SPRING 2002 ISSUE

REAL ESTATE ROUNDUP

Synthetic Stucco Suits
In the early 1990s, home builders began to use synthetic stucco (sometimes referred to as "Exterior Insulation and Finish (EIF) System") as a substitute for conventional masonry such as stone, brick, and stucco. The product has the look of stucco, but underneath are layers of Styrofoam, plywood, and fiberglass mesh.

For a price comparable to real stucco, the synthetic version provides better insulation, with less cracking and more flexibility. These advantages may be outweighed, however, by a drawback that has spawned many lawsuits around the country. If water gets through windows, doors, or roof lines and behind the synthetic stucco, it may have nowhere to go, causing rotting and sometimes even toxic mold. The latest EIF systems, if properly installed, allow the water to drain away, but in the meantime some court dockets are becoming crowded with litigation brought by owners of damaged homes.

Many builders are being sued for negligence in not applying synthetic stucco properly, or for breach of contract, breach of warranties, fraud, and violation of state consumer protection laws. In a majority of cases, the property damage can be traced to mistakes in applying the synthetic stucco that allow water to penetrate its surface, or do not allow water to drain, or both. Claiming that the product itself is defective, or that unqualified people are being certified to install it, some builders and homeowners are also taking manufacturers to court.

In one case, a state appellate court allowed a lawsuit to go to trial by jury after a new home was damaged by rotting wood and termite infestation. Although the builder knew of progressive damage to the house caused by synthetic stucco while the house had been rented, there was evidence that he misrepresented to buyers of the house that it was a "quality house" with only minimal past water problems and no structural problems.

In a similar case from another state, an appellate court affirmed a jury verdict of nearly $200,000 against a home builder. Whether or not the builder knew about inherent problems with synthetic stucco, was at fault in using it instead of real stucco, or installed it improperly, the failure to keep out moisture was a major structural defect for which the builder was responsible.

A Preexisting Regulation May Be a "Taking"
When a landowner challenges a restriction on the use of land on the grounds that it is so burdensome as to be a "taking" of the property for which the government must pay compensation, the United States Supreme Court has said in past decisions that a court should consider, among other things, the extent to which the regulation interferes with the landowner's "reasonable investment-backed expectations." If the restriction was already in place when the owner acquired the property, the question arises as to whether the owner could have reasonable expectations for any use of the property that is in conflict with the restriction. After all, the purchaser "moved to the problem" because he should have knowledge of the restriction that is already in place.

Now the Supreme Court has given landowners new hope with a contrary ruling. Knowing about regulations at the time of sale will still make it harder to win because of the rule about reasonable expectations, but it will not completely preclude such a taking argument. The Court was unwilling to categorically deny relief to someone subjected to the most extreme or unreasonable land-use restriction solely because the restriction was in place when the property was acquired.

The practical effect of the Supreme Court's ruling is to increase the significance for the property owner of creating a record that will demonstrate that the new owner is expecting to acquire all of the same rights as the prior owner, including the right to challenge the legality of the preexisting regulations. The language of the sales contract itself can be drafted to reflect these expectations. The purchaser's actions, such as hiring an architect or a consultant and spending money in the approval process, may speak as loudly about expectations as words in a contract. The Supreme Court left some matters unresolved, but it unquestionably has left open a door to taking arguments that was previously closed by many courts.

Comfort Zone for Churches
In disputes between churches and local land-use officials, Congress has tipped the scales in favor of the churches with recently passed legislation. Although its full impact is being sorted out by the courts, the law prohibits any land-use regulation that has the effect of imposing a substantial burden on the exercise of religion, unless the government proves that such a burden furthers a compelling governmental interest and is the least restrictive method of doing so.

The new measure already has been a potent weapon for religious groups in conflicts with localities over the location, size, and design of churches, synagogues, and mosques, as well as schools, day-care centers, homeless shelters, summer camps, and other church-run uses of property. Even prayer meetings held at homes benefit, as using any real property for a religious purpose is a protected religious exercise.

Counties and municipalities will have to show more flexibility in dealing with religious uses of property, although they have not been rendered powerless every time a church applies for a land-use permit. It can be expected that religious land uses will be allowed in more zoning districts and are not as likely to be subjected to special conditions. Certainly, any zoning ordinance that excludes churches from the entire locality is ripe for a court challenge. The law explicitly prohibits any regulation that "totally excludes religious assemblies from a jurisdiction," or unreasonably limits them.

CASE BY CASE

Finders, Not Keepers
While installing a new driveway for a customer, the owner of a paving company and his employee unearthed a glass jar containing rolls of gold coins wrapped in paper. They collected, cleaned, and inventoried the gold pieces. The coins were worth many thousands of dollars.

At first, the finders agreed to split the coins between themselves, with the company owner retaining possession. After the two had a falling out over ownership of the coins, the company owner gave them to the customer on whose land they were found. The other finder then sued for possession of the coins.

The finder of the coins argued that under the "treasure trove" doctrine he should have the right to possess the found property against the entire world, except the rightful owner, regardless of where the property was found. The state court reviewed the law on found property and held that the landowner was entitled to possession of the coins, to the exclusion of all but the true owner.

The doctrine of treasure trove, and its use of a "finders keepers" rule, had never been adopted in the state where the coins were found. Even if it were otherwise, the court was ready to discard the rule as antiquated and unfair. The doctrine encourages trespassers to roam at large over the property of others in search of hidden treasure, contrary to the reasonable expectations of modern-day landowners.

A Matter of Opinion
Another recent case involved a claim of defamation that was brought against the writer of a letter to the editor in a small-town newspaper. A news article in the paper reported on the upcoming closing of a downtown grocery that had been in business for 50 years. Three days later, the newspaper printed a letter to the editor that blamed the closing of the grocery store on the store's landlord. Calling him a "ruthless speculator," among other things, the writer accused the landlord of forcing the store out of business by charging "exorbitant rent." The letter stated that the landlord's "self-centered greed" caused the demise of the grocery.

The landlord responded to the letter to the editor with a defamation action against its author. The lawsuit was dismissed because the state constitution's free expression clause shielded the letter writer from liability. To distinguish between statements of opinion, which are protected, and assertions of fact, which are not, the court looked at all the surrounding circumstances. In each instance, the offending parts of the letter were found to be opinions. The context of the letter as a whole showed it to be an exercise in venting frustrations and opinions about the loss of a valued downtown business. Finally, the fact that the letter was an expression of protected opinion was confirmed by its very location in the newspaper's opinion pages, a traditional forum for the robust exchange of viewpoints.

QUALIFIED PERSONAL RESIDENCE TRUST

Many people's assumption that their estates will escape federal estate tax may be incorrect because they often underestimate the worth of the most valuable asset that they own, their personal residence. Federal estate tax law provides a means for reducing the tax consequences of transferring the family home. The device that is used to accomplish this goal is known as a "qualified personal residence trust" (QPRT).

Tax Savings Advantage
An individual creates a QPRT by transferring his residence to a trust (usually for the benefit of family members) but retaining the right to use the residence rent-free for a specified period of time. The tax savings occur only if the grantor of the trust survives the period of his retained interest.

Upon the transfer of the residence to the trust, the grantor is regarded as making a gift of the remainder interest in the trust. The value of the gift is the fair market value of the residence less the value of the grantor's retained interest. The gift is taxable, but only to the extent of the remainder interest, and there will be no further tax on the residence at the grantor's death. If a trust other than a QPRT were used, the total value of the residence would be subject to tax, just as it would be if the residence were transferred by will.

Although the grantor must survive the period of his retained interest in order for the tax savings to be achieved, there is no gamble involved. If he fails to survive his retained interest period, the full value of the residence will be taxed, but that is the same result that would be reached if he never transferred the residence to a QPRT. Also, the grantor may continue to occupy the residence once he has survived the retained interest period, but he must pay rent in order to avoid inclusion of the residence in his estate.

Disadvantages
The most obvious disadvantage of creating a QPRT is that the grantor of the trust has a predetermined limit on his right to occupy the residence, after which time he must give up ownership while he is still alive. The remaindermen (normally the grantor's children) then will have ownership of the residence, and the grantor will have to pay rent to them. Since many people may find this to be an awkward situation, the QPRT requires a personal decision that should be given careful consideration.

A second disadvantage concerns the amount of income tax liability that will result if the grantor's children (or other remaindermen) later sell the residence. If no trust is created and the residence passes at the grantor's death, the heirs or beneficiaries get a "step-up" in basis, meaning that the gain on the sale will be measured against the value of the residence as of the grantor's death. If a QPRT is created, however, there will be no such step-up and the gain will be measured against the price that the grantor originally paid for the property.

Other Considerations
Cash may also be put into the trust, but the trust instrument must limit such additions to amounts needed to pay trust expenses, to make improvements to the residence, and to enable the trust to purchase a replacement residence.

The residence must be used by the grantor as his principal residence, although he may use the premises secondarily for business purposes. A vacation home can qualify for purposes of the QPRT provisions if certain requirements are satisfied.

The trust must prohibit the sale of the residence to the grantor, his spouse, or to an entity controlled by the grantor or his spouse during the period of the grantor's retained interest and thereafter in certain situations.

Conclusion
A QPRT has many technical requirements and establishing one is very complicated. A poorly executed trust has many potential undesirable effects. Anyone considering the use of such a trust should seek qualified legal advice.

PREPARATION FOR DISASTER

Careful planning ahead of time can ease the stressful process of responding to and recovering from natural or man-made disasters. In the middle of an emergency, when time may be short and the stakes high, is not the time when individuals should be thinking about important papers and safety for the first time.

Good recordkeeping makes sense any time, but becomes especially important in the aftermath of a disaster. Official documents and financial and estate planning papers should be kept together as a comprehensive file in a secure location. The following are some of the documents that should be easily retrievable:

• birth, marriage, and death certificates;
• identification records, such as driver's licenses and passports;
• titles, deeds, and vehicle registrations;
• insurance policies;
• loan information and credit-card statements;
• investment and bank account records;
• income tax information;
• wills and trust documents.

For especially important and hard-to-replace documents, keep a set of originals in a safe-deposit box and a set of copies at home. Include in your central file the telephone numbers and addresses for the entities with whom you have accounts or policies. Other family members should know where the records are kept.

Advance planning about personal safety means foreseeing the types of disasters your family may face and knowing the steps each person should take in a particular kind of emergency. Select a place in the home where everyone can come together. Confirm your fastest and safest evacuation routes. Identify the most important tasks to be undertaken and assign tasks to the most appropriate persons. Each individual should always have the telephone numbers for family members and emergency help.

NEW RIGHT FOR WORKERS AT DISCIPLINARY MEETINGS

Two employees at a foundation wrote office memoranda stating that their supervisor was not needed on a project and that he had behaved inappropriately and unprofessionally. The foundation's executive director informed one of the employees that she wanted to meet with him and the supervisor. Feeling intimidated at the prospect of the meeting, the employee asked that his fellow complaining employee be present as well. When this request was refused, and the employee declined to attend the meeting alone, he was fired for insubordination.

The fired employee ultimately was found to be entitled to reinstatement to his position, with an award of back pay. The decision by a federal appellate court breaks new ground for non-union employees and employers, because the basis for the ruling is a principle previously associated only with union workers. It is settled law that an employer commits an unfair labor practice under the National Labor Relations Act if it denies a union employee's request to have a union representative present at an investigatory interview that the employee reasonably believes might result in disciplinary action.

The National Labor Relations Board has changed course several times on the question of whether this right also can be asserted by employees who are not in unions. In the case of the foundation employee, it answered that question in the affirmative, and the appeals court agreed.

The impact of the decision could well mean that in most cases a company should either allow an employee to have a co-worker present at a meeting that could be perceived as leading to disciplinary action or not have the meeting at all.

The right to have a co-worker present must be triggered by a request from the employee. Many employees, especially those not in a union, are unaware of this right and are unlikely to assert it. Managers and supervisors do not benefit from the ruling, as they are not "employees" as defined in the National Labor Relations Act. Non-union employees probably can only insist on being accompanied by a co-worker, rather than having a supervisor, manager, or outside representative present. The purpose of the right is to allow employees to engage in "mutual aid and protection." The rule applies only to a meeting that could lead to discipline, not a meeting whose purpose is simply to announce predetermined disciplinary action.

QUOTABLE

No legacy is so rich as honesty.
William Shakespeare