USA Regional Real Estate 2020

Last Updated May 14, 2020

Vermont

Law and Practice

Authors



Dinse PC has ten team members in its real estate sector, with its key office location in Burlington. The firm's other primary practice areas relating to real estate are environmental law, collections/foreclosures, tax law and immigration/cross-border law, and it has extensive experience in construction and permitting, financing and investor transactions, land conservation, leasing, purchase and sale of business, real estate development, real estate purchases and sales, and renewable energy development and financing.

The main substantive skills required of a real estate lawyer in Vermont are the ability to search and identify issues related to marketable title (in Vermont, attorneys search titles, not title companies), resolve title issues, draft and negotiate real estate transactional and real estate finance agreements, draft and negotiate development agreements related to common interest ownership, navigate permitting regimes and draft and negotiate leases. 

Three trends are impacting these areas. The first is the growing use of common interest ownership schemes across the state to solve development and subdivision issues. This trend has required additional insight and knowledge regarding application of Vermont’s version of the Uniform Common Interest Ownership Act (Vermont UCIOA).

The second trend involves increasingly complex permitting requirements which require deeper knowledge and awareness of permitting requirements and related risk. Vermont is one of the few states with statewide land use regulations, known as Act 250, which apply to large-scale development projects.

The third trend arises out of pressure from national title companies to outsource title searching, disconnecting this process from client relationships and from being seamlessly integrated within the transaction. This, coupled with relatively recent Vermont Supreme Court decisions broadly defining what permitting aspects constitute title defects, requires Vermont real estate lawyers to educate clients on the value of having their own attorney search and understand the chain of title and relevant encumbrances.

The COVID-19 crisis has raised issues and complications with respect to the practice of real estate law in Vermont. As of the writing of this chapter, closings in Vermont continue to happen; however, they are often delayed and will take additional time to arrange. Deal-specific factors (eg, the town/city in which the property is located) may impact the timing of closings as the most likely source of a closing delay will be a town/city clerk’s decision to close its office, even to title searchers.

For those municipalities that do not maintain online land records, many still allow limited title searches by appointment, while others will not permit any access, but will provide information and documents from the land records upon request. Some title companies operating in Vermont may offer gap coverage in some situations to address the issues presented by town/city land records closings and/or limited search and recording hours.

Another factor that may cause delays involves appraisals. Many residential appraisers are refraining from visiting occupied homes and are, instead, conducting “desk appraisals” whenever feasible (eg, a refinance with the same lender). Remote closings are encouraged but require additional time to arrange, especially with regard to the logistics of signing, notarizing and exchanging documents.

The Vermont Secretary of State has passed emergency rules for the remote notarization of documents via online video conferences. To assist notaries public, it also issued a detailed Guidance document that describes the process. The Governor and State legislature continue to work to open up real estate related businesses and supporting services and/or enact emergency legislation that affects the real estate sector, including legislation with regard to the witness requirement on Powers of Attorney, and otherwise allow town/city clerk offices to open to the public (in limited numbers).

Due to the uncertainty and constant changes, real estate professionals must be aware of the latest developments regarding the situation. 

The most significant trends in the real estate market in Vermont over the last 12 months are:

  • the continued effort revise the State’s comprehensive land use law (Act 250);
  • the sale of some of Vermont’s most significant ski areas; and
  • the continued public/private development of affordable and elderly housing through state bond issuances. 

Of most significance is the State legislative effort to revise the State’s 50 year old comprehensive land use law, known as Act 250. After several years of research and review of the law and focus on how to modernize it, a bill (H.926) was passed in the House in February 2020. The bill must be approved by the Senate and signed into law by the Governor. If a bill is passed, it will affect development and permitting throughout the State. On the ski area front consolidation continues, Peak Resorts Inc, the parent company of the owner and operator of Mount Snow Resort, was sold to an affiliate of Vail Corporation, and Sugarbush Resort was sold to an affiliate of Alterra Mountain Company.

The Tax Cuts and Jobs Act of 2017 (Public Law 115–97), generally effective January 1, 2018, introduced a new deduction for non-corporate taxpayers (ie, partnerships, LLCs, S corporations, and sole proprietorships) that allows these taxpayers to deduct up to 20% of the taxpayer's "qualified business income". Since most real estate ventures are conducted through partnerships (or limited liability companies taxed as partnerships), the new tax law is expected to benefit real estate developers.

The Treasury Department, under regulatory authority provided by the Tax Cut and Jobs Act, has designated a number of areas in Vermont as "Qualified Opportunity Zones" (QOZs). Development of these areas may provide investors with certain tax benefits if their investment complies with certain statutory requirements and is made through a special purpose corporate structure.

Organizing and facilitating opportunity zone investment will require close coordination between attorneys with experience in real property (to address traditional real estate development issues) and attorneys with experience in corporate law (to organize and maintain the special purpose entities through which investment in QOZs must be made). Due to the rapidly evolving regulatory framework of QOZs, the complex corporate structure involved in maintaining QOZ status, and the presence of QOZs in more capital-rich areas of the region (such as New York and Massachusetts), it is unlikely that QOZs will have a large impact on real estate development in Vermont.

Limited liability companies (LLCs) are by far the most common real estate ownership structures used in Vermont.

Nonresident sellers of real estate in Vermont are subject to a withholding of 2.5% of the purchase price, which is applied to the seller’s income tax liability related to the sale and is to be remitted to the Vermont Department of Taxes within 30 days of the sale. A nonresident seller can apply for a reduced or no withholding certificate from the Vermont Department of Taxes prior to sale if it can show that the tax liability will be less than the statutory 2.5% withholding requirement.

A special property transfer tax is also due on the sale of a nursing home. Under certain circumstances, the sale of a nursing home located in Vermont – including the sale of an interest (shares, partnership interest, membership interest, etc) in a nursing home located in Vermont – is subject to a transfer tax. The tax is set at 8% of the purchase price.

Transfer of title is made by deed to be recorded in the land records of the municipality where the property is located. Vermont utilizes a local recording regime (rather than by county, as is required in most US states) and is a pure "notice" state for priority purposes. Permitted encumbrances on title are typically listed in the deed.

Typical due diligence consists of property inspection, which can cover building conditions, soil and site conditions, radon, environmental, water, septic, public safety (if applicable), surveys, title, permit and zoning research, review of condominium covenants, conditions and restrictions (CCRs) and appraisals. Attorneys are directly involved in carrying out title, permit and zoning research and review of surveys and condominium CCRs, although some firms and attorneys outsource title examinations to third-party title abstractors. The buyer (and its lender) may directly obtain/explore the remaining issues with consultants/third parties.

Commercial Purchase and Sale Agreements typically provide seller representations regarding sole legal ownership, peaceable and undisturbed enjoyment, tenancies/occupancies, seller-granted easements or rights of way, adverse rights, construction activity within 180 days, no highways, abandoned roads, cemeteries or family burial grounds, springs, rivers, ponds, lakes, special tax assessments not shown in the public records, compliance with local, state and federal laws (including zoning, subdivision, land use, building, fire, health and safety and handicapped access) current zoning and any pending proceedings to change zoning, no condemnation proceedings pending or threatened, adequate utilities serving and connected to the property, no litigation proceeds pending or threatened, no undisclosed agreements or commitments, the seller not being a foreign person under FIRPTA, and the property not being located in a flood zone.

Other than a typical one-year construction warranty, no additional warranties are provided under Vermont law. With respect to a misrepresentation discovered after closing, a buyer will customarily sue for negligent misrepresentation, fraudulent non-disclosure or consumer fraud under Vermont’s Consumer Fraud Act. The damages available under these possible causes of action include costs of addressing the issue or the margin between the property as marketed and as actually conveyed. Limitations of a seller’s liability for a breach of representation and warranties are negotiated on a case-by-case basis, but one to three-year survival clauses are common.

Vermont does not impose additional restrictions on foreign investment in real estate. An investor will, however, need to be aware of federal laws, such as the Foreign Investment in Real Property Tax Act (FIRPTA), which requires withholding up to 15% of the purchase price for non-citizen sellers of US real estate.

At the state level, Vermont’s Waste Management Act (10 VSA Section 6615) imposes liability for abatement of pollution and costs of investigation, removal, and remediation of pollution on current and former owners and operators of a facility, which includes real estate used for treating, storing or disposing of waste. Current owners and operators and former owners and operators are treated differently under the statute. Former-owner liability is contingent on ownership “at the time of release.” A former owner is someone who owned the site when the contamination was caused but who no longer owns it.

By contrast, current owners are strictly liable by virtue of their current ownership. Under certain circumstances, there will be no liability if the contamination was caused solely by the migration of contaminants from an offsite location. A current owner or operator will have a complete defense against liability for historical contamination if it purchased the site having no knowledge of the contamination “after a diligent and appropriate investigation” (the diligent or innocent owner defense).

In several situations, a secured lender may have a complete defense against liability. A party who can prove responsibility for only a portion of the cleanup costs is liable only for that portion, and is not subject to joint and several liability. The statute also permits a responsible party to seek contribution and indemnity from any other responsible person. 

In addition to state requirements, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) can also impose liability for landowners for environmental contamination/issues for a site. To avoid this risk, most buyers/lenders retain an environmental consultant to assess the site before proceeding with a purchase.

Many Vermont jurisdictions provide their zoning maps/ordinances online, but given the rural nature of the state, this information is not always available online and a visit to the applicable town offices may be required. As applied to a specific parcel, a buyer may ascertain the permitted uses of a parcel of real estate by searching the town/city zoning files related to that parcel, which will provide certificates of occupancy, zoning approvals and other information regarding the property’s permit history.

A variety of state statutes provide for the use of eminent domain by various state or local governmental authorities/entities. There is a general prohibition under state law against the taking of private property if the primary purpose of the taking is for private economic development. The process for exercising the right of eminent domain varies by legislative act and can range from a town meeting vote with a two thirds majority or an affirmative vote (eminent domain for urban renewal purposes) to a utility company obtaining a Certificate of Public Good for the Public Utility Commission for a specific project, which requires the provider to demonstrate that the lands to be condemned are necessary for the project and will not unduly interfere with the orderly development of the area or region.

Recording fees in Vermont are typically USD15 a page, which is due at recording. The buyer in a real estate transaction typically pays the recording fees for the deed and most transfer-related documents.

Transfer of real property is subject to a property transfer tax at a rate of 1.45%, which applies either to the consideration paid or the fair market value (whichever is higher) (32 VSA Section 9602). The buyer is responsible for this tax. There is a discounted rate (0.50%) applied to the first USD100,000 for a principal residence. There are several exemptions that should be reviewed in detail, including exemptions for transfers made pursuant to mergers or consolidations of corporations pursuant to which no gain or loss is recognized under the Internal Revenue Code, transfers made by a subsidiary corporation to a parent corporation for no consideration other than cancellation/surrender of the subsidiary’s stock, bona fide transfers to owners in connection with a complete entity dissolution, and transfers to an entity at the time of formation, if no gain or loss is recognized under the Internal Revenue Code and provided the entity has no capital (fee interests for transfers after June 30, 2012).

Transfers of shares in property-owning companies are no longer exempt from property transfer tax if the transfer is of a controlling interest in such company (32 VSA Section 9602). Further, any entity that obtains a controlling interest in a corporation that holds real property that has a combined fair market value of over USD500,000, whether by one or more than one transfer of stock, must report to the Commissioner of Taxes the fair market value of all real property held in Vermont by the corporation at the time of acquisition of the controlling interest (32 VSA Section 9618).

No specific Vermont laws apply to foreign investors seeking to acquire Vermont real estate.

Acquisitions of commercial real estate are generally financed by loans secured against the value of the real estate. Increasingly, a variety of state and tax credits are playing a role in the financing of larger, more complex projects, including federal and state low-income housing state credits, federal historic rehabilitation tax credits, and state downtown and village center tax credits. Financings of publicly held companies’ acquisitions of real estate in Vermont are rare but generally follow the same structure as in the case of privately held companies.

A commercial real estate investor can grant:

  • a security interest in the personal property, including fixtures, related to the real estate, or a global security interest in all personal property and fixtures if the entity is not a single purpose entity; or
  • a mortgage interest in its equity ownership in the real estate-owning entity.

Vermont is a "title theory" state, so a mortgage does not create a lien but rather grants a fee interest subject to a condition of defeasance. Personal property UCC filings are typically filed with the Vermont Secretary of State and mortgages and fixture UCC filings are typically recorded in the land records of the municipality where the real property is located.

There are no specific state laws that apply to foreign lenders; however, a lender will need to comply with all requirements that apply to lenders in the state, including Vermont’s licensed lender statute (8 VSA Section 2200), which requires those engaged in the “business of making loans” to obtain a license. Although this term has not been defined, the legislature has indicated that this will be measured with an eye on the degree of habitualness and repetition that the lender engages in lending activity in the state.

Vermont does not impose a mortgage tax, transfer tax or documentary tax on the granting, recording or enforcement of security over real estate.

An entity must have received consideration before giving valid security over its real estate assets. If the grantor is not the borrower, it can enter into a guaranty at the time of the transaction and secure its guaranty obligations with a real estate mortgage.

A mortgagee brings a judicial foreclosure action in the Superior Court, the court of general jurisdiction in Vermont. The standard action is a strict foreclosure procedure. In strict foreclosure, upon recording of a judgment and decree of foreclosure and certificate of non-redemption, title vests in the foreclosing creditor (subject to any superior mortgages or other interests); however, a decree of foreclosure will not be issued unless the court finds that there is no substantial value in the property. Specifically, competent evidence must be presented that there is no substantial value in the property in excess of the mortgage debt plus assessed and unpaid property taxes due on the property.

Judicial sale is an alternative to strict foreclosure upon motion by any party in the foreclosure suit or at the discretion of the court. In a judicial sale, the court oversees a sale of the property following expiration of the redemption periods; the foreclosing creditor does not retain surplus sale proceeds.

Foreclosure judgment by default or summary judgment can be obtained in 60 to 90 days. Additional time will be required for the redemption periods, and for issuance and recording of a certificate of non-redemption or for a judicial sale.

Vermont law also provides for an accelerated, nonjudicial alternative to foreclose commercial mortgages (ie, mortgages on property that is not farmland or does not contain a dwelling). The law envisions a multistep nonjudicial process that simplifies and greatly expedites the foreclosure process for commercial mortgages. However, a mortgagor may redeem or file an objection to the sale at any time prior to the sale. This right to forestall a sale that has been noticed and arranged (often by an auctioneer who has done significant advertising and preparation for the sale), up to the last minute, has made many lenders reluctant to use the nonjudicial foreclosure process.

Redemption Period and Price

The standard redemption period is six months from the date of judgment (one year for mortgages executed prior to April 1, 1968). For mortgages executed on or after July 1, 1994, the redemption period for non-farm, non-residential property in a judicial sale is 30 days or less. The redemption price is the sum of principal, pre-judgment interest at the note rate, post-judgment interest at the higher of the statutory rate (12%) or the note rate, late charges, and – if so provided in the mortgage – reasonable attorneys’ fees and costs.

Waiver of Redemption/Reduction in Redemptive Period

A foreclosing creditor may apply to the court for a shortened redemption period, based on a demonstration that the property is deteriorating. There is no statutory provision contemplating the waiver of the redemption period, but one may be sought by agreement in conjunction with a motion to shorten the redemption period.

Deficiencies

The foreclosing creditor may include a deficiency claim in the foreclosure complaint, or pursue a deficiency in a second action after the foreclosure is complete. In the case of a judicial sale where the foreclosing creditor purchases the property, the amount of the deficiency is determined by appraisal.

Existing secured debt can become subordinated to newly created debt by agreement of the parties, which is typically recorded in the land records. 

Certain labor and material lien claims may have priority over existing secured debt as well. A mortgage granted as security for payment of money loaned to pay for labor and materials to improve the mortgaged property has priority over the statutory labor and materials lien, if the mortgage is recorded before the notice of lien is filed in the town or city clerk’s office where the mortgaged property is located. If the mortgagee receives written notice of labor and materials lien claim, the labor and materials lien has priority over the mortgage as to advances subsequently made to the mortgagor by the mortgagee, except for advances actually expended in completing the improvements to the mortgaged property, and except for advances made to protect the collateral.

Vermont does not have a specific environmental or "superlien" statute that governs environmental remediation costs, although a few statutes exist that may be relevant. After a violation of environmental laws or regulations has been identified, the Agency of Natural Resources can issue an administrative order for remediation or enforcement through a collection action that may become a judicial order. Like other liens, the court could file a lien for enforcement of the order at the town clerk’s office where the property is located in order to perfect it. However, this lien is subordinate to any prior-recorded liens.

If the state, through enforcement of its building regulations, finds a building to be unsafe and the owner does not remedy the violation, the cost and charges incurred to take down the building or make it safe “shall constitute a lien on the land upon which such building is situated, and shall be enforced within the time and in the manner provided for the collection of taxes on land.” Tax liens are given super-priority status. Therefore, if "demolition liens" are enforced using the tax collection process, these liens will have super-priority as well. This allows municipalities to recoup costs if the building is demolished.

Under Vermont’s Waste Management Act, a secured lender will not, “absent any other circumstances resulting in liability”, be liable merely because one or more of the following, among others, are true:

  • the lender holds indicia of ownership to assure repayment; or
  • the lender extends credit to a person owning a facility (10 VSA Section 6615(g)(1)).

A secured lender is not, however, insulated from liability if it causes, worsens, or contributes to a release. Additionally, as noted in 2.7 Soil Pollution and Environmental Contamination, at the federal level CERLCA would also apply. This does not generally result in lender liability, but would have similar impacts if the lender fails to take certain actions.

Federal bankruptcy law will govern how a security interest created by a borrower in favor of a lender before or following borrower insolvency is affected. Lenders generally seek to mitigate bankruptcy risk by ensuring their relative priority over junior liens, carefully reviewing and evaluating their real estate collateral and borrower creditworthiness and requiring personal guarantees of the real estate owner’s principals.

Vermont has a comprehensive state land use law known as Act 250. An Act 250 permit is required for certain development and subdivision activities, including commercial projects on more than ten acres (or on more than one acre in towns without zoning regulations) and applies to an individual developer's subdivision of ten or more lots within a five year period. Projects subject to Act 250 are reviewed by one of nine District Environmental Commissions on the basis of ten criteria.

Criterion eight is entitled “aesthetics, scenic and natural beauty” and includes review of historic sites, significant archaeological sites, rare and irreplaceable natural areas and necessary wildlife area. Before issuing a permit, the Commission must find that the proposed project will not have an undue adverse effect on the scenic or natural beauty of the area, aesthetics, historic sites or rare or irreplaceable natural areas. 

A construction permit and an occupancy permit from the Fire Safety Division of the Department of Public Safety are required for new construction and alterations to public buildings. The Fire Safety Division enforces fire, electrical, accessibility, plumbing and structural building codes. In some cities and towns in the state, Code enforcement is applied at the municipal level through cooperative agreements with the Fire Safety Division.

On the municipal level, some municipalities have adopted design review standards within design review overlay districts. In addition, municipal subdivision regulations generally include design standards.

Historic preservation ordinances may also apply requiring design review or preventing demolition of qualifying resources without municipal approval, as provided under the applicable local zoning or historic preservation regulation.

The Vermont Natural Resources Board (NRB) administers Act 250 through nine District Environmental Commissions (DECs). The DECs evaluate every development and subdivision application that falls under Act 250 according to ten criteria. These criteria focus on the projected impacts on air and water quality, water supplies, traffic, local schools and services, municipal costs, historic and natural resources, including scenic beauty, impacts of growth and municipal and regional plans.

Various state agencies regulate specific uses that create potentially high impacts or potential health and safety issues. The Agency of Natural Resources (ANR) administers the most generally applicable regulations for specific uses, including drinking water, air quality, stormwater, wastewater and solid and hazardous waste. Information about these permits can be found on the agency’s website; for many of them, searchable databases are available through the agency’s Environmental Research Tool.

At the local level, municipal zoning ordinances have been adopted in most, but not all, Vermont cities and towns. Traditional zoning ordinances regulate uses to ensure compatible uses in various different use zones. Form-based codes – with less regulation of uses – have been adopted in several cities and towns and are starting to be more common. Local zoning ordinances are administered by planning commissions and development review boards.

There are different procedures for obtaining entitlements for different permitting programs. Generally, after the project proponent files an application a public hearing date is set. Notices of the public hearing are sent to statutory parties (usually state agencies, municipal authorities and adjoining landowners) and published in a local newspaper. Interested third parties may request the right to participate in public hearings. The permitting authority decides whether third parties can participate, but generally decides in favor of broad public participation. 

There is no variance process under Act 250 or most other state permitting programs. Variances to the Vermont Fire and Building Safety Code may be granted by the Commissioner of the Department of Public Safety if an applicant provides evidence that strict compliance with the Code would entail practical difficulty or unnecessary hardship, or be otherwise unwarranted, and that a variance would equally protect the public’s safety and health. There is no mandated timeframe for this variance process. Local zoning boards may grant variances to local zoning bylaws if the criteria outlined in 24 VSA Section 4468 are satisfied. Zoning boards must issue a decision on a variance request within 45 days of the hearing on the variance request. The criteria for a variance are difficult to satisfy absent some unique physical characteristic at the property (eg, steep slopes, wetlands).

Property owners can ask to have their property rezoned. The process can take a long time since it first goes before the local planning commission and then to the municipal legislative authority (city council or select board). As with most legislative matters, the time required for rezoning will depend on the municipality’s level of motivation. A rezoning to permit a project deemed worthy by the host municipality has a better chance of moving quickly through the process than a rezoning that benefits only a single property owner

Applicants and interested persons with party status generally have the right to appeal decisions to the Environmental Division of the Vermont Superior Court, which has established specialized jurisdiction over land use and environmental permitting and enforcement.

Developers typically enter into development agreements with municipalities where a development will:

  • require use of some public infrastructure or public asset (eg, roadways, municipal utilities, parking garages);
  • rely on some form of public financing (eg, tax increment financing (TIFs)); or
  • place extraordinary demands on public services (eg, roads, sewer/water capacity or schools).

Developers also enter into agreements with private utilities (eg, electricity or gas) where a development requires assurances of adequate capacity.

Various state agencies have enforcement authority over their permitting programs and there is a statutory system of fines and penalties. The regulating authority can require removal or discontinuance of non-complying uses or structures. Municipal zoning is enforced by zoning administrators and code enforcement officers. There are generally limited resources devoted to enforcement and regulators often rely on complaints from neighbors suffering from adverse impacts.

Limited liability companies are the most common real estate ownership structures used in Vermont. Corporations, limited liability partnerships, limited partnerships, low-profit limited liability companies (L3Cs), and general partnerships are also available entity types.

The positive and negative features of the various entity types are largely driven by the tax treatment provided to the entities under federal law. In most cases the business objectives of a real estate venture can be accomplished through any of the conventional entity types used for real estate (ie, limited liability partnerships, limited partnerships, limited liability companies and general partnerships).

Most real estate entities are formed as a type of partnership (general partnership, limited partnership or limited liability partnership) or a limited liability company taxed as a partnership, since partnerships provide for "pass-through" tax treatment for the owners. Additionally, single-member LLCs are treated as "disregarded entities" for income tax purposes and are frequently used for real estate projects when there is only one owner, since the LLC form provides liability protection to the owner without adding significant costs associated with overall tax compliance.

Leaving aside corporations, which are rarely used for real estate investment, the governance requirements of a real estate venture are set forth in the partnership agreement or LLC operating agreement as negotiated by the parties. The Vermont statutes governing partnerships, limited partnerships and limited liability companies provide a set of default rules, but these statutes and freedom of contract statutes provide the parties with substantial latitude in negotiating the governance of the entity.

Leases, licenses and easements are all utilized in Vermont to allow a person or entity to occupy or use real estate for a limited period of time. A lease grants the lessee the exclusive right to occupy real property in exchange for the periodic payment of rent and is considered to be an interest in real property. In Vermont, a lease with a term longer than one year must be acknowledged and recorded in order to be enforceable against third parties.

In practice, it is more common for a memorandum of lease to be recorded in lieu of the full lease – which provides protection for the lessee in providing third parties notice of this interest in land without providing the entire contents of the negotiated agreement. The contents of a memorandum of lease are provided by statute and the memorandum must be executed and acknowledged for it to be enforceable against third parties. 

An easement is a mechanism whereby a real property owner may grant permission for a person or entity to use the owner’s real property for a specific purpose. An easement is also considered to be an interest in real property and must be executed, acknowledged and recorded for it to be enforceable against a third party. 

A license grants a personal right to use real property for a specific purpose. Licenses are generally freely revocable and do not convey an interest in real property.

There are no standard forms of lease in Vermont. Commercial leases take many forms depending on the intended use of the leased premises: office, retail, warehouse, industrial or any other use. There are also different types of commercial leases with regard to tenant payments. 

In a gross lease which is probably most common, the property owner pays directly for property taxes, insurance and maintenance, and the tenant pays the property owner a fixed base rent. 

In a net lease, the tenant pays the property owner a fixed base rent in addition to the tenant’s proportionate share of the operating expenses for the property. The number of operating expenses for which the tenant is responsible can vary and, generally, a "triple net" lease would include property taxes, insurance and common area maintenance (CAM) costs in the tenant’s share of operating expenses. It is also common for some retail leases to require tenants to pay a base rent plus a percentage of the tenant’s retail sales. 

As discussed in 6.4 Typical Terms of a Lease, long-term ground leases may be deemed as transfers of interests of land and may fall under the state’s subdivision, land use and taxation laws.

For commercial leases, there are no legal restrictions on the amount of rent that can be charged or the term of lease. However, leases and all contracts in Vermont contain an implied covenant of good faith and fair dealing. If the lease term is over 50 years, including renewal periods, or provides the right or option to acquire, the lease must be recorded and may be subject to Vermont’s property transfer tax.

No specific law or regulation addresses or limits the length of commercial leases, but generally lease terms are less than 50 years to avoid the lease being deemed the transfer of an interest in land and implicating the state’s transfer tax and potentially the state land gains tax. Additionally, if the lease is deemed a transfer of property, it may be required to comply with the state’s land use law (Act 250) or to provide an Act 250 disclosure statement (relating to dividing the land) about the other tracts of land/interests the developer has previously undertaken. If the property is served by a private drinking water system, the developer’s obligation’s regarding drinking water disclosure may also be triggered.

Pass-through expenses vary depending on the length of the lease, and capital expenditures are not a common item to be included in CAM expenses under a lease in Vermont.

Rent payments are generally made monthly, but this can vary depending upon the intent of the parties and the structure of the lease.

The rent payment, as negotiated by the parties, will typically hinge upon the length of the lease. For shorter leases, the rent payable will remain constant over the entire term. For longer-term leases, the lease would commonly include some provision for a future increase, or an escalator clause, whether based on a Consumer Price Index (CPI) or a fixed adjustable schedule.

Rent changes will typically be addressed in the lease at the outset (eg, USD2 per square foot for year one; USD3 per square foot for year two) or the lease will provide a formula to govern future increases based on the CPI or some other agreed-upon indicator of inflation or future value.

There are no VAT requirements or other similar taxes payable on rent under Vermont law.

Most commercial leases in Vermont provide for a security deposit, which will vary depending upon the length of the lease and the intended use of the property. For any capital improvements for a new tenant, including fitup costs, the tenant may need to pay for these expenses either up front or in an amount amortized over the initial term, although there may be some provision for allowances to also be paid by the landlord, depending upon the circumstances of the transaction.       

The allocation of maintenance and repair costs for common areas again depends on property being leased, its location and the intent of the parties. Many leases in Vermont include maintenance and repair costs as part of the rental payment, making them the landlord’s responsibility. In net or triple net leases, which are also becoming more common, these costs are allocated directly to the tenants as additional rent. In more urban areas of the state, it is becoming more common to see lease structures designed to pass some of these expenses to the tenants, particularly within the context of common interest communities and mixed-use developments.

Services, utilities and telecommunications are typically addressed through individual service contracts, although in some instances costs may be borne by the landlord and passed through as a portion of rent or monthly fee depending on the nature of the service, the building and the willingness of the service provider to separate out or separately meter/allocate these service payments among multiple tenants.

The question of who pays the cost of insuring real estate which is the subject of a lease, and what events causing damage will usually be covered by the policy, also depends upon the ownership structure, the nature of the building, the number of tenants and the duration of the lease agreement, in as far as exactly how these expenses will be passed through to the commercial tenant. In a standard gross lease, casualty insurance will be paid for by the landlord and is built into the rental fee. In a net lease, these costs will either be paid for directly by the tenant or the landlord will pay and obtain reimbursement from the tenant(s) as additional rent to ensure that these payments are being made. In addition to casualty policies, additional insurance, such as for flood insurance, may be required for an individual property.

Vermont law does not generally bar a landlord from restricting uses of the property, but these restrictions will be interpreted as narrowly as possible in favor of allowing uses and against the drafter. Zoning and local land use regulations will also potentially impact a leased property’s potential use and should be carefully explored during the due diligence period before entering into a commercial lease.

The lease agreement will typically set out a tenant’s rights to alter the premises during the period of the lease and is subject to negotiation between the parties. A landlord will likely want to retain design control and approval over tenant’s proposed work. Additionally, Vermont law may deem a lease to be a property transfer, with tax consequences depending upon the nature of the improvements being made to the leased premises.

Vermont law provides for a variety of regulations and protections involving the landlord/tenant relationship within the residential lease context, but is generally silent with regard to regulating commercial leases.

Generally, a tenant’s failure to fulfill its rental obligations would be considered a default under the lease. This would allow the landlord to proceed with eviction or pursue other remedies. Insolvency resulting in a bankruptcy filing would be governed by federal bankruptcy law.

Vermont law places no limit on the amount of a security deposit. Landlords are not required to maintain security deposits in a separate bank account for each tenant and do not typically place security deposits in an interest bearing account. Landlords are not required to pay to tenants any interest earned on the security deposit. Some municipalities place additional restrictions on security deposits.

For residential leases, a deposit should be retained only to pay for unpaid rent, damages beyond normal wear and tear, utility bills owed by the tenant, or to cover expenses for removing belongings left behind after a tenant has moved out. The landlord must return the security deposit by hand-delivering or mailing it to the tenant’s last known address within 14 days of the day the landlord discovers the tenant has moved out or the day the tenant actually moves out, if the tenant gives the landlord notice that he or she has moved. The return of the security deposit must include a written statement itemizing any deductions taken out by the landlord. If the landlord fails to return the security deposit and statement within the 14-day period, the landlord must return the entire deposit.

A tenant does not have an express right to renew their lease under Vermont law, but the state’s common law may, in some instances, imply a right to a holdover tenancy. The courts examine the conduct of the landlord and the tenant. A tenancy-at-will can convert to a tenancy-by-implication when a tenant for a fixed term of years or for a year under a formal written lease holds over after the term expires, and the landlord acquiesces and accepts rent. 

To prevent creating a new tenancy, a holdover provision should be included in the lease to expressly provide how to address any holdover tenancy and the nature of the tenant’s obligations (payments and otherwise) during this period.

Commercial tenants/landlords cannot terminate a lease before the express expiration date unless this is specifically addressed in the lease. Leases often provide notice and cure periods, of five to ten days or longer, requiring the landlord to notify tenant of the missed rental payment or a non-monetary default, before a landlord can exercise its remedies under the lease.

A landlord evicts a tenant by bringing an ejectment action in the Superior Court. An eviction is not authorized until a judge issues a writ of possession order and the order is delivered to the tenant. A landlord must provide the tenant with a written eviction notice that contains the reason for the eviction and the lease termination date. The amount of advance notice the tenant is required to receive depends on the reason for the eviction (eg, 14 days for nonpayment of rent and 30 days for the breach of another material term of a lease agreement).

In order to complete this eviction, strict compliance with the state’s laws, including the time, mode and manner of the notice of termination of tenant is essential. There are some expedited mechanisms for moving this process forward, but it can be a lengthy and complicated process to complete.

Vermont law does not prohibit a commercial landlord from engaging in self-help upon a tenant’s default, but it is advantageous to provide for this specific right within the rental agreement. A commercial landlord may peaceably enter the leased premises upon default without formal demand, notice or court order. A landlord may seek a preliminary injunction, which can be triggered on the same day that an ejectment complaint is filed. A court may grant the landlord possession by preliminary injunction if it finds that the landlord is likely to prevail in the ejectment action.

Although somewhat unlikely, a local government could use the right of eminent domain in Vermont to condemn a property (along with any leasehold interests). This action would not be targeted at the leasehold interest, but it would be terminated in the takings process and the amount of compensation allocated between the landlord and tenant would be set by the court – which will vary by the nature and duration of the lease agreement.

Varying price structures are used depending on the scope and size of the project. Typically, however, the owner and contractor will agree on an estimate for materials and labor based upon a budget and cost allocation. This amount is generally subject to adjustment from time to time as agreed to by the parties. In addition, the contractor is generally paid a "contractor’s fee", which is a percentage-based amount calculated based on the above estimate. Often, a construction contract will also include a "guaranteed maximum price" to be paid by the owner, which may not be exceeded absent extraordinary circumstances.

Projects can either be design-build, using only one contractor, or a joint effort with a contractor and architect. The path chosen typically depends on the sophistication of the project and parties. When both a contractor and architect are engaged to perform services, the architect typically retains all rights to is work and designs. The contractor, and its subcontractors, may only use the architect’s work to meet official regulatory requirements or for other purposes in connection with the project.

Initially, all contractors are expected to maintain adequate insurance to protect the contractor from typical claims (eg, bodily injury, workmen’s compensation or loss of personal property) which may arise out of or result from the contractor's operations, whether by itself or by any subcontractor or employee for whose acts it may be liable. The owner generally maintains hazard and fire insurance upon the project to its full insurable value.

Risk allocation is very common in construction contracts, through the use of:

  • indemnification and hold harmless provisions;
  • warranties for all defects (typically for one year from substantial completion); and
  • limitation of liability clauses (waiving liability for incidental or consequential damages, including loss of profits). 

The enforceability of many of these provisions generally turns upon equitable considerations and the sophistication of the parties.

Time limits stated in the contract documents are typically "of the essence". A contractor confirms that the amount of time provided in the contract is a reasonable period for performing the work. If the contractor is delayed at any time in the commencement or progress of the work by changes ordered, labor disputes, fire, unusual delay in deliveries, abnormal adverse weather conditions not reasonably anticipatable, unavoidable casualties or any causes beyond the contractor’s control, then the schedule may be extended for such reasonable amount of time as determined by the parties. 

Payments made under a construction contract are typically made in installments as the project is progressing. Often, an owner may hold a "retainage" (usually 5% of the payment) to be held to resolve disputes such as defective work, damages and liens. Entire progress payments are often withheld if the contractor is not making the requisite progress in the time specified. If a contractor is being particularly delinquent, owners can carry out the work by hiring a replacement contractor, and seek damages or indemnification from the original contractor. Parties may negotiate incentives for Contractors exceeding scheduling milestones or cost below budget.

The use of additional forms of security depends upon the nature of the project. For large construction projects which involve a bidding process, the bidding requirements often reflect the fact that the owner reserves the right to require the contractor to furnish bonds covering faithful performance of the contract and payment of obligations arising thereunder. Such bonds are not commonplace for smaller projects.

Any person who supplies labor or materials for a construction project may claim a lien against the improved property in the event of non-payment.  These liens may have priority over existing secured debt depending upon the circumstances. A mortgage granted as security for payment of money loaned to pay for labor and materials to improve the mortgaged property has priority over the statutory labor and materials lien, if the mortgage is recorded before the notice of lien is filed in the town or city clerk’s office where the mortgaged property is located.

If the mortgagee receives written notice of labor and materials lien claim, the labor and materials lien has priority over the mortgage as to advances subsequently made to the mortgagor by the mortgagee, except for advances actually expended in completing the improvements to the mortgaged property, and except for advances made to protect the collateral.

A lien is valid for a period of 180 days from the time when payment becomes due. The contractor asserting the lien must bring an action within such time to obtain judgment and attach the property. Accordingly, the lien may be removed either through passage of time, payment to the satisfaction of the contractor, or the furnishing of a bond sufficient to satisfy the lien.

Vermont state law requires compliance review for all construction permits. The municipality in which the construction has taken place issues Certificates of Occupancy to document compliance.

Federal and state income taxes are applicable to the gain realized on the sale of real property at the rates applicable to the particular seller. Under Vermont law, nonresident sellers are required to remit 2.5% of the sale price to the Vermont Department of Taxes within 30 days of the sale, to be applied to the seller’s state income tax liability.

A property transfer tax is paid by purchasers equal to 1.45% of the higher of consideration paid or fair market value (0.5% of the first USD100,000 of a principal residence) unless otherwise exempt.

A land gains tax applies to gains recognized from the sale of land (not improvements) purchase and subdivided and held for less than six years by the transferor. The tax ranges between 5% and 80% of the gain. There are a number of potential exemptions and this tax is paid by the seller.

Structuring a deal to qualify for an exemption under the property transfer tax laws is the best way to mitigate property transfer tax.

There are no municipal taxes levied on the occupation of business premises or payment of rent in Vermont.

Nonresident aliens and foreign corporations are subject to federal income tax on any disposition of a US real property interest (USRPI) under the FIRPTA. Any gain or loss on a USPRI disposition is treated as "effectively connected with" a US trade or business of the foreign person. A USRPI may consist of a direct interest in US real property or an interest in a corporation that owns an interest in US real property. The purchaser/transferee of a USRPI is obligated to deduct and withhold a tax equal to 15% of the amount realized on the disposition of the USRPI by the foreign person (subject to certain exceptions and the availability of a reduced or eliminated rate of withholding under a withholding certificate).

The primary tax benefits of owning real estate result from the federal tax treatment of owning and operating real property, which include the ability to depreciate the real estate (even though its value may in fact be appreciating) and the 20% deduction for "qualified business income" (see 1.4 Impact of New US Tax Law Changes).

See 1.4 Impact of New US Tax Law Changes.

Dinse PC

209 Battery Street
Burlington
Vermont 05401

+1 802 864 5751

+1 802 895 8730

mollylangan@dinse.com www.dinse.com
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Law and Practice

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Dinse PC has ten team members in its real estate sector, with its key office location in Burlington. The firm's other primary practice areas relating to real estate are environmental law, collections/foreclosures, tax law and immigration/cross-border law, and it has extensive experience in construction and permitting, financing and investor transactions, land conservation, leasing, purchase and sale of business, real estate development, real estate purchases and sales, and renewable energy development and financing.

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