Friday, March 31, 2017

Oral Contracts - Binding or Not?




 
We have all been told that oral agreements are not binding. But don’t tell that to David Reyes and Sonia Valenzuela.

In 1993 David and Sonia approached Annette Burrus and inquired about buying one of her lots in Tornillo Texas. Tornillo is a colonia in El Paso County, on the border, with a population of 1,568 as of the last census.

Burrus claims she advised them that she had no lots for sale, but instead she offered to rent them a portion of her 11-acre tract. Burrus offered to purchase a mobile home of their choice, which she would move to the property at her expense. Thereafter, David and Sonia and their children could rent the mobile home and the lot from Burrus on a month-to-month basis.

Burrus purchased a mobile home as selected by David and Sonia, and had the home moved to the lot. David and Sonia paid $500 before moving into the mobile home in September 1994, and thereafter paid $200 per month. For 17 years.

Although Burrus saw the relationship as Landlord and Tenant (but evidently Burrus neither repaired nor maintained any portions of the lot and home), David and Sonia believed that they had agreed to purchase the mobile home from Burrus for $21,000, that their initial $500 payment was a down payment on the lot, and that the $200 monthly payments were to be applied as principal and interest on a seller-financed Note.

As would be the case in a contract for deed transaction, David and Sonia anticipated they would receive full title to both the mobile home and lot from Burrus once they paid off the loan.

Shortly after they moved in, David and Sonia erected a chain link fence around the perimeter of the lot, installed plumbing fixtures, lighting and ceramic tiles in the home, built a shed and dog kennel and planted trees. Then they added a porch and several rooms to the mobile home, moved the home to the center of the lot and paid to have a concrete slab poured on which to build the additions.

In all, David and Sonia spent over $22,000 in materials for the improvements with no reimbursement from Burrus.

In March 2011 Burrus began negotiating to sell her acreage to Tornillo DTP VI, LLC, which included the lot where David and Sonia were living. Evidently Tornillo DTP was buying the property to lease it to Dollar General, which intended to build a retail store at the site.

Burrus signed a contract with Tornillo DTP in January 2012, in which she would receive $90,000 for the sale, with a closing date in February 2012. After Burrus informed David and Sonia of the closing, demolition crews hired by Tornillo DTP came onto their property and began removing improvements including the fence, trees and dog kennel. So David and Sonia sued both Burrus and Tornillo in April 2012, attempting to stop the demolition.

David and Sonia resolved their dispute with Tornillo DTP, then turned their gun turrets towards Burrus. The jury determined that an oral agreement existed for Burrus to sell her property to David and Sonia, Burrus breached the agreement, and David and Sonia were damaged.

The trial court entered judgment awarding David and Sonia $70,000 in damages, $92,000 in attorney’s fees and $23,000 related to Burrus’ failure to render annual accounting statements as provided by Texas’ contract for deed statutes.

Burrus appealed, contending that oral agreements regarding real estate are prohibited in Texas.

The appellate court first concluded that ordinary real estate transactions in Texas must be written. But also that there were exceptions to that rule when valuable and unreimbursed improvements were made to the property, and when fairness and equity requires Courts to enforce an unwritten agreement.

I’ll spare you the 23-page single-spaced analysis written by the Court, but you can already guess the outcome. The trial court’s judgment for David and Sonia is affirmed.

See Burrus v. Reyes, Case No. 08-14-00265-CV, Texas Court of Appeals, 8th District, March 8, 2017: http://scholar.google.com/scholar_case?case=18368523796023647491&q=burrus+v.+reyes&hl=en&as_sdt=6,44.   

Lessons learned:

1.      Beware the oral agreement. Yes Texas law still says that real estate agreements regarding the purchase and sale of property must be written. And yet judges and juries can still find a way to ignore the law.

2.      The oral-agreements-are-not-binding-in-Texas-theory is even more problematic regarding leasing, where real estate leases for a term of one year or less need not be written. That can be particularly dangerous in the context of short-term executive office leasing, short-term warehouse leasing or a “holiday” lease of retail space.


3.      The B/L: If for no other reason than clarity, get it in writing!

                                                                                    Stuart A. Lautin, Esq.*

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

Tuesday, February 28, 2017

Use Clauses in Commercial Leasing


It is hardly unusual for tenants to require special licenses to conduct their business, in addition to Certificates of Occupancy and zoning compliance. Bars need liquor licenses from the Texas Alcoholic Beverage Commission. Banks need licenses from the Texas Department of Banking or similar federal authority. Racetracks require licenses from The Texas Racing Commission. Chiropractors must have licensure from the Texas Board of Chiropractic Examiners.

And so on for surveyors, architects, physicians, veterinarians, engineers, lawyers, dentists, accountants, brokers, medical facilities, pest eradication companies, repair shops using oil or hazardous substances, fuel dispensing, etc.

But what happens when the tenant signs the Lease, and then is unable to secure the license? What if the tenant doesn’t try [very hard] – should the tenant be excused?

Bre Mariner Conway Crossings, LLC, as Landlord, entered into a five-year commercial Lease with Genuinely Loving Childcare, LLC, as tenant. The Lease provided that tenant could use the premises solely for the purpose of operating a child day care center for up to 35 pre-school children.

The target space consisted of 2800 SF in an Orlando shopping center. The Lease further provided that the tenant must use its best efforts to keep the children inside the premises and prevent them from loitering in the common areas.

In Florida, the operation of a child care center that cares for more than five children requires licensure from the Department of Children and Families. The Florida legislature has set minimum standards for licensure, including that the child care center must have at least 45 SF of outdoor play area per child. Drop-in childcare and urban child care centers are exempt.

The urban child care center designation which permits the substitution of indoor play space for outdoor play area, requires written documentation from the local governing body that the area where the child care center is located has been declared urban.

Evidently the Lease was signed at the end of 2013 or beginning of 2014. In January 2014 the Florida Department of Children and Families denied tenant a permanent license because the Department did not believe the child care center was located in an urban area. The Department did, however offer a provisional license with the understanding that an outdoor play area would be required for permanent licensure.

Using the provisional license, Tenant opened the child care center in February 2014. Unable to obtain a permanent license, tenant abandoned the premises in February 2015, only one year into a five-year commercial lease term, when tenant’s provisional license expired and no further renewals were permitted by operation of Florida law.

The landlord sued Genuinely Loving Childcare, LLC and its Guarantors, and obtained a judgment in trial court for eviction and damages. Tenant appealed the damages portion of the award.

The Appellate Court reviewed the evidence and tenant’s affirmative defenses of: (a) impossibility; (b) impracticality; and (c) frustration of purpose. The thread that connects them all is foreseeability at the inception of the Lease. The Court determined that “if a risk was foreseeable at the inception of the lease, then there exists an inference that the risk was either allocated by the contract or was assumed by the party.”

Landlord used that argument to Landlord’s benefit, stating that tenant’s defenses are insufficient because the risk tenant would not obtain a license was foreseen and allocated by the Lease to tenant. However, the Court concluded that the Lease provisions did not explicitly allocate the risk that the Department of Children and Families would deny tenant the urban designation and a permanent license without outdoor play space.

Due to a Lease that is ambiguous on this point, the Appellate Court reversed the final Judgment and dispatched the case to the lower court to determine the intent of the parties regarding the licensure issue.

See Genuinely Loving Childcare, LLC vs. Bre Mariner Crossings, LLC, Case No. 5D15-4168, District Court of Appeal of Florida, 5th District, January 13, 2017: https://scholar.google.com/scholar_case?case=9889607525199014198&q=genuinely+loving+childcare+v.+bre+mariner&hl=en&as_sdt=6,44&as_vis=1.  

Lessons learned:

1.      Failure to explicitly allocate the risk of licensure is a common problem in commercial leasing. If a tenant is unable to secure its license, it might assert a position of “frustration of purpose,” meaning that if the tenant cannot open or continue its business due to matters outside of its control, perhaps it should not remain liable for lease obligations.

2.      Landlords, conversely, may insist that Landlord was not operating the business inside the four walls. It’s tenant’s business and there is no one better than tenant to process the applications, overcome objections and secure necessary licensure.

3.      The B/L: In your Lease Agreements provide for not only how the premises will be used, but if it is subject to special licensure to be obtained by tenant and tenant is unable to obtain the license, or perhaps tenant secures the license but not for the duration of the lease term, then also state what happens in those circumstances too. Does the tenant remain liable? For the full remainder of the term? Is there an exit strategy for the tenant where it can terminate the Lease by payment of a set amount?

                                                                                    Stuart A. Lautin, Esq.*

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

Monday, January 30, 2017

Are Emails Binding?


Prentis Tomlinson is the President and CEO of PetroGulf, Ltd. Petro was formed to trade oil commodities from Iraq with regional markets. In 2009 Tomlinson met with John Khoury, seeking investment into Petro. Khoury invested $400,000.

Khoury, unhappy with the performance of his investment, met with Tomlinson in early 2012 to discuss Petro’s failure to disclose financial information. In that meeting, Tomlinson agreed to personally repay Khoury the $400k debt over a four or five-year period.

A week later Khoury sent an email to Tomlinson summarizing the meeting. Tomlinson replied by email with, in addition to other text: “We are in agreement.”

When Tomlinson failed to make the payments, Khoury brought a lawsuit. Tomlinson’s defense was that any recovery for breach of contract was barred by the Texas Statute of Frauds, which requires that many agreements must be in writing and signed to be enforceable.

At trial, Tomlinson admitted sending the email but claimed that his response of being in agreement referred to an agreement different from the terms identified in the email to which he replied.

The jury concluded that Tomlinson had obligated himself to repay the $400k investment, and that Tomlinson has breached that agreement. The jury found in favor of John Khoury on all claims and awarded him $400k plus attorneys fees.

Tomlinson then asked the trial court to enter a Judgment disregarding the jury’s verdict on the $400k breach of contract claim. The trial court, likely accepting Tomlinson’s position that emails do not satisfy the Texas Statute of Frauds, agreed and in doing so, gutted the jury’s verdict.

John Khoury appealed.

The Texas Appellate Court reviewed the Texas Statute of Frauds, providing that debt agreements must be written and signed. You can read it at TBCC 26.01(a)(1) and (2), and 26.01(b)(2): http://www.statutes.legis.state.tx.us/Docs/BC/htm/BC.26.htm.

Seems clear enough. The law requires a signed writing. There was no written paper agreement; there was no signature.

However, there was an email chain that basically ended with “We are in agreement.” The last email from Tomlinson does not contain Tomlinson’s name in the body of the text he wrote. But his name and email address do appear in the “From” field of the email.

The Appellate Court started by evaluating the Uniform Electronic Transactions Act as adopted in Texas at TBCC 322.001 – 021: http://www.statutes.legis.state.tx.us/Docs/BC/htm/BC.322.htm. UETA was added 10 years ago to remove barriers to electronic transactions by setting an expansive view of what constitutes electronic writings, records and signatures. The goal was to adopt our now-common practice of foregoing paper in favor of emails, texts and similar.

It took the Court three full single-line pages to analyze this one issue and conclude that a signature block in an email performs the same authenticating function as a “From” field. Consequently,  the Court concluded that the email satisfied the definition of a writing and signature; the Statute of Frauds could not be used to avoid enforcement of the agreement.

John Khoury won his appeal; Prentis Tomlinson owes him $400,000 plus attorneys fees. Whether or not Khoury will be able to collect his Judgment is an entirely different matter. See Khoury v. Tomlinson, Case No. 01-16-00006-CV, First District Harris County Court of Appeals, December 22, 2016: https://casetext.com/case/khoury-v-tomlinson.

Lessons learned:

1.      Our Texas Statute of Frauds has been hijacked. Writings and signatures are no longer strictly required. Emails can be sufficient to create binding agreements

2.      If emails suffice, then I suppose so do texts, social media, chat rooms, bulletin boards and similar e-platforms where one can identify who is communicating and agreements can be made electronically without paper or ink signatures.

3.      However – the Fort Worth Court of Appeals reached an opposite conclusion in 2011 and decided that an email was insufficient to serve as a “signature.” See Cunningham v. Zurich American Ins Co: http://caselaw.findlaw.com/tx-court-of-appeals/1580444.html.

4.      The B/L: be careful with email agreements and instead, until we have more guidance from our legislators or Supreme Court, insist on old-fashioned, ink-signed contracts, leases, amendments, loan docs, release and settlement agreements, and everything else related to what we do. Don’t type “agreed” in an email or similar unless you are prepared to be bound.

                                                                                    Stuart A. Lautin, Esq.

 

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

Wednesday, December 21, 2016

Tell Me Again Why I Can't Lease It for Income?

Ken Tarr bought a house in the Timberwood Park subdivision of San Antonio in 2012. In 2014, when his employer transferred him to Houston, he began leasing his San Antonio home for short durations.

In the summer and fall of 2014 Ken entered into 31short-term rental agreements ranging from one to seven days, totaling ~ 102 days. Ken did not lease rooms separately, but rather leased the entire home each time.

In the same time period Ken was notified by the Timberwood Park Owners Association Inc., that he would be fined if he continued to use the house as a rental property.

Predictably, Ken was fined so he scheduled a meeting with the Association’s board to review and appeal their decision.

Ken lost the hearing before the Association’s board in September 2014. To avoid paying the fines but primarily to continue his use of his property for income purposes, Ken sued the Association, seeking a declaration that the Restrictive Covenants imposed by Timberwood did not prohibit his leasing activity.

The Association responded by claiming that there were no facts at issue, and that the Association was entitled to a Judgment by operation of law. The Court agreed with the Association and rendered Judgment for the Association.

Ken appealed.

The Restrictive Covenant reviewed on appeal stated substantially “All tracts shall be used solely for residential purposes . . .” That gave Ken the ammunition to claim that indeed his property was being used a residence. A leased one. But still – it was built for human habitation and, humans were, well, habitating [yes I know English grammarians are going to yell at me for converting that noun into a verb. But it happened. It’s the new me, in a new year.]

The Association replied that Ken’s short-term renters are not “residents” and are not using the property for “residential purposes,” but rather they are transients using the property temporarily. And the Association further argued that a temporary residential use does not equal the “residential purpose” mandate.

The Texas Appellate Court determined that if a person comes to a place temporarily, without any intention of making that place his of her home, then that place is not considered the person’s residence. And from there, it wasn’t a far stretch for the Texas Appellate Court to conclude that the lease of a home to be used for transient purposes is not in compliance with the restrictive covenant that it be used solely for residential purposes.

Perhaps sensing an appeal to the Supreme Court, the Texas Court of Appeals also noted that the Austin Court of Appeals came to the opposite conclusion in 2015, holding that a covenant requiring use “for single family residential purposes” was fatally ambiguous.

Regardless, the 4th Texas Court of Appeals affirmed the trial court’s Judgment. Ken Tarr lost and may not rent his property, at least not in the manner he had been leasing it. Timberwood Park Owners Association Inc. wins again.

See Kenneth Tarr v. Timberwood Park Owners Association Inc.; Texas 4th Court of Appeals, San Antonio; Case Number 04-16-00022-CV; November 16, 2016: http://caselaw.findlaw.com/tx-court-of-appeals/1754436.html.

Lessons learned:

1.      I have clients, some institutional, that need to lease residential properties where restrictive covenants might be read in a manner to prohibit that activity. We have different appellate decisions across the State. Our Texas Supreme Court needs to accept a case and give us some definite guidance.

2.      Texas brokers and agents enter the danger zone when they assume that their clients are purchasing property for their own residential use. But even if that is the stated purpose, the clients still need to be aware if covenants are in existence that could impede later leasing activities. Things change.

3.      The problem is amplified when principals are buying properties with the stated intent of converting them to income-producing. Beware, my Texas cadres, and review the covenants before the Contract is signed, so that buyers are making an informed, educated and intelligent decision!

                                                                                    Stuart A. Lautin, Esq.*

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

 

 

Thursday, December 1, 2016

Whoops I May Have Renovated the Wrong Property....

Ravi Prasad received notice of a public auction from the County. Ravi, a retired chemical engineer who was in the real estate flipping business, was interested in Parcel 8-C, identified as 17211 Shands Road. A photograph on the property card showed that the lot was improved with a residence.

The residence shown, however, was owned by William and Elnora Washington. The Washington's house is located two lots north of Parcel 8-C. The street address for Will and Elnora’s house is 17201 Shands Road, but was incorrectly marked on the front of the house and mailbox as 17211 Shands.

William testified that 17211 was the original address when it was owned by his mother. When Will purchased it in 2004, he learned the address had been changed to 17201, but he never altered the fourth digit on the house or mailbox.

The Washington house had been vacant at all times relevant to this case.

Ravi viewed the Washington house prior to the tax sale, thinking it was Parcel 8-C. Although Ravi obtained a County tax map showing the physical location of both Parcel 8-C and the Washington property, Ravi drove instead to the Washington home for his inspection.

Ravi’s $11,000 bid for Parcel 8-C was accepted, and soon after Ravi began renovating Will and Elnora’s house instead of Parcel 8-C. He expended more than $23,500 before he received a letter from an attorney engaged by the Washingtons, suggesting he might cease his efforts to improve a property he did not own.

Will and Elnora Washington refused to pay Ravi Prasad for the work completed, so Ravi sued M/M Washington for damages.

Ravi claimed at trial that Will and Elnora had been unjustly enriched due to Ravi’s efforts. And, if the Washingtons had not displayed the wrong address on their house, “upon which both he and the County ‘obviously’ relied,” then none of this would have occurred.

Ravi further argued that although he did not conduct a title search, obtain a title commitment or title policy, if he had done so the result would have been the same since a title analysis would not have revealed that Ravi had inspected the wrong property and was confused as to the exact location of Parcel 8-C.

The Washingtons asserted that Ravi was not entitled to damages since the Washingtons did not know their property was being renovated. Recall that the property was vacant at the time.

The trial court found that it would be inequitable to allow the Washingtons to receive the value of Ravi’s renovations, regardless of the Washingtons’ testimony that their property was vacant. And that they did not gain knowledge of the repairs until two months after commencement. And at that time they promptly engaged an attorney to advise Ravi to stop his efforts.

The trial court entered Judgment for Ravi in the amount he expended on the house – $23,508 – and also imposed a lien on the Washingtons’ property for that amount.

Will and Elnora appealed.

The Supreme Court took a different approach, finding that Ravi had at least imputed knowledge (we call this constructive notice) that he was renovating property he did not own. Ravi’s foreclosure Deed clearly identified Parcel 8-C. Ravi had no legal right to rely on mailbox numbers and similar. Further, a property tax map in Ravi’s possession identified both Parcel 8-C and the Washingtons’ property, located a bit north of 8-C.

The trial court’s Judgment was reversed. William and Elnora Washington win and they can keep Ravi’s improvements without a duty to pay for them. See Washington v. Prasad; Record No. 151783; Supreme Court of Virginia; October 27, 2016: http://scholar.google.com/scholar_case?case=10093304851191612435&q=washington+vs.+prasad&hl=en&as_sdt=6,44.

Lessons learned:

1.      Foreclosures are inherently risky business. My savvy foreclosure buyer-clients will not bid more than 50% of fair market value, due to bumps in the road like this one.

2.      Mailbox numbers and addresses painted on curbs, or nailed to the fences and front and back walls, are not binding for this type of property identification purpose. County Maps and Plats should have been more carefully reviewed.

3.      Although there wasn’t much text about this in the Supreme Court opinion, I believe a different outcome would have been reached had the Washingtons known that someone was working hard to improve their property. Perhaps this is one of those rare moments where ignorance is bliss. But I also believe that Will and Elnora expended far more than the value of the improvements to defend and appeal the case to the Supreme Court.

 
                                                                                    Stuart A. Lautin, Esq.
 
 
                  Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
 
 
 
 

Monday, October 3, 2016

It Must be Written - Correct?

Bobby Miller agreed to purchase two acres of land in Cass County from Leorris Thomas. Under the terms of the deal, Bobby was to pay Thomas’ mortgage on the property. When it was paid in full, Bobby would own the property.

The contract was oral. Not written.

Bobby claimed that he had a conversation in 2003 with his brother-in-law Thomas, to the effect that if Bobby paid off the notes then Bobby would become the owner. Bobby said they shook hands to confirm their deal.

Evidently Bobby did not know how much was owing, to whom it was payable, or how long it would take to pay off the debt. Regardless, Bobby started making payments to TEXAR Federal Credit Union of $113.76 per month. Bobby also paid the property taxes.

The target property contained two water wells and a house, which Thyra Miller (Bobby’s wife) described as “condemned.” Regardless, Bobby elected to repair the dilapidated home, and spent approximately $30,000 to do so.

He also repaired the water wells, completing all renovations in 2006. Thomas, owner of a barbeque restaurant near the property, was aware of the work.

Cass County property records established that the property was appraised for $13,490 in 2003, and $35,460 in 2009.

Leorris Thomas hired an attorney in 2007, who sent a notice to M/M Miller that Thomas had elected to terminate their “verbal lease agreement,” and that M/M Miller needed to vacate the premises.

M/M Miller did not vacate. Instead, they continued to remit monthly payments to the Credit Union until 2009 when Thyra Miller vacated because, as she states, Thomas was harassing her. At that juncture, the note balance might have been approximately $3,100, and M/M Miller had been paying property taxes for six years.

After Thyra moved out, Thomas sold the property to Clay Jiles and a Deed was executed and recorded. That prompted M/M Miller to file a lawsuit.

The primary defense asserted by Thomas was that the Texas Statute of Frauds requires that real estate sales contracts must be written. See Texas Business & Commerce Code Section 26.01(b)(4): http://www.statutes.legis.state.tx.us/Docs/BC/htm/BC.26.htm. Indeed, that is precisely what the law requires.

The jury returned a verdict providing that Thomas agreed to deed two acres of property to Millers in exchange for Millers paying off a loan Thomas owed to TEXAR Federal Credit Union; M/M Miller repaired and improved the property; M/M Miller made six year of tax and mortgage payments; M/M Miller had occupied the property; and M/M Miller were entitled to damages.

The trial court entered Judgment for M/M Miller based on the verdict for $40,000+. Leorris Thomas appealed.

The Appellate Court reviewed the Texas Statute of Frauds requiring that all real estate sales contracts must be written, and initially agreed that indeed the contract did not satisfy the Statute.

However, the Court found an exception to the Statute of Frauds. If a literal reading of the Statute would amount to a “ . . .virtual fraud in the sense that the party acting in reliance on the [oral] contract has suffered a substantial detriment for which he has no adequate remedy, . . .” then justice will not allow a party to benefit merely because the contract was not written.

It is unknown if Bobby Miller will be able to collect his $40,000+ Judgment. Regardless, Bobby Miller wins again.

See Thomas v. Miller; Cause No. 16-15-00095-CV; Tex. App. 6th Dist.; June 28, 2016: http://law.justia.com/cases/texas/sixth-court-of-appeals/2016/06-15-00095-cv.html.  

Lessons learned:

1.      Texas law clearly states that real estate contracts must be written. Clearly. As near as I can detect, we’ve had this law since 1967, likely much longer.

2.      Sometimes, not everything goes the way it is planned. If someone is going to benefit at someone else’s detriment, Texas judges are willing to pitch the law and focus on doing what is fair, regardless of what the law provides. I like that.

3.      Although Texas judges might be willing to bend Texas statutes to assure the proper outcome, that may not help M/M Miller this time. Given the depth of debtor-exemptions available to Mr. Thomas, I will be shocked if M/M Miller recover the $40k Judgment amount, or even an amount close to it. Hope I’m wrong. Do you want to see the list of Texas statutory exemptions including two guns, two horses, mules or donkeys, saddles, blankets and bridles for each, 12 cattle, 120 chickens, 60 other types of livestock, one motor vehicle (yes I was surprised the law does not say TRUCK instead of motor vehicle), one bible and more? You can read it here: http://www.statutes.legis.state.tx.us/Docs/PR/htm/PR.42.htm.

                                                                                Stuart A. Lautin, Esq.
 
 
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.