Commercial Tenants and Subordination, Non-Disturbance and Attornment Agreements

By Bruce B. May and Alan P. Christenson

In Hans Christian Andersen’s “The Emperor’s New Clothes,” an emperor is left exposed after the fine clothing promised by two weavers turns out to be of no more substance than his own vanity. Subordination, non-disturbance and attornment agreements, also known as SNDAs, can similarly leave a commercial tenant exposed if not obtained, carefully reviewed and, as necessary, negotiated.

An SNDA is an agreement among a tenant, landlord and typically the landlord’s lender under which the tenant subordinates its lease to the lender’s lien on the property and promises to recognize the lender as landlord in the event the lender acquires the property, typically through foreclosure. In return, the lender agrees to leave the tenant’s lease in place so long as the tenant is not in default. The SNDA is commonly incorporated into the terms of a commercial lease. A lender whose lien attaches to the property subject to the lease is subject to terms of the lease and the tenant’s rights.

What many tenants do not realize is that first, if the lease is entered into after the lien is attached, that the provisions in the lease do not control and many lenders will not agree to the provisions unless the tenant executes an SNDA in lender’s form. The lender’s form of SNDA will often contain significant exclusions to a lender’s promise of non-disturbance that will leave an unsuspecting tenant exposed to unanticipated liabilities. These exclusions often include the following together with others:

• The tenant will not have the ability to exercise certain remedies in the lease, such as the right to offset or abate rent; 

• The lender will not be bound by any amendments or assignments made without lender’s consent; 

• The lender will not be liable for any of the prior landlord’s acts or omissions; and 

• The lender will not be liable for any unpaid tenant improvement allowance. 

There are just a few of the exclusions. A tenant should consult with capable legal counsel to review and negotiate the terms of the SNDA and avoid the cost and embarrassment of being left exposed by an SNDA that does not offer a tenant sufficient protection.

OMB Approves PHMSA Changes to Incident and Annual Report for Gas Pipeline Operators; PHMSA Plans to Initiate Rulemaking to Implement Further Changes

The Pipeline and Hazardous Materials Safety Administration (“PHMSA”) received approval from the Office of Management and Budget (“OMB”) to continue using, with changes, various “Incident and Annual Reports for Gas Pipeline Operators” under OMB Control No. 2137-0522.  PHMSA had initially proposed changes to six specific forms that were used to gather certain annual and incident information from gas pipeline operators to track gas release incidents and help guide future regulations to reduce future pipeline incidents.  OMB ultimately authorized the amendments to, and continued use of, six specific forms as detailed in the table below:

Form	Amendments
Mechanical Fitting Failure Report (PHMSA F 7100.1-2)	Modified cause categories to collect more accurate data about the cause.
Gas Distribution Incident Report (PHMSA F. 7100.1)	Added more options for type of gas, type of pipeline system, and type of material to collect more precise data.
Incident Report—Natural and Other Gas Transmission and Gathering Pipeline System (PHMSA F 7100.2)	Added another option to type of gas to collect more precise data.  At the request of industry, added information about how the MAOP of a gas transmission pipeline was determined.
Annual Report—Natural and Other Gas Transmission and Gathering Pipeline Systems (PHMSA F. 7100.2–1)	Collecting volume transported from all operators to enable comparisons among operators.  Modified the display of summary data in Parts Q and R with no change to the data collected.
Incident Report—Liquefied Natural Gas Facilities (PHMSA F 7100.3)	Removed the geospatial coordinates from the form since the location of each LNG facility is already reported to PHMSA.
Annual Report for Calendar Year 20l Liquefied Natural Gas Facilities (PHMSA F 7100.3–1)	Removing section describing how the report differs from the previous year report.  PHMSA collects data about modifications through the national registry.  Removing sections for reportable incidents and safety-related conditions since they are reported to PHMSA on other forms.  Specified whether a data field applies to the plant or the facility.
Gas Distribution Annual Report (PHMSA F 7100.1-1)	No changes.

PHMSA submitted its proposed changes to OMB in late 2013, and OMB provided two opportunities for interested parties to participate by submitting comments for the record.  Following receipt of these comments, PHMSA recognized that further changes to the forms were required, but that the immediate proceeding was the inappropriate venue for such changes.  In summarizing one specific comment, PHMSA emphasized that: “On the MFF Report, every failure is a joint failure.”  PHMSA intends to initiate a rulemaking to change the title of regulations 191.12 and 192.1009 to more accurately reflect that failures are in joints rather than in fittings. It is anticipated that the titles will become 49 CFR Part 191.12 – “Distribution Systems: Mechanical Joint Failure Reports” and 49 CFR Part 192.1009 – “What must an operator report when a mechanical joint fails?”

These changes and the decision to institute a rulemaking are significant because they recognize the inaccurate information that, to this point, has been collected by PHMSA.  Without these changes, PHMSA’s reporting provides insufficient detail, and many failures due to incorrect installation of gasketed joints are incorrectly reported as  failures due to other causes.  While the approved changes to the form and instructions are a step in the right direction, they are insufficient by themselves to provide PHMSA with wholly accurate information.  The rulemaking is another step in the right direction.  Once the rulemaking is complete, PHMSA will at least be able to separate joint failures from fitting failures by further modifying FORM F7100-1.2 and associated instructions to reflect the better understanding that reported leaks are not in mechanical fittings, but in joints between fittings and pipe.

For more detailed information on these changes, see http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201311-2137-001.

Happy Holidays for Children of Divorce

By Norma Izzo Milner

The holidays are coined as a magical time of year for children. Can this thought be applied to children of divorce? Are visions of sugarplums dancing in their little heads as they lay down to sleep, or are they having nightmares about being torn between their parents? Are they hearing the clatter of reindeer on the roof, or are they hearing their parents argue on the phone about time-sharing, pick-up, drop-off, and the other usual topics of conflict? We sure hope not.

Divorcing parents need to take special care to stay aware of their children during the holidays. As a divorced parent, part of your responsibility is to foster a relationship between your children and your ex-spouse, no matter how difficult it might seem. Children are at greater risk for depression and anxiety during this time because divorce can drain the magic right out of their experience. The holidays can become either a blessing or a burden for the children of divorce based on how their parents collaborate on how to proceed in their co-parenting. When parents work together to create a positive holiday experience for their children, they are also creating a window of opportunity for their children to be resilient and hopeful for the future of their transitioning family.

What can divorcing parents do to help their children enjoy this time of year? Ideally, they can: maintain a cooperative spirit about time sharing; create some new meaningful rituals that strengthen a positive family transition; demonstrate good communication and kind energy in their interactions; encourage their children to visit with both parents as scheduled; emphasize love and affection for the other parent regardless of your feelings toward that parent; and most of all, be sensitive and prioritize the needs of the children.

Here is an example of a holiday challenge with children of divorce. In the first year of their separation, Mom and Dad have divided Christmas Eve and Christmas Day so that little Johnny will spend Christmas Eve with his Mom until 7:00PM and then be picked up by his Dad to sleep over and be there for Christmas Day. Both parents have noticed that 9 year-old Johnny is not his usual, excited holiday-self. Mom and Dad choose to have a constructive phone conversation about their observations. They decide to ask Johnny how he would like to spend these two important days.

After explaining to Johnny that both parents love him equally and want to spend time with him but want him to feel happy about his experience, Johnny shares that he really wants to wake up in Mom’s house on Christmas Day to open his gifts with both parents. He quietly shares that he doesn’t really want to spend the day at Dad’s place. Mom and Dad do not want to physically force, bribe, or withhold acts of love in order to cajole Johnny into spending the day at Dad’s place if he doesn’t want to. Dad makes a conscious decision not to take Johnny’s desires personally. Instead, Mom and Dad collaboratively decide to keep Johnny at Mom’s house and Dad will visit for breakfast and a gift exchange. Johnny’s eyes light up when they share their decision with him.

Johnny’s parents have given him the most precious holiday gift: the gift of a voice. Over time, Johnny’s parents may decide to involve a family counselor to help identify and address any issues related to Johnny’s unwillingness about spending time at Dad’s place. There is not likely to be a quick fix here, but as Family Law professionals, we can work to spread the peaceful meaning of the season by encouraging our divorcing clients to exchange good will and keep the needs of their children at the forefront.

Jennings, Strouss & Salmon Expands Phoenix Office with the Addition of Paul J. Valentine

 

PHOENIX, Ariz. (December 17, 2014) – Jennings, Strouss & Salmon, a leading Phoenix-based law firm, is pleased to announce that Paul J. Valentine has joined the firm as an associate in the Tax Law department.

“The varied experience Paul has earned in the tax field over the past four years makes him an excellent addition to the tax group,” stated Rich Smith, Chair of the Tax Law department at Jennings, Strouss & Salmon. “In particular, his experience in the area of tax controversy, on both federal and state levels, allows the firm to expand its services in these areas.”

 Mr. Valentine focuses his practice in the area of Taxation Law. He earned his LL.M. in Taxation from New York University School of Law, his J.D. from American University Washington College of Law, and a B.S. from Leeds University. Prior to joining Jennings, Strouss & Salmon, Mr. Valentine was a Tax and Bankruptcy junior partner at Arboleda Brechner, where he managed clients’ tax collection and controversy matters.

“Joining Jennings Strouss & Salmon presented a fantastic opportunity to be a part of a strong and dynamic tax practice,” stated Paul Valentine.  “Although the firm represents clients throughout the United States, its solid reputation in Arizona and commitment to Arizona's businesses was extremely attractive to me. I am looking forward to working with the other members of the tax law team to help meet our client's business needs.”

About Jennings, Strouss & Salmon, PLC

Jennings, Strouss & Salmon, PLC, has been providing legal counsel for over 70 years through its offices in Phoenix, Peoria, and Yuma, Arizona; and Washington, D.C. The firm's primary areas of practice include agribusiness; bankruptcy, reorganization and creditors’ rights; construction; corporate and securities; employee benefits and pensions; energy; family law and domestic relations; health care; intellectual property; labor and employment; legal ethics; litigation; professional liability defense; real estate; surety and fidelity; tax; and trust and estates. For additional information please visit www.jsslaw.com and follow us on LinkedIn, Facebook and Twitter.

The firm’s affiliate, B3 Strategies, assists clients with lobbying and public policy strategy at the local, state, and federal levels. For more information please visit www.b3strategies.com.

~JSS~

Commercial Landlord’s Liability For VOCs

By Bruce B. May and Alan P. Christenson

Question: What are a Landlord’s obligations to reduce or eliminate VOCs (Volatile Organic Compounds) in commercial leases?

It is less a question of what a Landlord’s obligations are under the lease than what would be prudent. At the very least, the Landlord must comply with the evolving body of regulations governing indoor contaminants, including VOCs and be aware of the growing body of litigation brought by tenants and their employees seeking considerable damages and relief arising from the presence of VOCs in the premises.

VOCs are virtually everywhere and emitted in some quantities by much of what can be found in workplaces, even office plants. A common source of what may be excessive VOCs are Landlord’s standard improvements or tenant’s improvements installed by the Landlord. Common tenant improvements that contain VOCs are paint, carpet, drywall and spackle. There is no generally recognized standard among the manufacturers of paint or other products of what can be identified “No VOCs”. Advertised claims may not bear up under testing for detectable amounts. Moreover, improper cleaning of a VOC-bearing substance may make matters worse. Shampoo cleaning a carpet can release excessive VOCs but there is no guarantee that “steam cleaning” is necessarily an answer. VOCs could be released in greater volume, particularly if the contractor is not expert and implementing the proper technique.

An “as is” clause of general application in the lease and a general indemnity from the tenant is unlikely to completely insulate the Landlord from liability.

If a tenant alerts the Landlord of particular sensitivities and insists on certain products, the Landlord should consider a provision to the lease that might provide that the Tenant undertakes sole responsibility and liability for painting, spackling and carpet cleaning with an appropriate credit and indemnifies the Landlord from any claims brought by tenant’s employees. The products, contractors, processes and finish should be subject to the Landlord’s approval, with appropriate disclaimers regarding their efficacy.

The Landlord may want to consider, cost and time permitting, to start using Low-VOC or No-VOC products and appropriate cleaning procedures and cleaning products recommended by LEED or similar organizations. It may also be prudent to have a consultant take a reading of the premises to establish a baseline or identify what could be liability before a tenant occupies the premises.

As a final thought, the Landlord should prohibit in its lease tenants from using contaminating products or processes in undertaking any maintenance, repairs and improvements.

New Client Alert: 2014 Year End Tax Planning Strategies

By: Jack N. Rudel 
December 1, 2014

Every year we lament how complicated year-end tax planning has become.  This year is no exception. Attorney Jack N. Rudel provides 2014 year-end tax planning strategies that will help to yield rewards and avoid surprises.

Read the client alert here.

NLRB Rules that Employees May Use Company E-mail for Union Organization

By Keith F. Overholt

A new name has entered the lexicon of American labor law:  Purple Communications.  It will turn employers several shades of red when they learn that, on December 10, 2014, the National Labor Relations Board (NLRB) held that if an employer makes its e-mail available to its employees for use in connection with their job, the employer must permit employees to use the e-mails system “for statutorily protected communications.” In a union context, that means if a union is trying to organize an employer, employees of that employer may use the company e-mail system to communicate virtually anything they like, as most communications are protected. Presumably, protected communications could, for example, include such statements as, “This place sucks,” ”I hate working here,” or ”These bozos do not know what they are doing,” and be sent through the company e-mail system. 

The NLRB did suggest some exceptions, such as where an employer completely bans use of e-mail for non-business purposes; however, the agency will require the employer to “justify” such a ban by demonstrating “the special circumstances that make the ban necessary to maintain production or discipline.” Furthermore, an employer would have to show that such a ban is enforced on a uniform and nondiscriminatory basis. Clearly, the NLRB does not expect many employers to meet that standard.

FERC ACCEPTS PRO FORMA AGREEMENT FOR TRANSMISSION PROJECT DEVELOPERS IN THE CAISO, ENABLING NEW OPPORTUNITY TO JOIN THE CAISO ONLY AS A PARTIAL PARTICPATING TRANSMISSION OWNER

The Federal Energy Regulatory Commission (“FERC” or “Commission”) accepted, subject to certain conditions, the California Independent System Operator Corporation (“CAISO”) proposed pro forma Approved Project Sponsor Agreement (“APSA”) to be added as Appendix X to its Open Access Transmission Tariff (“Tariff”). See California Independent System Operator, 149 FERC ¶ 61,107 (2014).

The pro forma APSA establishes the terms and conditions for the construction of transmission facilities selected in the CAISO’s regional planning process by project developers selected to build and own such regional transmission facilities in the CAISO’s competitive selection process (i.e., Approved Project Sponsors). The pro forma APSA requires Approved Project Sponsors to become participating Transmission Owners (“TOs”) in the CAISO and sign the CAISO’s Transmission Control Agreement (“TCA”).  Notably, however, developers are only required to turn over to the CAISO’s operational control facilities they are selected to build and own in the CAISO’s competitive selection process. See California Independent System Operator, 146 FERC ¶ 61,237 (2014)(ruling on CAISO’s proposed Competitive Transmission Initiative).

This is a significant change because historically a transmission owner was required to turn all of its transmission facilities over to the operational control of the CAISO when joining the CAISO as a participating TO.  Now, transmission project developers, including potentially neighboring utilities transmitting renewable energy that is imported into the CAISO, have an opportunity to participate partially in the CAISO without losing the ability to serve their own existing wholesale or retail customers with other transmission facilities in their service areas under their own separate rates and tariffs.

In its order, FERC addressed various comments concerning the APSA’s requirement to enter into an interconnection agreement with the incumbent participating transmission owner. The CAISO does not have a process in its Tariff governing interconnection of transmission facilities similar to the well-established process for interconnection of generator facilities. Instead, the interconnection of transmission facilities in the CAISO is primarily governed by the incumbent participating transmission owner’s tariff and certain provisions of the CAISO TCA. Commenters raised concerns about putting Approved Project Sponsors in a position where they would have to negotiate an interconnection agreement with the same incumbent transmission owner with which they may have competed to build the transmission project and asked FERC to direct the CAISO to either: (i) be a party to these transmission facility interconnection agreements, or (ii) have the interconnection process for transmission projects included in the CAISO Tariff. FERC declined to order this particular change and was satisfied with protections provided pursuant to the contractual relationship between the CAISO and the participating TOs under the TCA and the CAISO Tariff.  FERC, however, directed the CAISO to revise the APSA in order to: (i) clarify that delays caused by the interconnecting participating TO should not be sufficient to justify reassignment of the project; (ii) clarify that the CAISO may facilitate coordination between the Approved Project Sponsor and the interconnecting participating TO; and (iii) specify that an Approved Project Sponsor may include additional just and reasonable costs, such as interconnection costs, for recovery in its Transmission Revenue Requirement filed with FERC. Notably, FERC also stated that costs incurred to comply with any additional specifications, beyond the initial functional requirements issued by the CAISO at the time of the competitive solicitation, will be excluded from any cap containment agreed to and included in an APSA.

FERC rejected proposals by an incumbent participating TO to: (i) require that Approved Project Sponsors post financial security to cover the incremental costs of construction resulting from a reassignment of the project due to default or abandonment; (ii) clarify that all rights associated with the project (including real and personal property rights and all rights under agreements associated with the project) will be transferred to the new project sponsor in the event of abandonment; and (iii) allow third parties to seek remedies for a party’s breach of the APSA so that the back-stop participating TO or the alternative project sponsor selected by the CAISO can bring an action to protect ratepayers. FERC also rejected proposals by other parties to: (i) expand the concept of force majeure, which CAISO defines to exclude economic hardship; and (ii) revise the APSA so that the CAISO would need only to approve major modifications to a project.

On December 3, 2014, the CAISO made a compliance filing in response to FERC’s order.