Florida's Sovereignty Submerged Lands Leases

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1 Florida's Sovereignty Submerged Lands Leases Richard E. Englebright, Jr. * The author provides a primer on Florida's sovereignty submerged lands leases and the initial application process. On March 3, 1845, by an Act of the U.S. Congress, the state of Florida was admitted to the United States, as a consequence of which the state acquired title to all land lying under navigable waters within the state, up to the ordinary high water line. While the terms navigable and ordinary high water line have been the subject of disagreement over the years, these state-owned lands include (but are not limited to) certain tidal lands, islands, sandbars, shallow banks, and lands waterward of the ordinary or mean high water line, beneath navigable fresh water or beneath tidally-in uenced waters. 1 These lands are generally called sovereignty submerged lands, the legal title to which is vested in the Board of Trustees of the Internal Improvement Fund of the State of Florida (the Board of Trustees ), which consists of the governor and the governor's cabinet. 2 While the Board of Trustees is vested with title to sovereignty submerged lands, the Florida Department of Environmental Protection ( FDEP ) or the state's Water Management Districts serve as sta to the Board of Trustees in the acquisition, administration, and disposition of state lands, including the leasing of sovereignty submerged lands. 3 As the title holder to Florida's sovereignty submerged lands, the Board of Trustees is authorized to issue leases of state-owned submerged lands to private parties. Chapter 18-21, Florida Administrative Code ( F.A.C. ), sets forth the rules that guide the Board of Trustees in that regard. Adjoining Owners Owners whose properties adjoin sovereignty submerged lands are sometimes called upland, riparian or littoral owners. The term upland, of course, refers to the higher property abutting any kind of water body. Traditionally, the term riparian referred to property abutting a river or stream, while littoral referred to property abutting a lake, sea or ocean; however, nowadays all three terms are frequently used interchangeably. An upland owner generally has a common law right to use and enjoy the adjacent water for viewing, swimming, shing, bathing, boating and similar passive purposes, but this does not entitle the upland owner to build * Rick Englebright is a senior associate in the Litigation and Creditor's Rights practices of Lowndes, Drosdick, Doster, Kantor & Reed, P.A. Resident in the rm's o ce in Orlando, he can be reached at richard.englebright@lownd es-law.com. 86

2 Florida's Sovereignty Submerged Lands Leases structures in the water, such as ramps, docks, boathouses, marinas and the like. These activities require an upland owner to obtain a lease of the adjoining sovereignty submerged lands. In order to obtain such a lease, the owner must submit an application to the FDEP which includes, among other things: a legal description of the location of the proposed improvements, including any mooring areas; satisfactory evidence of a su cient upland ownership interest (typically a recorded deed showing the proposed lessee's fee simple interest in the upland property); two copies of a survey of the a ected sovereignty submerged lands prepared by a licensed surveyor; current local zoning and status of any local government approvals necessary for the proposed activities; and payment of a non-refundable processing fee. 4 If the upland property owner's lease application is approved by the FDEP, the sovereignty submerged lands lease will be for a standard term of ve years, but a lease for marinas where at least 90% of the slips are maintained for rent to the public on a rst-come, rst-served basis will be for a term of 10 years. 5 The annual lease fee under the sovereignly submerged lands lease will be for the greater of: (a) 6% of the annual income derived from the use of the sovereignty submerged lands; (b) the base fee (based on the square footage of the submerged lands); or (c) the minimum annual fee. 6 A lessee who is permitted under its lease to rent slips will be required under the terms of its sovereignty submerged lands lease to submit annual income reports to the FDEP, which report must include all income derived directly or indirectly from the lease area, the number and type of slips, and a certi cation that all income information reported is correct. 7 In addition, pursuant to the Florida Administrative Code, the FDEP will be required, at least once every ve years, to conduct a site inspection of the leased area to determine compliance with the terms and conditions of the lease. 8 The standard terms of the sovereignty submerged lands lease also provide that the lease is renewable, modi able, and assignable, subject to approval by the Board of Trustees. 9 Finally, the lease will provide that upon expiration or cancellation the lessee will be required to remove all structures and equipment from the leased area. 10 Financing and the Sovereignty Submerged Lands Lease For lenders nancing the acquisition of upland property from an owner who has a sovereignty submerged lands lease for the adjacent submerged lands, obviously the lender will want a mortgage or collateral assignment covering all of the upland owner's right, title and interest in and to the lease. It is important to note that neither the Board of Trustees nor the FDEP customarily executes formal consents to mortgages or collateral assignments of sovereignty submerged lands leases. However, a lender may request from the FDEP an estoppel letter in favor of the lender that provides that in the event that the lender acquires title to the upland property subsequent to a default in a mortgage by the lessee, whether by means of a mortgage foreclosure or a deed-in-lieu of foreclosure, the lender may maintain the sovereignty sub- 87

3 The Real Estate Finance Journal merged lands lease for the unexpired term of the lease by assuming the duties and responsibilities of the lessee, provided the lease is not in default. Any subsequent renewal of the lease will remain at the option of the Board of Trustees. In the event a borrower/lessee does subsequently default under its loan, a lender or its counsel should immediately contact the FDEP to determine the status of the sovereignty submerged lands lease, speci cally, whether the borrower is current on its reporting and income payment requirements. If necessary to preserve the lease, the lender should advance any payments which are past due under the lease and should seek cooperation from the defaulting borrower to satisfy its annual reporting requirements. In practice, so long as the annual lease payment is made current by the lender, the FDEP is likely to waive the income reporting requirement pending foreclosure of the upland property if the borrower is uncooperative in bringing its income reporting obligations current. A commercial lender should provide in its loan documents speci c provisions that a borrower is required to remain current with all its payment, reporting and other requirements under the terms of a sovereignty submerged lands lease, and that the lender may advance under its loan documents any payment and/or take any other actions necessary or desirable to maintain the lease in e ect and otherwise comply with the terms of the lease. Assignment and Transfer of Lease When acquiring title to upland property from an owner having a sovereignty submerged lands lease for the adjacent submerged lands, a purchaser or a foreclosing lender should obtain an assignment of the lease. In that regard, perhaps the most important factor to consider is that, whether it is a traditional real estate closing, a judicial foreclosure or a deed-in-lieu of foreclosure, the FDEP will not consent to an assignment of a sovereignty submerged lands lease until after title to the upland property has already been transferred to the new owner and the transferring instrument is recorded in the county where the upland property is located. As a result, the assignment of a submerged lands lease to a new owner of the upland property will always be completed post-closing or post-foreclosure. Nevertheless, a purchaser of the upland property would be prudent to obtain at closing an assignment from the seller of all of its interests in the sovereignty submerged lands lease to preclude any claim by the seller post-closing that the seller continued to have an interest in the sovereignty submerged lands. Moreover, counsel for a purchaser or foreclosing lender should be in contact with the FDEP prior to a transfer of title in order to obtain con rmation from the FDEP that it will consent to the assignment of the lease after the upland property is transferred. In order for the FDEP to provide such con rmation, the FDEP requires that all annual lease payments and reporting be up to date, and that the current lessee be in compliance with the terms of its lease (e.g., the lessee may not be engaging in any unpermitted activity in the leased area). After review and con rmation that a lessee is in compliance with the foregoing, the FDEP 88

4 Florida's Sovereignty Submerged Lands Leases will issue a letter of intent pre-closing or preforeclosure stating such. The FDEP's letter should also indicate the date of last site visit and whether the lessee was in compliance with the lease terms at that time. As to this latter con rmation, given its limited resources the FDEP likely will not inspect the submerged lease area in connection with the transfer of the upland property, but will instead rely on its most recent inspection (which, as indicated above, is supposed to be done at least once every ve years). As a result, in addition to obtaining written con rmation from the seller or borrower that it is in compliance with the lease terms, a prospective buyer or foreclosing lender, as part of its due diligence, should independently inspect the submerged lease area before closing to ensure that is the case. Once the closing or foreclosure of the upland property is complete and the deed or certi cate of title is recorded, the FDEP will begin the process of transferring the sovereignty submerged lands lease to the new owner of the upland property, which will actually require the execution of a new lease. Before preparing the new lease, the FDEP will require that that the new owner: (1) submit a Billing Information Form which contains the new owner's billing contact information; 11 (2) provide the FDEP with a copy of the recorded deed or certi cate of title; (3) pay a processing fee; 12 and (4) provide written con rmation that the use of the upland property and authorized activity occurring within the submerged lease area will not change from the uses and activities indicated in the original lease. Once the above requirements are met, the FDEP will prepare a new sovereignty submerged lands lease to re ect the change in upland ownership. Typically, it takes the FDEP several weeks to prepare the new lease and have it executed. As to execution, similar to other state, county, and municipal agencies, the FDEP relies on the Florida Secretary of State's of- ce ( to con rm that the person executing the new sovereignty submerged lands lease on behalf of a new entity owner has the authority to do so (i.e., the individual executing the lease must be an authorized representative identi ed in the Secretary of State's records for that entity). If the FDEP cannot con rm that, it will require a separate resolution from the entity authorizing the individual to execute the lease on behalf of the new owner. As to the term of the new lease, the FDEP will not extend the pre-existing lease term and will only execute a new lease for the balance of the original lease term. Therefore, in most instances, the new owner will have to seek a renewal of the lease in less than ve years. Once the new sovereignty submerged lands lease is fully executed by the FDEP and the new lessee, the new lessee must record the lease within 14 days in the county where the submerged lands are located and provide a copy of the recorded lease to the FDEP within ten days following recording of the lease. Once this process is complete, any new lender nancing the new lessee's acquisition of the upland property should be able to obtain an estoppel letter from the FDEP as indicated above. Conclusion Waterfront properties are some of the 89

5 The Real Estate Finance Journal most valuable in the state. If you are purchasing or nancing an upland property with improvements in the adjoining sovereignty submerged lands, it is important to con rm that a valid sovereignty submerged lands lease exists and is in good standing. Likewise, once a sale or transfer has occurred, it is important to follow up with the FDEP and get a new submerged lands lease in place. The advice of experienced counsel can assist you in navigating the bureaucracy involved in this process and enhancing the value of your property. NOTES: 1 Fla. Admin. Code R (61) (2012). 2 Fla. Stat. Ann , & (2012). 3 Fla. Stat. Ann (2012). 4 Fla. Admin. Code Ann. R (1)(a). 5 Fla. Admin. Code Ann. R (1). 6 Fla. Admin. Code Ann. R (1)(a)(1) (2012). As of March 1, 2007, the base fee was computed at a rate of $ per square foot per annum and the annual fee was $ per annum. These fees are subject to annual adjustments and the FDEP should be contacted for current fees. 7 Sovereignty Submerged Lands Lease Income Reporting Forms, le s/links/incomereportingform.pdf. 8 Rule (1)(b)(4). 9 Rule (1)(b)(3). 10 Rule (1)(b)(5). 11 A copy of the Billing Information Form can be obtained at les/sub mergedbillinginformationform.pdf. 12 The processing fee is updated yearly on March 1 and the FDEP should be contacted for the current processing fee amount. 90