Tag: real estate

THE IMPACT OF COVID-19 ON BUSINESS AND REAL ESTATE TRANSACTIONS

By: Mark A. Severson
Board Certified Real Estate Specialist by the Minnesota State Bar Association

The devastating blow of the COVID-19 Virus has been felt by many in virtually all aspects of life, from Wall Street to Main Street.  Business has been essentially frozen as we all anxiously await positive developments.  The events of COVID-19 have certainly affected one’s ability to perform under previously agreed upon contracts. As we navigate this novel pandemic, we may wonder (a) does my contract address impossibility of performance due to a pandemic, or (b) what can I can do in a pure legal sense to protect myself against further devastation?  In terms of drafting contracts, there is a tool that has been used to address these concerns, dating back to the French civil law system.  “Force Majeure” is French for “superior force” and was intended to address “acts of God” for which no party to an agreement can be held accountable.

Specifically, a Force Majeure Clause is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.  Including such a clause in a contract is an attempt of the parties to account for unexpected events or events that are so devastating it ought to excuse the parties from performance of the contract.  The terms can account for both acts of God (natural events, floods, hurricanes) and/or acts of people (riots, strikes, wars).  It is a provision that can effectively remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and restrict parties to a contract from fulfilling their previously agreed upon obligations.

For contracts currently in place, a party may either invoke an existing Force Majeure Clause or request an amendment to include such a clause.  Without providing a full legal analysis, a contract containing a general Force Majeure Clause may not sufficiently apply to COVID-19.  Generally, Courts analyzing the issue must determine if it is a qualifying event, if the risk of nonperformance was foreseeable and able to be mitigated, and if performance is impossible.  A party is not able to invoke a Force Majeure Clause if it could have foreseen and mitigated nonperformance and, more importantly, if performance is merely difficult rather than impossible. Having COVID-19 classified as a pandemic is of great import to the question of whether a Force Majeure Clause is applicable.  If one is working under a government that has ordered certain businesses to not even go to work, and where remote operations are impossible, it would seem to make COVID-19 a qualifying event.

Locally, the invocation of a Force Majeure Clause came up with the Minnesota Twins and the Metropolitan Sports Facilities Commission.  The Twins attempted to invoke the clause when it learned that it would be contracted from Major League Baseball. In that case, the Twins argued they should be excused from the contract since they would be unable to play a home game for a reason beyond the Teams and the Commissions control, including strikes, an act of God, a natural casualty, or a court order. Ultimately, the Court sided with the Metropolitan Sports Facilities Commission and determined that the Twins would be in default of the agreement if they stop playing at the Metrodome, even if the team was removed from the MLB (in other words contraction by the MLB was not a qualifying event).

So what does this mean for us now? Parties may consider specifically accounting for the COVID-19 pandemic by agreeing it is a qualifying event. In drafting the language, like all provisions, it is critical to be specific and leave nothing to assumption.  A Force Majeure Clause is not the only means of “getting out of a contract” due to catastrophic events. A party may also argue the doctrine of “frustration of purpose” or “impossibility” as a justifiable reason to excuse one from contractual obligations. This is a doctrine that if a party’s principal purpose is substantially frustrated by unanticipated changed circumstances, that party’s duties are discharged and the contract is considered terminated.  This is essentially an excuse for a party’s nonperformance because of uncontrollable circumstances.  Of course, all parties are encouraged to honor their contracts; however, when performance is truly impossible, it is not dishonorable to apply principles of law that address the situation.

As you navigate this new world, and enter into contracts, raise this issue with your attorney or real estate agent so that it may be accounted for in your contract, should it be appropriate in your situation. Many real estate purchase agreement forms have already been revised to account for such a provision due to the devastation of this pandemic. Even if you wish not to have such a provision, be mindful of it as the other party to the contract may wish to include it.

 

 

VARIANCES: Obtaining Permission to Vary from a Zoning Ordinance

Local governmental units, including but not limited to municipalities, townships, or counties, (referred to hereafter as “LGU”) enact zoning ordinances as a way to regulate real estate development. On a very basic level, most would agree that zoning ordinances are for the mutual benefit of the LGU and its residents. It is a means to obtain order and ensure zones of commonality. For instance, a zoning ordinance sets up a residential zone with a certain set of regulations of allowed uses as well as a commercial zone with a certain set of regulations setting forth allowed uses.  As the circumstances of a property and surrounding properties change, along with the applicable laws, sometimes it may not make sense to strictly enforce the letter of the law against a particular landowner seeking to develop his or her home or commercial property. If circumstances unique to the property can justify a landowner violating the zoning ordinance, then it may make sense for an LGU to allow that landowner to violate the ordinance.  This is why zoning ordinances typically have a promulgated process for permission to vary from certain provisions of the zoning ordinance (which, in other words, is permission to do something with your land that would otherwise violate the ordinance).

A variance is a way that an LGU may allow an exception to provisions of a zoning ordinance. A variance is a way to obtain clear permission from the LGU to depart from strict enforcement of the ordinance on an isolated and one time basis.  The typical variance application for a lake property is to obtain a more favorable setback restriction, either from the lake, the right of way, or the neighboring lot line.  A variance could be sought for a great number of reasons such as an increased building envelope, increased impervious surface allowance, greater height allowance, and so on. 

The process of obtaining a variance can vary depending on the LGU, but typically applications are first considered by the local “Board of Adjustment” or a planning commission or sometimes directly to the Township Board or City Council.  A variance can usually be appealed either to the Council or to the local District Court, depending on the particular zoning ordinance.

In order to successfully obtain a variance, an applicant must be able to prove that not providing the variance would cause practical difficulties for the landowner.  Minnesota has a three factor test for the LGU to consider in the decision to grant or deny a variance. All three factors must be met by the landowner to have the application approved. Additionally, the LGU must be able to state that the variance sought would be in harmony with the general purposes of the zoning ordinance (usually this means the variance is in line with the comprehensive plan).  Without going too in depth, the three aforementioned factors include, (1) the landowner proposes to use the property in a reasonable manner (this is somewhat of a judgment call for the LGU as to whether it might make sense to allow the subject property to have a less restrictive setback from the lake or the lot line, for example), (2) the landowner’s difficulty in complying with the zoning ordinance is due to circumstances unique to the property not caused by the landowner (for example, the topography of the land has certain limitations that may require a variance for placement of a septic mound), and (3) a granted variance cannot alter the essential character of the locality (for example, if all the homes in the locality or no more than two stories it may not make sense to allow a three or four story home that would stick out or alter the character of the neighborhood).

The consideration of whether to grant or deny a variance is public. Usually nearby landowners receive notice of an application as an opportunity to provide feedback. Although, as effective as it may be on some LGU councils/boards, neighbor feedback (positive or negative) is not a factor to approving or denying a variance.  Economic or personal concerns are also not factors. Many applicants without legal representation labor on the economic hardship that would be imposed if the variance sought is not requested. As much sense as that may make, it is not a factor that the governing body should consider.  Some applicants also labor over personal concerns such as handicap access or related needs. Notice too that those are not relevant factors for the governing body to consider. Although it is counterintuitive, neighbor feedback, economic and personal concerns are not factors in proving practical difficulties. That fact can be difficult for many applicants to understand.

Regardless of whether a variance is granted or denied, the findings supporting the decision are usually prepared in advance of the public hearing. For that reason, it is essential to have a complete variance application and to not save any arguments for the hearing. 

Notwithstanding the earlier comments regarding the technical irrelevance of economic concerns, on a pragmatic level, if a variance is granted it can significantly improve the value of the property. It may be prudent, then, to invest in sound legal representation to properly apply for a variance. The decision to have professional guidance in the variance process should be made at the very beginning of the process because, if denied by the LGU, a record is being built for appeal.  If the record is complete with reasons to support all three practical difficulty factors it may be possible to reverse the decision on appeal. However, the bar is quite high to successfully reverse the initial decision to deny a variance.

Knowing the process to grant or deny a variance is beneficial to those that object to a variance application as well. As real estate law firm, it is not uncommon to represent applicants and objectors. Most of the time the local governing board wants to make “the right decision” that invites the least conflict. If an application is prepared with these things in mind the chance of that application being granted increases. If an opposing position is prepared with these things in mind, the chance of that application being granted can decrease.

If you as a landowner or interested party could ever be impacted by a variance do not be afraid to discuss the issue with the local zoning administrator or a local real estate attorney.

 

Mark A. Severson

MSBA Certified Real Property Law Specialist

Severson Porter Law

mark@seversonporter.com