Governor Signs 4 Major Real Property Bills Into Law

Last week, Governor McDonnell signed into law four (4) significant pieces of legislation affecting real property laws in Virginia:

Mechanics Lien laws (SB 105): Mechanics Lien Agents (MLA's) no longer need to consent to being designated as such. In addition, the law clarifies the requirements for the Notice required to be given to the MLA when a contractor or sub begins to perform labor or adds materials to the project. Notice now just needs to go to the MLA posted on the building permit when the contractor begins work, not, as the law previously required, the MLA noted when the building permit was originally issued. The law also allows building permits to be freely amended to add MLA's later on, bringing the law into conformity with the realities of construction work, where building permit are often pulled without an MLA named, or the MLA is changed at a later time.

Residential Landlord-Tenant Act (HB 407): Several new provisions are beneficial to landlords, but the two most important, in my view, are: 1) clarifying the ability of a landlord to place damage or renter's insurance and then bill the tenant for that premium as part of the rent cost; and 2) allowing the landlord to withhold returning the security deposit until the final utility bills are received, instead of being required to return the deposit or portion thereof to the tenant 45 days after the lease term ends, as the law currently requires.

Exchange Facilitators (HB 417): The "Exchange Facilitators Act." I call this the "Post-LandAmerica Debacle Statute." For the first time, any person or entity who serves as a qualified intermediary in a Section 1031 Deferred Like Kind Exchange will be regulated. Exchange Facilitators will be required to maintain the escrowed funds in separately identified accounts or in a qualified escrow or qualified trust; they will be required to maintain errors and omissions insurance; amounts escrowed with them will be deemed to be held in trust and must be deposited in a financial institution, with interest accruing to the parties or otherwise invested per a written agreement; they will be required to have a cash deposit or letters of credit equal to at least $250,000; they must account for all moneys and property; and they shall not commingle escrowed funds with other accounts nor lend such monies out. Sadly, this law codifies the code of conduct that some of us thought was always expected of qualified intermediaries, but which was violated by LandAmerica Exchange Services which essentially embezzled from their own exchange customers prior to filing bankruptcy. (See prior post on this Blog dated May 15. 2009.)

Expanding "Vested Rights" in Virginia (HB 1250): Virginia's "Vested Rights" Statute establishes when a landowner can know for sure that a decision of government affecting their land will "vest" certain rights in the property which cannot be altered by a subsequent governmental action. This new law expands the definition of a "significant affirmative governmental act" by adding written orders, decisions or determinations of a zoning or other administrative officer to the list. Previously, only the decision of a governing body, such as the Boards of Supervisors, Board of Zoning Appeals, or Planning Commission, could be considered to "vest" rights. Because so many government decisions are delegated to staff such as zoning administrators and planning managers, landowners had not previously been able to rely on the guidance or decisions of these powerful local government officers, whose decisions carry a lot of weight. Now they can. Critics of this legislation say that it is now possible that emails and casual correspondence with landowners may be deemed to be a governmental action. In my opinion, this legislation is very good law.

LandAmerica Ruling Puts 1031 Exchanges in Jeopardy

At the Real Estate Practice Seminar I attended last week, there was a lot of buzz among real estate attorneys across Virginia about the astounding LandAmerica decision rendered May 7th in the bankruptcy court for the Eastern District of Virginia. For those who have not heard about the decision, Judge Huennekens found that none of the 450 claimants who had escrowed a whopping $227 million with LandAmerica as a Qualified Intermediary (QI) for their 1031 exchanges can recover these funds. Instead, the funds are now considered part of the bankrupt company's assets in bankruptcy! The reasoning for the opinion is that no express trusts were created in favor of these claimants, the 1031 exchangors.

This opinion has sent widespread shock throughout the bar because of its far reaching implications. Not only have these claimants/exchangors lost their escrowed profits from their "first leg" transaction, but they now have to pay capital gains on those profits, and may be contractually liable to complete the "second leg" transaction without their monies.

In speaking with one attorney representing 20 claimants (and counting) who will probably be filing appeals of the decision, I learned that LandAmerica began to invest the escrowed funds in securities, not conservative, liquid accounts. When the market went south, the escrowed funds were at risk and then began to lose value. It is my understanding that, as the losses mounted, LandAmerica began to utilize new escrows to fund escrows that were being called upon for the "second leg" transactions, a la a Ponzi scheme. It has been established that LandAmerica took on new 1031 escrows mere days before filing bankruptcy, so it is likely that principals there knew that the house of cards would fall as there would be no more new escrows accepted to provide funding for these "last in" transactions.

Because of this federal judge's far-reaching ruling, real estate practitioners are wondering how funds escrowed for 1031 exchanges can ever be deemed safe and separate from the assets of the QI. I know many of our local title agents and branch offices for title underwriters are preparing various responses and guidance for us, as they all act as QI's for 1031 exchanges.

[In full disclosure, I should mention that I sold my former company, The Closing Company, to LandAmerica in 2004, and was employed there as an Area Manager overseeing the operations I formerly owned. I left one year later in 2005. I was not employed in the Exchange Services division, although I did recommend their services to clients of mine while I was at LandAmerica and on occasion afterwards. Fortunately, I have not done so since ~2006. - Cheri Lewis]