Teaching the Rule Against Perpetuities?

Professor Ilya Somin, George Mason University School of Law, is thinking of not teaching the Rule Against Perpetuities: Should We Teach Law Students the Rule Against Perpetuities?

"In legal circles, the RAP is virtually a byword for abstruse complexity,
and is traditionally one of the most hated parts of the law school curriculum.
Forcing law students to learn it is almost a form of hazing, much like making
them learn the Blue Book."

Rotating Skyscraper

Not content with having the tallest building, now Dubai wants a building that spins.

Plans are underway for a 68- story combination hotel, apartment and office tower. Each floor can turn separately, so the building will be changing shape.


It looks great in this video, with the shape undulating. It looks like crap in the picture on Dubaicity.com. Each floor would take 90 minutes to rotate.

This is actually the second spinning building planned for Dubai. The first is a mere 30 story 200 unit condominium tower that rotates once per week.

Construction is scheduled to begin in June, 2008.

Turning a Debt into A Personal Guaranty

In the case of Orix Financial Services, Inc. v. Leclair (S.D.N.Y. Feb 26, 2007) the court found that under Rhode Island law, an individual who assumes to be acting for a corporation without authority to do so is liable for all debts arising from the action.

Mr. Leclair defaulted under his obligation under a note. The maker of the note was "Brian Leclair DBA T and D Excavating Co." Unfortunately for Mr. Leclair, the charter for T and D had beeen revoked two year prior to the execution of the note.

Under R.I. Gen. laws Section 7-1.2-1801: "All individuals who assume to act as a corporation without authority so to do are jointly and severally liable for all debts and liabilities incurred or arising as a result of that action."

Debt Market Update - LIBOR Upswing

I got this update from Chatham Financial this morning:

As many of you may have already heard, 1M LIBOR opened up 19bps this morning. This is, of course, a very sudden change particularly after a very stable year of LIBOR trading in the low 5.30's. This market movement demonstrates the reaction of many dealer banks after BNP Paribas halted withdraws from 3 funds that hold US subprime mortgage investments and NIBC (a Dutch bank) announced US$189mm in actual losses. This is the first significant news of US subprime markets impacting European banks. The European Central Bank, responding to an urgent demand for cash from banks affected by the subprime mortgage collapse in the U.S., loaned $130.2 billion (EUR 94.8bn) to assuage a credit crunch. For your reference, below is a current chart of some of the numbers that you may be interested in. As always, please feel free to call Chatham to discuss further.

Chatham Financial
235 Whitehorse Lane
Kennett Square, PA 19348
T: 610.925.3120
F: 610.925.3125
http://www.chathamfinancial.com/

Debt Markets Continue to Implode

Real Estate Finance and Investment is reporting that five securitizations worth at least $4.8 billion have been pulled from the market in the last week.

So far this does not seem to have much impact on pricing of commercial real estate. Surely, less debt is available and the pricing is less favorable, but there is still gobs of capital dedicated to real estate that are looking for investments. Highly leveraged deals and buyers relying on lots of debt are running into trouble. WSJ.com is reporting that the parties have extended the closing for the Tischman Speyer / Lehman acquisition of Archstone-Smith.

The debt markets are continuing to crush the residential real estate market. American Home Mortgage Investment has gone belly-up, National City has stopped offering some products through brokers and now jumbo loans are running into trouble: Mortgage Fears Drive Up Rates on Jumbo Loans (WSJ.com $$).

The problem with the jumbo loans is that they cannot be purchased and guarantied by Fannie Mae or Freddie Mac. That limts the resale value of the debt and the securitizations of the loans.

Building the Tallest Building

Younan Properties seems to think it can build the tallest building in the world: Younan Vows To Build Tallest Building. Of course they have not selected a city or a site to build on yet. Nor does it appear that they have the financing to build it.

It was a good way to get your name in the paper.

Meanwhile, my gas money has allowed Emaar Properties of Dubai to build the Burj Dubai Tower.



It is still under construction, but on July 24 the had steel up to 512.1 meters making it the world's tallest building. But they are still going and expect to reach a height of 700 meters. The tower is scheduled to open late next year.

According to the website for the tower, the goal "is not simply to be the world's highest building. It's to embody the world's highest aspirations."

Prior to the Burj Dubai, the world's tallest building was Taiwan's Taipei 101. It is a mere 508 meters tall.

Acceleration Clause Upheld For Lease Default

The Massachusetts Supreme Judicial Court allowed a commercial landlord to enforce a liquidated damages clause against a tenant for non-payment of rent in Cummings Properties, LLC vs. National Communications Corporation (SJC Docket 09778. July 17, 2007).

The tenant had argued that the liquidated damages clause was unenforceable under Commissioner of Insurance v. Massachusetts Acc Co., 310 Mass. 769 (1942). That case barred enforcement of a liquidated damages provision that, by the terms of the lease, could apply to both trivial as well as material breaches.

A contract provision that clearly and reasonably establishing liquidated damages should be enforced so long as it is not so disproportionate to anticipated damages as to constitute a penalty. If, at the time the contract was made, actual damages were difficult to ascertain and the sum agreed on by the parties as liquidated damages represents a reasonable forecast of damages expected to occur in the event of a breach, it will usually be enforced. TAL Fin. Corp. v. CSC Consulting, Inc., 446 Mass. 422 (2006).

A rent acceleration clause, in which a defaulting lessee is required to pay the lessor the entire amount of the remaining rent due under the lease, may constitute an enforceable liquidated damages provision so long as it is not a penalty.

The SJC modified "their holding in Commissioner of Ins. to the extent that in the case of a commercial agreement between sophisticated parties containing a liquidated damages provision applicable to breaches of multiple covenants, it may be presumed that the parties intended the provision to apply only to those material breaches for which it may properly be enforced. This modification is consistent with the goal of resolving disputes "efficiently by making it unnecessary to wait until actual damages from a breach are proved" and helps to eliminate uncertainty and costly litigation. Kelly v. Marx, 428 Mass. 877, 881 (1999). It is also consistent with the intention of the parties in the present case as expressed in the language they agreed to in the liquidated damages and severability clauses of the lease."

Trustee of Nominee Trust Not Liable Under Lead Paint Suit

The Massachusetts Appeals Court ruled in the case of BELLEMARE vs. CLERMONT that the trustee of a nominee trust is not an "owner" of the property under the Childhood Lead Poisoning Prevention and Control Law (MGL c. 111 s. 189A et seq.).

Under a nominee trust in Massachusetts, the trustee may only act at the direction of the beneficiaries of the trust. The trustee has no independent authority. The trustee is better thought of as an agent of the beneficiary of the trust. As an agent, the trustee holds bare legal title.

In 1993, the legislature added the definition of "owner" to the Section 189A:

“Owner”, any person who alone or jointly or severally with others (i) has legal title to any premises; (ii) has charge or control of any premises as an agent who has authority to expend money for compliance with the state sanitary code, executor, administrator, trustee or guardian of the estate or the holder of legal title; (iii) is an estate or trust of which such premises is a part, or the grantor or beneficiary of such an estate or trust; or (iv) is the association of unit owners of a condominium or cooperative, which shall be considered an owner solely with respect to common areas and exterior surfaces and fixtures of such condominium or cooperative; provided, however, that the term “owner” shall not include a secured lender except to the extent provided in section one hundred and ninety-seven D.

Prior to 1993, there was no definition of owner in the statute. The plaintiffs were harmed prior to 1993.

Even though the current version of the statute would indicate that a trustee of a nominee trust could be held liable, the Court held that the definition of "owner" should "not be read out of context and employed to impose liability on one who is effectively an agent for a principal; who possesses "only the barest incidents of ownership," Morrison v. Lennett, 415 Mass. at 861; and who neither controls the property nor benefits from its ownership." The Court rejected a literal reading of the statute because it produces an absurd result.

The plaintiff should have filed suit against the trustee and the beneficiary of the trust. The trustee would be dismissed from the suit, but could be compelled to reveal the identity of the benficiary of the trust.

Bad Boy Guaranty

Bruce Falby wrote an article in Real Estate Finance and Investment on the case of Blue Hills Office Park LLC v. J.P. Morgan Chase Bank, as Trustee for the Registered Holders of Credit Suisse First Boston Mortgage Securities Corp., Commercial Mortgage Pass-Through Certificates, Series 1999-C1, and CSFB 1999­C1 Royall Street, LLC.

Don't Mess With the Collateral: A Cautionary Tale

The significance of the case is that the court enforced a "bad boy" non-recourse carve-out guaranty against principals of a borrower.

Full guaranty of real estate loans is rare these days. However, lenders do generally require a bad-boy guaranty from principals of the borrower. The guaranty will trigger full recourse against the borrower and its principals in cases of fraud, misapplication of funds, transfers of the mortgaged property or other egregious behavior. Sometimes the guaranty will be limited to the amount of damages, rather than a full guaranty of the debt.

In the Blue Hills case, the borrower settled a zoning dispute with a neighboring property. The principals pocketed the $2 million cash settlement, rather than depositing the settlement into the borrower's account. With the zoning dispute settled, the neighboring property owner was able to complete its property. The single tenant of the borrower's property did not renew its lease and moved into the neighboring property. With no tenant and no rent payments, the borrower stopped making payments on its mortgage loan and the lender foreclosed.

The lender was not happy to find out that the principals pocketed the $2 million rather than making it available to the borrower to pay the mortgage loan.

The court found that under the language of the loan documents the $2 million settlement for the zoning dispute was part of the collateral for the mortgage loan. Therefore, the borrower and principals transferred a portion of the collateral in violation of the loan documents. As drafted, the bad boy guaranty made the principals liable for the full amount of the debt in the case of an unauthorized transfer of any portion of the collateral. Therefore the principals were liable for the $17.5 million loss of the lender.

This case is the first I have seen that enforced a bad bay guaranty. It should be no surprise that it was found to be enforceable. The case also makes it clear that the collateral for a mortgage loan can be more than just the real estate, in this case, a lawsuit affecting the property.

By messing with the collateral, the principals turned their $2 million windfall into a $17.5 million loss.

Boston's Historic Ames Building Will Become Boutique Hotel

The Ames Building on the corner of Court Street and the Washington Mall has changed hands to another owner who will try to convert it to a hotel: Boston's Historic Ames Building Will Become Boutique Hotel. Previously, O'Callaghan Hotels was trying to convert the property into a hotel.


The Ames building stands out because of its masonry construction. Take a look at the enormous columns at the base of the building. Those are load-bearing supports. The Ames Building was built prior to wider-spread use of structural steel in building construction. All of that thick stone on the exterior is carrying the weight of the building.