Friday, September 30, 2022

FED!

            In real estate law, FED does not relate to food. Or eating. No, FED is an abbreviation for Forcible Entry and Detainer. And, Forcible Entry and Detainer means eviction.

             In October 2019 Joshua and Jamie Scott rented an apartment from Xin Hickey, requiring a $1500 security deposit and rental of $850 per month. When Josh and Jamie moved in, they paid $525 and shortly after a third-party paid $1500 on their behalf.

             No further payments were made.

             In December 2019 Hickey issued a termination notice due to nonpayment of rent. The notice stated that Josh and Jamie owed $1700 in unpaid rent - $850 for October and $850 for November. When no other monies were paid, Hickey filed an FED action.

             The FED trial was held in January 2020. J&J claimed they owed no additional rent for October and November, stating that Hickey had received $2025 total but was owed only $1700 so Hickey had been overpaid by $325. Hickey replied that the first $525 received was “understood” to cover a $100 cleaning deposit and $425 in rent, and that the $1500 secondary payment was to be applied as a security deposit. Not monthly rent. And as a consequence, J&J owed rent.

             J&J requested a Judgment to the effect that they had paid all they owe, and then some more. Hickey requested an eviction Judgment.

             The trial court concluded that J&J were required to submit the amount stated in the termination notice. Since J&J failed to do so, Hickey is entitled to an eviction Judgment.

             J&J appealed.

             The Court of Appeals determined that J&J had two choices to avoid eviction: (1) pay the amount owing and contest the difference at trial; or (2) deposit the disputed amount with the registry of the court until the matter is resolved.

             Since J&J did neither, the Court of Appeals affirmed.

             J&J further appealed.

             The Supreme Court determined that only an exact statement of the amount due is satisfactory. If the notice is inaccurate, it is invalid and an eviction Judgment cannot be granted. Because Hickey did not issue a notice that stated the correct amount owing, the Court must dismiss the request for eviction Judgment.

             Hickey could then file another FED lawsuit after issuing proper notice.

             J&J win this round; Hickey loses. See Hickey v. Scott; Supreme Court of Oregon; Case No. S068647; July 28, 2022: https://cases.justia.com/oregon/supreme-court/2022-s068647.pdf?ts=1659022760.

             Questions / Issues:

  1. The Opinion doesn’t state it, but this must be an oral Lease. Otherwise, presumably there would be no issues regarding the exact amount owing.
  1. Even if this is a written Lease at issue, many jurisdictions allow oral amendments to written documents. Does your Lease have a provision prohibiting oral amendments and allowing only written modifications?
  1. In my State, a landlord is permitted to demand that a tenant pay the delinquent rent or vacate. Perhaps demanding that tenant pay the delinquent amount is not the best practice, if there is a chance of a computation error. Instead, maybe best practice is simply an unequivocal demand to vacate, unless the Lease requires otherwise.

                                                                                      Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York

  

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

 

Thursday, September 1, 2022

RECEIVERS!

            Borrowers executed a loan agreement for $9.4 million to finance the purchase of Village Square Apartment, as well as another mortgage loan agreement for $29 million to purchase Liberty Village Apartments. The loans have similar default provisions.

            The properties were then sold to Westland Liberty Village, LLC, and Westland Village Square, LLC. Westland assumed responsibility for payment of both loans. Meanwhile, the loans were sold to Federal National Mortgage Association (Fannie Mae).

            The loan agreements contain covenants obligating the borrowers to pay maintenance expenses and repair the properties. The borrowers authorize lender to inspect, and if lender determines that the properties have deteriorated then lender may obtain a new property condition assessment (PCA) at borrowers’ expense.

            Additionally and subject to appropriate advance notice, lender may obligate borrowers to make additional deposits to the replacement reserve account or the repair escrow account. As well, lender has the right to require further repairs and replacements, then use borrowers’ funds to pay those expenses.

            Generally, lender has the discretion to demand such additional repairs and additional deposits without obtaining borrowers’ approval. Failure of borrowers to repair, replace, and fund, is an automatic event of default in the loan agreement.

            If an event of default occurs in the loan agreement, then lender may accelerate the loan balance, demand payment in full, and foreclose. Further, if borrowers trigger an event of default in the deed of trust, then lender may cause a receiver to be appointed by the court.

            Although unstated, presumably the deed of trust contains a provision stating that a default in the loan agreement is also an event of default in the deed of trust.

            After Westland closed the two deals, Fannie Mae observed a substantial decrease in occupancy rates and became concerned that the decline resulted from deterioration in the condition of the properties. Fannie Mae inspected and engaged a third party to prepare a PCA. The inspector determined that Village Square was in substandard condition while Liberty Village was in fair to poor condition.

            Village required repairs and replacements of $1.09 million; Liberty needed $1.75 million. Fannie Mae’s servicing agent sent Westland demand notices requiring an aggregate deposit of $2.8 million in escrow accounts. Westland resisted.

            Fannie Mae then petitioned the district court for the appointment of a receiver. Westland opposed.

            The district court found that Fannie Mae did not show that Westland ceased payments. And as a consequence, a receiver was not warranted.

            Fannie Mae appealed.

            On appeal, Fannie Mae argued that Westland defaulted in the loan covenants by failing to provide additional deposits, failing to maintain the properties, and refusing to allow Fannie Mae to inspect. And, that no default in the payment of principal and interest or escrow is required in order for Fannie Mae to successfully petition the court to appoint a receiver, due to the nature of the other defaults and Westland’s contractual agreement that receivership is an appropriate remedy.

            It did not take long for the appellate court to determine that the district court was entirely wrong. Fannie Mae had the right to inspect. Fannie Mae had the right to obtain a new PCA. Fannie Mae had the right to require repairs, replacements, and escrow deposits.

            When Westland refused to repair, replace, increase escrow, and allow inspections, Westland defaulted. One of Fannie Mae’s default remedies, as stated in the contracts and agreed to by Westland, is the appointment of a receiver.

            The district court abused its discretion in denying Fannie Mae’s request for a receiver, and the order declining to appoint a receiver is reversed. See Federal National Mortgage Association v. Westland Liberty Village, LLC and Westland Village Square, LLC; Supreme Court of Nevada; Case No. 82174; August 11, 2022: https://scholar.google.com/scholar_case?case=2734121237971392065&q=federal+national+mortgage+association+v.+westland&hl=en&as_sdt=6,44&as_vis=1.

            Question:

  1. Why did this Nevada district court ignore the plain language of the loan documents? Answer: That was rhetorical; I have no idea why FNMA was on the receiving end of a wrong decision and was forced to appeal. If any of my readers know this answer, please share.

                                   

                                                                                    Stuart A. Lautin, Esq.*

 

 

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York

  

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

Saturday, July 30, 2022

LEASING CO-TENANCY

            In June 2003, JJD-HOV Elk Grove leased space to Jo-Ann Stores, consisting of 35,000 SF in a commercial shopping center. The initial term was 10 years, with four options to extend of five years each.

            Base monthly rent started at $36,548 per month, increasing every five years. At the time of the dispute base rental was approx. $43,000 per month.           

            The Lease contained a co-tenancy provision obligating JJD to enter into leases with either three anchor tenants, or otherwise maintain an occupancy level of at least 60% of the gross leasable area of the Shopping Center. If the co-tenancy obligation is not met, then Jo-Ann can pay only Substitute Rent until the occupancy threshold is met. ‘Substitute Rent’ is the greater of 3.5% of Jo-Ann’s gross sales at that location, or $12,000 per month.

            Also, if the co-tenancy burden is not satisfied for a period of six months, then Jo-Ann could terminate the Lease.

             Jo-Ann invoked the co-tenancy provision twice before this claim. For several months in 2004 and 2005, Jo-Ann paid Substitute Rent until all three anchors, Jo-Ann, Sports Chalet, and Sacramento Food Coop, were open for business.

            Then, in 2007, a dispute arose over Jo-Ann’s right to pay Substitute Rent when the Coop was replaced by Grocery Outlet.

            The present dispute arose in 2018 when Jo-Ann informed JJD it would start paying Substitute Rent again because two anchors – Sports Chalet and Toys R Us – had both closed. Sports Chalet had closed in 2016, but presumably the subsequent closure of Toys R Us brought the shopping center’s occupancy load to below 60%.

            Jo-Ann proceeded to pay Substitute Rent until May 2020, when Scandinavian Designs opened in the former Toys R Us space. At that time, Jo-Ann returned to paying the full base rent provided in the Lease.

            JJD, offended by its own co-tenancy clause, asserted a complaint against Jo-Ann, claiming that the Substitute Rent provision is an unenforceable penalty and as a consequence, Jo-Ann is obligated at all times to pay full rental, regardless of occupancy loads and anchor tenants. JJD tabulates that Jo-Ann owes $638,293 in rent as of January 2021.

            The trial court ruled in favor of Jo-Ann. JJD appealed.

            JJD’s argument regarding an unenforceable penalty was centered around a theory of proportionality. If there is no proportional relationship between the forfeiture compelled and the damages that might actually flow from the failure to perform or satisfy a condition, then the provision must fail.

            An unenforceable penalty bears no reasonable relationship to the range of actual damages the parties could have anticipated when the contract was signed. How to know? The court must compare the value of the money forfeited or property transferred to the party protected by the condition, to the range of harm or damages anticipated to be caused that party by the failure of that condition.

            Although this is a close call for the appellate Court to make, the Court concludes that the co-tenancy provision is valid and enforceable as it is neither disproportionate nor a penalty. Jo-Ann wins again; JJD loses again.

            See JJD-HOV Elk Grove v. Jo-Ann Stores; Case Number C094190; California Court of Appeals 3rd District; June 28, 2022: https://casetext.com/case/jjd-hov-elk-grove-llc-v-jo-ann-stores-llc.

                                                                                    Stuart A. Lautin, Esq.*

 

 

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York

  

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.