Reviewing Residential Construction Contracts

Winter Park Home Magazine - Issue 2 2014

There are many high-quality contractors in Central Florida that do an outstanding job, building beautiful homes. They try to get their projects finished on schedule and within their client’s stated budget, as they know that their hard-earned reputations are on the line. However, given the complicated nature of construction, some of the best laid plans can go astray. Here are a few tips for protecting the homeowner’s interests in construction contracts.

Define the Scope of Work. The contract should be as specific as possible about what the owner is paying to have built. That may seem obvious, but contracts can be surprisingly vague. The contract should expressly incorporate the final set of design documents that are going to be submitted for the building permit.

Payment Structure. It is increasingly common for contractors to propose that the homeowner pay them on a “cost plus” basis, i.e., the homeowner reimburses them for their costs plus some percentage mark-up. With this approach, the homeowner cannot rely upon any cost estimate that may be stated in the contract. The contractor has no obligation (or even financial incentive) to keep the price within that estimate. From the homeowner’s perspective, the better approach for keeping the project within budget is to negotiate a lump sum price. But, the homeowner will need to decide the project details before contract signing and then guard against changing their mind during the job. While the homeowner can still change the project design under a lump sum contract, the contractor will justifiably require a change order to do so - typically at a premium.

Progress Payments. The contract should provide guidance on the amount of each progress payment until project completion. The contract should allow the homeowner to withhold enough unpaid contract balance to cover the cost of a replacement contractor if, for whatever reason, the original contractor is terminated. To accomplish this goal, the contract should include a “schedule of values”, which is a break-down of the lump sum price allocated for each of the major work items (e.g. foundation, rough carpentry, electrical, etc.), equating to the value of those respective work items. Each month, the contractor should get paid a percentage of the amount allocated for each of the work items based upon the work actually performed.

Protection Against Liens. Even if a homeowner pays the contractor every dollar owed on the project, if that contractor fails to use those funds to pay all of the material suppliers and subcontractors, the homeowner could end up paying twice for those materials and subcontractor services - plus their attorney’s fees and costs. And if you don’t pay, you can lose your house. It’s harsh, but it’s the law. The good news is that Florida’s lien law provides specific procedures for homeowners to protect themselves against such liens. Briefly, the homeowner needs to condition all progress and final payments on receipt of lien releases from all potential lienors. There are additional steps to take as well, and homeowners are strongly encouraged to contact their construction lawyer prior to contract signing to make sure that the contract will require the contractor to follow all of the procedures that will guard against liens.

Project Schedule. Perhaps the biggest complaint by homeowners is that the project takes longer than expected. If the delays were caused by things beyond the contractor’s control, such as a hurricane or multiple changes requested by the homeowner during the project, this is excusable. But, if that is not the case, then the contract should give the homeowner the right to terminate their contractor if the project is taking an unreasonable amount of time to finish. To establish that right, the contract should establish a firm substantial completion deadline (e.g. a certain number of days after the permit is issued) and specifically state that “time is of the essence” with respect to that deadline.

Insurance. The contractor should provide the homeowner a Certificate of Insurance reflecting that he has Comprehensive General Liability Insurance and Workmen’s Compensation Insurance. The contract should condition payment upon the contractor furnishing that Certificate of Insurance and keeping the insurance in force through final completion.

Attorney’s Fees. When projects do not go as planned, a lawsuit could result. If it does, the contract should provide the homeowners the right to recover their attorney’s fees if they win. If the contract is silent on attorney’s fees, it can create an unfair advantage for the contractor because if the owner breaches by failing to pay amounts due, then the contractor can lien the house and sue under Florida’s lien law, which provides a statutory right to recover attorney’s fees for the prevailing party. However, if the contractor breaches the contract by performing work defectively or delaying the job, the homeowner does not have any right to recover attorney’s fees unless the contract expressly authorizes it. So, unless the contract includes an attorney’s fees provision, the contractor would have an unfair litigation advantage.

Conclusion. This article discusses only a few of the issues to be addressed when reviewing a construction contract from the perspective of the homeowner. It is strongly advisable to retain the services of an experienced construction attorney to guide you through the process – not only for the negotiation of the contract, but also as a part of the team to help through the issues that might come along throughout the project. 

Frank and his wife, Joan, have two daughters. They have lived in Winter Park, Florida since 1980. Joan is a retired Speech Pathologist. Their older daughter, Allison, who is a mixed media artist, lives in Venice, California and is a 2007 graduate of Hamilton College, graduated from Parsons The New School For Design with a postgraduate degree in Graphic Designs in 2008, and received her Master of Fine Arts in Electronic Media Arts and Design from the University of Denver in 2010. Their younger daughter, Rachel, who works at the Aspen Institute, lives in Washington, D.C. and is a 2011 cum laude graduate of Hamilton College and received her Master of Arts from Georgetown University in 2013.

Closing Problems & Pitfalls

Winter Park Home Magazine - Issue 1 2014

Occasionally unexpected issues arise that delay, or even stop, a real estate closing. There are also situations in which a Purchaser obtains title to property, and after closing learns that the property is subject to significant problems that would have been disclosed by the advice of an attorney or the review of a survey. Here are four recent examples:

Number 1 – Use of a Durable Power of Attorney after death of Principal. John and Michael, both single, own platted Lot 8. They enter into a Contract to sell Lot 8 to the Kelleys, with John signing the Contract on behalf of Michael utilizing a Power of Attorney. At closing John presents an original and properly executed Durable Power of Attorney signed by Michael (the "Principal"), which authorizes John to sign the deed on Michael’s behalf. At closing John then signs the deed and companion documentation, both individually and as Attorney in Fact for Michael. When presented with the Affidavit of the Attorney in Fact (the "AIF"), which includes the confirmation by the AIF that the Principal is still alive, John hesitates. He then advises the closing agent that Michael recently died, and that he did not realize that he could no longer use the Power of Attorney after John’s death. The closing agent has no choice but to stop the closing.

The title work reflects that John and Michael owned the property as tenants in common. Michael's estate will therefore need to be probated to determine his heirs for his one-half interest in Lot 8. Furthermore, the Contract was signed by John as AIF after Michael had died. Michael’s estate is therefore not contractually bound to sell the property, and the deposit will be returned to the Kelleys. If the Kelleys still wish to purchase Lot 8, they will have to renegotiate the Contract at a later date once Michael’s heirs have been judicially determined.

Number 2 - “Too much” cash at closing. Andrew and his wife agree to purchase property for $150,000.00, with no financing contingency. Three days before closing they indicate they will bring $10,000.00 in cash, and will wire the remainder of the funds. This potential delivery of a large sum of cash immediately raises a red flag. The Buyers are advised by the closing agent that all funds need to be wired into the closing agent’s account before the closing can be completed. There may be some minor exceptions to this rule. For example, a Buyer may be allowed to bring a small amount of cash (e.g. $350.00) to cover any additional costs due to last minute changes to the settlement statement.

In recent years the State of Florida (Chapter 896 – the Florida Money Laundering Act) and the federal government (the Anti-Drug Abuse Act of 1988) have imposed mandatory reporting requirements for transactions involving more than $10,000.00 in cash received in a trade or business. These laws also impose substantial penalties and fines if the closing agent fails to comply with these guidelines. The reporting of these cash funds must be filed without delay. To avoid the penalties potentially associated with receiving cash in excess of $10,000.00, the prudent closing agent will therefore stop, or at least delay, the completion of the closing until such time as the issues associated with these funds can be satisfactorily resolved.

Number 3 - Property purchased at foreclosure sale. Some investors independently search the public records websites when deciding whether to bid on property at a foreclosure sale, and do not obtain a title insurance commitment, thereby losing the benefits of a professional search and examination. A title insurance commitment (when issued in conjunction with a final Owner’s Policy) not only serves to identify the current owner of a property, and to identify all liens impacting the property that will be eliminated or remain as liens on the property after the issuance of the Certificate of Title, but it also serves to protect the prospective purchaser by shifting the burden of correcting any mistakes in the examination of title to the title insurance underwriter. This shift of burden, of course, only occurs when a title insurance policy has been issued in conjunction with the title insurance commitment.

Recently, I spoke with one investor who had purchased property at a foreclosure sale. His “online” title search failed to pick up the existence of a $125,000.00 mortgage recorded prior to the foreclosed mortgage. If this investor had obtained a title insurance commitment, the outstanding mortgage would have been disclosed, and the investor could have elected not to purchase the property. Alternatively, if this prior mortgage had been misindexed or missed by the title insurance underwriter, and no exception for this mortgage appeared in the title commitment and the Owners' Policy (after issuance of the Certificate of Title), then the investor, under the parameters of the title insurance policy, could look to the title insurance underwriter, and not to himself, to pay the cost and expense of eliminating the prior mortgage as an encumbrance on the property.

Number 4– Ordering a Survey for closing. To save money, a Buyer sometimes chooses not to obtain a survey for closing. This money saving approach can be very expensive. In one recent example, an individual purchased a vacant metes and bounds parcel of land and chose not to obtain a survey until six months later – when he submitted plans to construct a new home. At that time he learned that he had purchased the “wrong” lot, i.e. a lot lying between two neighboring parcels of land, and not the corner lot on the street that he thought he was purchasing. In another example, a Purchaser acquired vacant land subject to an access easement that bisected the property. The Purchaser did not obtain a survey or read the easement terms prior to closing, and never retained counsel to review the contract or the related title work. As a result, this individual had to subsequently, and at considerable expense, attempt to negotiate with the beneficial owner of the access easement to change its location. If the Purchaser had retained counsel prior to closing, the attorney could have reviewed the easement terms, determined their impact, and advised his client of his contractual options. Alternatively, if a survey reflecting this easement had been obtained and reviewed prior to closing, the Purchaser could have elected to retain an attorney to determine his options under the contract. Ideally, the Purchaser would have wanted to place the burden of moving the easement onto the Seller – or otherwise have elected not to purchase the property.

Not even a well-prepared and knowledgeable closing agent can anticipate every issue that may arise at a closing. Having an attorney guide you through these potential pitfalls is probably the best way for you to protect what is often the greatest financial investment of your lifetime.

This Article is not a substitute for hiring an independent

attorney to review your title commitment and closing documents.

 Frank and his wife, Joan, have two daughters. They have lived in Winter Park, Florida since 1980. Joan is a retired Speech Pathologist. Their older daughter, Allison, who is a mixed media artist, lives in Venice, California and is a 2007 graduate of Hamilton College, graduated from Parsons The New School for Design with a postgraduate degree in Graphic Designs in 2008, and received her Master of Fine Arts in Electronic Media Arts and Design from the University of Denver in 2010. Their younger daughter, Rachel, who works at the Aspen Institute, lives in Washington D.C. and is a 2011 cum laude graduate of Hamilton College and received her Master of Arts from Georgetown University in 2013.

Review of the Owner/Design Professional Agreement from The Design Professional's Perspective

ProNetwork News - December 2013 - Volume III - Issue 12

This article reviews some of the issues addressed in a standard Owner/Design Professional Agreement, outlines concerns from the Design Professional’s perspective, and discusses how the Design Professional can reduce liability on a project and ensure equitable adjustments to the contract price and schedule for changed or additional design services. The agreement contemplated by this article is one to be used as part of a traditional design-bid-build approach.

Standard of Care

When trying to hold a Design Professional liable for negligence, one of the first legal considerations is the standard of care owed. Absent an express contractual warranty, the law does not require the Design Professional to guarantee that the design will be perfect. Rather, the standard of care that the courts will typically apply is that degree of care which a reasonably careful architect/ engineer would use under like circumstances. However, nothing prevents an Owner from seeking contractual language that increases the typical standard of care owed by the Design Professional to the level of an express warranty of the design; in fact, Owners frequently attempt to do so in their proposed agreements – and courts will enforce such language. This is a danger to the Design Professional, as it is possible that the increased standard of care could go beyond professional liability insurance coverage available to the Design Professional. Thus, the Design Professional should insist on the deletion of any such guarantee as unreasonable.

Similarly, a Design Professional should insist on the deletion of any proposed language that attempts to establish a fiduciary duty between the Design Professional and the Owner, as such language also results in an increased standard of care owed on the Project.

Owner’s Project Criteria

Before commencing with design services, the Design Professional should insist upon a well-defined project criteria from the Owner, upon which it may rely for establishing the overall parameters of the project. The agreement should expressly state that the project criteria furnished by the Owner describes all of its program requirements and objectives for the project, including use, space, budget, time, site, maintenance requirements, and expandability requirements, as well as submittal requirements and other requirements governing the Design Professional’s performance of the work on the project. Ideally, the Owner’s project criteria includes conceptual documents, design criteria, performance requirements and all other Project-specific technical materials and requirements needed by the Design Professional to commence work without further information gathering after the contract is executed.

Any language that requires the design documents to reflect the Owner’s “intent” or other such wording should be deleted (as mind reading should not be a contractual requirement). The Design Professional should insist on express contractual language that states that if the Owner seeks to supplement or change the project criteria after the contract price is established or after the Design Professional commences work, then the Design Professional is entitled to an equitable adjustment to the contract price and schedule as a condition precedent to performing any such additional work.

Similarly, to the extent that the Owner changes the project budget, there should be contract language entitling the Design Professional to an equitable adjustment in the contract price and schedule, to be reflected in an executed change order, for all resulting value-engineering needed to reach the revised budget. However, if value engineering is needed because the bids from all contractors exceed the project criteria’s budget (possibly resulting from inaccurate pricing estimates by the Design Professional), then the contract should include language that states whether a Design Professional must perform that value engineering work without additional compensation. Perhaps the contract states that the Design Professional is only required to do so if the lowest responsive and responsible bid exceeds the budget by some threshold percentage. Regardless, the Design Professional should expressly limit any liability for any claims or damages sought by the Owner arising from the cost of the work exceeding the project criteria’s budget.

Equitable Schedule of Values

Owners may seek to establish a draw schedule that withholds most of the contract price until after the construction documents are 100% complete and approved and permitted by the governing building authorities, i.e. when the Owner has a work product in hand that would allow construction to commence. However, the Design Professional should insist on a payment draw schedule that equitably reflects the value and time required at all preliminary stages: schematic phase, design development phase, the staged percentage completion milestones of the construction documents, negotiation/bid review phase and contract administration. Moreover, the contract should define the work product required at each such stage, as applicable, that would trigger entitlement to each successive draw payment.

Construction Contract Administration

While the standard AIA Documents for construction contemplate intensive contract administration services to be performed by the Architect during the construction phase, oftentimes a companion AIA design agreement is not used on the same project. Indeed, even if a percentage of the Design Professional’s contract price is dedicated to contract administration, often the design agreement does not define well the Design Professional’s contract administration duties (or may not address them at all). This disconnect creates fertile ground for conflict. It is difficult, if not impossible, to predict the amount of involvement required by the Design Professional during the construction phase for some contract administration duties, such as RFIs. Accordingly, the Owner and Design Professional should attempt to define the Design Professional’s scope of contract administration services to be performed during the construction phase and break-out and identify certain contract administration services to be performed on an hourly fee basis (with a rate schedule agreed to and incorporated into the agreement).

Additional Services

The agreement should expressly state that the Design Professional is entitled to an equitable adjustment in the contract price and schedule for the following items:

• as previously discussed, any change in the project criteria;
• change in the instructions or approvals given by the Owner that necessitate revisions in the design documents;
• enactment or revision of codes, laws or regulations or official interpretations which necessitate changes to previously prepared design documents;
• decisions of the Owner not rendered in a timely manner;
• failure of performance on the part of the Owner or its agents;
• preparation for an attendance at a any deposition, dispute resolution proceeding or other legal proceeding.

 Reimbursable Expenses

Briefly, as the amount of Reimbursable Expenses will necessarily remain an unknown contingency, they should not be limited to a Reimbursable Expense Allowance (as is sometimes requested by the Owner), but rather should be additional compensation over and above the contract price.

Insurance

The Design Professional is strongly advised to consult with its insurance broker to review the contract’s insurance requirements to determine whether its current policies comply and whether additional coverage is required. If so, the Design Professional will need to ensure that any additional premium to be paid is included in the contract price or otherwise covered as a reimbursable expense.

Limitation of Liability

As it relates to the Owner, the Design Professional should seek to limit its total liability for any and all claims or injuries arising from the project to the amount paid on behalf of or to the Design Professional by its insurer in settlement or satisfaction of such claims. If no such insurance coverage is provided with respect to the Owner’s claims, then the Design Professional’s total liability to the Owner for any and all such uninsured Owner claims should nonetheless be capped at some dollar amount, such as some percentage of the contract price that reflects the Design Professional’s profit on the Project. Such limitation of liability provisions are generally enforceable (although the Design Professional should confirm with an attorney licensed in the state whose laws govern the contract).

Instruments of Service

The contract should expressly state that all drawings, specifications and other documents and electronic data furnished by the Design Professional per that same contract are deemed to be instruments of service, and that Design Professional shall retain the ownership and property interests in them, including the copyrights. Only upon the Owner’s payment in full for all amounts due under the agreement should the Owner be granted a limited license to use the Instruments of Service in connection with the Owner’s occupancy or use of the project.

The contract must also address what happens if the design contract is terminated at any point prior to completion of the design documents. What rights, if any, does the owner have to the Design Professional’s work product under that scenario? Since the Design Professional is no longer involved in the design, if the Owner is granted license to still use the work product to complete the project, then the Owner should be required to indemnify and defend the Design Professional as a result of any claims arising from such use.

The issues outlined herein are not intended to be exhaustive. Design Professionals are strongly advised to have each design agreement separately reviewed by their construction attorney and insurance broker.
__________________________

Frank L. Pohl, Esq. and James C. Washburn, Esq. are partners in the law firm of Pohl & Short, P.A. in Winter Park, Florida. Pohl & Short, P.A. represents architects, engineers and other participants in the construction industry throughout Florida. Mr. Pohl has been advising clients involved in all aspects of real estate development for over 30 years. Mr. Washburn has focused his practice in construction law for over 15 years and is Board Certified in Construction Law by The Florida Bar. Additionally, the law firm’s attorneys practice in the following four main areas of business law: commercial litigation, real estate law, corporate law and trusts and estates. Further information about the law firm can be obtained by visiting its website at www.pohlshort.com, by calling the office at (407) 647-7645 or via e-mail at pohl@pohlshort.com.

Vesting Property Title 2: The Sequel

John Smith and Michael Jones are two friends who enjoy fixing and remodeling homes. They decide to go into business together, to buy distressed properties through foreclosure sales, to repair and remodel them, and then to sell the remodeled homes for a profit. They shake hands and agree to proceed, with each contributing one half of all expenses, and with each sharing one half of the profits. John Smith then comes to me for advice.

I advise John that he and Michael have effectively entered into a general partnership agreement, and that Florida law does not require their agreement be in writing. I advise John, however, that their agreement needs to be in writing, to more completely set forth the parameters of their understanding, thereby avoiding many of those disputes which occur with oral agreements. I also advise John that all property acquired by the partnership should be vested solely in the partnership’s name, in order to avoid any claims of creditors against either of the partners in their individual capacities. I told John to consider the following scenario.

Two partners buy a parcel of land. Immediately after closing, one of the partners unexpectedly has to leave the state to deal with a family emergency. The second partner undertakes all the necessary improvements to the property in partner one’s absence, and upon his return the two partners sign a contract to sell the property. At closing, Second Partner insists that he be paid a greater share of the profits since he had been the only partner to work on the house. He also “reminds” his partner that they once had a phone discussion in which they had both agreed that there may be circumstances in which one partner may provide more services than the other, and that the profits would need to be adjusted accordingly. Partner One says he does not remember that conversation, and that if Partner Two refuses to split the profits evenly that he will file a lawsuit to “clear up the record.” Unless the partners can come to an amicable resolution, not only will this matter end up in court, but realistically the partnership agreement will come to an end. A properly drafted written partnership agreement could have addressed this situation, and the partners could then have looked to the partnership agreement to address their differences.

A General Partnership is defined in chapter 620 of the Florida Statutes as “an association of two or more persons to carry on as co-owners a business for profit.” Unlike most business entities that must register with the Florida Department of State, there is no registration requirement for a General Partnership. These business entities, whether oral or written, are governed in Florida by the Revised Uniform Partnership Act (“RUPA”). Under RUPA, the general partners share both the profits and the obligations of the general partnership, and each partner is jointly and severally liable for all obligations of the partnership. A person who is later admitted as a general partner, however, will not be personally liable for any partnership obligation incurred before that person’s admission as a partner.

The manner in which title is vested in the general partnership will impact the enforceability of judgments against real property owned by the partners and the partnership. The general rule is that judgments against a person who is a partner of a partnership do not attach to property vested in the partnership. Partnership property is viewed as separate and distinct from the interests of the individual partners. As a result, if John Smith and Michael Jones create the JSMJ General Partnership (“JSMJ”), and title is vested in JSMJ, a duly perfected judgment against JSMJ will be enforceable against the real property owned by that partnership. A judgment against John Smith as one of the principals of that partnership, however, would not attach to the partnership’s property.

It is therefore important to properly vest title in the partnership name, and not in the individuals creating the partnership. Let’s assume that John Smith and Michael Jones have created the JSMJ General Partnership to buy Whiteacre. Title to Whiteacre, however, is mistakenly vested in their individual names, and not in the name of the partnership. A certified copy of a $50,000.00 judgment against Michael Smith is then recorded in the public records of the county in which Whiteacre is located. The Smith judgment will then automatically attach to Michael Smith’s one-half interest in the investment property. If title had been vested in the JSMJ General Partnership, the judgment against Michael Smith would not have attached to Whiteacre.

What if a partner does not want to be personally liable for the debts of the partnership, while sharing in the profits of the business? Florida law permits the formation of a Limited Partnership, which is a form of legal entity by which there may be one or more general partners and one or more limited partners. Unlike a general partnership, a limited partnership cannot legally exist unless it is in writing and registered with the Florida Department of State. The name of the partnership itself must also end with the words “Limited Partnership”, “L.P.”, “Ltd.” or “LP”. In a validly formed limited partnership, each of the general partners will have the same rights and obligations of general partners in a general partnership. The limited partners however are passive investors (similar to shareholders in a corporation). The limited partner has no control over the partnership business, and also has no personal liability for any of the acts of the partnership. The Limited Partnership is generally the preferred form of partnership agreement for those investors who do not want to be held liable for the debts and obligations of the partnership.

Judgments against limited partnerships attach to all real property titled in the partnership name. Judgments against a person who may be either a general or limited partner in the partnership will not attach to the property that is vested in the limited partnership’s name.

In future articles we will discuss other forms of legal entities which can acquire real property, and the impact that judgment liens may have on those particular forms of ownership and their respective principals.

This Article is not a substitute for hiring an independent attorney to assist in the determination of the appropriate legal entity by which a purchaser should acquire title to real property.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank’s legal practice has concentrated on complex real estate, tax and corporate transactions throughout Central Florida. Frank has been involved in the Central Florida community for more than thirty years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M from New York University School of Law in 1980.

How Should Property Title Be Vested?

Winter Park Home Magazine / Issue 2 / 2013

Clients frequently ask how they should take title when purchasing real property. This question encompasses a consideration of the goals of each client, and if appropriate, the client’s need for asset protection.

If property is to be used as a primary residence, I generally advise that title be vested in the individuals’ names. This provides the buyers homestead protection from judgment creditors, and also allows the buyers to take advantage of the real property tax benefits associated with the homestead. If the buyers are husband and wife, and acquire title in their individual names, I typically recommend that the title be vested as husband and wife, in order to create a tenancy by the entireties. A tenancy by the entireties is a legal fiction, by which property is treated as owned by the married couple as a unit, and not in their individual capacities.

Judgments generally do not attach to homestead property. A judgment against one spouse, but not both spouses, also will not attach to entireties property. There are limited exceptions to this rule.  For example, under recent case law a federal tax lien against one spouse attaches not only to entireties property, but also to homestead property. Generally speaking, however, judgments and liens against one spouse do not attach to property owned as tenants by the entireties.

Another benefit of owning property as tenants by the entireties is the survivorship feature – at the death of the first spouse the entire interest in the property passes automatically to the surviving spouse, without the expense of probate. The only requirements to clear title in the surviving spouse is the recording of the death certificate of the deceased spouse, and the execution and recording of an affidavit establishing that the husband and wife were continuously married from the date they acquired title until the death of the deceased spouse.  

If the right of survivorship is not the couple’s intention, then an alternative form of tenancy should be recited in the deed. For example, the deed could state “to Michael Smith and Mary Smith, husband and wife, as tenants in common and not as tenants by the entireties.” In this example, Michael and Mary would each own a one-half undivided interest in the property. If Michael died, his one half interest in the property would need to be probated to determine the identity of his heirs, i.e the new owners of his one-half interest. The clearer the recitation of tenancy, therefore, the better the result. In this tenancy in common example, a judgment against either one of the spouses (unless the property is homestead) will attach to that spouse’s one-half interest in the property.

If no recitation is made concerning the form of tenancy, and the parties are married, then a tenancy by the entireties is presumed. If they are not married, and no form of tenancy is recited, the property will be owned as tenants in common. Divorce automatically terminates an entireties tenancy, and creates a tenancy in common. If the parties then remarry each other, the parties will remain as tenants in common unless a new deed from the parties to themselves is executed to recreate the tenancy by the entireties status.

A third alternative is to create a joint tenancy with full rights of survivorship, and is often used when purchasers are not married (to each other), and wish to create a survivorship benefit. For example, title is placed in Mary Smith and Amanda Johnson, as joint tenants with full rights of survivorship.  Each will own a one-half undivided interest in the property. Unlike a tenancy in common, however, if Mary Smith were to die, her interest would automatically pass to Amanda – without the need nor the expense of a probate proceeding. A judgment lien against Mary Smith, during her lifetime (again, assuming that the property is not homestead) would attach to her interest while she is alive. If a judgment creditor failed to enforce its lien against Mary during her lifetime, then the lien would be extinguished at the time of her death – due to the survivorship feature of the joint tenancy. This would also be true of any voluntary lien that Mary may place on joint tenancy property. Prior federal tax liens and estate taxes, if any, are the exceptions, and will attach to the property even after the death of Mary.

When purchasing non-homestead property, buyers often should consider the benefits of placing title in a legal entity to protect their individual assets. Examples of legal entities vary, and individuals should consult with their attorneys to determine which legal entity will best serve their purposes. Corporations, for example, are one alternative form of business ownership, and consist of shareholders, a board of directors, and officers who are appointed by the board members or shareholders. The President typically is authorized to bind the corporation, and can execute documents on behalf of the corporation.

Conceptually, only the corporation is liable for its debts and obligations. In the event of a judgment against the corporation, the shareholders, officers, and directors typically do not incur any individual liability. Judgments against the shareholders, directors, or officers of the corporation, when entered in their individual capacities, also do not attach to the property owned by the corporation. There are, of course, additional costs and fees associated with the creation of a corporation (as well as any other legal entity that may be created by the purchasers). In addition, individuals should consult with their attorneys and accountants to determine any additional income tax liability that may be imposed as a result of vesting title in a corporation, or any other legal entity.

Examples of other commonly used legal entities that can own real property are general partnerships, limited partnerships, limited liability companies, and limited liability limited partnerships. Florida law sets forth the guidelines, rules and regulations for each of these entities.

In my next article, I will describe the mechanics and benefits of these additional legal entities.

This Article is not a substitute for hiring an independent attorney

to assist in the determination of the appropriate legal entity by 
which a purchaser should acquire title to real property.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank’s legal practice has concentrated on complex real estate, tax and corporate transactions throughout Central Florida.  Frank has been involved in the Central Florida community for more than thirty years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M from New York University School of Law in 1980.

Encroachments Reflected By Surveys

Winter Park Home Magazine / Issue 1 / 2013

A grant of an easement by a property owner can often resolve disputes between neighbors resulting from encroachments of fences, driveways, and roof overhangs by one property owner onto another person’s property. An easement is a formal grant of permission by an owner of land in favor of the owner of a second parcel of land, which grants the second parcel owner the legal right to cross over and/or to utilize a portion of the first parcel owner’s land. An easement, however, also limits the rights of the parties, and in certain situations a transfer by deed may be preferable. The following example depicts certain considerations in determining whether a grant of easement or a conveyance by deed is the appropriate solution, and also emphasizes the fact that a contract purchaser should always obtain a survey prior to closing.

Five years ago Robert Smith purchased his home on Lot 1 in the XYZ subdivision. He paid cash, and opted to forego the expense of a survey. The house was situated inside the fences on the property. Mr. Smith was provided a title insurance policy at closing, and the general survey exceptions were reflected as an exception on Schedule B of his title policy. This effectively excluded coverage in his policy for any encroachments onto or from his neighbor's property that may have been reflected in a survey.

Last year Mr. Smith decided to make some home improvements, and contacted ABC Bank for a loan. The Lender indicated, as part of the loan approval process, that he would have to pay for a Lender’s title insurance policy and provide a copy of his survey. Since he never obtained a survey, Mr. Smith ordered a new survey which reflected  that the entire width of his house encroached 3 feet into Lot 2, and that the fence encroached an additional 4 feet beyond the edge of the house. The Lender then indicated that Mr. Smith's loan would not be approved unless he can establish that he owned, or had the right to use, this 7 foot strip of land.

Mr. Smith contacted me for advice. I advised Mr. Smith that he would not have a claim under his title insurance policy since the policy reflected the general survey exceptions. I also advised him that the owner of Lot 2 has no obligation to convey this strip or to grant an easement. I further advised Mr. Smith that his best case scenario is to have the owner of Lot 2 convey the 7 foot strip outright to Mr. Smith, and that the worst case scenario entailed Mr. Smith physically removing the fence and demolishing the portion of his house situated on Lot 2. In the event a portion of the house was demolished, Mr. Smith would also have to obtain permits from the building department to make the necessary changes to his home.

We then obtained title searches for each of the lots, and confirmed that Mr. Smith owns Lot 1, and that J.R. Jones owns Lot 2. The search also reflected one outstanding mortgage on Lot 2. Mr. Smith then authorized me to contact Mr. Jones directly to resolve the encroachment problem. 

Mr. Jones stated he was not aware of any encroachments, and that he would be constructing a home on his lot in the near future. He stated he was willing to convey the 7 foot strip outright, for an agreed sum, provided we obtained written confirmation from the building and zoning departments that this conveyance would not adversely impact his ability to construct a home on Lot 2. He also advised me to contact his attorney directly with the results.

The building department official indicated that each of the lots in the XYZ Subdivision are substandard in size, and that any reduction in the physical size of a lot, unless a variance was first obtained by that property owner, would result in the denial of a building permit for that lot. He could not guarantee, under the circumstances, that the variance would be approved.  I then asked whether the granting of an easement under the facts presented would require an approval by either the zoning or building departments, and he confirmed that no approval would be necessary.

I then contacted Mr. Jones' attorney, gave him the contact information for the building department, and asked him, after he talked with them, to determine whether his client would grant an easement instead of requiring a deed of conveyance. I also explained that his client had a mortgage on the property, and asked whether he would also contact his lender to obtain its consent to a grant of easement.

Ultimately Mr. Jones agreed to grant the easement, and to obtain the consent of his lender, provided Mr. Smith paid all costs and expenses incurred by Mr. Jones, and also provided Mr. Smith compensated him for the reduction in valuation of Lot 2 resulting from the grant of easement. The grant of easement that was finally approved also included language that the easement would automatically terminate in the event Mr. Smith's house were destroyed by fire or natural disaster, and that any new construction by Mr. Smith, or his successors in title, would have to be located within the platted lot lines of Lot 1.

The time and expense incurred by Mr. Smith could easily have been avoided if he had obtained a survey at the time of purchase.  Mr. Smith's predecessor in title would have been obligated to resolve these issues prior to their closing, and, if the issues were not resolved by the time of closing, Mr. Smith could have elected to terminate the contract and receive a return of his earnest money deposit.  These types of encroachments occur on a somewhat regular basis, and demonstrate the need for obtaining and reviewing a survey prior to closing. 

This Article is not a substitute for hiring an independent attorney

to prepare an easement or deed across real property.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank’s legal practice has concentrated on complex real estate, tax and corporate transactions throughout Central Florida.  Frank has been involved in the Central Florida community for more than thirty years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980.

Use of Easements

Winter Park Home Magazine / Issue 3 / 2012

An easement is a grant of permission by the owner of land (known as the subservient estate) in favor of the owner of a different parcel of land (known as the dominant estate) to cross over and/or use a portion of the subservient estate. Since it transfers an interest in real property, it must be executed and recorded with the same formalities as a deed (i.e. before two witnesses and a notary public), and be signed by all parties having a record interest in the subservient estate. This article addresses the procedural steps to be undertaken when adjoining property owners have determined that an encroachment exists, and the parties have agreed overall to the terms and conditions of the easement to be granted.

First, the parties need to determine whether there is a need for an easement. For example, John Smith and Mary Smith own Parcel A, and Michael Jones owns the adjoining Parcel B. Mr. Jones' concrete driveway encroaches two feet in width into the Smiths' property. There is no prior grant of easement of record authorizing this encroachment. Previously the Smiths verbally consented to Mr. Jones' use of the encroaching driveway area. Mr. Jones, however, is concerned whether he will be able to continue to use this encroachment area, especially if the Smiths were to later sell their property.

The Smiths can withdraw their verbal permission at any time, and under the facts presented, the Smiths have no obligation to continue to grant him permission to use the encroaching portion of the driveway. Absent a written grant of easement, the Smiths could bring a judicial action to make Mr. Jones remove the encroaching portion of the driveway. The Smiths are willing to execute and record a written grant of easement.

First, a title search of the Smiths' property should be performed and reviewed in order to confirm that the Smiths are in fact the owners of Parcel A, and also to determine whether there are any mortgages or other liens against the Smiths' property. In the event there are any mortgages or liens existing against the Smiths' property, those lenders or lien holders will need to provide their consent and subordinate their interests to the grant of easement. Otherwise, for example, if there is a prior mortgage on the Smiths' property and the lender’s consent is not obtained, a subsequent foreclosure of that mortgage would extinguish the grant of easement by the Smiths.

After review, the title search report confirms that the Smiths own Parcel A. The title report also reflects one mortgage on the property. Mr. Smith has spoken with his mortgage loan officer, and he does not anticipate any problem in obtaining the requisite consent.

The parameters and scope of the easement need to be determined. It is not sufficient to merely recite that there is an encroachment – its exact location must be established on the public record. A complete legal description of the easement area should be provided by a licensed surveyor – to be included in the grant of easement. A survey of Mr. Jones’ property was obtained at the time of purchase. Mr. Jones will need to contact his surveyor and obtain the appropriate legal description of the encroachment area.

The Smiths intend to impose limitations on the grant of easement. They not only want Mr. Jones, and his successors in interest, to maintain the driveway at all times in its current condition, but also the Smiths want the right to use this 2-foot strip in conjunction with their own abutting driveway. This is a reasonable request, especially in light of the fact that Mr. Jones property is the one encroaching on the Smiths’ property. This might create some logistical problems when, and if, it becomes necessary for Mr. Jones to resurface his driveway. Language will need to be included in the easement document describing all of the conditions requested by the Smiths.

In conjunction with this maintenance requirement, the Smiths also want the easement to automatically terminate if Mr. Jones fails to properly maintain his portion of the driveway. The better practice would be to provide specific language by which an examiner on the public record can determine whether the easement remains in full force and effect. Although various options are available, it is determined that the easement will provide that the parties must execute and record a formal termination of the easement if the easement is no longer needed by Mr. Jones, or if the driveway is not properly maintained.

It is readily apparent there are many factors to consider in preparing and recording an easement across real property. All interested parties should consult with a qualified real estate attorney to protect their interests before executing any document which impacts their respective interests in land that they own.

This Article is not a substitute for hiring an independent attorney to prepare an easement across real property.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.