'Legal Developments' continue to shape commercial real estate

Cox, Castle & Nicholson LLP (CC&N) is a California-based law firm that focuses on real estate. As part of its ongoing commitment to the industry, in each of the past 13 years, CC&N has published a comprehensive analysis of recent cases, statutes and other legal issues that will affect the real estate business.

The 1999 edition of Legal Developments Affecting the Real Estate Industry is one such analysis. The following are some of the legal trends highlighted in the publication.

Environmental Liability of Parent Corporation Limited Under CERCLA, owners and operators of property may be liable for hazardous substances. In United States vs. Bestfoods, the U.S. Environmental Protection Agency sued two parent corporations in connection with a chemical plant operated by their subsidiaries. Although a federal district court held that the parent corporations were liable under CERCLA, the U.S. Supreme Court affirmed the holding of the appellate court reversing the district court's decision. The Supreme Court stated that the language of CERCLA does alter the traditional requirements needed to pierce the corporate veil under applicable state law.

Capital Gains Relief As part of the 1998 Tax Reform Legislation, Congress eliminated the 18-month holding period for capital gains, retroactive to the beginning of 1998. All capital assets held for at least 12 months are now taxed at the favored long-term capital gain tax rate. Previously, the top federal tax bracket for most capital assets was reduced to 20%.

All depreciation claimed on real estate that is not recaptured at ordinary income rates (basically straight-line MACRS) is taxed at 25%. The top ordinary income bracket is 39.6%. The increased differential between ordinary income and capital gains and the decrease in the holding period for long-term capital gain treatment, is now an incentive for real estate companies to take advantage of structures to obtain capital gains treatment.

Disclosure of Y2K compliance The Year 2000 Information Readiness Disclosure Act encourages Y2K compliance disclosure by providing limited protection for inaccurate disclosures that were made unwittingly. The Securities and Exchange Commission has issued a release to help public companies determine whether their Y2K issues are known material events or trends that should be disclosed in their registration statements and Exchange Act filings.

Disclosure is suggested if the public company's assessment of the Y2K issues is not complete, or if its management determines that the consequence of the Y2K issues would have a material effect on the company's business, the results of the company's operations or the company's financial condition - without taking into account the company's efforts to avoid those consequences. Disclosure of Y2K compliance is similarly being required by lenders from not only their borrowers, but also from their borrowers' major creditors.

Landowners may be entitled to jury trial for inverse condemnation In Del Monte Dunes vs. City of Monterey, a jury found that, in rejecting a development proposal for a 37-acre site, Monterey had violated the developer's right to equal protection and had inversely condemned the property. The U.S. Supreme Court has agreed to consider the issue of whether a land owner who files a federal civil rights claim in a land use case is entitled to a jury trial.

Construction defects may not permit emotional distress damages In a positive development for builders, the California Supreme Court has agreed to review Erlich vs. Menezes, where a lower court held that a homeowner may recover damages for emotional distress suffered as a result of defective construction.

Insurance claims limited In Foster-Gardner vs. National Union Fire Ins. Co. of Pittsburgh, Pa., the California Supreme Court issued an opinion that impacts insurance coverage for environmental contamination. The court held that an administrative agency order regarding environmental matters does not constitute a suit or does not create a duty for an insurance company to defend under general liability insurance.

In adopting a literal meaning of the word, "suit," the court defined the word to mean the filing of a civil action and complaint, which excluded related claims asserted prior to filing. After this decision, many environmental claims previously covered by insurance may no longer be covered.

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