Rhode Island Property Law : Rhode Island Real Estate & Environmental Attorney & Lawyer John Boehnert for Development & Permits in RI

That’s the lesson I take away from a recent, and stunning, U.S. Ninth Circuit Court of Appeals decision that found a legally binding and enforceable contract for a highly complex multi-million dollar real estate transaction arose from a one page, nine paragraph, 205 word document labeled a “Final Proposal” and apparently crafted, if that is the word, by the business principals themselves. See First National Mortgage Company v. Federal Realty Investment Trust, 631 F.3d 1058 (9th Cir. 2011).

The Transaction

The transaction this “contract” was designed to document was a sophisticated ground lease transaction, which are decidedly not simple transactions, providing for rental payments of more than a million dollars a year, and containing a “put” and “call” provision regarding the ultimate purchase of the real estate, which was intended to be developed as part of the largest mixed use development project in San Jose, California. 

You know, the kind of a transaction you document on a napkin in a cocktail lounge, take a picture of with your Iphone and send to the other side for signing.

The Final Proposal

Now that you know the parameters of the deal, take a peek at this “Final Proposal” to see if you think sophisticated and experienced real estate professionals could reasonably have intended this one page document to be a binding and enforceable agreement in a multi-million dollar real estate transaction. Final Proposal.

You will note that in addition to being labeled a “Final Proposal”, it provides that one party is to “prepare a legal agreement” for the other party to “review to finalize the agreement” and it further provides that “the above terms are hereby accepted by the parties subject only to approval of the terms and conditions of a formal agreement” . (Emphasis supplied.)

And there was an essential term not expressly set forth—the length of the lease term.

The Evidence

In fairness to the appellate court, this matter was tried to a jury, which heard evidence from the plaintiff seeking to enforce the “contract” that the President of the defendant real estate developer said  he wanted to be sure “there was no way either party…could change any of the major points in the agreement”. 

A representative of plaintiff, who was asserting the one pager was a binding contract, also testified that the “legalese and the minor points” would be taken care of in the formal agreement”.  I am not making that up—see paragraph 11 of the decision!

There was also evidence that a provision in a prior draft stating the agreement was non-binding was removed from the Final Proposal.

And there was evidence that the parties intended the term of the lease to be ten years.

The trial judge concluded there was enough conflicting evidence to let the matter go to the jury.

The Decision

The end result was that based on the binding contractual terms of that one page document, the defendant was required to pay $15.9 million in damages.

Now, while it is true that the Ninth Circuit does not govern Rhode Island or the New England states, this case is nevertheless a wake-up call that juries, and even courts, might not always decide a real estate transactional dispute the same way experienced real estate professionals might assume or envision.

Lessons to be Learned

•          Business people, and/or their brokers, should not be negotiating letters of intent or preliminary agreements without getting lawyers involved
•          Never assume that because you say something is subject to a further agreement, it is non-binding
•          If you intend a document to be non-binding, say so clearly and emphatically
•          If some portions of the letter of intent are to be binding, such as confidentiality provisions, make that clear while stating expressly that the document is otherwise non-binding unless and until execution and delivery of a formal agreement
•          Be very careful of letters you or your brokers may exchange with the other side, to avoid the allegation that an exchange of correspondence constitutes a contract
•          Ask your lawyer for standard language to include in correspondence discussing potential deals to the effect that the letter is for discussion purposes only, no offer is being made or accepted, and no contractual obligations arise unless and until mutual execution and delivery of a formal agreement
•          If correspondence or discussion from the other side are framed in terms of an “agreement” or a “mutual understanding”, discuss with your attorney (sooner rather than later)

Oh, and you may want to try to stay out of the jurisdiction of the Ninth Circuit!

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If you are a landlord, the First Circuit Court of Appeals has made it clear you may be liable for the overly exuberant merriment of your tenants if you own rental property in Narragansett, Rhode Island. And similar laws may be coming to other cities and towns in Rhode Island, Massachusetts, Maine and New Hampshire, given the green light provided by the Court.

The Court recently upheld a Narragansett ordinance which made landlords jointly and severally liable with their tenants and others organizing events, including social gatherings, which result in a violation of law and created a “substantial disturbance”. See URI Student Senate  v. Town of Narragansett, No. 10-1209, 2011 WL 17610 (1st Cir. Jan. 05, 2011).  (The ordinance is appended to the Court decision.)

The Problem

Narragansett is home to some stunning beaches and numerous college students, which have spawned a thriving rental market, with vacationers (and sometimes college students) renting houses during the summer and college students renting houses in the off-season (September-May, coinciding with the academic year).

Apparently the town felt the need to take action to control the partying of renters, and the ordinance it enacted gives some clue as to the behavior it was attempting to address.

“It shall be a public nuisance to conduct a gathering of five or more persons on any private property in a manner which constitutes a substantial disturbance of the quiet enjoyment of private or public property in a significant segment of a neighborhood, as a result of a violation of law. Illustrative of such unlawful conduct is excessive noise or traffic, obstruction of public streets by crowds or vehicles, illegal parking, public drunkenness, public urination, the service of alcohol to minors, fights, disturbances of the peace, and litter.”

Picky! Picky! Picky! Can’t college kids have any fun, for heaven’s sake?

The Solution

And the authorities didn’t stop there. Not satisfied with just prohibiting what may be the mainstays of college recreational activities, they actually imposed fines for violations, and even increased the fines for subsequent violations ($300, $400 and $500), perhaps targeting slow learners. And court-ordered community service was also a weapon sanctioned by the ordinance.

Not only that, they implemented a notice posting requirement that was particularly controversial, and they cast a wide net for violators.

The Scarlet Notice

At the heart of the ordinance, if one could say that any ordinance which clamps down on wholesome fun for college kids has a heart, was a requirement that a notice of the violation be posted on the offending property, and remain posted during the summer, for violations that occur during the summer, or during the remainder of the academic year, for violations that occur during the academic year.

And those wily town officials had the notice printed in orange, causing the Court in a footnote to suggest it was reminiscent of The Scarlet Letter. (The Court noted in that footnote that there was no explanation as to the color and “the choice of hue” was “perplexing”. There I part company with the Court, as it seems the choice of orange was not at all perplexing but rather was selected for the same reason hunting vests are orange—maximum visibility; so police could readily identify a “party house”.)

Subsequent violations at the same house incurred increased fines and subjected to joint and several liability the property owner (but only after receiving notice of the first violation), tenants, organizers of the offending event, and participants in activity resulting in a public notice.

The Decision

The Court’s decision swatted away a challenge to the ordinance arguing that the State’s Landlord and Tenant Act preempted the ordinance, as well as several constitutional challenges based on procedural due process, overbreadth, and vagueness. 

Indeed, the Court only appeared to express reservations about the lack of a hearing before the Scarlet Notice was posted on the offending property and the possibility that the ordinance could potentially be applied in an unconstitutional manner. In considering the procedural due process challenge, the Court  noted as follows:

 “We, like the district court, are uneasy about the absence of a hearing. In addition, we recognize that there are potential applications of the Ordinance that might impair constitutionally protected liberty or property interests (say, if the police were to enforce the Ordinance in an invidiously discriminatory way). But the appellants have brought a facial challenge, not an as-applied challenge, and the record is barren of evidence that unconstitutional applications have occurred. The mere possibility of the misuse is insufficient to invalidate an ordinance on a facial attack.”

What Can Landlords Do

Landlords joined the legal challenge to the ordinance, arguing that the Scarlet Notice made the house harder to rent, and could result in the loss of rental income. (The Court was unmoved from a constitutional perspective.)

If you own rental property in Narragansett:

•          Make sure you know what your tenants are doing
•          Make sure your leases require Tenants to indemnify you for liability arising under the ordinance
•          Make sure the town has your correct notice address
•          Consider increasing your security deposit to address fines, if necessary
•          Consider trying to convince the town to amend the ordinance (difficult after being sustained by the Court) (i) to allow the removal of the notice if the tenant(s) causing the violation are subsequently evicted, at least as to a first violation, and (ii) to clarify designation of the offending premises (i.e. if it is a particular condominium unit, or one of many apartments, are all units in the complex tainted?)

If you own rental property in other localities where there are student populations or a large young rental market, as in the summer, such as Providence, Newport or Bristol, be alert for a similar ordinance being enacted and attempt to make it more “landlord friendly” as suggested above.

Oh, and for heaven’s sake, in any event, don’t join the partying yourself!

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