February 2010

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Green Leasing Goes Mainsteam

By Mark J. Bennett, Miller Canfield

The “green lease” is becoming more commonplace in commercial real estate as energy usage and sustainability affect property operating costs and impact a landlord’s ability to attract energy-savvy tenants.

Also driving the green lease are anticipated higher energy prices related to the proposed CO2 cap-and-trade regulations. If enacted, cap-and-trade will add a premium to energy costs for buildings with carbon-laden energy sources.

A green lease doesn’t replace existing lease forms, but provides a framework to address energy and sustainability issues in a leasehold relationship. The primary goal: landlord and tenant incentives to reduce energy consumption. Typical issues:

• Allocation of expense reductions from efficiency investments.
• Rights to economic incentives and energy credits available in several states.
• Rights to install and benefit from renewable energy systems such as roof top solar, geothermal, and wind.
• Responsibility for compliance with state/local green building codes.

Transactional energy disclosure laws in some states are also motivating green lease provisions. California, Washington, New York, Texas, and others require landlords to disclose energy consumption history prior to lease execution and/or building sale. Tenants in such states increasingly demand material lease provisions to require annual “green” representations by the landlord and ongoing compliance with LEED certification.

The American Society of Testing and Materials (ASTM ) should finalize by mid-2010 the Building Energy Performance Assessment (BEPA) as part of its new standard ASTM WK24707. Landlords will be able to use a BEPA to assess their property’s green condition, and prospective tenants will be able to competitively assess multiple properties.

Bottom-line for the new decade: both landlords and tenants are increasingly focused on energy consumption and its impact on building occupancy costs.

A New Uncapping Case Favorable to Taxpayers

Until the Court of Appeals ruled in Klooster v City of Charlevoix __ Mich App__, __NW2d __, (2009 WL 4824971), practitioners assumed that the death of a joint tenant leaving a sole remaining owner was a transfer of ownership leading to an uncapping of value. The Klooster court disagreed. The Klooster facts are common. Husband and wife first acquired the property by warranty deed. Later, wife quitclaimed her interest to her husband. Sole owner husband then quitclaimed his interest to himself and his son as joint tenants with rights of survivorship. When the husband died, the City of Charlevoix argued that his death was a “transfer of ownership” under MCL 211.27a(3). The Tax Tribunal agreed.

MCL 211.27a(7) provides exceptions to “transfer of ownership” that lead to uncapping. One exception is a transfer that creates/terminates a joint tenancy if 1) one tenant was an original owner, and 2) “if the property is held as a joint tenancy at the time of conveyance”, one of the parties was an original joint tenant. MCL 211.27a(7)(h). The Klooster court held that the death was not a “conveyance” since there was no instrument in writing that affected title.

Charlevoix has appealed. While waiting for the Supreme Court, practitioners should monitor assessors' decisions on similar facts. Attorneys may also want to consider an appeal under MCL 211.53a or any other statutory provision if there has been an improper uncapping. Also, if the Supreme Court reverses, some current capped values may suddenly become uncapped.

Are the Michigan Bankruptcy Specific Exemptions Constitutional?

By Winnifred P. Boylan, Lambert Leser Isackson Cook & Giunta, P.C.

In Michigan, a debtor filing for bankruptcy has the option of electing the “federal exemptions” provided in Section 522(d) of Title 11, or may elect to take advantage of exemptions provided for under state law. MCL §600.5451, effective in 2005, added provisions for exemptions, but only for debtors filing for bankruptcy. There appears to be no explanation as to why §600.5451 is for use exclusively in a bankruptcy setting.

The Michigan bankruptcy specific exemption has produced numerous challenges. In the recent decision, In re Pontius, 2009 Bankr. LEXIS 4065, December 22, 2009, Judge Gregg held that the ‘bankruptcy specific’ exemption in §600.5451 is unconstitutional for two reasons. First, Congress is constitutionally prohibited from delegating its ‘Bankruptcy Power’ to any state, including Michigan. Judge Gregg held that the Michigan Legislature enacted §600.5451 to, in effect, write a portion of the Bankruptcy Code. Second, the bankruptcy clause of the Constitution granted Congress the power to “establish uniform laws on the subject of bankruptcies throughout the United States.” The bankruptcy court found that §600.5451 is not consistent with other exemptions.

Pontius is the most recent case dealing with the constitutional validity of §600.5451. It should be noted that Pontius did not invalidate the standard Michigan exemptions such as MCL §§600.6023, 600.2807(1). Given the fact that previous cases facing this question have had varying outcomes, all should be watchful of this constitutional question when considering the use of the bankruptcy exemption statute in Michigan.

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