Spring 2019
Welcome to Pullman & Comley's Real Estate Newsletter, Groundbreaking News. Written by our team of attorneys, you'll find articles that highlight hot topics and developments spanning the fields of real estate, land use and property valuation.
In this Spring 2019 Issue:
A Cautionary Note on Soliciting "Highest and Best Offers" on Real Property
C-Pace Program: Affordable Financing for Energy Projects
Opportunity Zones: A New Tool for Investing
Phase I Site Assessment in Connecticut: RECs, AOCs and Local Knowledge
A Cautionary Note on Soliciting "Highest and Best Offers" on Real Property
In a recent case, Restaurant Supply, LLC v. Giardi Ltd. Pship., the Connecticut Supreme Court held that an owner of real property who solicited the “highest and best” offers from potential purchasers was not obligated to sell the property to the party that submitted the highest bid.
Factual Background
The defendant-property owner, who had received several offers to purchase, requested potential purchasers to submit their “highest and best offer” to buy the property. The plaintiff submitted an all cash, no contingency offer by providing to defendant a purchase agreement, signed by the plaintiff, accompanied by a down payment deposit check. The defendant did not accept plaintiff’s offer, the highest, electing instead to sell to another bidder for a lower amount. The plaintiff subsequently sued for specific performance and filed an action in the land records to put third parties on notice of its claim against the property. While the action was pending, the defendant sold the property to a third party and the plaintiff amended its complaint to add the buyer as a defendant.
The defendants moved to dismiss the complaint on the ground that the plaintiff’s contract was unenforceable under the Statute of Frauds, because the defendant-seller never signed plaintiff’s contract. The Statute of Frauds requires, among other things, that any contract for the sale of real property must be in writing and signed by the party to be charged. The plaintiff asserted that the facts of the case constituted an exception to the Statute of Frauds—i.e., an “auction without reserve”—which does not require a writing signed by the seller to be enforceable.
The Supreme Court’s Ruling
The Supreme Court affirmed the lower court’s dismissal of the action. First, the Court noted that the seller never “agreed” to sell the property to the bidder with the “highest and best” offer; it merely “requested” prospective purchasers to submit their offers. The Court, thus, rejected plaintiff’s argument that the seller’s solicitation of bids was the actual “offer” which the plaintiff “accepted” by submitting the highest written and signed purchase agreement.
Second, the Court rejected plaintiff’s claim that seller’s solicitation procedure, requesting “highest and best” offers, constituted an “auction without reserve” (i.e. an auction in which the item for sale will be sold regardless of price). The Court noted that Connecticut’s sale by auction statute contained in its Uniform Commercial Code (which the Court did not decide if actually applicable to a sale by auction of real property) provides that an auction may be “with reserve” or “without reserve” and that, by statute, “ ‘a sale is with reserve unless the goods are in explicit terms put up without reserve.’ ” The Court held that the seller’s use of the phrase, “highest and best offers,” without more, does not create an auction without reserve. To qualify as an auction “without reserve” in the state—and correspondingly, to qualify as an exception to the Statute of Frauds’ requirement of a signed, written instrument—one must explicitly provide so.
Takeaways
A request for bidders’ “highest and best offers,” without more, does not (1) constitute an offer to sell to the highest bidder which can form the basis of a contract if accepted, and (2) does not create an auction without reserve under the Uniform Commercial Code.
Johanna S. Katz litigated, and won, this case and can respond to questions about the decision. She can be reached at jkatz@pullcom.com or 860-424-4320.
C-Pace Program: Affordable Financing for Energy Projects
PACE (Property Assessed Clean Energy) loans provide long-term financing to property owners for qualifying green energy and energy efficiency upgrades and improvements to residential and commercial properties. The C-Pace program (for commercial properties) is a state program which has been implemented by legislation in a number of states, including Connecticut, and allows owners of commercial buildings (i.e. office, warehouse, retail, industrial and multi-family) to finance such improvements over time through a voluntary property assessment. In Connecticut, nearly 130 municipalities participate in the program. There are a number of capital providers that participate in this program which is administered by the Connecticut Green Bank. Once financing for qualified energy or green improvements is approved, the bank or other lender may require the participating municipality in which the property is located to levy a voluntary benefit assessment against the subject property in an amount equal to the financing which may include associated costs of the financing. After a financing agreement between the lender and property owner is executed, the municipality will file a benefit assessment lien on the applicable land records. The assessment will have priority over all liens other than property taxes and repayment of the assessment will be made in installments to the town which will collect the payments in the same manner as real property taxes. Although the assessment lien can be foreclosed if not paid, it cannot be accelerated and runs with the land in the event of a transfer of the property. Any commercial or industrial property (other than a residential property with less than 5 units) qualifies for this financing program.
If you have any questions related to the C-PACE program, please contact an attorney in our Real Estate Finance practice area.
Opportunity Zones: A New Tool for Investing
The “Opportunity Zone” community development program encourages long-term investments in low-income urban and rural communities that have been designated as ‘Opportunity Zones”. To achieve this, Congress provided significant tax incentives to investors, with the intent that developers in these Zones may be able to proceed with projects that otherwise may have been difficult to fund. There are over 8,000 Opportunity Zones nationwide and 72 of such Zones in Connecticut. For an investment to qualify for the tax incentives offered in this program, the invested funds must be from capital gain realized in a transaction with a non-related person within 180 days prior to the investment.
The capital gain tax due from the transaction will be deferred until the earlier of 1) when the investment is disposed of; or 2) December 31, 2026. Also, the deferred gain will be reduced by 15%, so long as the investment is held for at least seven years. Most importantly, if the investment is held for at least 10 years, when that investment is sold, all gain which would normally be recognized upon the sale of the investment is eliminated. Stated differently, there will be no taxable gain whatsoever on the sale of an Opportunity Zone investment meeting the 10-year holding period requirement.
In order to qualify for these tax benefits, the initial investment must be an equity interest in a “Qualified Opportunity Fund” (a “QOF”). A QOF is a corporation, a limited liability company or a partnership that invests 90% or more of its assets in qualified opportunity zone business property or qualified opportunity zone businesses. A QOF or qualified opportunity zone business generally may qualify by purchasing tangible personal property or real property and using substantially all of that property in an Opportunity Zone, or by acquiring tangible or real property and substantially improving that property over a 30-month period. The IRS has issued proposed regulations more precisely defining these terms and explaining necessary elections that each investor and the QOF must make in order to obtain the tax benefits described above.
If you have any questions related to Opportunity Zones, please contact an attorney in our Opportunity Zones practice area.
Phase I Site Assessment in Connecticut: RECs, AOCs and Local Knowledge
In corporate and real estate transactions, environmental due diligence routinely includes Phase I environmental site assessments in accordance with ASTM Standard Practice E1527, the principal objective of which is to identify “recognized environmental conditions” (RECs). For a Connecticut property, however, a Phase I report may say it follows the state “Site Characterization Guidance Document” (SCGD), and may report conclusions in terms of “areas of concern” (AOCs). And in an assessment reporting conclusions using both standards, there are typically more AOCs than RECs – indeed, it is not unusual for a report to list numerous AOCs and no RECs at all.
If you’re not familiar with these distinctions, you might think the SCGD is just a local variation – a Connecticut way of doing assessments. Structurally, however, the Connecticut approach is deeply rooted in state law concerning voluntary remediation and responsibility for contamination. In practice, the SCGD approach to site assessment can be confusing, and may not be relevant at all.
To see why, it’s critical to understand the SCGD’s function at the intersection of three related areas under the jurisdiction of the state’s Department of Energy and Environmental Protection (DEEP). First is a group of statutes defining substantive remediation “programs” and pathways to regulatory closure. Second is the Remediation Standard Regulations (RSRs), which define numerical criteria for remediation, remedial end points, and alternatives such as use restrictions. Third is the Licensed Environmental Professional (LEP) program, which empowers licensees to make decisions about investigation and remediation that would otherwise have to be made by overburdened DEEP staff.
The function of the SCGD in this framework is best understood from the perspective of the LEP component. To delegate remedial decisionmaking authority, DEEP needed confidence that LEPs would exercise it within tight limits. The RSRs achieve this by constraining discretion about cleanup criteria. DEEP also needed clear standards to limit the discretion of LEPs in conducting site assessments. The SCGD meets this need by constraining discretion about site characterization. In this regard, the AOC definition plays a vital role: it forces LEPs to identify areas of interest based on the mere presence of materials that might cause environmental harm if released.
This is the key distinction between the E1527 and SCGD Phase I assessment process. E1527 defines a REC as “the presence or likely presence of any hazardous substances or petroleum products … under conditions indicative of a release to the environment.” The SCGD AOC, in contrast, is a location or area “where hazardous wastes and/or hazardous substances have been or may have been used, stored, treated, handled, disposed, spilled, and/or released to the environment.” In other words, while a REC involves the presence of environmentally sensitive material plus some tangible reason to suspect (“conditions indicative of”) a release, an AOC requires only the presence of such material.
The sensitivity of the AOC definition reflects its function in the LEP framework. An LEP operating within the SCGD framework essentially has no discretion to designate areas for investigation based on whether hazardous materials are likely to have been released: if such materials are merely present, their location must be investigated to prove the negative. This minimizes the potential to miss such locations through the exercise of subjective judgment. The AOC’s hair-trigger approach is also crucial within the remediation programs that require full site characterization: whether approved by DEEP or verified by an LEP, the finish line under the Connecticut programs is reached only when all AOCs have been investigated and either remediated or confirmed clean. The conclusion that a property is in compliance with the RSRs is an exercise in proving the negative, so the SCGD logically – and rigorously – requires ruling out all possibilities of release, beginning with all locations where such possibilities exist.
Two important corollaries follow from the foregoing.
First: The SCGD is not a general statement of site assessment practice in Connecticut. It applies and must be followed for properties within one of the statutory remediation programs. And because a goal of Phase I assessment of a Connecticut property is to determine the applicability of one such program – the Transfer Act – a Phase I in this state should always address the property use and hazardous waste generation criteria that would make the property a Transfer Act “establishment.” Otherwise, however, parties are free to evaluate Connecticut properties by reference to their own risk tolerance and to conduct Phase I assessment without regard to the SCGD.
Second: The E1527 REC construct may be more functionally useful in due diligence than the hair-trigger AOC definition. Recalling also that the E1527 assessment process is an alternative to the “all appropriate inquiry” necessary to qualify for Superfund “innocent purchaser” liability protection, the presence of a REC essentially constitutes constructive or inquiry notice that some environmental problem may be present. The AOC definition, by contrast, contains no element of probability or likelihood, and thus tends to exaggerate the magnitude of environmental concerns.
We began with a hypothetical Phase I assessment report listing both RECs and AOCs. If you understand the distinctions between those terms, and the different functions they perform, you’ll be better able to put that report to practical use in the transactional setting.
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For a more detailed discussion of the issues covered in this article, see “Phase I Environmental Assessment Process(es) in Connecticut: Managing a State-Specific Approach to Achieve Transactional Objectives” by Christopher P. McCormack.