Mar 292013
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The Great Tennessee-Georgia Border War of 2013

On March 25, 2013, Georgia senators passed House Resolution 4 (“HR 4”), a resolution which proposed settlement of the boundary dispute between the State of Georgia and the State of Tennessee. The resolution attempts to settle the long running dispute regarding the Tennessee-Georgia state line and clarify Georgia’s access to the Tennessee River. It also directs the Georgia attorney general to file suit in the U.S. Supreme Court (based on Article III, Section 12 of the U.S. Constitution) if Tennessee does not accept Georgia’s offer by the last day of next year’s General Assembly session.

Everyone knows that the ultimate issue here is water. The current border cuts off Georgia from access to the Tennessee River. The Tennessee River has been long coveted by Georgia as a source of more than enough water to meet the demands of metro Atlanta’s ever growing population.

Georgia’s argument is that the boundary between Tennessee and Georgia was originally set at the 35th parallel until an incorrect survey in 1817 set it slightly to the south. Were the Tennessee-Georgia state line moved to precisely follow the 35th parallel, the line would be shifted northward to points over a mile north of its present location. Nonetheless, the proposed settlement from Georgia offers to claim only a tiny unpopulated part of Tennessee at Nickajack Lake (enough to withdraw water from the Tennessee River). Georgia would make no claims on the rest of the area up to the 35th parallel.

Georgia has raised this issue several times to no avail. Efforts were made by Georgia in the 1890s, 1905, 1915, 1922, 1941, 1947 (which similarly authorized the Georgia attorney general to bring suit to the U.S. Supreme Court), 1971 and 2008 to resolve this dispute. Each time Tennessee did little or nothing in response. Based on recent statements by Tennessee Gov. Bill Haslam and the Tennessee Legislature, it seems that Tennessee will be taking the same approach in response to HR 4.

A border lawsuit between Georgia and Tennessee be accepted by the U.S. Supreme Court would easily become one of the most significant border cases in our nation’s history. Furthermore, the political and economic effect of moving the Tennessee-Georgia border to the north by a mile would be massive.

Nov 192012
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Oral Modification to Construction Contracts

Construction contracts typically contain provisions that explicitly require the parties to reduce all modifications to the contract into writing. These “additional work” provisions are written to prevent the enforceability of oral modifications to the contract and, hopefully, prevent both parties from a potential loss. However, the Tennessee Court of Appeals recently allowed the parties to modify a construction contract by oral agreement even though the original contract explicitly required modifications to be in writing.

In Song & Song Corporation, and Jin Y. “Jim” Song, Individually v. Fine Art Construction Company, LLC, et al., No. W2011-01708-COA-R3-CV (Tenn. Ct. App. June 14, 2012), a property owner hired a general contractor to perform construction work on a commercial building. The contractor later performed additional work deemed necessary to install missing fire dampers without written authorization from the property owner to do so. When the work on the building was completed, the property owner refused to pay for the additional work pertaining to the fire dampers and the contractor sued.

The property owner argued that the lack of a written change order allowed him to avoid his obligations here as the contract included the following provision: “[T]his Agreement may not be modified except by separate written instrument executed by Owner and Contractor.” The Court of Appeals disagreed and found that the parties had in fact orally agreed for the contractor to perform the additional work, said oral agreements were valid and enforceable, and the property owner could not avoid his obligations thereunder simply because of the lack of an additional signed writing. The contractor was awarded full payment for the additional work despite the absence of written authorization.

Tennessee courts generally follow the rule that allows contracts to be orally modified even if the contracts specifically state that the contract can only be modified in writing. Even where the written contract prohibits oral modifications of the agreement, oral alterations will still be given effect by the Courts if otherwise valid. Regardless, contractors are still advised to document “additional work” agreements, utilize change orders, and adhere to the provisions of a construction contract to avoid future payment disputes.

Oct 232012
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Tennessee’s Greenbelt Law as a Tax Shelter

Pursuant to Tennessee’s Agricultural, Forest and Open Space Land Act of 1976, open land that exists near growing commercial and residential areas may be threatened by urban sprawl and the system of property taxation. This act has come to be known generally as the “Greenbelt Law.” As a result of the Greenbelt Law, open space real property that might otherwise be classified as residential, commercial, or other higher density use and thereby be subject to higher property taxes, may be eligible for classification as one of three different types of land: Agricultural Land, Forest Land, or Open Space Land. The result is a dramatic savings in property taxes — often resulting in an Owner having to pay only pennies on the dollar — designed to encourage production of valuable food, prevent loss of family farms due to higher taxes, and provide relief from urban sprawl and green spaces for enjoyment of people who would not normally have access to such areas.

There are limitations as to what qualifies for greenbelt classification. The law limits the amount of land eligible for enrollment to 1500 acres per Owner per county. Although an “Owner” may be more than one person, an Owner that owns greenbelt property with others, or as part of a corporation, is only credited with his or her proportionate share of the acreage towards the 1500 acre cap. If the use of the property changes, the Owners are then required to pay the taxes that would have been paid on the full unrestricted value of the land (“rollback taxes”). To be clear, rollback taxes are not a penalty. Rollback taxes are only a recapture of the amount of taxes saved by Owners over a certain period of time that the land qualified as Agricultural Land, Forest Land, or Open Space Land. For Agricultural Land and Forest Land, authorities can recoup up to three years in back taxes; for Open Space Land, authorities can recoup up to five years in back taxes. See Tenn. Code Ann. § 67-5-1008(d).

To be effective for the current tax year, Owners of property who are applying for the first time for greenbelt classification must apply on or before March 1  Owners who fail to file by the deadline date will result in the property not qualifying for the current tax year. There is no appeal procedure for late filed applications. However, the denial of a timely filed application is appealable to the county board of equalization. Once the property is classified as Agricultural Land, Forest Land, or Open Space Land, reapplication is not required so long as the ownership as of the assessment date (January 1) remains unchanged.

The Commercial Appeal recently reported on the use of the Greenbelt Law as a tax shelter, citing the estates and hobby farms of individuals such as AutoZone founder J.R. “Pitt” Hyde, Wynonna Judd, former University of Tennessee football coach Phillip Fulmer, and Nashville lawyer E. Warner Bass as examples. See Marc Perrusquia, Grant Smith, Cash crop: Tennessee farmland protection law shelters taxes for rich and famous, Commercial Appeal, October 14, 2012. The article closes with summaries of the recent legal battles over the Greenbelt Law, as well as a review of similar restrictions in other states. In a similar article, the Knoxville News Sentinel recently reported on the massive use of the Greenbelt Law by individuals in Williamson County. See Marc Perrusquia, Trees help shade Tennessee’s wealthy from taxes, News Sentinel, October 18, 2012.

Oct 112012
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Agricultural Zoning and the Right to Farm Act: Agritourism equals Agriculture in Tennessee

In a decision issued early this year by the Tennessee Court of Appeals, the court considered a dispute between an individual operating a farm as Maple Lane Farms and a neighboring property that claimed the farm-based activities were mostly commercial, not agricultural. According to the neighbor, the noise from the commercial activities interfered with her sleep and reading. The neighbor testified as follows:

“Q. How has the noise bothered you? What is it about the noise that has bothered you?

A. Well, the music was just very, very, very loud, you know, like I could almost feel the vibrations in my chest, you know, the whole house, and you couldn’t get away from it.

* * *

A. Yes, I could feel a thumping, thump, thump, thump, like it was thumping in my chest. It was extremely loud.”

Since 1985, Maple Lane Farms had been using their parcels to operate the farm as well as other things such as a pumpkin patch and corn maze in the fall. However, in 2000 they founded the Strawberry Jam Festival, a two day music festival held on their property, which lead to activities on the farm such as amplified musical performances, helicopter rides, and excessive ATV use. Shortly thereafter, the neighbors began to complain that the noise, bright lights, traffic and garbage was harming their health, comfort and property values. A neighbor sued the farm owner seeking to stop the activities on the property as a violation of zoning; specifically that these activities did not constitute a farming operation and thus the farm was not exempt from zoning requirements.

Under the Tennessee Right to Farm Act, Tenn. Code Ann. §§ 43-26-101 et seq., a farming operation is presumed neither to be a public or private nuisance. However, it is a rebuttable presumption that such farm operations are not nuisances unless a preponderance of evidence demonstrates that the operations do not conform to accepted agricultural practices. The Act also notes that a major point of it is to protect pre-existing farming activities from nuisance claims by newly arrived neighbors.

In a fairly broad approach to agricultural zoning and the Tennessee Right to Farm Act, the Court of Appeals held that the activities of Maple Lane Farms met the definition of “agritourism” and that these activities existed before the neighbor purchased her property. Shore v. Maple Lane Farms, LLC, No. E2011-00158-COA-R3-CV (Tenn. Ct. App. Apr. 11, 2012).

On August 16, 2012, the Tennessee Supreme Court granted permission for appeal. I would hazard a guess that the Supreme Court will take a more conservative approach here. Regardless, the opinion will prove to be an important one as this is an area of zoning and land use which needs some attention.

Aug 222012
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The Condo Hotel: The Worst of Both Markets

I stayed in a condo hotel this past weekend which you do not hear too much about anymore. Condo hotels tend to mainly be found near beach and mountain destinations. In Tennessee, they are primarily found near the Smoky Mountains in towns such as Gatlinburg, Pigeon Forge, and Sevierville.

In 2002, the Securities and Exchange Commission (SEC) issued a “no-action letter” which contained specific guidelines, or “safe harbors,” for how to market and sell a condo hotel product without engaging in the sale of a security under U.S. securities laws. Many developers viewed the letter as SEC guidelines on how to develop condo hotels and the result was an immediate boom in the industry. However, the condo hotel sector took a beating in the financial downturn (“the Pets.com of the real-estate bubble”) and it has been dormant ever since.

At first glance a condo hotel appears to represent the best of both the residential and commercial real estate markets. A buyer owns the specific condo unit and pays the property taxes, insurance, and maintenance fees for it, while a management company rents out the rooms and splits the revenue with the owners (typically around fifty percent). Even though the buyer owns the condo unit, they are limited on how often they can use the unit. With taxes, insurance, maintenance fees, tough financing, and rental market fluctuations, condo hotels are actually one of the more dangerous investments. Thus, many condo hotels were unable to close on unit sales when the real estate bubble burst and prospective buyers were faced with these tough economic challenges.

Although not specifically addressed by the Tennessee Condominium Act of 2008, the formation of a condo hotel is similar to that of a standard condominium regime. They are created by a Declaration and normally accompanied by a set of bylaws. They typically also require the approval of a shared facilities agreement, a rental management agreement, and a unit maintenance agreement. The structure of the agreements, and the advertisements and representations made in the sales process, are important because at some point the buyer is no longer just purchasing real estate but is instead investing in a business enterprise triggering U.S. securities laws.

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