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Non-Competes – Who is Excluded in Georgia?

Posted By by Benjamin I. Fink on January 12, 2018, Friday, January 12, 2018

 

What types of employees may be subjected to non-competes is one of the murkier issues under Georgia’s “new” non-compete law.  While we still do not have any guidance from the Georgia appellate courts, the federal judges in Georgia have been active in addressing various issues under the “new” statute, including this issue.  CSM Bakery Solutions v. Debus, 2017 WL 2903354 (N.D. Ga. Jan. 25, 2017) is one such decision. 

CSM and Lawrence Foods are competing bakery manufacturers.  Debus worked for CSM as a technical services sales representative (TSSR) and then a sales representative.  She left CSM to work for Lawrence in a similar capacity. 

Debus had signed an agreement containing a non-compete governed by the “new” law.  Judge Timothy Batten initially issued a preliminary injunction enforcing the non-compete against Debus.  After some discovery, Debus moved to dissolve the injunction.  Judge Batten granted the motion finding that she did not fit within the category of employees for whom non-competes are permitted.

The decision contains an extensive discussion of Debus’ employment duties at CSM.  Below is an outline of the issues raised in the case and how Judge Batten dealt with each one:

  • Debus’s employment with CSM
    • She was hired for her ability to make and decorate cakes.
    • She worked with CSM’s customer, Jewel.
    • As a TSSR —
      • She trained and assisted cake decorators on the decoration and display of cakes in Jewel stores.
      • She promoted new ideas for Jewel to use in designing and displaying cakes to customers.
      • She did not take orders or negotiate price with customer.
    • Promoted to sales representative.
      • She still had 2 supervisors on the Jewel account.
      • She still did not take orders or negotiate price.
    • CSM argues non-compete is enforceable under 13-8-53(a)(1) and (2).
      • Debus continuously and regularly solicited and/or made sales to Jewel.
      • Sales entail more than just placing or taking an order.
      • Includes process of convincing a customer to purchase new or larger quantities of products.
      • Self-evaluation – “aimed to bring more products into the territory that will be successful to [the] customers and benefit CSM.”
      • Court finds as follows:
        • This work was the job of everybody that works at CSM.
        • Does not show she was involved in sales, but that she, along with everyone else at CSM, worked to be quality employees for CSM.
        • Deposition testimony more persuasive than self-evaluation in which Debus had an incentive to cast her responsibilities in the most expansive light.
      • CSM argues Debus had the title of sales representative.
        • Court finds this is not sufficient to show she made or solicited sales.
        • Fact that title mentions involvement in sales, not conclusive that title reflected actual duties.
        • Supervisor testified that her role did not change when she was promoted from TSSR to sale rep.
        • As sales rep, she did not solicit customers.
        • CSM did not hire another TSSR after she was promoted to sales rep.
      • CSM argues that e-mails show she participated in sales.
        • E-mails with supervisor suggesting a cupcake promotion, making her supervisors aware of potential discounted products, asking about the potential role of key account manager, requesting a product’s price and providing her open “sales projects” on her last day.
        • Court finds these are not sufficient to demonstrate sales role.
        • CSM could only come up with 6 e-mails over last 5 years of employment.
        • Anyone involved in sales would be in frequent contact with customers.
        • E-mails show she had important role with products sold to customer, but also show she was a subordinate who sought permission from supervisors on matters of sales.
        • Supervisor testified she was not aware of Debus making sales.
      • CSM points to the resume Debus submitted to Lawrence Foods
        • “Key Skill: Bakery Product Sales”
        • Court finds this merely represents her interpretation of what skills and experience she had developed throughout her career.
        • Generic and generalized skills without substance elaborating.
        • Difficult to glean what she did at CSM just from a skill entitled “Bakery Product Sales.”
        • Drafted with hope of getting hired, so presumably erred on the side of overstating her skills and experience.
      • CSM argues she trained Jewel employees and bakery managers
        • How to decorate baked goods, how to present goods in stores and how to work with new products.
        • Attended seasonal sales meetings to present new products to Jewel.
        • CSM says this created ongoing relationship with Jewel.
        • Again, court finds this is not sufficient.
        • Role at seasonal meetings was only to help choose items to be presented and prepare items to be shown at the meetings.
        • Meetings with bakery managers only to show them products that would be available and how to best prepare them.
        • Any actual orders occurred during follow up by the account manager.
      • Court also notes there were no sales records, commission sheets for Debus
        • Lack of evidence one would expect if former employee regularly solicited customers or made sales.
      • Judge Batten finds that if Court interpreted statute in accordance with CSM’s reading, the statute would become meaningless because it would apply to every employee who positively impacts a company’s sales efforts.
      • CSM also argues 13-8-53(a)(3).
        • As sales rep, Debus managed 2 employees and had authority to hire/fire.
        • Debus described her role with CSM as managing a territory.
        • Court finds this is still not good enough
        • Primary duty with the company did not consist of managing the Jewel account.
        • She had 2 supervisors on the account.
        • Her conduct was managed by those supervisors.
        • Not the types of activities the legislature had in mind when requiring that the employee “[h]ave a primary duty of managing the enterprise…”
      • One last argument by CSM – Key Employee
        • Debus “gained a high level of notoriety, fame, reputation, or public persona as the employer’s representative or spokesperson or has gained a high level of notoriety, level of influence or credibility with the employer’s customers, vendors, or other business relationships…”
        • Resume shows her work allowed her to develop strong relationships with Jewel employees.
        • Held: While Jewel employees respected Debus, her role and status with the company do not indicate she was a key employee.
        • International business with thousands of employees worldwide.
        • Debus was one of the lower-ranking employees.
        • Legislature’s intent to limit the application of the statute to certain employees would be frustrated if the court agreed with CSM’s definition of “key employee” because virtually any employee with customer interaction could be covered.

There are several lessons that can be learned from this decision.  First, judges in Georgia are still reluctant to enforce non-competes against employees in Georgia, especially when they are not high-level managers or executives. Second, merely being involved in sales may not always be sufficient to qualify as someone who can be subjected to a non-compete in Georgia.  Before implementing non-competes for significant numbers of employees, employers should carefully consider each category of employees within the company and make a determination as to whether a non-compete is permissible as to that category of employee under the “new” law.

Authored By

 

Benjamin I. Fink Ben Fink, a shareholder in Berman Fink Van Horn P.C., concentrates his practice in business and commercial litigation with a particular emphasis on non-compete, trade secret and other competition-related disputes.With...

 

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Live from the Georgia Restrictive Covenants Seminar

Posted By by Neal F. Weinrich on January 11, 2018, Thursday, January 11, 2018

 

Today, I had the pleasure of attending and speaking at the annual Georgia Restrictive Covenants and Trade Secrets Continuing Legal Education (CLE). Following are some useful pieces of information I learned:

  1. For better or for worse, there are still no Georgia appellate decisions interpreting Georgia’s Restrictive Covenant Act, which went into effect in 2011. There are a handful of unpublished federal district court opinions applying the Restrictive Covenants Act (RCA). While these cases do not have precedential value, they shed some light on how judges are handling different types of noncompete situations.

  2. Does the RCA allow blue-penciling? Judicial modification/reformation? We still do not have a definitive answer. Two of the federal district court opinions mentioned above disagree on the scope of courts’ modification authority under the statute.

  3. When drafting (and litigating) non-competes, don’t forget to evaluate whether the employee who will be subject to the non-compete is an “employee” as defined by the RCA. In a recent decision, Judge Batten concluded that a bakery sales representative was not an “employee” within the meaning of the RCA.

  4. O.C.G.A. section 9-2-46 is a tool practitioners should remember to utilize when they are involved in multi-jurisdictional litigation over a non-compete. If there is a declaratory judgment action in Georgia and an out-of-state enforcement action, this statute can be used to obtain a quick ruling on the declaratory judgment.

  5. When you have an employee that leaves your company, quickly engage a forensic expert. A good forensic expert can quickly tell you a tremendous amount of information about your departing employee’s activities leading up to his or her departure.

  6. In trade secrets cases, consider retaining an industry expert to bolster the claim that the information at issue is trade secret (or if you are representing a defendant, to dispute that the information is a trade secret).

As always, please contact me with any questions.

 

Authored By

Neal Weinrich
 

Neal F. Weinrich Neal Weinrich is a shareholder at Berman Fink Van Horn. Neal’s practice focuses on resolving business disputes through litigation, arbitration, and mediation. The emphasis of Neal’s practice is litigation involving restrictive...

 

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SEC Office of Small Business Policy Website Updates are User Friendly

Posted By by Thomas E. Sowers on December 15, 2017, Friday, December 15, 2017

 

 

The Securities and Exchange Commission’s (SEC) Office of Small Business Policy recently updated the small business website on sec.gov.  The new website is user friendly and does a nice job of explaining the various exemptions from registration commonly used by businesses when raising money.  It is a great starting point for any small business owner interested in learning more about the various ways to raise capital. 

You can check out the new website here.

Authored By

 

Thomas E. Sowers Thomas E. Sowers is a shareholder in the Firm. Tom’s practice focuses on representing businesses and their owners in a wide range of legal issues. Much of Tom’s practice involves...

 

 

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Drone Hobbyists Must Register, Congress Reverses Taylor v. Huerta

Posted By by Lydia M. Hilton on December 14, 2017, Thursday, December 14, 2017

 

As announced earlier this week, owners of drones, or small unmanned aircraft, must register with the FAA. The National Defense Authorization Act (NDAA) for Fiscal Year 2018 was signed by the President on December 12, 2017.  Section 1092(d) of that bill specifically overrules the decision in Taylor v. Huerta.

Background: In 2015, the FAA issued a rule requiring ALL owners of small unmanned aircraft to register with the FAA.  Hobbyists were given a single registration number and that number was to be placed on any UAS that person owned that would be operated for recreational purposes.  If an individual owned more than one small UAS being flown recreationally, the same registration number would appear on each one. 

Conversely, if a small UAS were to be operated commercially, the owner registered the small UAS, and would receive a separate registration number for each aircraft.

Hobbyists had strongly opposed the registration requirement on grounds that certain statutes specifically prohibited the FAA from requiring it.  A lawsuit was filed. The Federal Circuit Court of Appeals for the District of Columbia Circuit ultimately ruled with the hobbyists, holding that under the existing law, the FAA could not require owners of small unmanned aircraft operated for recreational purposes to register with the FAA, and in fact can make no rule concerning recreational users. Taylor v. Huerta, Case No. 15-495 (D.C. Cir. May 19, 2017). 

In response to the Taylor decision, the FAA allowed previously registered hobbyists to request de-registration and get a refund of their $5 fee.  Now, as of December 12, 2017, hobbyist registration is back on. The recently passed bill states:

(d) Restoration Of Rules For Registration And Marking Of Unmanned Aircraft. The rules adopted by the Administrator of the Federal Aviation Administration in the matter of registration and marking requirements for small unmanned aircraft (FAA-2015-7396; published on December 16, 2015) that were vacated by the United States Court of Appeals for the District of Columbia Circuit in Taylor v. Huerta (No. 15-1495; decided on May 19, 2017) shall be restored to effect on the date of enactment of this Act.

If a hobbyist is already registered, it appears that nothing further is required. Your number and expiration date remain unaltered. A person who de-registered most likely will be required to go through the process again. 

This re-instatement is a step in the right direction toward stopping the unprofessional operation of small recreational drones.

As always, if you have questions about legally operating drones for business or pleasure, please do not hesitate to contact me

Authored By

Lydia Hilton
 

Lydia M. Hilton Lydia Hilton knows drones. Yes, drones. Having spent more than 25 years concentrating on real estate litigation and bankruptcy matters, today Lydia applies that versatility to the highly entrepreneurial business opportunities...

 

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RFPs: Important provisions when contracting drone services

Posted By by Lydia M. Hilton on December 13, 2017, Wednesday, December 13, 2017

 

A recurring problem with requests for proposals (“RFPs”) seeking drone services, and the resulting contracts for those drone services, is an unclear or incomplete description of the scope of work being sought and vague contract terms.

First ask why.  A company seeking to engage an outside vendor or pilot to capture data using unmanned aircraft systems, a/k/adrones, is wise, as part of preparing its request for proposals, to articulate the primary purposes for engaging vendors. For example, is the business seeking expertise in a particular function, such as surveying versus inspection? Or, is it hoping to obtain a better value or shift risks by having the services performed by a third-party?  Knowing why forces the party purchasing services to prioritize its criteria for selecting a vendor.

Be Clear and Assume Nothing.  Incomplete or unclear RFPs beget unclear responses and incomplete or unusable deliverables that fall below expectations. In one inspection project, a vendor delivered aerial footage of transmission lines without the GIS metadata imbedded because the RFP failed to specify it. The company assumed that this data would be included, but the vendor did not.  This lack of communication did not end out well for either party.

Specify who owns the data.  The cost of services may be liked to who owns the data or images collected or who stores and protects it. Generally, the author who actually creates a work, such as a photograph or video, in any medium, is its owner and may prevent others from using the work without her consent. Thus, the drone operator who actually captures images, technically owns the images unless an exception to the general principle, known as the “work for hire” doctrine, applies.  A work for hire is a work prepared by an employee within the scope of employment or commissioned or ordered specially for inclusion in a collective work.  While this sounds straightforward, the work-for-hire doctrine is actually very complicated.

The best way to address the potential problem is by clear contractual language that spells out exactly who owns the intellectual property and how the work can be used. A drone service company may charge less if it is entitled to sell/use the images it collects. Or, it may charge more if the images are the exclusive property of the utility, surveying or other company requesting services. Whether the parties are interested in such an arrangement depends on many factors, including how sensitive the images, where the images are stored and how they are accessed. To evaluate a vendor, the requesting party needs to understand who will be the “owner” of the works (the videos, images or data created).

Specify responsibility for data protection. Data must be protected while being collected, transferred and stored. This is not only about electronic transfers from one device to another, but also about the SIM chip that gets popped out of a device and put into someone’s pocket or backpack on the way to post-collection processing. Companies seeking to engage vendors should explain its requirements in as much detail as appropriate and include robust indemnification procedures, not overlooking the fact that monetary remedies may be cold comfort if the data is compromised.  Vendors seeking to offer drone services do well to demonstrate the efficacy of their data-security programs. 

Outsourcing drone services can be an excellent solution for many companies as well as a first step to creating an in-house drone program.  If you need help making that experience a safe and profitable one, I am available to draft and negotiate templates and custom products so that the risk and the benefits stay in all the right places.

Authored By

Lydia Hilton
 

Lydia M. Hilton Lydia Hilton knows drones. Yes, drones. Having spent more than 25 years concentrating on real estate litigation and bankruptcy matters, today Lydia applies that versatility to the highly entrepreneurial business opportunities...

 

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EEOC Releases Strategic Plan for FY 2018 – FY 2022

Posted By by Kenneth N. Winkler on December 12, 2017, Wednesday, December 13, 2017

 

 

The EEOC (U.S. Equal Employment Opportunity Commission) recently released for public comment a draft of its Strategic Plan for Fiscal Years 2018-2022. The draft plan can be found at Regulations.gov.  

The Strategic Plan serves as a framework for the EEOC in achieving its mission through the strategic application of the EEOC’s law enforcement authorities, preventing employment discrim­ination and promoting inclusive workplaces through education and outreach.  

Major Objectives and Goals

To accomplish its mission and achieve its vision, the Strategic Plan commits the EEOC to pursue the following strategic objectives and outcome goals:

  1. Combat and prevent employment discrimination through the strategic application of EEOC’s law enforcement authorities. The corresponding outcome goals are: 1) Discriminatory employment practices are stopped and remedied, and victims of discrimination receive meaningful relief; and 2) Enforcement authorities are exercised fairly, efficiently, and based on the circumstances of each charge or complaint.
  2. Prevent employment discrimination and promote inclusive workplaces through education and outreach. The corresponding outcome goals are: 1) Members of the public understand the employment discrimination laws and know their rights and responsibilities under these laws; and 2) Employers, unions, and employment agencies (covered entities) prevent discrimination, effectively address EEOC issues, and support more inclusive workplaces.
  3. Organizational Excellence. The corresponding outcome goals are: 1) A culture of excellence, respect and accountability; and 2) Resources align with priorities to strengthen outreach, education, enforcement and service to the public. The plan also identifies strategies for achieving each outcome goal and identifies 12 performance measures (with yearly targets) to track the EEOC’s progress as it approaches FY 2022.

Next Steps:

The EEOC announced on December 8, 2017, that it is seeking public comments for the Strategic Plan from advocacy groups and individuals. Comments must be submitted by 5:00 p.m. ET on January 8, 2018. This draft plan has not been approved by the Commission and is still under review.

Authored By

Ken Winkler
 

Kenneth N. Winkler Ken Winkler, a shareholder at Berman Fink Van Horn, has practiced employment law since 1994. His practice concentrates on counseling employers and business owners on the numerous laws and regulations...

 

Daniel H. Park Work hard at work worth doing. This is what drives Daniel Park in every aspect of his life. At Berman Fink Van Horn, Daniel demonstrates this in everything he does. A...

 

 

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Employers Have a Lot to Learn from Bama over OSU Decision

Posted By by Kenneth N. Winkler on December 7, 2017, Friday, December 8, 2017

 

The College Football Selection Committee has spoken.  Alabama nudged out my beloved Ohio State Buckeyes for the fourth and final spot of the National Championship Playoff picture this year.  For several hours leading up to the selection, I watched the pundits debate about which team they felt deserved to be selected for the final spot and which team they felt would be chosen by the Selection Committee.   There was no consensus among the pundits as to the answer to either of these questions, namely, because the Selection Committee did not clearly articulate the criteria it was using to rank the teams.  

In the end, the Selection Committee chose Alabama because it “just favored Alabama’s full body of work over that of Ohio State”.  Regardless of whether the decision was correct, controversy remains because the Selection Committee’s criteria is vague and amorphous.  Simply stated, the lack of clarity undermined the credibility of the decision.  The drama surrounding the playoff selection may be good for media ratings, but it is not the type of drama employers desire when making employment decisions.  

As the year comes to an end, many employers will be conducting performance evaluations and making decisions regarding headcount, salaries and bonuses.  To ensure that such decisions are fair, employers should attempt to measure employee work performance in objective terms that are uniformly applied in an unbiased manner.  For certain jobs, it’s easier to base evaluations on mostly objective criteria because performance is reasonably measured by numerical productivity and achievements such as sales figures, quotas, and completed projects.  For other positions, such as leadership roles, it is necessary that some subjective elements be considered including leadership skills, professionalism and creativity.   The more an employer relies on subjective criteria, however, the greater the risks that its subjective evaluation may be regarded as pretext for discrimination.  This is especially true if there are personality conflicts or tensions between the evaluator and the employee.  Whenever subjective criteria is used, therefore, it is important to provide examples of conduct that support the opinion.  This will help ensure that subjective criteria is being used fairly and it will go a long way to show the legitimacy of the evaluation. 

Obviously, employers would do well to avoid creating the kind of controversy generated by the Selection Committee’s decision in its operations.  Employers can help avoid such controversy by using clear criteria fairly and equally.

 

 

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Commission: No License, No Lexus, No Problem

Posted By by Charles H. Van Horn on November 15, 2017, Wednesday, December 6, 2017

 

I have written previously a variety of topics confronted in a real estate transaction, including selecting a real estate broker to represent you. In a landmark decision issued last week, the Georgia Court of Appeals ruled a person who does not have a real estate license may sue for a commission. This upsets a long line of court decisions. The General Assembly enacted a statute prohibiting a real estate commission to be paid to anyone who does not have a real estate license. The law has a few narrow exceptions, none of which were applicable to this recent court decision.

In the case, a developer looking to sell a series of lots and trailers agreed to give a person (without a real estate license) a specific lot and a trailer if she referred a purchaser for the other lots. The individual found the developer a purchaser. The developer did not follow through. The referring person sued. In response, the developer cited the Georgia statute limiting real estate commissions (including referral fees) to only those with a real estate license.

The Georgia Court of Appeals determined the referring person was able to pursue her claim for the referral fee she negotiated. This decision is a massive departure from long-standing rules.  If this ruling stands, the repercussions are quite broad. Will this open the door for many “referral” type claims for payment based on a successful introduction?

 

 

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Tenth Circuit Weighs in on DTSA Injunctions

Posted By by Neal F. Weinrich on November 14, 2017, Tuesday, December 5, 2017

There have been a number district court opinions since the enactment of the Defend Trade Secrets Act (“DTSA”) that touch on a wide range of issues.  There have, not too surprisingly, been very few appellate decisions.  However, one very recent appellate decision, First Western Capital Management Company v. Malamed, 2017 WL 4872570 (10th Cir. Oct. 30, 2017), addresses a significant issue for trade secret practitioners: does a plaintiff seeking an injunction under the DTSA have to prove irreparable harm to show entitlement to injunctive relief?

The plaintiff in the case, First Western, is an investment management company.  When the defendant, Mr. Malamed, learned that First Western was considering selling to another company, he had his assistant print three copies of his client list.  That list contained client names, contact information, the market value of the clients’ assets under management, and the fees being charged by First Western. 

First Western filed suit against Mr. Malamed after terminating his employment.  First Western asserted claims against Mr. Malamed under the DTSA and also the Colorado Uniform Trade Secrets Act (“CUTSA”). 

First Western sought a preliminary injunction prohibiting him from soliciting its clients.  As part of the district court’s analysis, it considered whether First Western must show it would be irreparably harmed without an injunction.   The court found First Western was excused from showing irreparable harm, relying on case law holding that a plaintiff is not required to prove irreparable harm when the evidence shows that a defendant is or will soon be engaged in acts or practices prohibited by statute and that statute provides for injunctive relief to prevent such violations.  The district court noted that both the DTSA and the CUTSA provide for injunctive relief to prevent misuse of trade secrets.  Therefore, because Mr. Malamed was misusing or threatening to misuse trade secrets with respect to First Western’s clients, the district court found that irreparable harm presumptively existed and need not be separately established.  The district court observed that had First Western not been excused from showing irreparable harm, it would not have granted injunctive relief because First Western’s alleged damages could be reasonably quantified and would have adequately made it whole.

Mr. Malamed appealed the injunction.  The Tenth Circuit reversed, finding that the district court erroneously found that the irreparable harm requirement was excused.  The Tenth Circuit concluded that the irreparable harm requirement is only excused when a statute mandates injunctive relief for a violation.  Because the DTSA authorizes injunctive relief but does not mandate it, the DTSA does not provide for a presumption of irreparable harm.  The analysis was the same for the CUTSA.  Because the district court had specifically found that irreparable harm could not be established if First Western had to show irreparable harm, the Tenth Circuit concluded First Western was not entitled to injunctive relief and vacated the preliminary injunction. 

This case demonstrates that a plaintiff pursuing injunctive relief based on a federal trade secrets claim (and most, if not all, trade secrets claims brought under state law) must establish irreparable harm to obtain a preliminary injunction.  This is true no matter how egregious the defendant’s theft may be.  If a trade secrets defendant can show that the plaintiff can be made whole through money damages, a defendant may be able to defeat an injunction, notwithstanding the fact that he or she may have taken trade secrets from his or her employer.  Of course, where the defendant’s continued use of the trade secret is likely to destroy the trade secret status of the information, a plaintiff will likely be able to show irreparable harm.

 

 

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Subsurface and Overhead Encroachments in Urban Environments

Posted By Ruari J. O’Sullivan on November 20, 2017, Tuesday, December 5, 2017

It is no secret that urban centers across the country are in the midst of a transformative period, experiencing increases in density, widespread development, and innovative conversions of public spaces. For the first time in history, more people live in cities than do not,[1] and in the U.S., for the first time since the 1920s, urban growth is outpacing growth outside of the cities. This trend toward re-urbanization is driven in part by millennials, who are living in urban areas at a rate higher than any other generation,[2] and in part by retiring baby boomers in search of more walkable communities.[3]

Developers and real estate investors are taking notice and are increasingly designing and building the types of dense, multistory and pedestrian friendly projects that millennials and baby boomers desire. In Atlanta, for example, there are nearly 100 multistory developments either proposed or in various phases of construction in the densest parts of Downtown, Midtown and Buckhead.[4]

These trends create unique problems for purchasers, sellers and developers of real property in urban areas. In this blog post, I will address two issues that arise from one distinctly urban feature – the zero lot line or setback.

Zero Lot Line or Setback

Before zoning regulations, many buildings in urban centers were designed and constructed up to and on top of the lot line. This trend reversed with the adoption of zoning setbacks that required new buildings to be set back from the street, even in dense cities. Realizing that that setbacks in urban areas (1) encourage sprawl and decrease a city’s walkability, (2) create unwelcoming and unfunctional corporate plazas, and (3) may create ambiguous zones of quasi-public space that are not maintained by the city or the building owner, many cities have reversed the setback trend in favor of zero or minimal[5]setbacks.

From a legal perspective, zero setbacks and lot lines (whether the building is a new development or is existing) are more likely to create encroachments. A less obvious problem, is that the encroachment may expand beyond the above ground footprint of the structure itself. Thus, investors and developers may need to do some digging, perhaps quite literally.

  1. What’s Underground (Probably) Matters

In most states, the fee simple owner of a parcel of property owns the area underneath the surface of that property unto, technically, the core of the earth, provided that a separate party has not been granted subsurface or mineral rights underneath the property at any point prior. This divestment of subsurface rights from the surface rights is more common in states that are geologically rich, like Colorado. In states like Georgia, it is more common that the surface owner of the property also owns all subsurface rights as well. Indeed, in Georgia, under O.C.G.A. § 44-5-618, if someone has been granted mineral rights in a property but they have not either paid personal property taxes on the mineral rights or worked or attempted to work the mineral rights for a period of seven years, then the surface landowner can claim back the mineral rights under a theory of adverse possession.

Because landowners typically own the subsurface rights, that landowner is responsible for all encroachments that may occur below the surface as well. This can be especially problematic where, like in many cities, buildings are built up to the lot line. While a building may appear to be built within the setback, a full survey of the underneath development may paint a different picture. Investors and developers in urban areas should be aware that when they have an ALTA/NSPS survey of a property performed, the surveyor is not required to and almost certainly will not automatically review the subsurface footprint of any aboveground improvements. In older, multistory buildings, it is not uncommon that the footings of the building, its underground base, and even its basement extend wider than the aboveground dimensions of the building. These wider underground elements may encroach on adjacent private property or into the right-of-way, both of which should be of concern to a landowner or prospective landowner.[6] In order to assess their full exposure, investors and developers of urban property can affirmatively request that the surveyor provide underground and vertical relief information. Some surveyors have the equipment to survey underground spaces such as basements, and will be willing to plot footings and other foundational features that can be shown on building plans or other as built drawings. Also, to aid surveyors, purchasers of existing zero setback buildings should make it a point to require, as a part of their due diligence, that sellers provide all development plans and as-built drawings of any improvements.

If a subsurface encroachment has been found to exist, whether that encroachment extends into a right-of-way or onto adjacent property, the investor and developer, with the help of an attorney, may wish to envision the future cityscape surrounding the property in question in order fully assess the risk posed by the encroachment. For example, as part of city revitalization, many urban centers are expanding and experimenting with alternative transit methods. If the encroachment is in the right-of-way, any plans or discussions of transit expansion, however remote, should be taken into consideration as a part of a purchaser’s risk assessment. The City of Atlanta itself has tentative (if very long-term) plans to greatly expand its streetcar system. In one known issue, a landowner faced an extremely costly lawsuit as the City of Atlanta was attempting to lay down the existing streetcar lines when it was discovered that the landowner’s basement encroached into the right-of-way, requiring the City to redraw the streetcar line. If the encroachment extends into an adjacent but vacant or underbuilt property, any future development of that site, especially in dense urban areas where vacant or underdeveloped lots are not likely to remain that way, would likely come face to face with the encroachment. Title insurance typically will not provide coverage for underground encroachments, and any questions about future or existing policies should be referred to an attorney with experience in this area.

 2. Don’t Forget to Look (and Envision) Upward

Landowners also own the rights above the surface of their property. The most famous, if murky, statement of landowner’s ownership of such air space came from the U.S. Supreme Court in United States v. Causby, where the Court found that a landowner “must have exclusive control of the immediate reaches of the enveloping atmosphere.” With such ownership, landowners are also responsible for encroachments that occur over their property line, no matter how high up.

While vertical aboveground encroachments are easier to spot, investors and developers should make sure that, where a zero or minimum setback is involved, surveyors are instructed to include vertical relief information in the survey. Developers and investors also should be aware that some cities have incremental setbacks that increase as the height of the building increases. In addition to existing encroachments, developers and investors should envision what their future use of an existing or proposed building may or could look like. Are visibly appealing balconies or pedestrian-friendly awnings or coverings over the sidewalks possible? All such overhead encroachments into the right-of-way would need prior approval from the entity that maintains the right-of-way, which may be a municipality or department of transportation. In our experience, the Georgia Department of Transportation has become increasingly reluctant to issue permits for right-of-way encroachments due to their visibility and line-of-sight concerns for vehicles.

Investors in and developers of real property in urban areas with zero or minimal lot lines should be cognizant of both underground and overhead encroachments, whether existing or planned, emanating from the subject property. If you have any questions pertaining to setback or encroachment issues with a project in which you are involved, or have questions regarding title insurance coverage for such encroachments, please feel free to reach out to me directly.

[1] World’s Population Increasingly Urban With More than Half Living in Urban Areas, United Nations, July 10, 2014, http://www.un.org/en/development/desa/news/population/world-urbanization-prospects-2014.html.

[2] Millenials Prefer Cities to Suburbs, Subways to Driveways, Nielsen, March 4, 2014, http://www.nielsen.com/us/en/insights/news/2014/millennials-prefer-cities-to-suburbs-subways-to-driveways.html.

[3] The New American Suburb: diverse, dense and booming.

[4] atlanta.curbed.com

[5] Many cities now impose maximum setbacks, almost guaranteeing that improvements are constructed close to the lot line.

[6] Some cities allow the footings and subsurface foundations of buildings to encroach a certain amount into the right-of-way,

 

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