Monday, October 2, 2017

Is Your Renewal Notice Sufficient?

Town and Country Center, Inc. owns property in Marion Illinois. T&C had a lease with Rax of Marion, Inc., whereby Rax leased the property from T&C. On December 1, 1993, Rax assigned its rights as tenant to Sher-Jo, Inc.

On July 26, 1994, T&C and Sher-Jo amended the lease to extend the term for 20 more years beginning January 1, 1994. As well, the amendment allowed Sher-Jo the right to extend the lease term for five more years, if the option was exercised at least 180 days prior to the end of the then-current term.

The math works out to July 4, 2013 – that was the last day that Sher-Jo was afforded the right to extend the term.

On September 1, 1994, Sher-Jo subleased the property to Fazoli’s Restaurants for a 10 year sublease term, with three 5-year option renewal terms. T&C approved the sublease, but otherwise T&C was not a party to it.

On May 31, 2013, Fazoli’s sent a letter to Sher-Jo stating that Fazoli’s was exercising its first sublease renewal option. On June 4, 2013, Sher-Jo faxed to T&C a copy of Fazoli’s letter. Sher-Jo verbally confirmed with T&C that T&C received the fax and at that time, verbally advised T&C that Sher-Jo also needed to exercise its five-year renewal option.

Other than the Fazoli fax, no other correspondence was sent to T&C prior to the renewal deadline of July 4, 2013. Two weeks later (July 18, 2013), Sher-Jo sent T&C a letter by email and US certified mail, formally advising of Sher-Jo’s intent to renewal the prime lease.

T&C, believing that Sher-Jo was required to furnish notice by registered US mail (since that is what the prime lease said) and that in any event, Sher-Jo’s letter of July 18 was two weeks too late, ignored Sher-Jo’s letter and instead entered into a direct lease with Fazoli’s.

In response, Sher-Jo sued T&C, claiming that Sher-Jo had effectively renewed the prime lease through Sher-Jo’s substantial compliance with the prime lease, and T&C had no legal means to ignore Sher-Jo’s lease renewal and instead deal directly with Fazoli’s.

The trial court granted judgment to Sher-Jo, concluding that the June 4 fax from Sher-Jo to T&C (recall that the fax was only Fazoli’s exercise of its sublease renewal term) satisfied the notice requirements of the prime lease.

T&C appealed.

There was no dispute that the phone calls and fax were sent within the time required by the prime lease. The sole issue was: Did the tenant Sher-Jo comply with the terms of the renewal option exercise in the prime lease?

The Appellate Court reviewed the fax, which references only an extension of the sublease between Sher-Jo and Fazoli’s. Sher-Jo argued that Fazoli’s was authorized to send a notice on behalf of Sher-Jo to T&C. While that may or may not have been true, the notice that was actually sent did not reference Sher-Jo’s option exercise. Only Fazoli’s.

The Appellate Court found that Sher-Jo did not sent written notice of its desire to exercise its option to extend the prime lease within the requisite timeframe. Oral notice does not excuse the failure of Sher-Jo to strictly comply with the terns of the renewal option and notice provision in the prime lease.

The circuit court’s decision was reversed. T&C wins; Sher-Jo loses; T&C may directly lease the property to Fazoli’s or anyone else as Sher-Jo’s prime lease term expired December 31, 2013.

See Sher-Jo, Inc. v. Town and Country Center, Inc.; Case No. 5-16-0095-U; 5th District Appellate Court of Illinois; July 31, 2017:

Lessons learned:

1.      This Illinois Appellate Court concluded that commercial tenants who seek to exercise a renewal option must strictly comply – not substantially comply – with the terms of the lease. Those terms include not only timing elements, but also the manner in which notice must be sent.

2.      I have seen recent situations where commercial tenants engaged commercial brokers, agents and REALTORS® to assist with lease renewal negotiations. If the agent doesn’t understand the law and hasn’t read the lease, then malpractice claims can be asserted against the agent if the tenant is disadvantaged when the landlord doesn’t accept tenant’s late renewal notice. This may be so even though the agent was working with the landlord relative to the terms of the renewal, and inadvertently let the formal renewal date slide thinking (knowing!) that surely better renewal terms for the tenant would be received with just a few more days of negotiations.

3.      Are you helping a landlord or tenant negotiate a new commercial lease? Don’t overlook the notice ‘boilerplate’ provisions. No one uses faxes anymore. Change the notice provisions to allow notices to be sent by scan and email, provided they are also sent within the following three days by certified mail or overnight courier service.

                                                                                    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, 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:

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:  

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.