CHAPTER 5.05. Other Laws Affecting Real Estate Finance

• Jurisdiction: United States

5.05. Other Laws Affecting Real Estate Finance

[1] The Fair Housing Act¹⁹¹

The Fair Housing Act is designed to eliminate discrimination in housing offered to the public for sale, rent, or exchange and to provide an administrative resolution procedure. For a mortgage lender's purposes, the relevant sections of the act are Section 4602 (11) (definition of "discriminatory housing practice"), Section 4602 (21) (definition of "residential real estate-related transaction"), Section 4604 (discrimination in residential real estate-related transactions), and Section 4606 (aiding discriminatory practices).

[2] Dower and Curtesy

Under the common law, a wife had certain dower rights to her husband's real property and a husband had certain curtesy rights to his wife's real property. The estates of dower and curtesy appear to have been eliminated in Delaware.¹⁹² However, while it is clear that the statute was effective to abolish dower and curtesy with respect to property acquired after its effective date of December 25, 1974, there is some uncertainty about property acquired prior to the effective date. In other words, did the statute have retroactive effect, abolishing all inchoate interests of dower or curtesy that arose prior to its effective date? Unfortunately, there are no reported Delaware cases on point. And the general rule of statutory interpretation is that a statute will not have retroactive effect unless that intent is clearly expressed in the statute. Delaware courts have followed the general principle that statutes will not be retrospectively applied to a cause of action already accrued unless there is a clear legislative intent to do so, since the retrospective application of a statute may operate unfairly against a litigant who justifiably acted in reliance on some provision of the prior law.¹⁹³ In interpreting the legislative intent, the courts have held that "if there is any doubt whether an amendment was intended to operate retrospectively, the doubt must be resolved against such operation."¹⁹⁴ Nevertheless, not all retroactive statutory applications are impermissible; there are narrow exceptions.¹⁹⁵ A statutory amendment may apply retrospectively when the amendment relates to practice, procedure, or remedies and does not impair or divest substantive or vested rights.¹⁹⁶ On the other hand, one could rely on the interpretation by Maryland courts of their comparable statute, from which (at least according to the lore of the Delaware bar) Delaware's statute was copied.¹⁹⁷ According to Maryland case law, the Maryland statute eliminating dower and curtesy had retroactive effect.¹⁹⁸ And there is a presumption in statutory construction that prior case law interpreting the law existing at the time the law was copied was also intended to be adopted. Accordingly, dower and curtesy might be lingering in Delaware, notwithstanding the intent of the legislation to abolish those estates. However, a possible result in the Delaware courts may be that if the right did not actually vest (by death of the spouse) prior to December 25, 1974, there is no longer any inchoate right.

[3] Homestead Exemption

Delaware's homestead exemption statute allows certain personal property (e.g., the family Bible) to be exempt from execution for the satisfaction of a money judgment.¹⁹⁹ In addition, Delaware law allows property that is owned and occupied as a principal residence to be exempt from being included in the debtor's estate in a federal bankruptcy or state insolvency proceeding. The exemption applies to equity of up to $125,000 of the debtor's principal residence.²⁰⁰ However, the debtor is not exempt if the bankruptcy court determines that the debtor owes a debt that arises from any violation of the federal or state securities laws; fraud, deceit, or manipulation in a fiduciary capacity or in connection with a purchase or sale of any securities registered under the Securities Exchange Act of 1934 or Securities Act of 1933; or a criminal act, intentional tort, or willful or reckless misconduct causing serious physical injury or death to another individual in the preceding five years.²⁰¹

[4] Mortgagee Address

Delaware law requires that a mortgagee or assignee file a notification with the applicable recorder of deeds if the holder changes its notice address from the address stated in the mortgage.²⁰² The statute provides a safe harbor for notices going to the address stated in the mortgage prior to the filing of any such change of address.²⁰³

[5] ERISA

Real estate finance documents often include representations or covenants regarding the Employee Retirement Income Security Act of 1974 (ERISA).²⁰⁴ For example, a loan agreement or mortgage might contain language such as the following:

(a) Borrower shall not engage in any transaction which would cause any obligation, or action taken or to be taken, hereunder (or the exercise by Lender of any of its rights under the Note, this Security Instrument and the Other Security Documents) to be a non-exempt (under a statutory or administrative class exemption) prohibited transaction under the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
(b) Borrower further covenants and agrees to deliver to Lender such certifications or other evidence from time to time throughout the term of the Security Instrument, as requested by Lender in its sole discretion, that (i) Borrower is not an "employee benefit plan" as defined in Section 3(3) of ERISA, or other retirement arrangement, which is subject to Title I of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), or a "governmental plan" within the meaning of Section 3(32) of ERISA; (ii) Borrower is not subject to state statutes regulating investments and fiduciary obligations with respect to governmental plans; and (iii) one or more of the following circumstances is true: (A) equity interests in Borrower are publicly offered securities, within the meaning of 29 C.F.R. §2510.3-101(b)(2); (B) less than twenty-five percent (25%) of each outstanding class of equity interests in Borrower is held by "benefit plan investors" within the meaning of 29 C.F.R. §2510.3-101(f)(2); or (C) Borrower qualifies as an "operating company" or a "real estate operating company" within the meaning of 29 C.F.R. §2510.3-101(c) or (e).

There are at least two reasons why ERISA has meaning for a lender. It is also worth noting that the issues that this provision is intended to address deal with defined-benefit pension plans. Although statistics may be available to support this, anecdotal evidence is that employers (the plan sponsors) are eliminating defined-benefit plans in light of the tremendous hit taken by plans during the last recession.²⁰⁵

Under ERISA, the Pension Benefit Guaranty Corporation (PBGC), a federal agency, serves as the backstop to insure payments to retirees under defined-benefit plans when both the plan and the plan sponsor do not have the assets to cover the obligation. That is where ERISA meets commercial real estate lending. The PBGC needs to have some recourse against the failed sponsor if the PBGC has to cover the shortfall. Under ERISA, the PBGC is entitled to a lien on 30 percent of the sponsor's assets and, more importantly, the assets of what is called the "controlled group." ERISA defines the controlled group as, among other situations, another company in which the plan sponsor has at least an 80 percent ownership share. Consequently, if the borrower whose real estate is collateral for the loan has a parent that is a plan sponsor, and that parent owns at least 80 percent of the borrower, the PBGC lien can attach to the real estate collateral of the borrower. Although the PBGC lien does not have superpriority over the lender's mortgage lien, the PBGC lien is likely to constitute an unpermitted junior lien, and more importantly, the PBGC could consolidate the borrower with its parent in bankruptcy, putting the borrower's credit at risk. The provision regarding ERISA found in loan documents attempts to identify the risk and provide some notice to the lender. One could see that a mezzanine lender has even greater exposure to loss because the foreclosure of a lien of any priority against the borrower's assets can affect the mezzanine lender's position in the capital stack.

The other issue that such a provision attempts to address is the potential of a penalty on the lender itself. ERISA includes a concept of "prohibited transaction," which would include a transaction that seems to create a self-dealing situation. Generally speaking, this means a transaction involving both the investment of pension plan assets and a party to the transaction otherwise involved with that pension plan. For example, the mortgage lender or its affiliate may be acting as a trustee for a pension plan investor, and that pension plan investor is also an investor in the borrower or the owner of the borrower. The penalty for the lender can be up to 100 percent of the loan amount. Of course, ERISA contains a number of exceptions to what would constitute a prohibited transaction in this context. And the facts themselves are very specific and unusual. In most cases, the diligence of the lender with respect to the loan transaction should uncover whether or not either of these situations might be a realistic possibility and could determine that there is no reason to include the ERISA provisions in the loan documents. But, as with many provisions in loan documents, it has been easier to keep it in than it to take it out.

[6] Realty Transfer Taxes

Generally, realty transfer taxes in Delaware equal 4 percent (typically 2.5 percent to the State of Delaware and 1.5 percent to the county or certain municipalities in which the property is located) of the value of the property conveyed.²⁰⁶ There are certain exceptions applicable to real estate financing transactions. Generally, the granting of a mortgage is not subject to the payment of transfer...