Minnesota Law
Minnesota Commercial Real Estate Law
- Commercial Real Estate Law
Commercial Real Estate Law
Terminology
Assessment
An assessment is a value placed on real property by a local taxing authority for purposes of levying taxes. Real estate taxes are calculated by multiplying the assessed value of a piece of property by the tax rate. Most properties are reassessed periodically, but a property's assessed value may not be the same as its actual market value.
Co-Ownership
Co-ownership is ownership of property by more than one person. The two common ways in which two or more parties can co-own a piece of property are joint tenancy and tenancy in common, both discussed below. Although there are advantages to co-owning property, there are drawbacks as well. If co-owners cannot agree on use, sale, or possession of a piece of property, they may have to go to court to resolve the matter in a partition action. In a partition action a joint tenant or tenant in common asks the court to split the property in a fair and just manner. Because real property may be difficult to divide and partial interests may be difficult to sell, a court will usually order that the property be sold and proceeds from the sale distributed to the co-owners in relation to their interests.
Deed
A deed is a written instrument that transfers the title of property from one person to another. The two most common types of deeds are general warranty deeds and quitclaim deeds.
Deed Restriction
Deed restrictions are usually imposed on a buyer of land when the property is sold and the restrictions are included in the seller's deed to the buyer. Restrictions are generally imposed by a property developer to maintain certain standards. Restrictions may include limits on the color an owner may paint a building, what trees one may plant, or the size of structures to be built on the property. Deed restrictions may also be known as covenants or conditions.
Easement
An easement is the right to use another person's land for a particular purpose. There are many forms of easements. Public utility companies frequently have utility easements that permit them to run gas, water, or electrical lines through particular property they do not own. The owner of property on a lake shore might sell to the owner of an adjacent lot without lake access an easement to cross over to the shore. A person who owns property that is landlocked may receive an easement from an adjacent land owner to have access in and out of the property. This kind of easement is also called a right of way.
Encumbrance
An encumbrance is an obligation attached to a piece of real property. It is a right or interest held by a party who is not the owner of the property. An encumbrance is not an ownership interest in real property, and the property may be bought and sold even though there are encumbrances attached to the property. Because encumbrances attach to property, not the property owners, a person who buys property with an encumbrance is bound by the encumbrance. Easements and deed restrictions are examples of encumbrances.
General Warranty Deed
Generally, in Minnesota, title is transferred by a general warranty deed. A general warranty deed provides the greatest protection to the purchaser because the seller pledges or warrants that he or she legally owns the property and that there are no outstanding liens, mortgages, or other encumbrances against it. A warranty deed is also a guaranty of title, which means that the seller may be held liable for damages if the buyer discovers that the title is defective. A warranty deed is no substitute for title insurance, however, as a warranty from a seller who later dies or goes bankrupt may have little, if any, value.
Joint Tenancy
Joint tenancy is a form of co-ownership. Although usually thought of as a way for a husband and wife to own property, there is no requirement that joint tenants be married to one another or that there be only two joint tenants. Each individual owner in joint tenancy has a right to sell, encumber, and possess the entire property. Regardless of the number of joint tenants, when one joint tenant dies, the remaining joint tenants automatically take the deceased joint tenant's share of the property by right of survivorship. In such cases, the surviving joint tenants are required to file a death certificate and an affidavit with the county recorder without having to pay transfer taxes. A principal advantage of joint tenancy is that it allows the surviving joint tenant to avoid probate and death taxes.
Lien
A lien is a charge against property that provides security for a debt or obligation of the property owner. The lien holder does not own the property. The owner of property may voluntarily agree to a lien, perhaps by taking out a mortgage, or a lien can be imposed, perhaps for nonpayment of taxes. One of the most common liens is the mechanics lien. A mechanics lien arises when someone furnishes labor or materials to improve a piece of property. If the worker or supplier is not paid by the property owner, he or she can file a notice of lien with the county recorder and the property owner and collect the amount owed from a subsequent sale of the property. If a property owner has paid the general contractor in full but the general contractor has not paid the subcontractors, the owner will not have to pay for the services a second time.
Quitclaim Deed
A quitclaim deed is a deed that relinquishes to the buyer whatever interest, if any, the seller may have in the property. A quitclaim deed gives the buyer the least protection of any deed. If the seller is the sole owner of the property, the quitclaim deed is enough to transfer title, but the buyer takes a risk by accepting a quitclaim deed because it offers the buyer no guarantee that the title is valid. Quitclaim deeds are used frequently during the property settlement phase of a marriage dissolution.
Recording
In Minnesota, real estate records are kept in each county. Owners and parties with real estate interests are required to file, in the county, all documents affecting their interest in property in order to give public notice of the interest. Titles in Minnesota may be registered under the abstract system or the Torrens system. Abstract records go back hundreds of years and an abstract of title is a record of all the entries for that property. Torrens or registered property is much simpler, more modern, and more efficient. Instead of a thick abstract of title, Torrens property has a simple certificate of title.
Special Assessment
A special assessment is a tax levied on a piece of property to pay for improvements that benefit the particular property. These taxes are frequently used to pay for improvements such as streets, sidewalks, and street lighting. Special assessments are liens on the property until they are paid.
Sublease
Subleasing is having someone else take over a tenant's rights and obligations under a lease before the original lease expires. The tenant has a right to sublet a unit if the lease does not prohibit doing so. If the new tenant does not pay rent, damages the unit, leaves before the lease expires, or breaches another condition of the lease, the landlord can hold the original tenant responsible. The original tenant can then sue the new tenant for those costs.
Tenancy in Common
Tenancy in common is a form of co-ownership. Tenants in common, like joint tenants, share the right to possess, sell, and encumber the property. Unlike joint tenants, tenants in common do not have a right of survivorship. Upon the death of one tenant in common, his or her ownership interest passes to his or her heirs as part of the estate.
Title
Title to real estate is the right to, or ownership of, the property. Title may refer to the actual ownership or to the documentary evidence of that ownership. In order to sell a piece of property, all title matters must be cleared. Usually, this is accomplished through a title search, in which a diligent search is made of all records relating to the property to determine whether the owner can sell the property and whether there are any claims against it. If any defects in title are discovered during the title search, the seller is usually given time to cure the defect. Title insurance is often taken out to protect against any hidden defects in the title. There are two types of title insurance. One type protects the lender's interest in the property and the second protects the owner's interest.
Purchasing Real Estate
Environmental Liability
Of increasing concern to businesses are environmental hazards associated with acquiring real estate. Whether in the form of leaking underground oil storage tanks or hazardous emissions, such concerns may, under state and federal environmental laws, become the cleanup responsibility of a new owner, even a new owner who neither contributed to or knew of the contamination. The new owner may be required to pay for the cost of cleanup of contamination that occurred even under a former owner.
Leasing Real Estate
Negotiating a Lease
Some novices in real estate negotiations assume that the terms of a lease are non-negotiable. It is in a property owner's best interest to give potential renters printed forms presented in a "take it or leave it" manner. Contrary to the impression many rental property owners give tenants, most leases are negotiable, especially in today's overbuilt commercial real estate market. Many businesses will have specific needs that cannot be satisfied by a standardized lease agreement, so it is important that a prospective tenant identify its needs and negotiate a lease agreement that meets them. Of particular and increasing concern in commercial lease agreements are the operating expenses provisions of the lease. It is not unheard-of for a landlord to negotiate a lucrative cut in rent, only to compensate for the price break by loading costs onto operating expenses.
The following items should be addressed in negotiations:
- Amount of and conditions for recovering the security deposit
- Maintenance of fixtures, appliances, and common areas of the property; who is responsible for maintenance and what standards apply
- Renewal rights at the end of the lease
- Cancellation rights
- Circumstances under which the owner can enter leased premises; who has access to keys
- Which party is obligated to insure the property and which party is named beneficiary under the policies
- Subleasing rights or prohibitions
- Whether the landlord will agree not to rent adjacent space to competing businesses
Security Deposit
Landlords have a right to insist that renters pay a security deposit before moving in. The security deposit is used to pay for any damage beyond ordinary wear and tear that the tenant might cause to the rental property, to satisfy any debts between the tenant and landlord under an agreement or to cover any unpaid rent. There is no limit to how much the landlord can require for a security deposit. The landlord can increase the security deposit at any time during a periodic lease if the tenant is given proper notice -- generally, one rental period plus one day. If the lease is a term lease, no changes can be made to the deposit until the lease comes up for renewal or the parties agree otherwise. At the end of the tenancy, the landlord must return the deposit to the renter with interest (4 percent non-compounded per year). The landlord is allowed to keep the amount of deposit necessary to repair damages, or to pay off debts owed to the landlord as part of the lease.
Real Estate Development
A property owner has many land ownership rights, but these rights are also restricted by controls from the local, state and federal government. It is important to understand exactly what regulations apply to certain properties and to the rights of the property owners. In any transaction, it is important for a developer to understand what government regulations are in force and how they affect the property.
Construction Contracts
Construction contracts are a highly specialized subcategory of contract law. Most construction projects involve many parties, each with unique expectations, deadlines, and responsibilities. Architects, engineers, contractors, subcontractors, and lenders all have to understand their rights and responsibilities. Failure to have an experienced real estate attorney negotiate and draft documents can lead to numerous headaches and unplanned expenses. Good planning includes discussion of mechanics liens, periodic inspections, bonding, timetables and appropriate rewards or punishments for early or late completion.
Mortgage Financing
Many attorneys practicing real estate law spend a substantial portion of their practices negotiating mortgages secured by real property. These negotiations are often quite complex. Mortgage financing for new real estate can be as difficult to obtain for an established business as for one that is starting up. To help move the process along, a business often has to give up a degree of control over business decisions that affect the property. A lender may want to impose liabilities for the property onto the borrower, while at the same time retaining a say in how the property is managed.
It is important for a borrower to try and retain as much flexibility and control as is possible. For example, a borrower may want to retain control of insurance proceeds in the event of damage to the property so that the property can be restored, while a lender may want to require that such proceeds go toward debt owed.
Foreclosure
Foreclosure is a legal action in which property that has been used as security for a debt is sold in order to pay off that debt. It must be initiated by the grantor of the mortgage, must occur in the county in which the property is located, and must follow a default by the debtor on the terms of the mortgage. Mortgages provide for foreclosure in order to give lenders the right to recover the money they previously lent. In Minnesota, most mortgages include a power-of-sale clause that gives the lender authority to conduct the foreclosure without taking the matter to court. Although there are various forms of foreclosure available, the most common method in Minnesota is foreclosure by advertisement, in which a notice that the property is up for sale is posted in advance of the sale and the property owner is served a notice. Foreclosure by advertisement must precisely follow a detailed set of laws and rules. A foreclosure is determined legal and may not be disputed three years after the sale of the property.
Zoning
Zoning regulations are a particular type of land use control. Their purpose is to control and regulate development and growth of a community in a way that is best for the general public. They attempt to accomplish this task by dividing a community into areas (zones) that can be used only for certain purposes.
Zoning laws are generally divided into four basic categories -- residential, commercial, industrial, and agricultural. Most cities further divide property into much more intricate specifications, such as single-family houses within a residential area, or zones that allow for the building of condominiums or apartments. Furthermore, an industrial section of a city might be split between areas zoned for light-industrial and heavy-industrial operations.
It is important to find out exactly how a property is zoned, for this could have serious consequences on how the property can be used both at the present time and in the future. Zoning ordinances can be changed through amendments. Such changes can be sought by an individual property owner or by local governments. The changes must be determined to be in the best interest of the community, and the opinions of those persons affected must be sought through public hearings.
Another way to seek relief from zoning laws is through a variance permit. Such permits make exceptions for uses of property that are not otherwise allowed under the zoning laws. Other ways around zoning laws include conditional use promises that allow special permission for an inconsistent use that benefits the community, and spot zoning, which re-zones a small area or even one plot of land. Again, this is only allowed if it benefits the community.
Land Use Law
In addition to zoning laws, there are other laws that mandate how a building can be built, how big or small it can be, and where it may be placed on the property. These specifications may be laid out in local regulations or in building codes. Building codes are developed to protect public health and safety. To ensure compliance with building codes, many municipalities require that property owners get building permits before they begin any type of construction or development. Another way communities enforce codes is by issuing a certificate of occupancy (without which a building cannot legally be occupied) to buildings that pass code requirements.
As stated before, communities often regulate the size and shape of buildings as well as their locations on lots. On shoreline areas, the state adds other rules to these local regulations. The additional regulations are intended to avoid adverse environmental consequences resulting from building construction.
Other kinds of land-use regulations serve to protect the environment. Any development that may have an effect on the environment must conform to local, state, and federal regulations. For example, the National Environmental Policy Act is a federal law that requires federal agencies to create environmental impact statements and secure approval before proceeding with projects that could adversely affect the environment. Such statements detail the effects of projects on areas such as air and water quality, safety, and wildlife. More information about these rules is provided in the Land Use & Environmental Law Chapter.
Water Law
With the purchase or sale of real estate comes certain rights. These include air rights, mineral rights and water rights. In the land of 10,000 lakes, water issues are not as serious as in arid states. Nonetheless, there are some issues to be aware of. Water rights include the use of underground water as well as water that touches the owner's property. Landowners whose property touches flowing water are "riparian owners," which means they have the right to use the BORDERing water for reasonable and beneficial use. This use includes boating, swimming and other recreational purposes. Riparian owners may not, however, legally divert the water to land that does not adjoin the stream or lake. An owner may not use the adjoining water in a way that affects the quality or availability of the water further upstream, downstream, or down the coast, by polluting the water or changing its flow.
Resources
Stuart M. Saft, Commercial Real Estate Transactions, Shepard's/McGraw Hill, Inc. (Colorado Springs, CO, 2d ed. 1995).
Richard Larson and Bruce Harwood, Minnesota Real Estate (Reston Publishing Co., Reston, VA, 2d ed. 1984).