Navigating Tariff Risk in Construction and Development Deals
Tariff Policy Shifts Introduce New Real Estate Risks
Over the past few months, there have been significant changes to tariffs by the United States and other countries around the world. These changes continue to evolve and there is significant uncertainty about the timing, rate, and overall impact of tariffs. The magnitude of uncertainty and cost associated with tariffs has resulted in new and increased risks to existing and prospective real estate projects. We see this broken down into the following questions from clients:
How are these new costs covered under our existing agreements?
How do we address the risks of these potential new costs in the agreements that we are currently negotiating?
Where to Look: Construction and Partnership Agreements
In real estate, answers to these questions are most likely to be found in the construction contract between the owner and the general contractor and the partnership agreement(s) (i.e., operating or joint venture agreement) among sponsors and investors in the project.
Reviewing Key Construction Contract Provisions
As an initial step to clarifying these questions, we recommend reviewing the provisions in your construction contracts which govern the allocation of risk and costs with respect to compliance with changes in the law, force majeure (also known as, third-party delays), and tax and tariff responsibility (Sections 3.7, 8.8 and 3.6 in the form AIA 201-2017, respectively). While the standard AIA form is silent, some parties may have negotiated these terms to clarify whether the contractor or the owner is responsible for the costs associated with newly enacted tariffs. We are already seeing general contractors proposing new provisions that expressly place the risks associated with increased costs from tariffs on the owner. In these circumstances, at a minimum, those increased costs should be passed through without any additional fees or general conditions costs and, generally speaking, there is no reason for these increased costs to result in schedule delays (unlike traditional force majeure events).
Impact on Ownership Structure and Cost Sharing
When the owner is responsible for increased costs from tariffs, the next question to ask is how those costs are allocated among the ownership parties; and whether the developer or sponsor of a project is obligated to incur all or a disproportionate share of such costs. In many circumstances, the operating agreement governing the relationship among the partners should determine how cost overruns are to be shared and whether there is any overriding force majeure clause that applies to the situation. The traditional concept of force majeure, as interpreted by the courts, is limited to “acts of God” and the like, and is unlikely to cover changes to tariffs. However, force majeure clauses are often heavily-negotiated in development joint ventures and may include concepts such as “changes in law” that, when read closely, encompass the costs associated with the changes in tariff policy. Additional questions to ask are:
In what proportion are those costs allocated among the partners;
What discretion does the developer have to apply contingency or other cost savings to cover these costs; and
What approvals are needed to adjust the development budget to reflect these costs (including through change orders to the construction contract).
Mitigating Risks Through Careful Legal Review
As clients brace for the impact from these ongoing policy changes, we encourage you to consult with legal counsel to familiarize yourself with your rights, obligations and risks with respect to newly-imposed tariffs. In these unprecedented times, attorneys can provide tailored advice to address your specific circumstances to mitigate exposure to increased project costs and schedule impacts. This can only be done through careful analysis and negotiation of your transactional documents.
Megan Goldman Watts contributed to this article
California Bill Proposes a Vacancy Tax on Commercial Real Property
On Feb. 21, 2025, California State Sen. Menjivar introduced Senate Bill 789 (SB-789), proposing a vacancy tax aimed at commercial real property (property) to address prolonged vacancies, incentivize property activation, and generate revenue to support first-time home buyers through the California Dream for All Program. SB-789 is scheduled to become effective on July 1, 2028, with initial annual tax obligations due in 2029.
Summary of SB-789 Changes
Vacancy Tax on Commercial Real Property
SB-789 imposes an annual vacancy tax of $5 per square foot on properties remaining vacant for 182 or more days, whether consecutive or nonconsecutive, within a calendar year. The tax explicitly excludes residential spaces within mixed-use properties. Revenues collected would be directed exclusively to the California Dream for All Fund, aiding first-time home buyers.
Exemptions
The proposed tax would not apply under the following conditions:
1.
Active renovation: Properties undergoing construction or repair pursuant to an approved building permit, with work ongoing for at least 90 consecutive days.
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Legal or regulatory barriers: Properties subject to litigation, environmental reviews, or permitting delays that prevent occupancy.
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Natural disasters: Properties affected by natural disasters, including properties state or local authorities deem uninhabitable.
Compliance and Reporting Requirements
Property owners subject to the proposed tax must:
Register with the California Department of Tax and Fee Administration (CDTFA).
Electronically file annual returns by March 15 of each year, reporting the prior calendar year’s vacancy status, property square footage, and applicable exemptions. Supporting documentation, including lease agreements and utility records, may be required.
Penalties for Non-Compliance
Owners intentionally misstating information or making fraudulent claims would face civil penalties of up to 75% of the total tax liability.
Public Outreach and Reporting
The CDTFA would conduct public outreach to educate property owners on compliance and would publish
Annual reports that detail revenue, exemptions, and program outcomes.
Economic evaluations every five years, starting in 2033, that tracks the tax’s impact, its effectiveness, and compliance costs.
Potential Constitutional Conflict
The implementation of SB-789 faces potential constitutional challenges arising from pending litigation. Specifically, in Debbane v. City and County of San Francisco (Appeal No. A172067), property owners successfully challenged a San Francisco vacancy tax, arguing that it violated the Takings Clause of the U.S. Constitution. The city of San Francisco’s appeal of the trial court decision creates legal uncertainty about the constitutionality of vacancy taxes. If the First District Court of Appeal upholds the trial court’s ruling, it may set a precedent that prevents SB-789’s enactment.
Takeaway
SB-789 represents a shift in California’s approach to addressing vacant commercial properties. By imposing a vacancy tax, the bill seeks to revitalize local economies, reduce neighborhood deterioration, and generate funding for housing affordability initiatives. Property owners should familiarize themselves with the new requirements and consult with legal advisors to enhance compliance and understand the potential financial implications.
Bree Burdick and Samuel Weinstein Astorga also contributed to this article.
UAE Real Estate in 2025: AML Compliance and Investment Trends for Developers
The UAE’s real estate sector has experienced significant growth and development in recent years, becoming one of the world’s most active real estate markets. As with other developing global markets, growth may bring challenges. With the residential and commercial appeal of UAE real estate attracting buyers from around the world, one of these challenges is maintaining vigilance against money-laundering. Efforts to detect and prevent illicit flows of money remain a priority for the UAE since its removal from the FATF Grey List in April 2024. Given the influx of investment and the increasing number of high-value transactions, the UAE government has expanded its oversight and controls around the real estate sector, which impacts all industry stakeholders.
Throughout 2024, a series of regulatory updates reinforced the need for diligence across real estate purchases. Now, all regulated real estate companies must carry out enhanced due diligence for high-risk buyers, including foreign investors from jurisdictions with weak anti-money laundering (AML) controls. Know-your-client (KYC) protocols must include full verification of buyer identities and their source of funds, and company or entity purchasers must disclose their ultimate owners. Companies that fail to meet these requirements may face penalties, increased regulatory scrutiny, and potential operational restrictions.
These regulatory changes apply to real estate brokers, agents, and other businesses concluding property transactions on their customers’ behalf. While some developers may not fall directly within the UAE’s AML framework, businesses accepting cash and cryptocurrency for real estate assets must also be aware of their potential exposure to money laundering activity, as they may be liable for money laundering offences and may face operational difficulties if they are used as a conduit for criminal activity.
Continued Growth of the UAE’s Real Estate Sector
The UAE real estate market remains attractive to global investors. Key factors driving demand include strong foreign investment from Russian, Chinese, Indian, and European buyers, as well as golden visa-linked property investments with long-term residency incentives attached to purchases of over AED 2 million.
The Dubai Economic Report from the Dubai Economic Department shows that the real estate market in Dubai contributes between 5-7% to annual GDP, with 2024 set to reflect further highs. Dubai’s real estate market continues its upward trajectory, with residential prices increasing by 20.7% year-on-year as of March 2024. Off-plan sales grew 23.9%, outpacing the 15.2% rise in secondary market transactions.
Investment, Compliance, and Cryptocurrency
The question remains whether regulatory-driven due diligence and accelerating property transactions can both continue at the same rate. This is particularly relevant in the context of the sector’s shift towards digitalization. The UAE is seeing a growing trend in the use of cryptocurrency in property transactions. To enhance transparency and security with respect to these transactions, under the UAE Central Bank AML & CFT Regulations 2024, real estate transactions involving virtual assets must now be processed through a licensed virtual asset service provider, which seeks to ensure all funds are traceable and compliant with AML standards.
The Ministry of Economy has repeatedly confirmed its commitment to global AML safeguards, as well as its support for advancing real estate digitalization and broader blockchain integration. Modernization in the real estate sector may be an opportunity for the UAE authorities to show how they can enforce AML laws while maintaining investor confidence.
Key Takeaways
While the UAE has established itself as a well-regulated investment hub, the real estate sector remains attractive for investment. To stay competitive, businesses should adapt to evolving AML regulations. Those who do not may experience issues.
Changes to Long Island Development: Oversight Through Special Use Permits
Go-To Guide:
Special use permits are becoming more common for various developments across Long Island municipalities.
These permits allow certain uses in zoning districts, subject to additional standards or conditions.
The approval process typically involves public hearings and consideration of factors like traffic, environmental impact, and community compatibility.
Municipalities aim to balance development needs with community concerns through special use permits, but the process may be time-consuming for applicants.
Long Island municipalities have been revising their zoning ordinances to address evolving community needs, environmental considerations, and intelligent development, expanding the list of uses that require special use permits. This GT Advisory explains what a special use permit is, what it entails, and analyzes the potential implications of a special use permit on future development.
In the past year, the towns of Babylon, Huntington, and Smithtown have revised, or are considering revising, their respective zoning codes to incorporate or expand special use permit requirements.
Town of Babylon – The town board revised its code to require a special use permit for recreational marijuana dispensaries.
Town of Huntington – In the Melville Town Center overlay, the town board adopted amendments to its zoning code to require a special use permit for mixed-use buildings, breweries, wineries, and similar uses. Huntington is also considering requiring a special use permit for certain warehouse uses in industrially zoned properties.
Town of Smithtown – Officials are considering amending the zoning code to require a special use permit for rail transfer stations and rail freight terminals.
A special use permit (also known as a “special permit,” “special exception,” or “conditional use permit”) is a land use approval for a use that is generally considered to be permitted in the respective zoning district subject to compliance with additional standards or conditions. The special use permit differs from a variance in that “[a] variance is an authority to a property owner to use property in a manner forbidden by the ordinance while a special [use permit] allows the property owner to put his property to a use expressly permitted by the ordinance.” North Shore Steak House, Inc. v. Board of Appeals of the Inc. Village of Thomaston, 30 N.Y.2d 238, 331 N.Y.S.2d 645 (1972). Simply put, a special use permit is an “as of right” use subject to additional conditions that ensure compatibility with the character of the surrounding community.
Throughout Long Island, special use permits are often required for religious or educational uses within a residential zone, drive-through establishments, and active recreational uses. Municipalities favor special use permits because they require a public hearing where the deciding board can ensure that the application conforms to the required standards or conditions. These standards or conditions are set forth in the local zoning ordinance and vary from municipality to municipality, but often center around traffic and parking impacts, conformity with the municipality’s comprehensive plan, environmental effects, and pedestrian safety. This provides the municipality flexibility by allowing the deciding board to consider each application on a case-by-case basis.
Oftentimes, the deciding board may waive the conditions of the special use permit. Where the board deciding the special use permit is the local planning or zoning board, under the New York State Town Law and Village Law, the governing board (typically the town board or village board of trustees) may authorize the board to waive approval conditions. As long as the board has the authority to do so, it may waive conditions if it determines the conditions, as they apply to the specific application, are not in the interest of the public health, safety, or general welfare, or inapplicable to the requested use. To make this determination, boards will often consider the application’s consistency with the local zoning code, the comprehensive plan, compatibility with surrounding uses, precedent, fairness, and – often most importantly – public input.
Regardless of whether the board decides to grant or deny the special use permit application, the decision must be based upon substantial evidence in the written record. North Shore Steak House, 30 N.Y.2d at 245. Generalized community objections, community pressure, and speculation cannot be the sole basis for denial of a special use permit. Instead, the written record must support that the special use permit’s specific negative impacts will exceed similar as-of-right uses. Robert Lee Realty Co. v. Village of Spring Valley, 61 N.Y.2d 892, 474 N.Y.S.2d 475 (1984).
Municipalities throughout Long Island face challenges as they increase reliance on special use permits. The special use permit application process requires significant time and resources – including traffic studies, civil and architectural plans, and environmental review under the State Environmental Quality Review Act. Some applicants may grow impatient and choose to abandon projects that might have economic and community benefits to the locality. As such, the reviewing agency should have the resources to ensure a speedy review so that the applicant can secure a public hearing.
Special use permits likely will remain a central land use regulation in Long Island’s future. The regulation generally provides a tool to allow municipalities to promote sustainable development and ensure compatibility with the comprehensive plan. However, municipalities should work with applicants and residents to navigate the challenges and opportunities discussed in this GT Advisory.
Coalition Agreement for New German Government: Real Estate Industry Implications
On 9 April 2025, the Christian Democrats (CDU and CSU) and the Social Democrats (SPD) announced an agreement to form a new government in Germany and presented their coalition agreement (Koalitionsvertrag). The CSU has already approved the agreement, while the CDU and SPD plan to finalize their approval the end of April following party conventions and a member survey. The new chancellor is expected to be elected in early May, with the new federal government taking office shortly thereafter.
The coalition agreement includes several key initiatives impacting the real estate industry:
Rent Control and Tenant Protections
Prolongation of the rent price brake (Mietpreisbremse) for new lettings by four years, through the end of 2029.
Enhanced regulation of indexed rents for apartments in distressed housing markets (angespannte Wohnungsmärkte).
Tightened regulation of furnished apartments and short-term lettings in distressed housing markets.
Expert group proposal (due by the end of 2026) to introduce penalty fines for violations of the rent price brake and to tighten rent usury (Mietwucher) regulations.
Adjustment of the modernization levy (Modernisierungsumlage) to ensure better “affordability” of rents whilst maintaining sufficient investment incentives.
Increase in the threshold for the simplified modernization levy procedure from €10,000 to €20,000 by the end of 2025.
Introduction of a “shared apartment guarantee” (WG Garantie) for trainees and students.
Implementation of national rent surveys.
Strengthening of consumer protection rights for tenants.
No reduction of the cap (Kappungsgrenze) on rent increases in existing leases.
Building Law Reform
Introduction of a “construction turbo” (Bauturbo) and simplified noise protection regulations within the first 100 days of the new government’s term. According to a proposal made in the last legislative period, the “construction turbo” aims to enable greater flexibility in building and zoning law requirements.
Subsequent implementation of a fundamental building law reform, including:
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Adjustments to technical guidelines for noise emissions (TA Lärm) and air protection (TA Luft) to better resolve conflicts between residential, commercial, and agricultural uses.
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Simplification of building standards.
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Facilitation of serial and modular construction.
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Protection of building type E.
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Exclusion of defects when deviating from technical standards (anerkannte Regeln der Technik).
Municipal Preemption Rights
Measures to prevent circumvention of municipal preemption rights (Vorkaufsrechte) through share deals.
Extension of municipal preemption rights in milieu protection areas (Milieuschutzgebiete).
Ban on Condominium Conversion
Extension of the ban on converting properties into condominiums in distressed housing markets for another five years, through end of 2030.
Milieu Protection Areas
Facilitation of building measures to improve barrier-free access and energy efficiency.
Exemption of private owners from milieu protection regulations.
ESG Initiatives
Repeal of existing heating law (Heizungsgesetz).
Introduction of more technology-neutral provisions into the Buildings Energy Act (Gebäudeenergiegesetz).
Promotion of flexible, urban quarter-based heat planning (Wärmeplanung).
Initiative to postpone the implementation deadline for the EU Energy Performance of Buildings Directive (EPBD), currently scheduled for May 2026.
Support for the EU omnibus initiative to reduce the scope of sustainability reporting (CSRD) and supply chain due diligence (CSDDD).
Tax Incentives and Public Subsidies
Establishment of a specialized investment fund for housing construction, combining private capital with public guarantees (e.g., via the Kreditanstalt für Wiederaufbau – KfW).
Tax measures to promote home ownership for families, as well as new construction and refurbishments.
Federal initiatives to reduce financing costs for apartments in distressed housing markets at rents below €15 per sqm (through guarantees).
Increased funding for social housing.
Tax incentives for letting apartments at low rents.
Restructuring of KfW funding into two programs: “new construction” and “modernization.”
Support for housing cooperatives (Wohnungsbaugenossenschaften).
Simplification of rent subsidies (Wohngeldprogramme) by the federal states.
Mixed Signals for the Real Estate Industry
The coalition agreement sends mixed signals to the real estate industry. While regulatory tightening – especially in the residential market – is evident, there is also a commitment to more flexible building regulations, increased tax incentives, and enhanced subsidy programs. However, many of the initiatives lack specific details, leaving their scope and impact dependent on subsequent actions by federal ministries and parliamentary committees. The real estate industry can engage with these developments by voicing its interests and priorities through industry associations.
Navigating Ethical and Legal Complexities in Insider Lease Agreements in the Context of Bankruptcy
Insider lease agreements, where a property owner leases assets to a related entity, are prevalent in real estate-based businesses. While these arrangements can offer tax advantages and liability protections, they also present intricate ethical and legal challenges, particularly in bankruptcy scenarios. This article delves into the nuances of insider lease agreements in the context of bankruptcy exploring ethical considerations, and providing best practices for attorneys and business owners.
Definition of ‘Insider’
Bankruptcy Code Section 101(31) defines an ‘insider’ to include relatives, general partners, and directors or officers of the debtor. Understanding this designation is critical, as insider transactions face heightened scrutiny and potential challenges from creditors and trustees.
David Levy, managing director at Keen-Summit Capital Partners, points out that courts apply various non-statutory tests to determine whether a party is an ‘insider’ in a lease agreement. He explains that factors like control, closeness of relationships, and financial influence are key indicators that could lead to heightened scrutiny in bankruptcy cases.
Understanding Insider Lease Agreements
An insider lease agreement occurs when a business owner leases property to a related entity, such as a subsidiary or an entity under common ownership. This structure can be advantageous, allowing for tax deductions and asset protection.
However, it can also create conflicts of interest, especially if the lease terms are not established at fair market value or if the arrangement favors insiders over creditors. Matt Christensen, Managing Partner at Johnson May, notes that insider lease agreements can significantly impact bankruptcy avoidance actions.
True Lease vs. Disguised Financing
It’s crucial to distinguish between a ‘true lease’ and a ‘disguised financing arrangement.’ A true lease involves the lessor retaining ownership of the asset, with the lessee having the right to use it for a specified period. In contrast, a disguised financing arrangement, though labeled as a lease, functions as a secured transaction where the lessee effectively owns the asset and the ‘lease’ serves as collateral for a loan.
Courts scrutinize the substance over form to determine the true nature of the agreement. For instance, a court might recharacterize lease agreements as security agreements based on factors like the lessee’s lack of termination rights and nominal purchase options.
Jonathan Aberman, partner at Troutman Pepper Locke, stresses that courts review insider transactions more rigorously in bankruptcy cases. He advises that ensuring fair market value and independent oversight in lease agreements is crucial to avoiding claims of self-dealing.
Fair Market Value (FMV) vs. Residual Value
Fair Market Value refers to the price at which an asset would change hands between a willing buyer and seller, neither under compulsion and where both have reasonable knowledge of relevant facts. Ensuring that lease terms reflect FMV is vital to prevent allegations of preferential treatment or fraudulent conveyance, especially in insider transactions.
Residual value is the estimated worth of a leased asset at the end of the lease term. Lessees may have options to purchase the asset at this value. Accurate estimation is essential to avoid disputes and ensure compliance with tax regulations.
Lease Provisions
Most leases have certain provisions in place to ensure that the lessor is protected in the event of bankruptcy or other unforeseen circumstances. Below are some common provisions and clauses included in leases:
Hell-or-High-Water Clauses: This clause stipulates that the lessee’s obligation to make payments is absolute and unconditional, regardless of any difficulties encountered. Such provisions are common in equipment leases to protect the lessor’s revenue stream.
Force Majeure Clauses: A Force Majeure Clause excuses parties from performance obligations due to extraordinary events beyond their control, such as natural disasters or government actions. The applicability of this clause depends on its specific wording and the unforeseen nature of the event. For example, during the COVID-19 pandemic, courts examined whether government-imposed restrictions triggered force majeure clauses in lease agreements.
Purchase Options: A Purchase Option grants the lessee the right to buy the leased asset at the end of the lease term, often at FMV or a predetermined price. The specifics of this option can influence the lease’s classification for accounting and tax purposes.
Maintenance and Return Conditions: Lease agreements typically require the lessee to maintain the asset in good condition and specify the state in which it must be returned. These terms protect the lessor’s residual interest and ensure the asset’s value is preserved.
Indemnity Provisions: Indemnity clauses obligate one party to compensate the other for certain losses or damages. In leases, lessees often indemnify lessors against liabilities arising from the asset’s use, mitigating the lessor’s risk exposure.
Ethical Considerations
Insider lease agreements raise myriad ethical considerations for the parties involved.
Conflicts of Interest
Insider lease agreements inherently risk conflicts of interest. Attorneys must ensure that such arrangements are transparent and that all parties provide informed consent. ABA Model Rule 1.7 addresses conflicts of interest, emphasizing the necessity for clear client relationships and the avoidance of representing parties with opposing interests within the same transaction.
Duty of Candor
Attorneys also have an ethical obligation to be truthful in dealings with tribunals and opposing parties. This duty is paramount when presenting insider lease agreements in legal proceedings, ensuring that all material facts are disclosed. ABA Model Rules 3.3 and 3.4 outline these responsibilities.
Transparency and Fair Dealing
Full disclosure of insider relationships and lease terms is essential to prevent legal disputes and uphold ethical standards. This transparency ensures that all parties, including creditors, are aware of potential conflicts and can assess the fairness of the transaction.
Samantha Ruben of Dentons’ Restructuring Insolvency and Bankruptcy practice points out that ethical considerations in insider leases can arise when fiduciaries prioritize personal interests over the business entity. She explains that in a distressed situation, these transactions may face higher levels of scrutiny and disclosure from the get-go can be key.
Conclusion
Insider lease agreements, while beneficial in certain circumstances, must be handled with care to avoid ethical and legal pitfalls. By adhering to best practices, ensuring transparency, and complying with legal standards, attorneys and business professionals can mitigate risks and uphold ethical integrity in real estate transactions.
To learn more about this topic view Ethical Issues In Real Estate-Based Bankruptcies / Insider Lease Agreements. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about real estate-focused bankruptcy cases.
This article was originally published on here.
©2025. DailyDACTM. This article is subject to the disclaimers found here.
Replacement Cost Insurance Coverage in Turbulent Times
After the wildfires in Los Angeles, extreme weather events throughout the United States, and recently enacted tariffs, it seemed like a good time to revisit the calculation of replacement cost under policies insuring against loss or damage to property. The concept of replacement cost — sometimes referred to as “new for old” — seems simple, but issues often arise over the calculation and various policy terms and conditions. So, let’s dig in.
What Is Replacement Cost Coverage?
Replacement cost coverage is the most common type of insurance found in first-party property insurance policies, including standard business property policies and builder’s risk policies (for property in the course of construction). It usually applies to both “building” coverage and to business personal property (BPP) coverage, with some exceptions. It is referred to as “new for old” because it pays to replace lost or damaged property with new property of the same type.
Insurance companies frequently argue that because they cover only loss or damage to covered property, policyholders must prove that a particular item of covered property was damaged before the insurance company has an obligation to repair or replace it. Insurance policies, however, rarely are specific on this point. In Windridge of Naperville Condo. Ass’n v. Philadelphia Indem. Ins. Co., 932 F.3d 1035, 1040 (7th Cir. 2019), for example, the court held that “the unit of covered property to consider under the policy (each panel of siding vs. each side vs. the buildings as a whole) is ambiguous.” Thus, the court construed the policy in favor of the policyholder under the well-settled rule that ambiguous language in an insurance policy must be construed in favor of coverage and strictly against the insurance company.
The Windridge court also examined the so-called “matching” issue that often arises with partial damage. Specifically, where new materials will not match the existing undamaged materials, does the insurer have an obligation to pay for changes in the undamaged portions of a building so that the new and old will match? The court noted that the case law is “mixed” in answering this question. The court followed the case law holding that the insurer must account for matching, noting that “buildings with mismatched siding are not a post-storm outcome that the insured was required to accept under this replacement-cost policy.” Id. at 1041.
What Is “Like Kind and Quality”?
“New for old” is usually not difficult when property is a total loss, but it becomes a challenge when property is only damaged or partly destroyed. It can often be difficult, if not impossible, to replace only part of a damaged structure. Issues like tying the new into the old, matching the new and the old, material and technology changes, and code requirements for new versus old often arise.
Most policies require replacement of lost or damaged property with property of “like kind and quality,” or similar words. The standard ISO form uses the phrases “comparable material and quality…used for the same purpose.” These words usually are not further defined.
As discussed above, several courts and/or state statutes provide that replacement materials must match the undamaged portions of the property to qualify as like kind or comparable. For other issues, whether replacement materials are “comparable” often involves expert testimony. In Republic Underwriters Ins. Co. v. Mex-Tex, Inc., 150 S.W.3d 423 (Tex. 2004), for example, the court held that “comparable” does not mean “identical” and affirmed the trial court’s ruling finding coverage for a different type of roof based on expert testimony that the replacement roof was comparable, even though it was different from the damaged roof and cost more to replace.
What if Building Codes Have Changed?
The standard ISO replacement cost form states that the “cost of building repairs or replacement does not include the increased cost attributable to enforcement of or compliance with any ordinance or law regulating the construction, use or repair of any property.” However, some coverage is available for “Increased Cost of Construction,” which includes coverage for the increased cost necessary to comply with the minimum costs of complying with building codes or ordinances, subject to certain conditions. This additional coverage also is sometimes referred to as “Ordinance or Law” coverage. It is limited to certain amounts in the standard ISO form ($10,000 or 5% of the applicable limit), but additional coverage can be purchased.
How Is My Value Determined?
At a high level, replacement cost valuation is straightforward — it is cost to repair or replace the lost or damaged property with comparable property. The standard ISO form limits recovery to the maximum of “the amount actually spent that is necessary to repair or replace the lost or damaged property.” But the total replacement cost can be affected by the issues discussed above (e.g., matching or whether the replacement property is “comparable”), as well as a host of other issues.
The number of factors that can affect replacement cost vary based on the type and age of construction, materials, geography, and macroeconomic events like weather, tariffs and the labor market. These factors affect things like:
The availability of replacement materials
The cost of replacement materials
Alternatives to the damaged property
Lead times for materials
Labor rates and intensity of different repair options
Market or aesthetic changes
The schedule for repairs or replacement
Most insurance companies and their experts use software programs to calculate replacement costs. These programs contain regularly updated labor and materials costs by geographical regions. In calculating replacement cost estimates, they also consider additional costs, such as overhead, profit, permitting, and other costs that may be included in a general contractor’s “general conditions.”
While these programs are the insurance industry’s standard for calculating replacement cost, they are the map and not the territory. Nothing in the policy requires the use of estimates to calculate replacement cost, and recovery ultimately is based on the actual costs of repairs or replacement, subject to the policy’s terms and conditions, such as those discussed above.
Contractors and builders generally do not use the same programs that insurance companies use — they base their cost estimates on sub-contractor bids and their general knowledge about the costs and time involved in a potential job. In tight labor markets or times of rapidly rising or fluctuating prices, the replacement cost estimates in an insurance company’s software program may not reflect the events on the ground.
The numbers in the estimating software used by insurance companies also necessarily reflect figures among a range of possible costs a policyholder might receive from a contractor in an estimate for actual repair or replacement work. The costs of the most available or desirable contractor may be higher than the cost reflected in an insurance company’s insurance program. In addition, the accuracy of an estimate will only be as good as the information entered into the program. If the details of the loss are entered incorrectly, or if the scope changes as additional work becomes necessary or additional damage is uncovered during demolition, the estimate will need to be corrected or updated.
Policyholders should not accept software driven estimates as final costs, but as useful tools for receiving early partial payments on a claim and for setting a general framework for replacement costs. Policyholders should not settle claims until after they fully understand the scope of their loss and the actual costs they will incur in repairing or replacing damaged or destroyed property.
Do I Get Replacement Cost if I Don’t Rebuild or Rebuild Something Different?
Many policy forms state that the insurer will pay only the “actual cash value” or “ACV” of property damage until after repairs are made. Some courts have held that this condition may be waived by an insurer’s handling of a claim. In Rockford Mut. Ins. Co. v. Pirtle, 911 N.E.2d 60 (Ind. Ct. App. 2009), for example, the court held that this condition was waived where the insurer waited six months and until after foreclosure proceedings were initiated to offer an ACV payment.
Most insurers define ACV as replacement cost less depreciation, and some policies define the term in this way. But many policies do not define ACV. In the absence of a policy definition of ACV, or where the policy language allows, many states use the “broad evidence rule” for calculating ACV. This rule is a “flexible rule” that permits consideration of “any relevant factor” in determining ACV. Travelers Indem. Co. v. Armstrong, 442 N.E.2d 349, 356 (Ind. 1982).
Some policies allow recovery of replacement cost where the policyholder rebuilds at another location, or even if the policyholder rebuilds something different from the damaged or destroyed property. Other policies go so far as to allow a replacement cost recovery where the policyholder does not rebuild, if the proceeds are used elsewhere in the policyholder’s business. These provisions often also require that the proceeds are used on unplanned expenses. In these situations, disputes center on the “hypothetical” replacement cost of repairing or rebuilding with like kind or comparable property, given that no actual costs are incurred for that work.
Who Decides What I Get?
There are three ways disputes over replacement cost may be decided. If the dispute involves a question of what the insurance policy language means, then the issue is usually decided by a court. But courts only decide what the law mandates or what the insurance policy language means. Juries typically decide factual disputes or issues that turn on experts’ credibility.
In the case of disputes over the amount of replacement cost, property insurance policies usually contain a third remedy, called appraisal. The appraisal process involves each side choosing an appraiser and those appraisers choosing an umpire. The appraisers and the umpire then evaluate the differences in replacement cost calculations and the umpire’s agreement with one of the party’s appraisers is binding. Appraisals too can be fraught with issues, which is discussed in a prior article linked here.
Conclusion
Disputes over replacement cost raise legal and factual issues in normal times, but they present enhanced challenges when costs, climate, and market forces are changing and uncertain. Policyholders should navigate those challenges thoughtfully to ensure they obtain the benefits they paid for under their property insurance policies.
Texas Supreme Court To Review Whether A Corporate Trust’s Shareholder Has Standing To Sue On Behalf Of The Trust
The Supreme Court granted oral argument in In re UMTH Gen. Servs., L.P., 2023 WL 8291829 (Tex. App.—Dallas 2023), wherein a real estate investment trust entered into an advisory agreement with an entity and gave it authority to manage corporate assets. One of the trust’s shareholders sued the advisor and its affiliates, asserting claims under the advisory agreement for the alleged improper use of corporate funds for legal expenses. The advisor filed motions objecting to the shareholders’ claims due to a lack of capacity and standing. After the trial court denied the motions, the advisor filed a petition for writ of mandamus in the court of appeals, which was denied, and then in the Texas Supreme Court. The advisor argues that the trial court abused its discretion in allowing the shareholder to bring its claims directly rather than derivatively, as it lacked a personal cause of action and a personal injury, and that the shareholder lacked derivative standing because it did not maintain continuous or contemporaneous ownership of trust shares. The Supreme Court has set the case for oral argument.
Mass. Chapter 93A Clarifications: Understanding Demand Letters and Contract Breaches in Dworman v. PHH Mortgage
In Dworman v. PHH Mortg. Servs., the District of Massachusetts recently issued a decision that deals with various aspects of Chapter 93A jurisprudence. Some of the court’s statements about Chapter 93A, however, may benefit from clarification.
As to the dispute at issue, the plaintiff (a mortgagor) alleged that the defendants (mortgage servicers) breached a contract to forgive mortgage debt, and that defendants’ alleged failures were unfair or deceptive under Chapter 93A, Section 9. The defendants countered with allegations that the plaintiff breached their contract, and the court granted their motion for summary judgment against the plaintiff.
When addressing Chapter 93A, the court discussed the Chapter 93A “Legal Landscape” in its decision. In particular, the court concluded that, although sending a demand letter is prerequisite to a Section 9 suit, the “failure to respond or an inadequate response to a demand letter is not itself a violation of Chapter 93A.” First, a 30-day demand letter is required in most instances; however, a claimant does not need to send a demand letter to trigger Chapter 93A jurisdiction if the claim “is asserted by way of counterclaim or cross-claim, or if the prospective respondent does not maintain a place of business or does not keep assets within the commonwealth” as set forth in Section 9(3). Second, as to not responding to demand letters or providing an inadequate response, it is important to understand and appreciate that a bad faith refusal to grant relief in response to a demand letter “with knowledge or reason to know that the act or practice complained of violated said section two” may expose a defendant to double or treble damages, also as set forth in Section 9(3). Responses to demand letters may not only limit multiple damages, but may also cut off a plaintiff’s attorneys’ fees and costs.
Also, when explaining that a mere breach of contract without more does not violate Chapter 93A, the court stated that a defendant’s action must “attain a level of rascality that would raise an eyebrow of someone inured to the rough and tumble of the world of commerce.” However, the Massachusetts Supreme Judicial Court (SJC) abandoned the rascality language as uninstructive in Massachusetts Employers Ins. Exch. v. Propac-Mass, Inc., 420 Mass. 39 (1995). Instead, according to the SJC, courts should focus on the nature of the challenged conduct and on the purpose and effect of that conduct as the crucial factors in making a Chapter 93A fairness determination. That SJC standard has been used by the First Circuit Court of Appeals, along with an additional evaluation of “the equities between the parties,” the “plaintiff’s conduct,” and “[w]hat a defendant knew or [reasonably] should have known.” (Schuster v. Wynn MA, LLC, 118 F.4th 30 (2024)). As to when a breach of contract would violate Chapter 93A, there must be a “plus factor” with the breach. For example, conduct in disregard of known contractual arrangements and intended to secure benefits for the breaching party may violate Chapter 93A. In other words, conduct used as leverage to destroy another party’s rights is viewed as commercial extortion and may violate Section 2. A good faith contractual dispute regarding whether money is owed, or performance of some kind is due, may not.
California Court Clarifies CEQA Tribal Consultation Duties in First Published AB 52 Decision
On March 14, 2025, the California Court of Appeal for the First District issued the first published opinion interpreting Assembly Bill 52 (AB 52), the law governing tribal consultation procedures under the California Environmental Quality Act (CEQA). In Koi Nation of Northern California v. City of Clearlake (Cal. Ct. App., Mar. 14, 2025, No. A169438) (Koi Nation), the court held that a city’s failure to engage in “meaningful” consultation with a California Native American tribe violated AB 52, resulting in the invalidation of project approvals for a hotel and roadway development. The ruling significantly elevates the expectations placed on lead agencies and developers with respect to documenting and conducting tribal consultation under CEQA.
Overview of AB 52 Tribal Consultation Requirements
AB 52, enacted in 2014 and codified in Public Resources Code section 21080.3.1 et seq., establishes a formal process for consultation between CEQA lead agencies and California Native American tribes traditionally and culturally affiliated with the geographic area of a proposed project.
Consultation is only required if a tribe has submitted a written request to the lead agency for notice of projects within its traditional territory. Once a lead agency deems a project application complete, it must notify the tribe within 14 days. The tribe then has 30 days from receipt of the notice to request consultation in writing. If the tribe timely requests consultation, the lead agency must begin the process within 30 days. Importantly, consultation must begin prior to the release of a CEQA environmental document and must be conducted in good faith, with the goal of reaching a mutual agreement on mitigation measures to avoid or reduce impacts to tribal cultural resources.
The Dispute in Koi Nation
The case arose after the City of Clearlake (City) approved a Mitigated Negative Declaration (MND) for a proposed four-story hotel and associated road extension within the traditional territory of the Koi Nation. The Koi Nation had previously requested formal consultation pursuant to AB 52, and a designated representative attended an initial meeting with the City, which the City subsequently failed to document in the record.
Following the meeting, the tribal representative submitted a letter to the City requesting three mitigation measures to safeguard potential tribal cultural resources. However, the City did not respond to this letter or otherwise continue consultation. Instead, it adopted the MND, incorporating only one of the three proposed measures, and provided no documentation explaining its decision to end the consultation.
Court’s Findings: Consultation Must Be Meaningful and Documented
The Court rejected the City’s argument that its general coordination efforts and consideration of archaeological surveys (the latter of which were not shared with the representative, nor the Koi Nation generally) satisfied AB 52. The court emphasized that consultation must be “meaningful” and directed toward seeking agreement and found that the administrative record lacked sufficient evidence to support the City’s decision to terminate the consultation process. The City’s failure to respond to tribal input, to share the results of its archaeological survey, or to document its rationale for limiting mitigation measures proved fatal to its CEQA compliance.
Importantly, the Court distinguished between informal discussions held outside the AB 52 framework and the formal consultation process required by statute. While the Court acknowledged that the tribal representative’s correspondence could have more clearly referenced the Koi Nation, it concluded that the City’s reliance on that technical omission did not excuse its broader failure to engage in the statutorily mandated process. The opinion affirms that meaningful consultation is not merely procedural, but substantive — requiring reciprocal communication, thorough documentation, and a demonstrable effort to address tribal concerns.
Consequences for CEQA Noncompliance
As a result of the decision, the court vacated the City’s MND and all associated project approvals. The Court further ordered that consultation must recommence in accordance with AB 52 and awarded litigation costs to the Koi Nation. Notably, although the tribe had not submitted comments on the draft MND during the public review period, its earlier request for consultation and subsequent efforts to reengage with the City Council proved sufficient to preserve its claims.
Key Takeaways for Agencies and Developers
This decision signals that lead agencies and project proponents must treat tribal consultation not as a box-checking exercise, but as a substantive and confidential intergovernmental dialogue. Agencies must be prepared to demonstrate in the administrative record that they actively sought agreement with tribal representatives, responded in good faith to proposed mitigation measures, and documented the rationale for any decisions to limit or reject tribal input. Although AB 52 mandates confidentiality regarding tribal cultural resources, the lead agency must still summarize the consultation process in environmental review documents and maintain a sealed appendix for judicial review, as occurred in Koi Nation.
For developers, the case reinforces the importance of early and continuous engagement with both lead agencies and tribes. Incomplete consultation records or failure to substantively address tribal concerns may result in significant project delays or invalidated approvals. To ensure compliance and reduce litigation risk, developers should work closely with CEQA counsel to structure consultation efforts that meet both the procedural and substantive requirements of AB 52.
Land Court’s Invalidation of Deed as the Result of Undue Influence Affirmed
What constitutes undue influence sufficient to invalidate a deed? In Erikson v. Erikson, 105 Mass. App. Ct. 1115 (February 24, 2025), the Appeals Court of Massachusetts affirmed the Land Court’s invalidation of a deed on the ground that one sibling unduly influenced his mother to deed a home occupied by his sister to his 6-year-old twin daughters.
The decedent (Doris) and her husband had three children, two of whom (Wendy and Bruce) were involved in the case. In 1985, Doris and her husband purchased a house, telling the seller that this property was “exactly what [they wanted] for [their] daughter, Wendy.” Doris told Wendy that they purchased this property to be her inheritance. Wendy lived at the property since 1985, was responsible for the property’s upkeep, utilities, insurance and taxes, and made major repairs and improvements to the property during the years she resided there.
By 2005, Doris’ physical and mental conditions were deteriorating and she moved in with Bruce and his family. While living with Bruce, in November 2006 Doris executed a deed which purported to convey the house in which Wendy lived to Bruce’s twin minor daughters, retaining a life estate for Doris. Doris was eighty-one years old at the time, while the minor daughters were six years old. Soon after, Doris moved into an assisted living facility and then a nursing home. Wendy was never informed of the deed during Doris’ lifetime.
Doris died intestate in May 2020. Wendy learned of the deed after Doris’ death, and brought an action in Land Court seeking to set aside the deed as procured by Bruce’s undue influence. After trial, the Land Court agreed. Bruce appealed, and the Appeals Court of Massachusetts affirmed. The court cited four elements as comprising an undue influence claim: “(1) an unnatural disposition has been made (2) by a person susceptible to undue influence to the advantage of someone (3) with an opportunity to exercise undue influence and (4) who in fact has used that opportunity to procure the contested disposition through improper means.”
The court found Wendy had proven all four elements. (1) The disposition was “unnatural” because “it was highly unusual to convey real estate to six year old children and to retain a life estate in property one does not intend to occupy.” (2) Citing evidence of previous confusion by Doris, the court found that “[t]he [trial] judge’s conclusion that her confusion, coupled with her age, made her susceptible to undue influence was supported by the evidence….” (3) The court agreed with the trial judge that, during the time Doris lived with Bruce, he had the opportunity to exercise undue influence. (4) The court found “Bruce benefitted from this conveyance because it benefitted his minor children, thereby reducing the financial burden of supporting them [and] Bruce [also] believed he could control the property….”
The Takeaway: In considering whether to bring an undue influence claim, or how to defend such a claim, counsel should give close attention to the four factors discussed in Erikson. Further, if the subject matter is a deed, Erikson indicates that the Land Court may be a proper forum rather than the Probate & Family Court.
Ohio Moves to Ban Property Ownership by China and Russia
Ohio Moves to Ban Property Ownership by China and Russia. Ohio lawmakers recently proposed legislation to limit property ownership by foreign entities from China, Russia, and other countries identified as adversaries by the U.S. government. This effort is part of a broader national push, with similar proposals appearing in 37 states to protect local communities […]