Thursday, August 31, 2017

Lease Guarantees


In 2003, L + C Unlimited Corp. received the assignment of the tenant’s interest in a lease that permitted the Golden Isle Restaurant to operate in a strip mall. Xiao-Yan Cao, President of L + C, personally guaranteed the performance of L + C.

In 2006 the tenant’s leasehold estate was again assigned, this time to Hong Lin. At the same time, the Lease term was extended five years to September 30, 2013. Both Cao and Lin signed new, personal Guarantees.

From 2008 to 2010 L + C and Lin failed to timely make rent payments, and owed ~ $24,000. However, L + C, Lin and the Landlord PC Riverview, agreed to a repayment schedule to permit L + C and Lin to catch up by making five additional payments. Which Lin did.

In 2013, L + C and Lin defaulted again and failed to pay the last monthly installment of rent. PC Riverview sued both Lin and Cao for the rental deficiency. Cao defended, arguing that the 2010 repayment schedule materially modified the Lease and discharged Cao’s Guaranty, since Cao did not agree to the repayment schedule, was not notified about its existence, and did not execute the repayment agreement.

The district court agreed and ruled in Cao’s favor. PC Riverview appealed.

The court of appeals reversed, reasoning that merely extending the period within which a tenant may pay rent did not materially modify the Lease and consequently, all guarantors remain liable. Cao appealed to the Supreme Court.

The Supremes first turned to Cao’s Guaranty Agreement, which provided that Cao “. . . guarantees performance of all covenants, conditions and obligations and duties required of Tenant under said Lease.” And here’s what the Guaranty Agreement did not provide Cao: right to a notice before the Lease was amended or a prohibition against such amendments without Cao’s consent.

We can guess where the Supremes are headed when they state that before the 2010 Modification was made, Cao was responsible for the payment of rent, interest and late fees. And after the 2010 Modification was signed, Cao was responsible for – wait for it – rent, interest and late fees.

The Supreme Court affirmed the Judgment of the court of appeals. Xiao-Yan Cao is obligated to pay PC Riverview. See PC Riverview LLC v. Xiao-Yan Cao; Case No. 20160781; Utah Supreme Court; August 23, 2017: http://caselaw.findlaw.com/ut-supreme-court/1871913.html.

Lessons learned:

1.      Are you on the Guarantor-side of this issue? Then be sure the Guaranty Agreement does not obligate the Guarantor for future amendments and modifications to the Lease. Also provide that the Guarantor receives notice of all claims of the Landlord against the Tenant, and prohibit the Lease from being amended or extended without Guarantor’s prior written consent.

2.      Are you on the Landlord-side of this issue? Then be sure the Guaranty obligates the Guarantor for all amendments, without any requirement of notification or approval, and that the Guaranty continues until all obligations of the Tenant to the Landlord have been discharged as reported by Landlord.

3.      On both sides of this? Be sure that the Guaranty Agreement is clear and unequivocal, and 12 people sitting in a jury box with average 11th grade educations can readily understand what you are trying to accomplish in both the Lease and Guaranty.

                                                                                    Stuart A. Lautin, Esq.*

                Reprinted with permission by North Texas Association of REALTORS®, Inc.
               * Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
                 Texas Board of Legal Specialization

                 Licensed in the States of Texas and New York
 



Friday, June 30, 2017

Supremes Speak. I Listen. So Should You.


And yet here’s more from the Texas Supreme Court regarding commercial property. This one shocked me and I suspect you’ll be hearing / seeing / reading more about it.

Jay Cohen, trustee of various trusts, transferred several properties owned by the trusts into different partnerships. One involved the “West Newcastle” property, which Cohen transferred to Flat Stone II, Ltd. The controlling shareholder of Flat Stone’s general partner, Matthew Dilick, gave Regions Bank a mortgage to secure a personal loan.

When the loan wasn’t repaid because Dilick defaulted, Dilick transferred a piece from the West Newcastle property to a new entity. Cohen sued Dilick, alleging a fraudulent transfer and that Dilick lacked authority to mortgage the parcel. Cohen also filed notices of “litigation pending” (lis pendens) on the various pieces of property involved in the lawsuit.

One of the Notices of Lis Pendens stated that the purpose of the underlying suit was to invalidate the transfer of property and Regions Bank lien. The trial court granted the Dilick’s motion to expunge the Notices of Lis Pendens.

While Cohen was appealing the Expunction Order, Dilick sold one of the parcels to Sandcastle for $750,000.

Meanwhile the Texas court of appeals overturned the trial court’s Expunction Order, so Cohen added Sandcastle as a defendant to cancel its recent purchase. When Dilick sold another piece to NewBiss for $1.8 million, Cohen added NewBiss as a defendant to the same litigation.

And now to the important part: Both Sandcastle and NewBiss claimed that they lawfully relied on the trial courts Expungement Orders, which had the effect of voiding any notice derived from the Lis Pendens.

The trial court agreed that the Expungement Orders superceded the Notice of Lis Pendens, and that such Notices were void. That was the first win for Sandcastle and NewBiss. Cohen appealed.

The Texas Court of Appeals agreed with the trial court. That was the second win for NewBiss and Sandcastle. An appeal to the Texas Supreme Court followed.

At our State’s highest Court, Cohen argued that expunction of the Notices of Lis Pendens does *not* relieve a purchaser from the duty to review the underlying lawsuit to determine if it could impact future ownership. NewBiss and Sandcastle defended by stating the obvious: that is what the word “expunction” means, to remove from a record, erase or destroy.

The Supremes decided that, no, the word “expunction,” at least in the context of Notices of Lis Pendens, does not mean what we think it means. Rather, the word means that although the chain of title may be free from the recorded Notice, the E word does not have the affect of ignoring the underlying lawsuit altogether.

The Texas Supreme Court reversed the Judgment of the court of appeals and trial court. NewBiss and Sandcastle lost this last round and are now charged with knowledge of the contents of a lawsuit they believed was no longer relevant due to the Expunction Orders. See Sommers v. Sandcastle Homes and NewBiss Property.; Case No. 15-0847; Texas Supreme Court; June 16, 2017: http://cases.justia.com/texas/supreme-court/2017-15-0848.pdf?ts=1497621851.  

Lessons learned:

1.      The implication of this case is far-reaching. This means that if a Notice of Lis Pendens has ever been filed (even though later released / discharged / expunged), purchasers, tenants and lenders are still charged with understanding what was contained in the Notice as well as the underlying lawsuit. This appears to be the case even though after release / discharge / expungement, the Notice would not typically appear in a commitment for title insurance.

2.      If a purchaser, tenant or lender fails to review the Notice (again, even though it’s been released), the purchaser / tenant / lender may find itself defending a claim regarding fraudulent transfer or other legal issue. And, the title insurer may refuse to defend or indemnify claiming that the Notice (even though released) was a matter of public record, accessible to anyone who looked for it online.

3.      Our Texas legislators will need to fix this when they next meet. In 2019. We’ll need new laws to the effect that the word “expunge” means exactly what we think. Otherwise and until that happens, smart buyers, lenders and tenants will need to instruct title agents to specifically search for all Notices of Lis Pendens affecting the target property, even though they may appear to have been subsequently released. Because a recorded Release – and I’m struggling writing this – but it appears that a recorded Release of Lis Pendens is ineffective and provides no safe harbor to buyers, lenders and tenants and everyone else who trusts that the word “release” or “expunge” means exactly that.

                                                                                    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, June 1, 2017

Boo Bradberry and the San Francisco Rose


Our Supremes (Texas Supreme Court, that is) never get involved in eviction cases. Certainly not in commercial evictions. Not that I can recall, anyway.

With one recent exception.

Shields Limited Partnership owns commercial property in Dallas, which was leased to Boo Bradberry and subleased to 40/40 Enterprises, Inc. Boo and 40 have operated the San Francisco Rose there, which has been a Dallas-area Greenville Ave fixture since the 1970s.

Boo was not timely with his rent payments, and regularly violated the Lease terms by paying late. Without fail, Shields accepted the rental when tendered without protest or assessment of late fees.

In May 2012 Boo was late again with the rental payment, which was not tendered until June 13. The late rent payment was, again, accepted without protest.

If Boo had properly exercised a lease option, his rate starting June 1 would have increased to $3,340 per month. Instead, Boo continued to pay $3,000 per month. And Shields continued to accept it.

In November 2012 Shields’ broker sent Boo an email notice that Boo had incurred late charges, and declared that Boo was a month-to-month tenant.

Since no further rent payments were received, Shields’ broker sent Boo a notice of default in December 2012.

Almost one full year later – October 2013 – Boo received additional default notices and Shields offered Boo a new lease with a rent rate of $9,700 per month. When Boo refused, Shields started an eviction lawsuit.

The JP Court ruled in Boo’s favor, as did the Dallas County Court. The Texas Court of Appeals affirmed, finding essentially that Shields’ actions in constantly accepting late rental payments without protest is inconsistent with the assertion that Boo had failed to fulfill the lease obligations.

The main point before the Supremes turned on the non-waiver provision in the Lease, which said exactly what you think it would say:

“Landlord’s failure to enforce any provisions of [the] Lease or its acceptance of late installments of Rent shall not be a waiver and shall not estop Landlord from enforcing that provision or any other provision of [the] Lease in the future.”

So the issue is only whether Shields could, by its conduct in continually accepting late rent, waive the non-waiver provision of the Lease.

After pages of discussion and case citations from 1945 on (let’s not forget this is the Texas Supreme Court), the Supremes held that Shields’ constant acceptance of late rent payments does not waive the non-waiver clause. Meaning: Shields could still claim a Lease default and evict Boo.

Wow. Got to be honest with you – I did not see this coming although I should have. Since the Texas Supreme Court accepted review of the case, that meant that new laws were headed our way. Because, see above. Our Supreme Court never reviews commercial eviction cases.

See Shields Limited Partnership v. Boo Nathaniel Bradberry and 40/40 Enterprises, Inc.; Case No. 15-0803; Texas Supreme Court; May 12, 2017: http://docs.texasappellate.com/scotx/op/15-0803/2017-05-12.guzman.pdf.

Lessons learned:

1.      If a Texas landlord has been accepting late rents without protest, perhaps there is still a means to evict a tenant for non-payment. Maybe.

2.      But rather than litigate the case to the Supreme Court, a Texas landlord would be wiser to reject the late rental, or accept it “under protest” and consistently enforce late provisions. In that manner, appellate litigation should not be needed.

3.      There’s a procedural point I don’t understand. Texas laws only allow residential evictions to be appealed past the county court level. See TPC 24.007: http://www.statutes.legis.state.tx.us/Docs/PR/htm/PR.24.htm. This has been our laws since at least 1983. I need to read this case again and figure out how / why this commercial eviction was appealed, twice, past that level.

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