All Forum Posts by: Edward Schenkel

BP community, I am writing a brief post about landlord tenant law in Connecticut. Between real estate transactions and litigation, I do practice landlord/tenant law as well. If you are evicting a tenant for a reason other than nonpayment of rent or lapse of time (expiration of the lease) then you must follow an additional procedural hoop before you serve a notice to quit. You must serve a pre-termination notice (also known a Kappa notice) which sets forth the reason they are in breach and notifying them they have 15 days to resolve the breach or you will terminate the lease and then serve them with a notice to quit. You need to be careful about how you word the pre-termination notice. If you do not follow the proper procedure, your case could get dismissed! 

 @Mike Neubauer:

I would consult with an attorney and accountant in your state but you should also review a previous post that I posted a few months ago on this very topic. If you own multiple properties, from a legal / liability perspective you should set up separate LLCs. However, there are accounting costs associated with multiple LLCs. With two properties it makes sense to have two LLCs because it should not increase your accounting / admin costs significantly (check with an accountant) but if you had 50 properties, that is another story. So it is a balance of accounting / admin costs and legal protection. See my previous post for more information. 

Ed

@Josane Cumandala, you can purchase property in Connecticut with a LLC created out of state (foreign LLC) or with a LLC created in the State of Connecticut. If you use an out of state LLC then you have to register it with the Connecticut secretary of the State. If you have any other questions, please ask.

Ed

 @Jack Bailin: The new haven zoning code defines the multi-family dwellings as: 

DWELLING, MULTI-FAMILY: A dwelling having three or more dwelling units.

I think you are ok, but if you want to be safe, please check with the zoning officer. I can help you navigate this. If you have any more questions, please do not hesitate to contact me. 

Ed

@Jack Bailin: 

I will check the zoning for you but as long as 4 family is permitted in the zone, the use will be permitted without the necessity of a special permit or a variance. Usually, a zone permits multi-family which includes 4 family so is a 3 family is permitted I would be surprised if a 4 family was prohibited. I have done some work in New Haven but not in a little while so I will check the zoning and get back to you with confirmation. 

Key Due Diligence Items in Purchasing Commercial Real Estate

Buying commercial real estate can be a good investment opportunity. Commercial properties typically offer more financial reward than residential investments, but commercial investments are often more complicated and come with more risks. That is why it is particularly important to exercise great care when conducting your due diligence.

In a commercial transaction, as in a residential transaction, you will have a period to conduct your necessary due diligence. Since commercial real estate is significantly more complicated than residential acquisitions, there is much more to investigate during your due diligence period. A few of the more important due diligence items in commercial real estate transactions are discussed below. If you are considering purchasing commercial real estate, this post is important to review.

1.Zoning

A thorough and careful assessment of whether the current use of the property and/or the intended use of the property conforms to the municipal zoning code is critical. If the property is in violation of the zoning regulations, you will be in for a major headache down the road.

If you are purchasing a commercial property and do not intend to change the use, one thing you can and should do to determine whether the property complies with the zoning regulations is to request a certificate of zoning compliance from the City or Town planning and zoning department. The zoning officer will conduct an examination of the property and if the property is compliant, s/he will issue a certificate of compliance stating that the property contains no violations. This will provide you with a certain level of assurance that there are no violations at the property. In addition to obtaining this certificate from the town, a contractual representation by the seller that there are no violations will also provide you with protection. The Seller representation and zoning compliance certificate may also serve as a basis for a lawsuit against the Seller and/or Town if it in fact turns out there is a zoning problem after you close.

If you intend to change the use or substantially alter the Property (e.g. construct an addition), in addition to zoning compliance certificate, you should also carefully research whether your intended use is permitted by the zoning regulations. For example, if the property is currently vacant and you intend to lease to a medical practice, you should make sure the zoning regulations permit the use of the property as a medical practice. Similarly, if you intend to physically alter the property, such as construct an addition, you should make sure that the planned alterations are permitted by the zoning regulations (e.g. bulk, setback, and height requirements). You should consider sitting down with staff from the planning and zoning department to go over your project and the intended use so there are no surprises down the road with the zoning regulations. You may need to obtain a permit for your intended use and this should be accounted for when drafting the purchase and sale agreement.

The due diligence contingency provision is important in any real estate transaction but is of particular importance in a commercial transaction. The due diligence provision should be carefully drafted so as to allow you to investigate the zoning regulations and determine whether your intended use and/or alterations are permitted by the zoning regulations. If it is anticipated that you will need a permit from the town, such as a special permit, you should strongly consider a contingency provision that makes the deal contingent on obtaining the necessary permit.

As you can see, zoning issues are significantly more complicated in commercial real estate transactions. This is why it is imperative to carefully conduct your zoning due diligence and include the necessary provisions in the contract to protect you.

2.Title

It is essential to conduct a careful review of the title of any real property before moving forward to closing, but there are often complicated nuances in the title of commercial real estate that any investor should be ready for if thinking about purchasing commercial property. For example, there may be more complicated leases with commercial tenants than your typical residential tenants. Such leases may contain provisions such as options to purchase, covenants not to lease space to tenants that would cause competition to a particular tenant, longer terms, expansion provisions (giving tenants rights to expand into additional space in the future), and sublease arrangements with subtenants. Reviewing the tenant leases is important in any real estate transaction but of particular importance in commercial transaction due to the various additional provisions that may appear in commercial leases.

Moreover, there are various other types of title issues you may encounter in commercial transactions that typically do not appear in residential. For example, I have encountered several commercial deals where a municipal redevelopment contract was recorded against the title and governed the development of the property, and also contained certain restrictions on the use. This meant that at some time in the past, the town gave a sweetheart deal to a developer (usually in an area in need of redevelopment) and the developer in return promised to build a certain type of building that promoted certain uses. Both deals closed, but my clients had to confirm that the intended use not only conformed to the zoning regulations but also to the redevelopment contract as well. This is one example of a title issue that may appear in a commercial deal that would not manifest in a residential transaction.

As a final point, title insurance is generally more complicated in a commercial deal. Title insurance is a form of indemnity insurance which insures against title defects, unrecorded deeds and easements, boundary line disputes, among other potential title problems. Title insurance is generally required by lenders to protect their mortgage. The lender will typically require a more comprehensive title insurance policy with endorsements typically not required on a residential purchase. These endorsements may insure zoning, usury, environmental liens, mineral rights, along with other matters. Certain endorsements may also be required for certain types of loans such as construction loans.

In summary, you should be ready to face more complicated title issues in commercial real estate transactions. With the proper knowledge and guidance, you should be able to navigate any title issue that comes your way.

3.Environmental

Another major differences between due diligence in commercial and residential real estate transactions is that environmental due diligence is often required in commercial transactions. Lenders will often require some form of environmental due diligence before allowing you to close the deal. Such environmental due diligence is typically performed by retaining environmental professionals to conduct a “Phase 1 environmental site assessment,” and if necessary, a “Phase 2” and “Phase 3” site assessment.

An environmental site assessment is a report prepared by an environmental company for a prospective purchaser that identifies potential or existing environmental contamination liabilities. The environmental site assessment is conducted in sequential stages, with the first stage called a “Phase 1.” If the first stage of investigation reveals existing or potential contamination, then a “Phase 2” and possibly a “Phase 3” are necessary to determine wither contamination exists or the extent of such contamination, along with remediation strategies.

A Phase I site assessment is a non-intrusive site investigation and does not typically involve the sampling of soil, air, groundwater, and/or building materials. During the Phase I investigation, the environmental professionals will conduct a visual inspection of the site and research records from various public sources to identify any present or potential environmental contamination based on the history of the site and neighboring sites. The research will investigate potential soil contamination, ground and surface water quality, along with the presence of hazardous substances on the site, and will include researching files from various municipal and state departments including the planning and zoning department, health department, fire department, and the Department of Environmental and Energy Protection (DEEP). The Phase I will likely include interviewing the current owner and others with knowledge of the site. If the research and interviews conducted during the Phase I reveal no contamination or potential contamination, a Phase II site assessment is unnecessary. If the phase I does reveal such contamination or potential contamination, a Phase II will then be required.

A Phase II is generally more involved than a Phase I. A Phase II, unlike a Phase I, involves investigations which collect samples of soil, groundwater, and other materials to test to determine whether such samples contain contamination. Common substances tested include petroleum, hydrocarbons, solvents, and sometimes asbestos and mold. Depending on the substances tested, a Phase II could take significantly longer than the initial Phase I test.

If the Phase II reveals contamination, a Phase III will likely be required. The Phase III aims to determine the extent of the contamination and may involve further testing, often more extensive than the Phase II testing. The Phase III will typically provide strategies for a remediation along with recommendation for site monitoring after the cleanup. Remediation methods can vary greatly depending on the type of and extent of contamination, ranging from soil excavation to more complicated soil vapor extraction systems.

It is essential to understand whether there is any contamination on the site before closing the deal. This is particularly important in Connecticut that has a statute called the Connecticut Transfer Act on the books, which regulates the transfer of certain types of polluted sites and requires a party to file certain forms that certify that the site is clean or if polluted, will be remediated.

Moreover, remediation can be very expensive and may make your investment economically unfeasible. Therefore, it is important to have the right environmental professionals conduct your investigations to understand what types of environmental issues are on the site. It is also essential to make sure the contract contains a carefully drafted due diligence clause that allows you to conduct such environmental site inspections and terminate the contract if the results are unsatisfactory.

4.Financial Due Diligence

Financial due diligence in commercial real estate transactions is complicated and involves a careful review of numerous legal and financial documents. This investigation is critical to assess whether the investment is economically feasible and will generate the desired revenue. Some of these documents should be reviewed by your attorney while others should be reviewed by your accountant/financial professionals. The following are some of the key documents that you should review with your attorney and accountant during your financial due diligence:

(1)Tenant files, including leases, amendments, subleases, and any related documents

(2)Service / maintenance agreements

(3)Utility Bills

(4)Tax Documents

(5) Insurance policies and any pending claims

(6)An accounting of all income and expenses related to the property, including rent rolls, tenant delinquencies, taxes, maintenance, security deposits, insurance premiums, management fees, security, budgeted capital improvements, etc.

(7)A list of all personal property being conveyed with the real property

(8)A list of all pending litigation

As mentioned above, the financial due diligence is key in determining whether the investment makes economic sense. It is therefore essential to make sure that the due diligence contingency in the contract includes financial review and requires the Seller to provide the relevant documents.

In Summary

In summary, commercial real estate transactions are significantly more complicated than residential transactions and involve risks not present in residential transactions. This is why it is imperative to conduct extensive due diligence and assemble the proper team of financial, environmental, and legal professionals. Moreover, it is important that your due diligence provision in the real estate contract is carefully drafted to allow you to conduct extensive investigations and to terminate the contract if any such investigations are not to your satisfaction. 

If anyone has any questions about due diligence in commercial real estate deals, please feel free to reach out!

Ed

 @Justin R, I do not understand your question. Please message me and we can chat. 

Ed

My Neighbor Claims Part of My Land, Which I Have Owned For Decades, Belongs to Him. After Surveying the Land, He is Actually Right. What Can I Do? You May Have a Claim to Keep That Land Under The Legal Doctrine of Adverse Possession.

The following scenario happens more than you would expect. You find a home after years of looking and it is perfect. You purchase the home and start a family. You mow the lawn, plant trees, make a garden, and work hard to make sure that every inch of your property looks beautiful. Your property is separated from your neighbor’s lot by an old fence that was put up by the previous owners. You have never had the property surveyed and your neighbor has not either. You believe the fence was accurately erected along the boundary line and have no reason to question otherwise.

Many years later, your neighbor plans to sell her property to an eager purchaser. The purchaser decides to have a survey done of the property and is surprised to learn that the fence separating your properties was not erected along the boundary line, as you both had believed. In fact, the fence was actually erroneously erected twenty-five feet inward from the boundary line onto your neighbor’s property, which means that a twenty-five foot strip of land which you had thought was yours is actually part of your neighbor’s lot. You planted trees and a garden in this strip for years and spent many, many hours maintaining this area. You even constructed a play scape for your kids in this twenty-five foot strip area and watched your kids swing for years. However, after your neighbor provides you with a copy of the survey, you realize that the garden, trees, and play scape are all on your neighbor’s property, and she is now demanding that you remove everything and move the fence to accurately reflect the boundary line. This would result in you losing a 25 foot strip of your property! You sympathize with your neighbor, but you and your family love that strip of land and it has become an integral part of your Property over the years. What are your options? What can you do?

You may be able legally acquire that strip of land under a theory of a legal doctrine called Adverse Possession. Connecticut law recognizes Adverse Possession as a mechanism to acquire legal title to Property. If you can establish title of land by Adverse Possession, you will own the land the same as if you had acquired the land by deed from the owner. However, in order to establish title by adverse possession, you must establish the necessary elements by submitting evidence to the Court.

The use must also be exclusive, and shared dominion by you and your neighbor will likely defeat any claim that you acquired the land by adverse possession.186 Conn. 490, 498 (1982). First, the owner of the land must be ousted from possession and kept out uninterruptedly for fifteen years under a claim of right. This essentially means that the possession and use of the land must be without permission and you must treat the land as your own. Roche v. Fairfield, The following are the elements that you must satisfy to establish a claim that you have acquired land through adverse possession. The elements are established by statute and reiterated by case law in cases, including the Supreme Court case,

The other elements that you must establish to claim title to land through the doctrine of adverse possession are that your use must be uninterrupted, open, visible, and exclusive, for a period of fifteen years. While each element has been articulated in more detail by the Courts, this generally means that your use of the land must be commonly known and must also be continual. The Courts will examine the specific facts of the case to determine whether your use was commonly known and continual, and look at things like maintenance, frequency of use, and other factors. In a case like the example above, a strong claim may be made that the use was commonly known and continual if the claimant maintained and used the property frequently.

Therefore, if you find yourself in a situation like the example discussed above, you need not forfeit your strip of land to your neighbor notwithstanding an erroneously placed fence if you can prove the elements of adverse possession. In order to make such a claim, you must file an action the Court called an Action to Quiet Title, which is a cause of action used to settle title disputes. If you can prove your case, you will receive an order from the court allowing you to acquire title to the strip of land and the integrity of your lot will be preserved.

If you have any specific questions about adverse possession, please ask here or message me. 

The Town Has Denied My Building Permit and Will Not Let Me Develop My Undersized Lot. Are they Right? Actually, the Town May Be Wrong.

Over the years, more than a few clients have approached my firm with a similar dilemma: the Town will not permit the client to develop an undersized lot and they would like my opinion whether the Town is right or wrong. The answer? Sometimes the Town is right, often the Town is wrong.

The clients’ stories behind the lots are usually similar. The lot is an undersized lot that does not conform to the minimum area requirement of the current zoning regulations. In other words, the lot’s size is too small to comply with the current zoning regulations. The lot has been owned by the client’s family for many years and it may have been passed down through generations. The client believed that s/he would have no problem developing the lot because it is an old lot that either predates zoning or it complied with the regulations before the minimum lot area was increased by amendment. The client is surprised when the town will not permit him/her to develop the lot. That leads them to my firm to ask what is going on.

Whether a client may develop an undersized lot that is non-conforming as to the minimum area depends on several factors. First, if the lot was created as part of an approved subdivision or resubdivision plan, the lot should be treated as a legally non-conforming lot and it may be developed, notwithstanding any subsequent changes in the zoning or subdivision regulations. In other words, since the lot complied with the subdivision and zoning regulations at the time the subdivision plan was approved, the lot’s approved status is vested and should continue after the Town changed the zoning regulations to increase the minimum area requirements in that zone. Therefore, even though the lot does not comply with the minimum area of today’s current zoning regulations, the Town should allow the lot to be developed.

Equally as significant, Conn. Gen. Statute § 8-26a provides that the owner of such a lot may use the zoning regulations in effect at the time that the subdivision map was approved to develop the lot. This is significant and may be overlooked by the town’s Planning and Zoning Dep’t. Whether the town applies the current regulations or the regulations at the time that the subdivision map was approved may determine whether the lot may be developed. For example, the current zoning regulations may be much more restrictive in terms of setbacks, coverage requirements, height requirements, and so on, compared with the zoning regulations in place back when the subdivision map was approved. Therefore, it may be impossible to develop the lot under the current more restrictive regulations, but may be developed if the town applied the regulations in effect at the time that the subdivision map was approved.

If the undersized lot was not part of a subdivision map, whether the lot may be developed becomes more complicated and may depend on local zoning ordinances. The Connecticut General Statutes do not protect a vacant lot that is not part of a subdivision map in the same way that it protects lots that were part of approved subdivisions. In other words, if a vacant lot is part of an approved subdivision map, it has a vested right to be developed under the zoning regulations at the time the map was approved, notwithstanding any subsequent changes in the regulations. If the lot is not part of a subdivision map, for example if it predates zoning, there is no such protection from changes in the zoning regulations and you may not be able to develop it.

However, the Town may have a zoning ordinance that does protect such undersized lots as legally non-conforming lots that may be developed under the current regulations, notwithstanding the fact that the lot was not part of a subdivision map. Many towns do have such regulations, but it is important to review the specific regulations to understand whether these lots may be developed. Significantly, since these lots are not part of an approved subdivision plan, they must be developed under the current zoning regulations, which may make development impossible if the current regulations are more restrictive than before. Of course, if you cannot develop under the current regs, you are free to apply for a variance (an exception to certain regulations), which will be the topic of another post.

In summary, whether you can develop a lot that does not conform to the minimum size requirements is a complicated issue and largely depends on the history of the lot. If the lot was part of a subdivision plan, you should be able to develop it and apply the zoning regulations in effect at the time the subdivision plan was approved. If you own an undersized lot that was not part of an approved subdivision plan, development becomes more challenging and whether you can develop it will depend on the current zoning regulations.

So if you have been told by your town that you cannot develop your lot because it is too small, they may be wrong. It is worth taking a close look at the history, statutes, and the regulations.

ESSENTIAL LEGAL ISSUES IN PURCHASING MULTI-FAMILY INVESTMENT PROPERTIES

Investing in multi-family property is a great way to build wealth. Multi-families are also great first investments for new investors looking to make a smaller purchase to get their feet wet before buying something bigger. However, when buying a multi-family property there are a number of legal issues that every real estate investor should be aware of that do not arise when purchasing a condominium or single-family home. I have outlined three important issues to consider when purchasing a multi-family property.

1.ZONING: IS THE PROPERTY A LEGAL MULTI-FAMILY PROPERTY?

One of the first things I advise clients buying multi-families is that they need to understand whether the property is a legal multi-family. This comes in two forms: it must be either a permitted use under the current zoning regulations or a “legally non-conforming” property. If it is neither, then the purchaser may be in for serious problems down the road. That is why every investor should understand the zoning issues that can arise when purchasing multi-family property and how to navigate through them.

If the multi-family property is a permitted use under the zoning regulations, then you can rest comfortably that the property’s use does not violate the zoning regulations. However, what if the multi-family is in a zone where multi-family property is not a permitted use? Is it an illegal use and therefore a buyer should shy away from the purchase? Not necessarily.

The multi-family property may be a legally non-conforming use. In the world of land use law, a property may not be a permitted use under the current zoning regulations but multi-family may have been a permitted use in the past. A property is considered legally non-conforming if the use complied with the zoning prior to the date that the town changed the zone to remove such use from the zone. For example, if a multi-family was a permitted use in the R2 Zone in 1999 and the town thereafter removed multi-family from the R2 zone, as long as the property was in use as a multi-family prior to the change of zoning it can continue as a multi-family property after the change of zoning as a “legally nonconforming” property.

However, it is possible that an owner illegally converted a property to a multi-family property in a zone that does not permit it. This would mean the property is an illegal multi-family and a property you do not want to purchase. This is why it is important to explore the zoning and the history of the property to make sure you do not purchase an illegal property. As long as the property is in a zone that permits multi-family or the property is legally – nonconforming, you can safely purchase the property. Make sure you ask your attorney these questions during your due diligence. 

2.PROTECT YOURSELF: CREATE A LIMITED LIABILITY COMPANY (LLC) TO LIMIT YOUR LIABILTIY

Buying a multi-family, or any property with tenants, is a transaction that comes with risks and potential exposure to liability that are not inherent in purchasing a residence for you and your family. For example, what if a tenant slips and falls and files a lawsuit against you arguing that her injuries are a result of you failing to comply with your obligations under the lease? What if a tenant accidentally starts a fire that spreads and causes damage to other homes in the surrounding neighborhood? These are examples of the inherent risks in buying multi-family properties. This is why it is imperative to do everything you can to minimize your liability if something goes wrong. One important thing you can do to limit your liability is to create a Limited Liability Company (LLC) and take title in the name of the LLC.

Taking title in the LLC instead of individually will limit your liability to the value of the real estate and will insulate you from personal liability (there are several narrow exceptions to this not discussed in this post). Since the LLC is the owner of the property, any lawsuit concerning the property properly names the company as the defendant and not you individually. Since the LLC's only asset is the real estate, the maximum exposure from any lawsuit is the value of the real estate. In other words, any judgment obtained by a tenant, neighbor, or other potential plaintiff may only look to the company's assets to satisfy the judgment which is the real estate. If the property was owned by you individually, a plaintiff could look to the real estate and other personal assets (bank accounts, other real estate, etc.) to satisfy the judgment.

Setting up the LLC may seem like a simple process but there are various things to consider. For example, if you are creating the LLC with more than one member, you should think about creating an operating agreement which will delineate the authority of each member; whether authority to manage the property will be vested in a manager; the process that more significant decisions are made (for example, will major decisions like whether to sell require a unanimous vote?); the process that the company should utilize in taking on new members; and how the company will decide a tie vote. Drafting a detailed operating agreement will prevent problems between members in the future.

In short, every investor should strongly consider setting up a LLC and taking title in the name of the company to minimize liability. If your LLC has more than one member, creating a detailed operating agreement will prevent problems between the members in the future.

3.TENANTS AND LEASES: DO YOUR DUE DILIGENCE

When buying any property with tenants, it is essential to do your due diligence with respect to the tenants and the leases. As an investor, you want to make sure that the tenants are current on the rent. You do not want to purchase the property only to learn that the tenants are six months behind on the rent and are vigorously fighting an eviction lawsuit. Therefore, it would be prudent to request that the seller sign a document called an estoppel certificate. This document will require the Seller to make a representation that the leases are in full force and effect and that the tenant is current on the rent. This will provide you some assurance that the tenants are not behind on the rent. Moreover, having estoppel certificates signed by the Seller will give you an additional cause of action for misrepresentation if in fact the tenants are not current on the rent.

It is also prudent to review each lease with your attorney. You should be aware of the termination date of each lease and whether the tenant has the option to renew. If the leases are to terminate a month after closing, you should be prepared for the possibility of vacancies. Moreover, if the tenants have an option to renew, this may interfere with plans to lease to other tenants. Similarly, some leases have options to purchase or lease to own arrangements. This type of provision is problematic for any investor as the tenant would have the option to purchase the property after you closed. You would likely not want to move forward with the investment if there was such a provision in any of the leases. This is why it is imperative to review each lease thoroughly to make sure you know what you are getting into.

In summary, it is in your best interest as a real estate investor to carefully review each lease before purchasing an investment property. In addition, having the seller sign estoppel certificates will provide you additional protection in the event the tenants are in fact behind on the rent.