On behalf of Jenner & Block’s Real Estate Litigation and Counseling Group, we are pleased to present our first quarterly newsletter. This newsletter is designed to inform lawyers and business leaders about key legal developments affecting REITs, developers, brokers, investors, contractors, tenants and other real estate industry participants. In this edition, we cover topics affecting these industry players:
- Developers: California and Illinois litigation concerning development rights
- Mortgage, design and construction firms: federal fair housing litigation involving significant alleged damages
- Leaseholders: Utah court decision allocating eminent domain compensation based on lease termination language
- Landlords: litigation concerning federal lease procurement process
California Court Green Lights Surplus Land Act Suit Seeking to Prevent Los Angeles Clippers from Building Arena
Under a consequential California court decision interpreting California’s Surplus Land Act (SLA), developers seeking to develop land controlled by a California local agency should ensure that the agency has complied with the SLA prior to entering into any agreement with the agency requiring exclusive negotiations. The SLA generally provides that any local agency “disposing of surplus land” must send, prior to disposing of that property, a written offer to sell or lease the property to any local public entity supporting low or moderate income housing.
In June 2017, the city of Inglewood approved an exclusive negotiating agreement with a developer involving the potential sale of parcels of land to build an NBA arena for the Los Angeles Clippers. Some of the parcels were owned by the city and some were privately owned and would need to be obtained through eminent domain. In June 2018, a private organization known as “Uplift Inglewood Coalition” filed a lawsuit seeking to compel compliance with the SLA.
The plaintiff alleged that the city violated the SLA by agreeing to negotiate exclusively with the developer, which would preclude the city from providing an offer to a low-income housing public entity, as required by the SLA. The developer moved to dismiss on the ground that the SLA only requires sending a written offer upon “disposition” of property or an agreement to dispose of property, while the developer and city had only entered into contract to negotiate exclusively. The plaintiff argued that the SLA requires a written offer upon a local agency’s “wish” or “intent” to sell surplus land, or in the alternative, when an agency has “manifested intent to sell surplus land.”
The court held that the meaning of “disposing of surplus land” in the statute was ambiguous, and therefore evaluated the legislative history and purpose of the statute. The court concluded that “it is reasonable to interpret the SLA to apply when an agency has manifested intent to sell surplus land” and denied the motion to dismiss the SLA claim. The court specifically noted that the developer did not address the legislative history or other extrinsic aids to interpret the proper construction of the SLA—a reminder of the importance of gathering and using extrinsic evidence to interpret a statute where the plain meaning is arguably ambiguous.
The case is Uplift Inglewood Coalition v. City of Inglewood, et al., No. BS172771 (Sup. Ct. Ca., Cty. of L.A.)
Developer Sues Village of Lincolnwood and Its President for Allegedly Preventing It from Redeveloping the “Purple Hotel” in Lincolnwood, Illinois
The site of the “Purple Hotel”—renowned for its purple façade and infamous for the 1983 murder of alleged mobster Allen Dorfman in the hotel’s parking lot—is at the center of a lawsuit related to recent redevelopment efforts. A complaint recently filed in Illinois federal court against the Village of Lincolnwood by a developer who lost its bid to redevelop the hotel site highlights some of the challenges and risks developers face in working with local governments in high profile developments.
Developer Lake Forest Real Estate Investors LLC alleges it was under contract to purchase and redevelop the Purple Hotel site, but the Village and Village president, Barry Bass, took steps to obstruct the developer’s efforts to buy the property “as part of a scheme to displace [it] as the contract purchaser of the property.” The developer brought claims against the Village for violations of its procedural and substantive due process rights, equal protection violations, and intentional tortious interference with prospective economic advantage. The developer seeks damages of $25.5 million for lost profits and other expenses.
According to the complaint, the Village was initially supportive of the developer buying the property, but later “attempted to dissuade the seller from entering into the purchase and sale agreement, favoring instead one of Bass’s colleagues and then repeatedly interfered with the plaintiffs contract rights.” The developer alleges that pressure from the Village caused it to lose its contract with the seller. Soon after, the developer alleges, the Village began supporting another buyer, including by repealing and staying certain ordnances that had impeded the developer’s efforts.
The case is Lake Forest Real Estate Investors, LLC v. Village of Lincolnwood And Barry I. Bass, No. 19- cv-2263 (N.D. Ill.), assigned to Judge Charles Kocoras.
11th Circuit Holds City of Miami’s Fair Housing Act Suit against Wells Fargo and Bank of America for Damages to Its Tax Base Can Proceed
A recent opinion by the Eleventh Circuit potentially opens the door to lawsuits by municipalities against lending institutions for claimed losses of property tax revenue stemming from alleged violations of the Fair Housing Act. In an opinion defining the limits of proximate cause under the FHA, the Eleventh Circuit held that claims for damages to Miami’s tax base for alleged FHA violations by Wells Fargo and Bank of America could proceed.
The city had alleged that the banks violated the FHA by engaging in discriminatory mortgage lending practices, including extending credit on predatory and unfair terms. The alleged result was that minorityowned borrowers suffered foreclosures faster and more frequently than did non-minorities, resulting in: (1) loss in value to the foreclosed properties and neighboring properties; (2) increased expenses for municipal services the city provided to deal with problems attributable to foreclosed and vacant properties, including police, firefighters, building inspectors and debris collectors.
Prior to the Eleventh Circuit’s decision, the Supreme Court held in 2017 in the same litigation that proximate cause under the FHA required “some direct relation between the injury asserted and the injurious conduct alleged,” in addition to foreseeability. But the Supreme Court declined to “draw the precise boundaries of proximate cause under the FHA,” leaving the issue for the lower courts.
On remand, the Eleventh Circuit held that the city adequately pled proximate cause by alleging a “substantial injury to its tax base that is not just reasonably foreseeable, but also is necessarily and directly connected to the Banks’ conduct.” However, the court denied the City’s claim for increased expenditures for municipal services because the complaints did not explain how those injuries “are anything more than merely foreseeable consequences of redlining and reverse-redlining” and “there is too much opportunity in the causal chain between foreclosure and increased expenditures for intervening actors and causes to play a role.
” The Eleventh Circuit’s decision contrasts with a 2018 decision in the Northern District of Illinois in a case between Cook County and HSBC. In that case, the district court dismissed a claim for lost property tax revenue as too “indirect” due to “a number of intervening factors.”
The Eleventh Circuit cases are City of Miami v. Wells Fargo & Co., No. 14-14544; City of Miami v. Bank of America Corp., No 14-14543; 2019 WL 1966943 (11th Cir. May 3, 2019).
Lease Provision Terminating Lease in Eminent Domain Context Precludes Condemnation Award to Tenant
A recent ruling by the Utah Supreme Court highlights the allocation of risk between landlords and lessees in the context of condemnation actions where leases contain a “termination clause,” terminating the lease in the event a public authority exercises its eminent domain authority. In this case, the Utah Department of Transportation (UDOT) exercised its eminent domain power to condemn an access point to a shopping center owned by FPA West Point, LLC (FPA), which leased buildings in the shopping center to several businesses including Kmart. Both FPA and Kmart asserted rights to “just compensation” in the condemnation proceeding.
The condemnation provision in the lease at issue contained a “termination clause” that provided that the lease would terminate in the event any “points of ingress and egress to the public roadways” are “materially impaired by a public authority.” UDOT argued that the termination provision precluded any condemnation award to Kmart because the lease terminated upon condemnation, extinguishing any property right for Kmart as tenant. The trial court, however, entered a condemnation award in favor of Kmart of $1.4 million.
The Utah Supreme Court rejected that award. While recognizing the general rule that “a lessee is entitled to a condemnation award if the value of its leasehold is diminished or terminated by a governmental exercise of the eminent domain power,” the Court adopted the rule followed in other jurisdictions that, where a lease has a termination clause, “the lessee is not entitled to a condemnation award in the event of a condemnation, because any continuing interest in the leased property . . . has been extinguished under the lease agreement’s terms.”
The Court held that this result was consistent with eminent domain principles, which require a plaintiff seeking “just compensation” to make an initial showing that it has a “protectable property interest in the property,” which Kmart no longer had upon the condemnation due to the Lease’s termination clause. The Court also found that its ruling was consistent with contract principles, which allow contracting parties to apportion risk of future events: “By agreeing to the inclusion of a termination clause, the lessee is freed from the risk of any continuing obligations under the lease agreement, and the lessor is guaranteed a condemnation award for its reversionary interest in the leased property.”
The case is Utah Department of Transportation v. Kmart Corp., 438 P.3d 118 (Utah 2018).
Design and Construction Firms
Federal Authorities Sue Ohio-Based Real Estate and Construction Company Miller-Valentine for Alleged Fair Housing and ADA Violations in 13 States
A recent complaint by federal authorities against a national real estate and construction company for alleged violations of the Fair Housing Act (FHA) and Americans with Disabilities Act (ADA) serves as a reminder to landlords and construction companies to ensure that their properties comply with federal law. A complaint filed on May 9, 2019 by the US Attorney’s Office for the Southern District of Ohio and the Civil Rights Division of the Department of Justice seeks injunctive relief, monetary damages and civil penalties for alleged violations of the FHA and ADA at 82 apartment complexes, comprising more than 3,000 rental units in 13 states, that were designed and built by Ohio-based Miller-Valentine.
According to the complaint, most of the properties are required to meet accessibility criteria under the FHA because they were built with the assistance of federal programs intended to promote affordable housing for lower-income populations, the elderly and persons with disabilities. Additionally, many of the properties contain “places of public accommodation,” triggering accessibility requirements under the ADA. The complaint alleges the properties lack accessibility features required by the FHA and ADA, including that the properties contain “numerous, egregious accessibility barriers, including steps, inaccessible routes, and kitchens and bathrooms in units with inaccessible features and a lack of space for wheelchair users to maneuver.” The lawsuit seeks declaratory relief, an injunction requiring the defendants to bring the properties into compliance with the FHA and the ADA, monetary damages to persons allegedly harmed by the accessibility issues, and civil penalties to the United States.
The case is US v. Miller-Valentine Operations, Inc., et al., No. 19-cv-00346-TSB (S.D. Ohio).
Landlord for SEC Headquarters Files Federal Claims Bid Protest, Challenging Proposed Lease Terms
The current landlord entities for the US Securities and Exchange Commission’s headquarters are protesting the terms of the SEC’s new headquarters lease as a violation of federal procurement law. The lawsuit illustrates the unique rights landlords may have to challenge the terms of requests for proposals under federal procurement law when bidding for leases with federal agencies.
According to a complaint filed in April 2019 in the US Court of Federal Claims, in July 2018, the United States General Services Administration issued a Request for Lease Proposal (RLP) for a 15-year lease with a 10-year option for commercial office space in Washington, DC to serve as the SEC’s headquarters. The RLP required the proposal to contain a fixed-price purchase option, offering the property for sale to GSA (or any assignee of GSA) at both 15 and 25 years out, at prices established at the time of lease, as opposed to the date on which the option would be exercised.
The current landlord argued the purchase option violated federal procurement law, which dictates that agency actions cannot be arbitrary or capricious, determinations of pricing prior to rendering an award must be “fair and reasonable,” and that agencies promote “full and open competition” in soliciting proposals. Namely, the landlord argued the purchase option “is completely out of step with commercial real estate practice and, as a procurement matter, goes beyond what is reasonably necessary to effectuate the [SEC]’s stated requirement” because the future fair market value is “not capable of being forecasted at this point.”
The landlord alleged, therefore, that any offeror would be forced to accept as a condition of bidding “a real and substantial risk that they will be forced to sell their property to the Government for significantly less than fair market value”—which would translate into an “undue windfall” for GSA. Moreover, the landlord alleged GSA admitted that, if the price is above market value in 15 or 25 years, GSA would not exercise the purchase option, but would re-negotiate at that point or condemn, which would result in the government paying fair market value for the property. Therefore, the landlord alleged the purchase option “completely untethers the future real estate transaction from fair market value, which is the central underpinning of any rational land acquisition.”
The case is Second Street Holdings LLC et al. v. US, No. 1:19-cv-00473 (Ct. Fed. Cl.).