Under the guise of the Fair Housing Amendments Act of 1988, or FHAA, the U.S. District Court for the Western District of Pennsylvania in Milan v. Pyros recently decided whether to temporarily enjoin a landlord from evicting tenants who suffered from physical disabilities.

The George Washington Hotel is a multi-unit apartment complex in Washington, Pa.  Late last year, Robert Milan, a quadriplegic man, sought to rent an apartment unit at the hotel with the assistance of Kathleen Kleinmann, a disabled woman herself, an existing tenant at the hotel, and the chief executive officer of a non-profit organization which promotes independent living through direct services to disabled persons.  Her non-profit organization also leased an apartment unit at the hotel for use as a transitional living space for disabled persons moving from institutional care to independent living.

With Kleinmann’s assistance, the hotel eventually agreed to enter into a six-month lease with Milan.  Milan moved into his unit without first executing a written lease agreement with the hotel.

Independent of these lease negotiations, Kleinmann requested from the hotel that her friend, who was suffering from cancer at the time, be allowed to temporarily stay in her apartment unit so she could serve as his caregiver.

All hell broke loose when Milan moved into his apartment unit with his service dog, Daisy.

Within days of his arrival, the hotel, which had a no pet policy, in no uncertain terms, expressed its unwillingness to continue the lease arrangement with Milan if the dog remained there.  Kleinmann then received a letter from the hotel stating that she would be evicted from her apartment unit if her cancer-stricken friend did not leave the unit within a stated period of time.

After the hotel apparently began receiving complaints about Milan’s dog, the hotel summoned the police in an attempt to forcibly evict Milan from the hotel as a squatter (as he had not signed the lease agreement).  The police explained to the hotel that they could not take any action against Milan without a court order.

The hotel then issued separate letters to Milan and Kleinmann.  In its letter to Milan, the hotel directed him to leave voluntarily or face eviction proceedings as he was an unauthorized tenant.  No mention was made in the letter about his dog.

In the letter to Kleinmann, the hotel claimed that she brought Milan into the hotel under the false pretense that her non-profit organization would execute a lease for him.  The hotel then expressed its dissatisfaction that Milan was unable to care for his dog.

Although Kleinmann’s friend left her apartment unit within the time prescribed by the hotel, the hotel nevertheless filed a landlord-tenant complaint against her in district justice court based upon the friend’s alleged illegal occupancy of the unit.  The hotel also filed a landlord-tenant complaint against Milan because of his alleged violation of the hotel’s no pet policy.

Milan and Kleinmann then removed their cases to federal district court, consolidated the cases together, filed a counterclaim against the hotel under the FHAA, and sought a preliminary injunction preventing the hotel from evicting them from their respective apartment units while the litigation was pending.

The federal district court’s ruling in Milan centered upon whether Milan and Kleinmann should be allowed to remain in their respective apartment units in the meantime.

Four factors govern whether to issue a preliminary injunction: (1) whether the movant has shown a reasonable probability of success on the merits; (2) whether the movant will be irreparably injured by denial of the relief; (3) whether granting preliminary relief will result in even greater harm to the nonmoving party; and (4) whether granting the preliminary relief will be in the public interest.

The federal district court first focused on whether Milan and Kleinmann established a reasonable probability of success on the merits of their FHAA claim.  Under the FHAA, it is illegal, in housing practices, to discriminate on the basis of a tenant’s disability.

In order to make out a claim for a FHAA violation, the tenant must show: (i) that he is suffering from a disability as defined under the statute; (ii) that the landlord knew or reasonably should have been expected to know of the disability; (iii) that reasonable accommodation of the tenant’s disability might be necessary to afford him an equal opportunity to use and enjoy his apartment unit; and (iv) that the landlord refused to make a reasonable accommodation.

The federal district court reasoned that both Milan and Kleinmann established a reasonable likelihood of success on the merits that the hotel violated the FHAA.

With respect to Milan, the federal district court noted that Milan was clearly disabled within the meaning of the FHAA and that Milan’s dog was a service animal allowed under the statute.  While acknowledging the existence of the hotel’s no pet policy, the federal district court concluded that the hotel violated the FHAA by nonetheless refusing to accommodate his disability.

As for Kleinmann, the federal district court pointed out that her FHAA claim was based upon retaliatory discrimination because she was the person who referred Milan to the hotel.  In essence, the federal district court concluded that Kleinmann’s alleged lease violation regarding her friend’s temporary presence in her apartment unit was nothing than a pretext for the hotel’s initial discriminatory decision.

The federal district court next decided whether Milan and Kleinmann would suffer irreparable harm if their requested injunctive relief was denied.

Unlike Kleinmann, the federal district court did not believe that Milan would suffer such harm if the injunctive relief was denied.  The federal district court emphasized that Milan resided at the hotel only for a short period of time, had only a six-month lease to begin with, and was actively seeking new housing and did not desire to remain at the hotel for obvious reasons.  The federal district court thus elected to summarily deny the injunctive relief requested by him on these grounds alone.

In contrast, the federal district court highlighted that Kleinmann had invested significant funds to modify her apartment unit in order to accommodate her disability and to promote independent living.  The federal district court was also swayed by the strong likelihood that her unit would no longer be available if she ultimately succeeded through litigation.

On the flip side, the federal district court was unconvinced that the hotel would suffer greater harm by granting the injunctive relief sought by Kleinmann.  The hotel explained its intention to convert her apartment unit to a hotel room.  The federal district court pointed out that, if the hotel’s early termination fell victim to the FHAA, Kleinmann would be able to remain in the unit until early 2009 and the hotel would thus be prohibited from converting the unit into a hotel room until then.

Finally, the federal district court stated the public interest favored the issuance of a preliminary injunction because the enforcement of the FHAA was at issue and since maintaining the status quo for Kleinmann promoted independent living for persons with disabilities.

LESSONS LEARNED

The federal district court’s ruling in Milan illustrates the fine line between a court granting and denying preliminary relief in the real estate context.  In contrast to Kleinmann, the federal district court refused to allow Milan to remain in his apartment unit until the underlying litigation concluded because he could not establish that he would suffer irreparable harm if he was evicted from the unit.  Milan, unlike Kleinmann, had only resided in the hotel for a short period of time prior to the attempted eviction, had entered into a short-term lease, had not invested any of his own financial resources in the apartment unit, and was content to seek alternative living arrangements.

Reprinted with permission from the June 2, 2008 edition of The Legal Intelligencer © 2008 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.

Alan Nochumson

Whenever real estate is purchased, the buyer should obtain title insurance to protect their interest in the property.  As part of procuring title insurance, the public records are reviewed to determine what liens, if any, encumber the property.  Any such liens are then identified and paid in full and satisfied at closing.  The reason for this is simple: when the property is transferred to the buyer at closing, the title insurer guarantees that the buyer now owns the property free and clear from any such liens.

In Ingomar Limited Partnership v. Current, the U.S. District Court for the Middle District of Pennsylvania recently found that subsequent purchasers were liable for a mortgage lien against the property when the title insurer had mistakenly concluded that the mortgage was previously satisfied of record.

In the late 1990s, a married couple borrowed money from Ingomar’s predecessor-in-interest.  The loan was collateralized by adjacent properties they jointly owned.  The smaller parcel included their residence.  The other, larger parcel consisted of unimproved land.  The mortgage document contained separate legal descriptions of each parcel along with their respective tax identification numbers.

Since the married couple had believed that the mortgage lien attached only to the small parcel, they were surprised to discover that the mortgage lien attached to both parcels when they applied for a loan to construct a new home on the large parcel.

When the husband attempted to contact the mortgage holder at the time, he was advised that the mortgage lender had filed for bankruptcy and its assets were being managed by a third party provider.  After a series of communications with the third party provider, the married couple received a copy of a satisfaction piece bearing the tax parcel identification number for the large parcel and stating that the “[m]ortgage has been fully paid or otherwise discharged and that upon the recording hereof said Mortgage shall be and is hereby fully and forever satisfied and discharged.”  The postal address used for both the small and large parcels appeared in the satisfaction piece and was the same address that appeared in the note executed by the married couple.  The satisfaction piece incorrectly referenced the deed book and page number at which the mortgage was recorded.

The married couple ceased making payments under the underlying promissory note after receiving the satisfaction piece.  Because the postal address used for both parcels appeared in the satisfaction piece, they reasoned that the mortgage was released on both parcels, thus extinguishing their monetary obligations under the note.  In spite of repeated written and oral demands by the mortgage holder at the time to repay the note, they refused to do so because of the alleged satisfaction of the mortgage.

After receiving notice of foreclosure, the married couple sold the small parcel to two individuals and used the net sale proceeds to build a new home on the large parcel.  The purchasers of the small parcel arranged for a title search before purchasing the small parcel.  The title search located the existence of the mortgage lien and the satisfaction piece.  The married couple never disclosed to the purchasers that they had failed to satisfy the note in full.

After title to the small property was transferred, an amended satisfaction piece was recorded by the mortgage holder at the time that corrected the reference to the deed book and page where the previous mortgage was recorded. A revocation of the satisfaction piece followed thereafter and stated that the mortgage had not been satisfied and had been released in error.

After Ingomar acquired the note and mortgage, it filed suit in federal district court against the subsequent purchasers, among others, to obtain a declaratory judgment that they purchased their property subject to the mortgage lien.

Both parties then filed motions for summary judgment.  In support of their motion and in opposition to Ingomar’s motion, the subsequent purchasers argued that the declaratory judgment action should be dismissed as time-barred and because they acquired their property as bona fide purchasers.

They first argued that Ingomar’s claim was barred by the statute of limitations.

In Pennsylvania, there is no uniformly applicable limitations period for a declaratory judgment action.  Rather, such an action is instead governed by the time-bar rules applicable to the underlying substantive claim. As such, the federal district court pointed out that “declaratory judgment proceedings seeking relief at law must be filed within the statute of limitations applicable to a claim asserting legal rights underlying the declaratory judgment action.”

The federal district court was unimpressed by the subsequent purchasers’ attempt to redress the equitable claim in the language of negligence.  They reasoned that the case hinged upon their alleged failure to perform a reasonable title search of the small parcel.  As such, damage to the validity of the mortgage lien allegedly resulted from this negligence and was time-barred by the applicable two-year limitations period.

The federal district court instead found that “an action seeking declaratory relief to establish real property rights is not governed by a limitations period but by the equitable doctrine of laches.”

In doing so, the federal district court emphasized that Ingomar did not seek recovery for negligence committed by the subsequent purchasers but rather sought declaratory judgment that the mortgage lien was satisfied in error and remained attached to the small parcel.

As an aside, the federal district court refused to consider whether the doctrine of laches served as a potential bar to Ingomar’s claim because the subsequent purchasers never raised that affirmative defense during litigation.

The federal district court next discussed whether the subsequent purchasers had bona fide status.

“A buyer of property qualifies as a bona fide purchaser if the buyer ‘pays valuable consideration, has no notice of the outstanding rights of others, and acts in good faith.’  A buyer who qualifies as a bona fide purchaser receives title to the property unencumbered by any previously existing interests.”

“A buyer may receive notice of ‘the outstanding rights of others’ through two methods.  First, proper recordation of an interest places subsequent buyers on constructive notice of prior interests, preventing them from attaining status as bona fide purchasers.  Second, actual notice of a preexisting interest will prevent a buyer from claiming rights as a bona fide purchaser regardless of whether the interest is recorded.”

The subsequent purchasers based their bona fide status on their lack of actual knowledge of the mortgage lien at the time of closing and their reasonable reliance on the title search which disclosed its satisfaction.

The federal district court disagreed with the subsequent purchasers’ assertion that they were bona fide purchasers of the small parcel because the satisfaction piece incorrectly referenced the deed book and page where the mortgage appeared and contained only the tax parcel identification number for the large parcel.

Due to these discrepancies between the parcels identified in the mortgage lien and the parcel referenced in the satisfaction piece, the federal district court believed that the subsequent purchasers were placed on notice of potential encumbrances to the title to the small parcel and thus they were not entitled to bona fide purchaser status.

In a footnote, the federal district court insinuated that the title insurer dropped the proverbial ball by failing to investing the potential preexisting interest and that the subsequent purchasers may have a right of action against their title insurer for its failure to discover Ingomar’s prior interest.

LESSONS LEARNED

The federal district’s holding in Ingomar is rather harsh but not surprising.  Buyers obtain title insurance for a reason, which is to protect themselves from claims of preexisting liens.  In Ingomar, the federal district court admonished the title insurer for its lack of detail and attention during the real estate transaction and, in essence, suggested that the subsequent purchasers should seek legal redress against the title insurer, as opposed to the mortgage holder which now had a valid lien against their property.

Reprinted with permission from the March 31, 2008 edition of The Legal Intelligencer © 2008 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.

Alan Nochumson

In order to encourage this streamlined process, however, most letters of intent contain language disclaiming its enforceability and expressly require lease execution so as to bind the parties to contract.

LEASE NEGOTIATIONS

The U.S District Court for the Eastern District of Pennsylvania in WP 851 Associates, L.P. v. Wachovia Bank, N.A. recently refused to find that a letter of intent contained an implied duty for a prospective tenant to negotiate a lease in good faith with a property owner.

In early 2007, WP 851 was developing a parcel of land into a shopping center on the Main Line near Philadelphia. Wachovia Bank sought to lease a portion of that shopping center as a branch office. When WP 851 and Wachovia Bank discovered that the configuration of the shopping center could not accommodate the anticipated bank building, WP 851 agreed, in principle, to lease additional land from an adjoining property owner for Wachovia Bank’s benefit.

Afterward, Wachovia Bank sent WP 851 a draft letter of intent outlining the proposed lease terms. The letter of intent contained numerous disclaimers. Among other things, the letter of intent stated that “[n]o such obligation [would] arise from th[e] letter and any resulting Lease drafts unless and until a mutually-satisfactory Lease [wa]s fully executed by, and delivered to, all parties” and the terms and conditions of the letter were still subject to the review and approval of Wachovia Bank’s real estate committee.

WP 851 subsequently confirmed in writing that the parties had reached an agreement for Wachovia Bank to become a tenant of the shopping center. Wachovia Bank thereafter volunteered to perform the first draft of the lease.

Not only did several rounds of revisions of the lease take place, but, with Wachovia Bank’s assistance, WP 851 began the process of obtaining land development approval from the local governmental authority for the bank building.

Wachovia Bank eventually ceased lease negotiations with WP 851. WP 851 then found out that Wachovia Bank was finalizing the terms of a lease agreement with another property owner and intended to develop a branch office on a different property instead.

WP 851 filed a complaint against Wachovia Bank asserting, among other things, a claim for breach of the duty to negotiate in good faith. Wachovia Bank moved for dismissal of that claim.

TRIAL COURT DECISION

The federal district court refused to find that the letter of intent in WP 851 created an implicit agreement for Wachovia Bank to negotiate with WP 851 in good faith.

While noting that the Pennsylvania Supreme Court had not yet addressed whether a letter of intent can create such a duty, the federal district court pointed to the 3rd U.S. Circuit Court of Appeal’s ruling in Channel Home Centers v. Grossman, where the appellate court predicted that the Pennsylvania Supreme Court would find that an agreement to negotiate in good faith would be enforceable if it meets the requisite elements of a contract.

Similar to WP 851, Channel Home Centers involved an agreement between a commercial property owner and a prospective tenant. Applying Pennsylvania law, the appellate court in Channel Home Centers focused its inquiry on whether the parties manifested an intention to be bound by the agreement, whether the terms of the agreement were sufficiently definite to be enforced, and whether there was consideration.

In Channel Home Centers, the appellate court found such a duty existed because, under the letter of intent, the property owner “’unequivocally promised’ to withdraw a piece of property from the market, and to negotiate a lease only with the [tenant] ‘to completion.’” The appellate court “found other indicia of an intent to be bound persuasive, including the level of detail in the letter, and the subsequent actions of both parties.”

The federal district court in WP 851 then compared the Third Circuit’s holding in U.S.A Machinery Corp. v. CSC Ltd. to that in Channel Home Centers. In U.S.A. Machinery Corp., the appellate court found that “an oral ‘registration’ between a broker of steel-making equipment and a purchaser and seller of equipment did not give rise to an agreement to negotiate in good faith, because the parties did not expressly agree to negotiate in good faith, and had not made extensive preparations to further or consummate the transaction.”

In distinguishing Channel Home Centers, the appellate court in U.S.A. Machinery Corp. noted that the parties lacked a “’similar indicia of intent to be bound’ . . . because there was ‘no detailed expression of the parties’ intent.’”

The federal district court in WP 851 thus surmised that, under 3rd Circuit precedent, which has predicted how the Pennsylvania Supreme Court would react under the circumstances, “in order for an agreement to negotiate in good faith to be enforceable, the parties must manifest a specific intent to negotiate in good faith.”

In a footnote, the federal district court also mentioned two occasions where the Pennsylvania Superior Court has refused to find that a letter of intent embodied an agreement to negotiate in good faith. According to the federal district court, in GMH Associates, Inc. v. Prudential Realty Group and Philmar Mid-Atlantic, Inc. v. York Street Assoc. II, the Superior Court, respectively, found that such a duty did not exist because the letter of intent did not include an express term regarding such a duty or a mutual assent to be bound.

Similar to the Superior Court’s ruling in GMH Associates, Inc., the federal district court in WP 851 pointed out that the Eastern District in Milandco Ltd. v. Wash. Capital Corp. refused to find the existence of a duty to negotiate in good faith because the letter of intent did not contain an “expression that the parties agreed to negotiate a deal in good faith.”

After reviewing the language contained within the letter of intent in WP 851, the federal district court concluded that such an implied obligation to negotiate in good faith did not exist.

The federal district court first pointed out that the letter of intent explicitly stated that it was not enforceable.

In another damaging blow to WP 851, the federal district court noted that the letter of intent only included an obligation for WP 851, not Wachovia Bank, to negotiate in good faith. Noticeably absent from the letter of intent was a provision requiring Wachovia Bank to “either to negotiate in good faith or to refrain from engaging in negotiations with other prospective landlords.”

Finally and most importantly, the federal district court refused to find that a duty to negotiate in good faith may be implied by surrounding circumstances. Rather, the federal district court stated that the parties must expressly agree to negotiate a deal in good faith. In doing so, the federal district court merely confirmed previous rulings rendered by federal and state appellate courts in Pennsylvania.

LESSONS LEARNED

The federal district court’s ruling in WP 851 illustrates the potentially devastating consequences of letters of intent and why attorneys representing landlords and tenants in this forum should tread carefully.

In essence, a landlord or tenant who is inexperienced with the usage of a letter of intent may detrimentally rely on its existence. Before doing so, such a landlord or tenant must, at the very least, include language in the letter of intent requiring his counterpart to negotiate in good faith. On the flip side, of course, a landlord or tenant who wants to keep his leasing options open should not execute a letter of intent expressing such an agreement to negotiate.

Reprinted with permission from the January 28, 2008 edition of The Legal Intelligencer © 2008 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.

Alan Nochumson