Probate and Property (35:05) Issue - American Bar Association

A PUBLICATION OF THE AMERICAN BAR ASSOCIATION | REAL PROPERTY, TRUST AND ESTATE LAW SECTION

VOL 35, NO 5SEP/OCT 2021

LANDOWNER’S GUIDE TO GROUND LEASES

REVOCABLE TRUSTS FOR CHANGING TIMES

ESTATE PLANNING MISFIRES OF THE RICH AND FAMOUS

CONTACT TIM MCCARTHY | 626.463.2545 | WHITTIERTRUST.COM/ABA

$10 MILLION MARKETABLE SECURITIES AND/OR LIQUID ASSETS REQUIRED. Investment and Wealth Management Services are provided by Whittier Trust Company and The Whittier Trust Company of Nevada, Inc. (referred to herein individually and collectively as “Whittier Trust”), state-chartered trust companies wholly owned by Whittier Holdings, Inc. (“WHI”), a closely held holding company. This document is provided for informational purposes only and is not intended, and should not be construed, as investment, tax or legal advice. Past performance is no guarantee of future results and no investment or fi nancial planning strategy can guarantee profi t or protection against losses. All names, characters, and incidents, except for certain incidental references, are fi ctitious. Any resemblance to real persons, living or dead, is entirely coincidental.

He helped us fi nd our son’s calling. It was as plain as the nose on his dog’s face.

I was worried my son lacked direction. Doug said he

just needed to fi nd his passion and suggested we all

three meet for lunch at an outdoor café and chat. My

son brought his rescue dog Max. Doug had brought

a dog biscuit for Max and when he saw how well

trained Max was, he recognized my son’s true passion:

working with rescue dogs. Doug connected him with

a local rescue organization. A few years and my son is

running the whole outfi t. Doug saw something bigger

in my son because he was paying attention to the

little things.

— Ashley, Los Angeles

September/OctOber 2021 1

Published in Probate & Property, Volume 35, No 5 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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A monthly webinar featuring a panel of professors addressing recent cases or issues of relevance topractitioners and scholars of real estate or trusts and estates. FREE for RPTE Section members!

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WILLS IN THE 21ST CENTURY: TOWARDS SENSIBLE APPLICATION OF FORMALITIES

Tuesday, July 14, 202012:30-1:30 pm ET

BRIDGET CRAWFORD, Elisabeth Haub School of LawNAOMI CAHN, George Washington Law SchoolKAREN J. SNEDDON, Mercer University School of Law Moderator: AMY M. HESS, University of Tennessee College of Law

THE SECURE ACT: RETIREMENT PLANNING AND MONETARY EXPECTATIONS

Tuesday, August 14, 202012:30-1:30 pm ET

CHRIS HOYT, University of Missouri-Kansas City School of Law Moderator: AMY M. HESS, University of Tennessee College of Law

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A monthly webinar featuring a panel of professors addressing recent cases or issues of relevance to practitioners and scholars of real estate or trusts and estates. FREE for RPTE Section members!

Register for each webinar at http://ambar.org/ProfessorsCorner

REGULATING THE TIME TO GIVE AWAY MILLIONS: PROPOSED LEGISLATION ON DONOR ADVISED FUNDSTuesday, September 14, 2021 12:30-1:30 pm ET

ROGER PAUL COLINVAUX, Columbus School of Law RAY MADOFF, Boston College

THE TRANSITION AWAY FROM LIBOR Tuesday, October 12, 2021 12:30-1:30 pm ET

GARY A. GOODMAN, DentonsANDRES VERSTEIN, University of California at Los AngelesALICE F. YURKE, DentonsModerator: ALEX COTA, Stroock

September/OctOber 20212


S e p t e m b e r / O c t o b e r 2 0 2 1 • V o l . 3 5 N o . 5

C O N T E N T S

22

10

Features

10 NFTs for Estate Planners: Not Just a Token Concern By Joshua Caswell and Leigh E. Furtado

22 The Effect of the New 2021 Minimum Standard Detail Requirements for ALTA/ NSPS Land Title Surveys on Commercial Real Estate Transactions By Wendy Gibbons and Gary R. Kent

34 Celebrity Estate Planning: Misfires of the Rich and Famous IV

By Jessica Galligan Goldsmith, Samuel F. Thomas, Jessica D. Soojian, Stacia C. Kroetz, David E. Stutzman, Lauren G. Dell, and Daniel J. Studin

40 Revocable Trusts for Changing Times By Brent W. Nelson, Rachel M. Sass, and

Deborah Plum

46 A Landowner’s Guide to Ground Leases By Jerome D. Whalen

52 Estoppels and SNDAs—Understanding and Negotiating the Landlord’s Lender’s Lease Documents

By G. Andrew Gardner, Hannah Dowd McPhelin, and Joseph M. Saponaro

Departments

4 Section News

6 Young Lawyers Network

8 Uniform Laws Update

16 Keeping Current—Property

28 Deliberate Well-Being

30 Keeping Current—Probate

60 Book Review

61 Practical Pointers from Practitioners

62 Technology—Property

64 The Last Word



A Publication of the Real Property, Trust and Estate Law Section | American Bar Association

Departments

4 Section News

6 Young Lawyers Network

8 Uniform Laws Update

16 Keeping Current—Property

28 Deliberate Well-Being

30 Keeping Current—Probate

60 Book Review

61 Practical Pointers from Practitioners

62 Technology—Property

64 The Last Word

EDITORIAL BOARDEditorEdward T. Brading 208 Sunset Drive, Suite 409Johnson City, TN 37604

Articles Editor, Real PropertyBrent C. ShafferYoung Conaway Stargatt & Taylor, LLPRodney Square1000 N. King StreetWilmington, DE 19801

Articles Editor, Trust and EstateMichael A. SneeringerPorter Wright Morris & Arthur LLP 9132 Strada Place, 3rd Floor Naples, FL 34108

Senior Associate Articles EditorsThomas M. Featherston Jr.Michael J. Glazerman

Associate Articles EditorsTravis A. BeatonKevin G. BenderKathleen K. LawJennifer E. OkcularAmber K. QuintalHeidi G. RobertsonAaron SchwabachBruce A. Tannahill

Departments EditorJames C. Smith

Associate Departments EditorSoo Yeon Lee

ABA PUBLISHINGDirectorDonna Gollmer

Managing EditorErin Johnson Remotigue

Art DirectorAndrew O. Alcala

Manager, Production ServicesMarisa L’Heureux

Production CoordinatorScott Lesniak

ADVERTISING SALES AND MEDIA KITS Chris Martin410.584.1905 [email protected]

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All correspondence andmanuscripts should be sent tothe editors of Probate & Property.

Probate & Property (ISSN: 0164-0372) is published six times a year (in January/February, March/April, May/June, July/August, September/October, and November/December) as a service to its members by the American Bar Association Section of Real Property, Trust and Estate Law. Editorial, advertising, subscription, and circulation offices: 321 N. Clark Street, Chicago, IL 60654-7598.

The price of an annual subscription for members of the Section of Real Property, Trust and Estate Law ($20) is included in their dues and is not deductible therefrom. Any member of the ABA may become a member of the Section of Real Property, Trust and Estate Law by sending annual dues of $70 and an application addressed to the Section; ABA membership is a prerequisite to Section membership. Individuals and institutions not eligible for ABA membership may subscribe to Probate & Property for $150 per year. Single copies are $7 plus $3.95 for postage and handling. Requests for subscriptions or back issues should be addressed to: ABA Service Center, American Bar Association, 321 N. Clark Street, Chicago, IL 60654-7598, (800) 285-2221, fax (312) 988-5528, or email [email protected].

Periodicals rate postage paid at Chicago, Illinois, and additional mailing offices. Changes of address must reach the magazine office 10 weeks before the next issue date. POSTMASTER: Send change of address notices to Probate & Property, c/o Member Services, American Bar Association, ABA Service Center, 321 N. Clark Street, Chicago, IL 60654-7598.

Editorial Policy: Probate & Property is designed to assist lawyers practicing in the areas of real estate, wills, trusts, and estates by providing articles and editorial matter written in a readable and informative style. The articles, other editorial content, and advertisements are intended to give up-to-date, practical information that will aid lawyers in giving their clients accurate, prompt, and efficient service.

The materials contained herein represent the opinions of the authors and editors and should not be construed to be those of either the American Bar Association or the Section of Real Property, Trust and Estate Law unless adopted pursuant to the bylaws of the Association. Nothing contained herein is to be considered the rendering of legal or ethical advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. These materials and any forms and agreements herein are intended for educational and informational purposes only.

© 2021 American Bar Association. All rights reserved. No part of this publica-tion may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Contact ABA Copyrights & Contracts, at https://www.americanbar.org/about_the_aba/reprint or via fax at (312) 988-6030, for permission. Printed in the U.S.A.



THE SECTION OF REAL PROPERTY, TRUST AND ESTATE LAW WELCOMES ITS NEW LEADERSHIP BOARD:

SECTION CHAIRRobert C. Paul, East Hampton, NY

SECTION CHAIR-ELECTHugh F. Drake, Springfield, IL

REAL PROPERTY DIVISION VICE CHAIRRobert S. Freedman, Tampa, FL

TRUST AND ESTATE DIVISION VICE CHAIRBenetta Y. Park, Chicago, IL

DIVERSITY OFFICERKellye Curtis Clarke, Alexandria, VA

SECTION SECRETARYJames G. Durham, Dayton, OH

SECTION FINANCE AND CORPORATE SPONSORSHIP OFFICERRana H. Salti, Madison, WI

SECTION DELEGATES TO ABA HOUSE OF DELEGATESJo Ann Engelhardt, Palm Beach, FLOrlando Lucero, Albuquerque, NM

IMMEDIATE PAST CHAIRStephanie Loomis-Price, Houston, TX

SECTIONN E W S

2021–2022 Section Leadership

REAL PROPERTY COUNCIL MEMBERSWogan Bernard, New Orleans, LAGeorge P. Bernhardt, Houston, TX

Jack Fersko, Roseland, NJShelby D. Green, White Plaines, NY

Christina Jenkins, Dallas, TXCheryl A. Kelly, St. Louis, MO

Soo Yeon Lee, Chicago, ILJin Liu, Tampa, FL

Joseph Lubinski, Denver, COJohn P. McNearney, St. Louis, MOPatrick T. Sharkey, Houston, TXS. Scott Willis, New Orleans, LA

REAL PROPERTY ASSISTANT SECRETARYJames E.A. Slaton, New Orleans, LA

TRUST AND ESTATE COUNCIL MEMBERSKaren E. Boxx, Seattle, WAJames R. Carey, Chicago, IL

Elizabeth Lindsay-Ochoa, Boston, MARay Prather, Chicago, IL

Robert D. Steele, New York, NYKaren Sandler Steinert, Minneapolis, MN

Robert Nemzin, New York, NYBenjamin Orzeske, Chicago, IL

Crystal Patterson, Owensboro, KYHenry Talavera, Dallas, TX

Mary E. Vandenack, Omaha, NERyan Walsh, Chicago, IL

TRUST AND ESTATE ASSISTANT SECRETARYMary Elizabeth Anderson, Louisville, KY



SECTIONN E W S

SECTION NOMINATIONS COMMITTEEPursuant to Section Bylaw §6.1(f), the names of the Section’s 2021-2022 Nominations Committee and the Section officer and council positions to be elected at the 2022 Section Annual Meeting are set forth below. Any Section member wishing to suggest a nomination should send the suggested nomination to one of the Nominations Committee members listed below.

Nominations CommitteeChair: Jo-Ann Marzullo, Ligris, 1188 Centre Street, Second Floor, Newton, MA 02459, [email protected]

Vice-Chair: Stephanie Loomis-Price, Winstead PC, 600 Travis Street, Suite 5200, Houston, TX 77002-3017, [email protected]

Members: George P. Bernhardt, Baker Hughes, A GE Company, 17021 Aldine Westfield Road, Houston, TX 77073-5101, [email protected] E. Vandenack, Vandenack Weaver LLC, 17007 Marcy Street, Suite 3, Omaha, NE 68118-3122, [email protected] M. Mathis, Geometric Results, Inc., 26555 Evergreen Road, Suite 710, Southfield, MI 48076, [email protected]

Positions to be elected for service commencing September 1, 2022.

Office Incumbent Eligible for Re-nomination?Chair-Elect Hugh F. Drake Section Chair (Automatic)

Real Property Division Vice Chair Robert S. Freedman Eligible for nomination as Chair-Elect

Trust and Estate DivisionVice Chair Benetta Y. Park Eligible for re-nomination

Finance and CorporateSponsorship Officer Rana Salti Eligible for re-nomination

Assistant Finance and CorporateSponsorship Officer

Section Secretary James G. Durham Eligible for re-nomination

Section Delegate Orlando Lucero Eligible for re-nomination

Real Property CouncilMembers Wogan Bernard Eligible for re-nomination

Christina Jenkins Eligible for re-nomination

Soo Yeon Lee Eligible for re-nomination

Patrick T. Sharkey Eligible for re-nomination

Assistant Secretary James E.A. Slaton Eligible for re-nomination

Trust and Estate CouncilMembers Karen Sandler Steinert Eligible for re-nomination

Robert D. Steele NOT eligible for re-nomination

Henry Talavera NOT eligible for re-nomination

Ryan Walsh Eligible for re-nomination

Assistant Secretary Mary Elizabeth Anderson Eligible for re-nomination



YOUNG LAWYERSN E T W O R K

A Primer on Reviewing and Negotiating Commercial Real Estate Purchase and Sale Agreements

In this issue’s column for Young Law-yers Network, we highlight typical deal points to consider when reviewing and negotiating an agreement for the purchase and sale of commercial real estate. This column aims to assist new associates who have been tasked to pro-vide an initial “mark up” of a purchase and sale agreement (Agreement) to a supervising attorney. Depending on the type of commercial real estate (i.e., hotel, office building, restaurant, shop-ping center, apartment complex), the associate will want to take into account other important provisions based on the representation of either the buyer or seller.

1. The Due Diligence Provision. Parties to any commercial real estate agreement invariably nego-tiate the mechanics of the due diligence provision, which allows the buyer to terminate the Agree-ment if the buyer determines that the property (Property) covered by the Agreement is not suitable for the buyer’s purposes. If you represent the buyer, you will want to include language that your cli-ent can terminate the Agreement at any time during the due dili-gence period (DD period) and receive the full return of its ear-nest money. If you represent the seller, you will want to include language that limits the ability of the buyer to walk away from the transaction. Sellers will some-times want notice of the buyer’s

specific concerns, so the seller can attempt to “cure” any issues dur-ing the DD period rather than allowing the buyer to terminate the Agreement “for no reason or any reason at all.”

2. Earnest Money. As mentioned above, buyers will typically insist on a full return of their earnest money if they terminate the Agreement during the DD period. If the client tells you that it wants a good number of inspections of the land or improvements, or if the client thinks certain third parties may take a long time to perform their necessary inspec-tions (i.e., surveyors), you will want to build in a provision that allows the buyer to pay additional earnest money, which is typically non-refundable, to extend the DD period for an additional period of time (i.e., 30 days). Extensions can involve the buyer paying an additional $10,000 to $25,000 to extend the DD period, depending on the size of the transaction.

3. Title Objection and Cure Period. If you represent the buyer, you will want to negotiate as much time as possible (i.e., 14 to 30 days) to review the commit-ment for title insurance and the underlying title documents encumbering the Property. If the title commitment has 25 or more exceptions listed in Sched-ule B-2, be sure to give yourself adequate time to review those encumbrances and to prepare the inevitable title-objection letter to be delivered to the seller’s coun-sel. As buyer’s counsel, always make sure the seller is required to pay off any monetary liens at

For more information on the RPTE YLN, please contact: Josh Crowfoot, Chambliss, Bahner & Stophel, P.C., Liberty Tower, 605 Chestnut Street, Suite 1700, Chattanooga, TN 37450, [email protected].

closing. As seller’s counsel, you want a short title objection and cure period, and you want to give your client broad ability to choose to cure any title defects or to walk away from the transaction if it elects to do so.

4. Critical Dates Memo. Most first-year associates will assist a supervising partner by preparing a “critical dates memorandum,” which lists all the important dead-lines in the Agreement, such as expiration of DD Period, expira-tion of title objection and cure periods, deadlines for delivery of key documents, and dates for depositing additional earnest money. Prepare the memo early and put their deadlines on your calendar, so you can stay abreast of them. Critical Dates Memos are good to circulate among all the involved parties (opposing coun-sel, lender’s counsel) so everyone is on the same page regarding upcoming deadlines.

5. Representations and Warranties. If you represent the buyer, you will want to include many seller representations and warranties to protect your client. Typical seller representations and warranties include the following: (i) Seller’s power and authority to enter into the transaction and sign closing documents related to same; (ii) the Property is not the subject of any pending or threatened litiga-tion; (iii) Seller’s entering into the transaction does not conflict with any contract or agreement with a third party; (iv) a representation identifying all leases or service contracts that affect the Property; (v) a representation regarding no

Published in Probate & Property, Volume 35, No 5 © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.January/February 2021 7

YOUNG LAWYERSN E T W O R K

notice of violations of any law, code, or ordinance; (vi) a repre-sentation that the Property does not violate any environmental laws; (vii) no options to purchase or rights of first refusal encum-ber the Property; and (viii) Seller is not in bankruptcy. Numerous additional representations can be added, and some will depend on the type of real property being sold. If you represent the seller, you want to limit the number of representations and warranties as much as possible. For represen-tations and warranties that must be given, you want to limit (i) the scope of such representation or warranty and (ii) the amount of liability for your client. Sellers will ask buyers to make repre-sentations and warranties, too, but they are far fewer in number. Buyers and sellers will also nego-tiate the survival period (i.e., six months, one year, or longer) for representations and warranties made by the seller or buyer.

6. Default. If you represent the buyer and the seller defaults, you want to be sure to obtain a return of the earnest money deposit. In

addition, a right for the buyer to obtain specific performance is customary. If you have lever-age, ask the seller to pay for the expenses and costs incurred by the buyer during the DD period in the event of the seller’s default. If you represent the seller and the buyer defaults, ask to keep the ear-nest money deposit but also push for any other remedy in law or equity in case the default causes a loss to the seller that exceeds the earnest money deposit.

7. Deliveries by Parties. The Agreement will list the closing documents the buyer and seller must deliver as part of the trans-action. Review this list early and prepare the documents in advance for review by your super-vising attorney.

8. Ensure the Accuracy of the Legal Description. Before the parties sign the Agreement, review the legal description of the property to ensure it matches the legal description of the deed that vests title in the seller. If it does not, be sure to figure out why (i.e., there may be an express reason for that). Never allow a purchase and sale

agreement to be signed without a legal description.

9. Other Considerations. These days a land survey for commer-cial real estate can take a while to obtain. If you represent the buyer, be sure to build enough time into the DD period to accom-modate the completion of the survey. If you represent the buyer, make sure there is a pro-vision that allows your client to assign the Agreement to an affili-ate or third party. If you represent the seller, limit the buyer’s abil-ity to assign and ensure that the original assignor remains liable under the Agreement despite any assignment.

This column cannot cover every consideration when reviewing and negotiating a purchase and sale agree-ment for commercial real estate, but it highlights key considerations. If you want to develop your skillset in this area, please review other articles in Pro-bate & Property, articles published in The Practical Real Estate Lawyer, and checklists available for commercial real estate transactions via Practical Law, a service available through WestLaw. n



UNIFORM LAWSU P D A T E

Uniform Laws Update Editor: Benjamin Orzeske, Chief Counsel, Uniform Law Commission, 111 N. Wabash Avenue, Suite 1010, Chicago, IL 60602.

Powers of attorney are an important component of every modern estate plan, but it wasn’t always so. Until the 1960s, powers of attorney were used almost exclusively in the business con-text to establish an agent’s authority to act on behalf of a remotely-located prin-cipal. Under the common law of agency, when the principal lost the legal capac-ity to contract, the agent’s authority to act on behalf of the principal was also terminated.

The concept of durability, that is, of granting an agent authority that sur-vives the principal’s loss of capacity, first developed in the 1960s. The Uni-form Law Commission (ULC) helped promote the use of durable powers by promulgating a series of uniform acts on the subject. The Uniform Power of Attorney Act of 2006 is the most recent act governing financial powers and has been adopted by a majority of US juris-dictions. The Uniform Health-Care Decisions Act (UHCDA) of 1993 governs both healthcare powers and advance directives but has been adopted in only seven jurisdictions: Alaska, Delaware, Hawai’i, Maine, Mississippi, New Mex-ico, and Wyoming. The relatively low number of adoptions is in large part due to the timing of its approval; by 1993 most states had already legislated on the subject.

Recently, the ULC formed a new drafting committee to review the UHCDA and draft a revision. The com-mittee is chaired by Pennsylvania commissioner Nora Winkelman with Vice-Chair Shea Backus of Nevada, and the Reporter (principal drafter) is Nina Kohn, the David M. Levy Professor at

health care when the principal is no longer able to make decisions for himself. Many disputes arise because the principal’s status is uncertain. Healthcare provid-ers are loath to take directions from an agent unless that agent’s authority to act is undisputed. The 1993 UHCDA contains a default rule that capacity is deter-mined by the principal’s primary physician, but some documents vary this standard to require the determination to be made by two or more physicians, or to include a trusted family member in the decision. Several participants noted that the standard should be flexible enough to recognize that capacity can vary. For example, a patient may be lucid at certain times of day but not at others. Or a patient may be capable of mak-ing decisions about basic care but not about a particular procedure. The law should recognize that incapacity may be temporary, and the determination must be revis-ited when conditions change.

2. Relationship between advance directives and physician orders for life-sustaining treatment. Several members of the commit-tee believed healthcare providers did not understand the legal distinction between patient-gen-erated advance directives and physicians’ orders regarding life-sustaining treatment. Although physicians are supposed to review a patient’s expressed wishes regarding end-of-life care and issue orders consistent with them, not all physicians have access to a patient’s records at the time they issue orders. Moreover, health-care providers and their physician

Syracuse University College of Law and a leading national expert on elder law issues. The committee includes an impressive roster of expert observers representing many facets of the legal and medical communities who will con-tribute their expertise.

The need for a UHCDA revision is clear. In the 28 years since the approval of the previous version, courts and practitioners have struggled with many challenging issues that are not addressed adequately (or at all) under current state statutes. The drafting committee met once in June to dis-cuss these issues and set out some initial guidelines for the first draft of a revised UHCDA. The committee will next meet on November 12–13, 2021, to review and revise its draft and will continue meeting periodically until summer 2023. All drafts are posted for review at www.uniformlaws.org, and RPTE members are encouraged to sub-mit comments for the committee’s consideration.

Issues under Consideration by the Uniform Health-Care Decisions Act Drafting Committee

1. Capacity trigger. A springing power of attorney for health care authorizes the agent to make decisions about the principal’s

Uniform Laws Update provides information on uniform and model state laws in development as they apply to property, trust, and estate matters. The editors of Probate & Property welcome information and suggestions from readers.

ULC to Produce a New Uniform Act Governing Advance Directives and Health-Care Powers of Attorney



UNIFORM LAWSU P D A T E

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employees might consider a set of factors the patient did not, including the risk of liability if any healthcare measures are with-held. Participants suggested there is a need for a clearer set of rules to resolve discrepancies between physicians’ orders and a patient’s expressed desires and for a more consistent collection of data from patients and their surrogate deci-sion-makers. It was also noted that neither advance directives nor a physician’s orders control when a patient is able to make and communicate the patient’s own decisions, and some conflicts could be avoided through better communication.

3. Psychiatric advance directives. Participants discussed whether the UHCDA should be expanded to include provisions related to psychiatric advance directives. Some questioned whether the legal standard for recognizing a patient’s instructions related to refusal of treatment should be identical for treatment of physi-cal and mental disorders. It was suggested that a different set of rules and separate forms may be necessary and appropriate for psychiatric advance directives.

4. Default surrogates and disquali-fication of surrogates. The 1993 UHCDA provides a list of per-sons who may act as a surrogate for healthcare decisions when the patient has not named any-one. In order of priority, they are the patient’s spouse (unless sep-arated), adult child, parent, and adult sibling. Several participants noted that relatives are some-times poor choices as surrogates, as when there are intra-family conflicts. Some believed the list should recognize non-traditional family and support structures and give priority to those who are at the patient’s bedside in a time of crisis. There were also con-cerns about providing healthcare providers with greater flexibil-ity to choose among potential

surrogates because the provider may have a financial interest in the surrogate’s decision. Finally, the group discussed the UHCDA’s grounds for disqualifying a per-son to act as an agent or surrogate and whether additional guidance would be helpful.

5. Authority to apply for health-care benefits. Participants discussed whether an agent named in a healthcare power of attorney should have the author-ity to apply for government healthcare benefits or whether such a power properly resided with an agent for financial deci-sions. If the healthcare agent or surrogate were granted such power, some expressed concern about the potential scope of such a power.

6. Execution requirements and electronic documents. Many existing statutes governing powers of attorney require a prin-cipal’s signature to be either witnessed by disinterested par-ties or acknowledged by a notary. Participants discussed the proper balance between eliminating for-mal execution requirements to encourage greater use of advance directives and healthcare pow-ers of attorney and requiring formalities to prevent fraud. In the internet age, there is also a demand for electronic docu-ments and a need to provide a

method for authentication of elec-tronic documents by healthcare providers.

7. Statutory Forms. The 1993 UHCDA provides a series of statu-tory forms: a power of attorney for health care, directions for the patient’s end-of-life care, organ donation, and designation of a primary physician. The partici-pants debated the pros and cons of including forms in a statute and discussed how the origi-nal forms should be modified if included in the revised statute.

8. Oral designations. Participants discussed whether and under what circumstances oral desig-nations of health-care surrogates should be honored.

Additional issues may be considered at future meetings of the committee. All interested persons with expertise in the subject matter are invited to join the drafting committee as observers and contribute to this project. A draft revision of the UHCDA will be read and critiqued at the 2022 ULC Annual Meeting next July.

The primary source for this edition of Uniform Laws Update is a memo-randum by Professor Nina A. Kohn, Reporter for the Uniform Health-Care Decisions Act Drafting Committee, and Nora Winkelman, Chair of the Com-mittee (June 14, 2021) (on file with this column’s editor), summarizing the June 2021 drafting committee meeting. n



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NFTS FOR ESTATE PLANNERS Not Just a Token Concern

By Joshua Caswell and Leigh E. Furtado

What Is an NFT?

As anyone paying attention to

the news almost certainly knows,

nonfungible tokens, or NFTs, are

suddenly everywhere. Recent exam-

ples include (1) digital art by the

artist Beeple auctioned by Chris-

tie’s for $69 million; (2) an album

by rock band Kings of Leon; (3)

Jack Dorsey’s first tweet, which was

auctioned for more than $2.9 mil-

lion, the proceeds of which were

donated to charity; (4) a game

where you can buy and sell “crypto-

kitties” with players paying as much

as $172,000 for a crypto cat; and

(5) a recent New York Times article

about NFTs, which was itself auc-

tioned as an NFT, resulting in more

than $500,000 in proceeds that

were donated to charity. This year’s

Oscar’s gift bags even included a

memorial NFT of Chadwick Bose-

man for each nominee.



Major companies are getting involved in NFT mania too. Nike holds a patent on a blockchain technology designed to verify rare sneakers called “Crypto-kicks.” NBA Top Shot, the NBA’s blockchain-based platform that allows fans to buy and sell officially licensed NFTs of highlights from NBA games, sold more than $250 million of NFTs to over 100,000 buyers between February and March of this year. Kendall Baker, What to Know About the NBA Topshot Trading Phenomenon, Axios (Mar. 12, 2021). Top Shot’s success has inspired Topps, the 83-year-old trading card company, and Major League Baseball to create a similar platform, and the NFL is studying whether it should follow suit. Always in search of a big win, even Tom Brady is capitalizing on NFTs by launching his own NFT platform called Autograph.

With NFTs becoming more and more prevalent, and an eye-popping amount of money changing hands, it is impor-tant that estate planners and financial

advisors understand how to advise cli-ents on their NFT assets. So, what is an NFT?

Anything digital can be turned into an NFT. NFTs transform a digital file, such as an NBA highlight, digital work of art, or other digital collectible, into a verifiable asset (often referred to as “tokenizing”), the ownership of which becomes a discrete thing that can be bought, sold, tracked, and traded using blockchain technology (most are traded on the Ethereum blockchain, though other networks can be used). Although an oversimplified definition, block-chain is a technology that functions like a database to record transactions chronologically, forming an irrevers-ible chain of information on the timing and characteristics of the transaction. Blockchain can be as private or anony-mous as the creator desires, depending on how the technology is implemented across the peer-to-peer network. The “nonfungible” nature of a token means it cannot easily be interchanged with another token. Because each token is so unique, assigning a standard value to a token is nearly impossible because of the lack of comparable products and sales. This is in contrast to assets that are fungible and interchangeable, such

as cash—one $20 bill can be exchanged for two $10 bills—or even BitCoin—each coin has a standard value that is equal to all other coins. Boiled down to their most basic essence, NFTs aim to replicate the properties of scarcity, uniqueness, and ownership more com-monly associated with the exchange of physical items, such as artwork, but in new and evolving forms. Non-fungi-ble Tokens, Ethereum, https://ethereum.org/en/nft/. The extent to which NFTs achieve these goals and the security of individual ownership are hotly debated topics at this point in time.

The ownership structure of an NFT can be complex. Only one person (or a set number of people) owns the token, but others may own the intellectual property rights to the content behind the token, and many additional people may own digital copies (particularly for digital art or collectibles). An NFT can also have a feature that enables the cre-ator to earn a percentage every time the NFT is sold or transferred, similar to a royalty payment, by employing smart contract technology.

Some commentators argue that NFTs are the next step for artists seeking to monetize unique mediums or musi-cians aiming to recoup profits in the

Joshua Caswell is a senior associate at Day Pitney LLP in Providence, Rhode Island. Leigh E. Furtado is an associate at Day Pitney LLP in Providence, Rhode Island.



NFTs have no objective intrinsic value. Instead their value is driven by three qualities: brand, scarcity, and market.

era of streaming. It has even been sug-gested that titles to houses, contacts, and perhaps even estate planning doc-uments will eventually be tracked via blockchain technology. According to Ethereum, NFTs “can be used to repre-sent ownership of any unique asset, like a deed for an item in the digital or phys-ical realm.” Id.

Art experts have noticed that a new class of young “digital speculators” are attracted to NFTs, and established con-temporary art collectors are holding back to let the dust settle on what may

become a parallel art market. Zachary Small, As Auctioneers and Investors Rush into NFTs, Many Collectors Stay Away, N.Y. Times (Apr. 28, 2021). Although it can certainly be argued that the Beeple sale was an outlier, and that the value of NFTs has started to descend from its peak earlier this year, there are still mul-timillion-dollar sales being reported monthly. Although the market will undoubtedly level out to a degree, the underlying technology and concept seem to have lasting appeal, and prac-titioners would be wise not to discount an emerging asset class simply because it is esoteric and evolving.

Estate Planning ImplicationsAt this point you may be wondering how NFTs will affect your estate plan-ning practice. Many professionals asked the same question years ago when cryp-tocurrency was a fringe and untested investment, but now there are many clients holding blockchain-based curren-cies in their portfolios. Like BitCoin and other cryptocurrencies, it is imperative that estate planners start asking their clients about NFTs, updating the refer-ences to digital assets in all estate plan documents, and preparing fiduciaries to properly handle these types of assets.

As a first step, client intake ques-tionnaires and asset summaries, which should already ask for information about digital assets—cyrptocurrencies, domain names, digital photos and vid-eos, online “channels” where content is monetized, etc.—should be revised to include a reference to NFTs. Who wouldn’t want to know if a client owns an asset worth $69 million? We should all be certain to ask about digital assets, including NFTs, when meeting with clients as well. Asking clients about emerging asset classes could trigger an

important discussion with implications for tax planning, re-titling, and alloca-tion to specific beneficiaries.

If a client owns an NFT, consider the following:

Planning with NFTsIn many cases, holding the NFT in a limited liability company (LLC) will be ideal. LLCs have several uses in estate planning. Most importantly, perhaps, an LLC can provide for the efficient management of the entity’s under-lying asset, in this case the NFT. The client can transfer the NFT to the LLC and, subject to certain limitations, if tax planning is a concern, retain control over the sale and management of the NFT by serving as manager of the LLC. The client can also name an appropriate successor manager, who will take over when the client is no longer willing or able to serve. Great care should be taken to ensure that the successor manager is knowledgeable about NFTs and capable of managing the token. Naming some-one who is lacking in either skill could result in the mismanagement of the dig-ital asset, with catastrophic results.

An LLC can also facilitate trans-ferring ownership of the NFT. As the members (owners of the LLC interests)

wish to sell, gift, or transfer interests in the NFT, they will be able to do so by simply transferring membership inter-ests in the LLC, rather than having to go back to the blockchain for each trans-fer. Moreover, because the NFT will be owned by the LLC rather than the mem-bers individually, economic interests in the underlying assets can be trans-ferred (via the transfer of membership interests in the LLC) without also trans-ferring control of the token. This allows for the centralized management of the NFT, despite the fact that the economic interests can be spread across multiple parties.

In addition to these benefits, an LLC can also provide a mechanism for min-imizing transfer taxes by allowing for discounted gifts or other transfers of LLC interests. These discounts, which are generally in the range of 15–35 percent, take into account minority interests and the lack of marketability associated with the transferred mem-bership interest. By applying a discount to the fair market value of an LLC inter-est, clients can leverage their gift, estate, and generation-skipping transfer tax exemptions, thus passing more assets to children (or other beneficiaries) without incurring transfer taxes.

It is conceivable that the growth potential of NFTs could make them ideal assets for gifting strategies as a part of a well-rounded estate plan. Coupled with the discounting noted above, the volatile nature of such assets could support substantial valu-ation discounts. Given their novelty and the varied nature of NFTs, a formal appraisal should be obtained before engaging in any planning transac-tions. One might also consider using a Wandry-style defined value clause, a formula clause that allows a client to determine a gift’s fair market value by referencing a fixed dollar amount rather than transferring a fixed quantity of property, in any transaction involv-ing an NFT. However, great care must be exercised in using such clauses, as the IRS has challenged them on several occasions with mixed results.

Like collectibles and works of art, NFTs have no objective intrinsic value.



Instead their value is driven by three qualities: brand, scarcity, and market. Brand creates value, scarcity enhances value, and markets establish price in a virtuous cycle that results in the desir-ability and value of a given NFT. When NBA Top Shot creates an NFT, the token has value tied to the NBA’s brand. Of the millions of Top Shot moments, some moments—legendary moments—only have 25 NFTs available, compared to common moments with tens of thousands of available tokens. It goes without saying that the rarer moments and tokens are more valuable than the common ones. When Beeple creates a one-of-a-kind NFT tied to a piece of his digital art, the token has value because the creator, Beeple, is a world-renown digital artist, graphic designer, and ani-mator. The value is then enhanced by virtue of the fact that the token is one-of-a-kind. Many people have questioned how Beeple’s NFT can have value, given that others can simply copy the under-lying artwork and create their own NFT. However, the analogy is similar to any piece of fine art—anyone can sell a copy or photograph of the Mona Lisa, but there is only one true original. As the number of NFT transactions increases, valuation firms will have a better data set with which to inform opinions of fair market value and discounts for estate planning and other purposes.

Finally, an LLC can also be used for asset protection purposes. In most cases, LLCs are used to protect the members’ personal assets from liabili-ties related to the LLC—and that can certainly apply in the NFT context. For liability purposes, an LLC is treated as a company—liabilities are limited to the assets of the company—and the per-sonal assets of the members won’t be implicated in the company’s liabilities in the absence of fraud. In some cases, however, the NFT may represent the members’ most valuable asset. In such a circumstance, a properly-structured LLC in an asset-protection-friendly jurisdiction can offer reverse asset pro-tection, protecting the NFT (owned in the LLC) from the reach of the mem-bers’ personal liabilities.

Updating Estate Plan DocumentsRegardless of whether the NFT is held in an LLC, the language regulating digi-tal assets in wills, trusts, and durable powers of attorney should be drafted to be as broad as possible with the goal of encompassing NFTs and other emerg-ing technologies. At this point, the term “digital assets” should specifically ref-erence cryptocurrencies, NFTs, and all assets owned through blockchain technology. It is advisable to incorpo-rate a reference to the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) into estate planning doc-uments in states that have enacted RUFADAA or a similar state statute. Though a full review of RUFADAA is beyond the scope of this article, gen-

erally speaking it allows fiduciaries to access, copy, and manage certain digi-tal assets, and the written consent of the owners is deemed to override more restrictive terms-of-service agreements.

In addition, and as noted above, great care should be given to selecting fiduciaries who are knowledgeable with respect to NFTs and who are capable of managing such assets. In many cases, it may be worthwhile to name a sepa-rate “digital fiduciary” who is tasked only with handling digital assets. Cli-ents might also consider directing their fiduciaries to seek the advice of a tech-savvy trusted advisor with the skills and knowledge necessary to help the fiduciaries handle and manage valuable digital properties.

Consideration should also be given to specifically authorizing trustees to retain NFTs as a part of the trust estate, despite the fact that many states have enacted prudent investor rules. Such rules generally require that fiduciaries invest as a reasonable, prudent person would after considering the purposes,

distribution requirements, and other circumstances of the trust and to diver-sify trust investments to mitigate risk. In the absence of specific authoriza-tion to retain the NFT, a trustee may be obligated to sell the token and reinvest the proceeds, particularly in circum-stances where the NFT represents a majority of the clients’ wealth. Given the volatility in the NFT marketplace and the uncertain future of such assets, giving fiduciaries flexibility in decid-ing whether to retain such assets or sell them is ideal. Alternatively, clients who feel strongly that their NFTs have reached a high-water mark should con-sider including a provision in their documents requiring that such assets be sold.

Clients would be wise to log the historic value of their NFTs, as the inev-itable fluctuation in the value of these assets can have consequences for estate taxes and ultimately for those standing to benefit from the estate.

Access and SecurityThe decentralized nature of blockchain technology poses some unique issues with respect to access and control of NFTs. It is absolutely crucial that clients create a system for tracking and locat-ing the personal keys and passwords necessary to access these digital assets, both for security during the owner’s lifetime and so that those administer-ing estates can locate and secure the digital asset after the owner’s death. There exist programs that will encrypt and back up the wallet and keys in a so-called digital vault. There are even companies that will emboss the per-sonal key, sometimes known as the “seed phrase” (a recovery phrase the cryptocurrency wallet relies on to access holdings), on steel so that it will survive

Great care should be given to selecting fiduciaries who are knowledgeable with respect to NFTs and who are capable of managing such assets.



a house fire or other catastrophic event. Other experts recommend a “paper” solution whereby parts of various keys and passwords are disseminated to a few trusted individuals or stored in a safe deposit box, and those pieces must be united by the executor to access the decedent’s wallet and the digital asset. See Pamela Morgan, Cryptoasset Inheritance Planning: A Simple Guide for Owners (2018). Although this may seem rather involved, there have already been a number of instances where executors or trustees either didn’t know that the decedent possessed cryptocurrencies or were unable to access the keys, result-ing in the loss of millions of dollars of assets.

Hacking is also a very real security threat for this type of asset. Although the blockchain technology records are very secure, if a hacker is able to access the holdings in a wallet by compromis-ing login credentials, the hacker can then sell or transfer the asset. This sale would be recorded on the blockchain irreversibly. Digital art holders on the

platform NiftyGateway recently alleged that this type of theft occurred. Attor-neys can certainly envision how undue influence could be a contributing fac-tor to accessing or hacking an account with a valuable digital asset. A recent successful attempt at “sleepminting” (creating a second edition of a work and causing the artist to unknowingly claim authorship on the blockchain) the recent Beeple digital artwork by an “eth-ical hacker” aimed to show that there are still grave concerns with the smart contracts underlying NFTs that may have been overlooked in the rush to capitalize on this new ownership form. Tim Schneider, The Gray Market: How a Brazen Hack of That $69 Million Beeple Revealed the True Vulnerability of the NFT Market (and Other Insights), Artnet (Apr. 21, 2021).

Although estate planners are unlikely to be experts in the various blockchain exchanges, it is advisable to impress upon clients the importance of investing in exchanges with transpar-ent anti–money laundering and “know

your client” policies to avoid inadver-tently participating in illegal activities. Less-established exchanges also provide questionable information on trading volume, thus affecting both the value of the investment and the ability to sell at a future date.

ConclusionNFTs, as a technology and an asset class, are relatively new. The evolution of NFT forms, the transition of such assets to mainstream investing, and the ultimate value of NFTs all remain speculative at this point in time, but there is no deny-ing the potential upside of embracing this emerging technology. Given the recent popularity of NFTs and their seemingly endless permutations, we can expect to be interacting with NFTs in planning and administering estates for decades to come. Advisors would best serve their clients by exploring this emerging asset class and the planning opportunities that may accompany NFT ownership. n



KEEPING CURRENTP R O P E R T Y

Keeping Current—Property Editor: Prof. Shelby D. Green, Elisabeth Haub School of Law at Pace University, White Plains, NY 10603, [email protected]. Contributor: Prof. Darryl C. Wilson.

CASES

EMINENT DOMAIN: Oil and gas com-pany must own development rights to condemn a way of necessity over pri-vate land. In Wyoming, when two or more entities have the right to produce oil and gas in an area, the first entity to collect the necessary information and file an application for a permit to drill (APD) acquires sole operating rights. EME Wyoming, LLC, an oil and gas com-pany, sought access to 52,000 acres of land for the stated purpose of gathering data to evaluate the property’s suitability for condemnation under the Wyoming Eminent Domain Act, Wyo. Stat. §§ 1-26-501 to 1-26-817. BRW, the property owner, believed that EME sought access to the land, not for a statutory purpose, but to gain an advantage in getting an APD. BRW denied EME’s request. EME then brought an action under the act to obtain a “way of necessity” over the BRW land. The trial court granted EME access to the land to survey and gather data but barred EME from using the survey data to file an APD. Both parties appealed. The supreme court reversed on the first issue and affirmed on the second. The act extends the right of eminent domain to oil and gas companies to acquire access over private land for resource development. Id. §§ 1-26-814, 1-26-815. But an eligible condemnor must own development rights to landlocked minerals before invoking the act. The access permitted is not intended to be a device used to determine if the condem-nor wants to acquire mineral ownership in the first place. The data sought must relate to the development of minerals owned by the condemnor. Here, EME

the memorials. In a close textual anal-ysis of the statute, the supreme court reversed. Because the statute, enacted in 1997, spoke in the present tense, the court concluded that it was meant to have prospective effect and only apply to monuments or memorials erected pursuant to it, not also to war memori-als erected in the past, as claimed by the citizens. In the court’s view, its interpre-tation “was not absurd” because, before 1997, no general state statute prevented local governments from removing war memorials or monuments. City of Char-lottesville v. Payne, 856 S.E.2d 203 (Va. 2021).

FORECLOSURE: Mortgagee must commence foreclosure within 90 days after homeowners association gives notice of default to keep priority over homeowners association’s lien. In 2011, the owner of a condominium unit defaulted in making mortgage payments and in 2013 stopped paying condo-minium assessments. The homeowners association (HOA) recorded a lien against the unit, which was junior to the bank’s interest at the time. During the next year, the bank filed and dismissed two separate foreclosure actions. In Octo-ber 2014, the HOA sent the bank written notice of the unit owner’s default on assessments. Or. Rev. Stat. § 100.450(7)(a) required that the bank initiate a fore-closure proceeding within 90 days after the notice or lose its lien priority. But the bank did nothing until May 2015, when it moved to reinstate the previ-ous foreclosure action. The HOA claimed lien priority, but the trial court and the appeals court held that the bank retained senior priority because the reinstated foreclosure action, as originally filed, pre-ceded the 90-day statutory deadline. The HOA argued that the statute required the bank to initiate a foreclosure action after receiving notice of the assessment default. The supreme court reversed,

failed to show that it owned the right to develop landlocked minerals that it could not access without condemning BRW’s property. Therefore, it was not entitled to statutory access to the prop-erty. EME Wyo., LLC v. BRW East, LLC, 486 P.3d 980 (Wyo. 2021).

HISTORIC PRESERVATION: Local government may remove Confeder-ate statues and memorials. In 1918, the city accepted a donation of land to erect a statue of Robert E. Lee and to build a park in his name and, in 1921, accepted a similar donation for a statue and park honoring Thomas J. “Stonewall” Jack-son. Statues honoring these men were erected in 1921 and 1924. In 2017, the city council voted to remove the Lee statue from Lee Park and to rename and redesign the Lee and Jackson Parks. Several citizens sued to enjoin the city from carrying out these plans, alleging a violation of a statute enacted in 1997, which authorized local governments to erect “monuments or memorials for any war or conflict… including …Confeder-ate or Union monuments or memorials of the War Between the States (1861-1865)” and made it “unlawful to disturb or interfere with any monuments or memorials so erected, or to prevent … citizens from taking proper measures … for the protection, preservation, and care of same.” Va. Code § 15.2-1812 (prior to amendments made in 2020). The trial court agreed with the citizens and enjoined the city’s plans to remove

Keeping Current—Property offers a look at selected recent cases, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.




holding that the HOA’s notice triggered the bank’s obligation to act anew and, failing to do so within 90 days, it lost its senior lienholder status. The court explained that the notice provision aims to prompt first lienholders to commence foreclosure to transfer the unit to a new owner who would pay assessments. Allowing the Bank to use the long-ago-filed foreclosure action to justify its inaction would defeat this purpose. Bank of New York Mellon Trust Co. v. Sulejman-agic, 481 P.3d 293 (Or. 2021).

INVERSE CONDEMNATION: State authorization of contaminated water source that causes injury to property states claim for compensation. From 1964 to 2014, the city of Flint took water from Lake Huron via the Detroit Water Department. In 2013, the governor authorized a process for permanently switching the source of water supply and to use the Flint River as an interim water source. This move was autho-rized despite warnings by city officials that the suitability of the water had not been independently assessed and that the proposed treatment plant was unfit for operation. Less than a month after the switch, Flint residents who drank the water became ill, some suffering from lead paint poisoning. The plaintiffs brought an inverse condemnation claim, alleging physical damage to their water pipes, service lines, and water heaters, as well as in the loss of property value because of their inability to use their properties and the refusal of mortgage lenders to finance purchases of proper-ties affected by the noxious water supply. The court of claims found the plaintiffs sufficiently pleaded a claim for inverse condemnation, and the court of appeals affirmed. The supreme court affirmed, easily finding the first two requirements of an inverse condemnation claim. First, the plaintiffs had alleged substan-tial physical damage to their property by the injury to water pipes and other infrastructure. Second, they sufficiently alleged that the government had affir-matively abused its power by knowingly using river water that could cause harm and then concealing data that showed the dangers. The harder issue before the

court was whether the plaintiffs had suf-fered an injury that was different from that suffered by all persons similarly situated. The court found the plaintiffs demonstrated special injury. After the switch to the Flint River, water contami-nated with Legionella bacteria and toxic levels of iron and lead flowed through their pipes, service lines, and water heat-ers, damaged the infrastructure, and diminished their property value. These effects were not like the service disrup-tions and costs normally incurred by water users when a municipal water pro-vider changes sources of water. Mays v. Governor of Michigan, 954 N.W.2d 139 (Mich. 2020).

LANDLORD-TENANT: Notice of lease termination must identify spe-cific grounds for termination. The Raleigh Housing Authority (RHA) received three noise complaints concern-ing the apartment of its tenant, Patricia Winston, and sent Winston a letter ter-minating her lease as of December 31, 2017, for violating paragraph 9(f ) of the lease. After an informal meeting, the RHA rescinded the termination letter based on a finding that the noise was due to altercations between Winston and her guest, who threatened domes-tic violence, although Winston had not sought a protective order. In February 2018, the RHA received another noise complaint and sent a second lease termi-nation, stating “Inappropriate Conduct — Multiple Complaints.” Winston sought judicial review. The trial court found the notice adequate, and the appel-late court affirmed. The issue on appeal was compliance with a regulation of the Department of Housing and Urban Development (HUD), which requires a notice of termination to “state specific grounds for termination.” 24 C.F.R. § 966.4(l)(3)(ii). Although the regula-tion does not define “specific grounds,” the court observed that the plain mean-ing requires the housing authority clearly to identify the factors forming the basis for termination. The notice here failed to state any specific conduct by Winston. Nor was the reference to the specific lease provision that requires tenants to control the conduct of their

guests enough because not all the dis-turbances covered by the provision are grounds for eviction as a matter of law and might involve conduct for which a landlord may not evict a tenant. Specifi-cally, the Violence Against Women Act of 1994, 34 U.S.C. § 12491(b)(1), prohibits covered housing programs from evicting tenants based on actual or threatened domestic violence. On its face, the notice of termination was indeterminate and, therefore, fatally deficient. Raleigh Hous-ing Authority v. Winston, 855 S.E.2d 209 (N.C. 2021).

LANDLORD-TENANT: Claim for return of security deposit is governed by statute of limitations for recovery of personal property and not general catchall provision. When a residen-tial tenant terminated his lease and moved out, the landlord promptly sent him a “Deposit Disposition” claiming that he owed $2,281 after applying his $300 deposit. More than two years later, the tenant filed a complaint for dam-ages, claiming a violation of the state’s enactment of the Uniform Residential Landlord and Tenant Act (URLTA) by not providing a full and specific statement of the basis for retaining the security deposit or returning the deposit within 14 days after he vacated the premises. Wash. Rev. Code § 59.18.280(1)(a). The trial court granted the landlord’s motion to dismiss on the ground of the expira-tion of a two-year statute of limitations. URLTA does not include its own statute of limitations. The question before the court was whether to apply a three-year statute of limitation for “[a]n action for taking, detaining, or injuring personal property, including an action for specific recovery thereof,” Wash. Rev. Code § 4.16.080(2), or a two-year “catchall” statute of limitation for all other actions not otherwise specifically provided for in the state code, Wash. Rev. Code § 14.16.130. Therefore, the resolution came down to whether a security deposit is considered the tenant’s personal prop-erty as would trigger the three-year statute of limitations. The supreme court concluded that it did. Because the catch-all statute applies only to those actions that do not fall within any other statute




Adirondack Park, New York. Photo by James St. John.

of limitations, the tenant had the bene-fit of the three years to claim his security deposit. Silver v. Rudeen Mgt. Co., 484 P.3d 1251 (Wash. 2021).

PREMISES LIABILITY: Sovereign immunity does not bar action for injury caused by inadequate outdoor lighting. Wise fell on a sidewalk outside a public housing complex and sued the public housing authority for negligence. She alleged that her fall was the result of insufficient lighting because of the loca-tion of a pole light and a tree obstructing the light provided. The trial court granted the housing authority’s motion for summary judgment based on sover-eign immunity. The issue was the scope of the “real estate exception” of the Penn-sylvania Sovereign Immunity Act, which removes the bar of sovereign immu-nity for a “dangerous condition” of “real estate and sidewalks” owned by the state. Pa. Consol. Stat. § 8522(b)(4). The trial court found the exception did not apply because there was no defect in the side-walk, only inadequate outdoor lighting. On appeal, a three-judge panel affirmed unanimously, ruling that Wise’s com-plaint boiled down to a claim that the state failed to alter the natural state of nighttime darkness, causing her fall, and that nighttime darkness was not an arti-ficial condition caused by the state. The supreme court reversed, noting that the real estate exception is to be construed strictly, given the legislature’s intent to exempt the state from immunity only in specifically defined situations. In that vein, the court had previously observed that the exception applies only “where it is alleged that the artificial condition or defect of the land itself causes an injury to occur,” not merely when it facilitates injury by acts of others. Here, Wise did not merely claim the absence of light-ing as the cause of her injury; instead, she maintained that insufficient artifi-cial lighting existed on the state property because of the arrangement of the side-walk, pole light, and tree, which are part of the real property. As a matter of law, this claim fell within the real estate exception to sovereign immunity. Wise v. Huntingdon Cty. Hous. Dev. Corp., 249 A.3d 506 (Pa. 2021).

RECREATION: Snowmobile trails in state forest violate “forever wild” con-stitutional provision. The Adirondack Park Agency, in charge of managing the vast Adirondack Park in New York, pro-posed to build “multi-use” snowmobile trails in the park, which would entail clearing and grading a 27-mile trail, taking down more than 6,000 mature trees, and removing rock formations. A citizens’ group challenged the plan, claiming it would violate Article 14 of the state constitution, which provides that the state’s Forest Preserve “shall be forever kept as wild forest lands.” N.Y. Const. art. XIV, § 1. Following a bench trial, the court agreed with the citi-zens, but the intermediate appellate court reversed, finding that the “quali-ties of the trails” would not impair the wild forest nature of the Forest Preserve. The court of appeals disagreed. Look-ing back on the history of the use of the forest, the court noted that the destruc-tion or removal of trees represented the principal threat that led to the constitu-tional amendment in 1895 that adopted the “forever wild” provision. Building snowmobile trails, with widths and con-figuration necessary for safety, requires a greater interference with the natu-ral development of the Forest Preserve than is necessary to accommodate hik-ing trails, which are allowed. The court relied on its only prior interpretation of the constitutional provision when it did not allow building a bobsled run for the 1932 Olympics; equally, destruc-tive snowmobile trails are not allowed absent constitutional amendment.

Protect the Adirondacks! v. N.Y. State Dep’t of Envtl. Conservation, 170 N.E.3d 424 (N.Y. 2021).

REMEDIES: Liquidated damages clause in settlement agreement pro-viding for seven and a half times the amount owed if party had complied with agreement is an unenforceable penalty. The Trustees of Columbia Uni-versity (Columbia) and D’Agostino Supermarkets, Inc. (the Market) entered into a 15–year commercial lease for the Market’s rental of the ground floor and basement levels of a building owned by Columbia. Thirteen years into the ten-ancy, when the Market faced financial difficulties, the parties entered a Sur-render Agreement that terminated the lease in exchange for the Market’s sur-render of the premises and a staggered series of payments totaling $261,751. The Surrender Agreement provided that should the Market fail to make the payments as scheduled, “the aggregate amount of all Fixed Rent, additional rent or other sums and charges due and payable during the term of the Lease shall immediately thereafter come due and payable by Tenant to Landlord and …Tenant shall no longer be enti-tled to be released and relieved from and against any Released Claims.” As agreed, the Market vacated and sur-rendered the premises to Columbia within days of signing the Surrender Agreement and timely made an initial $43,000 surrender payment. Colum-bia relet the premises one month after the surrender. The Market failed timely

to pay monthly surrender pay-ments from July to October 2016, despite Columbia’s notice to cure. In November 2016, Columbia commenced an action to enforce the damages provi-sion in the Surrender Agreement and moved for summary judg-ment on a claim for $1,020,125, representing future rent under the lease, plus interest and other taxes and costs provided for under the lease. Columbia rejected the Market’s tender of $175,751, which represented the overdue and remaining monthly




surrender payments. The trial court denied Columbia’s summary judgment motion and entered judgment against the Market for $175,751. The court of appeals affirmed, first finding that dam-ages are properly measured against the Market’s breach of the Surrender Agree-ment, not against the breach of the terminated lease. Viewed in that light, the court concluded that the liquidated damages provision was an unenforce-able penalty because it was plainly disproportionate to the actual dam-ages from the only contractual breach at issue, i.e., overdue payment of the monthly surrender payments. The court explained that liquidated damages are “an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement,” and has its basis in the principle of just compensation for loss,” citing Restatement of Contracts § 339. If they operate as a penalty, they are unenforceable. A provision that requires damages “grossly dispro-portionate to the amount of actual damages provides for [a] penalty and is unenforceable.” Here, the liquidated damages sought by Columbia were seven and a half times what Colum-bia would have received if the Market had fully complied with the Surrender Agreement. The court stated that “[b]y any measure the more than one million dollars plus interest demanded here is disproportionate to the $175,751 unpaid under the Surrender Agree-ment.” Trustees of Columbia Univ. v. D’Agostino Supermarkets, Inc., 162 N.E.3d 727 (N.Y. 2020).

RESTRICTIVE COVENANTS: Developer cannot impose restric-tive covenants on subdivision lots after their sale. The developer platted a subdivision and sold the vast major-ity of lots with time-limited restrictions against non-residential use in the deeds of conveyance. Later, when the devel-oper no longer owned any lots in the subdivision, the developer recorded a declaration of restrictive covenants with no time limit—including a restric-tion against non-residential use—that

purported to apply to all lots in the sub-division. Decades later, well after the expiration of the time-limited deed restrictions, Hatfield purchased lots and proposed to build a structure for the operation of a retail business to sell “adult novelty items.” Neighbors, who resided on lots adjacent to the Hat-field’s property, brought a declaratory judgment action to enforce the non-time-limited restrictions contained in the recorded declaration. The trial court enjoined Hatfield’s proposed commer-cial use, concluding that his property, through the declaration, was subject to an implied negative reciprocal ease-ment that prohibited non-residential use. The intermediate appellate court affirmed. The supreme court reversed. In a tutorial on the meaning and effects of servitudes that run to burden succes-sors, the court emphasized the essential requirement that a person imposing or agreeing to restrictions must own the land. Here, the developer did not own the lots when he executed and recorded the declaration, and there was no agree-ment by lot owners to any restrictions. It made no difference that the developer had reacquired some of the sold lots over time. Restrictions cannot be applied ret-roactively. Nor did the facts support a finding of an implied reciprocal negative easement because the developer was no longer acting as a common grantor of a development plan when the developer recorded the restrictions. Phillips v. Hat-field, 624 S.W.3d 464 (Tenn. 2021).

LITERATURE

CONSERVATION EASEMENTS: In Conservation Easements and the Pro-ceeds Regulation, 56 Real Prop. Trust & Est. L.J. 111 (2021), Prof. Nancy A. McLaughlin provides an in-depth look at Treasury Regulation § 1.170A-14(g)(6)(ii), known as the proceeds regulation. The proceeds regulation is intended to protect the public investment in con-servation after the extinguishment of a perpetual conservation easement that was the subject of a charitable deduction under IRC § 170(h). A proper under-standing of the proceeds regulation is critical because the public investment

in deductible easements is significant—billions of dollars are invested in such easements annually—and the regulation has recently been subject to challenges regarding its interpretation and validity. Prof. McLaughlin examines the history and operation of the proceeds regula-tion as well as possible alternatives. She explains that the proceeds regulation provides a simple and easy-to-imple-ment rule that avoids a host of future valuation difficulties. In her view, the proceeds regulation is neither irrational nor inherently unfair to donors or sub-sequent property owners, and it serves to temper the perverse incentive that property owners may have to seek to extinguish easements. Prof. McLaughlin concludes that the regulation provides a reasonable solution to the difficult prob-lem of ensuring that the conservation purpose of a contribution is protected in perpetuity as required by IRC § 170(h)(5)(A).

LEASES: Leased farmland comprises approximately 40 percent of all farm-land in the United States, with the leases taking many forms. Some are informal, some even unwritten, some are between family members, some involve arm’s length parties, some provide for cash rent, and, for others, the consideration is crops or a percentage of the crop gross revenue. Leases present a full variety of contract and property issues from the statute of frauds to the rule against per-petuities to estate administration. Many farm leases have options to purchase. In Purchase Options in Agricultural Farmland Leases, 25 Drake J. Agric. L. 41 (2020), Chad G. Marzen gives a comprehensive analysis of state appellate decisions on agricultural purchase options. His read-ing shows that there are no straight lines from one context to another or from one court to another. The results show the importance of drafting with clarity and with an understanding of operating legal principles to carry out the parties’ intentions and to avoid burdensome arrangements.

TAKINGS: In The Aftermath of Takings, 70 Am. Univ. L. Rev. 589 (2020), Prof. Shelley Ross Saxer thoroughly discusses




the history and current use of the power of eminent domain in the context of redevelopment. By aftermath, she refers to the disturbances that result when the proposed redevelopment never happens or is later abandoned. The disturbances include the loss of property, jobs, and community. She discusses the various reforms adopted by the states to respond to these disturbances, including mitiga-tion measures taken by private parties who received property in exchange for an eminent domain land assembly. She recommends decommissioning for some kinds of public uses, including dams, pipelines, and railroads, even when emi-nent domain was not used to acquire the property supporting this infrastructure. In the end, she proposes incorporating the public trust doctrine (or a modified concept of the doctrine, perhaps formu-lated by state statute) as a way to recover property no longer required to serve a public use. When return to the origi-nal property owner is not feasible, other measures may address adverse after-maths of previous takings.

Adding new insight to the takings dialogue is Prof. John D. Echeverria’s article, What Is a Physical Taking? 54 UC Davis L. Rev. 731 (2020), which exam-ines the long line of Supreme Court cases to see what the Court means by “physical taking.” Prof. Echeverria con-cludes that no coherent meaning can be found. His study focuses on the appar-ent demarcation between occupation and appropriation of private land on the one hand and restrictions on use on the other. In the latter type, claims are generally analyzed under a relatively

more forgiving, complex analytic frame-work. He claims that each type should be understood as arising from an impair-ment of a distinctive normative value: in the case of appropriations, the instru-mental exploitation of citizens for governmental purposes; in the case of occupations, the impairment of personal privacy; and in the case of restrictions on the use of property, the potentially extreme and unfair redistribution of wealth. Some government actions may implicate several of these different prop-erty-related values with the result that a single government action can poten-tially support different types of taking claims. However, the values associated with each type of claim are sufficiently distinctive to support different rules for different types of alleged takings. He proposes a new approach to physical tak-ing cases that eschews an absolute per se theory but also recognizes that courts should analyze physical-taking claims (based on either appropriations or occu-pations) differently than claims based on use restrictions. Under his proposed approach, physical-taking claims would be evaluated without regard to the eco-nomic impact of the government action or the size of the portion of the prop-erty affected by the government action. Instead, courts would apply other factors from traditional takings analysis, includ-ing the extent of interference with the owner’s reasonable expectations and the purposes of the government action.

LEGISLATION

ARKANSAS amends rules for

beneficiary deeds. A grantee under a beneficiary deed is no longer liable for reimbursement claims for governmental benefits paid to the grantor. 2021 Ark. Laws 570.

KENTUCKY adopts abandoned real property act. Upon petition, a court may appoint a conservator to take pos-session of, repair, and eventually sell property that is abandoned or neglected as defined by the act. The owner must be given notice and an opportunity to be heard. 2021 Ky. Laws ch. 166.

NEW MEXICO adopts Revised Uni-form Law on Notarial Acts. The act allows for electronic notarization and prescribes rules for identifying persons appearing before the notary and for recordkeeping. 2021 N.M. S.B. 12.

NORTH DAKOTA adopts the Uni-form Environmental Covenants Act. The act prescribes the content of an envi-ronmental covenant, states its effect as running with the land without many of the common-law requirements, and provides for recording, amendments, ter-mination, and enforcement. 2021 N.D. Laws 1079.

VIRGINIA amends regulations for comprehensive plans. Local govern-ments must include “strategies to promote manufactured housing as a source of affordable housing,” such as by creating new communities and subdivi-sions for them. 2021 Va. Laws ch. 91.

VIRGIN ISLANDS adopts the Uni-form Residential Mortgage Satisfaction Act. The act sets out rules for notices to mortgagors, the correction of mistak-enly recorded instruments, loan payoff statements, and formal requirements for satisfaction statements. 2020 V.I. Laws 8396.

WYOMING adopts Revised Uniform Law Notarial Acts. The act allows for electronic notarization and prescribes rules for identifying persons appearing before the notary and for recordkeeping. 2021 Wy. Laws ch. 27. n

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2021–2023 RPTE FELLOWS

TRUST AND ESTATE FELLOWS REAL PROPERTY FELLOWS

CHELSEA P. FITZGERALDLiskow & LewisNew Orleans, LA

JENNIFER FRIEND-KELLYOffit Kurman, P.A.Washington, DC

ANTHONY N. MANSOURGordon Rees Scully Mansukhani, LLPSan Diego, CA

FREDERICK H. MITSDARFER, IIIRichards, Layton & Finger, P.A.Wilmington, DE

RAYMOND L. TRANSeyfarth Shaw LLPAtlanta, GA

LISA GOODRICH PAGEDungey Dougherty PLLCGreenwich, CT

MAYA S. GOREECross, Gunter, Witherspoon & Galchus, P.C.Little Rock, AR

JEFFREY D. HOPKINSBarnes, Alford, Stork & Johnson, LLPColumbia, SC

RACHEL M. LEEPrimiani, Stevens & Punim, P.C.Los Angeles, CA

IMAAN MOUGHALManice & Budd, LLPNew York, NY



The Effect of the New 2021 Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys onCommercial Real Estate Transactionsby Wendy Gibbons and Gary R. Kent



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Wendy Gibbons is Vice President and Deputy Chief Underwriting Counsel in the Corporate Legal Department of Old Republic National Title Insurance Company in Tampa, Florida. Gary R. Kent is owner and manager of Meridian Land Consulting, LLC in Noblesville, Indiana.

In October 2020, after two years of concentrated effort and the input of hundreds of interested persons, the

American Land Title Association and the National Society of Professional Sur-veyors adopted the new 2021 version of the ALTA/NSPS Land Title Survey Mini-mum Standards. The effective date was February 23, 2021. This date may seem random, but the effective date was chosen because it is the date of the festival held in honor of the Roman god Terminus, who protected boundary markers.

The most significant changes are explained in this article, although those who review, rely on, and perform land title surveys may wish to review a red-lined version of the 2016 ALTA/NSPS Standards (2021 Standards), indicating the deletions and additions that resulted in the 2021 version.

The redlined version, a copy of the offi-cial 2021 ALTA/NSPS Land Title Survey Minimum Standards, and an extensive set of Frequently Asked Questions are available on the National Society of Pro-fessional Surveyors’ website at NSPS.us.com under the Resources tab.

Title Insurance and the ALTA/NSPS SurveyA title insurance company relies on a survey for several reasons, including con-firmation of legal access to and from the land, location of boundary lines, location of improvements on the land in relation to the boundary lines, and extended pol-icy coverage for survey matters. The title insurance company also relies on a sur-vey to disclose information relating to coverage for issuance of the ALTA 3-06 zoning endorsement series insuring zon-ing matters and for issuance of several other endorsements. These endorse-ments include the ALTA 9-06 series providing encroachment, easement, cov-enant, and mineral rights coverage, the ALTA 17-06 series insuring access and

utility access, the ALTA 19-06 insuring contiguity, the ALTA 22-06 insuring the property address and improvements located on the land, the ALTA 25-06 insuring that the land in the title policy is the same as shown on the survey, and the ALTA 28-06 series providing cover-age over easements and encroachments. Some endorsements may be issued based on a review of an ALTA/NSPS survey with no Table A items. Table A is a list of optional items that are part of the 2021 standards that the surveyor and client can negotiate to appear on the survey. Other endorsements require the insured to negotiate certain Table A items for issuing particular endorsements. Table A revi-sions will be discussed later in this article.

A lender providing financing secured by real property also relies on the survey to determine marketability, to identify access problems such as landlocked prop-erty, and to address matters that may affect its client’s ability to refinance in the future, such as encroachments, over-laps, unrecorded easements, and possible underground utilities. A lender provid-ing commercial financing on commercial property typically requires a lender’s title insurance policy to protect the valid-ity, enforceability, and priority of its mortgage.

Section 1 of the 2021 Standards details what the surveyor must do in the field to gather all the information the title com-pany needs to issue its title policy. It is customary for a title insurance commit-ment to contain a standard exception from coverage in Schedule B for loss aris-ing out of

any encroachment, encumbrance, violation, variation or adverse cir-cumstance affecting the Title that would be disclosed by an accu-rate and complete land survey of the Land. The term “encroach-ment” includes encroachments of existing improvements located on the land onto adjoining land and encroachments onto the Land of existing improvements located on adjoining land.

The definition of “encroachment” is exemplary and not exclusive. This

exception and the commitment exception for unrecorded easements are included in the “general survey exceptions.” The sur-vey exceptions are intended to exclude from coverage those matters affecting title that would normally not be discovered by an examination of the documents in pub-lic land records. This premise is reflected in section 1 of the 2021 Standards, setting forth the purpose of the standards and acknowledging that title insurers have specific needs when asked to insure title without exception to matters that may be discoverable only from survey and inspection.

When the general survey exceptions are deleted from Schedule B of the title policy, the coverage for survey matters is provided in section 2(c) in the ALTA Owner’s and Loan Policy, which expressly insures against loss or damage affecting title from any

encumbrance, violation, variation, adverse circumstance, bound-ary line overlap, or encroachment (including an encroachment of an improvement across the bound-ary lines of the Land, but only if the encumbrance, violation, variation, adverse circum-stance, boundary line overlap, or encroachment would have been disclosed by an accurate and com-plete land title survey of the land.

What constitutes “an accurate and complete land title survey of the land” for the purposes of obtaining a dele-tion of the survey exceptions from the ALTA Loan or Owner’s Policy? Section 1 of the 2021 Standards states that title companies, lenders, and their respective customers and insureds may rely on sur-veys that are of professional quality and appropriately uniform, complete, and accurate. Section 1 of the 2021 Standards continues to define a “complete survey” as the on-site fieldwork, the prepara-tion of a plat of the land title survey in relationship to documents provided or obtained by the surveyor from the title company, any information from Table A items requested by the client, and the surveyor’s certification of survey. From a title insurer’s and lender’s perspective,



the most accurate and complete survey for transactions involving commer-cial property is the ALTA/NSPS survey. The ALTA/NSPS survey is considered the “gold standard” of surveys for com-mercial transactions that involve a high dollar investment because it is a detailed survey in an established, standardized format that can be used for as-built and construction projects. It provides the detail of a boundary survey plus improve-ment location with adherence to national standards.

Most lenders and buyers in commer-cial transactions require the deletion of the general survey exceptions from the title insurance policy. To delete the gen-eral exceptions from the ALTA Owner’s or Loan Policy, the title company will require an ALTA/NSPS survey prepared by a registered surveyor certified to the title insurer. Upon receipt of the sur-vey, the title company will conduct a detailed review and examination of the survey and make appropriate Schedule B exceptions in lieu of the general survey exception for such matters as unrecorded easements, overlaps, encroachments, easements located outside the recorded easement boundaries, and other posses-sory interests and matters disclosed by the survey.

Section 2 of the 2021 Standards, cap-tioned “Request for Survey,” provides that the surveyor’s client should request the survey and that the request should include which, if any, of the optional items listed in Table A must be incor-porated in the survey. Section 2 further provides the insurer shall not be respon-sible for any survey costs unless approved in writing. This follows established case law that the title insurer does not have a duty to obtain a survey to issue a title insurance policy. It is up to the insured to obtain a survey and correspondingly negotiate with the surveyor those items that should appear on the survey for the benefit of the surveyor’s client, the title insurer issuing the title policy, and the lender providing financing for the trans-action. See Kuhlmann v. Title Ins. Co. of Minn., 177 F. Supp. 925 (W.D. Mo. 1959).

The 2021 Standards consist of eight sections and an attached Table A with Optional Survey Responsibilities and

Specifications to be negotiated between the client and the surveyor. The following discussion will track the 2021 revisions to these sections and Table A in numeri-cal order.

False ImperativesOne of the primary changes is the num-ber of occurrences of the word “shall” that have been changed to “must” in the 2021 Standards. This does not indicate some fundamental change in the thinking of the joint ALTA/NSPS Survey Standards Committee (Joint Committee), but rather it simply reflects the US Supreme Court’s decision in Gutierrez de Martinez v. Lam-agno, 515 U.S. 417 (1995), in which the Court ruled that “shall” really means “may” and that “must” is the word that imposes an obligation or command that something is mandatory.

Using “shall” in earlier versions of the standards was consistent with its common usage at the time; various authoritative references agreed that “must” and “shall” were basically syn-onyms—both were imperatives. For 2021, each use of the word “shall” in the ALTA/NSPS Standards was reviewed and if “shall” was intended as an imperative, it was replaced with “must.”

Section 2—The Request for SurveySection 2 specifically provides that cer-tain properties—such as marinas, campgrounds, mobile home parks, ease-ments, leases, and other non–fee simple interests—present issues outside those normally encountered in an ALTA/NSPS survey and directs the surveyor to consult with the interested parties to determine the scope of the related Land Title Survey.

Several suggestions for the 2021 Standards addressing mineral rights were received. After considerable dis-cussion and definitive input from the ALTA members of the committee, it was decided that mineral rights can be so problematic that the best way to deal with them was to simply add them to the list of atypical and non-fee interests that a Land Title Survey may involve and leave it up to the parties to negotiate the scope of work.

The ALTA Loan and Owner’s Policies

do not insure specific mineral rights. A search of the public land records to be insured may disclose a severance of min-eral rights from the fee simple title in the form of an oil or gas lease, reservation of mineral rights in a deed, or specific grant of mineral rights, all of which will be shown as exceptions from coverage in Schedule B. There are several endorsements, such as the ALTA 9-06 series and the ALTA 35-06 series, that provide affirmative coverage against the forced removal or loss or dam-age to improvements located on the land because of the extraction of mineral rights. Issuing these endorsements does not depend on an ALTA/NSPS survey. Rather, the title company usually relies upon a search of the public records from the pat-ent and an opinion of an experienced land person or attorney. The title insurer recog-nizes that, under the 2021 Standards, it is beyond the scope of the surveyor to locate mineral interests on the property because the standards dictate that the surveyor’s fieldwork disclose observations on the sur-face of the land and not the subsurface, unless there are above-ground markers. To address property that may be subject to mineral rights, the client and the surveyor may negotiate for the surveyor to disclose and show on the survey any surface mark-ers of mineral extraction. This information is helpful to the title insurer as mineral rights affecting the surface of the land are considered an extra-hazardous risk.

Section 3.D—The BoundaryConcerns were expressed that the former title of this subsection, “Boundary Reso-lution,” might lead the uninformed to conclude that the professional surveyor is the final authority as to the location of boundary lines and corners. Surveyors and title professionals know that a boundary survey is merely a surveyor’s professional opinion. As a result, the decision was made to drop the word “Resolution” from the title of this subsection.

In addition, previous versions of the Standards had used several terms to describe the property that is the subject of the Land Title Survey. Under the 2021 Standards, that property is now referred to as either “the surveyed property” or “the property to be surveyed,” depending on the context of the clause in which it appears.



Section 3.E—The Measurement StandardsThe American Land Title Association has always appropriately required a measure-ment (precision) requirement in the ALTA/NSPS Standards. Because of its technical nature, however, that need has been defined by the surveying community. The meaning of “Relative Positional Precision” (RPP) has been expanded and modified in the 2021 Standards to simplify the calculations and to provide a second, more statistically-based manner of calculating it.

Section 4—Records ResearchAlthough this section appears on the red-lined version to have undergone a major rewrite, the order of the included items was merely rearranged for clarity; the actual content is virtually unchanged. This section addresses what records the surveyor will require to complete the sur-vey and who must provide those records. Over the years, questions have arisen over which party to the transaction must provide the surveyor with copies of the current record’s legal description, the title commitment, and other recorded doc-uments affecting the property such as easements, servitudes, and covenants. There is no requirement in the 2021 Stan-dards that the title company provide this information to the surveyor, but the title company typically will provide this infor-mation. In some states, surveyors are required under state regulations to con-duct their own title and deed search and may not seek information from the title company. More likely, the title company will be happy to provide this informa-tion so that the surveyor can locate the property and the recorded encumbrances identified in Schedule B, which will help the client, the lender, and the title com-pany negotiate policy coverage and endorsements to the policy.

Section 5—FieldworkSection 5 underwent very few changes except for subsections C and E, where sev-eral significant modifications were made.

Section 5.C.ii has always required the sur-veyor to locate and show all walls, buildings, fences, and other improvements within five feet of the perimeter boundary. Likewise, Table A item 11 has always required the

surveyor to locate and show utility poles within 10 feet of the perimeter bound-ary. But as the 2016 Standards required locating and showing all utility features on the property, the 10-foot requirement for utility poles was inadvertently left in Table A rather than moving this require-ment to section 5. In the 2021 Standards, the 10-foot requirement for utility poles is now set forth in section 5.E.iv.

Now, all utility features located on the surveyed property and within five feet of the perimeter boundary of the surveyed property are to be located and shown, except for utility poles, which must be located and shown if they are on or within 10 feet of the perimeter boundary of the surveyed property.

In a major change, section 5.E now requires the surveyor to locate and show utility locate markings, such as above-ground paint markings evidenc-ing underground location of utilities, as evidence of easements for utilities. The surveyor must also identify the source of the markings and include a note if the source is unknown. It must be empha-sized that nothing in section 5 requires an 811 utility locate request.

Although not a change in the 2021 Standards, it is worth noting that survey-ors are also required to show the extent of any potentially encroaching utility pole cross-members.

Section 6—Plat or MapTwo of the most significant changes to section 6 occur in subsection C.ii, where two problematic issues have been addressed.

First, some lenders have customar-ily requested surveyors to list all of the items shown in Schedule B of the title commitment on the face of their surveys, whether those items are survey-related or not. Such requests are generally inappro-priate—this is a survey, and it addresses survey-related issues. To address such requests, section 6.C.ii now calls for a “summary of all rights of way, easements and other survey-related matters” (empha-sis added). The intent is to clarify that the surveyor does not have to show other matters listed on the title commitment such as covenants restricting use of the property, liens affecting the property,

notice of commencement of construction, or environmental disclosures that may affect title but are not related to the sur-vey of the property.

Second, the ALTA/NSPS Standards have always strived to make certain that the requirements placed on the profes-sional surveyor while undertaking an ALTA/NSPS Land Title Survey are rooted in factual, objective observations. That has been the reason to avoid the word “affects” in the Standards when discuss-ing the effect that an easement may have on the surveyed property.

Whether an easement “affects” a prop-erty is dependent not only on where the easement plots in accordance with the legal description of the easement but also on the validity of the easement under applicable state law. For example, if the person who granted an easement in 1920 was not the sole owner of the property to be encumbered, the omission of the other owners as grantors may invalidate the easement grant. Hence, an easement could be plotted on a property but have no legal effect on title because it was not a valid grant.

It is not the surveyor’s responsibility to confirm the validity of an easement, yet lenders and others often focus on the word “affects” regarding easements as if the surveyor is giving an opinion as to the legal effect of the easement. Section 6.C.ii for 2021 now suggests that surveyors may note whether an easement “affects” the surveyed property based on the descrip-tion contained in the record document. In this way, the word “affects” is quali-fied as being based only on an objective assessment of where the easement plots under the granting instrument. When provided with an objection letter from a buyer or lender objecting to a particu-lar easement shown on the survey and title commitment, it is up to the title com-pany’s attorneys and underwriters to determine the legal effect of the easement and whether it should remain in or be deleted from Schedule B as an exception to coverage. The title company must pro-vide the documentation evidencing the extinguishment of the recorded easement to the surveyor for the surveyor to remove the reference from the face of the survey.

Section 6.C.viii has been added. It



outlines the surveyor’s responsibility when the surveyor learns of an easement not listed in Schedule B-II of the title com-mitment where subordinate matters are listed in the ALTA Loan Policy. In that event, the surveyor must notify the title company of the easement and, unless the insurer can provide evidence that the easement has been extinguished, the sur-veyor must show or explain its existence on the face of the plat or map with a note that the title company has been notified. Both the surveyor and the title insurer mutually benefit from this change. The surveyor must disclose an easement he or she learns of to the title company and show the easement on the face of the survey. The responsibility for determin-ing whether the discovered easement affects the property is then shifted to the title insurer and its examination of the document. Unless there is release or ter-mination or the easement is extinguished by merger of the burdened and benefit-ted estate based on evidence provided by the title company, the surveyor will not be in the position to delete a reference to the easement on the survey.

Table ABefore outlining the specific and con-sequential revisions to Table A, two important changes should be noted. First, two optional Table A items have been deleted, so there are now only 19, instead of the 20 in 2016 (one was a sub-item, so it did not change the overall number of optional items).

Second, it has been intended, since the introduction of what is now Table A in 1988, that the exact wording of each Table A item may be negotiated between the surveyor and the client. It became clear while working on the 2021 Standards this was not universally under-stood, so the introductory paragraph to Table A now makes that patently clear.

Regarding the specific and more signif-icant changes to Table A, items 6(a) and 6(b) have been modified to specify that the zoning report or letter provided to the surveyor must be specific to the sur-veyed property. This change was made to prevent surveyors from being put in the position of having to interpret zoning

ordinances, which is an exercise fraught with potential danger from the survey-or’s standpoint. Title insurers will look to the ALTA/NSPS survey to provide zoning coverage by endorsement because zon-ing matters are excluded from coverage in Exclusion No. 1(a) of the ALTA Own-ers and Loan Policy. A title company will look to the survey to disclose the height of any structures, setback lines, floor space area of the structure, number of parking spaces, and area, width, or depth of land as a building site for the structure, all of which are items relevant to the coverage provided in the ALTA 3.1-06, 3.2-06, and 3.3-06 title endorsements.

Item 10(b) (a determination of whether certain walls are plumb) has been eliminated. It had been a Table A item for years, but it is not rooted in any title issue (other than the possibility of an encroachment, which is addressed in sec-tion 5.C). Additionally, clients and lenders often requested this item without giving any consideration to what walls, if any, they were actually concerned about. With the 2021 Standards, if there is concern about plumbness, it may be negotiated as an additional Table A item.

Item 18, wetlands, has also been elim-inated. This item has caused confusion since it was introduced in 2011 and is also not rooted in a title-related concern. Rather than trying to modify it yet again in 2021, the Joint Committee decided to simply strike it. If the surveyor’s firm has a wetlands biologist or if the client wishes to negotiate a wetlands-related service, that may be negotiated as an additional Table A item. If wetlands are required by the client as an additional Table A item and wetlands are shown on the sur-vey, the title company will likely make a wetlands exception in Schedule B of the policy because wetlands present an extra-hazardous risk. Wetland boundaries may be uncertain and subject to frequent change. Additionally, the state or federal government may have a legal interest in the wetlands, and there may also be gov-ernment regulations and restrictions that affect the ability to build on wetlands or require the payment of mitigation costs if the wetlands are improperly filled.

One of the most significant changes

in the 2021 Standards is to item 11. This utility-related item has been problem-atic, primarily because it is very difficult to manage clients’ expectations regarding underground utilities, as the survey can-not show complete, accurate, and reliable underground utility information unless the site is excavated.

As a result, item 11 has been altered sev-eral times over the years. For 2021, Table A now provides the surveyor with two options to show evidence of underground utilities. The first option is to show “[e]vidence of underground utilities exist-ing on or serving the surveyed property as determined by plans and/or reports provided by client.” The second option is to show “evidence of underground utili-ties existing on or serving the surveyed property as determined by markings coor-dinated by the surveyor pursuant to a private utility locate request.”

Several important points must be noted. First, a “private utility locate request” means the client must hire a private firm to locate the utilities and provide the report to the surveyor. “Plans and reports” means the cli-ent must provide utility plans or reports or maps from utility companies to the surveyor. The responsibility to obtain these items is placed on the client, not the surveyor.

In most states, 811 utility requests from surveyors are routinely ignored or, at best, given a low priority. Therefore, references to “811 utility locate requests” have been deleted and been replaced with a “private utility locate request.”

Notwithstanding the above, and as men-tioned in the introductory paragraph to Table A, the exact wording of a Table A item is negotiable. So, if the surveyor has ready access to utility plans, then item 11(a) can be modified. Likewise, if 811 locate requests from surveyors are actually fruitful in the jurisdiction where the property is located, item 11(b) can easily be modified by chang-ing the word “private” to “811.”

Title companies and lenders are espe-cially concerned with any underground utility lines that could cause damage or removal of existing improvements or that could interfere with the proposed improve-ments in a new development project and create a loss. A title insurer may take



exception to coverage for “possible under-ground utilities” in Schedule B and require a copy of utility plans or letters from the utilities, an 811 locator report, or an addi-tional certification on the survey stating the survey has identified underground utilities according to the 811 locator report.

To help control clients’ expectations regarding what is actually achievable regarding underground utilities, the authors suggest that all parties carefully review the “Note to the client, insurer, and lender” immediately following Table A item 11. The note is essentially a disclaimer that, absent excavation, the exact location of underground features cannot be accurately, completely, and reliability depicted. This disclaimer language may be incorporated by the surveyor into its scope of work or on the face of the plat or map.

Item 18 has been rewritten to clarify that, if selected, beneficial easements typically shown and insured in the legal descrip-tion in Schedule A of the title policy will be surveyed as if they were part of the fee. If this item is not selected, the surveyor may graphically depict the easement on the sur-vey, but it is a matter for information only, and this item must be selected to survey the easement as part of the fee in compliance with the 2021 standards.

Transition PeriodIf a contract to perform a Land Title Survey is executed on or after February 23, 2021, the survey must be performed according to the 2021 Standards. Both surveyors and title insurers recognize there will be a tran-sition period where contracts for survey have been entered into before the effective date with the survey completed after the effective date, or a survey may have been completed before the effective date and is being updated for closing after the effective date. In each instance, the surveyor, the title company, the lender, and the client can dis-cuss the appropriate standards to use and note accordingly in the contract or on the face of the survey. One exception would be where a contract to “update” or “recertify” an existing survey is entered into after Feb-ruary 23, 2021. In this instance, the survey update should be performed in compliance with the new 2021 Standards. Notwith-standing these guidelines, an ALTA/NSPS

survey prepared or updated according to the 2016 Standards during the transition period should not affect the title insurer’s ability to provide survey-related coverage during the transition.

HUD SurveysOn March 25, 2021, HUD’s Office of Mul-tifamily Production Technical Support Division issued Interim Instructions for Surveyors for Form 91073M Pending HUD Revision of the Form. Those instructions state, in part:

Multifamily Production will accept the new 2021 ALTA/NSPS survey requirements. A revised HUD-91073M (Survey Instructions and Surveyor’s Report) in redline for-mat showing necessary changes to the HUD form to accommodate the underlying changes to the new ALTA/NSPS form is attached. HUD will allow surveyors for multifam-ily transactions who use the 2021 ALTA/NSPS requirements to make the redlined edits to the 91073M without HQ review. Please note that these interim instructions are appli-cable to multifamily applications only, not Office of Health Care.

HUD recommends to partici-pants the following transition and implementation guidance pro-vided by ALTA:

• If you (surveyor) were/are under contract prior to February 23, 2021 you could use the 2016 Standards—even if the survey is not completed until after the 23rd.

• If you (surveyor) were/are under contract prior to February 23, 2021 and you know the survey will not be completed until after the 23rd, it would be logical, but not required to contract to use the 2021 Standards.

• “Updates” must be to the 2021 Standards if they are contracted after February 23, 2021. The only exception to that might be if you (surveyor) contracted to do a 2016

survey before February 23 and, for some reason, the closing was delayed so long that participants (owner, lender, HUD) wanted the survey “updated” before closing. In that case, you might be able to do that update to the 2016 Stan-dards: not for a new conveyance but for the delayed conveyance.

If a new construction or sub-rehab project has a 2016 survey performed for initial closing, but Final Endorsement will occur after March 18, 2021 the final survey should meet the 2021 Standards. The surveyor should be alert to the changes to Table A between 2016 and 2021. A revised Form 91073M is now in process to update the form to the ALTA 2021 Standard and likely will conclude later in 2021.

As of the date of this article, no infor-mation has been discovered regarding the survey requirements related to HUD LEAN 232 loans.

SummaryThe goal of the work of the Joint Commit-tee in considering revisions to the ALTA/NSPS Standards every five years is to bal-ance and consider the corresponding needs of the surveyor, the title insurer, and the client; consider any changes in the law and technology that necessitate revisions; limit liability where appropri-ate; and provide better clarity as to the requirements for all parties involved. The 2021 Standards were drafted by the Joint Committee to provide additional clarity and guidance for real estate practitioners and their clients.

Although there are several changes to the 2021 ALTA/NSPS Standards that are not outlined in this article, the authors have attempted to provide background on the primary changes. Interested par-ties should review both the redlined version of the 2016 Standards and the 2021 Standards to be well informed about all changes for 2021. n



Deliberate Well-Being

“Have you traveled internationally within the last seven days?” “Have you been in close proximity to anyone who has been diagnosed with COVID-19 in the last 48 hours?” I answer NO to both of these and a few other health questions that my new employer requires me to answer correctly to enter the building. It’s August 2020, and I am three days into a new position at a new firm. Fortunately, a limited number of people can work in our office. I’m schlepping my office trinkets from one side of the city to the next.

I enter and pass the firm’s newly renovated break room that has not been used since March. I turn the corner and see someone in a mask. I eagerly approach him, anxious to meet other members of the firm. Standing at least 6 feet away, I introduce myself as the newest addition. He quickly admits that he is not a member of the firm but the computer tech – here to troubleshoot some of the firm’s hardware. Embarrassed and slightly dumbfounded, I wondered:

With limited face-to-face interaction, how does a new hire decipher who’s who in the office? I thought of new associates (or even partners) in large firms and small ones. How would they navigate this world where everything and now everybody is on a screen? How would I now create my new office community?

The unexpected advantage of transitioning during the quarantine period was that I could transition quickly and quietly. With everyone working virtually, there was no one stopping by my office to introduce themselves. There was no water cooler chatter. I focused on sending new

engagement letters and transitioning my files. The unexpected disadvantage was that there was no welcome party. No opportunity to introduce myself to my new colleagues in one short evening. The firm has had some virtual events, which allow me to see other faces, but what exactly does the person you’re speaking with virtually actually look like? Is he short, tall, skinny, stocky? What are her mannerisms? Is he serious or jocular? I don’t think I would be able to pick them out in a crowd, especially if they are wearing masks when in person. So,

Deliberate Well-Being Guest Columnist: Anne Kelley Russell, Womble Bond Dickinson (US) LLP, 5 Exchange Street, PO Box 999 (29402), Charleston, SC 29401, [email protected].



how have I survived the last nine months? Some tips and tricks I have lived by in this new world:

1. Be Compassionate. For those of us who have never worked virtually before, this is a time of compassion—not only for ourselves but for everyone around us. We face different hurdles, whether it’s homeschooling our children while continuing with a full-time career, working side-by-side in a 1,000 square foot apartment with our spouses, or being a self-proclaimed social butterfly with nowhere to go and nothing to do. Since I’ve started my new position, I have been forced to virtually introduce myself to so many staff members and colleagues who are not only in their workout clothes but who have kids screaming, dogs bark-ing, and cats meowing in the background. I’ve cherished the glimpses of others’ lives they would normally leave behind during the workday.

2. Be Patient. I am constantly reminding myself that my new staff does not know my nuances. How can they? They sit in their own home and see only my face. I cannot walk down the hall and explain something to them in person. Virtual commands and demands only go so far. We also need patience when dealing with colleagues in other firms. I have approved the extension of so many litigation deadlines. Courts and county offices have closed at a mo-ment’s notice; opposing counsel is in quarantine without the ability to work from home because the mediator of the in-person mediation he recently attended was diagnosed with COVID two days after the mediation; some of us are out sick with the common cold (we are still prone to non-COVID conditions). I calmly wait for things to get back to normal and until then continue to be patient and grant the extensions.

3. Be Creative. Taking advantage of every opportunity to have others see your face reminds those you work with you are available. I thought I had to go to a restaurant for a wine tasting until I had wine pours shipped to my front door. I’ve joined contests for who has the best zoom back-ground—my favorite is the glamorous and clean New York City condo —it hides the otherwise literal chaos that I call my home. As the weather has improved and more people are vaccinated, I’m choosing to have interoffice meetings while we go on a walk. I earn steps and billable time simul-taneously.

4. Be Intentional. Time has become more important during COVID than ever, and quarantine has made us all reposi-tion our priorities. Like many of us, I had no time for a hobby before COVID. I went from billing a client to at-tending a firm luncheon, to picking up my daughter from school, to dropping by a cocktail hour with high-powered referral sources. I was on a constant hamster wheel with little to no time for myself. Once I overcame the shock of being forced to homeschool my daughter while main-

taining a full-time law practice, quarantine allowed me to breathe and to read a book because there was literally nothing else to do when I wasn’t on the clock. Since start-ing at a new firm I am much more protective of my time and how I spend it. I’ve said no to some virtual events. Though I want to be available, creative, compassionate, and patient, I cannot do any of those things for others if I don’t give myself my own time.

Whether transitioning as a lateral to another firm or starting as a first-year associate, doing so during COVID has presented unique hurdles. Although the guidelines above were meant for the transitioning attorney, those welcoming the transitioning attorney should also follow them. Be compassionate toward the on-boarding attorney whose only law office has been her home; be patient to the on-boarding attorney who must learn everything about the new firm from a screen; be creative in introducing yourself and your team to the new attorney; be intentional to ensure that the new attorney feels welcomed and appreciated. Now, I’m off to a virtual beer tasting. The beer pours were delivered to my door this morning. n

DELIBERATEW E L L - B E I N G



KEEPING CURRENTP R O B A T E

Keeping Current—Probate Editor: Prof. Gerry W. Beyer, Texas Tech University School of Law, Lubbock, TX 79409, [email protected]. Contributors: Claire G. Hargrove, Paula Moore, Kerri G. Nipp, and Prof. William P. LaPiana.

CASES

ALTERNATIVE DISPUTE RESOLU-TION: Failure to appear at mediation precludes objection to result. The trustee of the decedent’s revocable trust brought a proceeding to determine the beneficiaries. The court ordered mediation and one of the possible ben-eficiaries sent a notice of mediation to all interested parties. Not all the parties participated. Those that did partici-pate reached a settlement dividing the trust property among the decedent’s heirs and the other participants. The non-participants objected to the court’s approving the settlement. The court dismissed their objections, and, on appeal, a divided California intermedi-ate appellate court affirmed in Breslin v. Breslin, 276 Cal. Rptr. 3d 913 (Ct. App. 2021), holding that all the possible ben-eficiaries had received notice of the mediation and that those who did not participate could not now object.

ARBITRATION: Trust terms did not allow the trustees to compel the ben-eficiaries to arbitrate. The trust terms granted the trustees authority to sub-mit to arbitration all claims involving the trustees or the trust property. In a case brought under diversity jurisdic-tion, Burgess v. Johnson, 835 Fed. Appx. 330 (10th Cir. 2020), the Tenth Circuit affirmed the district court’s holding that, under Oklahoma law, the trust provision does not give the trustee the authority to compel the beneficiaries to arbitrate an action they brought alleg-ing that the trustees breached their fiduciary duties.

ATTORNEY-CLIENT PRIVILEGE: Fiduciary exception to attorney-cli-ent privilege sustained. An equally divided Supreme Court of Pennsylva-nia let stand a Superior Court decision requiring a trustee to honor a discovery request from the beneficiaries for unre-dacted copies of invoices from law firms retained by the trustee in In re Estate of McAleer, 248 A.3d 416 (Pa. 2021). The opinions provide a thorough discussion of the history and current status of the fiduciary exception.

POWER OF ATTORNEY: An agent lacked authority to bind the princi-pal to arbitration related to health care. The decedent’s spouse was the decedent’s duly appointed agent. The decedent lacked capacity at the time of admission to a nursing home, and the spouse signed the contract with the institution on the decedent’s behalf and wrote the word “wife” on the line under the signature entitled “Legal Represen-tative Capacity.” After the decedent’s death, the spouse brought a negli-gence action against the nursing home, which moved to compel arbitration as required by the contract. The trial court denied the institution’s motion, hold-ing that the spouse signed as “wife” and not as agent. In Cambridge Place Group, LLC v. Mundy, 617 S.W.3d 838 (Ky. Ct. App. 2021), the intermediate Kentucky appellate court affirmed, holding first that the spouse had no authority as the decedent’s “wife” to bind the decedent

to the contract and second that even if the spouse had signed as an agent, the agent was without authority because the terms of the power of attorney expressly withheld authority to make health care decisions, and the agent, therefore, could not obligate the princi-pal to an arbitration agreement related to health care.

POWER OF ATTORNEY: Neither a general durable power of attorney nor a health care power of attorney gave the agent authority to bind the prin-cipal to arbitration. The principal’s child acting as an agent under a dura-ble general power of attorney signed the contract for admission of the prin-cipal to an assisted living facility. The contract included an arbitration agree-ment. After the principal’s death, the child became the personal represen-tative and brought a wrongful death action against the facility. In Arredondo v. SNH SE Ashley River Tenant, LLC, 856 S.E.2d 550 (S.C. 2021), the Supreme Court of South Carolina held that provi-sions of the general power of attorney authorizing execution of instruments concerning all types of property—including choses in action and entering into agreements concerning transfers of property—did not authorize the exe-cution of the arbitration agreement. In addition, executing the arbitration agreement was not necessary to carry out a health care decision and thus was not authorized under the grant of authority to do what is necessary to carry out such decisions. Finally, the grant of authority to the child under a health care power of attorney to pursue legal actions in the name of the prin-cipal did not authorize the agent to execute the arbitration agreement.

PRETERMITTED CHILD: A child not mentioned in a holographic will is pretermitted. Oklahoma’s pretermitted heir statute, 84 Okla. Stat. tit. 84,

Keeping Current—Probate offers a look at selected recent cases,tax rulings and regulations, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.




§ 132, gives a child or issue of a deceased child an intestate share when a testator fails to provide for that per-son unless it appears from the face of the will that the omission is inten-tional. In Matter of the Estate of Chester, No. 118,018, 2021 WL 1098208 (Okla. Mar. 23, 2021), the Supreme Court of Oklahoma held that a holographic will which gave the entire estate to a grand-child of the testator with no mention of the testator’s child did not disinherit that child and that extrinsic evidence was not admissible because the will was not ambiguous.

PRETERMITTED CHILD: Refer-ence in will to a child and spouse of the testator’s child is not a sufficient reference to the child to prevent appli-cation of pretermitted heir statute. New Hampshire’s pretermitted heir stat-ute, N.H. Rev. Stat. § 551:10, applies to every child or issue of a child of the testator not named or “referred to” in the will. In In re Estate of Dow, No. 2019-0752, 2021 WL 199619 (N.H. Jan. 20, 2021), the New Hampshire Supreme Court addressed a will giv-ing the residuary estate to the spouse of the testator’s child (described as “my daughter-in-law”) and, if the spouse does not survive the testator, to the child’s child. The will did not refer to the testator’s child, who is therefore a pretermitted heir and entitled to the appropriate intestate share. The court also held that language in the will directing that the law of Massachusetts to govern the administration of the estate did not prevent the application of the New Hampshire statute because the testator was domiciled in New Hamp-shire and the estate consisted only of personal property.

TRUST REFORMATION: Reforma-tion of a special needs trust granted. A parent created a lifetime supple-mental needs trust for a child. The trust terms were appropriate for a trust funded with the beneficiary’s funds (a first-party trust) and therefore at termi-nation required the trust to reimburse the state for expenditures made for the

beneficiary before making other dis-tributions. At the parent’s death, the parent’s will poured over the residuary estate to the trust. After the beneficia-ry’s death, the trustee filed a petition to reform the trust based on mistake. Because the trust was not funded with the beneficiary’s funds, it was not a first-party trust but a third-party trust that need not reimburse the state. The probate court rejected the petition on the grounds that the payback provision was necessary to prevent disqualifi-cation of the parent from receiving Medicaid benefits for a period of time because of the transfer. The trustee appealed and the intermediate Massa-chusetts appellate court vacated and remanded in Matter of Pecce Supplemen-tal Needs Trust, 167 N.E.3d 429 (Mass. App. Ct. 2021). The court held that ref-ormation was proper to prevent the payback provision from applying to the estate property poured over to the trust. Otherwise, the transfer could not affect the parent’s eligibility for benefits.

TAX CASES, RULINGS, AND REGULATIONS

ESTATE TAX: Tax Court valued Michael Jackson’s image and like-ness as well as trusts holding his two music catalogs. The IRS and Estate of Michael Jackson disagreed over the value of three intangible assets in the famous entertainer’s estate: (1) Jack-son’s image and likeness; (2) his interest in New Horizon Trust II, which held an interest in Sony/ATV Music Publish-ing; and (3) his interest in New Horizon Trust III, which contained a music pub-lishing catalog that owned copyrights to compositions by Jackson and oth-ers. In a lengthy opinion in Estate of Michael J. Jackson v. Commissioner, T.C. Memo 2021-048 (2021), the Tax Court described the vast ups and downs of the entertainer’s personal and professional life which contributed to the difficulty in valuing the three assets and noted that when Jackson died, the value of each asset at issue was distressed. Even his image and likeness were not produc-ing any noticeable income, and he had

not been able to contract for tour mer-chandise for an upcoming tour. Also, at the time of his death, his interest in the two trusts secured large loans with high-interest payments. Ultimately, at trial, the estate increased its valuation of the decedent’s image and likeness from that on the estate tax return by looking not just at pre-death revenue, but also post-death rights and growth and decline rates using pre-death mar-ketability and a potential post-death boom. Although the Tax Court valued the image and likeness higher than the estate, it rejected the amount sought by the IRS. The Tax Court also did not impose accuracy-related penalties and held that the estate’s reliance on the original valuation was reasonable. Fur-ther, the Tax Court valued both trusts using the discounted cash flow method. It valued the New Horizon Trust II at zero after applying a discount for lack of control. The New Horizon Trust III was valued at $107 million after determin-ing the revenue stream and subtracting liabilities. As with the image and like-ness valuations, the Tax Court did not impose accuracy-related penal-ties because the estate’s reliance on the appraisal values was reasonable.

EXTENSION OF ESTATE TAX: An executor cannot delegate his duty to timely seek an extension of the estate’s return and payment deadlines to his or her attorney. The executor’s attor-ney advised the executor to file a Form 4768 extension for the Form 706 return given that the estate was illiquid and would have difficulty converting its large amount of real property to cash in time to pay the estate tax due. How-ever, despite that advice, the attorney made a calendaring error and did not timely file the extension. Upon realiz-ing her mistake, the attorney filed the estate’s Form 706 but the IRS assessed penalties. The Court of Federal Claims in Andrews v. United States, 153 Fed. Cl. 665 (2021), held that the estate was not entitled to a refund of its late-filing pen-alty, late-paying penalty, and interest as the taxpayer’s reliance on the attorney to file the extension did not constitute




reasonable cause for the late filing.

SPLIT-DOLLAR LIFE INSURANCE: Split-dollar life insurance agreements served legitimate business purpose by ensuring family business would remain in family control and com-pany management could smoothly pass to the next generation. The dece-dent entered into an estate plan that included several split-dollar life insur-ance policies and agreements. The decedent and her husband greatly desired that the family trucking busi-ness remain in the family, but tensions among the next generations ran high. The split-dollar life insurance agree-ments included a restriction on the parties’ right to unilaterally terminate the agreements and incentivized the next generation to stay with the busi-ness and keep the company under family control. The court in Estate of Clara M. Morrissette v. Commissioner, T.C. Memo 2021-060 T.C.M. (2021), held that the premiums paid on the poli-cies and the cash surrender values were not includible in the gross estate as the transfers had a legitimate non-tax pur-pose and were bona fide sales for full and adequate consideration. The split-dollar rights were includible, however, in the gross estate.

LITERATURE

CHARITABLE GIFTS OF PARTIAL REAL PROPERTY INTERESTS: In his article, Charitable Gifts of Partial Interest in Real Estate – A Nondeductib-lity Rule with Surprisingly Wide Scope, 48 Est. Plan. 45 (2021), Howard M. Zaritsky uses recent cases to demonstrate some of the instances in which an income tax deduction may be denied for a gift of what turns out to be a partial interest in the property.

CHARITABLE TAX DEDUCTIONS: In his article, Navigating the Section 642(c) Minefield – Obtaining the Income Tax Charitable Deduction for Estates and Non-Grantor Trusts, 48 Est. Plan. 4 (2021), Jeremiah W. Doyle IV presents a primer on I.R.C. § 642(c), applicable

case law, regulations, and private let-ter rulings to aid the practitioner in determining if a charitable deduction is allowable.

DATA PRIVACY: Kate C. Ashley’s Note, Data of the Dead: A Proposal for Protecting Posthumous Data Privacy, 62 Wm. & Mary L. Rev. 649 (2020), focuses on the posthumous disposition of indi-viduals’ personal information that businesses collect, use, and sell and argues that data privacy rights should extend posthumously to fulfill the promise of data privacy legislation. DEATHBED TRANSFERS: Beckett G. Cantley and Geoffrey C. Dietrich pro-vide a thorough overview of deathbed transfers case law in How Soon is Now: Estate of Moore and the Unraveling of Deathbed Estate Planning, 34 Quinnipiac Prob. L.J. 141 (2021).

DISCLAIMERS: In his Note, No Dis-claimer for the Domestic Support Evader: Why Alimony and Child Support Obligors Should Be Barred from Their Right to Dis-claim Inheritances, 71 Rutgers U.L. Rev. 1097 (2020), Fabian N. Marriott argues for a revision to the UDPIA to include protections on a federal level for ali-mony or child support recipients. He also sets forth reasons why New Jersey needs to follow in the tracks of those states that have already adopted legis-lation specifically barring a disclaimer of inheritance when alimony and child support are owed.

ESTATE TAX AND NONRESI-DENT ALIENS: Jay A. Soled, Leonard Goodman, and Glenn G. Fox argue that Congress should consider repeal-ing I.R.C. § 2104(a) or, at the very least, significantly narrowing its applica-tion in The Estate Tax Should Not Apply to Domestic Stock Owned by NRAs, 34 Quinnipiac Prob. L.J. 167 (2021).

FAMILY GOVERNANCE: Thomas C. Rogerson examines the reasons wealth dissipates and how conscious choices in family governance can address and remedy those causes in Back to the

Future: The Central Role of Family Gov-ernance in Today’s Estate Planning (Part 1 of a Two-Part Series), 48 Est. Plan. 24 (2021).

INCOMPLETE NONGRANTOR TRUSTS: Grayson M.P. McCouch closely analyzes incomplete nongrantor trusts revealing gaps and contradictions that call into question the viability of the ING trust as a planning technique in Adversity, Inconsistency, and the Incom-plete Nongrantor Trust, 39 Va. Tax Rev. 419 (2020).

MARITAL TRUSTS: In her arti-cle, Trusting Marriage, 10 UC Irvine L. Rev. 199 (2019), Allison Tait threads together multiple strands of scholar-ship to better understand how new trust forms are affecting wealth transfer between couples and within families, and what the proper regulation of these trusts should be.

NARRATIVE WILLS: Karen J. Sned-don advocates that wills should provide instructions for the disposition of prop-erty as a narrative, that is, as a story of the testator, in Dead Men (and Women) Should Tell Tales: Narrative, Intent, and the Construction of Wills, 46 ACTEC L.J. 239 (2021).

NO CONTEST CLAUSES: In their article, Boilerplate No Contest Clauses, 82 Law & Contemp. Probs. 69 (2019), David Horton and Reid Kress exam-ine no contest clauses from a different angle, asking whether these provisions are a symptom of a larger pathology in estate planning, that is, a drafting norm in which attorneys rely too heav-ily on standardized terms without fully ascertaining the testator’s informed preferences.

PRIVATE FOUNDATIONS: Zoey F. Orol analyzes The Failures and the Future of Private Foundation Governance, 46 ACTEC L.J. 185 (2021).

SAME-SEX MARRIAGES: Suzianne D. Painter-Thorne explains in Fraying the Knot: Marital Property, Probate, and




Practical Problems with Tribal Marriage Bans, 85 Brook. L. Rev. 471 (2020), that although most Americans are governed by federal and state laws, members of Native American tribes are subject to the laws of their tribe as well. When state, federal, and tribal laws diverge, as they do in tribes that prohibit same-sex marriage, these legal differences may implicate wide-ranging issues from child custody determinations to pen-sion benefits and property rights.

TRANSMISSION DEMOGRAPHICS: Danaya C. Write analyzes many of the dif-ferences between testate and intestate decedents and suggests areas of concern for law- and policy-makers, as well as practicing lawyers and financial planners in The Demographics of Intergenerational Transmission of Wealth: An Empirical Study of Testacy and Intestacy on Family Property, 88 UMKC L. Rev. 665 (2020).

TRUST REFORM: Bridget J. Craw-ford’s article, Magical Thinking and Trusts, 50 Seton Hall L. Rev. 289 (2019), brings into focus two interrelated strains of magical thinking in the law of trusts: the one that gives rise to the existence of trusts in the first place; and the other that anticipates that courts will play a visible, if not active, role in minimizing the use of trusts by wealthy individuals. The author argues that shaking free of magical thinking clears the way for meaningful trust reform.

UNIFORM PROBATE CODE: The Uniform Law Commission approved substantial amendments to the Uni-form Probate Code in 2019. Mary Louise Fellows and Thomas P. Gallanis, the principal drafters of these amend-ments, provide a detailed analysis in The Uniform Probate Code’s New Intes-tacy and Class Gift Provisions, 46 ACTEC L.J. 127 (2021).

LEGISLATION

ALABAMA enacts the Qualified Dispo-sitions in Trust Act. 2021 Ala. Laws Act 2021-238.

ARKANSAS adopts the Uniform Fidu-ciary Income and Principal Act. 2021 Ark. Laws Act 1088.

ARKANSAS creates procedures to per-mit a person who is conceived and born after the decedent’s death to inherit as if the child were born during the dece-dent’s lifetime if specified conditions are satisfied. 2021 Ark. Laws Act 924.

ARKANSAS provides consumer pro-tection for seniors from predatory practices. 2021 Ark. Laws Act 1015.

COLORADO enacts a method for the creation of supported decision-making agreements for adults with a disability that are less restrictive than guardian-ships. 2021 Colo. Legis. Serv. Ch. 61.

COLORADO passes “Pruitt’s Law” to protect persons with disabilities from discrimination in receiving organ trans-plants. 2021 Colo. Legis. Serv. Ch. 99.

INDIANA authorizes counterpart wills. 2021 Ind. Legis. Serv. P.L. 185-2021.

INDIANA updates statutes governing electronic wills. 2021 Ind. Legis. Serv. P.L. 185-2021.

KANSAS adopts the Uniform Fidu-ciary Income and Principal Act. 2021 Kan. Laws Ch. 63.

MONTANA adopts the Uniform Directed Trust Act. 2021 Mont. Laws. Ch. 325.

MONTANA enacts the Uniform Trust Decanting Act. 2021 Mont. Laws Ch. 177.

NEBRASKA enacts the Uniform Foreign-Country Money Judgments Recognition Act. 2021 Neb. Laws L.B. 501.

NEBRASKA passes the Nebraska Protection of Vulnerable Adults from Financial Exploitation Act. 2021 Neb. Laws L.B. 297.

NORTH DAKOTA adopts the Revised Uniform Unclaimed Property Act. 2021 N.D. Laws S.B. 2048.

OKLAHOMA adopts the Uniform Power of Attorney Act. 2021 Okla. Sess. Law Serv. Ch. 332.

OKLAHOMA enacts the Oklahoma Decanting Act. 2021 Okla. Sess. Law Serv. Ch. 268.

OKLAHOMA passes “Everett’s Law” to protect persons with disabilities from discrimination in receiving organ trans-plants. 2021 Okla. Sess. Law Serv. Ch. 87.

UTAH prevents individuals who com-mit specified felony offenses against a vulnerable adult from receiving vir-tually any probate or non-property because of the adult’s death.

WASHINGTON adopts the Uniform Fiduciary Income and Principal Act. 2021 Wash. Legis. Serv. Ch. 140.

WASHINGTON enacts the Uniform Electronic Wills Act. 2021 Wash. Legis. Serv. Ch. 140.

WASHINGTON passes the Uniform Powers of Appointment Act. 2021 Wash. Legis. Serv. Ch. 140.

WYOMING protects persons with disabilities from discrimination in receiving organ transplants. 2021 Wyo. Laws Ch. 35. n



Many people idolize celebri-ties and often consider them to be role models. However,

the truth is that celebrities are just peo-ple. Like many of us, celebrities often ignore estate planning altogether or fail to update outdated estate plans. Oth-ers take the time to think through their estate plans carefully and benefit from the assistance of competent counsel. The problems and issues discussed in this article may involve celebrities, but they create useful lessons for everyone.

Whitney Houston: The Perils of Short-Term TrustsBackground: Whitney Houston, the legendary songstress and accomplished actress, led a tumultuous life, struggled with addiction, and had a failed mar-riage to singer Bobby Brown. Sadly, she drowned in a hotel bathtub in 2012 on the eve of the Grammy Awards, leaving a 19-year-old daughter from the mar-riage, Bobbi Kristina.

Estate Plan: Houston left her entire estate to a trust for her daughter that provided for mandatory payments of principal beginning at age 21 and paid out completely to her daughter at age 30. It has been reported that the trust

contained more than $20 million, with substantial ongoing royalty income expected. Tragically, Houston’s daugh-ter was also found unconscious in a bathtub and died at age 22 after spend-ing six months in a coma.

Result: At the time of her death, Bobbi Kristina was domiciled in Georgia and had already received approximately $2 million from her trust. As a result, the disposition of the assets held in Bobbi Kristina’s own name was governed by the laws of intestacy in Georgia and not by Hous-ton’s will. It was also unclear whether Bobbi Kristina legally married her fiancé Nick Gordon, who had been raised by Houston as a son. In the absence of a spouse, Bobbi Kristina’s father, Bobby Brown, was her presump-tive heir. Because Gordon never proved his claim that the couple was married and was eventually found civilly liable for Bobbi Kristina’s death, Houston’s ex-husband became the sole beneficiary of the trust funds that had been distrib-uted to her daughter. This was certainly not the result that Houston intended.

Lesson: The foregoing result could all have been avoided if Houston’s plan had included a lifetime trust for

Whitney Houston performing “Greatest Love of All” during the HBO-televised concert “Welcome Home Heroes with Whitney Houston” honoring the troops who took part in Operation Desert Storm, their families, and military and government dignitaries. Photo by Mark Kettenhofen. From Wikimedia Commons.

CELEBRITY ESTATE PLANNING

Misfires of the Rich Famous IVand

By Jessica Galligan Goldsmith, Samuel F. Thomas, Jessica D. Soojian, Stacia C. Kroetz, David E. Stutzman, Lauren G. Dell, and Daniel J. Studin



Jessica Galligan Goldsmith is co-managing partner in the White Plains office of Kurzman Eisenberg Corbin & Lever, LLP. Samuel F. Thomas is a partner in the New York office of Seward & Kissel LLP. Jessica D. Soojian is a partner in the New York office of Milbank. Stacia C. Kroetz is a vice president and senior wealth planner in the New York office of Brown Brothers Harriman. David E. Stutzman is counsel in the New York office of Seward & Kissel LLP. Lauren G. Dell is a strategic advisor in the New York office of Brown Advisory. Daniel J. Studin is senior counsel in the New York office of Morrison Cohen.

her daughter rather than a trust that required mandatory distributions at a very young age. A lifetime trust can serve as a shield, protecting a ben-eficiary from predators, unfortunate circumstances, and negative behav-ior. In addition, by keeping property in trust for a beneficiary’s lifetime, one can also “hardwire” the destiny of any remaining funds at the benefi-ciary’s death, preventing the diversion of assets to undesirable recipients. Given Bobbi Kristina’s troubles, her trustees also could have considered certain options before the first manda-tory payment date. For example, the trustees could have tried to persuade Bobbi Kristina to roll her mandatory distribution into a self-settled trust for her continuing benefit under ongo-ing trustee control and, if unsuccessful, could have explored decanting the trust assets to eliminate the mandatory dis-tributions. Clients should revisit their estate plans routinely to ensure that their objectives and the evolving needs of their beneficiaries continue to be met.

Kirk Douglas: Significant Charitable GoalsBackground: Kirk Douglas, the famed star of classic films like Spartacus and Gunfight at the OK Corral, died in 2020 at the age of 103. Douglas had an impoverished childhood with immi-grant parents and six sisters. However, Douglas was an innovator who began his career at the tail end of the studio system. As he gained star power, Doug-las pushed to gain profits interests and other benefits that had not tradition-ally been granted to actors. Douglas was one of the first actors to have his own production company, and that company retained the rights to many of his films, including Spartacus. Doug-las barely survived a helicopter crash in 1991 and then suffered a significant stroke in 1996.

Estate Plan: In 2012, Kirk and his wife, Anne, both of whom were charita-bly minded, formed the Douglas Family Foundation. As of 2018, it remained an unfunded vehicle set to receive future charitable gifts, including a large

portion of Douglas’s estate. Douglas and Anne also together set up a family trust. Over time, they transferred a major-ity of their assets, including Douglas’s film and image rights, to the trust, mini-mizing their gift and estate tax burden along the way. In 2015, it was reported that the trust held approximately $80 million.

Result: When he died in 2020, Doug-las left his entire estate—rumored to be $60–80 million—tax-free to char-ity, with nothing to his wife of 66 years, Anne, or any of his four children. On its face, this seems like the story of a star who disinherited his entire fam-ily. However, given Douglas’s lifetime estate planning, it turns out that the opposite was true. Douglas’s estate plan gave his family a significant portion of his wealth during his lifetime and left a simple, nontaxable estate to charity.

Lesson: Douglas was careful to pro-vide very well for his family during

Kirk Douglas. Image from Wikimedia Commons.

his lifetime, while making sure that he maintained his own lifestyle and paid minimum estate taxes. Douglas’s estate utilized charitable planning and life-time gift planning to minimize estate taxes and is an example of how proper estate planning works well when a cli-ent articulates clear goals, sets the plan in motion during the client’s lifetime,

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Estate Plan: Allegedly, at Thom-as’s urging, Indiana fired his long-time New York attorney and hired a local practitioner to prepare a new 3½-page will leaving the entirety of his estate, including his artworks, archives, and residence, to a private operating foun-dation formed and overseen by the new attorney and Thomas. Thomas was named as the attorney-in-fact with full control over Indiana’s financial and personal affairs, and the new attorney was also named as personal representa-tive under the will. As attorney-in-fact, Thomas allegedly entered into arrange-ments to produce and market new or derivative works of art by Indiana, including works that Indiana had previ-ously authorized his art agent to market exclusively. Questions were raised about whether Indiana was in fact the creative force behind the new works, or whether he even signed his name to them, and critics began to worry that his artistic legacy was in jeopardy.

Result: Just before his death, law-suits to determine control over Indiana’s estate, estimated at $100 million, were initiated. Indiana’s art agent alleged copyright and trademark infringement, breach of contract, tor-tious interference of contract, unfair competition, and defamation. Fol-lowing his death, Indiana’s estate

and continues to implement the estate plan over time.

Robert Indiana: From LOVE to AcrimonyBackground: Robert Indiana was an icon of the 20th century art world. His image of LOVE in stacked, sten-ciled letters in vivid color expressed the zeitgeist of the 1960s and 70s. Wildly successful and immediately recogniz-able, the image was eventually turned into one of the most beloved US stamps of all time and made Indiana’s repu-tation as an exemplar of Pop Art. The mass commercial success of LOVE, how-ever, contributed to Indiana’s being snubbed by the New York art establish-ment. In response, Indiana abandoned the city and decamped permanently to the small island of Vinalhaven off the coast of Maine, where he settled in a Victorian Odd Fellows Hall that he called the Star of Hope. There, Indiana continued to produce art. Late in life, Indiana employed a local man named Jamie Thomas as a studio assistant. Over time, Thomas’s duties increased, and eventually he became Indiana’s personal and financial gatekeeper, and, according to some, increasingly iso-lated Indiana from Indiana’s long-time friends and colleagues and his art agent, the Morgan Art Foundation.

counterclaimed that the art agent had not paid Indiana his rightful royal-ties and that the agency agreements terminated on death. To fund litiga-tion expenses exceeding $4 million, the attorney-fiduciary sold important works of art that had been intended for the Star of Hope Foundation. The attorney-fiduciary later sued Thomas, alleging misappropriation of funds and elder abuse, and detailing how, during the period when Thomas was acting as his caretaker, Indiana lived in squalor at the Star of Hope amid his valuable art collection, but surrounded by vermin and animal waste, with the building itself falling into disrepair. The court records are voluminous and littered with acrimonious assertions lobbed by various warring parties. Nevertheless, certain patterns faced by many elderly clients appear in the record.

Indiana’s death in 2018 exposed issues faced not only by the rich and famous, but also by many older cli-ents—namely the lack of competent advisors and increased exposure to elder abuse. Eventually, Thomas was removed from all control of the Star of Hope Foundation. Although the attor-ney-fiduciary has to date refused to settle, late in 2020 the art agent and the Star of Hope Foundation agreed to join forces to preserve Indiana’s legacy and to restore his home in Vinalhaven by opening it as a museum with an artist-in-residence program. The expensive litigation has not escaped the eye of the Maine Attorney General’s office, which in April 2021 filed a demand seeking the recoupment to the estate of nearly $3.7 million in legal fees paid out by the attorney-fiduciary to the seven law firms involved in the litigation.

Lesson: This unfortunate chain of events shows that the competence of professional advisors matters. A cli-ent with an illiquid multimillion-dollar estate, especially a world-recognized artist whose reputation depends upon proper cataloguing, preservation, mar-keting, and disposition, and who has specific charitable goals in mind, needs more than a basic will. Indiana replaced his former team of advisors, who had deep experience in representing artists

Robert Indiana working in Maine. Photograph by Charles Rotmil, from Wikimedia Commons.



and artist-endowed foundations, with an attorney who did not appear to have the same necessary skills, thereby put-ting his artistic legacy at risk.

Additionally, elder abuse—be it financial misappropriation or physi-cal abuse—is real and is more common than one might think. Planners should be aware of, and react to, possible signs of abuse. It has been reported that two-thirds of elder financial crime is committed by family members, friends, or other trusted persons. Attorneys should be on the lookout for elder abuse, and should not discount poten-tial abuse by family members or close friends.

Indiana’s Maine attorney was pre-vented by Thomas from seeing Indiana between 2016, when Indiana signed his will, and Indiana’s death. Attor-neys should not accept being directed by family members or friends. Attor-ney-client relationships are between the attorney and the client, not with the client’s managers, advisors, or fam-ily members. Oftentimes, attorneys accept dealing with advisors or staff, being told that the clients are too busy or too unwell to meet. Leaving aside the possible ethical violations inher-ent in sharing client confidences with nonclients, estate planners should never forget that their duty is to the cli-ent alone. Attorneys and other advisors should also reach out periodically to ensure that no evidence of elder abuse exists. For planners, the saga of a Pop Art icon’s later years, and the fractured details of the litigation surrounding his estate, provide sobering counsel that should be heeded carefully when repre-senting clients.

Aretha Franklin: The Horrors of Holographic WillsBackground: Aretha Franklin, Ameri-can singer-songwriter and “Queen of Soul,” died of pancreatic cancer on August 16, 2018, at the age of 76. She was survived by her four sons and four grandchildren. During her lifetime, Franklin recorded 112 charted singles, including 17 top-ten pop singles and 20 number-one R&B singles, and won 18 Grammy awards. Franklin was also

the first female performer inducted into the Rock and Roll Hall of Fame. At the time of her death, Franklin’s estate reported assets of $17 million, although many have estimated the total value to be closer to $80 million and growing because of royalties on her music cata-log and other pending business deals, such as a biopic of her life.

Estate Plan: Franklin was initially believed to have died without a will, which meant that under Michigan’s intestacy statute, Franklin’s estate would be split equally among her four children. Her children seemed ame-nable to this outcome, but any family harmony was lost nine months later when three handwritten wills, dated between June 2010 and March 2014, were discovered in Franklin’s Michi-gan home. Each of the documents was illegible in some places, containing various strikethroughs and edits, and none had been executed with appro-priate formalities. An expert confirmed that the documents were in Franklin’s writing, but given their state, it was unclear whether they were rough drafts or actually expressed Franklin’s final inten-tions. Each of the documents contained varying provisions regarding beneficial interests and fiduciary appointments, and two of Franklin’s sons objected to the hand-written wills.

Since then, the in-fighting has con-tinued, and the legal costs have mounted. In March 2021, yet another “draft will” was filed with the court. The latest unsigned will was reportedly created by Aretha in 2018 using the law firm Dickinson Wright. According to the court filing, Aretha hired attorney Henry Grix to assist her with estate planning. The

court filing includes correspondence between Franklin and her attorney that relates to Franklin’s estate plan and dates back to 2017.

Result: Almost three years later, Franklin’s beneficiaries still haven’t received any distributions. Although the fourth will was not signed by Aretha, it leaves specific assets to cer-tain relatives, creates a trust for her disabled son Clarence, and splits the balance of Franklin’s estate equally among her other three sons. In his petition, Clarence’s court-appointed attorney asks the court to recognize the draft of the will and its accompanying notes as Aretha’s final wishes. The attor-ney’s petition cites a Michigan law that allows a deceased person’s “intent to be recognized even if the documents are defective in execution.” In light of the new will, the judge scheduled a trial for August 2021 to determine whether any of the documents that have been found can be deemed a valid will.

Lesson: Sadly, it seems clear that Franklin’s true testamentary wishes will likely never be known or effected.

Aretha Franklin in Billboard Magazine, February 17, 1968. From Wikimedia Commons.



Franklin’s failure to complete and sign a formal will has resulted in acrimony among her children and inefficien-cies in the management of her estate and postmortem business endeavors. Franklin was also well known for her desire for privacy. Ironically, Franklin’s lack of estate planning has provided the public with myriad details about her family, her history, and the value, nature, and potential distribution of her estate. Although Franklin’s estate may eventually be split equally among her four children based on the intes-tate succession laws in Michigan, it is not at all clear whether this is the result that Franklin intended. In an intestacy, each child’s inheritance would be out-right, and at least one of her children is known to have significant disabilities. Had Franklin created continuing trusts for all of her children, her personal affairs could have been sheltered from prying eyes, her assets could have been protected from the children’s creditors, and she could have utilized her gen-eration-skipping exemption, thereby avoiding substantial estate and genera-tion-skipping transfer taxes when any remaining assets ultimately pass to the next generation.

Philip and Helen Wrigley: Tax Planning and Estate Liquidity IssuesBackground: Philip K. (P.K.) Wrig-ley was the son of William Wrigley Jr., the chewing gum manufacturer who founded the Wm. Wrigley Jr. Company and built one of the most famous for-tunes in the country. Wrigley came to own a substantial share of his father’s chewing gum company and, in 1932, he also inherited his father’s controlling interest in the Chicago Cubs. Wrigley Field, the Cubs ballpark, was built in 1914 and remains their beloved home stadium. In 1933, Wrigley told the Daily News: “The club and the park stand as memorials to my father . . . I will never dispose of my holdings in the club as long as the chewing gum business remains profitable enough for me to retain them.”

Estate Plan: Wrigley stayed true to his word and did not dispose of his

interests in the Cubs during his life-time. At the time of his death in 1977, Wrigley’s fortune included significant interests in the chewing gum company; the Chicago Cubs and Wrigley Field; the Wrigley Building in downtown Chi-cago; substantial real estate holdings in downtown Phoenix, Arizona; and most of Catalina Island off the coast of South-ern California. However, when Wrigley and his wife, Helen, passed away only two months apart from each other that year, they had limited liquid assets. The estates owed more than $40 million in federal and state estate taxes, and were tens of millions of dollars short of the liquid funds needed to settle the vari-ous estate tax liabilities. It does not appear that the attorneys for the Wrig-leys helped them forge an estate plan during life to account for these tax and liquidity issues in their estates.

Result: After Wrigley died, his son William III became president of the Cubs. In 1981, on the heels of federal and state estate tax audits and saddled with huge estate tax burdens, William III, as executor of his parents’ estates, approved a sale of the Cubs and Wrigley Field in a deal that valued the franchise and its related assets at $20.5 million, ending more than 60 years of the Wrig-ley family’s association with the team. The sale proceeds went directly to the

IRS and various state tax authorities. As of March 2021, various sources value the team and its related assets at $3–4 billion.

Lesson: The Wrigley situation is a prime example of how taxes can over-ride the dispositive provisions of an estate plan. With careful planning to address the tax crunch in the estates of Wrigley and his wife, Helen, it is possible that the Wrigleys could have retained their controlling interest in the Cubs and perhaps even still own the team and its iconic Wrigley Field today. Prospective planning, for exam-ple, employing intrafamily gifts, sales, or loans, can often substantially reduce overall wealth transfer taxes. In many instances, even simple gift strategies such as making present interest gifts up to the federal gift tax annual exclu-sion amount ($15,000 per donee in 2021; $30,000 if the gift is split with a consenting spouse) and direct tuition payments can ultimately result in significant estate tax savings. Life insur-ance held in trust or owned by family members can also be utilized to cre-ate liquidity necessary to pay estate taxes. In addition, postmortem intra-family sales and loans can often help to mitigate estate liquidity issues before interest and penalties on unpaid taxes accrue. Where a shortfall of liquid funds remains, federal and state pay-ment extension provisions, such as I.R.C. § 6166 and N.Y. Tax Law § 997, both applicable to estates consisting of certain closely held business interests, can often help to avoid the sale of assets at an inopportune time.

Planning with Publicity Rights: Robin WilliamsBackground: Robin Williams was a beloved comedian and Oscar-winning actor. He was well known for his off-beat characters and improvisational skills and is often regarded as one of the best comedians of all time. Williams began performing stand-up comedy in California in the mid-1970s and is best known for playing the alien Mork in the sitcom Mork & Mindy. In 2014, Williams committed suicide at his home in Par-adise Cay, California, at the age of 63.

Philip K. Wrigley, 1894–1977. Photo by Chicago Daily News, Inc., Public Domain, https://commons.wikimedia.org/w/index.php?curid=23101625.



Medical experts attributed his suicide to Williams’s struggle with Lewy body disease.

Estate Plan: Prior to Williams’s death, he and his advisors paid special attention to his postmortem publicity rights. Such rights allow public fig-ures to control the commercial use of their name, visual and vocal likeness, or other personal characteristics, and are akin to a property interest in one’s unique identity. Publicity rights can be assigned, licensed, and inherited in some jurisdictions, including California, which affords celebrities postmortem publicity rights that last until 70 years after death. During his life, Williams transferred his postmortem publicity rights to his private charitable foun-dation, subject to the restriction that the rights not be exploited for 25 years following his death. After voicing the Genie character in the hit 1992 film Aladdin, Williams had taken issue with the fact that Disney had, in his mind, used his voice without his permission in advertisements promoting toys and other products related to the film.

The 25-year restriction was not the maximum 70 years under California’s publicity rights statute, but perhaps Williams was trying to strike a balance between the concern that his image would be misused after his death and the benefit that his postmortem public-ity rights would eventually bring to his charitable foundation. Because most of Williams’s remaining estate passed to his children, Williams may also have been concerned about a massive estate tax burden. In the past, the IRS has taken note of the income that can be generated from postmortem publicity rights. In 2018, the IRS settled Whit-ney Houston’s estate after contending that her executors had undervalued her publicity rights by more than $11.5 mil-lion. Notably, the IRS recently lost a Tax Court case against Michael Jackson’s estate, in which the Tax Court held that the IRS had overvalued the publicity rights and prospective income stream in Jackson’s estate by hundreds of mil-lions of dollars.

As an aside, celebrities domiciled in New York State at the time of their

deaths will now have a transferable postmortem right of publicity. On December 1, 2020, New York’s Civil Rights Law was amended and expanded to add two new sections: (1) one sec-tion recognizes rights of publicity for deceased performers and deceased personalities and (2) another section allows individuals to seek redress for use of their images in digitally manip-ulated sexual content without their consent. Under New York law, the new postmortem rights of publicity extend for 40 years after death and apply only to decedents dying on or after May 29, 2021.

Result: It is not clear whether the 25-year restriction on the use of his publicity rights would have reduced the estate tax value of such rights if the val-uation were ever challenged by the IRS. Under basic principles, a decedent’s gross estate is determined without regard to any restrictions imposed in the decedent’s testamentary instru-ment. However, the amount of the estate tax charitable deduction is gener-ally equal to the value of what passes to charity, and in this case, what actually passed to charity were publicity rights encumbered by a 25-year restriction. Somewhat counterintuitively, the com-bination of the 25-year restriction and the charitable bequest could arguably have resulted in full inclusion of the value of Williams’s publicity rights in his gross estate for estate tax purposes

with only a partially offset-ting charitable deduction.

Lesson: As Williams’s estate plan illus-trates, making testamentary arrangements regarding public-ity rights requires thoughtful busi-ness and tax planning. Public figures—includ-ing authors, artists, celebri-ties, athletes,

and political leaders—and their advi-sors may want to consider choosing a domicile where publicity rights are protected. In addition, it is important for advisers to discuss the client’s pref-erences regarding when and if heirs should benefit financially from these rights, as well as how the rights should or should not be used. Clients should also name a team of people, including an experienced entertainment law-yer and business manager, to manage any postmortem publicity rights, and should consider providing for estate tax liquidity needs with life insurance. Reportedly, Williams’s restriction pre-vented Disney from using outtakes from his Aladdin recording sessions to stitch together a sequel featuring his voice after he died. After years of delighting audiences with his humor, perhaps it was Williams who had the last laugh.

ConclusionThe celebrities highlighted above show the importance of well-designed estate plans. Some did not appropriately con-sider providing for damaged children or reflected elder abuse. Others saved estate taxes and benefitted families and charities. In today’s complex society, ordinary people, as well as celebrities, need to protect themselves and their loved ones with competent counsel and complete, comprehensive, and carefully thought-out estate plans. n

Comedian and actor Robin Williams performs at the 2008 USO World Gala in Washington, DC. Photo by Chad J. McNeeley, U.S. Navy. From Wikimedia Commons.



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By Brent W. Nelson, Rachel M. Sass, and Deborah Plum

Brent W. Nelson is a partner at Rimon, P.C., in Tuscon, Arizona. Rachel M. Sass and Deborah Plum are associates at Rimon, P.C., in Tucson, Arizona.

Things change—often in unexpected ways. This axiom has certainly been true for estate planners, who have juggled near

constant adjustments to state and federal laws over the last 10 years. The frequent move-ment of individuals and the evolution of the very nature of assets also conspire against well-meaning planning. It is no secret, then, that trust instruments need flexibility. How to do that depends on the circumstances of each cli-ent. Greater wealth and complexity may augur long-lasting trusts, while less wealth and less complexity may inform a simpler plan. Regard-less, the need to be nimble is paramount. Many of the tools to do this are well known. There-fore, rather than break new ground, this article serves as a brief reminder and reexamination of options, focusing on planning for spouses.

For purposes of this article, a revocable trust is always the foundation of an estate plan. While revocable trusts have frequently been touted as a means of avoiding probate and doing so may be important in some states (like California), focusing on probate avoidance sells revocable trusts short. Their true benefit is as a means of managing finances during life and, critically, during incapacity. Because the client will be alive for the potential trauma of a per-sonal conservatorship or guardianship of the estate, using a revocable trust to avoid those proceedings can spare the client from actual

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survivor’s personal assets. Thus, the simplicity of the trust leads to reduced barriers that can be exploited if the sur-vivor becomes susceptible to others.

Third, the assets of a simple revoca-ble trust can be subject to the claims of creditors, including future ex-spouses.

Finally, a simple revocable trust does not prioritize federal estate tax savings. If the federal estate tax basic exclusion amount drops below a spouse’s net worth, a simple revocable trust would not provide any federal estate tax sav-ings. See Marc S. Bekerman, Credit Shelter Trusts and Portability: Does One Exclude the Other?, Prob. & Prop., May/June 2011, at 10. Moreover, the future appreciation of the deceased spouse’s assets would be held in the survivor’s hands, thus increasing the survivor’s federal estate tax exposure, and the ben-efits of portability would be lost if the survivor remarried and the subsequent spouse died. See Treas. Reg. § 20.2010-3(a). Additionally, if the federal transfer tax exemption levels fall in the future, the federal generation-skipping trans-fer tax (GST Tax) could become an issue for more clients. Portability does not include the transfer of unused GST Tax exemption. A simple revocable trust cannot solve this problem because, for GST Tax purposes, the individual in whose estate the assets were most recently included (i.e., the survivor) is the “transferor” for GST Tax purposes, and that person’s GST Tax exemption must apply to the assets. See Treas. Reg. § 26.2652-1(a)(2). Thus, the first deceased spouse’s GST Tax exemption goes unused with the simple revocable trust structure.

Despite these drawbacks, for the right client, a simple revocable trust might make sense because it is often less expensive. In the case of a joint trust, there would be no requirement to divide trust property at the death of the first spouse and no requirement to obtain an employer identification number and file separate tax returns for a new trust. For individuals of lim-ited means, the cost savings could be critical. The trust instrument can have clear standards that permit an orderly change of trustee should the survivor

personal harm. Failing to use a revo-cable trust for incapacity planning purposes is often a missed opportunity.

Simple Revocable TrustEven clients with limited means need the principal benefits of a simple revo-cable trust. A trust can provide a means of financial management that is not available in any other legal form in most states. For example, aside from the conservatorship avoidance, financial institutions tend to be more comfort-able with trusts than powers of attorney, and they seem to have an easier time with a change of trustee when the terms of the trust instrument are clear about who is to serve and when. Trust prop-erty is also not the subject of probate at the death of a settlor, though the infor-mal probate procedures of some states, such as those adopting the Uniform Probate Code, are less burdensome than the probate proceedings in other juris-dictions, such as California. Because the location of clients and property at the time of death can be difficult to predict, however, it is equally difficult to pre-dict where a probate may be necessary when the client dies.

At the death of the first spouse, a simple revocable trust structure can essentially provide that nothing changes either by granting the survi-vor revocation and amendment powers over the trust, as in the case of a joint trust, or pouring the trust into the sur-vivor’s own revocable trust. Thus, the structure also allows for a streamlined administration at the first death.

Although a simple revocable trust provides the needed incapacity and probate planning, there are several drawbacks. First, the structure lacks control. To the extent that one spouse is interested in controlling the use of their property after their death, that is not an option with a simple revocable trust.

Second, the revocable and amend-able nature of the trust holding the deceased spouse’s property leaves the survivor vulnerable to influence. Exploitation is a significant concern with a simple revocable trust because, unless another party serves as trustee, the trust assets are essentially the

become incapacitated or vulnerable to exploitation. The trustee also can man-age the trust assets without significant expense consistent with a conservator-ship or probate.

Disclaimer Bypass TrustFor individuals with some means, the disclaimer bypass trust has been a pop-ular option for a long time. The premise of this trust structure is simple: After the death of the first spouse, the trust property is split into (i) a survivor’s trust (in the case of a joint trust) or dis-tributed to the survivor’s own revocable trust and (ii) a bypass trust, depending on how much, if any, of the deceased spouse’s trust property the survivor dis-claims in a “qualified disclaimer.” Thus, the survivor has the flexibility to deter-mine whether the bypass trust will exist after the death of the first spouse when the facts and circumstances relevant to that decision might be clearer.

What the disclaimer bypass trust brings in flexibility, however, is often undermined by its technical compli-cations. For example, (i) a qualified disclaimer must be exercised within nine months of the death of the first spouse, (ii) the survivor cannot have accepted any of the benefits of the prop-erty disclaimed, and (iii) the survivor may not, directly or indirectly, deter-mine who benefits from the disclaimed property (meaning the survivor may not hold a power to appoint the dis-claimed property). See I.R.C. § 2518.

While nine months may seem like a significant amount of time, if the trust includes hard-to-value assets, it may be challenging to obtain the needed appraisals to adequately evaluate the merits of disclaiming within that time period. The survivor also must main-tain capacity to exercise the disclaimer or be covered by an adequate power of attorney granting that authority to another person. See Bekerman, supra, at 14.

The functional ability for the survi-vor to avoid accepting the benefits of the disclaimed property over the course of months may also be almost impossi-ble to achieve when property is held in a joint trust. The Treasury Regulations



make it ominously clear that any act indicative of acceptance of benefits will constitute acceptance, including using the property, accepting dividends or interest, and directing others to act with respect to the property. Treas. Reg. § 25.2518-2(d)(1).

Although the survivor can be the beneficiary of the bypass trust to which the disclaimed property is directed, the survivor may not retain a power to appoint that trust. Thus, there is no direct way to alter the trust by a power of appointment should the circum-stances of the beneficiaries or the laws change in the future. The lone excep-tion would be a power of appointment subject to an ascertainable standard, but that is often impractical as a testa-mentary tool. See Thomas L. Stover, Will the Tax Tail Still Wag the Estate Planning Dog?, 41 Est. Plan. J. 3 (Mar. 2014).

The technical landmines mark the largest drawbacks to the disclaimer bypass trust. Because the bypass trust is frequently structured to be excluded from the survivor’s estate for federal estate tax purposes, the property of the trust is not subject to an income tax basis adjustment at the death of the sec-ond spouse even if the survivor’s gross estate does not exceed the federal estate tax basic exclusion amount and their deceased spousal unused exclusion amount. See I.R.C. § 1014(b).

Despite the drawbacks, the dis-claimer bypass trust has the clear advantage of simplicity. In concept, the structure also gives some flexibil-ity and time to make critical decisions after the death of the first spouse. With portability, should the first spouse die

when their gross estate does not exceed the federal estate tax basic exclusion amount, the option to disclaim grants some measure of flexibility to use or retain the unused federal estate tax basic exclusion amount for the survi-vor. The GST Tax exemption of the first deceased spouse may also be allocated to the bypass trust, if there is one, thus preserving the GST Tax exemption.

A/B or A/B/C TrustFor many years, the default in trust planning was the so called “A/B” or even “A/B/C” trust. The mechanics of either came in one of two forms with one of two funding formulas. First, at the first spouse’s death, the trust property was split into two or three trusts. In a joint trust estate plan, the deceased spouse’s federal estate tax basic exclusion amount was held in a bypass trust (the B trust), and the balance of the trust was held in the survivor’s trust (the A trust) or, alternatively, split between the sur-vivor’s trust and a qualified terminable interest property trust (QTIP Trust) (the C trust). In a separate trust estate plan, the deceased spouse’s federal estate tax basic exclusion amount was held in the B trust and the balance either added to the survivor’s own revocable trust or contributed to a C trust. Sec-ond, the determination of the bypass trust amount was either determined based on a pecuniary dollar amount equal to the available federal estate tax basic exclusion amount or a frac-tion derived therefrom. Sometimes, the dollar amount or fraction were deter-mined based on the minimum amount that needed to be funded into the QTIP

Trust to eliminate the federal estate tax liability at the death of the first spouse.

This planning is outdated under cur-rent law and does not provide much flexibility. With the currently high fed-eral estate tax basic exclusion amount, and the loss of income tax basis adjust-ment for any assets in the bypass trust, being locked into creating a bypass trust is a blunt instrument for a dis-crete problem. There may be no tax need for the bypass trust at the death of the first spouse, but with the A/B or A/B/C trust structure, there could be no easy way out of its funding. Some practitioners attempt to address this concern by including a conditional general power of appointment or caus-ing the survivor to trigger the so-called Delaware tax trap. See I.R.C. § 2041(a)(3), (b)(1). Either result would cause the bypass trust assets to be included in the survivor’s estate, thus allowing the tax basis adjustment at the survivor’s death. See id. § 1014(b). In the case of the general power of appointment, how-ever, it may also require opening the class of permitted appointees to unin-tended individuals or entities, such as creditors.

Yet some clients may still prefer an A/B or A/B/C trust structure for a few reasons. First, in blended fami-lies, the survivor does not need to be a beneficiary or the sole beneficiary of the bypass trust, thus allowing the first deceased spouse to leave property directly to children who are not the chil-dren of the survivor. Second, the bypass trust may permit discretionary income distributions to the survivor, rather than mandatory income distributions, which are required in an A/C or Clayton QTIP structure, discussed below. Last, clients with highly appreciating assets who believe estate tax exposure is a risk may prefer using a bypass trust to remove those assets from their estates.

A/C TrustRather than a traditional A/B trust structure, many clients who do not believe they will have a taxable estate may benefit from an A/C trust struc-ture. The C trust would be structured to qualify as a QTIP Trust for federal estate

The trust instrument can have clear standards that permit an orderly change of trustee should the survivor become incapacitated or vulnerable to exploitation.



tax purposes, meaning (i) the surviv-ing spouse would be entitled to all trust income at least annually, (ii) only distri-butions of principal may be made to the survivor, and (iii) no party may appoint the trust property to anyone other than the survivor during the survivor’s life-time. See Treas. Reg. § 20.2056(b)-7(d). The deceased spouse’s executor (for fed-eral estate tax purposes) would file a federal estate tax return to make a por-tability election, a QTIP election, and a “reverse” QTIP election. Each is dis-cussed below.

There is no question that an A/C trust structure is less flexible than a simple revocable trust. An A/C trust functions similarly to an A/B trust. In the case of a joint trust, at the death of the first spouse, the trust property is divided between the two trusts. In the case of separate trusts, all of the trust property of the deceased spouse’s trust is contributed to the C trust. The divi-sion, if any, is a requirement, not a mere suggestion. If the survivor is the trustee and does not fund the C trust, such fail-ure can expose the survivor to liability to C trust beneficiaries who are harmed. To make a QTIP election, the deceased spouse’s executor must file a federal estate tax return even if the deceased spouse’s estate is below the federal estate tax basic exclusion amount. Prior concerns that an unnecessary QTIP election may be rejected were amelio-rated in Rev. Proc. 2016-49, in which the IRS confirmed that a QTIP elec-tion made to elect portability would be respected. Thus, an A/C trust commits the executor to filing the federal estate tax return for both portability and QTIP election purposes.

Because of the QTIP Trust rules, in a purely A/C trust, no changes can be made to the requirement that the survi-vor receive all income at least annually from the C trust. Although the executor could fail to elect QTIP Trust treatment for part or all of the C trust, that would not, absent a Clayton provision, alter the QTIP Trust requirements in the trust instrument.

The ability to elect portability cou-pled with the GST Tax benefits and income tax savings of the C trust make

the A/C trust structure very compel-ling for clients with moderate wealth. Unlike the nine-month fuse on a quali-fied disclaimer, a QTIP election is made on a timely-filed federal estate tax return. The return is due nine months after the deceased spouse’s death, with an automatic six-month extension to file if timely requested. See Treas. Reg. §§ 20.6018-1(d), 20.6075-1, 20.6081-1(b). Thus, the A/C trust structure grants an additional six months to make decisions about the outcome of the trust after the first death.

The executor is also permitted to make a partial QTIP election, effec-tively splitting the C trust into two parts—the qualified and nonquali-fied portions for QTIP Trust purposes. See id. §§ 20.2056(b)-7(b)(2)(i) & (ii), 20.2056(b)-7(d)(3). The principal interest of any portion of the C trust, however, can retain creditor protec-tion from the survivor’s creditors. At the survivor’s death, all of the assets in the QTIP trust are included in the survivor’s estate for federal estate tax purposes. See I.R.C. § 2044. Though this exposes those assets to federal estate tax at that time, it also permits the non-IRD assets in the C trust to have an income tax basis adjustment at the sec-ond death without requiring the use of a general power of appointment. See id. § 1014(b).

Although the GST Tax exemp-tion of the deceased spouse cannot be included in a portability election, it can be preserved up to the value of the C trust through a “reverse” QTIP election. See id. § 2652(a)(3). The election treats the trust property as though it were most recently included in the deceased spouse’s estate for federal estate tax pur-poses, notwithstanding I.R.C. § 2044, thus allowing the deceased spouse’s executor to allocate the deceased spouse’s GST Tax exemption to the C trust. This effectively preserves the deceased spouse’s GST Tax exemption in the same way it could be preserved by allocating it to the bypass trust in a traditional A/B trust structure.

The surviving spouse of a QTIP Trust may have a limited power of appointment, but not a general power

of appointment. See, e.g., Treas. Reg. § 20.2056(b)-7(b)(2)(i) (a QTIP election may be made for property qualify-ing under I.R.C. § 2056(b)(7)(b)(i), but a trust granting a general power of appointment qualifies under I.R.C. § 2056(b)(5)). The class of permitted appointees can be broad, exclusive of only the survivor, the survivor’s estate, the survivor’s creditors, or the credi-tors of the survivor’s estate. See I.R.C. §§ 2041(b), 2056(b)(5). Alternatively, the class of permitted appointees could be limited as much as the spouses decide, which is often to the exclusion of individuals who are not descen-dants of the spouses or their parents. If a client desires to expand the class to include anyone or any entity, that could be accomplished without losing limited power of appointment status if the power is limited to an ascertain-able standard or can only be exercised in conjunction with another person. See id. § 2041(b)(1).

Clayton QTIP TrustAlthough the Clayton QTIP Trust is sim-ilar to the A/C trust structure, it has one important distinction: the ability to elect to use a bypass trust. In effect, the Clayton QTIP Trust structure combines the flexibility of a disclaimer bypass trust with the tax-favorable structuring of an A/C trust. As basic estate plan-ning documents go, it is the authors’ preferred structure for clients with at least $3,000,000 of wealth per spouse. The Clayton QTIP Trust name comes from a titular 1992 Fifth Circuit deci-sion in which the Court reversed the U.S. Tax Court and concluded that a partial QTIP election that could cause the unelected portion to be added to a bypass trust did qualify for QTIP Trust treatment. See Clayton v. Comm’r, 976 F.2d 1486, 1497 (5th Cir. 1992). Effec-tively, the date of the QTIP election relates back to the date of death, thus creating the mechanism to provide that the unelected portion of the C trust could be held in a bypass trust that does not qualify for QTIP treatment. See Rapp v. Comm’r, 140 F.3d 1211, 1218 (9th Cir. 1998). The Treasury Regulations now include a Clayton-inspired example that



concludes that a Clayton QTIP election resulting in the unelected portion of the property passing to the decedent’s children would not disqualify the QTIP Trust for the federal estate tax marital deduction. See Treas. Reg. § 20.2056(b)-7(h), ex. 6.

The downsides to a Clayton QTIP Trust structure are mostly similar to those of an A/C trust structure. One additional downside is that the survi-vor should not have the ability to make the QTIP election. Ideally, the person empowered to make the QTIP elec-tion would be an independent party (not related or subordinate to the sur-vivor under I.R.C. § 672(c)). Without this insulation, the survivor could be viewed as making a gift of the unelected property, and, in any case, the trustee is subject to fiduciary duties that could be tricky for the survivor to exercise with-out implicating conflicts of interest.

If there is concern that the remainder beneficiaries might complain about the election, it may be preferable to waive fiduciary liability to the extent possi-ble, at least as it relates to making the QTIP election. See U.T.C. § 1008. The QTIP election could generate differing legal rights in different beneficiaries, depending on the disparity in the terms of the QTIP Trust and the bypass trust, thus placing an unprotected trustee in an unenviable situation.

The Clayton QTIP trust structure gives the maximum amount of flex-ibility to choose between permanent outcomes after the deceased spouse’s death. Because the outcomes are tied to the QTIP election that will be made on

a federal estate tax return, the impor-tant decisions about what trusts should be funded can be deferred for up to 15 months after the date of death. No other option gives this amount of tax and nontax flexibility.

A Clayton QTIP Trust may be the closest thing to a crystal ball. It is, of course, impossible to predict the future. Whether a Clayton QTIP Trust will con-tinue to provide the most flexibility in the future is unknown. But, under cur-rent law, nothing approximates the flexibility it affords. The ability to defer making permanent decisions until up to 15 months after the date of death is incredibly valuable on several tax and nontax levels.

First, the apparently constant change in the federal transfer tax system merits, where possible, as much information as reasonable to do effective planning. The added buffer of a Clayton QTIP Trust does just that. The executor can gather 15 months of posthumous facts before committing to permanent tax outcomes. Nothing will be perfect, and there will always be uncertainty about the future beyond the 15 months, but having additional data will almost cer-tainly lead to wiser decisions.

Second, the survivor’s circumstances may be clearer based on facts gath-ered during the 15 months after the deceased spouse’s death. If the tax laws do not appear to be at risk of detrimen-tal change and the survivor is in poor health, then the QTIP election may be more attractive than if the tax laws have or appear to be headed toward a change that would increase the tax liability at

the second death. Having flexibility to pick the outcome under these circum-stances is very handy.

Third, assets are also not necessarily static in nature. Over time, their values can change and circumstances relating to the assets can change, in ways that improve or impede their desirability. Whether an asset is increasing in value might not be apparent on the deceased spouse’s date of death. Additional infor-mation in the interim might make that trajectory apparent and thus relevant to the desirability of having a bypass trust.

Finally, the survivor can accept the benefits of the property over which a QTIP election is not made, assuming the survivor is a bypass trust benefi-ciary. Unlike in a disclaimer bypass situation, when the survivor is a ben-eficiary of all of the trusts, there is no concern that distributing income to the survivor might disqualify the trust to do what was intended by the bypass trust mechanism.

ConclusionAs noted in the beginning of this arti-cle, the basic structure of any estate plan should include a revocable trust. In addition to offering a more stream-lined administration upon the settlor’s death, use of a revocable trust can offer significant benefits with respect to the management of finances during the individual’s life. These advantages are particularly relevant in the event of incapacity, as the trust provides free-dom from burdensome proceedings such as a conservatorship or guardian-ship of the estate.

Given the frequent changes in laws and client circumstances, most plans would benefit from additional flexibil-ity. Under these circumstances, that usually means using a simple revo-cable trust, an A/C trust, or a Clayton QTIP Trust structure. In deciding which structure is most suitable, clients and practitioners must consider not only the wealth of the individuals but also the potential value of preserving flex-ibility within the estate plan in order to account for changes in the tax law, fam-ily circumstances and dynamics, and the value of the estate itself. n


INTRODUCING THE RPTE SPECIAL COMMITTEE ON CAREER

DEVELOPMENT & WELLNESS

As part of RPTE’s ongoing effort to deliver value to its members, the Section has launched the Special Committee on Career Development & Wellness. The mission of the committee is to provide an array of resources that support attorneys throughout their careers.

The committee is working on several undertakings in both career development and wellness, the first of which is Midweek Mindfulness, beginning on September 15, 2021. Midweek Mindfulness will be a 15-20 minute live mindfulness session presented every Wednesday at noon central time by Chill Anywhere (the dynamic organization that has led mindfulness programs at RPTE meetings over the last year). Only RPTE members will be able to access Midweek Mindfulness, and they will do so through the Chill Anywhere app, which also will give them access to all Chill Anywhere’s extensive content. Midweek Mindfulness currently is scheduled for five trial sessions, September 15 through October 13, with plans to continue if you, our members, find it to be a valuable member benefit. Please watch for upcoming email blasts on how to download the Chill Anywhere app and access Midweek Mindfulness and other Chill Anywhere content.

The committee is currently organizing a series of roundtable discussions, training sessions, and other options for content delivery. Section members are encouraged to contact any committee member with suggestions for future committee programming on career development or wellness.

COMMITTEE CO-CHAIRS

Jim Durham (RP)Crystal Patterson (TE)

COMMITTEE MEMBERS Abigail Earthman (TE) Dana Fitzsimons (TE) Lilly Gerontis (RP) Soo Yeon Lee (RP)

Nancy Little (RP) Marie Moore (RP) Kelly Perez (TE) Mary Vandenack (TE)



Get

ty Im

ages

By Jerome D. Whalen

Jerome D. Whalen is a consultant to lawyers and their clients in connection with real estate matters in Seattle, Washington.

A LANDOWNER’S GUIDE TO GROUND LEASES

You’ve been approached about the sale or lease of a parcel you own. It’s the former site of a family business, now underproductive. Although it produces rents barely able to cover the taxes and insurance, it is in a

developing area and should become more valuable as the city grows. Capital gains tax would be substantial, so you are reluctant to sell. A proposed rent for a ground lease, however, is appealing.

Ground leases are often advantageous arrangements for landowners but problematic for developers. A landowner can obtain a secure income stream and long-term appreciation without a taxable sale. Most ground leases are “abso-lute net”; the tenant pays all expenses and taxes associated with the property. Ground leases are secure because the ground rent is the first claim on the land, even before the tenant’s debt service, which is secured only by a lien against the tenant’s interest in the lease (a leasehold mortgage), not the owner’s fee. The interests of the landlord and tenant in a well-constructed ground lease can be separately financed and sold without disturbing the other.

This article focus on issues that arise in connection with ground leases from the landlord’s perspective. For a more detailed and comprehensive discussion of ground leases, see the author’s book on the subject. Jerome D. Whalen, Commer-cial Ground Leases (3d ed. 2013).

For the tenant, the ground lease creates additional complications to an already complex development process, adding time and expense to financing, permitting, construction, and operation of the project. The landowner needs to keep in mind the concerns of the prospective tenant, as well as the landowner’s own concerns, in order to reach a viable agreement.

The most serious risks for the landowner arise during construction, until the improvements are complete. Of course, the landlord should not, except under the most compelling circumstances, allow the tenant to use the landlord’s fee as security for the tenant’s financing (known oxymoronically as “subordinating



the fee”). The tenant must finance its project with a leasehold mortgage (and whatever other credit or collateral the tenant may provide). Then, if the tenant defaults under the lease and the lender forecloses, the lender (or its successor) has to cure the defaults and undertake the obligations required to maintain the continuing leasehold, unless the lender is willing to allow the lease to be ter-minated, leaving no claim against the property or the project. That is unlikely to happen except in the event of a cata-strophic construction failure, in which there is little left other than an unin-sured hole in the ground. Construction monitoring is a critical need, first for the lender, but also for the landlord.

The landowner may list the prop-erty for lease with a broker, but, just as often, a developer approaches the owner with a proposal to buy or lease the land. Most ground leases occur in strong real estate markets when devel-opers are seeking favorable sites in a competitive environment, so they are willing to undertake the disadvantages of a ground lease. Sometimes land-owners issue requests for proposals for developers with respect to a site, but this is most often an institutional exer-cise, involving time and expense (and obscuring personal responsibility). Usu-ally, the landowner attempts to reach an agreement with the developer who opened negotiations. This may hide the fact that the choice of the developer is the single most important decision the landowner must make in reaching a ground lease. The owner needs the ten-ant to be someone who, together with his team of contractors, architects, and engineers, has a demonstrated capabil-ity of successfully completing projects comparable to the ground lease project. In terms of construction period risks, a ground lease is no place for beginners.

There are, of course, other factors of concern to the landowner, including the nature and design of the project, the market for the project, financing, pre-leasing, and the adequacy of the project budget. Review and due diligence by

the landowner are essential to ensure that the proposed project is well-con-ceived and a viable use of the property. Most landowners who are not real estate professionals will require profes-sional assistance, such as an architect or engineer and perhaps a commercial real estate broker. One item to discuss with the prospective developer is an allowance in the project budget for the landlord’s technical assistance with plan review and construction monitor-ing. Professional fees can add up, tens of thousands or more, which may be too burdensome for a small project. But if the developer expects the land-owner simply to turn over the property and trust that the developer will create the project without “interference,” that should be a big red flag.

The Initial AgreementThe initial oral agreement by the land-owner and the developer usually covers the base rental rate, the nature of the project on the site, and perhaps also the ground lease term. The developer may propose a schedule for development, including permitting and construction timetables. The lease term, rent, and project timing are among the thorniest issues to be fleshed out in the defini-tive documents. Documenting a ground

lease is time-consuming and expen-sive, usually taking months. The parties often become annoyed as issues arise. Often before requesting that the pro-fessionals draft definitive documents, the parties reach a preliminary agree-ment setting forth the general terms to the extent determined. This can take the form of a letter of intent or merely a term sheet with bullet points, but it should not be done without legal coun-sel, as even a brief outline of terms may later be evidence of a binding contract, with expensive consequences if nego-tiations fail to reach a final agreement. A ground lease project requires a fully developed, integrated lease agreement, something the tenant needs for financ-ing and both parties need to govern a long-term, complex relationship. A let-ter of intent may satisfy all the elements of a binding contract but is not suffi-cient to finance, construct, and operate a real estate project on a ground lease, It may be enough, however, to sustain a costly lawsuit.

Ground Rent AdjustmentsIndexing. Generally, the principals will have agreed on the initial base rent before anything else. The landowner is usually aware that future rent revisions will be needed over a long-term ground lease, simply to protect against infla-tion. The landowner may think that periodic increases governed by an index like the Consumer Price Index (CPI) would be reasonable. The developer, however, may fear that the potential for unlimited increases in the base rent, by CPI or otherwise, will render the project unfinanceable. The revenue produc-tion of a real estate project does not usually reflect general inflation, at least in the short run. High inflation may occur when the economy is in reces-sion. Rental rates for project occupancy tenants are typically set for many years, especially for major tenants. Potentially unlimited CPI rent increases will make it very difficult for a leasehold mortgage lender to value the proposed project ini-tially for the loan. This may also cause

A ground lease

project requires a fully

developed, integrated

lease agreement,

something the tenant

needs for financing

and both parties need

to govern a long-term,

complex relationship.



the lender to limit the loan amount and perhaps increase the interest rate or loan fees, which may undermine the financial feasibility of the project.

Instead, a ground lease might pro-vide for increases at five-year intervals for the first 25 or 30 years of the lease term based on the CPI, but limited to a maximum or minimum increase per annum; or simply fixed increases at a rate of, say, 2 percent per annum. The rate of inflation has varied widely over past decades, from double digits to periods bordering on deflation. The historical average for the century from 1913 to 2013 is about 3.25 percent per annum. The Federal Reserve now seems to favor a two percent annual rate as a “target.”

Reappraisals. Longer term ground leases very often provide further rent adjustments based on the appraised value of the land starting after 30 years or so, and then every 10 or 15 years thereafter. This is an important protec-tion for the landowner with a ground lease term of 50 years or more. There are two major issues with rent reap-praisal provisions. One is the rate of return to be used by the appraisers. It is difficult to find a “market rate” for ground lease rentals; the AA and AAA bond rates have been suggested, but no financial instrument truly reflects the characteristics or risks of an unsubor-dinated ground lease. Recent interest rates such as the 10-year Treasury rate have been historically low. Most land-owners would not agree to a rate of return on land value that might be two percent, especially for periods of 10 or 15 years. Similarly, most developers would not want to see a revised rental rate set in double figures. During the recent period of low inflation and inter-est rates, most reported ground lease rental rates have been at least 5 or 6 percent, often higher. In prior periods of higher inflation and interest rates, most reported ground lease rates have been anywhere from 6 to 12 percent. One cannot guess what rates might be 30 years from now. Perhaps the wisest

course is to state a rate in the ground lease to be applied to the land value, something like the rate implicit in the original base rental agreement (which might be acceptable if combined with interim five-year limited CPI increases), or perhaps 7 or 8 percent. This is a com-mon provision in many ground leases.

The second issue is land value, which again raises the leasehold lend-er’s concern with unlimited rent increases. Professional appraisers, in the absence of instructions to the con-trary (and sometimes even then), will value the land based on its “highest and best use.” During the years between the original lease and the date of a reap-praisal, significant changes other than inflation can affect the value of land, including changes in the market for property in the area, and changes in zoning that may either allow much higher density or higher value uses, or may prohibit the existing project use for new projects (existing projects are usu-ally grandfathered). Changes in height limits, setbacks, and other requirements may increase or decrease the value of the land for its then “highest and best use.” Lenders will object to a reappraisal that may value the land and the ground rent based on some greater theoreti-cal use that cannot be adapted to the property as a practical matter; and the landlord should object to a value based on a lesser use (after downzoning) that does not reflect how the existing proj-ect can be legally employed. This is not a theoretical concern—these things happen—but the possibility is usually ignored when the ground lease is nego-tiated because the reappraisal is so far in the future. The lease should pro-vide in clear, inescapable terms for the appraisers and others indicating that the land for some period should be val-ued on the basis of the tenant’s actual use as established under and con-ducted in accordance with the lease. That period should reflect the parties’ expectations regarding the likely useful economic life of the original improve-ments. If the lease is for a period longer

than that, including options to extend the term, then the rent afterwards should be based on the then highest and best use of the property.

Lease TermThe term of the ground lease often receives little serious consideration. The developer wants maximum flexibility and may propose a relatively short ini-tial term with many extension options. The parties may simply agree on a 99-year term because that seems like the appropriate term for a ground lease, but it is not. It’s arbitrary and often much too long. The logical term would be the expected useful economic life of the initial project. This would vary sig-nificantly from a strip mall or motel to a high-rise office or apartment building. After that, the landlord should be able to seek another use for the property (or the tenant, with a rent reappraisal at the highest and best use). The tenant should not be left to adapt the prop-erty to a more valuable use, or to drain the last ounce of revenue from the sur-viving improvements, while paying the landowner a rent based on a less-than-optimal use. Unfortunately, the lease term has often been agreed to by the principals in the first instance and can be difficult to change; then, the critical issue becomes the basis of rent reap-praisals over the life of the lease.

The Tenant (and the Landlord)When the first draft of the ground lease arrives from the tenant, the landowner may be surprised to see that it is not the “tenant” who will be the developer, but rather a limited liability com-pany newly formed for this project and lacking any appreciable assets. Mod-ern commercial real estate is largely a “nonrecourse” industry, and a “bank-ruptcy remote special purpose entity” may be a requirement of the tenant’s project lender. As a practical matter, once construction is complete, the ten-ant’s interest in the project, financed by a leasehold mortgage loan, will pro-vide substantial value as credit for



performance of the tenant’s obliga-tions, and the leasehold lender will serve as further support in the event of default. The highest risk is dur-ing the construction period, and it is likely that the construction lender will require additional credit in the form of guaranties, letters of credit, addi-tional collateral, or a requirement for substantial equity contributions to the tenant before funding of the loan. The landowner may take some comfort in the lender’s requirements or the exis-tence of equity commitments to the tenant (usually from third-party inves-tors) or may decide that some form of guaranty from the developer, letter of credit, additional equity, or the like is needed, at least before completion of construction. In the predevelopment stage when the developer’s feasibility studies, soils, and design work may give rise to liens against the project site, the landowner should expect the developer to be directly liable for payment. These requests are not unreasonable if tai-lored to the specific situation.

The developer may have contractual relationships only with the tenant LLC for development, leasing, and property management for seemingly large fees. The developer needs compensation for actual services provided for the proj-ect, as long as the total project fees do not exceed market rates for comparable services.

If it is not already the case, counsel is likely to suggest that the landowner’s interest in the property be put into a separate LLC, primarily to guard against third-party claims; the landlord should have virtually no obligations to the ten-ant under the ground lease once the lease is in effect.

The Ground LeaseThe actual negotiation of a ground lease is likely to take several months and ulti-mately may try everyone’s patience. Following are some of the more com-mon issues that can be anticipated, but it is by no means an exhaustive list. There is no standard form ground lease;

each transaction is unique.Predevelopment. When the devel-

oper begins feasibility studies, there are issues of potential third-party liabilities, insurance, invasive testing, interruption of current uses, and the like. The let-ter of intent, as well as the lease, should address these. The most difficult issue may be the development and review of plans for the project. The landowner should ensure that the final plans fulfill expectations for the physical improve-ments, a primary consideration in most cases, along with the ground rent, for agreeing to the lease. The owner will need an architect or engineer to aid in the review. The developer will not want an outsider in design meetings and will resist regular reviews entirely, fear-ing delays that may impede the project. The developer will be concerned that changes needed to keep the project within budget will be objectionable to the landlord. A schedule for review, detailing what will be subject to review, will likely require spirited, but worth-while, negotiation. The landowner’s concerns can be identified: Uses, exte-riors, quality of finishes, gross building areas, and the like can be approved in the preliminary plans and specifica-tions, and further review limited to material changes of those elements as plans go through development.

Construction Monitoring. It is criti-cal that the quality and cost of the improvements is monitored continu-ally during the course of construction to assure that construction meets the standards agreed upon, that the costs incurred are within the budget for avail-able financing, and that potential lien claimants—contractors, subcontractors, and suppliers—are paid. This is, in the first instance, the responsibility of the construction lender, who should per-form extensive monitoring, with the aid of architects’ inspections and cer-tifications, contractors’ certifications and lien releases, title insurance, and legal review. In some states, the ten-ant’s construction may give rise to lien claims against the fee. The landowner

can rely on the lender’s due diligence to a degree, but the owner’s interests are not always congruent with the lender’s interests, especially if serious problems arise. The owner should have access to the lender’s monthly draw packages and may need professional assistance to review the material, together with the right to seek additional information if necessary.

Leasehold Mortgages. The ground lease will need to include leasehold mortgagee protection provisions (LMPPs) for the benefit of the tenant’s lender. These permit institutional lend-ers to finance real estate without a lien on the fee, minimizing the risk to the landowner. LMPPs give the lender notices and opportunities to cure ten-ant defaults several times before the landlord can terminate the lease and, if the lease is nevertheless terminated, the further right to obtain a “new lease” from the landlord on the same terms and conditions. This might seem exces-sive, especially if the landowner’s counsel is not familiar with LMPPs, but for the lender the ground lease must be nearly impossible to terminate (resulting in the loss of its collateral); otherwise, no prudent lender would be willing to make the loan. These are essential, standard provisions.

There are a variety of nonstandard provisions that may be requested, espe-cially on behalf of construction lenders. If conditions threaten completion of the project requiring the construction lender to foreclose, the lender may ask for additional rights in the lease not available to the tenant or other lend-ers under the standard LMPPs. These may include rights to (i) replace the original tenant with another devel-oper or replace members of the team, like the general contractor, (ii) extend time frames for development, including substantial completion, or (iii) obtain waivers of the landlord’s rights to con-sent to assignments, changes in the building plans, project uses, or budget limitations. The lender will want a free hand, but these sorts of provisions are



negotiable; the landowner’s primary consideration should be the comple-tion of the improvements generally as originally contemplated, and not with-out “reasonable” approval of changes. Allowing some of these rights if the lender is forced to foreclose may help the tenant obtain construction financ-ing on a leasehold basis. In most cases the practical risks to the landlord from these rights in the lender will be small; if the owner has chosen a capable devel-oper, both the tenant and the lender will have every incentive to see the project complete, rather than turn the property into a parking lot, but careful drafting can help relieve much of the anxiety and limit the temptations.

Landlord Financing. The ground lease should not prohibit financing by the landlord using the fee interest as col-lateral. The principal restriction on the landlord will be that any mortgages or other liens against the fee must by their terms be subordinate to the ground lease, and to authorized subleases and any “new lease.” Any mortgage in place when the ground lease is signed must be subordinated of record to the ground lease.

Uses. Many, if not most, ground leases limit the tenant’s uses of the property and restrict substantial alter-ations to the improvements without the landlord’s consent. These provi-sions ensure the landowner will receive the agreed-upon project and that later changes in the use and structures will not be made if adverse to the landlord’s interests. Significant changes in the neighborhood or in economic markets, however, may render the original proj-ect less desirable or even uneconomical, and there may be higher and better uses for the property. If there are no restric-tions, the tenant can make changes and continue at the current rent and other-wise under the lease. If the landlord’s consent is needed, a reappraisal of the rents may be required in connection with the approval of the changes. The lease may need to explicitly grant the owner that right, or else imposing a rent

adjustment as a condition to consent may be deemed unreasonable.

Insurance. The tenant should carry all insurance for construction, for property damage, and for public lia-bility. The landlord should be named as an additional insured on the liabil-ity insurance and a loss payee (among others) on the property policy. The landlord should also have its own lia-bility policy covering the premises. The insurance provisions of the lease need to be reviewed by a capable com-mercial insurance agent on behalf of the landlord, one with experience of construction period insurance prac-tices. Attorneys sometimes like to think they know what insurance should be required; as a result, many leases contain inappropriate and archaic pseudo-insurance terms.

Condemnation. Extended arguments about condemnation are a waste of time and resources. The risks of any material taking of most real estate proj-ects is minimal. Governments have other ways to extract the concessions they want. Any actual taking likely would have little practical effect on the

project, and the award should go pri-marily to the tenant to fix any damage. The leasehold lender will have certain theoretical requirements for condem-nation clauses, but if the lender has confidence in its appraisal of the ten-ant’s leasehold estate, it should accept a division of condemnation proceeds, first, to the landlord, for the value of the interest taken, determined subject to the ground lease, and the remain-der to the tenant (subject to the lender’s mortgage).

Arbitration. Many people object to arbitration provisions, which have become oppressive in many commercial and consumer form contracts. The most frequent ground lease disputes concern rent, its calculation, or its reappraisal. Both landlord and tenant may want to keep these disputes private rather than exposed in a public forum. Arbitration can provide relatively expeditious and efficient, less expensive settlements (limiting, for instance, abusive discov-ery practices) in a private setting. For a long-term relationship such as a ground lease, arbitration should be a preferred method of dispute resolution.

ConclusionThere are potential benefits to the land-owner (and his or her heirs) extending for many years from a successful ground lease transaction. The careful choice of a developer is the most important decision, together with selection of an appropriate project. Developers, like many others in business, are used to negotiating for the maximum achiev-able advantage in any transaction. A ground lease is something of a zero-sum game; many matters of negotiation rep-resent costs to one side or the other that can affect the ultimate value of the lease to a party. Discussions can become con-tentious. But if both landowner and developer keep in mind the greater value of completing the ground lease, and are willing to negotiate in good faith, con-sider the needs of each other, and not seek unreasonable advantage, patient negotiation should be rewarded. n

A ground lease is

something of a zero-

sum game; many

matters of negotiation

represent costs to one

side or the other that

can affect the ultimate

value of the lease

to a party.



G. Andrew Gardner is senior counsel at Walter Haverfield LLP in Cleveland, Ohio, and co-chair of the Section’s Leasing Group. Hannah Dowd McPhelin is a partner at Troutman Pepper in Harrisburg, Pennsylvania, vice chair of the Section’s Leasing Group, and chair of the Emerging Issues and Specialty Leases Committee. Joseph M. Saponaro is a partner and chair of the real estate group at Meyers, Roman, Friedberg & Lewis in Cleveland, Ohio, and chair of the Section’s Retail Leasing Committee.

Lawyers who represent lenders, commercial landlords, or commercial tenants need to understand the leasing docu-ments required by lenders to landlords. This article provides

an overview of such documents, which usually include tenant estoppel certificates and subordination, nondisturbance and attornment agreements, with sample document forms.

A Brief Overview of a Lease TransactionSimply stated, a lease is the grant by one party (Landlord) to another party (Tenant) of a possessory interest in an estate in land (whether vacant land, an entire house or building, or a portion of a building). In the majority of commercial leases, the Landlord has obtained a loan from a bank or other lender (Lender or Mort-gagee) who will be taking a security interest in the property owned by the Landlord, as well as an assignment of the Landlord’s inter-est in the leases of the property and the rental income derived from the leases and the property as collateral to secure the Land-lord’s payment of the loan. The Tenant’s rent payments are part of the income stream the Landlord will use to repay the loan to the Lender.

The Lender made the loan to the Landlord to facilitate the Landlord’s acquisition, development, or redevelopment of prop-erty. As part of the terms and conditions of the Lender’s security documents with the Landlord—typically a loan agreement, mort-gage, or deed of trust (mortgage), and assignment of rents and leases—there will be certain restrictions and requirements regard-ing leasing of the property. These requirements can include requirements that the Lender approve any leases of the property by the Landlord. In the case of large commercial or industrial properties, the Landlord’s approval may include approval of the

By G. Andrew Gardner, Hannah Dowd McPhelin, and Joseph M. Saponaro

Tenant, including the Tenant’s creditworthiness, and the terms and conditions of the lease. In the case of multifamily leases or leases of smaller spaces in a large facility, the requirement may only be that the Landlord use a form that has been pre-approved by the Lender (allowing minimal changes as may be negotiated by the parties) and that the lease be on market terms (set forth in the loan documents or calculated by the terms of the loan documents). Additionally, the loan docu-ments may restrict the right of the Landlord to amend, modify, terminate, or extend the term of leases without the Lender’s consent.

In most loan documents for commercial properties, there will also be a requirement that all leases of the property be subordinated to the Lender’s liens created by the Security Documents. Why does this requirement exist? A lease cre-ates a possessory lien in favor of the Tenant (the priority of the lien will depend upon the lease terms and date that the Tenant obtained possession of the leased premises). The lien of the Lender’s Mortgage will establish a Lender’s lien on the property and provide the Lender with priority upon filing. Lenders require that the Tenant’s possessory lien be subordi-nated so that in the event that the Lender ever forecloses on the property, the Lender’s superior lien can be used to termi-nate any subordinate liens (including the Tenants’ rights to possession under their leases). Lenders typically require that the Landlord’s lease form expressly state that the Tenant’s lien is automatically subordinated to the lien created by the Mort-gage held by any first mortgagee.

A typical Mortgage provision may provide as follows:

Mortgagor shall comply with and observe Mortgag-or’s obligations as landlord under all leases of the Property or any part thereof. Mortgagor, at Lender’s request, shall furnish Lender with executed copies of all leases hereafter made of all or any part of the Prop-erty. Unless otherwise directed by Lender, all leases of the Property shall specifically provide that such leases are subordinate to this Mortgage; that the tenant under any lease attorns to Lender, such attornment to

Estoppels and SNDAsUnderstanding and Negotiating the Landlord’s Lender’s Lease Documents



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be effective upon Lender’s acqui-sition of title to the Property; that the tenant agrees to execute such further evidences of attornment as Lender may from time to time request; and that the attornment of the tenant shall not be termi-nated by foreclosure.

Lenders may also include reservation of the right to not subordinate a Tenant’s lien to Lender’s lien.

Subordinated liens may be termi-nated upon a foreclosure of the Property by the Lender (allowing Lender to deliver vacant possession). Depending upon the

property and creditworthiness of the Ten-ants, the Lender may want the leases to continue in the event that the Lender is forced to exercise its remedies under its loan documents (including foreclos-ing upon the property or taking a deed in lieu of foreclosure to take the Land-lord’s ownership interest in the property). As noted in the sample provision above, most commercial lenders also require that all leases contain a covenant that the Ten-ant agree to attorn to (or recognize and accept) the Lender as a successor landlord if the Lender forecloses upon Lender’s mortgage interest in the property. When a Landlord is obtaining a new loan, either

to acquire or refinance a property, in some cases Lenders may require subor-dination agreements only from Tenants who have placed their leasehold interest of record (by recording a memorandum of lease), and in other cases Lenders may require subordination agreements from the major Tenants of the property (which can be defined in many ways, but often by the major Tenant’s square footage).

In addition to the subordination and attornment requirements, the Lender will typically include a requirement that the Landlord periodically obtain confirma-tion from its Tenants of certain matters related to the Lease. In particular, these



items are the key financial terms of the Lease that the Lender used to underwrite its loan to the Landlord. This confirma-tion typically is made by requesting that the Tenants execute certificates in favor of the Lender, with the understanding that the Lender is entitled to rely upon all statements made in the certificate and that each Tenant will be estopped from asserting different facts in the future after confirming them in an estoppel certificate to the Lender. The confirmations most often included in estoppel certificates are those that are critical to the underwriting of the Lender’s loan to Landlord: (i) the length of the lease term, (ii) the amount of Tenant’s monthly rent payment, (iii) confirmation that payment of rent has commenced, (iv) confirmation of any ter-mination rights, and (v) confirmation that neither the Landlord nor the Tenant is in default under the lease. Depending upon the circumstances, in some cases, Lenders will require estoppel certificates only from certain major Tenants, and in other cases, Lenders may require estoppel certificates from the major Tenants and a certain per-centage of remaining Tenants, based on the number of tenants or rentable square footage.

In addition to the subordination provi-sions and estoppel certificate, the Lender typically will require that the Landlord reject payments under the lease more than one month in advance. This is nec-essary to protect the Lender’s income stream in the event of foreclosure.

As noted above, the Lender’s Mort-gage will have certain requirements with respect to the Landlord’s lease. A typi-cal lease provision for subordination and attornment provides:

Landlord and Tenant covenant and agree that this Lease and any and all renewals, modifications, extensions, amendments, and restatements hereof are subject and subordinate to any security instrument, including, without limitation, any mortgage or deed of trust (Security Instrument), which may now or hereafter be placed upon or affect the Real Property and the Project in which the Leased Premises is located,

A typical lease provision for estoppel certificates provides:

From time to time during the Lease Term, within fifteen (15) days of receipt of Landlord’s written request, Tenant shall acknowledge, execute, and deliver to Landlord, the holder of any Security Instrument, or any other persons whom Landlord may designate in such request, a state-ment in writing certifying that this Lease is unmodified and in full force and effect (or if there have been modifications hereun-der, that the same is in full force and effect as modified and stat-ing the modifications) and, if so, the dates to which the Rent and any other charges have been paid in advance, and such other items requested by Landlord, including, without limitation, the lease com-mencement date and expiration date, rent amounts, and that no offsets or counterclaims are pres-ent. It is intended that any such statement delivered pursuant to this Paragraph may be relied upon by any prospective purchaser or holder of any Security Instru-ment (including any assignee of the foregoing) encumbering the Premises.

Subordination, Nondisturbance, and Attornment AgreementsA subordination, nondisturbance, and attornment agreement, typically referred to as an SNDA, is an agreement among the Landlord, the Tenant, and the Lender who has (or will have during the loan or lease term) security with respect to the property leased between Landlord and Tenant. As noted above, SNDAs are gen-erally required by a Lender as a condition precedent in closing a commercial loan transaction with the purpose of subor-dinating the rights of the Tenant under its lease so that Lender has a superior lien in the property. In exchange for the Tenant’s agreement to subordinate, the Tenant requests that the Lender agree not to disturb the Tenant’s leasehold in the

provided that the holder(s) of such Security Instrument shall agree in writing not to disturb Tenant’s possession of the Prem-ises or Tenant’s rights under this Lease so long as Tenant is not in default hereunder (subject to any applicable notice or cure peri-ods granted to Tenant). In the event that a Successor Landlord, as defined below, receives title to the Real Property, (i) such Suc-cessor Landlord shall be bound to Tenant under all of the terms and conditions of this Lease, (ii) Tenant shall recognize and attorn to Successor Landlord as Ten-ant’s landlord under this Lease, and (iii) this Lease shall continue in full force and effect, in accor-dance with its terms, as a direct lease between Successor Land-lord and Tenant. This clause shall be self-operative, and no further instrument or subordination shall be necessary. For purposes of this Lease, the term “Successor Land-lord” shall mean any party that becomes owner of the Real Prop-erty, whether pursuant to (i) a foreclosure under the Security Instrument or any mortgage or deed of trust, (ii) any other exer-cise or the rights and remedies of the holder of the Security Interest, or (iii) delivery by Landlord to the holder of a security interest of a deed in lieu of foreclosure or any of the foregoing.

The confirmations most often included in Estoppel Certificates

are those that are critical to the

underwriting of the Lender’s loan to

Landlord.



event that the Lender has to foreclose its superior lien interest in theproperty (the “nondisturbance” provision of the SNDA).

Diving deeper into an SNDA requires a review of each of its components.

Subordination Provision: This provi-sion covers the subordination of the Tenant’s rights under its leasehold to the lien rights of the Lender created through the Security Documents. In the event of a Landlord’s default under the terms and conditions of the Security Docu-ments, the Lender is granted the first lien position to protect its interest in the Property. The subordination of the Ten-ant’s rights under a lease may be created by Security Documents that are recorded either before or after the Tenant’s lease-hold interest takes effect. As such, in a case where the Tenant enters into a lease after the Security Documents have been recorded, then the Lender may be able to terminate the Tenant’s rights under the lease at foreclosure. By contrast, if the Tenant enters into a lease before the Secu-rity Documents have been recorded, then the Lender may have a difficult time ter-minating the Tenant’s rights under the lease at foreclosure—many jurisdictions agree that foreclosure against the Land-lord does not affect the Tenant’s rights under the lease. We are focusing on leas-ing subordination in these materials; however, other types of subordination include debt subordination as well as property interest subordination, both tak-ing place in the commercial financing setting.

Nondisturbance Provision: This provi-sion pertains to the agreement between the Lender and the Tenant that the Lender will not terminate the Ten-ant’s subordinate rights under the lease, including the Tenant’s possessory rights, at foreclosure. Generally, this is with the caveat that the Tenant must not be in default under the terms and conditions of the lease at the time of foreclosure. If the Tenant is not in default under the lease at the time of foreclosure, then the Ten-ant’s rights under the lease shall be fully recognized. Nondisturbance can also take place in the context of a sublease, whereby the subtenant’s rights under the sublease will not be disturbed if the master lease is terminated by the master

landlord because of default by the mas-ter tenant (sublandlord). One caveat: If the Tenant is an affiliate of the Landlord, the Lender may not be willing to agree to a nondisturbance provision (result-ing in a subordination and attornment agreement).

Attornment Provision: In this provision, the Tenant covenants with the Lender that, in the event of a foreclosure, the Tenant’s rights under the lease will not be terminated and the Tenant agrees to recognize that the Lender, who would not otherwise be in privity with the Ten-ant, may enforce the lease as though the Lender were the original party to and beneficiary of the lease, and the Tenant and the Lender will be bound thereby.

The Lender derives benefits from a standard SNDA, which include the follow-ing: leasehold liens remain subordinate to the Lender liens until such Lender liens are released; the Tenant will attorn to the Lender as the new landlord upon the Lender or any successor or nominee acquiring the property; the Lender is not liable for any of the Landlord’s defaults under the lease, leasing concessions, and common area maintenance reconcilia-tions, unless as expressly set forth in the SNDA; and the Tenant will not exercise certain rights under the lease until the Lender has had an opportunity to cure the Landlord’s defaults.

There are other considerations in negotiating an SNDA: the Landlord and the Tenant under the lease that is the sub-ject of the SNDA subordination maintain each of their respective rights under the lease, however modified by the SNDA. Some typical requested covenants in the

SNDA that can function as lease modifi-cations (or restrictions on the Landlord and the Tenant) are as follows:

1. The SNDA may restrict any amend-ment, restrictions, and terminations under the lease by requiring the Lend-er’s consent in each such case, and failure to obtain such consent may render any such amendment, restrictions, and termi-nations null and void or not require the Lender to be bound if the Lender exer-cises its rights under the SNDA.

2. The SNDA should require that the Tenant pay future rent to the Lender without Landlord approval and with-out the Tenant being required to make a default determination by the Landlord. Further, the Tenant should receive full credit for such future rent payment.

3. The SNDA should contain language that enables the Lender to step into the shoes of the Landlord in the event of the Tenant’s default under the lease and to exercise all rights and remedies under the lease.

4. The SNDA should require the Ten-ant to provide notice to the Lender in the case of the Landlord’s default and to allow the Lender to cure such default after the applicable notice and cure period set forth in the lease, thus pro-viding an expanded right for the Lender to protect the Lender’s collateral and income stream.

5. Many SNDAs contain provisions that mimic the language in the estoppel certificate to confirm the Tenant’s rep-resentations of the current status of the lease.

A sample form of SDNA appears at the end of this article.



Estoppel CertificateFrom the Tenant perspective, estoppel certificates are important because they can have significant legal consequences, but they can be easily overlooked. Once a Tenant executes and delivers an estop-pel certificate, the Tenant is “estopped” or prohibited from asserting a position to the contrary of any of the statements in the estoppel certificate. Estoppel certificates take various forms, but typi-cally they are a series of statements that provide a snapshot of a lease at the time the estoppel certificate is given by con-firming certain facts regarding the lease and the Tenant’s occupancy of the prop-erty that a Lender requires.

There are several things Tenants must consider when completing an estoppel certificate. As a threshold mat-ter, the Tenant should be clear who the estoppel certificate will be in favor of—usually it is the Landlord, the Lender, and successors and assigns of both. As a second preliminary matter, the Tenant must carefully consider each statement it is requested to make in the estoppel certificate.

First, the estoppel certificate will iden-tify all of the lease documents by title, names of parties (original parties and any assignees), and date. All lease docu-ments, including amendments, letter agreements, guarantees, waivers, assign-ment and assumption agreements, and similar transfer agreements, should be identified and included. If the Tenant has assigned the lease or sublet any portion of the premises, it should be disclosed here as well, with the applicable documents described in the estoppel certificate. The Lender often requires that copies of all lease documents be attached to the estoppel certificate and that the estoppel certificate confirm that the attached lease documents are true, complete, and correct copies in all respects.

Second, the estoppel certificate will confirm that the lease term has com-menced (or if it has not yet commenced, confirm when it will commence based on the occurrence of certain events), together with the length of the initial lease term and any renewal terms that are available. If the Tenant has an early termination

right or similar right that could shorten the term of the lease, this will likely need to be disclosed in the estoppel certificate as well. It will likely also confirm the rent commencement date and that the Tenant is paying rent pursuant to the lease docu-ments if the rent commencement date has occurred. Another statement that some Lenders have included since the shutdowns that resulted from the COVID-19 pandemic include “Tenant has not, as of the date hereof, requested rent relief from the Landlord and does not antici-pate asking for rent relief.”

Third, the estoppel certificate will con-firm the size and location of the leased premises. It is best here to be as specific as possible in describing the leased premises by using a suite number or any similar designation for the space.

Fourth, the estoppel certificate will state the material economic terms of the lease. It will state the current monthly base rent as well as monthly installments of additional rent, such as common area maintenance charges, operating expenses, and real estate taxes that the Tenant is paying. As noted above, it is impor-tant to the Lender that rent not be paid more than one month in advance, and the estoppel certificate will likely have a statement to this effect. The estoppel certificate may also request that the Ten-ant confirm any increases in base rent amounts that will occur at later points in the lease term. The Lender will also want the estoppel certificate to recite the amount of any security deposit paid, the form of security deposit (cash or letter of credit), and whether, to the Tenant’s knowledge, any portion of the security deposit has been applied by the Landlord.

Fifth, the Lender will require state-ments in the estoppel certificate as to whether there are any defaults by either the Landlord or the Tenant that are then continuing. These types of statements typically include confirmation from the Tenant that all obligations of the Land-lord with respect to concessions (i.e., leasing incentives such as free rent and tenant improvement allowances) have been paid in full and that the Tenant does not have any offsets or deductions against rent available to the Tenant. As

the Tenant, it is appropriate to add a knowledge qualifier (i.e., to the Tenant’s knowledge) to the beginning of these statements regarding defaults, offsets, and deductions to protect the Tenant in the event that there is a default, offset, or deduction the Tenant is not aware of; otherwise, the Tenant may be deemed to have waived these matters.

Finally, the Tenant should be care-ful with respect to additional statements in the estoppel certificate beyond con-firmation of the facts above (such as representations regarding any potential environmental issues) or agreements that could provide the recipient of the estop-pel certificate with additional rights. For example, the estoppel certificate may include a fairly straightforward statement such as “So long as the obligations are outstanding, Lender or its designee may enter upon the property to visit or inspect the property.” This statement permits the Lender to inspect the property with-out restriction when, before the estoppel certificate, such rights would have been subject to any terms and conditions in the Tenant’s lease.

As a best practice, once you have reviewed and revised an estoppel cer-tificate to be accurate based on the lease documents, you will need to have your client review and confirm each state-ment as well to ensure that the Tenant provides an accurate picture of the lease and does not waive any of its rights. Fur-ther, make sure that every blank in the estoppel certificate is completed and use “Not Applicable” or a similar designation where needed. If the estoppel certificate will be returned along with an SNDA, the Tenant may want to include a notation on the estoppel certificate that it is not valid unless and until the Tenant receives back a fully executed SNDA.

A sample form of estoppel certificate appears at the end of this article.

ConclusionLawyers need to understand the basic requirements of Lenders to Landlords with respect to tenant estoppel certifi-cates and SNDAs and the provisions that need to be included in such docu-ments. n



SUBORDINATION, NONDISTURBANCE, AND ATTORNMENT AGREEMENT

THIS SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT (this “Agreement”), is made as of this ____ day of ____________ 202__, by and among ______________________________, having an address at _______________________________ (“Lender”); ____________________, a(n) _________________________________, having an address at __________________________________________________________ (“Landlord”); and _____________________________________, a(n) _________________________________, having an address at ____________________________________________________________________ (“Tenant”).

W I T N E S S E T H:

WHEREAS, Landlord and Tenant entered into a certain lease dated ___________________________ as supplemented and amended (the “Lease”), covering a certain building together with parking areas and other improvements (as more particularly described in the Lease and herein referred to as the “Premises”), located on a portion of that certain parcel or parcels of land in the _________________________________________ (as more fully described in Exhibit A attached hereto and made a part hereof by reference; WHEREAS, Lender is the mortgagee under an ____________________________________________________________________ (as amended and restated from time to time, the “Mortgage”), dated on or about the date hereof, which Mortgage encumbers the Premises as well as the Landlord’s interest in the Lease. WHEREAS, it is a condition precedent to obtaining the loan that the Mortgage shall be, and remain, a lien or charge upon the Premises hereinbefore described, prior and superior to the Lease and the leasehold estate created thereby, and it is a condition in the Lease that in order to provide for such subordination that the Landlord obtain certain agreements of the Lender with respect to the Lease. NOW, THEREFORE, in consideration of the foregoing, the mutual promises and covenants hereinafter set forth, and other good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged, and in consideration of the mutual promises, covenants, and agreements herein contained, Lender, Landlord, and Tenant, intending to be legally bound hereby, promise, covenant, and agree as follows:

1. Subordination. Subject to the terms of this Agreement, the lien of the Mortgage and any renewals or extensions thereof, shall be and remain at

all times a lien or charge on the Premises prior and superior to the Lease. Landlord hereby acknowledges that it has provided a copy of the Lease to Lender and Lender hereby acknowledges receipt thereof. Tenant acknowledges notice of the Mortgage.

The lien of the Mortgage shall unconditionally be and remain at all times a lien on the Premises prior and superior to any existing or future option

or right of first refusal of Tenant to purchase the Premises or any portion thereof, whether under the Lease or otherwise. In the event of any transfer of Landlord’s interest in the Premises by foreclosure or other action or proceeding for the enforcement of the Mortgage or by deed in lieu thereof, Tenant specifically waives any right, whether arising out of the Lease or otherwise, to exercise any purchase option or right of first refusal to purchase which remains unexercised at the time of such transfer.

2. Attornment. Subject to the terms of this Agreement, Lender and Tenant agree that in the event the Mortgage of Lender is terminated by reason of

foreclosure proceedings or for any other reason, and Lender succeeds to Landlord’s interest in the Premises, Lender and Tenant shall be bound to each other under all of the terms and conditions of the Lease, as landlord and tenant, respectively, such attornment and recognition to be effective and self-operative without the execution of any further instruments on the part of either Lender or Tenant, immediately, when Lender succeeds to the interest of Landlord under the Lease.

Tenant shall be under no obligation to pay rent, additional rent, or other payments to Lender until (and Tenant agrees that it shall pay rent,

additional rent, and/or other payments to Lender when) Tenant receives written notice from Lender that: (a) Lender has succeeded to the interest of Landlord under the Lease, or (b) Lender is exercising its right to receive rental payments from the Tenant under any assignment of Landlord’s interest in the Lease granted to Lender as security for the Mortgage. Landlord hereby consents to and approves Tenant’s payment of rent to Lender in either such instance, authorizes Tenant to rely on any such notice received by Lender, and releases and discharges Tenant of and from any and all liability to Landlord on account of any such payment. Tenant shall be entitled to full credit under the Lease for any payment made to Lender pursuant to the foregoing.

3. Nondisturbance. Lender agrees that if and so long as Tenant is not in default beyond any applicable cure period under the Lease, neither Lender

nor any Foreclosure Purchaser (as hereafter defined) will disturb Tenant in its use, occupancy, and enjoyment of the Premises or disturb its leasehold interest or any other rights of the Tenant under the Lease, including without limitation any option to extend the term of the Lease. Lender agrees that the foregoing nondisturbance shall apply whether or not the Mortgage held by Lender (or any future holder of the Mortgage) shall be terminated by reason of foreclosure proceedings or for any other reason, or if Lender or any other party, by way of any action or proceeding to foreclose the Mortgage or transfer ownership of the Premises by deed in lieu of foreclosure, succeeds to the interest of Landlord under the Lease (such other party herein referred to as the “Foreclosure Purchaser”).



If Lender or any Foreclosure Purchaser succeeds to the interest of Landlord under the Lease, provided Tenant is not in default of the Lease beyond any applicable cure period, Lender or such Foreclosure Purchaser shall assume and perform the Landlord’s obligations under the Lease. Tenant shall, from and after the date such Foreclosure Purchaser or Lender succeeds to the interest of Landlord, have the same remedies against such Foreclosure Purchaser or Lender for the breach of any covenant contained in the Lease that Tenant might have had under the Lease against Landlord, if such Foreclosure Purchaser or Lender had not succeeded to the interest of Landlord. The foregoing notwithstanding, Lender or such Foreclosure Purchaser, in such instance, shall not be (a) bound by any rent or additional rent which Tenant might have paid for more than one month in advance of when any such payment is due and payable under the Lease to any prior landlord (including Landlord) (i) except for credits due Tenant pursuant to any monthly payments paid in advance (such as contributions for common area charges), or (ii) unless such rent is paid in accordance with the applicable provisions of the Lease, or (iii) unless such rent was actually received by Lender or Successor Landlord; or (b) bound by any previous amendment or modification of the Lease (unless made with either Lender’s or Successor Landlord’s consent); or (c) liable to Tenant for any of Landlord’s breaches or events of default; or (d) liable to perform any Landlord obligations set forth under the Lease, such as Tenant improvements or construction; or (e) required to restore the Premises after any casualty or condemnation, except to the extent of proceeds received for such purposes.

Lender further agrees that so long as Tenant substantially performs the obligations imposed under its Lease and so long as the Lease shall be in

full force and effect, then: (a) Tenant shall not be named or joined as a party or otherwise in any suit, action or proceeding for the foreclosure of the Mortgage or

to enforce any rights under the Mortgage or the bond or note or other obligation secured thereby, except to the extent required by applicable law in order to enforce the Lender’s rights and remedies under the Mortgage (subject to other terms hereof); and

(b) the possession by Tenant of the Premises and Tenant’s rights thereto shall not be disturbed, affected, or impaired by, nor will the

Lease nor any of its terms or conditions thereof be terminated or otherwise affected by, (i) any suit, action, or proceeding upon the Mortgage or the bond or note or other obligation secured thereby, or for the foreclosure of the Mortgage or the enforcement of any rights under the Mortgage or any other documents held by the holder of the Mortgage, or by any judicial sale or execution of other sale of the Premises, or any deed given in lieu of foreclosure, or by the exercise of any other rights given to any holder of the Mortgage or other documents held as a matter of law, or (ii) any default under the Mortgage or the bond or note or other obligation secured thereby.

Lender agrees that neither the Mortgage nor any other security instrument executed in connection therewith shall cover or be construed as

subjecting in any manner to the lien thereof any trade fixtures, signs, or other personal property at any time furnished or installed by or for Tenant or its subtenants or licensees on the Premises regardless of the manner or mode of attachment thereof, except as otherwise provided in the Lease or pursuant to landlord lien rights under applicable law.

4. Amendments. This Agreement may not be modified orally or in any manner other than by an agreement in writing signed by the parties or their

successors and permitted assigns. 5. Notices. Any and all notices required or permitted to be given or served by the terms and provisions of this Agreement shall be in writing and

shall be sent to the following addresses: (a) if to Lender, at the address of Lender as hereinabove set forth or at such other address as Lender may designate by notice; (b) if to Landlord, at the address of Landlord as hereinabove set forth or at such other address as Landlord may designate by notice; or (c) if to Tenant, at the address of Tenant as hereinabove set forth or at such address as Tenant may designate by notice. Any notice shall be effective: (x) in the case of hand-delivery, when delivered; (y) if given by mail, four (4) days after such notice is deposited with the United States Postal Service, with first-class postage prepaid, return receipt requested; and (z) if given by any other means (including by overnight courier), when actually received.

6. Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 7. Counterparts. This Agreement may be executed in counterparts, all of which when taken together shall constitute one complete document. IN WITNESS WHEREOF, the parties have executed this Agreement on the dates shown hereinbelow.

[INSERT SIGNATURE LINES AND NOTARY ACKNOWLEDGMENTS]



ESTOPPEL CERTIFICATE

The undersigned (“Tenant”) is a party to a lease dated __________ [describe all Lease documents by title, date, and parties] between _________, as landlord (the “Landlord”), and Tenant, as tenant, for certain space (the “Premises”) located in the certain building commonly known as _______________ ([collectively, as amended and assigned,] the “Lease”).

Landlord, as the owner of the property of which the Premises is a part (the “Property”), intends to obtain a loan with respect to the Property from (“Lender”), who, as a condition of providing such loan, has required this Estoppel Certificate.

At the request of the Landlord and Lender, Tenant certifies as follows:

1. Attached hereto is a true, correct and complete copy of the Lease. The Lease is the sole agreement between Land-lord and Tenant relating to Tenant’s occupancy of the Premises. The Lease is in full force and effect.

2. The term of the Lease commenced on ____________ and expires on __________. Tenant’s obligation to pay rent under the Lease commenced on . Tenant has no right to extend the term of the Lease except as follows: .

3. The monthly base rent presently payable under the Lease is $__________. The monthly base rent payable under the terms of the Lease has been paid through ____________. The monthly amount currently payable by Tenant under the Lease on account of operating expenses and taxes is $________________.

4.[To Tenant’s knowledge,] Tenant has no existing defenses, offsets, claims, or credits against rent payable under the Lease or against the enforcement of the Lease by Landlord.

5. [To Tenant’s knowledge,] Landlord is not in default under the terms of the Lease [beyond all applicable notice and cure periods]. [To Tenant’s knowledge,] Tenant is not in default under the terms of the Lease [beyond all applicable notice and cure periods].

6. Tenant has no option or right to purchase the Property or any part thereof except as follows: .

7. All tenant improvement work required to be completed by Landlord has been completed by Landlord in accordance with the Lease and accepted by Tenant. Landlord has paid in full any and all tenant improvements allowances payable to Tenant under the Lease.

8. Tenant has no option or right of first refusal to lease additional space except as follows: .

9. Tenant has not assigned the Lease nor sublet any portion of the Premises except as follows: .

10. The security deposit held by Landlord under the Lease is $_____________ and is in the form of [cash/letter of credit].

11. [To Tenant’s knowledge,] there are no outstanding rent credits or free rent periods under the Lease.

This Estoppel Certificate may be relied upon by Landlord, Lender, and their respective successors and assigns.

[INSERT TENANT SIGNATURE LINES]



BOOKR E V I E W

With the publication of Mine! How the Hidden Rules of Ownership Control Our Lives, property law finally has its version of Freakonomics. Freakonomics teaches simple microeconomics through clever and engaging stories—why do sumo wrestlers cheat, and why do drug dealers live with their mothers? The answer is to follow the individual incentives. Mine!, by law professors Michael Heller and James Salzman, teaches property law through equally clever and engaging sto-ries—who owns the wedge of reclining space behind airplane seats, the recliner or the knee defender, and why does Dis-ney tolerate knock-offs of Mickey Mouse on t-shirts? But far beyond a collection of interesting stories, Mine! offers tre-mendous insight into the underpinnings of property law.

This combination of engaging stories and thoughtful insight has led to remark-able (for two law professors) media attention for Mine!, including a New Yorker essay by Elizabeth Kolbert and a book review in the Sunday New York Times. Property lawyers know why—this is a really interesting field. The conflicts over who gets what and why are fasci-nating. There simply has never been a book that brought this to the general public in an engaging and fun way. Now there is.

The book’s introduction revolves around two stories—fights over reclin-ing airplane seats and HBO password sharing. These set up the three basic premises of the book: (1) our lives are shaped every day by ownership rules, from where you stand in line and park to the food you eat and the medications you take; (2) ownership is a story-telling

common maxims are often true (oth-erwise they wouldn’t be maxims), but also they are often incorrect, twisted by owners to maximize the benefits of ownership.

In a particularly fascinating and dis-turbing section, for example, they show that the “Buy Now” button we all click on Amazon for e-books and Apple for music doesn’t mean we own the digital content, at least not the way we think we think we own a book. It turns out Ama-zon can technically delete e-books from Kindle readers without a refund, some-thing no bookstore would dream of doing.

The authors focus on natural resources in Chapter 4, “My Home Is Not My Castle,” where they explore the reach of accession, which they call “attach-ment” for easier communication. They tell stories of how inadequate ownership rules have led to excessive groundwa-ter pumping, oil drilling, fishing, and development that harms water quality. They then take the next step and show how “ownership engineering”—cleverly designed property rules—can remedy these problems.

This book is fun to read but also meaningful, in the sense of full of mean-ing. As a law professor who teaches property, I found myself stopping after particular sections, thinking about what I had just read and how to use it in my classroom. In my view, anyone who teaches property law should read Mine! and do the same. Indeed, I plan to rec-ommend it to my students. It brings alive what can often seem a dry and technical subject. Heller and Salzman show just how fascinating the rules over who gets what are. This is why Mine! is for more than law professors and their students. Anyone interested in how ownership shapes our lives should read Mine! n

battle—they argue that there are just six stories that everyone uses to claim ownership—with no natural or “correct” allocations; and (3), as a result, owner-ship is always up for grabs. If you are not choosing the ownership story on your behalf, then someone is choosing it for you and putting their values and inter-ests ahead of yours.

They frame the book by turning six popular maxims of ownership on their heads. Chapter 1, for example, is entitled “First Come, Last Served.” Using sto-ries of paid line-standers, Disneyworld’s strategies for who gets to the front of the line, HOV highway strategies, and many more, they show that what counts as first is always contested. True to their prop-erty law backgrounds, they describe how the famous decision in Pierson v. Post is just as relevant today as when the fox was taken two centuries ago. Currently, though, as they put it, more and more we are seeing that “owners are shifting background rules for first to last, from time to money, and from equality to privi-lege, all to advance their own interests, not necessarily yours.”

This short quotation captures well why the book has gained popular atten-tion. It is well written and shows why property rules really matter. Written for a popular audience, Heller and Salz-man never use the word “entitlement” or other technical legal terms but man-age to communicate easily the essential property theory toolkit, from the Coase theorem and ex-ante/ex-post decision making to baselines and rights or reme-dies approaches, among many others.

Later chapters take a similar approach in turning upside down the familiar property ownership sayings. Chap-ter 2 is titled, “Possession Is One-Tenth of the Law,” and Chapter 3, on intellec-tual property, is called “I Reap What You Sow.” Their basic point is that the

Review of Mine! How The Hidden Rules of Ownership Control Our Lives

Reviewed by J.B. Ruhl, David Daniels Allen Distinguished Chair of Law, Vanderbilt University School of Law.



The state of New York recently enacted sig-nificant amendments to its power of attorney law. The amendments became effective June 13, 2021. 2020 N.Y. Sess. L. ch. 323, amending N.Y. Gen. Oblig. L. § 5-1501B. The changes are intended to apply prospectively; those powers of attorney signed before the new law remain valid, though clients may want to revisit their existing documents and ensure their wishes are properly documented under the newest version of New York laws. These changes are intended to dramatically alleviate problems associated with the cre-ation, enforcement, and implementation of powers of attorney in New York.

Under the prior power of attorney law, a power of attorney was required to contain the precise language provided in the statu-tory short form to be considered a validly enforceable power of attorney. The new law provides that using the exact language is not required. Instead, the power of attorney must only substantially conform to the statutory short form, thus leaving leeway for practitio-ners whose forms stray in small degrees from the statutory form. The law provides that a power of attorney substantially conforms to the statutory form notwithstanding (i) an insignificant mistake in wording, spelling, punctuation, or formatting or the use of bold or italic type; or (ii) the use of language that is essentially the same as, but not identical to, the statutory form. Further, the new law pro-vides that substantial conformity does not depend on the presence or absence of a par-ticular clause or the failure to include clauses in the statutory form that are not relevant to a given power of attorney.

Under the prior law, a separate gift-rider document was required that specifically identified the principal’s wishes regarding

permits gifts of $5,000 in the aggre-gate each year on the principal’s behalf (increased from $500) to third parties.

• The agent is provided the authority to deal with financial matters related to the principal’s health care; this power does not permit the agent to make health care decisions for the principal.

• Co-agents have the power to delegate authority to each other if specifically authorized within the document.

• A requirement that agents retain records of all transactions under the power of attorney (as before) and a new requirement that they keep all receipts for payments or transactions conducted for the principal.

• Though it was permitted by the old law, the new law makes it clear that the agent has express authority to make investment decisions and pay-ment options regarding retirement benefits, but the agent does not have the power to change beneficiary designations for retirement bene-fits unless the authority is expressly granted in the modifications section of the statutory form.

• Added by a separate bill signed in March 2021, the new law requires two disinterested witnesses. 2021 N.Y. Sess. L. ch. 84, amending N.Y. Gen. Oblig. L. § 5-1501B(1)(b). Under the old law, the now eliminated statutory-gifts rider required these witnesses but the underlying power of attorney did not.

Practitioners have hailed these changes as welcome reductions in the complexity, cost, and difficulty of preparing, executing, and implementing powers of attorney. The changes assist with making the legal process easier for both practitioners and clients, and it also aids with making it more difficult for third parties to reject a power of attorney because of technical errors. n

the ability of the agent to make gifts. Under the new law, a separate gifts rider is no longer required, and the power of attorney can include provisions related to gifts directly in the modifications section of the document.

The changes also address the ramifi-cations of a third party’s refusal to honor a power of attorney and the procedure to address such refusal. Any refusal by the third party must be made in writing and furnished to the principal and the acting agent within ten business days of pre-sentment of the power of attorney, listing specific reasons for the refusal to honor the document. If the agent wishes to pur-sue an action to compel the third party to honor the document, a court can award damages to the agent, including reason-able attorney’s fees and costs, if the court finds that the third party acted unrea-sonably in refusing to honor the agent’s authority under the form. The agent’s action to compel the third party to honor the power of attorney is the exclusive rem-edy given to the agent under the new law, as under the old law.

The new law also provides safe-harbor provisions for third parties concerning the acceptance of a power of attorney. Under these rules, a person who accepts an acknowledged or notarized power of attor-ney in good faith without any knowledge that the power of attorney is invalid may presume that the signature is valid.

The changes to the New York power of attorney law also include:

• The power of attorney may be exe-cuted on behalf of a client who is physically unable to sign the docu-ment, provided that the signing person is not named to act as an agent under the document.

• Unless a different amount is other-wise specifically authorized within the document, the statute now

New York Enacts Significant Changes to its Power of Attorney Law

PRACTICAL POINTERS F R O M P R A C T I T I O N E R S

Contributing Authors: Robert M. Nemzin, HSBC Private Banking, 452 Fifth Avenue, New York, NY 10018, and Allison Heimann, Morgan Lewis & Bockius LLP, 101 Park Avenue, New York, NY 10178-0060.



TECHNOLOGYP R O P E R T Y

Over the past year, we have spent hun-dreds of hours in online meetings, conference calls, and virtual work ses-sions. In addition, most of our business conversations have been over VOIP (Voice over Internet Protocol) or cell phones. With the return to the office, in-person meetings will resume, but many of those meetings will have a virtual component, in which a client or col-league will participate over a phone or web meeting. What all these methods of communication share are the ability to record the communications with the click of a button.

Recording On-DemandThe technology to record these commu-nications is baked into the very devices we use. Most cell phones have a voice memo feature which can be activated to record a phone call. VOIP phones, which use software to send the conver-sations over the same internet wires you use for the internet, have an option to record and store conversations on demand. The same storage system that stores voicemail can store the complete communication. If you run your VOIP phone through your computer, there is a button when you pick up the call that allows you to record the session. At the end of the call, the voice file can be downloaded to your computer. With 8x8 (www.8x8.com) and Google Voice, there is a user setting that allows you to

your client may have supplied you and what guidance you may have supplied your client. In some situations, a pre-sentation you may make to a client’s executives may be useful to be shared with other employees who could not attend the meeting.

Going beyond attorney-client communications, there are further benefits. Recording contract negotia-tions with opposing counsel will allow you to review positions taken by your opposing counsel and weigh which con-cessions would be more important or more valuable. You might miss items that you failed to put in your notes. Those who did not attend the meet-ings could also review the recordings and provide their input. Discussions with a range of third parties can also be shorter; you will not need to make peo-ple repeat themselves so you can put it down in your notes.

In my consulting business, I teach attorneys how to use technology to be more productive, and I provide tech-nical support using remote access and virtual meeting technology. I record most of my remote sessions. On request, at the end of the meeting, I will supply my clients with a link to the recording of the meeting. They can use the links to review what I taught them or to bet-ter understand the remote support services I provided them. If your law firm offers compliance training, succes-sion planning, or estate planning, these recordings can be a value-extended teaching tool for your clients.

Some states require the prior permission of both parties to the com-munication; other states, like New York where I work, require only one party to consent. As a lawyer, you should review

automatically record all incoming and outgoing calls.

If you use Microsoft Teams, Skype, or Zoom for your calls, you can choose to turn on voice recording. With Microsoft Teams you can record the full meeting, save it to OneDrive or Sharepoint, and then live stream it without ever down-loading it. If you use Slack for a group call, you can turn on screen recording which records the voice and the screen.

GoToMeeting, Zoom, WebEx, Join.Me, TeamViewer, ScreenConnect, and a whole host of other virtual meet-ing platforms have a “record meeting” option. In most paid versions of these applications, the organizer of the meet-ing can initiate the recording. In some programs, the organizer can allow attendees to initiate the recording.

Recordings Enhance Your Legal PracticeThe value of recording these conversa-tions for lawyers cannot be overstated. The creation of a contemporane-ous record has evidentiary value in a legal proceeding that far exceeds the “hearsay” memory of one party to the conversation. For attorney-client com-munications, the recording allows you, the lawyer, to review what information

Technology—Property provides information on current technology and microcomputer software of interest in the real property area. The editors of Probate & Property welcome information and suggestions from readers.

Technology—Property Editor: Seth Rowland (www.linkedin.com/in/sethrowland) has been building document workflow automation solutions since 1996 and is an associate member of 3545 Consulting® (3545consulting.com).

What Comes Next after Virtual Meetings



your local state law regarding record-ings and the rulings of your local bar association. Violations of these rules can be an ethics violation or a criminal violation. Before recording someone in another state, you should check that state’s laws. Regardless, it is good prac-tice to obtain prior consent before you click the record button and to con-firm that consent once you start the recording.

The Need for a TranscriptHistorically, working with audio and video files has been difficult and expen-sive. The file sizes are large; a two-hour video can be over 10 gigabytes. Where do you store them? Although audio files are much smaller, they are even more difficult to manage. How do you remember what you said? Short of re-listening to the recording, how do you find the information in these recordings that you need or want to review? If you have ever fast-forwarded on an audio-tape, you will remember how difficult it was to find what you were looking for. If you ever fast-forwarded a video record-ing, you have the picture, but even that is not very helpful. If you want to take notes on a recording, the listening pro-cess can often take up to 3 to 4 times longer than the original recording.

The solution is to make a transcript of the recording. A transcript can be searched and indexed. The items in the index and lines of the transcript can be linked directly to audio or video. This process requires special playback soft-ware and a lot of time. Some costs can be saved by pushing the task to a para-legal or secretary, but that is still very expensive, and the accuracy of the tran-script varies depending on the skill of the paralegal and the quality of the recording.

Until recently, transcripts were avail-able only for depositions and trial testimony. The client would pay the bill. A court reporter or stenographer would be paid a substantial sum to attend the session and transcribe the sounds into a stenotype machine and then later convert those chords into a plain-text

transcript. It was simply too expensive to use a stenographer for the average call or meeting.

Advances in Transcription TechnologyIn the past few years, the price of “good enough” transcription has dropped to pennies per minute. This has been made possible by the convergence of high-quality digital recordings com-bined with newer artificial-intelligence (AI) powered software. The result is that a phone call can now be recorded and transcribed in real-time with an accept-able degree of accuracy. The same AI that powers Siri on the Apple phones, the Google Assistant on Android phones and Cortana on Microsoft com-puters, can take voice dictation. These tools can take your conversations in real-time and convert them to text and can even translate them live into another language.,

In addition to recordings, the paid version of Zoom offers a transcript of the meeting. A similar service is available with GoToMeeting, Webex, and Join.me. The quality of the tran-script can be varying. If your goal is searchable meeting notes, you may be satisfied. If you need a higher degree of accuracy or if you desire a better-for-matted transcript or a tool that works across multiple platforms, there are sev-eral new AI-based tools available. Some are pure artificial intelligence; others combine AI with human review.

Otter Live Notes (otter.ai), which works with audio and video files is a pure AI platform. Otter can also attend your Zoom, WebEx, or GoToMeeting virtual meeting as a participant. It will record and transcribe the meeting. You can then correct the transcript as you listen to the meeting. A similar service is offered by Trint (trint.com); Trint adds the ability to distribute the tran-script in 31 languages.

A higher degree of accuracy, at a higher cost, can be obtained by combin-ing artificial intelligence with human review. Services like Transcription-Puppy (www.transcriptionpuppy.com),

Rev (www.rev.com), Datalyst (www.datalyst), Automated Transcription (sonix.ai), Wingman (trywringman.com), Fireflies (fireflies.ai), and Colibri (colibri.ai) charge by the minute. They handle a wide range of data files. At prices between $.10 and $2.00 per min-ute, they are affordable if the accuracy of the transcription is important.

When these transcription services are embedded in the meeting service, the transcript arrives shortly after the meeting or within 48 hours of the meet-ing. Some apps will allow you to scroll through the transcript in one window while viewing the recorded meeting or listening to the recorded audio. It is as easy as clicking on a phrase in the tran-script to take you to the exact spot. The result is that the communications are now fully searchable.

The transcript can be stored in an online document management system like NetDocuments (www.netdocuments.com) and show up in search results alongside Word docu-ments, emails, and PDFs. The audio and video files can be linked to the tran-scripts and compiled into electronic binders (virtual outlines) using NetDoc-ument’s Set Builder tool.

Once you get comfortable with recording and transcription tools, they will become an integral part of your legal practice. You may even relearn the lost art of giving voice dictation. Fol-lowing the meeting or call, you would create a meeting summary, list key takeaways, capture a few personal anec-dotes, and prepare a task list, all using voice dictation. Now, before your next meeting with a client, you can review the prior meeting transcripts and sum-maries. Most clients will be pleased with how well-informed about their needs you are. When faced with a difficult cli-ent who contradicts prior instructions, you can pull up the transcript. You can even queue up the recording to the very spot where the statement was made. n

TECHNOLOGYP R O P E R T Y



THE LASTW O R D

Insurance forms are tricky—we know that. And they change over time, gener-ally prompted by a change in the forms promulgated by the Insurance Ser-vices Office, Inc. (ISO), a company that serves the insurance industry. See List of Products in the “Policy Language and Rules” Category, Verisk, https://vrsk.co/2SDb7o0.

Most contracts include risk man-agement allocations, generally based on which party is carrying what insur-ance. In leases, landlords’ lawyers have long assumed that requiring the ten-ant to maintain ample liability coverage naming the landlord as an additional insured will fully protect the landlord from all claims arising from accidents occurring at the premises. But that’s not accurate—and it’s particularly not accurate under ISO’s additional-insured endorsement form for managers and lessors, as revised in December 2019. See Additional Insured — Managers or Lessors of Premises (Dec. 2019 ed., Insurance Ser-vices Office, Inc. 2018), Verisk CG 20 11 12 19. Lawyers representing landlords should read this form and its sister ISO additional-insured endorsement forms carefully to learn and deal with their sig-nificant gaps in the coverage.

The Limited Covered LiabilityThe revised ISO form covers the addi-tional insured only for bodily injury (this means injury or death to a human being), property damage, and personal and advertising injury “caused, in whole or in part, by [the tenant] or those acting on [the tenant’s] behalf in connection with the ownership, maintenance, or use” of the premises leased to the tenant.

The important points in this language:

• The prior 2013 version of this CG 20 11 endorsement covered liabilities “arising out of ” rather than “caused, in whole or in part, by.” “Arising out of ” is broadly interpreted, whereas “caused by” is more limited; at least one court had held it encompasses only proximate causation. E.g., Unigard Ins. Co. v. Wausau Underwriters Ins. Co., 15 Wash. App. 2d 1014 (2020).

• The requirement that the liability be caused “by [the tenant] or those acting on [the tenant’s] behalf ” is new—it was not part of the 2013 endorsement form. Under this new requirement, the tenant’s policy covers the landlord only if liability is at least partially caused by the tenant or its agent. See, e.g., Dhein v. Frankenmuth Mut. Ins. Co., 950 N.W.2d 861 (Wis. Ct. App. 2020). Will the new language cover the landlord’s sole negligence on the premises or the negligence of a trespasser? It probably will not. See, e.g., Am. Guarantee & Liab. Ins. Co. v. Norfolk S. Ry., 278 F. Supp. 3d 1025, 1040-41 (E.D. Tenn. 2017) (citing various courts’ interpreta-tions of the language). Will it cover an accident entirely caused by a customer? We’ll see.

• Will the additional-insured endorsement cover the landlord for injury to the tenant’s employ-ees outside the premises? The authorities have indicated that it will not, particularly not with the “caused by” language. See, e.g., Cummings Props., LLC v. Pub. Serv. Ins. Co., 343 F. Supp. 3d 1 (D. Mass. 2018) (holding that even the “aris-ing out of ” language does not encompass such an injury).

The Additional LimitationsIn addition to the usual exclusions, such as coverages not permitted by law, both the 2019 and the 2013 endorsement forms provide that if the additional-insured coverage is required by a lease, the coverage “will not be broader than that which you are required by the [lease] to provide for such additional insured,” and the most the insurer will be required to pay on behalf of the addi-tional insured is the amount of coverage

“required by the [lease].” This provision is pretty frightening for the landlord’s drafter because its plain language limits the additional-insured coverage to the amount of the required liability policy; in other words, if the lease requires the tenant to provide only a $1 million lia-bility policy, then the additional insured may not be insured for the tenant’s actual limits of $4 million.

A lease drafter needs to understand these limitations in order to (attempt to) maximize the landlord’s additional-insured coverage in a couple of ways: First, by requiring the tenant to use the 2013 version of CG 20 11 (to the extent available) and, second, by specifying a minimum amount of coverage and providing that if the tenant maintains additional coverage, then the additional insured will receive its benefit. But the drafter’s main solution for the landlord (in addition to advising the landlord to maintain its liability coverage) is to draft a broad tenant indemnity provision. This indemnity provision can give the landlord another avenue for obtaining coverage under the tenant’s insurance policy—it can permit the landlord to tap into the tenant’s contractual liability coverage. But, as will be covered in Part Two in a later column, hacking through the double negatives of this contractual liability provision is truly an exercise in finding the pea. n

Hiding the Pea, Insurer-Style: Part One, the Additional (Somewhat) Insured

The Last Word Editor: Marie Antoinette Moore, Sher Garner Cahill Richter Klein & Hilbert, L.L.C., 909 Poydras Street, Suite 2800, New Orleans, LA 70112, (504) 299-2100.

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