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Beyond The Legalese

The Pluses and Pitfalls of Airbnb

7/30/2015

 
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Legal analysis is certainly not something that comes to mind when planning a vacation.  However, with the increasing popularity of finding accommodations via an online service called Airbnb, you might need to hire a lawyer before booking a place to stay or, more importantly, deciding to rent that spare room in your home to an overseas vacationer.

Airbnb operates a website that allows people to find hosts in cities in close to 200 countries around the world.  It is one of the growing number of companies active in what many refer to as today’s “sharing economy,” which involves “cloud-based platforms that establish a market between individuals” according to Freakonomics co-author Stephen J. Dubner.  Instead of booking a hotel room in a new or unfamiliar neighborhood, travelers use Airbnb to help connect them to potential hosts in their desired area, in whose home or rental property they can stay—usually at a rate far less than what a mainstream hotel costs.

This may seem like a win-win situation.  Visitors keep their travel expenditures down and hosts have an income stream to help cover their own expenses.  However, there are a number of considerations that could spell trouble for either or both of the parties.  In a typical hotel environment, for example, building codes dictate that the facility adhere to certain safety standards in terms of fire exits, informative signage, emergency-lit pathways, and the like.  The rationale is that transient guests are not familiar with their surroundings and need clear and immediately understandable instructions in case of emergency.  Joe Neighbor’s residential apartment on East 8th Street does not offer the same safeguards to the short-term guests passing through his doors.  This could pose a significant safety hazard in the event of an emergency.  The liability for injury or death may lie squarely on the owner of the dwelling in such a scenario.

Which brings us to another potential issue that may arise with this hosting model: Tenants who decide to list “their” apartments (or rooms therein) on Airbnb, without express permission from their landlords (a.k.a. the actual owners of the residence).  Depending upon the language in the lease, as well as any state regulations in effect, operating an ad hoc bed-and-breakfast may violate the lease, put one at risk of eviction, and/or incur significant fines (even if the host is the actual property owner).  Many states, including New York, have an “illegal hotel law” which, among other things, prohibits residents from accepting payment for houseguests who stay for fewer than 30 days, especially if the host is not present during their stay.  See New York State Multiple Dwelling Law § 4(8)(a).  Additionally, New York City imposes a 5.875 percent occupancy tax on hotel and other short-term room rentals.  To resolve the tax issue, Airbnb has been rolling out official automatic collection of a Transient Occupancy Tax, or “hotel tax,” in some of its service areas.

Before listing as a host on Airbnb, individuals should do their due diligence not only on their guest but to ascertain that their plans will not constitute a violation of their lease or of their location’s building safety and tax laws—laws which are now being revisited because of how widespread the service has become.

A Few Tips to Help Sellers Avoid Omissions in Commercial Real Estate Contracts

4/30/2015

 
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Sometimes, what you don’t know can hurt you.

Preparation of a commercial real estate purchase agreement can be challenging for the inexperienced.  Although the parties will generally have reached agreement on the price, the devil is in the details.  The first draft of the contract is often the buyer’s responsibility.  The seller's attorney must then revise the agreement to ensure maximum protection for the client.  Aside from revising the purchaser's draft agreement, it is important to determine what provisions are missing from the purchaser's draft.  Buyers often leave out certain provisions which are to their disadvantage.  Below are a few suggested provisions that are important for sellers to keep in mind when examining their real estate contracts.  If the following items are not addressed in your potential buyer’s proposed draft, then you should consider including them.
  • “Time is of the essence” clause:  This helps buyers from dragging their heels during the sales process.  Include a hard deadline after which point, if the sale has not yet closed, the seller may pursue other buyers for the property.
  • Clarify term of representations and warranties:  The buyer’s draft will contain a laundry list of seller representations and warranties.  If the draft agreement is silent as to whether the seller’s representations and warranties survive closing, a seller should not allow the issue to remain ambiguous.  The seller should add language stating that its representation and warranties do not survive at all or that its representations and warranties survive for an agreed upon period but no longer.  Whether the buyer will accept a clause that limits survival is a topic of negotiation that will depend on the negotiating power of the two sides.
  • To the best of seller's knowledge:  While the representations of the buyer's draft agreement will generally be unqualified, the seller will often qualify the representations as being "to the best of seller's knowledge."  The seller's modification is certainly better than an unqualified representation, but such language could be interpreted as requiring the seller to investigate the facts of the clause at issue or be charged with constructive knowledge based on the knowledge of its employees.  To avoid these uncertainties, it is recommended that the seller include a definition of knowledge which limits knowledge to the actual, subjective knowledge of a named individual and expressly excludes constructive knowledge, imputed knowledge and any duty to investigate.  Once defined, the same knowledge language should be used throughout the contract where a representation of knowledge is called for. 
  • Binding only once fully-executed:  There is some support to the argument that versions of an agreement that were passed back and forth--over email or otherwise—could be considered legally-binding contracts, even without there being a final approved and signed version.  Therefore, it is recommended that the seller include language making it clear that the document draft is not an enforceable contract until and unless both parties have executed the final version of the agreement.
These are a few recommendations.  Attorneys for both sellers and buyers may want to create a checklist of issues so that nothing is left to chance.  Future blog posts may feature additional provisions that should be considered by parties negotiating commercial real estate contracts.  

Regulators Ease Mortgage Standards in Hopes of Rebuilding the Housing Market

10/31/2014

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Ever since the housing market collapsed around 2007, many lenders (and borrowers) went into somewhat of a crisis-mode.  There has been a significant drop in refinanced loans, and home sales in the U.S., though rising gradually, are still lower than they have been in years past.  Lenders were reluctant to approve mortgages as borrowers were defaulting left and right as a result of any number of unfortunate financial circumstances—whether due to mismanagement on their own part or on the part of the entities from whom they’d borrowed to begin with.  People on both sides of the banker’s desk were generally skittish about real estate financing, and tightened lending restrictions were a large contributing factor.  High-quality “qualified residential mortgages” often required a minimum 20% down payment, which made it significantly more difficult for lower-income families or those with weak credit to buy a home.  In order to be flexible and accept a lower down payment, according to a proposal in the original 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, banks would have to assume 5% of that mortgage’s risk.

Last week, however, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency and the Federal Housing Finance Agency (FHFA) agreed to relax the down payment obligation, so that consumers would no longer have to cough up 20% at the outset.  A lender does, however, need to verify that borrowers have a favorable debt-to-income ratio, so that they can be reasonably counted upon to repay their loans.  (If the borrower’s debt threshold is 43% or lower, the bank can similarly avoid having to take on that 5% risk, as well.)  According to the FHFA, some mortgage companies—such as Fannie Mae and Freddie Mac—may even guarantee loans with down payments as low as 3%.

There are those who are critical of the federal government’s seemingly increasing involvement in the housing system; some fear that the recent officially-sanctioned mortgage leniency might bring about the same bubble-to-bust pattern that we saw after the lax borrowing and lending practices caught up with the housing market and brought it crashing down less than a decade ago.  FDIC chairman Martin Gruenberg (as reported in the Wall Street Journal), however, is confident that the new regulation “’promotes compliance’ and minimizes costs for lenders by providing a unified federal standard for mortgage lending.”  Likewise, Julia Gordon, director of housing policy at the liberal Center for American Progress confirmed that research has established that “low- down-payment loans to lower-wealth borrowers perform very well if the mortgages are well-underwritten, safe and sustainable.”

The new mortgage standard is scheduled to go into effect this time next year, and its influence on the economy will be evaluated regularly thereafter.  According to a statement released by the FHFA, they believe that the implementation of this policy “means more clarity for lenders and encourages safe and sound lending to creditworthy borrowers.”

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The Latest on "Bad Boy" Guaranties

8/27/2014

 
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Many commercial loan packages involve the signing of non-recourse, otherwise known as “bad boy,” guaranties.  Since the guarantor is often the principal of the borrower, the guarantor typically signs the “bad boy” guaranty assuming that the guarantors assets are not really at risk if the loan goes into default.  However, this assumption is far from the case because the “bad boy” events that trigger guarantor liability are usually not limited to fraudulent conduct, but other less pernicious conduct such as the borrower’s filing of bankruptcy, failure to pay taxes or maintain insurance.  Because the guarantor’s personal assets are potentially on the hook in these circumstances, it is critical that loan participants carefully negotiate the recourse provisions of the loan agreement.  Ambiguities often lead to contentious litigation . . . and more often than not, courts have sided with lenders.
 
Judge Deborah A. Batts of the Southern District of New York recently disrupted that cycle earlier this year when she decided that the defendant guarantor was not liable for payment of a loan balance after the property had gone into foreclosure.  See CP III Rincon Towers Inc. v. Cohen, 2014 WL 1357323 (S.D.N.Y. Apr. 7, 2014).  The Court held, inter alia, that various mechanic’s and judgment liens that encumbered the property were not “voluntary” and therefore did not trigger the guarantor’s full recourse liability under a “bad boy” provision that applied to “voluntary” liens.  By contrast, for a decision in which a lender successfully recovered against a guarantor on summary judgment, see Greenwich Capital Financial Products, Inc. v. Negrin, 74 A.D.3d 413 (1st Dep’t 2010), which was litigated by, among others, a member of our office while at his prior law firm.


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