Monday, February 5, 2024

DEFECTIVE ACKNOWLEDGMENT MEANS DEFECTIVE DEED?

             In August 1990 John and Virginia Turcato created separate Living Trusts. John and Virginia each conveyed one-half of their home to each Trust so that title to the residence was owned 50% by John’s Trust and 50% by Virginia’s Trust. 

            John died in 2009. In 2020 Virginia was 94 years old and continued to live at the residence. Virginia wanted to transfer 100% of the home to Darrell Turcato and Robbin Wilkins, two of the grantors’ four children, in recognition of the physical and financial assistance they provided her. 

            A Deed was prepared conveying the home from both Trusts to Darrell and Robbin. Robbin, acting as a Co-Trustee, signed the Deed before a notary. Virginia’s signature was also required, but evidently Virginia signed the Deed out of the presence of a notary since Robbin did not want to take her mother out in public due to COVID and her mother’s frail health. 

            The notary who witnessed Robbin’s signature also acknowledged the deed for Virginia, as the notary had known the family for 20+ years and had previously notarized Virginia’s signature. 

            Virginia died in 2020. Jan Frady and Larry Turcato, the two remaining children of John and Virginia, sought a judicial declaration that the transfer of the home to their siblings was invalid based on the defective acknowledgment and for other reasons. The trial court granted their petition, ruling that the Deed failed and consequently Jan and Larry would become part owners of the property, as provided in the Trusts. 

            Darrel and Robbin appealed, claiming that the Deed was valid and consequently, Jan and Larry have no interest in the residence. 

            To start, the Appellate Court reviewed statutes which require that all deeds must be acknowledged before any notarial officer. Failure to have the instrument properly acknowledged prevents the document from being recorded. And, failure to record it means there is no public record of the transfer. The result is that third parties are unaware of the previous transfer. 

            However, this issue has been litigated previously in many States, as an imperfect acknowledgment or failure to obtain execution by proper witnesses is common. As are other administrative and mechanical errors. 

Consequently, some States have concluded that the failure of parties to follow a statutory requirement like notarization does not always render ineffective a deed or other transfer document as between those who know of its existence, presumably the parties identified in the document. 

            And, depending on the circumstances, perhaps other parties too. 

            The trial court Judgment is reversed; Darrell and Robbin own this property by virtue of the deed signed by all those who are required to sign it, even without a valid notary acknowledgment. See Turcato v. Frady; Wyoming Supreme Court; Case 2024 WY 8; January 23, 2024: https://casetext.com/case/turcato-v-frady. 

Questions / Issues: 

1.      This outcome may be a surprise to some of my loyal readers. And for fair reasons, as who can say for sure which parties to an unrecorded instrument know of its existence, except only for those who signed it. And to that point, absent notary acknowledgments and witnesses, all signatures are subject to challenge as forgeries. 

2.      This must be another place where State legislatures responded to a common problem – failure to dot each i and cross each t – but in making it easier to mortgage and transfer properties perhaps worse problems were created. 

3.      If you were a member of your State’s legislature, would you vote for a law that rendered void all important documents (deeds, mortgages, deeds of trust, ground leases, easements, deed restrictions, wills, trusts, oil and gas reservations, &tc) unless those instruments are either witnessed or signed before a notary? Or is this one of the situations where there is no middle ground and any resolution is imperfect because people will always make inadvertent, ministerial mistakes. 

                                                                        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.

Wednesday, December 27, 2023

AGREEMENT TO AGREE LAWFUL?

             Thomas and Teresa Capone purchased commercial property in 1999 and opened Capone’s Pub & Grill. Shortly after opening the business, the Capones wanted to expand, but the City required more parking. 

            The Idaho Youth Ranch owned property north of the restaurant. An easement agreement was negotiated between the parties, allowing the Capones’ customers the limited use of a portion of the IYR property for evening parking. 

            The easement was properly executed and recorded. 

            Almost 10 years later several nonprofit entities approached the Capones with a plan to redevelop the IYR land to create affordable housing. A contract was prepared to reflect the plan and relocate the easement to one of the lots encompassing the new development. 

            Most necessary parties signed the contract.

            Ultimately the redevelopment faced overwhelming opposition in the community and was abandoned. So, in the years following the execution of the redevelopment contract, the Capones continued to use the IYR parking lot based on the 1999 easement. 

            In 2018 the lot containing the easement property was conveyed to Midtown Ventures. In 2019 Midtown tried to convince the Capones to terminate the 1999 easement and move the overflow parking elsewhere. 

            The Capones refused. Midtown sued. 

            Midtown asserted that the 2008 agreement obligated the Capones to relocate their parking lot easement. The Capones defended by claiming that the 2008 agreement was invalid and as a consequence, the 1999 easement remained extant. 

            The parties were aligned that the Capones and the nonprofit entities agreed in principle to relocate the easement. However – the parties dispute whether the 2008 agreement was a complete and enforceable final expression, or just an agreement to agree, more like a suggestion of what they would prefer to accomplish. 

            The trial court concluded that the 2008 agreement was unenforceable. Midtown appealed. 

            Basic contract law requires a “meeting of the minds” on all material terms to frame an enforceable contract. The inquiry is objective and does not focus on the subjective beliefs or intentions of the parties. 

            The appellate court, in reviewing the 2008 contract, found many details lacking from the agreement. Some of the omissions are material, such as the precise new location of the relocated easement. 

            An agreement to agree in the future on material terms is not a contract requiring mandatory obligations to perform. Rather, it expresses merely the wishes and desires of the parties to negotiate later and then decide important provisions, and as such, is a precatory document at best. 

            Contracts containing material terms, even if requiring future performance, are generally enforceable. But agreements missing material provisions are typically invalid. 

            Judgment is affirmed for Thomas and Teresa Capone. See Midtown Ventures v. Capone; Idaho Supreme Court; Docket No. 49679; December 8, 2023: https://caselaw.findlaw.com/court/id-supreme-court/115597853.html. 

Questions / Issues: 

1.      Except for a retail transaction where money is exchanged contemporaneously for goods or services, the dividing line between “enforceable contracts” and “agreements to agree” is razor-thin. 

2.      Surely not all agreements to agree are unenforceable. As just one random example, consider lease renewal options based on fair market valuation, as determined by MAI appraisers, commercial brokers, or others who are not signatories to the contract. 

3.      My conclusion is that contracts with terms to be decided in the future can still be valid, provided that the precise mechanism to make that determination is included. Conversely, failure to provide sufficient detail in the contract can turn an enforceable agreement into an invalid, precatory, hot mess. 

                                                                       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.

Wednesday, November 29, 2023

LEASE OR LICENSE?

            Castaic Studios entered a contract with Wonderland Studios in 2021. In the agreement, Wonderland was granted a right to use commercial real property. The contract entitled Wonderland to exercise 35 one-month extension options. To exercise the options, Wonderland was required to timely make all payments and send Castaic an extension letter at least 20 days before the end of the current month. 

            The agreement specified that it was a revocable license, as opposed to a lease, with the owner – Castaic – retaining legal possession and control of the premises. The agreement also stated that it was to be governed by contract laws, not by landlord-tenant laws. When the agreement ended, Wonderland was required to remove its personal property and move out. 

            Wonderland defaulted in July 2022. Castaic filed an eviction lawsuit in August 2022, seeking both possession of the property and unpaid “rent.” Wonderland defended by claiming that the contract states that it is not governed by typical landlord-tenant laws. 

            The trial court agreed with Wonderland. So instead of the rocket-docket eviction proceedings offered by the legislature, Castaic would need to file a traditional lawsuit and prove that Wonderland breached the contract. What could have been resolved in weeks may now take years. 

            With little choice, Castaic appealed, arguing that despite the designation of contract laws and disavowal of landlord-tenant laws, Castaic could still utilize the fast eviction proceedings applicable to lease defaults. 

            The Appellate Court’s lead statement confirmed that anyone may waive the advantage of a law intended solely for [his] benefit. However, laws established for “public reasons” cannot be contravened by private agreement. 

            The Court next determined that whether a contract constitutes a lease or license is a ‘subtle pursuit.’ Regardless, that is not the Court’s focus. 

            Instead, the Court determined that whether or not the contract is a lease or license is irrelevant. The true focus should be on the parties’ desire to waive rights afforded by landlord-tenant laws. 

            From there, the runway is short to hold that parties are allowed the latitude to design their own contractual engagements. And that as a consequence, parties may freely waive laws that would otherwise substantially benefit at least one of them. 

            Castaic waived its right to assert an eviction claim, and instead must utilize the general court system for redress. The waiver is lawful. 

            Wonderland wins again. Castaic loses again. See Castaic Studios v. Wonderland Studios; California Court of Appeals, 2d District, Division 5; Case No. B325853; November 15, 2023: https://cases.justia.com/california/court-of-appeal/2023-b325853.pdf?ts=1700074896. 

            Questions / Issues: 

1.   I have seen many Leases. I have seen fewer License Agreements (sometimes called Occupancy Agreements). Sure as the world the property owner never intended to be precluded from using its quickest, easiest, most cost-effective method to remove a defaulting occupant. 

2.   So what happened here? Was this property owner out-maneuvered by the occupant? Perhaps. Or maybe insufficient thought was given to each “what if” scenario and instead there was too much focus on this subtle pursuit. Because, at least from the owner’s perspective, the benefit of the owner’s waiver of the landlord-tenant eviction procedures in most jurisdictions would never outweigh the risk, time, and expense of a full-out lawsuit. 

3.   Conversely, perhaps all of this was carefully vetted by both sides and all knew exactly, precisely, what this waiver meant. In exchange for the waiver, maybe Castaic received above market rate rents, an enhanced security deposit or similar collateral or Guaranty, and avoided burdening the premises with a long-term obligation. 

                                                                        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.

Monday, October 30, 2023

TIES THAT BIND

             Four Seasons is a housing development in Tennessee. FSD Corporation operates the homeowners’ association for Four Seasons. 

            In 1984 FSD executed a Declaration of Covenants, Conditions, and Restrictions for the benefit of all owners of residential properties within the Four Seasons development. The CCRs provide that the restrictions are intended to “run with and bind” all of the Four Seasons properties identified in an exhibit attached to the CCRs. 

            CCR restrictions include: (a) each Lot must be used only as a residence; and (b) no gainful profession, occupation, or trade may be conducted on any Lot. 

            Two other provisions are important: (c) owners may delegate the right to use common areas and facilities to tenants; and (d) the CCRs can be amended by the affirmative vote of all record Lot owners. 

            The CCRs are valid for 30 years. At expiration of the initial term, they are automatically extended for successive 10-year periods, unless a majority of owners elect to terminate them. 

            The CCRs were properly recorded in DeKalb County; the CCRs were not terminated by action of the owners. 

            Pratik Pandharipande purchased his Four Seasons property in 2015, with the intent of leasing it on a short-term basis as income-producing property. And, with the assistance of a property management company, Pratik was successful – he leased his property to third parties for rental terms ranging from two to 28 days. 

            Possibly as a reaction to the activities of Pratik and others, a majority of FSD owners voted to amend the CCRs in 2018. The amendment requires that all leases must be for a minimum of 30 days. FSD recorded the amendment with the DeKalb County Register of Deeds. 

            Unperturbed by these events, Pratik continued to lease his property for terms of fewer than 30 days. In March 2019 FSD send Pratik a letter, notifying him that he was violating the 2018 amendments. 

            Pratik responded by filing a lawsuit in 2019, seeking a declaratory judgment that the 2018 amendments did not prohibit him from using his property as an STR. Then Pratik appealed when he lost at the trial court. 

            The Court of Appeals concluded that the 1984 CCRs were in effect when Pratik purchased his Four Season property. And the 2018 amendment was lawfully approved and properly recorded. Finding no basis for determining that the 2018 amendment was subject to challenge, FSD prevailed. 

            So Pratik further appealed. 

            The Supreme Court first evaluated the CCRs and determined that they pass automatically with the land when ownership or possession changes, whether or not each successor owner consents. That leaves the question of only the effectiveness of the 2018 amendment. 

            Under law, unless CCR modifications are arbitrary and capricious, amendments will be effective when a purchaser buys into a community governed by restrictive covenants that permit future amendments. Holding that the 2018 amendment restricting STR activities is neither arbitrary nor capricious, Pratik and his Four Seasons property are bound by it. 

            The 2018 amendment is effective. Pratik may not lease his Four Seasons property for a term of less than 30 days. See Pandharipande v. FSD Corp.; Supreme Court of Tennessee; Case No. 2019-CV-60; October 17, 2023: https://www.tncourts.gov/sites/default/files/OpinionsPDFVersion/FSD%20-%20Majority%20Opinion.pdf. 

Questions / Issue: 

1.      Likely a rhetorical question, but curious why this case was litigated all the way to the Supreme Court. The only surprise here is that Pratik kept pushing an untenable / untenantable position when the outcome seemed clear. Perhaps this is a matter of first impression in Tennessee. 

2.      Not stated in the Opinion is whether or not Pratik knew or should have known of the existence of the CCRs when he purchased the property. If not, then claims could have been asserted against the seller, title company, and others. 

3.      Also unstated are Pratik’s efforts to oppose the 2018 amendment when it was proposed. Or announce his candidacy to become a director or officer of the POA, to potentially influence the decision behind the 2018 amendment. 

                                                                            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.

Tuesday, October 3, 2023

MORTGAGE GIFT LETTERS

             Stephanie Shields and Timothy Wilkinson decided to cohabitate in 2017. At that time Tim lived in a home owned by his grandmother, Ida Mae Clark. The three determined it would be best for all of them to live together, so Stephanie engaged a Realtor to both purchase a new home and sell Ida Mae’s property. 

            Since Stephanie’s credit scores were better than Tim’s, Stephanie applied for a VA mortgage. Ida Mae sold her property to provide equity for the new home, to be occupied by Stephanie, Tim, and Ida Mae. 

            Stephanie took Ida Mae to the office of the mortgage lender, where Ida Mae was furnished a form titled “Gift Letter.” The form stated: “I have made a gift of $111,213.14 to Stephanie Shields,” who was incorrectly identified in the letter as Ida Mae’s granddaughter. The form also provided that “No repayment of the gift is expected or implied . . .” 

            When Tim learned of the gift letter, he contacted an attorney. The attorney drafted a Memorandum Agreement for Tim and Stephanie. The Agreement acknowledged that Tim and Stephanie used substantially all of the gift proceeds from Tim’s grandmother to purchase the new property. Further, the Memorandum Agreement stated that if either Stephanie or Tim “failed to pay [their] half of the bills, then [Ida Mae’s gift] amount [would] be made good at the time of payout.” 

            Ida Mae was not a party to the Memorandum Agreement. 

            The property purchase closed in July 2017. The Memorandum Agreement was not signed until February 2018. Presumably at the time of the purchase the mortgage lender received a title policy insuring its first lien position. 

            When the relationship between Stephanie and Tim deteriorated in 2018, Stephanie posted an eviction notice on Ida Mae’s door, requiring that both Tim and Ida Mae vacate within 30 days. So Ida Mae engaged an attorney, who filed a lawsuit against Stephanie in 2019. 

            A trial was convened in 2021. The court determined that Ida Mae and Stephanie had a valid agreement to jointly purchase the property, and entered an Order requiring that Stephanie reimburse Ida Mae for substantially all of the “gift” funds. 

            Stephanie appealed. 

            On appeal, Stephanie argued that Ida Mae disclaimed any interest in the property when she signed the Gift Letter. Ida Mae responded by claiming that Stephanie admitted the money was not a gift when Stephanie signed the Memorandum Agreement. 

            The Appellate Court considered the mortgage broker’s testimony that the Gift Letter was required for Stephanie to qualify for a mortgage loan. Conversely, the Court noted that Stephanie signed the Memorandum Agreement requiring her to repay Ida Mae’s gift amount from the proceeds available at the time of sale. 

            Thus negating the concept of a gift. 

            These competing facts led the Appellate Court to reconsider the relationship between the parties. Evidently monies described in a gift letter may not be a gift, depending on the intent of the parties. Rebuttal testimony is permitted to challenge the presumption that the monies paid were actually a gift with no expectation of repayment, even though the Gift Letter is unambiguous. 

            Further, the High Court did not find it particularly relevant that the Memorandum Agreement was signed eight months after closing, since the Court determined that the true agreement of the parties preceded the purchase of the property. Not stated in the Opinion is the reasoning to allow the Memorandum Agreement to controvert the Gift Letter, as typically extrinsic evidence is not allowed to be considered as evidence unless required to support or contest an ambiguous document. 

            Ida Mae wins again; Stephanie must repay the “gift” funds. See Shields v. Clark; Supreme Court of Alaska; Case No. S-18325; August 18, 2023: https://cases.justia.com/alaska/supreme-court/2023-s-18325.pdf?ts=1692378023. 

Questions / Issue: 

1.      Our judicial system is composed of people with parents, children, grandparents, and grandchildren. From purely a legal perspective and without the overlay of a grandma trying to do something nice for her grandson, this is an absurd result. But given the context of this claim, both the superior court and Supreme Court delivered results that were likely anticipated. 

2.      And yet, what if the State where this was litigated has a theory of equitable liens and constructive trusts? And what if a Judgment is entered that allows grandma to enjoy the position of a first lienholder, priming the mortgage lender and VA, allowing grandma to foreclose and eradicate the secured position of the mortgage lender? Then the lender would seek recourse against the title company that insured its lien position, who, in turn, would look for indemnity from the mortgagors.

3.      In law school we learn that ‘bad facts make bad laws.’ Perhaps that should be supplemented with this appendix: ‘Also, Gift Letters mean nothing. At least not in Alaska. 

                                                                        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, 2023

PURCHASE OPTIONS V2

             In 2014 Bronco Elite Arts & Athletics entered into an agreement to lease commercial property from Tricon Properties. The 10-year term commenced January 1, 2015. Two lease renewal options of five years each followed the initial term.

            The lease provided Bronco an exclusive option to purchase the property for approx. $1 million, preceded by Bronco’s notice to Tricon and remittance of $85k to Tricon as option consideration applicable to the purchase price. Bronco was only entitled to exercise the option if Bronco had not committed an event of default in the lease or otherwise breached any of its terms or conditions.

            Bronco paid the $85k option price by check in two installments. The first check was for $25k; it was cashed on December 19, 2014. The second check was for $60k. That check was cashed on December 22, 2014.

            Tricon conveyed the property to 106 Garden City in January 2019. On May 5, 2020, Bronco sent a letter to Tricon and 106 Garden, stating that it intended to exercise the option and specifying a closing date of July 7, 2020.

            On June 15, 2020, Bronco sued 106 Garden and Tricon for anticipatory breach of contract and specific performance, asserting that both Defendants had refused to sell the property to Bronco. Both Defendants answered and counterclaimed, asserting that Bronco breached the lease, committed various defaults, and therefore could not properly exercise the purchase option.

            The district court determined that 106 Garden and Tricon had breached the lease by failing to honor Bronco’s purchase option, and a judgment was rendered accordingly. The district court ordered specific performance. All parties appealed.

            The Supreme Court determined that Bronco had breached the lease before Bronco exercised the purchase option on May 5, 2020. It is evident that Bronco had breached the lease by failure to pay late fees when Bronco did not timely remit rent. Under the provisions of the lease, late fees were charged automatically if rent was not paid within seven days after it is due.

            Next, the Supremes found that Bronco further defaulted by failing to remove the lien of a contractor Bronco had engaged to modify the Property into a code-compliant gymnastics center. Mitigating the lien filing was the failure of Tricon and 106 Garden to complain about the matter for four years commencing March 11, 2016.

            The lease contained a full anti-waiver provision in favor of the landlord. Regardless, the Supreme Court concluded that all defaults and breaches of Bronco had been waived and that the purchase option was properly exercised. Judgment is rendered for Bronco; the purchase option was properly exercised; Bronco is entitled to receive a transfer of the property from the Defendants.

            See Bronco Elite Arts & Athletics v. 106 Garden City and Tricon Properties; Supreme Court of Idaho; Case Nos. 49094 and 49523; August 18, 2023: https://cases.justia.com/idaho/supreme-court-civil/2023-49094.pdf?ts=1692372761.

Questions / Issue:

 

1.      We know this to be an axiomatic truth: lease purchase options are not favored by Courts and are strictly construed against tenants. Failure to toe the line *exactly* as required by the lease renders void a purchase option. Right? Well . . . perhaps not necessarily true . . . this case gives hope to defaulting tenants everywhere . . . as lawyers throughout history have claimed, you just need to convince a court that the non-waiver clause was waived (that likely makes sense only to attorneys - others will just need to trust me that challenging a non-waiver clause in a contract is a common litigation tactic).

2.      So, if you are on the tenant side of the equation you now have an additional weapon in your arsenal. But maybe when your next lease is drafted you could clarify that minimal breaches and cured defaults don’t count, non-waiver clauses can indeed be waived by inaction, and your valuable purchase right will continue if landlord accepts the cure.

3.      But no, you say, you are on the landlord side of the docket? Well then, the purchase option needs to be written to self-destruct at the moment of a lease breach or default, without any action or notice required by landlord. Ok so instead of “self-destruct” perhaps you’ll use words like abrogate and vitiate. But you get my drift.

                                                                        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.

Monday, July 31, 2023

REALTY OR PERSONALTY?

             Huntcole LLC sold its transformer refurbishment business to 4-Way Electric Services LLC in 2014. The Asset Purchase Agreement provided that Huntcole would receive $11.5 million, in exchange for the transfer of “all . . . properties and assets, real, personal or mixed, tangible and intangible, of every kind and description.”

            Huntcole made a warranty in the APA that its included assets were related to Huntcole’s business as presently conducted or necessary to permit 4-Way to conduct Huntcole’s business after Closing similar to the businesses which were conducted by Huntcole prior to Closing.

            The APA also required that Huntcole lease commercial property to 4-Way, together with buildings, improvements, structures, fixtures, compressors, and equipment. The Lease required that 4-Way pay all taxes assessed against both the realty component as well as non-realty fixtures, inventory, merchandise, and equipment.

            4-Way announced in 2017 that it would relocate its transformer refurbishment operation. In preparation, 4-Way began detaching and removing commercial equipment from the leased space. When Huntcole learned of it, Huntcole asserted that it still owned the equipment and demanded that 4-Way desist.

            4-Way refused, arguing it had purchased the equipment from Huntcole as a consequence of the APA.

            Huntcole filed a lawsuit, seeking a declaration that it owned the equipment in the leased building as it had become permanently attached to the building. 4-Way responded with a counterclaim, asserting Huntcole had breached the APA in which it agreed to transfer to 4-Way all property owned by Huntcole necessary to conduct the transformer refurbishment business. And that the equipment within the leased building was an integral part of the transformer refurbishment operation, no matter how or if the equipment was attached.

            The trial court determined that several building improvements were scheduled in the APA as excluded assets. Finding that equipment attached to the building become building improvements and believing the APA did not alter the analysis, the court determined that 4-Way unlawfully committed conversion when it removed the equipment.

            Huntcole was awarded $1+ million in conversion damages, plus $1 million punitive damages and attorney’s fees. Judgment was rendered based on the general rule that once personal property becomes affixed, it changes character from personalty to realty. Consequently, the trial court concluded that what was once personal property refurb equipment changed character to real property, and must be surrendered to the Landlord regardless of the APA.

            However, 4-Way believed that it had purchased the equipment, whether or not it was affixed to the building, and that 4-Way had the lawful right to remove it.

            So 4-Way appealed.

            The Lease was examined on appeal. Recall that the Lease stated that Huntcole was leasing the building and all fixtures to 4-Way. If the APA controlled this issue, then Huntcole could still lease to 4-Way the equipment that Huntcole retained, consisting of additional equipment purposefully not transferred to 4-Way. Recall further that the APA did provide for the retention of some equipment by Huntcole.

            Since Huntcole was obligated to convey all assets in the APA and lease the remainder to 4-Way, 4-Way could not have converted equipment 4-Way had previously purchased from Huntcole when 4-Way removed it from the building. 4-Way owned that equipment; it was not excluded in the APA; attaching that equipment to the building did not mean that 4-Way suffered a loss of title or ownership.

            The trial court’s Judgment for Huntcole is reversed and rendered for 4-Way. See 4-Way Electric Services v. Huntcole; Supreme Court of Mississippi; Case No. 2021-CA-00778-SCT; June 22, 2023: https://cases.justia.com/mississippi/supreme-court/2023-2021-ca-00778-sct.pdf?ts=1687512815.

Questions / Issue:

            The line separating realty from personalty has never been crystal clear. This issue comes up often in the content of mechanic’s liens. Laborers and material providers with properly perfected liens have been able to lawfully remove flooring, windows, doors, roofs, conduit, wiring, elevator cabs, HVAC components, security systems, sprinkler systems, and brick siding.

            I haven’t yet seen a court allow the removal of drywall, foundations, framing, structure, and load-bearing components. But all else seems fair game unless specific provisions are added to commercial leases, addressing each addition.

                                                                     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 29, 2023

ARE HOTEL GUESTS TENANTS?

             Efficiency Lodge advertises as an extended stay motel; its website invites guests to “Stay a nite [sic] or stay forever.”

            Armetrius Neason, Lynetrice Preston, and Altonese Weaver each occupied their rooms for months or years. Neason remains there still, but Preston and Weaver have left.

            When the three Plaintiffs first moved in, they each signed a rental agreement. The agreements stated that “The relationship of Innkeeper and Guest shall apply and not the relationship of Landlord and Tenant.” Each referred multiple times to the occupant and Lodge as Guest and Innkeeper.

            The agreements provided that payment was due weekly, while management reserved the right to enter for housekeeping and maintenance. The agreements also addressed the term of occupancy, but the blanks were never completed.

            One of the agreements allowed the occupant to remain on a week-to-week basis, while another agreement specified that the occupant could remain “for 180 days straight,” after which she would have to vacate for two days before she could return.

            All three Plaintiffs contend that they used the Lodge as their home; the Lodge does not contest this assertion.

            In 2020 during the COVID-19 pandemic, all three Plaintiffs were unable to pay Lodge. Weaver was locked out of her room, although the other two Plaintiffs were not.

            Neason, Preston and Weaver sued the Lodge. They asked for an injunction prohibiting the Lodge from removing them without formal eviction proceedings, and for damages to compensate Weaver for the lockout. The trial court granted the injunction, determining that Plaintiffs used the Lodge as their long-term home.

            The Lodge appealed.

The court of appeals affirmed, finding that the contracts signed between Plaintiffs and the Lodge were ambiguous about the nature of the legal relationship. The appellate court noted that Plaintiffs had lived at the Lodge for a long time, that each brought many personal items with them, and that they used the Lodge as their home address for official purposes. As a result, the court of appeals determined that the Lodge is required to process formal eviction proceedings to remove the Plaintiffs.

So the Lodge appealed to the Supreme Court. The high Court reviewed the facts and applicable law.

            Under the law, tenants must be evicted through a court procedure while guests can simply be precluded from entering their rooms. Innkeepers are required to receive a written statement establishing the period during which a guest may occupy a room. At expiration, an innkeeper can change door locks or otherwise prohibit the guest from entering, without court involvement.

            The Supreme Court first analyzed the structure of a landlord-tenant relationship, which grants a right of possession, enjoyment, and use. Although not stated, the implication is that an estate in land is contemplated in each LL-T scenario. And similarly, a motel or hotel guest has less, more like a license or limited contractual right.

            Possession of the premises is a factor and use of the property as a “home” and “dwelling place” is evidence of a LL-T relationship. The ability to accept and preclude visitors and third parties can also be an important factor in finding or negating the existence of a LL-T structure.

            However, a LL-T relationship is not determined by a person’s subjective belief that a property is used as a home. And of course commercial tenants do not use their premises as a residence, but yet the LL-T foundation is undeniable.

            So the Supreme Court lands exactly where it should, by asking about the intent of the parties. If the agreement is clear then there is no reason to ask further questions. If unclear, extrinsic evidence is needed to explain and resolve the ambiguities.

Parol evidence might also include the parties’ course of conduct, as shown by their actions.

            In that vein, the Supreme Court asks if the Plaintiffs decorated and furnished the premises, cleaned and maintained the room, entertained guests, altered the locks, and changed or added security devices. Or, maybe the Plaintiffs had those rights but ignored them, and instead the innkeeper tightly controlled access, maintained and cleaned, allowed and prohibited guests and set hours, and prohibited anyone from changing door locks and adding security equipment.

            The high Court concludes that the LL-T relationship is created by the transfer of possession, while the innkeeper-guest structure is “marked by the payment of a fee ‘for the purpose of entertainment’ at an inn.” Both court of appeals and trial court decisions are vacated; the case is returned to the trial court to start over and more closely examine the precise relationship of the parties with specific emphasis on the contracts and other related evidence.

See Efficiency Lodge v. Neason; Case No. S22G0838; Supreme Court of Georgia; June 21, 2023: https://casetext.com/case/efficiency-lodge-inc-v-neason-2.

            Questions / Issues:

  1. The legal difference between a tenant and guest is a common issue. The former is entitled to all the protections of law; the latter has virtually none. Hotel and motel contracts are often non-existent, or if there is one it is poorly written on an index card, and not signed by both parties. This well-reasoned decision merits review to understand how at least one Supreme Court makes the distinction between tenant and guest.
  1. If you are a landlord, there is likely nothing you can do to recharacterize your tenant as a guest. If however you own a hotel or motel, or perhaps your mother-in-law is overstaying her welcome at your humble abode, it may be pivotal to examine the relationship closely before you conclude that your occupant is merely a guest, subject to virtually no protection under law, and you prevent entry. Because if you guess wrong, the damages could be steep.
  1. Is this yet another situation where the State legislature could help? Perhaps paying guests could be automatically converted to tenants after six months of continued occupancy without default, while all others remain guests. Wouldn’t most paying guests be surprised to learn they have no legal protection after six months of room possession?

                                                                                    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.