Contributed By Jones Walker LLP
The main necessary substantive skills include a thorough knowledge of complex ownership structures and security interests used in commercial real estate financing, as well as:
As of time of writing, the long-term impact of the unprecedented COVID-19 crisis on Louisiana real estate is largely unknown but depends on many factors including the effect of the enormous federal and state monetary infusion, the length of time non-essential commercial businesses are shut down, the risk of subsequent waves of infection later this year and in the future, and uncertainty respecting consumer and commercial spending and investment in the post-virus economy. Tourism, a major revenue driver across the state, has been brought to a standstill with stay-at-home orders in effect across the country and abroad.
Significant numbers of employees have been furloughed or terminated as businesses are shuttered with significant negative effects on local businesses and spending is sharply reduced for non-essentials. Commercial tenants, including national tenants, have adopted, in large measure, an attitude that landlords should share in the losses and are negotiating rent reductions and forbearance. Thinly capitalized AirBNBs are for sale creating downward pressure on real estate values.
Closure of restaurants and retail businesses will likely not experience pre-virus profitability as social distancing affects the number of customers who may be served, which, in turn, may cause contractions in those sectors with a concomitant negative effect on real estate values.
Significant trends include the continued development of infrastructure projects, the expansion of the petro-chemical industry, the continued expansion of the hospitality industry in New Orleans and the expansion of mixed use developments such as the luxury apartment and condominium market in the Central Business District, the Warehouse District and the South Market District of New Orleans. The most significant projects include the ongoing redevelopment of the historic World Trade Center building in New Orleans as a Four Seasons Hotel and Residences, the expansion of the New Orleans Convention Center, the development of multiple LNG terminals and methanol production facilities and a major renovation of the Mercedes-Benz Superdome.
The most important considerations for real estate businesses as a result of changes to the US income tax law in 2017 and in 2020 are as follows:
Real estate may be owned by one or more persons or juridical entities. Ownership of real estate by two or more persons or juridical entities is referred to as "ownership in indivision". Although the Louisiana Civil Code provides for the management and common use of property owned in indivision, commercial practice is for common ownership of property to be held indirectly through a single juridical entity such as a corporation, limited liability company (LLC) or limited partnership.
In addition to full (fee) ownership, which includes the right to use and enjoy the property, a person or juridical entity may obtain the following interests in real estate:
Real property is referred to in Louisiana as immovable property, and is transferred by a contract between the owner and transferee. Such a contract is typically referred to as an Act of Sale.
While there is no legal requirement for an Act of Sale to be witnessed or notarized, the Louisiana Uniform Title Standards require that such instruments be “in a form which would allow their introduction into evidence in a court proceeding as prima facie proof of their contents”. Accordingly, an Act of Sale is typically executed in "authentic form" in the presence of a notary public and two witnesses which is the only form of a "self-proving" act.
An Act of Sale must be signed by the individual who owns the property or by an individual properly authorized to sign and deliver the Act of Sale on behalf of the legal entity that owns the property. Corporate resolutions or appropriate evidence of authority should be attached to the Act of Sale or separately recorded.
As between the parties, the transfer of ownership takes place immediately upon the execution and delivery of the Act of Sale. In order to be effective against third persons, the Act of Sale must be recorded in the conveyance records of the parish (the Louisiana equivalent of a county) in which the immovable is located.
It is common in all commercial real estate transactions for the buyer to obtain an owner’s policy of title insurance. Louisiana is a "fixed rate" state, which means that premiums for title insurance are submitted for and approved by the Louisiana Department of Insurance. Agents are prohibited from modifying such rates or rebating insurance premiums.
For commercial transactions, buyers are usually afforded a due diligence period under the purchase agreement, and typically obtain a Phase I Environmental Report, an ALTA/NSPS Survey and a commitment for title insurance. Unless there are unique circumstances, the buyer’s lawyer will typically obtain the survey and title commitment at the buyer’s expense. Additional diligence may be necessary – for example, if the Phase I Environmental Report indicates a potential site condition such as a recognized environmental condition (REC). Zoning diligence and real estate appraisal are also completed during the due diligence period.
Unless there are unique circumstances, most commercial properties are sold without any representations or expressed or implied warranties other than typical authorization representations of selling entities.
As a default rule, Louisiana law provides that the seller warrants title to the property. Lawyers representing a seller will often negotiate a more limited warranty of title so that the seller provides either a warranty against their own acts (referred to as a special warranty deed in other states) or no warranty of title whatsoever. In such circumstances, the buyer will rely on a policy of title insurance in lieu of a seller’s limited warranty.
Regarding the condition of the property, Louisiana law provides that the seller warrants the buyer against "redhibitory" defects or vices which, generally, are defects that render the thing useless or inconvenient (or diminish the property's usefulness) such that prior knowledge would presume “that a buyer would not have bought the thing”. Depending on the defect, the buyer may have the right to rescind the sale or obtain a price reduction. Defects known to the buyer (or which should have been discovered through inspection by a "reasonably prudent buyer") are not covered. Almost all commercial sales include a waiver of such warranty of condition.
A foreign investor must consider federal, state and local income, franchise, sales/use, property and occupational license taxes when acquiring real estate in Louisiana. Special considerations must also be made pertaining to foreign notaries.
Provided that a purchaser obtains a "clean" Phase I Environmental Site Assessment where no recognized environmental conditions (RECs) are found to exist, and that such assessment is compliant with the ASTM legal standards, the purchaser will be entitled to an "innocent landowner" defense to clean up liability under federal (CERCLA 42 U.S.C. 9607(b)) and state law (Louisiana Revised Statutes 30:2271, et seq). "Innocent landowner" status means the owner has no legal obligation to clean up the property from off-site environmental conditions. If the owner later finds evidence of contamination, they are required to report to the Louisiana Department of Environmental Quality and allow that agency to access the property.
While "innocent landowner" status entitles the purchaser to a defense to clean up liability, it is not a defense to toxic tort liability, eg, vapor intrusion resulting from substances that may have migrated from off-site. This risk is common in many transactions, and confirmation of whether there is risk of substances migrating from off-site onto the property may only be determined by obtaining a Phase II report.
Purchase and sale agreements typically allocate risk for environmental liability such that the seller is responsible for environmental conditions that exist before the sale. The buyer is responsible for environmental conditions that arise after the sale; this is often negotiated.
Zoning and planning laws vary by municipality and parish. Many cities and parishes, including the City of New Orleans and East Baton Rough Parish, have online portals with zoning maps and copies of the current local zoning ordinance to determine the zoning designation and permitted uses. Local governing bodies will also provide a zoning verification letter. In addition to zoning ordinances, a buyer should determine whether the property is subject to a historical district, which may restrict the construction or renovation of improvements.
Planned unit developments are provided for under many local zoning ordinances, but often are limited to larger sites.
Public bodies and certain quasi-public entities such as utilities have the authority – after good faith efforts to negotiate for the purchase of property – to expropriate property that is necessary for public purposes, pursuant to specific statutory authority. A property owner whose land is expropriated is entitled to compensation. Louisiana law also provides an expedited taking mechanism by which the Department of Transportation and Development can expropriate private property needed for "highway purposes" that cannot otherwise be acquired amicably.
Recording fees are set by state law and are generally based on the number of pages or established as flat fees. At the time of publication, only Orleans Parish charges a documentary stamp tax on the conveyance or encumbrance of immovable (real) property; this is a minimum of USD325 and up to USD2,525, depending on the number of pages. The statute also provides that, if a conveyance and mortgage are dated the same day, the tax will be waived for one of the instruments. Each parish has established formatting requirements which incur a nominal fee for failure to comply.
For US income tax purposes, the FIRPTA rules (IRC Sections 897 and 1445) generally require a buyer to deduct and withhold 15% of the amount realized by the foreign seller from the disposition of US real property interests, and treat gain realized by a foreign person from the sale of US real property interests as effectively connected income, subject to US income tax.
Acquisitions of commercial real estate in Louisiana are generally financed by both domestic and out-of-state financial institutions and other commercial lenders. In addition, there are multiple tax-exempt financing alternatives, including tax-exempt municipal bonds, which are either governmental bonds (to finance government functions and services) or private activity bonds (by a state or local government issuer for private business financings). In order to finance a project with the proceeds of tax-exempt qualified private activity bonds, a borrower must identify a conduit issuer.
Local port, terminal and harbor districts are used for projects within the boundaries of a Louisiana port. The Internal Revenue Code provides that small issue manufacturing bonds, subject to a limit of USD10 million, may be used for expansion and investment in existing manufacturing facilities or the development of new manufacturing facilities. Exempt facility bonds may be used to finance other infrastructure projects, including docks and wharves, water, sewerage, qualified residential projects, green building and sustainable design projects and other similar projects, provided projects comply with the restrictions imposed by the Internal Revenue Code.
Tax increment financing and community development districts may also provide tax-exempt or tax-reduced financing vehicles.
Commercial real estate acquisitions are collateralized by security instruments that effect a mortgage, lien or security interest on the real estate, such as buildings and improvements, together with other collateral associated with the transaction, including, without limitation, pledges of leases and rents, security interests in tangible and intangible personal property, collateral assignments of insurance proceeds and contracts, ie, construction contracts, and other security interests. Unlimited or limited personal guaranties may be required, depending on the structure of the transaction.
Deeds of trust are not recognized in Louisiana.
Although three forms of mortgage are recognized in Louisiana, the primary form is the the multiple indebtedness mortgage, which was created by statute in 1991 and may secure existing obligations, obligations contemporaneously incurred with the execution of the mortgage, and specific, general or indefinite future obligations, provided the mortgage expressly and specifically sets forth the maximum amount of indebtedness it is intended to secure. The mortgage is effective upon execution; for third parties, it is effective from the date it is filed for registry in the proper records of the appropriate jurisdiction. Recordation of a mortgage is effective for a period of ten years from the date of recordation, unless the mortgage describes a note with a payment maturity of nine years or more, in which case it will remain effective for six years following the note’s stated maturity date.
To continue the effect of recordation beyond ten years, it is necessary to reinscribe the mortgage by filing a written notice of reinscription including the name of the mortgagor and the recordation information from the original mortgage, stating that the mortgage is reinscribed. The effect of reinscription lasts for ten years from the date the notice of reinscription is recorded.
Louisiana does not impose any regulations or restrictions on a foreign lender’s ability to make loans or accept mortgages or other security interests in Louisiana, subject to the caveat that foreign lenders may be subject to other federal laws and regulations. Louisiana Revised Statutes 12:302 provides that a foreign corporation shall not be considered to be transacting business in Louisiana, for the purpose of being required to procure a certificate of authority pursuant to Louisiana Revised Statutes 12:301, to the extent that it engages in certain activities, which include but are not limited to:
The statute also provides that, if the foreign corporation is a bank, real estate investment trust or insurance company, the entity may, among other things, acquire or make loans, including renewals, modifications and extensions of such loans, acquire property at foreclosure sale or by deed in lieu of foreclosure, and manage, lease, operate and sell such property.
Sales of real estate in Louisiana will typically include a proration of ad valorem property taxes between the buyer and the seller. Ad valorem property taxes are assessed by the local parish assessor on an annual basis, and are based on the assessed value of the property. The assessed value is a percentage of the fair market value (10% for land and 15% for most other property).
In every parish except for Orleans Parish, ad valorem taxes are assessed in arrears. At the closing of the sale, the prior year’s tax bill is apportioned between the buyer and the seller, based on the number of days each will occupy the property during the current calendar year. Unless special circumstances exist, prorations of ad valorem taxes are considered final at the closing and are not re-allocated when the tax bill is issued, which is usually in the Fall of each year.
In Orleans Parish, tax bills are generally issued in December or January and the parties can allocate on the current year’s tax bill. Taxes are due by January 31st of the current year and carry interest and penalties if not paid promptly. Pro-rated ad valorem taxes in Orleans Parish, assuming they have been paid, will be added to the seller’s proceeds at closing.
Other than modest recordation and filing fees for the sale documents and security instruments, which are based on the type of document and number of pages, mortgage taxes, transfer taxes and documentary transaction taxes are not imposed in Louisiana, except in Orleans Parish (see 2.10 Taxes Applicable to a Transaction).
In order to give valid security, an entity must comply with its own internal organizational documents and all requirements of its state of organization. If a foreign entity is intending to conduct business in Louisiana, it will have to qualify with the Louisiana Secretary of State. In acquisition or financing transactions, a seller and borrower will also have to demonstrate that the entity has authorized the transaction and the signatory to act on behalf of the entity in the transaction.
Typically, this is accomplished by means of a resolution of the board of directors for a corporation, or by a certificate of authority for an LLC.
Although borrowers are granted certain statutory protections in the event of a mortgage default, most commercial mortgages and loan documents contain waivers of statutory procedural and other protections, with such provisions being drafted heavily in favor of the lender. A sophisticated borrower may be able to negotiate some protections – typically, limited notice of default and cure rights. To give lender’s security interest priority over other creditors, commercial lenders typically use pre-closing lien and litigation searches and title insurance.
Enforcing Security Rights
In Louisiana, there are two methods to enforce security rights.
Ordinary process with pre-judgment sequestration
To enforce a mortgage by ordinary process, the lender files a petition in the district court where the property is situated, seeking a personal judgment against the borrower with recognition of the mortgage.
In an executory process, the property can be seized and sold through an ex parte proceeding without a personal judgment against the borrower. A prerequisite to the executory process is that the mortgage is in proper form and contains a confession of judgment by the borrower/mortgagor for the full amount of the indebtedness, including attorney’s fees. An additional prerequisite to the executory process is the production of original or certified copies of evidence of authority of the signatory to act on behalf of the entity, typically by means of a resolution of the board of directors or by a certificate of authority.
Designating a Keeper
Under either scenario, the parties to a mortgage may designate a keeper in the mortgage whereupon the keeper will be appointed upon the filing of the foreclosure (the Louisiana equivalent of a receiver) of the property. Otherwise, a contradictory hearing is required, which may delay the keeper’s appointment considerably.
The keeper may be the seizing creditor or its agent, and the parties shall also specify in the mortgage the method by which a keeper is to be selected. A keeper will be appointed in the order, without the requirement of a bond, if the mortgage contains the appropriate provisions for the appointment of a keeper pending the judicial sale of the collateral. Otherwise, an application must be filed with the court for the appointment of a keeper, and a bond will be required in an amount determined by the court.
Louisiana law provides that the keeper shall perform their duties as a prudent administrator with full powers of management and administration of the property, and may operate the property seized in the ordinary course of business. The keeper collects all revenue from the property, pays all expenses and provides interim reporting to the court of its administration of the property.
Following the entry of a final judgment and the expiration of appeal delays in an ordinary proceeding, or the entry of an order of seizure and sale in an executory proceeding, the sheriff of the parish will set a sale date for the property. The sheriff must advertise the sale of the property at least twice and, typically, an appraisal of the property is submitted by or on behalf of the borrower and the lender. The lender must be careful to give notice of the judicial sale to any parties holding an interest in the property that may be affected by the sale.
At the sale, the property will not be sold if the highest bid does not exceed two-thirds of the appraised value, and the sheriff must re-advertise for a second sale, at which time the mortgaged property will be sold for cash at any price. The judicial sale of the property is subject to superior liens, encumbrances and leases; all inferior liens, encumbrances and leases are cancelled. In some cases, a lender may be entitled to pursue a deficiency judgment against the borrower if the sale proceeds do not satisfy the judgment. Louisiana does not provide redemption rights to the borrower once the property has been sold at a foreclosure sale.
Typically, the filing of the mortgage or the financing statement in the appropriate registry will establish the priority of that security interest against other competing security interests. In some cases, a lender may elect to voluntarily subordinate its mortgage or security interest to a newly created mortgage or security instrument through a subordination agreement. There are some circumstances in which new debt or liens may prime existing debt, including purchase money security interests, and priority treatment may be established for certain classes of lien claimants under the Louisiana Private Works Act.
Federal law exempts a lender who acquires title to property pursuant to a foreclosure sale or by dation en paiement (deed in lieu of foreclosure) from liability for cleanup costs due to contamination of the property, provided that the lender does not – before or after the acquisition of title – participate in the management of the property such that the lender exercises decision-making control over environmental compliance or comparable to a manager of the property. Louisiana law provides that it is the intent of the legislature that secured lenders shall have no greater exposure to environmental liability and financial responsibility under state law than they would under federal law.
The filing of a petition by or against a borrower in federal bankruptcy court effects an automatic stay (hold) of the foreclosure proceedings and makes enforcement of the mortgage and the sale of the property more difficult. It is not unusual for a borrower to file a bankruptcy on the date of the sheriff’s sale in a foreclosure, which delays the sale through the imposition of the automatic stay. If the sale has already occurred, the borrower is no longer the owner of the property, unless the purchaser at the foreclosure sale fails to pay the purchase price on time, in which case the borrower has no right of redemption.
Zoning ordinances in Louisiana may be enacted on both municipal and parish levels, and can restrict owners’ enjoyment of real estate, typically by providing limitations on permissive uses and establishing building site plan requirements. State law specifically allows for local regulations aimed at historic preservation.
While such regulations have been adopted and are prevalent throughout Louisiana, they are most restrictive in the City of New Orleans and the Parish of East Baton Rouge. Although Louisiana is heavily industrialized, zoning regulations are also generally restrictive with regard to industrial uses.
For commercial projects, it is customary to obtain a zoning endorsement in connection with the title policies issued for a particular project, which insures that the intended use and the proposed plans are permitted under the applicable zoning laws.
Local governing authorities are primarily responsible for regulating the development and use of real estate. A planning commission and board of zoning adjustments are typically empowered under the local ordinance to administer the zoning and land use laws discussed in 4.1 Legislative and Governmental Controls Applicable to Design, Appearance and Method of Construction, as well as the subdivision regulations discussed below.
Louisiana Revised Statutes Annotated Section 33:5051 requires that real estate must be surveyed and platted before the owner can sell off lots or squares. An owner of land within a subdivision may not transfer a portion of a subdivided lot without approval from the planning commission of a plat of resubdivision. If a landowner attempts to transfer property that is not properly subdivided, state law provides for a monetary penalty, and the local parish or municipality may enjoin the transfer. There are restrictions on the use of property that is not properly subdivided; for example, a parish or municipality may withhold the issuance of a building permit.
Applications for entitlements such as conditional use permits and variances are made to the local planning commission or board of zoning adjustments. The request process varies by municipality or parish, and is provided for in the applicable local comprehensive zoning plan. Public notice and a public hearing are almost always required in order to obtain an entitlement not permitted of right.
Zoning ordinances and acts of zoning commissions, boards of adjustment or zoning administrators are subject to judicial review on the basis of “abuse of discretion, unreasonable exercise of the police powers, an excessive use of the power herein granted, or the denial of the right of due process”. Local zoning ordinances typically establish the time period to file such a review, although there is limited state law regarding when an appeal must be filed.
Local government involvement in projects varies by parish or municipality. Certain parishes, such as East Baton Rouge Parish, often enter into planned unit developments (PUDs) while planned developments are less prevalent in the City of New Orleans, given that the minimum size is generally five acres.
The municipal or parish governing body may enforce zoning ordinances by injunction. In addition, neighbouring property owners may seek an injunction to enforce a zoning ordinance. In practice, the enforcement of zoning ordinances is handled during the permit process.
As a general rule, an action to enforce a zoning restriction, building restriction or subdivision regulation must be brought within five years, although there are exceptions, such as for properties in the French Quarter.
Real estate assets may be owned by state-law corporations, partnerships, trusts or LLCs. An LLC is the most common type of entity used to hold real estate.
From a US income tax perspective, LLCs generally provide the most flexibility to mitigate federal and state income taxes.
From a US tax perspective, other than regular, taxable corporations, most entities can be taxed as "pass through" entities, providing one level of US income tax on net income from real estate operations. A corporation, or an entity that elects to be taxed as a corporation, will be subject to two levels of US income tax: once at the entity level and once at the owner level.
There are no special governance requirements for real estate investment entities; the general rules of governance for the various types of entities apply.
Louisiana law recognizes several types of grants that allow a person to occupy and use real estate. The right of exclusive use of real estate may be granted by a lease of improved or unimproved real estate for a term not exceeding 99 years. A grant of servitude establishes the (usually non-exclusive) right of an estate or person to use real estate for specific purposes, such as passage or access. Servitudes may be predial or personal.
Predial servitudes are established in favor of an estate and may not be separated or assigned separately from the estate, while personal servitudes are established in favor of a person or juridical entity and may be freely assigned. Usufruct is a personal servitude that confers the exclusive right to the use of real estate and to occupy and/or collect the fruits, rents and revenues from the real estate. An usufruct may be established by contract or by operation of law and usually terminates on the death of the grantee.
The right of habitation may be granted to a person, conferring the right to occupy real estate.
There are two basic types of commercial lease: the ground lease and the commercial lease. A form of ground lease is utilized for the lease of undeveloped land on which a tenant intends to construct buildings and improvements. Ground leases usually have a longer term, which may extend to a maximum of 99 years. A form of commercial lease is utilized for the lease of commercial buildings or for space in commercial buildings.
Rents and lease terms are not regulated in Louisiana, except that the maximum term of a lease is 99 years.
Ground leases are usually longer, so that the tenant who constructs buildings and improvements on the leased premises may have the opportunity to enjoy the buildings and improvements throughout their useful life. Other commercial leases have shorter terms.
In the absence of specific provisions in the lease, the Louisiana Civil Code governs the repair and maintenance obligations of the landlord and tenant. Most commercial leases have specific provisions governing those responsibilities. Ground leases usually require the tenant to provide all repairs and maintenance. Other commercial leases usually provide that the landlord will provide repairs and maintenance, and that the tenant will pay to the landlord its proportionate share of the cost of this work as additional rent.
Rent remains the same for the full term, unless the lease provides for future increases in rent. Longer term commercial leases and ground leases usually provide for periodic increases in rent in specific amounts or as determined by increases in the CPI or other indexes.
Any increases in rent, including rent during any renewal term, must be specifically set forth in the lease.
There are no taxes in Louisiana on rentals of real estate, other than as may be payable for US and Louisiana income tax purposes. In Louisiana, state and local sales/use taxes are levied on most rentals of tangible personal property.
In addition to any required rent payment, the tenant may be required to pay all or part of the costs of improvements to the leased premises that are necessary for the use intended by the tenant.
The tenant under a commercial lease usually pays a proportionate share of the costs of maintenance and repair of common areas, landscaping and other common costs.
If public services, utilities and telecommunication services may be separately metered, tenants are required to pay for their services directly. If not, each tenant typically pays a proportionate share as additional rent.
Under commercial leases, the landlord usually obtains commercial property and general liability insurance, and the tenant is required to pay a proportionate share of the premiums. Commercial property insurance covers common casualties, and general liability insurance covers claims of damage to property and claims of injury to or death of persons against the landlord. The tenant is often also required to carry general liability insurance naming the landlord as an additional insured, and commercial property insurance covering the tenant's property located in the leased premises.
Commercial leases usually define the permitted uses and prohibit the tenant from using the premises for other purposes. In the absence of restrictions on use in the lease, the tenant may use the premises for any purposes permitted under local, state and federal law.
Commercial leases usually prohibit the tenant from making alterations, additions or improvements to the leased premises without the landlord’s consent. The tenant is required to submit plans and specifications to the landlord for approval, and the landlord often has the right of approval of the general contractor. The lease may also require the general contractor to provide a payment and performance bond.
There are no regulations in Louisiana that apply to leases of particular categories of real estate, except that local ordinances often regulate the short-term rental of residential property.
Commercial leases often contain default provisions under which insolvency, receivership or bankruptcy would constitute a default under the lease, but these provisions are generally unenforceable under federal bankruptcy law. The other effects of a tenant’s insolvency are governed by bankruptcy laws.
All forms of security available in Louisiana may be used to secure the tenant’s obligations under a lease, including mortgage, UCC security interest, assignment of leases and rents, pledge of assets, etc. The most common security is the deposit of a sum of money with the landlord as a security deposit. Separate guaranties may also be required.
The tenant has no right to occupy the premises after the expiry of the term of the lease. If the landlord allows the tenant to remain in the premises, the lease may be tacitly reconducted under Louisiana law unless otherwise provided in the lease. A tacitly conducted lease of commercial property would be deemed to continue on a month-to-month basis.
The landlord should deliver a notice to vacate at the expiry of the lease, unless waived by the tenant in the lease, and take immediate steps to evict the tenant by legal proceedings in order to avoid tacit reconduction. Most commercial leases provide for "holdover" rent in the event a tenant does not vacate the premises at the expiry of the term.
Both the landlord and the tenant have the right to terminate the lease in the event of a default by the other party under the terms of a lease. Commercial leases usually require written notice and an opportunity to cure the default before the right to terminate the lease is enforceable. Louisiana courts have complete discretion regarding whether to terminate a lease in the event of default, and lease provisions that give either party the right to terminate a lease without a judicial determination are unenforceable in Louisiana.
The tenant may be forced to vacate prior to the expiry of the term in the event of a default. For example, if the tenant fails to pay rent when due, the landlord may file eviction proceedings. Eviction proceedings are summary proceedings and require 30-90 days to complete, depending on the particular judicial district and the facts of the case. The action for unpaid rent and/or damages against the tenant is brought through ordinary proceedings, which require longer to complete.
A lease may only be terminated by a third party or by a governmental entity through expropriation proceedings, as described in 2.9 Condemnation, Expropriation or Compulsory Purchase. Both the landlord and the tenant are entitled to assert claims for just compensation in such an event. The time required for these proceedings varies greatly, depending on the judicial district.
The most common compensation mechanisms for construction projects are fixed price (sometimes referred to as "lump sum" or "stipulated sum") and "cost plus".
Under fixed price contracts, the contractor agrees to perform the work for the stipulated sum within the contract time, and bears essentially all the cost and schedule risks, such as the actual costs of labor and materials being higher than estimated. Fixed price contracts are appropriate where the scope of the work and the schedule for performance are sufficiently definite to allow the contractor to reasonably estimate the cost of the work and contingency amounts for cost and schedule risks.
Cost plus contracts are used where the scope of work is too indefinite to allow for pricing on a lump sum basis, ie, where an owner must begin the work before the design is complete, creating uncertainty as to the labor, material and equipment that will ultimately be required to perform the work. Under a cost plus contract, the owner and contractor agree to the contractor costs that will be reimbursed. Additionally, the contractor is entitled to a fee (the "plus"), which is negotiated between the parties.
The contractor recovers its overhead and profit through this fee, which can take many forms, with the most common being a fixed or lump sum fee, or a fee that is calculated as a percentage of the cost of the work. The owner is generally at risk for cost escalation over the contractor’s estimate.
A variant of the cost plus contract form is a guaranteed maximum price contract (sometimes referred to as GMax or GMP). The work commences under a cost plus reimbursement model, but once the design reaches a certain state of development, the owner can request from the contractor a guaranteed maximum price proposal, under which the contractor bears the full risk of the project costs once the costs plus the fee equal the guaranteed maximum price.
In industrial projects, the work is usually performed under the cost plus model, or under a variant thereof, the time and material (T&M) contract, where labor is billed at agreed-upon rates that include direct and indirect costs plus profit. Materials and equipment costs typically are billed with a specified mark-up that includes the contractor’s indirect costs and profit. Theoretically, construction under a cost plus arrangement results in low overall construction cost because the owner is not paying for contingencies, but realization of these savings requires effective management of the project by the owner, eg, timely delivery of owner-furnished materials and equipment, timely finalization of design.
The allocation of responsibility for design and construction on a project is a function of the project delivery method selected by the owner.
Under the traditional design-bid-build model, a project is divided into three phases, which proceed sequentially. The design and construction responsibilities are strictly segregated, and the commonly used industry form contracts specifically provide that the design professional is not responsible for construction means and methods, and that the contractor is not responsible for providing design services.
In the design-build delivery method, the lead principal is typically a contractor, who is then responsible for engaging the design professional, giving the owner a single point of responsibility for all services. In industrial projects, EPC (Engineering, Procurement & Construction) contracts are common whereby the general contractor assumes full responsibility for delivering a "turnkey" facility.
Louisiana has adopted the Spearin Doctrine, under which the owner warrants the adequacy of the plans and specifications to the contractor, as defined in contract documents. If the project calls for the use of specific materials or equipment and they are installed in accordance with the plans and specifications, the contractor cannot be held responsible for the insufficiency of the specified item. This warranty, however, has been eroded through the adoption of performance specifications, under which the contractor is obligated to achieve a result and the means of achieving that result is left to the contractor.
Under these circumstances, the performance requirements agreed to by the contractor may require the contractor to engage the services of a design professional in order to achieve the required result.
Finally, contractors may be allocated design responsibility through project requirements that mandate the procurement and installation of specialty components or equipment that require detailed engineering by the manufacturer or supplier.
Appropriate contract terms and conditions represent a significant tool for the management of construction risk. Ideally, contract terms should allocate the project risks to the party best able to control and manage the risk, and which receives some benefit for doing so. Some of the more important contract provisions regarding risk allocation are as follows.
Scope of Work Definition
One of the best ways to avoid financial risk and disputes between the parties is by establishing a clear definition of the scope of work being undertaken, and how differences in the parties’ interpretation of that scope will be resolved over the course of the project.
Dispute Resolution Provisions
Parties must structure the dispute resolution process in these provisions before their relationship becomes contentious over the course of the project. Items to consider include step negotiation, the employment of dispute review or dispute adjudication boards, and whether the ultimate dispute resolution mechanism should be litigation or arbitration. If arbitration is selected, there are myriad decisions to be made in order to reduce future uncertainty, such as procedural rules, governing law, arbitral seat and arbitrator selection.
While parties should identify and plan for potential risks at the front end of the project, problems arising during performance of the work must be brought to light and resolved as quickly and collaboratively as possible.
Indemnification provisions, an important component of risk management, make one party financially responsible for the occurrence of a specified risk. Under Louisiana law, construction contracts cannot contain "broad form" indemnity provisions, whereby a party indemnifies another against personal injury and property damage claims arising out of the indemnitee’s own negligence. Rather, indemnity obligations are limited to occurrences arising out of the negligence of the party giving the indemnity.
Louisiana also imposes requirements concerning the insuring of indemnity obligations, such as mandating recovery of the insurance cost and limiting the indemnity obligation to the policy amount.
It is common for construction contracts in Louisiana to include waivers of consequential damages, which are defined as damages that directly but not necessarily arise from the breach of the contract of construction. Examples include loss of revenue, production, profits, use and rental income. Louisiana law does prohibit waivers of consequential damages in contracts for the sale of equipment or machinery to be incorporated in a construction project, but the definition of construction project specifically excludes industrial and agricultural projects.
Incorporation by Reference
Contract provisions that incorporate other documents by reference mainly serve two purposes. First, they identify the documents that are part of the contract but are not attached to it. Second, the provisions allow the "flowdown" of contractual obligation, in which case the clause allows the contractor to impose upon its subcontractors the duties and responsibilities assumed by the contractor to the owner. By including such provisions, the contractor provides a means to pass their damage exposure to the owner through to responsible subcontractors.
Louisiana law recognizes a contractor’s right to include "contingent payment" clauses in subcontracts, which pass the risk of owner non-payment through to the subcontractors. Case law interpreting such provisions requires the use of specific language to transfer that risk.
The first line of defense in managing schedule risk is the institution of appropriate reporting requirements and other project controls to ensure that the contractor is performing the work in a timely fashion, and that project risks that affect the schedule – such as differing site conditions or material delivery problems – are identified early and their impact on the schedule mitigated.
Contractually, Louisiana law permits an owner and a contractor to stipulate the damages to be recovered in case of nonperformance, defective performance or delay in performance of an obligation in the contract for construction. Most commonly, stipulated damages provisions relate to late completion of milestones or the overall project. In the case of a contractual breach, the liquidated damages clause relieves the non-breaching party of the need to prove actual damages.
Liquidated damages may not be imposed as a penalty, and must be intended to compensate the owner for the contractor’s delay. Thus, the stipulated amount must represent a reasonable estimate of the anticipated or actual loss resulting from the failure to timely complete the work, made at the time the contract was executed. If the amount fixed as liquidated damages is unrelated to anticipated actual loss, or is imposed simply as a negative inducement to ensure timely completion, the liquidated damages may be subject to attack as an unenforceable penalty.
Bilateral mutual negotiation of the stipulated damages and/or supporting the amount with an estimate of actual damages increases the likelihood of the clause being enforced. Paradoxically, courts examining the enforceability of a liquidated damages clause will also look at whether, at the time of contracting, actual damages for delayed performance were difficult or impossible to establish with certainty, making the use of such damages appropriate.
As a general rule, if a party recovers liquidated damages for delay, those stipulated damages constitute the sole remedy for the delay.
The most commonly used device for securing contractor performance on a project is a contractual requirement that the contractor furnishes and maintains performance and payment bonds. Such bonds are required on public projects, but not on private projects, although they offer important protection to the private owner and its property, as discussed in 7.6 Liens or Encumbrances in the Event of Non-payment.
The Louisiana Private Works Act, LSA-R.S. 9:4801, et seq, requires statutory bonds to be obtained from a solvent, legal surety. The Act also specifies the conditions of the bond, namely:
The amount of the bond is specified with reference to the amount of the contract price.
Bonds are typically used in lump sum or guaranteed maximum price contracts where there is a "benefit of the bargain" to be protected.
Louisiana has recently overhauled its Private Works Act with respect to privately owned construction projects, LSA-R.S. 9:4801, et seq, which serves the purpose of protecting persons who furnish labor, materials, equipment or services for the construction or repair of immovable property by creating privileges in their favour on the property.
In general, the Act creates two classes of claimants in the event of non-payment: persons who perform work or services directly for a property owner (eg, the general contractor), and persons who perform work or services for the owner's general contractor (ie, subcontractors, sub-subcontractors and suppliers). In regard to the first category, the Act grants a claimant a privilege on the owner’s property that serves to secure payment of the claimant’s contractual claim against the owner. The second category of claimants is provided a claim against the contractor and owner notwithstanding the lack of contractual privity with the owner, as well as a privilege on the owner’s property.
Because the claims and privileges afforded by the Act are in derogation of ordinary contract law principles, claimants must strictly adhere to the requirements of the Act regarding timeliness and claim elements. As one court noted, the omission of required information is “statutorily fatal”.
The privileges are not self-executing. Rather, a statement of claim and privilege (referred to colloquially as a lien) must be filed in the mortgage records of the parish (county) where the project is located, in accordance with the requirements of the Act. Furthermore, because privilege merely acts as security for the payment of the underlying claim, suit to enforce the claim and privilege must be filed within one year of the filing of the statement of claim and privilege, or both the claim and privilege are extinguished by operation of law.
Protection from Claims
The Act does provide a mechanism through which an owner can protect itself from claims and privileges, namely the filing of a notice of contract and a payment bond prior to the commencement of work. If a notice of contract and bond is filed in accordance with the Act, the proper filing of the notice of contract and bond allows the owner to avoid personal liability to the second class of lien claimants (ie, those with whom the owner does not have contractual privity), and the lien attaches to the bond rather than the owner’s property.
In addition, the Act provides that any interested party may obtain cancellation of a statement of claim by depositing with the recorder of mortgages either a bond of a lawful surety company authorized to do business in the state or cash, certified funds or a federally insured certificate of deposit to guarantee payment of the obligation secured by the privilege. Such security must be in the amount of 125% of the principal amount of the claim as asserted in the recorded lien.
Ranking of Privileges
The Act prescribes the ranking of privileges and liens on immovable property, with some privileges ranked by the time of claim filing and others by the nature of the claim. As a general rule, mortgages and other privileges that become effective before Private Works Act liens prime Private Works Act liens, with one exception: liens by laborers rank higher than prior-filed mortgages and privileges. Liens by persons who contract directly with the owner and persons who contract with the general contractor rank lower than prior filed mortgages and privileges.
Upon completion of construction, and in compliance with the Act, the owner and contractor will execute a notice of termination or substantial completion and record it in the mortgage records of the parish where the property is located. If a notice of contract was properly filed in a timely manner as set forth in the Act, then the filing of the notice of termination or substantial completion commences a 30-day lien period in which claimants under the Act have the right to file a statement of claim or privilege. Upon the expiration of the period, the clerk of the court will issue a lien and privileges certificate and, if clear, the owner and contractor will file a notice of cancellation of the notice of contract.
During this process, a certificate of occupancy is issued by a local government agency following an inspection of the building to certify its compliance with current zoning and building laws, including that all utility services are established and operating, and that all equipment has been installed and connected. In addition, the Louisiana State Fire Marshal will inspect the building and determine that it satisfies the National Fire Code and the Americans With Disabilities Act, and complies with the American National Standards Institute standards, the UL Fire Resistance standards, the Energy Code and the Office of State Fire Marshal Manual.
There is no VAT in the US and there are no transfer taxes on real estate at the federal level, other than those imposed by FIRPTA (see 2.11 Rules and Regulations Applicable to Foreign Investors). Some state and local governmental units may levy transfer taxes on transfers of real estate, but there are no such transfer taxes in Louisiana.
There are no federal or Louisiana transfer taxes on real estate transfers. In some states, ownership of real estate assets in a legal entity and transfer of ownership of the legal entity may mitigate any applicable transfer taxes.
In Louisiana, municipal occupational license taxes are generally levied on real estate businesses.
See the discussion of FIRPTA in 2.11 Rules and Regulations Applicable to Foreign Investors. In certain circumstances, the seller of real estate may apply to the Internal Revenue Service for a withholding certificate certifying an exemption from FIRPTA withholding or a reduction of the amount to be withheld.
US income tax benefits for real estate include 15%/20% preferential long-term capital gain rates on dispositions, and 100% "bonus" depreciation for certain depreciable property (excluding buildings).
See 1.4 Impact of New US Tax Law Changes.