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The Global Warming Solutions Act’s Mandate to Reduce Greenhouse Gas Emissions: A Fool’s Errand?

The Massachusetts Supreme Judicial Court (Massachusetts’ highest court) recently concluded that the Massachusetts Department of Environmental Protection (“DEP”) failed to adequately comply with the Global Warming Solutions Act because it did not adopt regulations that would mandate a 25% reduction in greenhouse gas emissions by 2020.  Kain v. Department of Environmental Protection

The Court found that the DEP is required under the Act to “promulgate regulations establishing a desired level of declining annual aggregate emission limits for sources or categories of sources that emit greenhouse gas emissions.” The Act required that a level of reduction of between 10% and 25% from 1990 levels be chosen, and a prior administration had chosen a reduction level of 25%.  Based on the commitment to this reduction, the Court looked at whether programs to meet this selected reduction level had been put in place.

The Court looked at three programs that the DEP relied on as fulfilling the Act’s requirement to reduce greenhouse gas emissions: participation in the Regional Greenhouse Gas Initiative (“RGGI”), which caps greenhouse emissions from power plants over a nine state area; a low emission vehicle (“LEV”) incentive program; and sulfur hexafluoride leak regulations designed to reduce emissions of a very potent greenhouse gas connected with the electric distribution system. One difficulty right off the bat was that these programs only anticipated an 18% reduction in emissions, and much of the decision centers around whether this 25% reduction was an aspirational “target” or a “mandate”. The Court concluded that this was now a mandate.

The Court found all three of these programs to be helpful measures that would likely reduce emissions, but ruled that they did not meet the statutory requirements of the Act to mandate greenhouse gas reductions that would meet the 25% reduction standard by 2020. While it may not be unreasonable for the Court to have concluded that the DEP has not met the Act’s required emission reduction mandates, what is disturbing in this decision is that it is very hard to conceive of a reasonable program that might pass muster according to the Court’s criteria, given the reasons put forth to invalidate the three programs.

Take RGGI – for the past nine years we have been adding a surcharge to fossil fuel power generation, with the more intensive greenhouse gas emitters paying a higher surcharge. Most economists would say that making such power plants more expensive to operate means that they are called on less often to supply power, which is what has been happening in real life. However, this is not adequate for the SJC, because RGGI would allow a facility in Massachusetts to acquire allowances from another state and therefore “there is no way to ensure mass-based reduction in carbon dioxide emissions from power plants in the Commonwealth that participate in the RGGI”. Because of this feature, RGGI “does not comport with the specific requirements [of the Act]”.

The other two programs fail for similar reasons. A program to get more low emission cars on the road does not limit the overall number of cars in the state, and so even if there are more low emission vehicles, there could still be more cars overall and more emissions. For the sulfur hexafluoride leak program, mandating that equipment be changed out so that only minimal leaks are possible may not work because a company could just put in more equipment (even if it is better), and negate the benefits.

So what would the Court find acceptable? Let’s brainstorm a bit. If RGGI does not pass muster, perhaps what we need is a state wide cap on greenhouse gas emissions from major sources. But it can have no “escape clause” since it is the possibility that a facility could just buy its way out of compliance that troubles the Court, and the scheme might need to force power plants to shut down once all the capped allowances are used up.  But in reality, the effect of adding an additional burden on Massachusetts power plants would simply mean that they would operate for fewer hours than plants in neighboring states that do not have to live under this cap, and so the emissions would simply shift to out of state power plants, which may release more greenhouse gas emissions. One fact about greenhouse gas emissions is that the effect is not local. Shifting emissions from Massachusetts to Connecticut or New York or New Hampshire does not reduce Massachusetts’s contribution to the greenhouse gas inventory, since it is the electric usage that must be controlled.  Given that greenhouse gasses are a global, not a regional (and especially not a state), issue, a state-wide cap is useless at best, or counterproductive at worst.

So what about energy efficiency programs that reduce the actual amount of electricity people consume?  Energy efficiency programs are usually “carrots” that provide incentives to reduce long term usage, to avoid the “stick” of high electric prices. But relying on that mechanism would not appear to meet the Court’s requirements of a “mandate” that reduces the amount of electricity used, as a homeowner would not be prevented from using more electricity even if they were taking advantage of energy efficiency “carrots”.

Buildings are a major source of greenhouse gas emissions. Green building codes are being adopted whereby new construction must meet stricter requirements. But this only limits the growth in new emissions, and does not reduce total future emissions from the building sector. Somehow existing buildings have to also be covered by a mandate to reduce emissions to levels needed to meet the 2020 and beyond limits. It is possible to conceive of a program that forces new construction to offset their emissions by paying existing buildings to reduce emissions. A cap and trade system could work precisely this way. However, a cap and trade system that covers hundreds of power plants would be very different from such a system that covers hundreds of thousands of buildings.

Would forcing utilities to buy more renewable energy work? It would likely reduce greenhouse gas emissions in the Commonwealth, but then again, people could just use more electricity and negate the offsets gained from renewables. Even programs that greatly encourage the development of solar, while obviously reducing emissions, would not pass muster, since a home with solar panels could just turn up the air conditioning and use even more dirty energy overall.

Another program that has been discussed in recent years is to tax people on the number of miles driven. Actually, the better way to do it is to somehow tax people on the mileage they get, since you would want to encourage people to drive more fuel efficient vehicles. Gee – maybe a gas tax would then make the most sense. But that was passed several years ago and then pretty much overruled by the voters.  And besides, such a tax would not reduce the number of cars on the road or the actual number of miles driven, and so would certainly not count as the “mandate” to reduce emissions that the Court requires.

Maybe we could block the roads into Boston and force people to take the MBTA.

But let’s get serious.  I wonder if the SJC is actually speaking to the Legislature through this case (or the regulators who picked the 25% standard) – telling them that if they are going to adopted laws that mandate “feel good” policies, they have to own what they have created, and just establishing “mandates” with no real intent to back them up (say perhaps passing some sort of energy reform bill, or a gas tax, or fix the MBTA in some meaningful way) is not getting the job done.

Climate change is a very real issue. A lot has been done to reduce emissions, but a lot more needs to be done. This case reads like the deliberations over Shakespeare’s “pound of flesh” -where the court ruled that you have to read the requirement literally. The Court may be saying that “mandates” by themselves are meaningless, and just lead to results such as this case – a lot of ink wasted over semantics, with not much time spent trying to figure out what works.

An Environmental Closure By Another Name May Not Sound As Sweet

The Massachusetts Department of Environmental Protection promulgated revisions to the Massachusetts Contingency Plan in the spring of last year.  One of the changes made to the clean-up regulations was to change the terms used for the filings made to “close-out” a site from “Response Action Outcome” statements (or RAOs) to Permanent Solutions or Temporary Solutions.  Part of the rationale for this change was to allow parties unfamiliar with the MCP Regulations to be a little clearer that the filing of these documents amounts to a “closure” of the site.  (Previously, it was sometimes difficult to explain to an out-of-state party that an RAO was all that was required or could be obtained for a site closure.  Obtaining a “Permanent Solution” just sounds more final.)

However, this change may have unintended consequences.  An RAO filing would have been under one of three classifications – Class A, B or C.  However, under the revised MCP there is now no unified definition of closure that is equivalent to RAO; rather a closure report is now called either a Permanent Solution or a Temporary Solution. Class A or Class B RAOs are essentially equivalent to a Permanent Solution, and a Class C RAO is essentially equivalent to a Temporary Solution under the new regulations.  However, under the old MCP, a clean-up that achieved an “RAO that complies with the MCP” might have included a Class C RAO as a perfectly reasonable outcome – for example, where groundwater contamination remains after a certain period, or contamination remains under a building, but does not affect the uses at the site.  Under the new regulations, an end result which achieves a “Temporary Solution” may be far less acceptable, even though a Class C RAO and a Temporary Solution may be exactly the same.

In other words, where a Class C RAO may have been acceptable in some transactions, many lenders or buyers may now only be willing to accept that a “Permanent Solution” be achieved.  Lenders or buyers may be unwilling to agree that the current owner can achieve either “a Permanent Solution or Temporary Solution”.  As a result, DEP’s effort to be more descriptive may actually limit the remediation actions that will be commercially acceptable.

The Future of Our Transportation Infrastructure and the Impact on Real Estate and Economic Development

The arrival of Spring brings to an end one of the most difficult winters in history here in Boston, where we managed to surpass the highest recorded snowfall in history for the 2014-2015 season.  It was also a ridiculously cold winter.  As many know, the snow and cold temperatures have taken a huge toll on the public transportation system in Boston, causing significant service disruptions which have frustrated commuters for nearly two months.

With this context, it was particularly interesting to read a recently released draft report prepared by the U.S. Department of Transportation entitled “Beyond Traffic: Trends and Choices 2045.”  The report provided a sobering look at how the U.S. has failed to adequately plan for and fund our transportation infrastructure.  In the face of significant shifts in transportation and growth patterns, such as increased urbanization, an aging population, and significant increases in freight volumes, our approach to transportation planning and funding has potentially disastrous consequences for the future.

The importance of transportation to real estate cannot be overstated.  Throughout the country, residential and mixed-use growth opportunities continue to be focused on transit hubs.  Industrial development is happening in areas where goods can be moved with relative ease.  The quality of our transportation infrastructure will always have a significant impact real estate, both in terms of the market for properties and in our ability to grow and develop.

Beyond Traffic offers an interesting look at trends and technology shaping transportation, such as online shopping, car sharing, and, interestingly, 3-D printing (which the report suggests could disrupt supply chains by allowing distributed manufacturing of customized products and parts).  Many of these trends and technological innovations will lead to changes in how real estate is developed and used.  For example, as automation increases at industrial complexes, larger complexes could be staffed by smaller workforces (lower those parking requirements please!).   Flexible schedules and “hoteling” (unassigned office seating) is reducing the amount of office work space required for many companies.

The Department of Transportation is seeking constructive advice on Beyond Traffic, with the goal of helping objectively frame critical policy choices that need to be made in the future.  It will be important for the real estate community to be engaged in these discussions to ensure that the transportation system of our future continues to foster desired economic growth.

The Massachusetts Chapter of NAIOP – The Commercial Real Estate Development Association is hosting a Transportation Transformation Conference on April 9, 2015 that will discuss transportation planning and economic growth as it encourages the leaders of Massachusetts to engage in long term planning of our infrastructure.

 

Note:  Greg Sampson serves as the Assistant Vice President of Government Affairs for NAIOP Massachusetts Inc. and has been involved in the planning of the transportation conference.

The Best Laid Plan of Mice and Friends

How often does this happen?  Two business acquaintances develop a friendship over a number of years.  An opportunity then arises and the two friends decide that they will work together to take advantage of the situation.  They then draft a one paragraph or one page letter which they are sure will be sufficient for all purposes since their friendship will undoubtedly prevail over any unforeseen disputes.

Unfortunately, a difference of opinion then arises and it turns out that one page letter did not address the situation and the friendship gives way to each person’s own economic interests.

This was the chain of events that occurred in a recent case decided by the Massachusetts Appeals Court, Robert and Ardis James Foundation and another vs. Daniel Maxwell Meyers.  The facts of the case were typical of many similar disputes.  Meyers was one of the founders of First Marblehead LP which was formed in 1995.  James was a professional investor who had graduated from Harvard Business School and taught at MIT.  In 1997, Meyers and James had developed a friendship which included taking leisure trips together.  According to the court, Meyers purchased a leisure boat by selling 10,000 shares of his privately held stock in First Marblehead to James.  In 1998 and 1999, James and Meyers signed two letter agreements under which James agreed to provide funds to Meyers and another founder of First Marblehead, Stephen Anbinder.  Meyers and Anbinder would use the funds to  purchase stock in First Marblehead and in return James would share in the sales proceeds.  The letter agreements did not provide any provisions regarding their termination or establish any conditions upon which Meyers would be required to sell his stock.

First Marblehead was a great success and an initial public offering occurred in 2003, under which shares were traded on the New York Stock Exchange.  In 2005, James and Anbinder reached an agreement regarding the disposition of the shares of stock purchased by Anbinder that James had funded.  Pursuant to that agreement, James’ investment of $461,625 yielded a payment to James of $8,791,000.

James was unable to reach an agreement with Meyers and James’ foundation filed a complaint in 2006 which, in part, alleged that Meyers had violated the 1998 and 1999 agreements by not unwinding them when James had requested that he do so.  As a result of stock splits, the 31,107 shares purchased by Meyers that James had funded had grown to 1,866,402 shares at the time of the trial in 2011.  The Trial judge found that Meyers had no duty to sell “on demand” but that Meyers had a duty of good faith and fair dealing implied in the letter agreements to engage in reasonable efforts to arrive at a reasonable time for sale of the stock, and that Meyers had failed to do so.

The Appeals Court disagreed and held that Meyers’ refusal to unwind the agreements did not violate the implied covenant of good faith and fair dealing.  The Appeals Court did find that the agreements contemplated that a sale of the stock would occur and that Meyers could not refuse to sell the stock indefinitely.  However, the Appeals Court did not determine what “indefinitely” meant.

The moral of the story of course is to “get in writing.”  While Meyers and James both wanted short user friendly letter agreements, their desire for simplicity resulted in years of litigation which could have been easily avoided.

A Watched Pot Boils

Earlier today I blogged about an anticipated upcoming decision from the Massachusetts Supreme Judicial Court which would decide whether a candidate for public office had the right to solicit nomination signatures at a supermarket. The Court previously had held that a candidate could solicit signatures at a large regional mall. The new issue before the court was whether this right should be expanded to include a local Roche Brothers supermarket in Westwood.

The Court’s decision in the case, Glovsky v. Roche Bros. Supermarkets, Inc.,  was just issued. The Court ruled, 6-1,  in favor of the candidate. The decision, written by Justice Duffly, further erodes the rights of commercial property owners and will make it difficult and costly for owners to deny access to any candidate for office who wishes to collect nomination signatures. Only Justice Cordy disagreed with the decision. His dissent was stinging in criticizing the reasoning of the majority and the broad expansion of prior case law.

A more detailed blog on this case will be posted shortly.

Three for the Road

It has long been said of real estate that “They ain’t making any more of it.”  While this may be true, rules governing what you can do with real estate are consistently changing and owners, users and anyone associated with real estate need to continue to keep their eyes and ears open for the latest innovations.  The following are three new matters which merit attention.

1. Sign of the Times.  McDonald’s has a two story restaurant located on Broadway in New York, near west 46th Street.  McDonald’s has operated the property for the past thirty years.  This past June, McDonald’s informed its landlord that it wanted to renew its lease for another ten years.  Unfortunately, McDonald’s and the landlord were not able to come to terms.  The reason behind the breakdown wasn’t that another tenant was in the offing.  Rather, according to McDonald’s, it was because the landlord wanted to increase rent by requiring McDonald’s to pay to place signage outside its own restaurant.  In the landlord’s view, McDonald’s should pay additional rent in the amount that the landlord could receive if the landlord installed sublet signage to a third party on the outside of McDonald’s building.  McDonald’s had never paid the prior landlord extra for any signage.  According to the New York Post and Cushman & Wakefield, signage rent is no small number since the average price in that locale is nearly $2,300 per square foot.  Now it will be up to the courts to determine if “McDonald’s deserves a break today.”

2. A New Law.  Several years ago, the Massachusetts legislature enacted the Prompt Pay Statute which set out a number of requirements regarding applications for payment and receipt of payment on any contract of $3 million or more.  Massachusetts recently enacted an additional construction law, dropping the proverbial second shoe on property owners.

The new statute imposes additional requirements on any construction contract with an original price of $3 million or more.  No contract may now include retainage of more than 5% of any progress payment.  This applies not only to contracts between owners and general contractors, but also any contract between the general contractor and the subcontractor and any sub-subcontractor.  In additional, no later than 14 days after substantial completion is achieved, the prime contractor is to submit to the owner a notice of substantial completion.  The owner then has 14 days to either accept the notice or to reject it.  Any rejection is then subject to the dispute resolution provisions in the contract and dispute resolution must be commenced by the prime contractor within 7 days after rejection by a project owner.  If the notice of substantial completion is accepted, either outright or after dispute resolution, then the owner has 14 days to submit a punch list.  In connection with withholding amounts for items on a punch list, if the contract does not set forth mutually agreed values, then the new statute caps the amount withheld from retainage at 2.5% of the total adjusted contract price, or 150% of the cost to complete or the reasonable value of all claims.  The statute contains additional requirements regarding the ability to withhold retainage, and the maximum time period between substantial completion and the payment of retainage.  Anyone associated with construction contracts of $3 million or more needs to be familiar with this new statute.

3. Collecting Nomination Signatures. Be on the lookout for a soon to be issue by the Massachusetts Supreme Judicial Court on the ability of strip mall owners to exclude candidates seeking to obtain signatures for their nomination papers.  Several years ago, the Supreme Judicial Court held that the owners of the North Shore Mall could not exclude a candidate since doing so would violate the candidate’s rights under the Massachusetts State Constitution.  The question before the Court now is whether fair access to the electoral process requires candidates to obtain signatures not only at major regional malls, but also at much smaller grocery anchored centers.

A Little Bit of Clarity for Hazardous Waste Site Closures

One of the good things about the Massachusetts program for cleaning up hazardous waste sites is the privatized nature of the process, and the fact that a party can get to “closure” without waiting for approval from the state.  However, one problem that occasionally is encountered, especially in explaining the finality of the process to an out-of-state lender, is the fact that the final closure document has been called a “Response Action Outcome” statement or RAO, qualified by a letter and number, which forces a somewhat detailed explanation as to what the document means.  In many cases, a person unfamiliar with the Massachusetts process expresses dismay that no state agency verification is available, and the party is generally left with having to accept assurances from the consultant or attorney that this is all that can be obtained in Massachusetts, and in fact is sufficient and complete.

The Massachusetts Department of Environmental Protection (MassDEP) has attempted to at least deal with the optics of this situation in its recent modifications to the Massachusetts Contingency Plan.  Documents closing out a site will now be referred to as either “Permanent” or “Temporary” Solutions.  So instead of having to meaning of a Class B-1 RAO, for example, the final closure document will now at least “sound” like closure documents.  This will hopefully give a lender some increased level of comfort simply because the name of the document should more clearly suggest the cleanup status.

The three types of closure documents will now be:

  • A Permanent Solution – (essentially equivalent to a current RAO Classes A-1, A-2 and B-1) in which no further work is required at the site and no limitations are imposed on future activities;
  • A Permanent Solution with Conditions – (equivalent to a current RAO Class A-3, A-4, B 2 and B-3) which indicates final closure of a site but imposes certain conditions that must be met or maintained.  These conditions can be as restrictive as an Activity and Use Limitation recorded on the Deed, or a more general set of conditions that alert future property owners to conditions that must be maintained in order to ensure that there is no future risk potential;
  • Temporary Solution – (equivalent to current Class C RAOs) which, as the name implies, are essentially a regulatory holding pattern.  Risk has been reduced or controlled, but complete remediation has not been achieved for various reasons (such as the presence of a building that does not allow access to the contaminated soil, but which does not pose a risk at this time).

For the most part, MassDEP has not changed the regulations for closing a site and the work that will be required to reach “closure” remains the same.  In addition, some lenders and others unfamiliar the process may still be uncomfortable that the state does not directly approve the closure, or provide a “No Further Action” letter.  However, it appears to be the hope that the status of “Permanent Solution” or “Permanent Solution with Conditions” will allow an increased level of comfort, even if it is just a change in name rather than substance.

Bankruptcy Codes Sections 363 and 365: Do Leases Survive A Bankruptcy Sale?

A recent decision of the United States Bankruptcy Court for the District of Montana approved a sale of the property pursuant to Section 363 of the Bankruptcy Code, free and clear of existing leases without granting the tenants any right to remain in possession under Section 365(h) of the Bankruptcy Code.

Section 363(f) of the Bankruptcy Code provides, in part, that a debtor can sell assets “free and clear of all liens and interests.”  While this implies that property is sold free from any rights of a tenant, Section 365(h) of the Bankruptcy Code states that if a landlord files for bankruptcy and rejects a lease, the tenant can remain in possession.  There has been a split between courts which found that a tenant’s rights under Section 365(h) may be terminated by a Section 363 sale and courts which determined that a free and clear sale did not terminate the tenants Section 365(h) rights.

The relevant facts of this case which involved the Spanish Peaks resort in Big Sky, Montana, are as follows:  In November, 2006, Spanish Peaks, as borrower, entered into a loan agreement with Citigroup pursuant to which Spanish Peaks obtained a loan in the original amount of $130,000,000.  The loan was secured, in part, by a mortgage.  After Spanish Peaks defaulted on various obligations, an amended and restated loan agreement was entered into between Spanish Peaks’ successor and Citigroup on March 16, 2010.  The amended and restated mortgage was filed on March 25, 2010.  After the original loan was made, but prior to March 16, 2010, Spanish Peaks entered into a 99 year ground lease for a restaurant and a 60 year lease for the placement of certain telecommunications towers.  The leases were with affiliates of the borrower.

On October 14, 2011, the debtors filed cases in the United States Bankruptcy Court for the District of Delaware under Chapter 7 of the Bankruptcy Code.  The cases were transferred to the District of Montana in 2012.

In late 2012, the Trustee, with the agreement of the senior pre-petition lender (CHSP Acquisition, LLC, the successor to Citigroup), marketed the property and proposed to transfer the property pursuant to Section 363(f) of the Bankruptcy Code free and clear of all liens, claims, encumbrances and other interests in the property other than certain identified “permitted encumbrances.”  The permitted encumbrances did not include the restaurant lease or the telecommunications lease.

In February 2013, the tenants/debtor affiliates opposed the Trustee’s motion arguing that if the Trustee rejected the leases, the debtor affiliates would elect to retain their rights to remain in possession of the non-residential real property for the balance of the term of the leases and for any renewal or extension periods.

In June 2013, the Court entered an order approving the sale of the property free of liens, claims, interests and encumbrances.  The sale order followed an auction which had resulted in the highest bid by the senior pre-petition lender in the amount of $26,100,000.

In September 2013, the Trustee filed a motion to reject the restaurant lease and the telecommunications lease.  The Court approved the motion.

CHSP asked the Court to determine that the sale of the debtor’s assets under Section 363 of the Bankruptcy Code to CHSP was free and clear of the restaurant lease and the telecommunications lease and that Section 365(h) of the Bankruptcy Code did not apply to preserve the debtor affiliates leasehold interests following the sale.  After exploring case law cited by both CHSP and the debtor affiliates, the Court found for CHSP and stated that a case by case, fact intensive, totality of the circumstances approach, rather than a bright line rule, was needed to determine whether Section 363(f) or Section 365(h) prevails in any given situation.  The Court noted that in this case, the Trustee had a good and sufficient justification for the sale and that CHSP was entitled to protection as a good faith purchaser.

The Court also noted, with particular emphasis, that the restaurant lease and the telecommunications lease were entered into at a time when all parties were controlled by the same person, that the restaurant lease provided a rent that was far below fair market rental rates and that the telecommunications lease was unrecorded despite provisions of the Montana Code providing that any lease which had a term of more than a year was void against any subsequent good faith purchaser whose conveyance was first duly recorded.  The Court also highlighted the fact that the lessees did not seek or obtain a non-disturbance agreement from Citigroup.

It is noteworthy that the Court determined that even though the leases predated the amended and restated loan agreement, they were, in fact, subordinate to the interests of CHSP, since they had been executed after the original loan agreement and the original mortgage.

Finally, the Court stated that the debtor affiliates provided no evidence that they would suffer any economic harm if their possessory interests were terminated and determined that the debtor affiliates had not established a claim for adequate protection under Bankruptcy Code Section 363(e).

It is likely that the Court also was persuaded by the fact that the leases were subordinate to a mortgage that exceeded the value of the property and likely would have been terminated in a foreclosure sale.  Accordingly, the Court may not have been willing to grant the debtor affiliates more protection under the Bankruptcy Code than they would have obtained under state law.

The case has been appealed.  We will post any updated information.

K.G.M. Custom Homes, Inc. v. Prosky: A Lesson in Drafting and Professionalism

The Massachusetts Supreme Judicial Court (“SJC“) recently ruled that a buyer of real property who was prevented from closing on its purchase agreement could choose between legal remedies because the seller’s attorney’s conduct, which frustrated attempts to close the deal, amounted to a default. The spurned purchaser, the SJC concluded, could either purchase the property at its value as determined by the court, or receive money damages as specified in the original purchase and sale agreement.

The saga recounted by the Court started off in a very unremarkable fashion. In 2009, a real estate developer contracted to purchase approximately 45 acres of land in Norton, Massachusetts. The sale price was to be determined after the residential building lots were approved and permitted, based on the number of lots. The agreement also contained a liquidated damages provision which, in the case of a seller default, would award the buyer a sum of money equal to all charges and fees paid by the buyer in connection with the transaction, including attorney’s fees. The purchaser was nearing final approval of the development plans in 2004, but the seller’s attorney falsely informed the buyer that another party was offering more money for the property.  Accordingly, the attorney told the purchaser it should calculate its damages pursuant to the liquidated damages provision of the contract. In so doing, the seller arguably anticipatorily breached the agreement by claiming that it had no intentions on carrying out its contractual obligations.

The buyer, intent on purchasing the property, sued the seller for specific performance—the legal remedy where one party is ordered to carry out their end of the deal as specified in the contract. In its suit, the purchaser claimed that the seller did not act in good faith and fair dealing during the transaction. While the lawsuit was pending, the purchaser obtained the final permits and approvals. The parties then met in May 2005 to close the transaction. To the purchaser’s surprise, the seller’s attorney arrived at the closing with video recording equipment and refused to allow the purchaser’s attorney to view the seller’s closing documents. As a result, the two sides could not close the deal.

The trial court determined that the seller breached the implied covenant of good faith and fair dealing when it told the purchaser to calculate its liquidated damages.  Further, the court concluded, the seller breached the agreement by trying to scuttle the closing, when the seller’s attorney brought video equipment and denied the purchaser’s request to view the closing documents. The court found that with respect to specific performance, the amount owed for the property would be the amount the seller claimed, which was significantly higher than the amount contemplated by purchaser. Therefore, as a legal remedy for the seller’s breach, the judge gave the purchaser the option to either pay the higher price and obtain title to the property or receive liquidated damages. The purchaser was also awarded attorney’s fees with respect to its costs in litigating the suit.

A panel of the Massachusetts Appeals Court reversed the trial court’s award of liquidated damages and attorney’s fees and the purchaser appealed. The SJC agreed with the trial judge that the purchaser was entitled to choose between receiving money damages or specific performance. However, the high court determined that the purchaser was not entitled to attorney’s fees related to litigating the breach.

Massachusetts generally does not award damages in the case of anticipatory repudiation. One exception to that general rule is where an aggrieved party holds an option to buy land. In that instance, specific performance—ordering a party to carry out its obligations under a contract—is the correct remedy.

The SJC agreed with the trial court in that in this case, the seller both repudiated the deal before it could be completed and also breached its obligations under the contract.  Accordingly, the purchaser could choose between remedies: it could either purchase the land or receive liquidated damages.

The SJC, however, did not rule completely in the purchaser’s favor. The SJC relied on the agreement’s ambiguous language to reverse the awarding of attorney’s fees incurred in the litigation. Using the “American Rule” regarding attorney’s fees, the SJC determined that ordering the sellers to pay purchaser’s attorney’s fees was not appropriate.  Under the American Rule, parties who win their lawsuits are not automatically entitled to recover attorney’s fees unless a statute or court rule provides otherwise. Parties may supplement their contracts to include recovery of attorney’s fees, but must do so through clear, unambiguous language. Here, the agreement stated that if the seller breached the agreement, it would pay to the purchaser the attorney’s fees incurred in connection with the transaction. The agreement’s plain language contemplated fees specifically relating to the transaction. The agreement, however, did not specify attorney’s fees in the event of litigation. The SJC found the language concerning attorney’s fees ambiguous with respect to litigating the breach, so the purchaser could not recover attorney’s fees sustained in suing the seller for the breach.

So what’s the take away?  This case underscores the importance of sound drafting techniques and legal professionalism.    When drafting liquidated damages provisions, drafters should be cognizant that if attorney’s fees are to be paid in connection with both the underlying transaction and any litigation then the provisions must clearly state that.  Further, parties to real estate transactions in Massachusetts should also know that courts are willing to allow an aggrieved party to choose between legal remedies when it has suffered a breach and the agreement does not require an election of remedies.

 

* Caleb C. French is a rising third year law student at Boston University and is currently a 2014 Summer Associate in Brown Rudnick’s Boston office.

FERC Ability to Require Demand Response Thwarted

Most of us pay the same price to turn on the lights no matter what the time of day.  Even if electricity happens to be scarce at that moment, our cost to turn on that light doesn’t change.  But scarce resources cost more, and the high cost of turning on that light at that moment gets reflected in our future utility bills. (Just look at your utility bill today and over the next few months – the cost of the past cold winter with scarce natural gas for electric generation will cause your future electric bill to increase.)

One way to deal with that is to try to get users to curtail energy use when resources are scarce.  But if the increased cost only shows up months after the energy is used, these customers may have little incentive to cut back.  In some states or utility areas, systems have been set up for customers to be able to receive a benefit for cutting back on demand when the load on the grid is very high.  This is referred to as “demand response” and entirely new businesses have grown up around this “product”.

In an Order issued in 2011, the Federal Energy Regulatory Commission (FERC) required power grid operators to allow demand response and to pay demand response providers who participated a rate comparable to generators who supply electricity to the grid.  The grid operator would agree to pay anyone who agreed to curtail load at certain critical times, which would have the effect of reducing the overall prices being paid by everyone at that time.

A Federal Appeals Court, however, has just ruled that promoting demand response violates the division between federal and state jurisdiction in the power markets.  While demand response programs have been shown to reduce peak demand and prices, and states and grid operators are free to encourage and even reward demand response, the Court held that the FERC does not have authority to regulate demand response.  The FERC has jurisdiction only over wholesale power markets, while the states retain jurisdiction over the retail side.  The Court found that demand response as required by FERC was actually a focus on retail customers, since it is end users who reduce the amount of electricity that they consume.  The dissenting opinion on the Court argued that the FERC was only creating a rational power market, and the incidental effect on retail consumers did not violate that jurisdictional divide.

Rationalizing the electricity markets is a daunting challenge.  Many aspects of the grid are still based on historic state level systems, while other aspects are clearly interstate and regional.  Trying to transform the electric system into one that is reliable and green, but not outrageously expensive, probably requires a new set of rules at the federal level.  However, given the current political stalemate in Washington, we are more likely to see continued ambiguity.

Until federal regulators update the rules to fit the new realities, there is a need to set power prices that provide an incentive to build power plants to meet increasing demand for electricity.  This court decision adds uncertainty to the power markets, and in an environment where more and more large generation units are being retired, it becomes critical that the incentives for all types of resources, be they new power plants or new innovations such as demand response, “real time” metering, and distributed generation, are appropriately part of the mix.

For power plant developers and new service providers, regulatory uncertainty makes it challenging to try to build the generation and provide the services that will be needed in the future, but it also creates opportunity for those able to navigate the complex markets that make up today’s electric system.

Many other aspects of the “smart grid”, and many innovative technologies that will need to be integrated into the grid in the future, are still entirely possible, but the focus for companies with new technologies may need to be at the state level.  Renewables, energy efficiency, Renewable Portfolio Standards and similar programs are regulated at the state level, and this court case may mean that other similar functions may now have to be handled at that level.  Such piecemeal regulation is more complex and inefficient, but it can and has been done.  Some aspects of the “smart grid”, such as energy storage, may be on the margin between retail and wholesale (i.e. state and federal jurisdiction) and to create a viable business model, efforts to influence regulations at both levels will be required.

So this decision will hardly kill demand response or other innovative technologies such as smart meters, energy storage, or renewables. Still, it muddies the waters in the short term and calls into question some programs already put in place by the FERC, while forcing companies who want to play in this arena to deal with and understand a number of regulatory regimes. Developers will require experienced, savvy and creative legal, regulatory and government relations teams to manage the new and evolving regulatory landscape.