The practice of real estate law requires a thorough understanding of real estate fundamentals, including real estate investment vehicles, the acquisition and financing of commercial real property, local land use laws, the development approvals process and the tax consequences of real estate transactions. Recent trends in Utah real estate have also required that real estate lawyers understand how to structure transactions with equity investors from outside Utah.
It is too early to determine the long term impact of the COVID-19 crisis on real estate transactions and values in Utah. In the short term, however, the pandemic has created instability in retail and residential rental markets due to governmental shutdown orders and the resulting loss of business revenues and employment. It has disrupted capital markets, causing lenders to hold off on new acquisition and construction loans until they can better determine the ultimate impact of the crisis, although construction projects that were underway in Utah prior to the pandemic have continued to progress, as construction was deemed to be an essential function under Utah governmental shutdown orders.
Some lenders are agreeing to forbear all or a portion of loan payments for a limited period of time based on the current inability of borrowers to operate their businesses or to collect rent from their tenants. Although a gradual recovery can be expected, the real estate sector will likely not fully return to normal until a vaccine or other solution to the threat of COVID-19 is available.
In 2019, Utah continued to see robust development of rental apartments, office buildings, and industrial properties. The state continues to plan for the redevelopment of the site currently occupied by the state prison and the development of an inland port in the northwest quadrant of Salt Lake City.
The effect in Utah of recent federal tax changes is no different from the effect in any other state. The recent decrease in the corporate tax rate has decreased the value of federal tax credits used to finance low-income housing. There have been no changes to Utah state tax law that would impact real estate investment, ownership or development, although the legislature is considering possible changes.
In Utah, fee simple ownership (ie, ownership of all the rights pertaining to a given parcel of real estate) is presumed in every conveyance, unless it appears from the conveyance that a lesser estate was intended. Utah recognizes the following ownership structures when a conveyance grants two or more persons an ownership interest in real estate:
A joint tenancy is a form of co-ownership in which the owners have equal rights to enjoy a property during life. Joint tenants also enjoy the rights of survivorship. That is, if any owner dies then the ownership rights pass to the survivors by operation of law. Joint tenants may sell their respective ownership interests during life, but they may not devise those interests in a testamentary instrument at death.
A tenancy in common is a form of co-ownership in which the owners enjoy equal rights to enjoy a property during life. This form of ownership differs from a joint tenancy in that each owner may convey their interest in life, as well as devise his or her interest through a testamentary instrument at death.
A tenancy by the entirety is a form of co-ownership between spouses. This ownership structure is treated the same as a joint tenancy in Utah.
In general, Utah’s ownership structures are in line with general principles of common law. However, there are some important distinctions. Concerning joint tenancies, conveyances to two people “designated as husband and wife in the granting documents is presumed to be a joint tenancy with rights of survivorship, unless severed, converted, or expressly declared in the grant to be otherwise” (Utah Code Annotated Section 57.1.5.), Additionally, joint tenancies may not be established between an entity or organization and another entity or organization, or between a person and an entity or organization.
Under Utah law, an entity or organization includes a corporation, a trustee of a trust or a partnership. Utah law generally disfavors the creation of joint tenancies. Unless a conveyance document specifically states that the interest being created is a joint tenancy, Utah law presumes the ownership structure to be that of a tenancy in common.
There have been no recent changes in Utah in common ownership strategy.
There are no additional requirements in Utah for transferring title to real estate beyond conveying and recording a valid, written deed from the current owner (the grantor) to the new owner (the grantee).
In Utah, title to real estate is effectuated by delivering a deed, executed by the current owner (the grantor), to the new owner (the grantee). Each deed conveying title in Utah must be in writing and must be notarized. Title is recorded in Utah by recording the deed in the recorder’s office of the county where the real estate is located.
A buyer of property in Utah is responsible for conducting its own due diligence. Utah law imposes only minimal disclosure requirements on sellers. Disclosure obligations vary depending on whether the sale concerns residential or commercial property. For example, a seller is only explicitly required to disclose to prospective buyers that there has been “use, storage, or manufacture of methamphetamines” in a residential home (see Utah Code Annotated Section 57-27-201).
In residential transactions, however, most real estate agents have their clients fill out a standard disclosure form to be given to the buyer prior to closing. Despite a robust list of required disclosures, a seller can still be held liable for fraud and fraudulent concealment in connection with concealing latent property defects or misrepresenting facts to a prospective buyer.
Although there is no statutory requirement, a buyer is typically encouraged to investigate the following matters before closing:
These matters do not constitute an exhaustive due diligence list. Rather, they present a starting point of matters that typically lead to discovery of actual or potential issues pertaining to a real estate transaction.
Lawyers are rarely involved to any significant degree in residential transactions in Utah. Real estate agents and brokers typically navigate those transactions without legal counsel. Furthermore, with the advent of technology making residential real estate listings more widely available, buyers and sellers are increasingly selling residential real estate without engaging any agents or brokers at all. In commercial transactions, due diligence tasks relating to title, zoning and survey review are typically assigned to lawyers.
There have been no recent changes in the allocation of responsibility for due diligence in Utah.
In Utah, customary representations and warranties would be typical of purchase agreements for real property in any state and reflect the relative bargaining power of the parties (ie, authority, no conflicts, no violations, no litigation, environmental). Some representations and warranties may be added or modified to reflect Utah law or practice depending on the circumstances. For example:
Other than title warranties that are inherent in the form of a deed used in the transaction, Utah law does not provide or require any other warranties with respect to commercial transactions. The Utah Fit Premises Act only applies to residential rental units, and Utah has an implied warranty of habitability only for new residences.
In addition to remedies specified in or limited by the language in a purchase agreement, there are no statutory remedies for a seller’s misrepresentations in a purchase agreement. A buyer has any common law remedies available for a misrepresentation.
Limitations on a seller’s liability for breach of representations and warranties may be customary based largely on the relative bargaining strength of the parties and not on the fact that the property is located in Utah. Those limitations may include:
Laws that should be considered by foreign investors in Utah real estate, including recent changes to regulations promulgated by the Committee on Foreign Investment in the United States, do not differ significantly than those in other states. Property ownership presents various types of potential and certain liabilities. Foreign investors should consider the tax implications of owning real estate. Additionally, foreign investors should consider their potential liability in tort and/or contract when entering into any ownership structure concerning real estate in Utah.
The buyer of a real estate asset is responsible for soil pollution or environmental contamination of a property even if the buyer did not cause the pollution or contamination, unless the buyer obtains federal and state liability protections. However, as a practical matter, if the buyer encounters contamination during development, it will likely have to take responsibility because state or federal funding sources are unlikely, unless the buyer has negotiated an indemnity from the seller.
A buyer can ascertain the permitted uses of a parcel of real estate by examining the applicable zoning maps and ordinance. It is possible to enter into specific development agreements with relevant public authorities to facilitate a development project in Utah. The extent to which such development agreements are available, however, is subject to certain provisions in the Utah Code; for example, Chapter 27a (County Land Use, Development and Management Act) of Title 17 (Counties) and Chapter 9a (Municipal Land Use, Development and Management Act) of Title 10 (Utah Municipal Code).
Utah law permits a governmental taking of land for public use so long as the burdened landowner is paid just compensation. A taking occurs when a government agency acts in a way that substantially interferes with private property and the result of that act destroys or materially lessens the property’s value, or the landowner’s right to use and enjoy the property is abridged or destroyed in any substantial degree. Utah law recognises the following types of takings:
Eminent domain (condemnation) occurs when a government agency acquires private property for a public use directly from a landowner. Just compensation must be paid in any eminent domain action.
A permanent physical occupation occurs when a government agency occupies private property temporarily or permanently, without providing any sort of compensation. When this occurs, any affected landowners are entitled to compensation based on the extent of the occupation.
Regulatory takings occur when a government agency does not necessarily physically occupy a landowner’s property, but rather adopts ordinances and/or regulations restricting the use of property such that the property is deprived of some or all rights. Utah recognizes regulatory takings when there is a complete loss of all economic value and when the government action interferes with investment-backed interests. Note that a regulatory taking will only be found when the government interference is so extensive that the government has effectively taken possession of the property.
Development exactions occur when a government agency imposes required contributions as conditions of approval for a proposed development. Such exactions do not constitute takings, however, when there is an essential link between the exaction and a legitimate government interest, and if the exaction is roughly proportional to the impact generated by the development.
Utah has enacted various laws defining "public use". In addition to public uses recognized by federal law, Utah recognizes such uses as urban development agencies using eminent domain to take private property for economic redevelopment projects and, to a limited extent, rights of way across private property to convey or store water for domestic, culinary, irrigation or industrial purposes.
In Utah, there is currently no transfer tax, mortgage tax or leasehold tax. In fact, Utah does not currently tax real estate transactions in any form, whether they be asset deals, share deals or changes in control in a corporation, partnership or other business entity. There may be other tax implications depending on the structure of the transaction, but the real estate portion of any such transaction is not taxed in Utah. In terms of common transaction costs in a real estate deal:
Utah does not currently have any rules or regulations that apply specifically to foreign investors acquiring real estate.
Financing options available for acquiring commercial real estate in Utah do not differ significantly from those in any other state. Whether the acquisition is by an individual, a special purpose entity organized to own the acquired property, or an entity with a large real estate portfolio, such financing is generally obtained through a bank or other private lender in the form of a term loan (ie, a loan for a specific amount and for a specific term). However, an individual with a high net worth or an entity with a large real estate portfolio may also have access to acquisition financing in the form of a revolving line of credit.
In addition, generally speaking, financing structures/options do not differ based on the borrower being a public company versus a privately held company.
The types of security interests that can be created by an investor who is borrowing funds to acquire or develop commercial real estate located in Utah do not differ from those in other states. They include security interests in the real property and personal property of the investor, security interests in the ownership interests (ie, partnership interests, membership interests or shares) of the entity that owns the real estate, or security interests in the right to call and receive capital contributions from the owners of the entity that owns the real estate.
There are no Utah regulations or requirements that apply only to foreign lenders.
Utah does not currently impose any mortgage taxes or other taxes or fees payable on the granting or enforcement of security interests in real estate. However, changes that may impose transfer taxes on the conveyance of real estate and the recordation of mortgages or deeds of trust in Utah are currently under consideration in the Utah legislature.
Utah does not have any rules or requirements that must be complied with before an entity can a grant a valid lien or security interest in its real estate assets. However, before a non-Utah entity acquires real estate in the State of Utah, it should register with the Utah Division of Corporations and Commercial Code as a foreign entity doing business in Utah.
Utah is a “one form of action” state (see Utah Code Annotated Section 78B-6-901), which means that to collect a debt secured by real estate, a lender must first foreclose on its real estate collateral before bringing an action against the borrower to collect the debt. Foreclosure under a mortgage must be done through the courts (ie, a “judicial foreclosure”) in accordance with ordinary requirements for the prosecution of a civil action. Under a deed of trust, the beneficiary can elect to judicially foreclose or non-judicially foreclose (ie, the trustee can exercise the “power of sale” to auction off the property at the county courthouse without having to file an action in court).
Utah has a post-sale statutory right of redemption for judicial foreclosures, which allows a borrower to reclaim the property by making payment in full of the sum of the unpaid loan plus costs. There is no right of redemption if the power of sale is exercised under a deed of trust. For that reason, most lenders in Utah will use a deed of trust and will elect to non-judicially foreclose under the deed of trust using the power of sale.
The power of sale under a deed of trust requires a notice of default to be recorded in the county records where the property is located and that three months pass after recording such notice, during which three-month period the borrower/trustor and certain other persons may cure the default. After the three-month period, notice of sale occurs, which requires approximately 30 days. Sale of the property is then conducted by the trustee in an auction at the courthouse in the county where the property is located (see Utah Code Annotated Sections 57-1-23 through 57-1-34).
Debt secured by Utah real estate can be subordinated to newly created debt secured by the same real estate pursuant to an agreement entered into between the party holding the existing secured debt and the party holding the newly created debt. Typically, these agreements are referred to as subordination agreements or intercreditor agreements.
In Utah, a lender holding or enforcing security over real estate cannot be liable under federal or state environmental laws if it did not cause any pollution of the real estate. In addition, Utah has a law (viz, Utah Code Annotated Section 78B-6-909) by which a secured lender may elect, if a property is “environmentally impaired” and the borrower’s obligations under its loan are in default, to waive its lien against the environmentally impaired property, or any portion thereof, including all fixtures and personal property attached thereto, and instead exercise the rights of an unsecured creditor, including the right to reduce its claims against the borrower to a judgment; or exercise the rights or remedies of a creditor having rights secured by a deed of trust or mortgage and, if applicable, a lien against fixtures or personal property attached to the real property security, including the right to obtain a deficiency judgment.
Under Utah law, real property is deemed environmentally impaired when the cost to clean up a release of hazardous material on to the real property exceeds 25% of the higher of the aggregate fair market value of all security for the loan at the time:
If a borrower under a loan secured by real estate in Utah files bankruptcy because it is insolvent, federal bankruptcy law would apply to prevent the lender from exercising its remedies against the real estate collateral during the automatic stay, which is triggered by the filing of bankruptcy and becomes effective without notice to the lender. The automatic stay prevents the lender from taking any action against a borrower or any of its property during the bankruptcy proceedings, including foreclosing or taking any other action to protect the value of the real property collateral. In addition, a lender’s security interest can be avoided in bankruptcy if it is deemed a "fraudulent conveyance", which means a security interest granted within two years of the filing of bankruptcy can be set aside if:
Utah has adopted the Uniform Building Code, with limited variations. As adopted in Utah, the Uniform Building Code governs the design and methods of construction, with application to both new construction and refurbishment of existing buildings. Municipal and county zoning ordinances also regulate certain aspects of building design and appearance.
Municipalities and counties regulate the development and use of individual parcels in Utah through zoning ordinances (excepting federal land located within the state). Zoning ordinances usually contain use and density restrictions, as well as other typical zoning restrictions.
Plans for a new development or a major refurbishment in Utah are submitted to the planning department of the municipality or county in which the property is located. Depending on the scope of the project and whether a zoning change or variance will be required, plans may require approval by the legislative body of the applicable municipality or county and a public hearing may be required. In the public hearing process, third parties generally have the right to appear and object.
The decision of a municipality or county regarding a development application is subject to administrative appeal. The administrative appeals process varies depending on the municipality or county. Following an administrative appeal, a party not satisfied with the outcome may bring an action in court.
Development agreements between developers and municipalities or counties are expressly authorised by Utah statute and may be required by the municipality or county. An agreement with a utility provider is typically required only if the utility service in question is being extended to an area not previously served.
Zoning ordinances are generally enforced by the withholding of a building permit or a citation for failure to comply or, if applicable, the revocation of a conditional use permit. Building code violations may be subject to a citation for failure to comply and a requirement that construction be halted, or by the withholding of a certificate of occupancy.
Utah does not differ significantly from other states in the types of entities that can hold title to real estate, although Utah has no limited liability limited partnership law. The entity most commonly used in Utah to hold real estate assets is a limited liability company. If a lender or equity investor from another state or country is involved, the lender or equity investor will often require that the limited liability company be organized in Delaware.
Limited liability companies are generally used to hold real estate in Utah because they provide liability protection equal to that of the corporate form, have advantageous tax treatment, and are flexible in ownership structure and management.
Investors in Utah real estate typically use "pass-through" entities (ie, limited liability companies, S-corporations or limited partnerships) to own real estate. If a C-corporation is used, income is taxed at both the corporate and shareholder levels, whereas a pass-through entity is disregarded for tax purposes, meaning that income of the entity itself is not taxed. Instead, income from the entity is passed through and treated as income of the members, partners or shareholders to whom it is distributed.
Any entity transacting business in Utah must be authorised to do business in the state, either by being organised in Utah or by qualifying to do business in the state as a foreign entity. Although bare ownership of property does not constitute doing business in Utah, any activities undertaken to develop or operate such property will likely require qualification.
Lease agreements and license agreements may be used to allow the occupation of real estate owned by someone other than the occupant for a specified term. A lease agreement provides for occupancy exclusively by the lessee, while a license agreement generally allows for non-exclusive access to the real estate.
As is the case in other states, Utah law allows for a variety of types of commercial leases.
In a "gross lease" or "full service lease", a landlord typically pays for property taxes, all of its insurance, maintenance and other expenses of owning and operating the real property, and does not pass these costs through to a tenant. The tenant thus has "all inclusive" rent, although in some gross leases the tenant may be required to pay for utility services to the leased property.
Modified Gross Lease
In a "modified gross lease", in addition to base rent or minimum rent, the tenant is required to pay its pro rata share of any increases in a landlord’s property taxes, insurance and maintenance expenses occurring during the lease term. Typically, in a modified gross lease a "base year" or "expense stop" will be used as a benchmark for determining the tenant’s obligations to pay any increases in such expenses attributable to the leased property. If a base year is used, the operating expenses for the designated base year are without additional cost to the tenant and the expenses for the base year are used as a comparison point for subsequent lease years.
For example, if 2019 is the base year, beginning in 2020 and all other subsequent years, the landlord compares the expenses for the subsequent years to the expenses for 2019. Any expenses in any calendar year in excess of the amount of the expenses in 2019 will be charged to the tenant. If expenses in any subsequent year are less than the expenses in 2019, the tenant will not be entitled to a refund.
When a lease uses an expense stop instead of a base year, a negotiated amount is used instead of a base year and any expenses in excess of the negotiated amount are charged to the tenant. Modified gross leases are often used for office spaces.
Triple Net Lease
In a "triple net" or "NNN" lease, in addition to paying rent instalments, typically called "base rent" or "minimum rent", a tenant is required to pay a pro rata share of the landlord’s taxes, insurance, maintenance, common area utility costs and other types of expenses incurred by the landlord as a result of the landlord’s ownership and operation of the leased property, and the tenant typically pays for utility and janitorial services to the leased property. Triple net leases are usually used for retail and warehouse spaces.
Double Net Lease
In a "double net" lease, in addition to the payment of base rent or minimum rent, the tenant is required to pay a pro rata share of the landlord’s property taxes and insurance, and the tenant typically pays for utility and janitorial services to the leased property.
Single Net Lease
In a "single net lease", in addition to paying base rent or minimum rent, the tenant is required to pay a pro rata share of the landlord’s property taxes, and the tenant typically pays for utility and janitorial services to the leased property. The landlord receives a rent "net" of expenses.
Percentage Rent Lease
In a "percentage rent" lease, a component of the rent is calculated as a percentage on the tenant’s gross revenues.
Utah has no state laws or regulations applying to rents or lease terms.
A typical commercial lease term is five to ten years, negotiated by contract. The lease term is not regulated under Utah law.
Responsibility for the maintenance and repair of a leased property is generally subject to negotiation, but in most leases (other than gross or full service leases) a tenant is responsible for maintenance and repair expenses attributable to the leased property (including, in a multi-tenant property, a pro rata share of any building and common areas expenses), and the tenant must also maintain and repair the interior of the leased premises at their sole cost and expense.
In most commercial leases in Utah, rent instalments are paid monthly.
While base rent may be fixed for an entire term in a lease with a term of five years or less, base rent more typically increases annually by a percentage specified in the lease.
Any increases in rent during the term of a lease must be expressly provided for in the lease. Increases are a matter of negotiation and are agreed to before the lease is signed.
No value added tax (VAT) or other taxes or governmental levies are payable on rent under Utah law.
A landlord in Utah may require the payment of a security deposit, in an amount negotiated by the parties and specified in a lease, prior to the commencement of the lease term. Capital improvements for a new tenant are typically paid by the landlord and amortized in rental over the lease term, or paid by the tenant.
Generally (except in a gross or full service lease), the cost of maintenance and repair of common areas in a multi-tenant property in Utah are paid by the tenants on a pro rata basis.
Typically, separate utility meters will be installed to each leased space in the property and the tenants pay utility charges directly to the utility providers.
As in other states, a landlord usually maintains casualty insurance on the building and (except in a gross or full service lease) charges the cost to the tenant, or, in a multi-tenant property, to the tenants on a pro rata basis. A tenant is typically required to insure its personal property, and to maintain liability insurance and sometimes business interruption insurance. The cause of the damage will determine which policy will be used to insure that damage.
A landlord in Utah can restrict the use of a leased property, and such restrictions are usually negotiated by the parties and included in the lease. The use of the leased property by a tenant must also comply with all applicable zoning ordinances and other state and local laws and regulations, including business licensing requirements.
As in other states, alteration of leased property by a tenant is a subject of negotiation prior to the execution of a lease. Typically, all alterations (other than minor cosmetic alterations that are not visible from outside the premises) require a landlord’s prior written consent. Specific conditions to consent are normally negotiated and set forth in the lease. If no conditions are specifically set forth, the landlord can impose any conditions it elects (subject to the implied covenant of good faith and fair dealing), unless the lease provides that landlord’s consent must not be unreasonably withheld or conditioned, in which case the conditions imposed must be commercially reasonable.
Residential tenants in Utah benefit from some consumer-friendly landlord and tenant regulations, and an implied warranty of habitability. For non-residential leases, any terms agreed to in a lease by a landlord and tenant will generally be enforced by the courts.
The insolvency and bankruptcy of a tenant should be addressed in a lease. In the event of a tenant bankruptcy, however, federal bankruptcy law will apply, and a bankruptcy court will usually have the authority to disregard these provisions.
Forms of security provided to a landlord for a tenant’s lease obligations may include a cash security deposit, a guarantee from a person or entity other than the tenant, or a letter of credit issued by a bank to the landlord.
A tenant in Utah does not have the right to continue to occupy a leased property after the expiration or termination of a lease. The lease should contain provisions specifying what will happen if the tenant fails to vacate as required. A typical provision would state that if the tenant remains in the leased property, it will be required to pay rent in an amount equal to 150% to 200% of the rent payable immediately prior to the expiration or termination of the lease. In addition to the increased rent, a landlord may institute eviction proceedings.
Typically, a landlord can terminate a lease after a breach of the lease by a tenant that remains uncured after the expiration of any notice and cure period specified in the lease. Both the landlord and the tenant may have rights, negotiated by the parties, to terminate the lease in the event of a casualty or condemnation. Most leases will provide that the tenant cannot terminate the lease except after a casualty where the landlord has not repaired the damage within a certain time period or if the leased premises or a significant portion of it has been taken in condemnation proceedings.
Eviction after a tenant default under a lease is governed by Utah statute. In very basic terms, the relevant statute requires that, to evict a tenant, a landlord must provide written notice of default to the tenant with a demand to rectify the default or vacate the leased premises in three days. If the tenant fails to vacate or rectify the default in the three-day period, the landlord will file a complaint in the state district court for the county in which the property is located.
The tenant is required to respond to the complaint within three days after the complaint has been served on the tenant. An occupancy hearing in the courts will usually be held within approximately two weeks and, unless the tenant asserts a valid defense to the eviction, the court will order the tenant to vacate the premises. In the event the tenant fails to do so, the landlord may arrange for the county sheriff to conduct an eviction.
A governmental or municipal authority may terminate a lease only by exercising the power of eminent domain to take a leased property, which requires a court action. The length of the proceeding varies from case to case depending on the factual and legal issues involved. In exercising eminent domain, the condemning authority must pay compensation in an amount determined in compliance with applicable law.
In a commercial or residential condominium, the condominium owners association may have the authority to terminate a lease, if such authority is granted to it in the declaration establishing the condominium regime.
The most common pricing structures for projects in Utah are a stipulated sum and cost-plus with a guaranteed maximum price. Typically, a stipulated sum agreement is associated with an e-design, bi-build agreement where the design drawings and specifications have been finalized prior to the advertisement of the project or request for proposal. A stipulated sum agreement is also used with design-build delivery methods, but requires that a general contractor and its design consultants have the requisite experience to price a project with those additional variables.
Owners also use cost-plus with guaranteed maximum price. This pricing allows for variability in a contractor’s pricing but the owner is protected by the maximum price allowed for the project.
Design responsibility is defined by the delivery method for a project. For most commercial projects, this is done through the design-build delivery method or a design-bid-build delivery method. In the design-build delivery method, a contractor is ultimately responsible for the design plans for the project. In a design-bid-build, an owner is ultimately responsible for the design plans.
Under Utah statutory law, in a contract for an improvement owned or to be owned by a governmental entity, an indemnification provision requiring a design professional (defined as an architect, engineer, land surveyor, or landscape architect) to indemnify the governmental entity from anything other than the damages resulting from the design professional’s actual breach of contract or negligence is void and unenforceable. The applicable statute also clarifies the design professionals’ standard of care and provides that this cannot be modified by contract (see Utah Code Annotated Section 13-8-7).
Construction risks are typically managed through respective construction agreements. In Utah, parties are free to adjust their contractual responsibilities and adjust risk through an executed agreement. In most large construction projects, an owner and contractor may waive consequential damages but allow for liquidated damages arising from a delay in substantial completion.
Most large projects do not include limitations of liability. However, in design-professional agreements with owners or contractors, the most effective way for design professionals to accept risk is through limitations of liability. These limitations are typically for the greater of the design fee or some agreed-to amount, provided that the amount is adjudged great enough to be an effective incentive to take precautions in preparing the design plans.
Indemnification is also used in most construction contracts. Under Utah law, however, a party can only indemnify another from that party’s own negligent acts or omissions (an owner cannot force a contractor to indemnify the owner from the negligence of a third party).
Schedule-related risk is typically managed by acceleration provisions and liquidated damages in an owner-contractor construction agreement. The acceleration provision allows the owner to demand acceleration, sometimes at no additional cost to the owner, if the contractor fails to meet intermediate project schedule milestones. Liquidated damages from failure to meet the substantial completion date is also used and is the most common tool used by owners to account for schedule risk.
In the current market in Utah, most owners cannot require security from a contractor for residential or small commercial projects. The competition in the market shifts the bargaining power to contractors in all but the largest projects, or in municipal or state projects. For large construction projects (and some municipal and state projects), owners may require performance bonds and payment bonds from a contractor.
However, the costs associated with such bonds will be built into the contract price. Thus, only large private projects and municipal and state projects typically use such instruments. Owners often require insurance and specific limits from the contractor and design-professionals, and are typically named as additional insured under those insurance policies. Under Utah law, payment bonds are required for commercial construction contracts exceeding USD50,000 and the contractor is required to secure the payment bonds.
Under Utah law, contractors, subcontractors, material suppliers and design-professionals providing goods or services have the right to record a construction lien against the property on which the relevant improvements are located. Existing encumbrances or liens do not affect the ability of a party to record a construction lien, but the priority of a construction lien is based on the date on which a preliminary notice of lien right is filed with the Utah State Construction Registry. Utah law requires that any party must file a preliminary notice with the Utah State Construction Registry to maintain construction lien rights.
Failure to file a preliminary notice will preclude a party’s ability to file a construction lien on a property. There are no statutory procedures that explicitly allow an owner to remove a construction lien, but typically the owner can post a bond whereby the lien claimant can pursue the bond in lieu of the lien, but the lien still cannot be removed without the consent of the lien claimant.
The process to ensure that an improvement is complete and can be used for its intended purpose is determined by the municipality or county in which a project is located. Typically, the municipality or county will require building permits for improvements, conduct inspections during various stages of construction of the improvements and issue a certificate of occupancy prior to allowing occupancy or use of the improvements. The specific requirements for permitting, inspections and certificates of occupancy are defined in the municipal or county codes or state laws governing the property on which the improvements are located.
Other than state and federal income taxes, Utah imposes no specific taxes on the sale or purchase of commercial real estate for corporate use.
Other than nominal recording fees, Utah does not currently impose transfer taxes, documentary taxes, or other taxes or fees payable in connection with the sale or purchase of real estate, regardless of the size or value of the property being sold or acquired. However, changes that may impose transfer taxes on the transfer of real estate in Utah are currently under consideration in the Utah legislature.
There are no taxes charged in Utah on the occupation of business premises or the payment of rent.
Withholding for foreign investors is a matter of federal law and is thus no different in Utah than in any other state.
Tax benefits from owning real estate come from the federal tax code and are therefore no different in Utah than in any other state.
The effect in Utah of recent federal tax changes is no different from the effect in any other state. The recent decrease in the corporate tax rate has decreased the value of federal tax credits used to finance low-income housing, presenting challenges to the development of affordable housing in Utah. Recent federal tax changes provide for favorable tax treatment of gains invested in designated Opportunity Zones.
Significant areas throughout Utah have been designated as Opportunity Zones. Although investment in Opportunity Zones in Utah through 2018 was limited, Opportunity Zone investment activity is expected to increase significantly as regulations governing such investments are finalized.
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