farm transition

The Use of Windfall Gain Agreements in Farm Transition Planning

farm transition

By: Jennifer Denchak Wetzel, Esq.

The importance of farm transition planning has become increasingly understood and accepted by the agricultural community.  The topic is regularly discussed in agricultural literature as well as through live seminars.  Yet, despite widespread awareness and adoption of the concept, there can still be a general reluctance, for a number of different reasons, to approach and tackle the issue.

Many times, the topic is ignored because it reminds the parent generation of their mortality.  The parent generation may also have a resistance to losing control and may operate under the assumption that no one could ever run the farm business as well as they have run it.  Sometimes there just is not enough of time to handle the farming obligations, let alone deal with this complex and time-consuming issue.

Another major deterrent is not knowing how to handle the “non-farm child” fairly.  In most farm transitions, the farm child receives the farm assets by gift or through a bargain sale at less than the fair market value.  This arrangement may reflect the sweat equity that has been contributed by the farm child to the farm operation over the years, as well as reflect the maximum price that can be paid by the farm child in order for the business to stay viable.  After the farm assets are transferred, few assets often remain for distribution to the non-farm child.

If your reluctance to approach this topic stems from your uncertainty regarding the treatment of the non-farm child, a possible solution is to add conditions to any transfer to the farm child requiring him/her to share a portion of the “windfall gain” that is recognized by the farm child if he/she sells or transfers all or a portion of the farm assets outside of the ordinary course of the farm business, or discontinues the farming operation, within a set period of time.  For example, for a period of ten (10) years from the date the farm child receives the farm real estate, he/she could be made to share a portion (often a higher amount initially and then decreasing over time) of the net profit he/she receives from the sale of the farm real estate with the parents and/or the non-farm child.  The time period and sharing percentage can be adjusted to fit each family’s circumstances, and parents can provide for exceptions to the windfall gain sharing requirement, such as the leasing of oil and gas rights and/or the sale of agricultural conservation easements, among others.

An agreement to share windfall gain may be part of the solution to guaranteeing fair treatment amongst your children, and may be the peace of mind needed to allow you to begin the farm transition process.

The attorneys at Mette, Evans & Woodside are available to counsel and assist you with the development of an Agreement-Sharing of Windfall Gain, as well as with all other aspects of your farm transition plan.

farm joint ownership

Untangling Joint Ownership of Real Estate

farm joint ownership

By: Ronald L. Finck, Esq.

It is not uncommon in the farm community for real estate to be owned jointly by two or more owners.  Many times, parents will transfer their real estate to more than one child as part of their estate and farm succession plan.  Joint ownership of real estate often presents unique problems for the joint owners.  A co-ownership agreement should be considered to set forth how the joint owners will use the real estate and how the expenses associated with the real estate will be paid.  That agreement could also address what the rights and responsibilities of the owners would be in the event of one of their deaths or if one of the joint owners decides to separate from the joint ownership.

If one or more of the owners decide they no longer want to be joint owners and if the joint owners cannot agree on a sale of the property or how to divide the property among themselves, the Pennsylvania legal system provides a remedy known as partition, which allows joint owners of real property to sever their ties to one another.  In some ways, partition is like the division of property in a divorce.  Two or more parties are splitting their jointly-owned assets and going their separate ways.  Unfortunately, like divorce proceedings, partition can be costly, time-consuming, and full of aggravation.

In Pennsylvania, partition is a two-step process.  First, the court determines whether partition is appropriate.  Second, the court determines how the real property should be divided up so that each joint owner receives a fair payment or distribution.  The first step to partition is relatively simple.  Any party with an ownership interest in real property has a right to have the property partitioned.  Therefore, all that the party seeking partition has to do is show that he or she has an ownership interest in the property.  Partition does not require the consent or permission of the other joint owner(s).

Determining how the property should be equitably divided among the joint owners is often much more difficult.  Frequently the court will employ a special master to assist with the process.  The first thing to be considered is whether the property can be physically divided.  If a court finds that the property can be physically divided, it must physically divide the property and award each joint owner his or her respective share.  This process may be relatively uncomplicated when dealing with large, undeveloped, and unimproved tracts of farmland or woodland.  More often, partition involves property that is improved with buildings or other improvements that are not easily divisible.  Further, factors such as zoning regulations, access to public roads, soil quality, agricultural conservation easements, etc., can prevent or complicate an equitable division of the property.  Thus, the court must find a way to equalize each joint owner’s share.

Equalizing the shares can be an onerous process, rife with potential for disputes.  Sometimes a joint owner will have to pay another joint owner a sum of money in order to equalize the interests.  If the parties are unable to agree on who gets what part of the property, or if there are more joint owners than parts into which the property can be divided, the court may auction off the parts between the joint owners and make awards of money, real estate, or both, to the parties according to their ownership interests.

Income tax consequences of the division and sale of property is another consideration.  If the division involves two or more properties that are not adjacent to each other, the division may have to be structured as a like-kind exchange under IRC §1031 to defer income tax consequences.

If the court finds that the property cannot be physically divided, it can order that the property be sold.  Such a sale may be limited to the joint owners or open to the public, depending on the circumstances.

The attorneys at Mette, Evans & Woodside can assist you with the various complex issues that can arise from the joint ownership of real property.

Life Insurance Policy

Will Your Whole Life Insurance Expire Before You Do?

By: Gary J. Heim, Esq.

Life Insurance PolicySome farmers have purchased whole life insurance as an integral part of their estate/farm succession plan.  Frequently, the children who are not actively involved in the family farm business (non-farming children) are the intended recipients of those insurance proceeds.  In the parents’ quest to be fair and equitable among the children, the insurance proceeds often pass to the non-farming children to eliminate or reduce the payments that the farming children would otherwise make for the family farm assets they are receiving.  Some of our clients, who have purchased whole life insurance as part of their farm succession plan, however, are discovering, unexpectedly, that their insurance may lapse before their deaths, whether automatically or due to unaffordable premium increases.  If the policy lapses, there are fewer assets to distribute at their deaths.  In the most extreme cases, there are no assets to distribute to the non-farming children.

People expect term insurance (no cash value) to lapse at a certain age.  On the other hand, whole life insurance (any insurance with a cash value such as universal, variable or traditional whole life) is commonly expected to continue until the insured dies… regardless of the age.  But this is a common misconception.

Just as longer life expectancies and reduced investment and interest returns have wreaked havoc in the pension world, these same factors have adversely impacted some (not all) whole life policies.  The most vulnerable policies are those purchased before 2008 when higher investment and interest returns were the norm.

An estate/farm succession plan should be reviewed every five (5) years to evaluate changes in farm/business circumstances, tax laws, Medicaid qualification and assets/debts.  Part of that review should include an insurance company-generated report that projects when the policy will expire under current premium and cash value levels.  The report, commonly referred to as an “in-force illustration,” can be requested from the agent or directly from the issuing company.

If you learn from the report that your policy is projected to expire at a certain age, you can determine whether changes to your estate/farm succession plan are necessary, so all of your children are treated fairly.  The attorneys at Mette, Evans & Woodside are available to counsel and assist you with updates to your estate/farm succession plan, including the interplay of the life insurance component of that plan.

Like-Kind Exchange

How Does a Like-Kind Exchange Work?

By: Gary J. Heim, Esq.

Most farmers and land owners have heard of a like-kind exchange, which goes by several other names, including a 1031 exchange or a tax-free exchange. The primary purpose of an exchange is to reduce the federal income taxes resulting from the sale of real estate.

Although an exchange will not be appropriate in all situations, it should be considered whenever business, farm or investment real estate is being sold.  Projecting the income taxes payable from the sale if an exchange is not used is the starting point.  To qualify for the tax savings, not only must the real estate being sold (relinquished property) be used for farm, business or investment purposes, but also the real estate that is being purchased (replacement property) must be held for farm, business or investment purposes.  It is not an all or nothing requirement, however.  The seller can keep some of the cash from the sale and only invest a portion of the sale proceeds in other real estate, but the income tax savings will only apply to the portion of the proceeds reinvested in qualified real estate.

Farm real estate can be exchanged for an apartment or other commercial property; the replacement property does not have to be a farm.  The like-kind requirement is satisfied as long as real estate is exchanged for real estate (used for farm, business or investment purposes).

Some of the more common situations where our office has assisted PFB members with exchanges include: (1) the sale of agricultural conservation easements; (2) the relocation of a farm operation from one place to another; (3) the sale of a portion of the farm for warehousing or other development purposes; (4) rearranging the ownership of jointly-owned property among siblings or others; and (5) the condemnation of property for highway, school, pipeline or other purposes (there are more lenient IRS rules for reinvestment of condemnation proceeds).

The like-kind exchange process usually involves four advisors or services, including: (1) a tax preparer/advisor; (2) an attorney to prepare the agreements of sale and related documents; (3) a title insurance company to insure title to the property; and (4) a qualified intermediary (QI).  The QI is used to satisfy the IRS condition that the seller cannot actually receive the sale proceeds.  Instead, the QI receives and holds those proceeds until it is directed to release the money to purchase a replacement property.

The IRS has rigid deadlines that cannot be extended for hardship or other reasons in the like-kind exchange process.  For example, replacement properties need to be identified within 45 days of the closing for the relinquished property.  Similarly, the closing for the replacement property needs to take place within 180 days of the closing for the relinquished property.

The attorneys at Mette, Evans & Woodside have guided and assisted many PFB members through the like-kind exchange process and can assist you in the evaluation and implementation of a like-kind exchange.

Water Treatment Plan

DEP Provides Clarification On Reporting Requirements For New And Increased POTW Discharges

Water Treatment PlanBy: Randall Hurst

In 2010 the EQB enacted extensive changes to DEP’s NPDES regulations, now codified at Chapter 92a. Among these changes was a revision to a previous requirement to apply for a new NPDES permit whenever significant changes to influent pollutant loadings—either the addition of a new pollutant or a substantial increase in an existing pollutant—was projected to occur.[1] The new regulation, now at § 92a.24(a), is a bit less stringent and states, in part:

[A]ny change of wastestream, that may result in [a] an increase of pollutants that have the potential to . . . violate effluent limitations specified in the permit, or [b] that may result in a new discharge, or [c] a discharge of [i] new or [ii] increased pollutants for which no effluent limitation has been issued, must be approved in writing by the Department before the permittee may commence the new or increased discharge, or change of wastestream. The Department will determine if a permittee will be required to submit a new permit application and obtain a new or amended permit before commencing the new or increased discharge, or change of wastestream. [Internal enumeration added for clarity.]

The NPDES permit provides these reporting requirements in Section A.III.C.2. However, several provisions of the permit appear to conflict with the regulation. Inquiries of DEP permitting staff in regard to these anomalies during permit reissuance negotiations did not result in any clarification. Additionally, one POTW reported to me that it had submitted a request for approval of new and increased pollutants to the regional DEP office, and was told by that office that DEP does not issue written approvals for changes to wastestream.

As a result of growing concern about compliance with the permit provisions, in 2018 I wrote to Mr. Sean Furjanic, DEP’s Environmental Program Manager, asking a number of specific questions. Mr. Furjanic kindly responded to the questions in writing and also replied to a follow-up letter I sent in October.[2] This article is a summary of my questions and DEP’s official responses; because of space limitations, not all issues raised in the letters are discussed here. Unless shown in quotation marks, the “DEP Responses” below are my syntheses or summaries of Mr. Furjanic’s statements. Because DEP’s responses were provided by a senior official, I believe that they constitute Department policy and can be relied on in interpreting and applying the NPDES permit conditions discussed. Please note that this article only addresses issues relevant to POTWs. Some provisions that apply to industrial direct dischargers were not discussed with DEP and may have different policy issues.

In addition to issues regarding reporting planned changes, I also asked about DEP’s policies regarding reporting changes in influent pollutants that are not planned but are discovered after the fact—a situation that is not covered by either the regulation or the permit. DEP’s responses on this issue are also discussed below.

Issue 1—Reporting “new” pollutants: This issue has two subparts.

A.) Definition. “New” pollutants are those that have not previously been detected in the influent, as reported in the most recent permit application. I asked if pollutants that were not tested for in the permit application process are also considered “new” pollutants for reporting and approval purposes?

DEP Response. Yes.

B.) Written Approval.  Both the regulation and the Permit state that a POTW cannot accept the introduction of new pollutants unless it (i) reports the intent to accept the new pollutant,[3] and (ii) receives written approval from DEP. I reported a case where the regional office staff refused to issue a written approval although they did communicate approval by telephone. I asked what a municipality is to do if DEP staff refuses to issue a written approval for the addition of new pollutants.

DEP Response.  DEP did not respond to the question of what to do if the regional office staff does not respond in writing. DEP stated that it does not have a standard operating procedure for how to respond to a notice, but offered that when a request to accept a new pollutant is received, the regional office staff is supposed to: (1) approve the request in writing; (2) request additional information; (3) deny the request; or (4) request submission of an application to amend the NPDES permit to provide for the new pollutant (as provided in the regulation).

Discussion.  If regional office staff does not respond in writing to a request to accept a new pollutant, the POTW is in a difficult position, since it may have to notify a local industry that it cannot accept the waste, or risk a permit violation by allowing the industry to proceed and accepting the new pollutant without DEP’s permission. I suggest that if this situation arises, the municipality consult with counsel as to its options.

Issue 2—Reporting Planned Increases In Existing (“Approved”) Pollutants. The permit introduces the term “approved” pollutants and defines it to mean any pollutant that has been detected and reported to DEP (usually in the permit application), regardless of whether or not there is a permit limit. To determine if a pollutant is “approved,” the POTW should consult the influent and effluent testing data provided in the most recent permit renewal application. As noted below, it may be beneficial to summarize these influent loading data on a separate record for future reference.

There are several inconsistencies between the permit and the regulation regarding “approved” pollutants. DEP provided clarification of these issues, which I have divided into two main topics: when to report, and how permission is obtained.

A.) Determining when to report increases. The regulation requires reporting planned increases of approved pollutants under only two conditions: (i) if an effluent limit violation could result,[4] or (ii) if there is no effluent limit in the permit. The permit includes the first of these criteria and adds three additional ones, which appear to be intended to address the second one (which is not actually stated in the permit). The added permit criteria are: (iii) if the proposed increase in mass loading is more than 20% of the maximum loading reported in the last permit application; (iv) if the increase could cause “pass through or interference”; and (v) if the increase would result in a violation of “water quality standards.” I questioned the addition of reporting criteria not in the regulations[5] and, perhaps of more concern, how POTWs are to determine if any of these criteria apply. The five reporting criteria are discussed separately below.

(i)  Effluent Violation. I asked how a POTW could decide if a proposed increase in pollutants from an industry or hauler might result in an effluent limit violation.

DEP Response.  DEP stated that POTWs may use the “20% rule,” discussed below, as a heuristic method of evaluating the potential to cause an effluent limit violation. (See quoted response under (iii) below.) However, DEP cautions that POTWs are still required to report any planned increase that they think may result in an effluent violation, regardless of whether the 20% rule applies (if, for instance, the current effluent concentrations of the pollutant are very close to the limit). Therefore POTWs would be well advised to estimate the effects on their own and if there is any question, report the planned increase to DEP for further evaluation.

(ii)  Increased Pollutants With No Effluent Limit. As noted above, this regulatory criterion is not stated in the permit. However, DEP indicated that the “20% rule” (discussed next) is intended to provide guidance for meeting the regulatory requirement to report all planned increases of pollutants with no effluent limits. However, since this is implied, not stated, POTWs might consider reporting all planned increases in pollutants with no effluent limits, no matter how small, so that they are in full compliance with the regulation.

(iii)  20% Increase.  I asked how this criterion relates to the two regulatory reporting criteria for increases in “approved” pollutants.

DEP Response.  “DEP has established a notification standard in permits of a 20% cumulative increase for approved pollutants to assist permittees in implementing the provisions in [the regulation] relating to ‘. . . increased pollutants for which no effluent limitation has been issued.’ This 20% standard also applies to pollutants with an effluent limitation . . . .”

Discussion. The “20% rule” provides a numerical criterion that should make deciding what to report easier. POTWs should keep the influent data from their most recent permit application available so that the maximum influent loading[6] of existing pollutants reported in that document can be compared to any proposed increases. The reporting form for planned increases—DEP Form 3800-FM-BCW0482 [7]—requires reporting both the average and maximum influent loading of that pollutant as reported in the last permit application. The Instructions for the form only reference the 20% increase standard; there is no mention of the other permit criteria for existing pollutants. This appears to confirm DEP’s statement that the 20 % rule can be used—with discretion—to evaluate all of the other criteria for reporting increases of existing pollutants.

Also, note the reference to “cumulative” loading. If prior increases less than 20% have already occurred during the five year permit cycle, a subsequent small increase might exceed the 20% cumulative reporting requirement. Thus, a POTW with an active industrial user base may wish to create a spreadsheet of all pollutants being accepted and documenting when increases occur and the magnitude of each one.

(iv)  Pass through and interference

(a)  Definition.  Not all POTWs are familiar with the terms “pass through” and “interference.” I suggested that the definitions of the terms, as they appear in the EPA pretreatment regulations (40 CFR § 403.3(k) and (p)), be included in the Permit.

DEP Response. DEP agrees and plans to do so.

(b) Application.  The EPA definitions require that a permit violation—not necessarily an effluent limit violation—must result from an event in order for it to be considered pass through or interference. Thus, this criterion is similar to, but somewhat broader than, the effluent limit violation criterion in the regulation and the 20% rule can be used with appropriate discretion.

DEP Response. DEP agrees.

(v)  Exceedance of water quality standards. The fourth reporting criterion in the permit for increases in pollutants appears nowhere in the regulation. I asked how POTWs are supposed to evaluate it, since only DEP has the tools to evaluate effluent impacts on receiving water quality. I suggested that since POTWs do not have the ability (or obligation) to compute appropriate effluent limits to maintain water quality standards, that all proposed pollutant increases of any magnitude be reported so that DEP can make that determination.

DEP Response. “The use of the 20% notification standard as discussed above is intended to eliminate the need for a permittee to determine whether the increased loading of pollutants may cause an exceedance of water quality standards. DEP does not expect permittees to perform fate and transport analyses [or] water quality modeling to determine the possible impact on the receiving waters. However, if the facility decides to do so anyway and determines that increased pollutant loading is likely to cause a violation of water quality standards . . . DEP would expect notification regardless of the amount of the increase. DEP will consider how this may be made clearer in the permit language. . . . Your proposal that DEP evaluate all increases of approved pollutants regardless of magnitude is legally appropriate but not practical given DEP’s resources.”

B.) Obtaining written permission. The regulation requires written permission from DEP before accepting any increase in pollutants that meets the regulation’s criteria. The permit, however, states that if DEP does not respond to a notice within 30 days, “the permittee may proceed with the increase in loading.” I asked how DEP reconciles these two apparently contradictory provisions.

DEP Response. “Where DEP does not reply to notification of a planned increase to pollutant loading within 30 days, DEP’s latest issued permit constitutes the written approval.”

Summary Discussion.  Reviewing all of DEP’s responses to my questions about reporting increases in pollutants, and looking at the instructions for the reporting form, it appears that, except in unusual cases, POTWs can rely on the “20% rule” to determine if proposed increases in existing pollutants should be reported.

However, DEP agrees that there is no prohibition on reporting any and all proposed increases, even very small ones. Doing so places the burden of deciding whether an increase would cause an effluent limit violation or result in exceedance of a water quality standard on the agency with the tools (and responsibility) to make the determination—DEP. Hence, reporting every planned increase of any magnitude may be the most protective approach, especially in light of the “permit as shield” rule[8] and DEP’s position that once a planned increase is reported, unless DEP actually denies the request the permit itself constitutes the “written permission” required by the regulation. (But remember that the 20% rule and the deemed approval do not apply to new pollutants.)

Issue 3.  Reporting Unanticipated Changes Neither the DEP regulation nor the permit address the question of new or increased pollutants discovered after the fact, as may happen when an industrial discharger changes its processes without notifying the POTW. However, an EPA regulation (40 CFR §122.42(b)) does require reporting such changes. I asked how DEP wants POTWs to comply, especially since no mention of this regulatory requirement appears in the permit to advise POTWs of the requirements.

DEP Response. DEP agrees that the EPA regulations at 40 CFR §122.42(b) require notification of changes in the wastestream discovered after the fact. The obligation to report changes in waste streams would be triggered upon the permittee’s awareness of the change: “When discovered after the fact, DEP expects that the permittee will notify DEP within 45 days upon discovery, assuming notification criteria are met.” The report of discovered changes is to be made using the same form used for planned changes: form 3800-FM-BCW0482.

Discussion. The “notification criteria” mentioned in the response are assumed to be those in the EPA regulation: “a new introduction of pollutants . . . from an indirect [industrial] discharger . . . [or] any substantial change in the volume or character of pollutants being introduced into the POTW by a source introducing pollutants into the POTW at the time of issuance of the permit.” EPA does not define the term “substantial change,” but given DEP’s reliance on the “20% rule” for everything else, one might assume that DEP would define a “substantial change” using that criterion. Obviously, discovery of a new pollutant would be reported regardless of its magnitude.

Issue 4. Applicability Of § 92a.24 To “Discovered” New Or Increased Pollutants. I asked if the POTW reports “discovered” after-the-fact new or increased pollutants, is that a violation of the Permit (or the regulations) because the change was not reported by the POTW 45 days in advance and written permission obtained?

DEP Response  No, but the POTW should have “mechanisms in place” to take enforcement action against an industrial user that fails to notify the POTW in advance of the change in its discharge.

Discussion  POTWs with EPA-approved Industrial Pretreatment Programs should already be regulating their industrial users so that there are no surprises; other POTWs that accept industrial wastes might consider some sort of industrial monitoring program to try to avoid unexpected changes in pollutants being received. This will both protect the treatment plant and make it less likely that a permit violation can occur.

Final Note. This article does not explore every issue discussed in the correspondence. For instance, there are unanswered questions about the legality of including substantive requirements in NPDES permits that are not contained in the regulations. This article is intended to help POTWs understand the reporting requirements as they appear in their permits, as DEP has explained them. The entire correspondence (omitting, however, some of the attachments) is provided on Mette Evans & Woodside’s website (www.mette.com) under my link and can be reviewed in detail by anyone interested in these issues. You may also contact the author (rghurst@mette.com, 717.231-5215) to discuss any concerns or questions you may have. And, of course, you may wish to discuss these policies with your regional office staff so that everyone is in agreement as to what is required.

[1]  The previous regulation at § 92.7 read, in part, “[Changes] which . . . do not violate effluent limitations . . . shall be reported . . . to the Department . . . . A new permit application shall be submitted and a new permit obtained before commencing new or increased discharge, or change in the wastestream, which would . . . include any new or increased pollutant not identified in a previous permit application.” [Emphasis added.] The latter provision appears to have rarely, if ever, been implemented.

[2]  All of the letters are available on the Mette, Evans & Woodside website (www.mette.com) under my link.

[3]  The Permit adds a requirement that the written notice be at least 45 days in advance and via certified mail.

[4]  The regulation, permit, and reporting form also refer to exceeding “ELGs.” Effluent Limits Guidelines are direct discharge limits which only apply to certain categories of industrial discharger, never to POTWs, so they are not discussed in this article.

[5]  Imposing enforceable permit requirements not provided for by regulation implicates legal principles beyond the scope of this article.

[6]  Keep in mind that the criterion is mass loading, not concentration. Thus, the flows at the time that samples are obtained must be recorded.

[7] The Form is captioned “Planned Changes To Waste Stream Reporting Form” and is found under Wastewater Management/DMR Reports/DMR Supplemental Reports on the DEP website.

[8]  To keep this article of manageable size, I have not included a discussion of this important rule. See discussion on page 10 of my July 12 letter introducing Question 6.

Real Estate What If Question

What if?

Real Estate What If Question

By: James L. Goldsmith, Esq.

These two words are the start of many questions by those who draft contracts, including agreements for the sale of real estate.   Consider Paragraph 18 of the PAR standard agreement entitled Maintenance and Risk of Loss.  This paragraph was borne of the following “what ifs?”  What if the HVAC system or other systems fail after signing but before settlement?  What if the seller is unwilling to repair within the sale price agreed upon?  What if the seller, instead of repair, promises to credit the buyer with the fair market value of the system at the time the agreement was reached?  What if the seller refuses to do anything?  What if the buyer is willing to make the repair and what if the buyer is not?  And you could go on and on and on.

Well drafted agreements are more likely to go beyond basic terms in order to deal with the possibility of intervening events.  Having an agreement that charts a path through all of the possibilities means that the parties don’t have to pause when one of these events occurs in order to negotiate a resolution.  The problem is anticipated and the fix covered.

When teaching, I frequently reference the fact that the agreement of sale is 14 pages long because it covers all of the possibilities and eventualities.  We could strip the agreement down to a 3-4 page agreement, but then when issues arise we would be stuck negotiating a new set of terms and conditions.

The problem addressed by this article is that when agents encounter a situation not covered by the agreement or a standard addendum, they may draft an addendum that doesn’t ask all of the “what ifs.”  This usually happens when the parties are drafting a change in terms addendum following an inspection report that reveals a problem.  When a buyer agent proposes that the seller make a repair, has the agent asked what will assure that the seller selects a qualified, experienced repairperson who will use A-grade materials versus a semi-qualified handyman who uses salvaged parts?

A recent call to the Hotline underscores the problem when the “what ifs” are not asked.  The property in question was serviced by a septic system that failed the buyer’s inspection because of a saturated drain field.  The drain field was wet, perhaps because of a malfunction, but certainly because of the heavy rains and snow that preceded the inspection.  The buyers were gung-ho on going forward with the purchase, but they certainly wanted recourse if a subsequent inspection found a problem.  With the “help” of their agents, the parties agreed that seller would get approval of the drain field by July.  Settlement was March 1.  In late March there was a major sewage back-up that may be related to the drain field.  Seller refused to take any responsibility saying that the agent-drafted agreement merely said that the seller would obtain a passing inspection by July.  July was months away; regardless, the agreement didn’t say that the seller had responsibility if seller couldn’t obtain a passing drain field inspection.

It’s clear that the buyers’ agent hadn’t asked “what if the seller is unable to obtain a report that the drain field was in satisfactory condition?”  In fact, the agent missed asking a whole lot of “what ifs” and the result was an abysmal set of words that covered little.  The aftermath will include litigation.

Effective draftsmanship is a skill and my belief is that licensees are not well trained in it and should probably defer to published standard forms and lawyers.  There is a legal doctrine that holds that ambiguities in draftsmanship are construed against the draftor.  This means that whoever penned the ambiguous language will find that the interpretation accepted by the court is the one most favorable to the other side.  If you wheeled the pen you better draft well and in a manner that can lead to no confusion.  There is nothing wrong with asking your clients to obtain the advice of their counsel.  There is nothing wrong with using tried and true standard forms that go through rigorous scrutiny.  Best of all, however, is having a transaction close only when all lingering doubt, problems and contingencies are resolved.  When the buyer gets everything bargained for in exchange for the full consideration, there are few “what ifs” that have gone unanswered.  Put money in escrow to cover a roof repair and we begin to think what if the repairperson finds more damage than was anticipated; what if a contractor can’t be engaged to complete the work before the balance is to be returned to the seller; what if  . . . what if . . . what if.

Copyright © James L. Goldsmith, Esquire, 2019  |  All Rights Reserved

Mr. Goldsmith is an attorney with Mette, Evans & Woodside and serves as general counsel to PAR.  A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends Realtors® in disciplinary hearings conducted by the Real Estate Commission. He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. 

Are Emotional Support Animals Permitted in a “No Pets Allowed” Property?

It can be a familiar prohibition in condominium complexes and rental properties: NO PETS ALLOWED. Does that include an emotional support animal?

The federal Fair Housing Act enlarges the definition of assistance animal to include “emotional support animals,” which it considers to be a reasonable accommodation. An emotional support animal is a type of assistance animal for a person with a disability under the Fair Housing Act.

An emotional support animal is not a pet, according to the U.S. Department of Housing and Urban Development, and can be animals other than dogs, like cats or other species.

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Pennsylvania Association of Realtors (PRNewsFoto/Pennsylvania Association of Real)

Deposits – Too Little, Too Late

Real Estate Purchase Deposits

To state that the typical deposit is too low an amount and that it is paid later than should be is not an overstatement.

The purchase deposit, which is referred to as “initial deposit” in the Agreement of Sale, is paid within five days of execution. Why a deposit? It is not a legal requirement of a binding contract. Don’t confuse a deposit with “consideration,” which is essential in the formation of a binding contract. No, a deposit is not legally required, but it is a good idea, assuming that it is of a sufficient amount. A sufficient deposit is a better telltale of the buyer’s interest than of the buyer’s stated expressions of love for the home. Money talks.

A deposit also serves to protect against financial damage suffered by seller in the event of buyer’s breach. If left alone, the seller may, upon buyer default, retain the full amount of the deposit and apply it to the actual damages suffered by seller or to the full purchase price or to retain it as a liquidated damage in lieu of actual losses incurred. Even if the agreement did not include any provision regarding seller’s remedies, the seller would enjoy the benefit of Pennsylvania law and could seek actual damages incurred or sue for the purchase price.

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Pennsylvania Association of Realtors (PRNewsFoto/Pennsylvania Association of Real)

Mediation Regarding Residential Agreements of Sale – Is it Binding?

The standard residential agreements of sale mandate that buyers and sellers “will submit all disputes” arising from those agreements to mediation.

Equally clear is the requirement that mediation “be concluded before any party to the dispute may initiate legal proceedings in any courtroom, with the exception of filing a summons if it is necessary to stop any statute of limitations from expiring.” While our courts will enforce the requirement that the parties mediate, not all will dismiss a suit that has been filed by a party who did not first invoke mediation. A fair number of courts will stay proceedings (rather than dismiss the suit) until the parties conclude mediation. Other courts simply dismiss a lawsuit filed prematurely because of the language compelling mediation before suit is initiated.

To answer the broader question, yes, mediation is binding. Regardless, there are many instances where mediation does not occur and where suits are filed and left to thrive unhindered by the failure to mediate. This can happen in several ways. An aggrieved buyer files a request for mediation with the local association of Realtors® claiming that the seller failed to disclose material defects. The request for mediation is served on the seller who does not respond or give any indication that she will participate in the mediation process. Maybe the seller lives thousands of miles away or maybe the seller hopes the matter will go away by sticking her head in the sand.

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Pennsylvania Association of Realtors (PRNewsFoto/Pennsylvania Association of Real)

Working Outside of the Box

Brokers Need to be Aware of Potential Risk When Real Estate Salespeople Have Second Jobs

Real estate salespersons often have second jobs. Should a broker care? All in unison: “it depends.” 

Issues relating to profitability and productivity of a salesperson aside, a broker has reason to be concerned when a salesperson is also employed in a job closely aligned to real estate. There can be unanticipated and negative consequences for the broker and the brokerage.

Recently I was retained to represent a broker sued by the unhappy buyers of new construction. The contractor who built the home was also a salesperson affiliated with the defendant broker though the real estate was never listed with the broker. The broker, however, was aware of the salesperson’s side-business of building homes for buyers with whom the brokerage had no relationship.

Why did the buyers sue the broker in addition to the contractor? On one occasion the buyers met with the contractor at the broker’s office. The purpose of the meeting was to discuss features of the home to be built. Neither the construction contract nor any of the papers that passed between the contractor and the buyers made reference to the broker and the broker never received a fee as a result of the sale of the home or lot. The contractor acknowledged that his construction business was independent of his licensed activity, but the buyers refused to dismiss the broker from their suit.

Ultimately, the court granted summary judgment in favor of the broker. By that time the broker had fully paid the $5,000 deductible required by the errors and omissions insurance. That too could have been avoided.

What if the contractor provided the buyers with a disclosure at their first meeting describing the contractor’s new home construction business as completely independent of the contractor’s affiliation with the broker? A statement to the affect that the broker has no control whatsoever of the contractor’s business and does not receive any benefit, financial or otherwise, from the construction business could have helped.

Such a disclaimer may go far, but keep in mind that aggrieved parties are always looking for a deep pocket. Contractors generally do not carry any type of malpractice coverage and we know that brokers do. Brokers should consider requiring salespersons to indemnify brokers for liability claims asserted against the broker as a result of salespersons’ outside activities. If the salesperson’s side business is truly independent of the broker’s real estate business, this should not be objectionable. Such an indemnity agreement can be made part of the original broker/salesperson independent contractor agreement or it can be executed separately if supported by consideration. Brokers and salespersons entering into indemnity agreement should seek the advice of their legal counsel.