Legal Sea Foods and Business Interruption Insurance

 Kimberly Bielan

As Massachusetts moves into Phase 4 of its reopening plan, residents and businesses appear cautiously optimistic. Red Sox games are on

schedule at Fenway Park (albeit at substantially reduced capacity). Spring and summer nights at Boston eateries are beckoning. But the reality of a “post-pandemic world” (if I can even venture so far to use that phrase yet) is that much will have changed. Visiting a game at Fenway may not be the same without a quick stop by Island Creek Oyster Bar and Eastern Standard beforehand, but both restaurants have closed over the past year. Of course, they are not alone. Boston.com is maintaining a running list of restaurants that have permanently closed, in large part due to the impacts of the pandemic and its associated restrictions and regulations that saw restaurants required to be closed and then substantially limited in services they were able to provide.

MTM will continue to keep you apprised as pandemic-related issues are litigated in the courts and decisions rendered that may impact how your business navigates the post-pandemic world and resumes normal operations.

Legal Sea Foods, a Boston stalwart, was not immune from the impacts of the pandemic. Legal Sea Foods locations in Park Plaza and Harvard Square closed in 2020, as did the Legal Test Kitchen in the Seaport. At the time it was announced the Park Plaza location would be permanently closing, the company noted that the location offered “no patio space, the wine cellar was exclusive to group events, and the landlord had previously expressed plans to redevelop the property.” In addition, what previously made the location valuable – its proximity to the Theater District – became less of a selling point. “[T]he area is now without theater and nearby hotels and office buildings have no real occupancy.”

While Legal Sea Foods does have many other locations in Massachusetts and several outside the state, it seems it was readily apparent to the company that the pandemic would have a substantial impact upon its business. In May 2020, while many others were still trying to assess what the COVID-19 restrictions meant for their business, Legal Sea Foods instituted an action in the U.S. District Court, District of Massachusetts, against its insurer, Strathmore Insurance Company (Strathmore), over insurance coverage for business interruption losses.

By way of background, the Legal Sea Foods lawsuit concerns a commercial property insurance policy (Policy), effective March 1, 2020. The Policy includes two provisions relevant to the lawsuit – a provision concerning coverage for lost income and expenses due to a necessary suspension of operations caused by direct physical loss of or damage to the covered properties, and a provision concerning coverage for lost income and expenses caused by action of civil authority that prohibits access to the covered properties. After making demand upon Strathmore in late March 2020, Legal Sea Foods initiated the action. As a basis for Strathmore’s claimed liability, the restaurant business cited state and local orders in response to the COVID-19 pandemic, which orders mandated that residents remain in their residences unless performing essential services and temporarily prohibited on-premises dining at restaurants. It also alleged the physical presence of the virus in its restaurants.

In the case, Legal Sea Foods asserts four claims against Strathmore: breach of contract for failure to pay business interruption and extra expense coverage; breach of contract for failure to pay civil authority coverage; unfair or deceptive acts or practices in violation of Chapter 93A; and declaratory judgment.

On Strathmore’s motion to dismiss, the U.S. District Court (Gorton, J.) dismissed the action in its entirety, holding that none of the claims asserted by Legal Sea Foods stated a claim upon which relief could be granted. In its decision, the Court noted that Legal Sea Foods’ claim – like many claims adjudicated across the country for business interruption losses – turned on the phrase “direct physical loss of or damage to” property, which was the prerequisite for coverage under the Policy. Noting that Legal Sea Foods failed to plausibly allege that its losses stemmed from the physical presence of COVID-19 at its properties (rather than the orders that had entered in connection therewith), the Court determined that the type of tangible, material and direct physical loss required to trigger coverage under the Policy was lacking. “The COVID-19 virus does not impact the structural integrity of property in the manner contemplated by the Policy and thus cannot constitute ‘direct physical loss of or damage to’ property.” In support of such holding, the Court cited to multiple decisions throughout the country that have reached the same conclusion.

Similarly, the Court concluded that the orders were insufficient to trigger business interruption losses resulting from an action of civil authority, as that Policy language was triggered only if the authority “prohibits access” to the covered properties. The Court identified that, while restaurants were required to close and access limited, there was no specific order “that expressly and completed prohibited access to” any of the covered restaurants. Indeed, the orders “permitted [Legal Sea Foods’] restaurants to continue carry-out and delivery operations.” The Court noted that, under its decision, it “is immaterial whether it is economically feasible for Legal to continue restaurant operations …. Rather, the relevant inquiry is whether the [orders] prohibited access to” the covered properties. Accordingly, while access was limited, it was not prohibited, and Legal Sea Foods was not entitled to civil authority coverage.

On the basis of the foregoing, the Court dismissed the remaining claims against Strathmore. Legal Sea Foods has recently appealed the Court’s decision, which appeal remains pending. (Click on this link to view the Legal Sea Foods, LLC v. Strathmore Insurance Co. case).

As with any litigation, Legal Sea Foods’ case is fact-specific and dependent on the language contained in the Policy. Nevertheless, the Court’s citation to numerous decisions throughout the nation in support of its dismissal of the case demonstrates that the courts are likely to take a relatively restrictive view of language contained in insurance policies notwithstanding the recognized devastating impact that the pandemic has had across all industries, not least of which is the restaurant industry.

MTM will continue to keep you apprised as pandemic-related issues are litigated in the courts and decisions rendered that may impact how your business navigates the post-pandemic world and resumes normal operations.

Originally posted April 25, 2017 on tlawmtm.com.

https://www.lawmtm.com/boston-business-interuption-insurance.html

Co-chair of REBA’s strategic communications committee, Kim Bielan is an associate in the litigation and zoning and land use departments of Moriarty, Troyer & Malloy LLC. Kim’s practice focuses primarily on real estate litigation, with an emphasis on zoning and land use matters. She can be contacted by email at kbielan@lawmtm.com.

Looking Back and Looking Forward: Lived Experiences and Future Ideas for Black Equity and Inclusion in Massachusetts Real Estate Practice (Video)

The guest speakers are Chrystal Kornegay, Executive Director of MassHousing, Joseph D. Feaster Jr., a Co-chair of My Brother’s Keeper (MBK) Boston Advisory Council, Taisha N. Sturdivant, a real estate associate at Sullivan & Worcester, and Gavin Alexander, a fellow on the SJC Standing Committee on Lawyer Well-Being. The program chair and moderator will be Darly G. David, a Partner at Lawson & Weitzen, LLP.

Recent times have highlighted the critical need to support diversity, equity and inclusion, and the deep work that needs to be done to dismantle the many systems of anti-Black bias and oppression in this country. The particular ways in which these systems intersect with real estate have made the practice of real estate law particularly complicated for Black attorneys and other professionals living in America, and in Massachusetts in particular. Join these talented panelists as they discuss the disparate impact of real estate systems on Black populations both in the past and in the present, share their lived experiences as practitioners in this sector, and suggest concrete steps law firms, companies, bar associations, and other legal institutions are beginning to take to promote more inclusive cultures and make the practice of real estate more sustainable, rewarding, and equitable for members of the Black community.

Environmental Due Diligence of Commercial Property: How Much is Enough to Preserve CERCLA Defenses?

David K. Moynihan

Under federal environmental laws, purchasers of commercial real estate who conduct an environmental due diligence inquiry may be entitled to rely on safe harbor provisions under federal law limiting

otherwise unlimited cleanup response costs should contamination be discovered after purchase.  This is especially significant if contaminated groundwater, for example, has migrated off site.

Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as CERCLA, if hazardous substances are found on a property, the owner of the property is generally liable for the costs of cleanup.  Purchasers of commercial properties want to know what they are purchasing, particularly for properties with past industrial uses.

So how does a purchaser determine a property’s environmental condition without triggering unlimited liability post-closing or on the owner if the sale terminates?  By retaining an “environmental professional” to conduct a Phase I Environmental Site Assessment of the specific commercial property.  The Phase I assessment must include making “all appropriate inquiries” into the prior ownership and use of the property, with no “recognized environmental conditions” (RECs) observed.  In doing so, the purchaser is entitled to assert the “innocent purchaser defense” if contamination is later discovered.

While “turning a blind eye” is not a defense to CERCLA liability, “looking deep enough and finding nothing” is a defense. 

So what constitutes “all appropriate inquiries”?  A search of all available public records, interviews with current (and if possible, past) owners and operators of the property, as well as a visual inspection of the property.  Collectively, this is known as a “Phase I Inquiry.” 

To begin a Phase I Inquiry, a purchaser of commercial property must retain an experienced “environmental professional” fully knowledgeable with the industry consensus standard: American Society for Testing and Materials (ASTM) 1527-13.  Only an environmental professional can prepare the Phase I Site Assessment to comply with ASTM 1527-13.

 

What is required to be designated an environmental professional?  One must: (i) possess a current professional engineer or professional geologist license or registration from a state and have the equivalent of 3 years full-time experience (with environmental due diligence activities); or (ii) possess a bachelor's degree or higher degree from an accredited institution in engineering or science and 5 years equivalent full-time experience; or (iii) have 10 years full-time experience.

Working closely with the environmental professional and experienced environmental counsel, a Phase I Inquiry will develop a Phase I Site Assessment of “all appropriate inquiries” to determine if the property contains “recognized environmental conditions”.  Done correctly, a Phase I Site Assessment finding no “recognized environmental conditions” will allow the purchaser or owner of commercial property to assert the “innocent purchaser defense”, limiting CERCLA liability if contamination is subsequently discovered.

The determination of “all appropriate inquires” is specific to the property.  No practical standard can be designed to eliminate the role of judgment and the value and need for experience in the party performing the Phase I Inquiry.  It is the professional judgment of an environmental professional that is critical to the determination of making “all appropriate inquiries” during the due diligence process.  At some point, the cost of further information that might be obtained or the time required to gather it outweighs the usefulness of the information and may jeopardize the purchase transaction.  An experienced “environmental professional” working with an experienced environmental attorney are the best parties to make that determination.

Accordingly, before engaging the environmental professional, it is prudent to engage an experienced environmental attorney to carefully draft a Scope of Work for the environmental professional performing the Phase I Inquiry.  This is a critical first step to ensuring that the Phase I Inquiry meets ASTM 1527-13 standards.

Other important considerations include identifying the recipient or “user” of the report, confidentiality regarding distribution, and reliance.  The prospective purchaser should be the “user” of the Phase I Inquiry to preserve the CERCLA defense.  An experienced environmental attorney should review the Phase I report, assess liability issues, and review the findings with the purchaser.

The consequences of an improperly drafted environmental due diligence plan can be expensive for the purchaser.  If the environmental professional does not conduct “all appropriate inquiries,” the purchaser will lose the CERCLA defense and may end up paying for an expensive cleanup.  In that case, liability may go far beyond the fair market value of the property, particularly if contamination has migrated off site.  Unfortunately, many environmental due diligence reports do not comply with the ASTM 1527-13 standard leaving the purchaser unable to invoke the “innocent purchaser defense” and exposed to unlimited liability under federal and state environmental laws. 

The key to conducting the “all appropriate inquires” to invoke the “innocent landowner defense” is ensuring that the inquiry is “just right” from the start.  An inquiry that is too deep risks requiring an invasive Phase II Inquiry, which usually includes soil borings, vapor monitoring, and other investigations and testing.  Aside from being costly, many purchase and sale agreements require the consent of the owner to a Phase II.  Typically, an owner may limit or reject an intrusive investigation due to the concern of the buyer uncovering unknown liabilities and then terminating the transaction leaving the owner with a likely reporting obligation and subsequent cleanup.  An experienced environmental consultant and attorney knowledgeable with the current ASTM standards should be involved at the outset to guide the purchaser through the regulatory process.

A former member of the REBA Board of Directors, David Moynihan is a director in McLane Middleton’s Real Estate Department.  He has substantial experience in all aspects of real estate ownership, development and finance, with an emphasis on land acquisition and disposition, leasing, title, and zoning matters.  He can be reached at david.moynihan@mclane.com. This article was originally published in NH Business Review (March 2021)

Superior Court weighs in on Question of First Impression under G.L. c. 183A § 8(f)

 Ryan R. Severance

A summary judgment decision in a Suffolk Superior Court case, recently reduced to judgment, has addressed a question of first

impression regarding the state of construction necessary to support the recording of plans showing the layout, location and dimension of the units for purposes of compliance with G.L. c. 183A § 8(f)

 

While the Trial Court’s decision does not constitute binding precedent, the significance of the decision cannot be overstated.

 

In the matter of The 1850 Condominium Trust v. Allied Residences, LLC, Suffolk Superior Court Civil Action No. 1884 CV 01594, the question presented was what, precisely, does G.L c.183A § 8(f) require in connection with the recording of the floor plans. Attorneys from Moriarty Troyer & Malloy LLC, including Kim Bielan and Tom Moriarty, were confronted with a claim that the floor plans accompanying a phasing amendment were invalid under G.L. c. 183A § 8(f) because; (1) they omitted a verification, under oath, from a registered architect, professional engineer or land surveyor, and (2) the construction of the common area was not substantially complete at the time the phasing amendment was recorded.

 

G.L. c. 183A § 8(f) provides, as follows:

 

The master deed shall be recorded in the registry of deeds or the land registration office where the real estate is located and shall contain the following particulars:

 

(f) A set of the floor plans of the building or buildings, showing the layout, location, unit numbers and dimensions of the units, stating the name of the building or that it has not a name, and bearing the verified statement of a registered architect, registered professional engineer, or registered land surveyor, certifying that the plans fully and accurately depict the layout, location, unit number and dimensions of the units as built.

 

While §8(f) refers to the master deed, it has long been recognized that such requirement applies to phasing amendments submitting additional units to condominium status.

 

In response to the claim that the subject plan lacked a verification under oath, the Defendant argued, in reliance on certain plan recording requirements of the registry of deeds, and G.L. c. 112 § 60F which controls an architect’s use of her seal, that the only verification required by G.L. c. 183A § 8(f) is the preparer’s signature and professional seal. In addition, the Defendant pointed out that the form of verification demanded by the Plaintiff was, in fact, missing from the floor plans recorded with the master deed, which plans the Plaintiff relied upon to sustain its very existence as a duly constituted condominium organization of unit owners. Confronted with the Defendant’s arguments, and no doubt recognizing that if its position in that regard were accepted the association would cease to exist, the Plaintiff disavowed such claims, and the claim was effectively dismissed.

 

In its summary judgment decision, the Trial Court rejected the Plaintiff’s claim that construction of the common area has to be substantially completed in order to record a plan compliant with G.L. c. 183A § 8(f). In connection with its decision, the Trial Court rejected each of the Plaintiff’s arguments addressing several with specific detail. The Trial Court did, however, acknowledge that there is no case that explicitly answered the questions presented, noting that cases addressing the issue had done so indirectly and inconsistently. In order to answer the question presented, the Court turned to ordinary principles of statutory interpretation concluding that the use of the term “as built” in Section 8(f) does not require “post-construction” plans, or a plan showing a building that is “substantially complete.” The Trial Court’s analysis is clear, concise, and self-explanatory and, for that reason, it is quoted at length herein below.

 

In its analysis the Court first observed as follows:

 

First, as Allied points out, if Section 8(f) required plans showing a building that is substantially complete, then including a requirement that plans show “the layout, location ... and dimensions of the units” would be meaningless, because those elements would necessarily be included in plans showing a building that is substantially complete. “We seek to avoid a construction which would make statutory language meaningless.” Commonwealth v. Maher, 408 Mass. 34, 37 (1990).

 

The Trial Court went on to find:

 

Second, Allied argues persuasively that, if the Legislature had meant construction to be “substantially complete” for purposes of Section 8(f), it would have said so explicitly, as it has in several other statutes. See G.L. c. 260, §2B (actions arising from improvements to real property must be brought no more than six years after “substantial completion of the improvement”); G.L. c. 254, §2A (requiring a notice of substantial completion in order to assert a mechanic’s lien); G.L. c. 30, §39G (requiring certification of “substantial completion” in public works projects); G.L. c. 149, §29F (same, for private construction projects). The Court should “not read into [Section 8(f)] a provision which the Legislature did not see fit to put there.” In re Adoption of Daisy, 460 Mass. 72, 76 (2011).

 

In refusing to accept the Plaintiff’s position on summary judgment the Trial Court also stated,

 

Conversely, the Trust’s contentions as to why Section 8(f) should be interpreted as requiring plans reflecting construction that is substantially complete are not persuasive.

 

The Court noted:

 

The Trust primarily argues that interpreting Section 8(f) as not requiring a building to be substantially complete would permit a developer to “build a house of cards,” in order to meet phasing deadlines, “and then knock it all down,” thus rendering those deadlines, which are meant to protect the rights of unit owners, meaningless. However, as Allied points out, the recording of a Section 8(f) plan fixes the layout, location and dimensions of the units within the structure containing the units. The Trust does not point to any part of G.L. c. 183A, or anything else, from which a declarant would derive authority, after recording Section 8(f) plans, to change the location, layout and dimensions of the units as shown on the plans.

 

The Court found, in addition, as follows,

 

Moreover, as Allied also points out, once a building is submitted to condominium status, a declarant no longer owns or controls the common areas of the building (excepting any phasing rights that have been reserved) and therefore cannot “knock it all down.” The Trust’s concern is therefore speculative and cannot serve as a basis for interpreting Section 8(f) so strictly.

 

Additionally, the Trial Court considered and disagreed with the Plaintiff’s argument that § 8(f)’s reference to “as-built” requires post-construction plans, as follows:

 

The Trust also refers to certain industry publications which define “as built drawings” as drawings that show how a building has actually been constructed. However, these publications speak to how the term “as built” is defined generally, rather than how it is defined in Section 8(f), specifically. Moreover, these publications are inconsistent. As Allied points out, the Mass. Conveyancers’ Handbook, §17.5 (4th Ed), referring to condominiums specifically, states that a unit “need not be completed, or even substantially completed in the customary architect’s term” at the time it is submitted under G.L. c. 183A.

 

Finally, the Court held that the Plaintiff’s reliance on the Appeals Court decision in DiBiase Corp. v. Jacobowitz, 43 Mass. App. Ct. 361 was misplaced as DiBiase “does not answer the question of what stage of “being” an edifice must be in to enable the developer to submit as-built plan under § 8(f) other than to require that there be an edifice in being.

 

While the Trial Court’s decision does not constitute binding precedent, the significance of the decision cannot be overstated. Had the Plaintiff’s position been adopted, it would have called into question the title to virtually every unit added by phasing amendment in the Commonwealth as it would have become impossible for any buyer, conveyancer or title insurer to determine whether a recorded plan showing the layout, location and dimensions of the units as built was compliant with G.L. c. 183A § 8(f). In that regard, the owner of every unit in a phased condominium, and the industry in general, avoided a substantial adverse consequence in connection with the Trial Court’s decision to reject the position advanced by the Plaintiff in the case.

 

A copy of the decision is available at this link.

 

If you have any questions, you can email Ryan at rseverance@lawmtm.com or any of our other attorneys at Moriarty Troyer and Malloy LLC at 781-817-4900 or info@lawmtm.com.

Disclosure v. Confidentiality: A Real Estate Agent’s Conundrum

Robert Stetson

Home sales rose in 2020 to the highest level since before the Great Recession.  Given the sheer mass of transactions involving real estate agents and brokers, it is hardly surprising that home sale disputes

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abound and that many of these cases involve brokers and agents; often times, the perceived deep pocket in the situation.  But, generally, a broker is not liable for merely passing along information to a prospective buyer, see; Fernandes v. Rodrigue, 38 Mass. App. Ct. 926 (1995) so, why do agents and brokers so frequently end up the targets of litigation?

One reason – at least in Massachusetts – is the dearth of seller’s disclosure forms.  As the National Association of Realtors recognized decades ago, seller’s disclosure forms provide cover for agents and brokers on a given transaction.  If the information contained on the form appears reasonable and accurate, the agent or broker owes no duty to inspect or investigate the information and can provide the form to a prospective buyer and avoid liability even for false information contained on the form. DeWolfe v. Hingham Ctr., Ltd., 464 Mass. 795, 800 (2013) (“While a broker ordinarily may rely on information provided by the seller in making representations about a property… the critical question is whether the broker ‘failed to exercise reasonable care or competence in obtaining or communicating the information.’”). 

However, Massachusetts is one of only four states in the United States that does not mandate sellers’ disclosures.  George Lefcoe, Property Condition Disclosure Forms: How the Real Estate Industry Eased the Transition from Caveat Emptor to ‘Seller Tell All’, 39 Real Prop. Prob. & Tr. J. 193, 250 (2004).  This lack of mandatory seller’s disclosures places brokers and agents in an awkward situation at the outset of any engagement.  Do they encourage their client to execute a disclosure form, or not?  The form would provide an additional layer of protection to the agent and broker, but unquestionably would increase their client’s risk of liability.  

Massachusetts laws and regulations create additional tension in the broker/agent and client relationship.  On the one hand, brokers and agents owe fiduciary obligations to their clients. See NRT New England, Inc. v. Moncure, 78 Mass. App. Ct. 397, 401 (2010).
 

confidentiality and nondisclosure on agents and brokers.  See 254 Code Mass. Reg. 3.00 (Professional Standards of Practice).

On the other hand, agents and brokers owe a competing duty to disclose material information to the opposing party in a transaction. 940 Code Mass. Reg. 3.16(2) states, as follows:  

Without limiting the scope of any other rule, regulation or statute, an act or practice is a violation of M.G.L. c.93A, § 2 if… (2) Any person or other legal entity subject to this act fails to disclose to a buyer or prospective buyer any fact, the disclosure of which may have influenced the buyer or prospective buyer not to enter into the transaction…

940 CMR 3.16(2) applies to agents and brokers.  Tragakis v. Angilly, 2006 WL 2848128, 4 (Mass. Super. 2006) (“A real estate broker has a duty, under G.L.c. 93A, § 2(c) and 940 CMR 3.16(2), to disclose to a buyer or prospective buyer any fact which may influence him or her not to enter into the transaction”); see also Rousseau v. Gelinas, 24 Mass. App. Ct. 154, 158 (1987) applying c. 93a to real estate professionals).  Consequently, although agents and brokers owe their clients duties of confidentiality, they also owe duties of disclosure to the opposing parties in a transaction and can face liability, including double or treble damages under c. 93a, for failing to satisfy their disclosure duties in a given transaction. 

Especially in the residential home sales context, the competing duties of confidentiality and disclosure faced by agents and brokers is unfair and unreasonable.  But, caveat emptor is alive and well in Massachusetts.  Generally, sellers of a “private home” are not required to disclose material defects about their home.  See Sullivan v. Five Acres Realty Tr., 2020 WL 8837439 (Mass. 2020) (rejecting seller liability for latent defects created by sellers despite evidence that sale occurred in the course of sellers’ real estate “business plan”).  Therefore, until Massachusetts sellers owe comparable disclosure obligations – like in the vast majority of states in the country – agents and brokers will face an unnecessary conundrum: protect their client or protect themselves? 

Robert Stetson is a construction and real estate litigation partner at Bernkopf Goodman LLP.  He can be contacted via email at: rstetson@bg-llp.com.

This blog entry was adapted from a webinar titled “Advising your Referral Source: A Primer on Real Estate Broker/Agent Liability” and is available here.

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