need to be allocated between servient and dominant properties (assuming dominant property also is benefiting from the same).

b. Need a three-dimensional description of the air rights.

c. Provide that if there are minor encroachments (because of the as-built improvements varying slightly from the three-dimensional description),

an encroachment easement shall exist to allow the encroachment for so long as the improvements stand. 2. Tower crane "overswing" rights.

a. Consider limiting the transport of construction materials over

servient property. b. Limit duration to temporary construction period. c. Consider granting reciprocal rights to servient property owner, so that in the future, servient owner would have the same overswing rights over the dominant property if servient owner needs to use a

construction crane. B. Easements for lateral support. In densely developed areas, excavation on one parcel may lead to destabilization of improvements on neighboring parcels.

1. Check state statutes and common law to determine whether neighbor has right to lateral support. If not, neighbor should seek

lateral support easement from excavator. 2. Issues to address in easements for lateral support: a. Neighbor may need right to review/approve of engineering, excavation and construction plans.

b. Dominant owner may need right to install underground soil nailing and shoring systems that may encroach upon or penetrate servient parcel, and to have such systems remain following completion of construction. c. Dominant owner may need access to portions of the neighboring parcel's surface during the construction period.

C. Easements for placement and operation of wind turbines and cell towers.

1. Depending on state/local subdivision laws, use of an easement (instead of a deed or lease) may avoid the application of land division requirements. 2. Wind turbine easements should include rights to install, maintain, repair and replace:

a. Wind turbines. b. Electrical transmission and communication lines, transformers, junction boxes, road improvements. c. Meteorological equipment to measure wind speed.

3. Cell tower easements should address:

a. Radio interference (of tower with servient owner's equipment and vice versa). b. Duty of dominant owner to comply with FCC regulations. c. Dominant owner's ability to allow other users to use the tower.

4. Cell tower and wind turbine easements should specify annual base compensation to landowner.

a. To avoid making this public record, consider putting the compensation provisions in a separate, unrecorded document. b. Provide for escalator, such as cost of living or periodic appraisal mechanism. 5. Cell tower and wind turbine easements should specify compensation for

destroyed crops (e.g., that year's average bushel/acre on balance of farm x that year's price per bushel x acreage of crops destroyed).

6. Cell tower and wind turbine easements should specify obligations of dominant

party to remove improvements upon expiration/termination of the easement. 7. Cell tower and wind turbine easements should specify obligation of dominant party to pay real estate taxes attributable to land the servient owner can no longer use and to increases in assessed value resulting from the improvements belonging to the dominant party.

8. Cell tower and wind turbine easements should specify obligation of dominant party to comply with FAA regulations.

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