Thursday, May 30, 2024

HOW NOT TO RELEASE A MORTGAGE

             Starting in 2010, Jerome Cohen and Shaun Cohen, through their entities EquityBuild, Inc. and EquityBuild Finance, LLC, sold promissory notes to investors. Each note represented a fractional interest in a specific real estate property. Investors were assured returns ranging from 12% to 20%. 

            Separate mortgages on underdeveloped areas of Chicagoland secured the notes. 

            The Cohens had each investor sign a contract granting to EquityBuild the right to service the loans. Consequently, the mortgages were structured so that EquityBuild was the borrower and individual investors were the lenders, “in care of” EquityBuild. 

            The contracts authorized EquityBuild to issue monthly statements and payoff demands, and collect loan payments. The contracts also limited EquityBuild’s power, by requiring written instructions from investors before foreclosure, amendment, or termination of the mortgage debt. 

            However, separately and in addition to the contract, many investors also signed a document providing EquityBuild with the authority to receive payments and issue mortgage releases. 

            In 2017, BC57 loaned $5.3 million to EquityBuild, in exchange for a first mortgage on five properties located on the south side of Chicago. Those five properties were already owned by EquityBuild, and were already subject to preexisting mortgage liens securing individual investors. 

            To deal with the problem of competing first-lien security interests, EquityBuild provided payoff letters and Releases to BC57 and the escrow agent at closing, purporting to pay and discharge the existing loans. The Releases were executed by EquityBuild, with Shaun Cohen signing as the manager of EquityBuild. 

            Individual investors did not sign the Releases. Neither did individual investors receive any monies from BD57’s payment. 

            All of this collapsed in 2018, when the Cohens admitted to the US Securities and Exchange Commission that EquityBuild had funded investor interest payments with later investments. The SEC filed a lawsuit, obtained a temporary restraining order, and the district court authorized the appointment of a Receiver to liquidate the assets of EquityBuild. 

            With approval from the district court, the Receiver sold the five Chicagoland properties and recovered $3 million. The individual investors asserted a claim to those proceeds, arguing that they never received payment or released their mortgages. 

            BC57 disagreed and asserted it had priority. 

            The district court ultimately awarded the funds to the individual investors, concluding that the mortgage releases were defective and that EquityBuild lacked the authority to execute them. 

            BC57 appealed, claiming that its $5.3 million payment was made in exchange for first-lien mortgages. And that the lien positions of the individual investors had been discharged through full payment of their mortgages. 

            The baseline rule, as determined by the Appellate Court, is that payment of a debt secured by a mortgage automatically extinguishes the security interest. BC57 contends that this rule yields the inescapable conclusion that BC57 is entitled to all net funds recovered by the court’s Receiver. 

            In reviewing other appellate decisions, the Court found that there can be circumstances when payment alone does not extinguish a debt. To cause a mortgage debt to be fully discharged, a properly executed, valid Release instrument, is also required. 

            The Releases that were tendered contained fundamental errors. As the most glaring example, the Releases list EquityBuild as the party issuing the releases, even though EquityBuild was the borrower – not the lender or the lender’s agent. 

            BC57’s response is that discrepancies do not invalidate the Releases, because they fall under the legal doctrine of mutual mistake. In reviewing that position, the Appellate Court approved the district court’s decision concluding the opposite. There was no mutual mistake here, rather all of this pertains directly to the Cohens’ business model operated to purposefully obscure legal responsibility and asset ownership. 

            The Releases were facially invalid. Mortgage payment alone does not extinguish a preexisting security interest without a valid Release. Individual investors win; BC57 loses. See SEC v. EquityBuild; US Court of Appeals 7th Circuit, Case No. 23-1870, May 6, 2024: https://media.ca7.uscourts.gov/cgi-bin/OpinionsWeb/processWebInputExternal.pl?Submit=Display&Path=Y2024/D05-06/C:23-1870:J:St__Eve:aut:T:fnOp:N:3206589:S:0. 

            Questions / Issues / Comments: 

1.      Title insurance for the individual investors and BC57 is not mentioned in this case. My conclusion is that all of this occurred without such coverage. I could be wrong – perhaps there are separate claims against escrow agents and title underwriters – but if so then presumably it all would have been consolidated here, for judicial economy. 

2.      Even if lender title insurance policies had been issued, the same claims and defenses would still have been asserted. But at least one or more “deep-pocket” insurance companies could possibly have been induced to pay claims. 

3.      Putting aside title insurance, the underlying issue is the legal effect of Lien Release documents. It is my impression that not enough real estate lawyers, title agents, underwriters, and escrow officers review these documents other than possibly to verify that the Property description and recording data are correct. The assumption is that mortgage payment equals mortgage release. That will now (should!) change, based on this case. 

                                                                       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, April 30, 2024

ARBITRATION, ROUND NEXT

             Mohammad Rafiei bought a new house from Lennar Homes in 2018. Three years after purchase, Rafiei alleges that the garbage disposal exploded, injuring him. 

            Rafiei sued Lennar for damages over $1 million. The lawsuit was asserted in a Texas District Court. 

            The contract executed between Lennar and Rafiei required that all disputes be submitted to arbitration, including claims of personal injury and issues regarding the enforceability and validity of the arbitration provision. The arbitrator was vested with sole authority to decide everything. 

            The provision incorporated the rules and procedures of the AAA, following its construction industry regulations. If claimed damages exceed $250,000, three arbitrators must resolve the dispute. 

            Each party is required to pay its own costs and expenses of arbitration. 

            Lennar requested that the trial court stop the litigation proceedings, and instead require arbitration as provided in the contract. Rafiei opposed Lennar’s motion, arguing that the arbitration provisions are unconscionable because arbitration costs are prohibitively expensive. 

            To support his response Rafiei submitted evidence that arbitration would cost him $8,025. And that all he could afford was $6,000. If Rafiei is required to use only arbitration he would effectively be precluded from pursuing his claim. 

            The trial court denied Lennar’s motion to stop the lawsuit and instead, require arbitration. Lennar appealed. 

            The court of appeals analyzed the situation and concluded that the trial court was correct. It is unconscionable that Rafiei was forced to use a dispute-resolution forum that he could not afford. This meant that, on a practical basis, he had no access to justice as he could not pay the fees and costs. 

            The court of appeals affirmed in 2022. Lennar again appealed. 

            The Supreme Court considered the concept of unconscionability. A contract is unconscionable and unenforceable when a transaction is so one-sided, with so gross a disparity in values exchanged, that no rational contracting party would have entered it. When a court applies an unconscionability standard to arbitration, the critical issue is whether arbitration is an adequate and accessible substitute for litigation. 

            To be enforceable, the alternative to litigation must be a forum where parties can effectively vindicate their rights. Anything less fails. 

            At trial, Rafiei presented no evidence that he sought a waiver or reduction of AAA arbitration fees and related costs. The court transcripts indicated that Rafiei failed to include a comparison of costs between litigation and arbitration. Further, Rafiei offered no testimony regarding his ability to afford litigation, but not arbitration. 

            Lacking submittals from Rafiei regarding costs between both alternatives other than the conclusion of Rafiei’s lawyers that arbitration costs are “astronomically higher” than litigation, out-of-pocket expenses in litigation are “minimal,” and litigation hearings and trials are “free,” the Supreme Court concluded that Rafiei failed to establish that he could afford litigation but not arbitration. 

            The Judgments of the trial court and court of appeals are reversed. Lennar wins this round but Mohammad Rafiei will have another chance to present evidence that arbitration costs preclude him from seeking justice. The case is sent back to the trial court for further proceedings consistent with the Opinion of the Supreme Court. 

            See Lennar Homes of Texas v. Rafiei; Texas Supreme Court; Case 22-0830, April 5, 2024: https://scholar.google.com/scholar_case?case=3185182584592779686&hl=en&as_sdt=6&as_vis=1&oi=scholarr. 

Questions / Issues / Comments: 

1.      It seems basic that Rafiei would furnish evidence of the cost disparity between litigation and arbitration, and his ability to afford only litigation. Could this have been a trial strategy, hoping Lennar would settle instead of appealing to the Supreme Court? Because if this had gone poorly for Lennar, it could mean that all of its contracts containing arbitration procedures are subject to challenge. 

2.      I am not a trial lawyer. But I am constantly discussing trial and arbitration strategies with litigators in my Firm. It feels like corporate America prefers arbitration for reasons of privacy and the perceived inability of a claimant to present facts to a jury, hoping to receive punitive and exemplary damages. And that plaintiffs typically prefer litigation, wanting to avoid the situation where a win in arbitration results in merely a Decree, which still requires conversion to Judgment via litigation to be capable of court-ordered enforcement. 

3.      In general, Courts find a way to uphold the enforceability of arbitration provisions. Builders, engineers, architects, surveyors, and construction contractors continue to insist on adding arbitration into their contracts. Mandatory arbitration provisions are difficult to challenge. 

                                                                        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, March 28, 2024

CAN YOU RELATE TO CONSTRUCTION LIENS?

             S&H Holdings purchased commercial real estate in 2014. In 2018, S&H engaged Integrated Construction Management Service to construct a new Burger King at the site. 

            ICMS contracted with Nore Electric to furnish materials and services in the construction of the BK. Ultimately, ICMS failed to pay Nore and other subcontractors. 

            S&H sold the BK site to Realty Income Properties, and the deal closed on January 18, 2019. The warranty deed was recorded with the County Clerk two weeks later. 

            In March and April 2019, Nore and other subcontractors recorded construction liens against the BK site. Since neither S&H nor RIP were willing to pay the subcontractors, Nore Electric asserted a lawsuit to enforce its liens. 

            The district court concluded that Nore’s liens were valid and properly attached to the BK site, placing RIP at risk of losing its ownership interest if the liens were foreclosed. The court issued a decree of foreclosure, holding that the transfer from S&H to RIP did not cause the liens to lapse or the subcontractors to waive their lien rights. 

            S&H and RIP appealed. 

            S&H and RIP contend that construction liens can only attach to the contracting owner’s real estate. The appellants further argued that because S&H incurred the debts, but the liens were not recorded until after RIP had become the owner, the liens must fail. 

            The Supreme Court disagreed and found that construction liens relate back to the time work began at the site. Construction liens are considered “inchoate” or “hidden” liens. Consequently, one who buys property within the time a contractor is allowed to perfect the lien takes title subject to construction liens recorded after the date of closing. 

            As a result, even though the liens were not recorded at the time of the sale from S&H to RIP, Realty Income Properties could not be a “bona fide” purchaser. 

            The Supreme Court determined that the ability of a contracting owner’s interest to be subjected to future construction liens passes to the next owner. Perfection of construction liens that relate back in time may lawfully occur following the recordation of a Deed. Or a Mortgage. Security Agreement. Deed of Trust. Financing Statement. Assignment of Rents. UCC-1. &tc. 

            The liens filed by Nore Electric and other subcontractors are valid, and are superior to RIP’s Deed, even though the liens were filed after the date the Deed was recorded. The foreclosure decree is affirmed. The Judgment of the district court is also affirmed; Nore wins; S&H and RIP lose. 

            See Nore Electric v. S&H Holdings; Nebraska Supreme Court; Case Number S-23-282; March 15, 2024: https://casetext.com/case/nore-elec-v-s-h-holdings-llc. 

            Questions / Issues / Comments: 

1.      You are a buyer. Or lender. Maybe even a tenant. You checked title and there is nothing untoward. How do you protect yourself from this anomaly? Obtain affidavits from the seller and borrower. Conduct site inspections to determine if the property has been recently repaired or improved. Obtain construction escrows and holdback accounts, to secure the need to later pay the contractors. Get all-bills-paid affidavits from all major contractors and subcontractors. And of course, purchase the best title insurance policy with extended endorsements. 

2.      This is not an issue unique to Nebraska. It is my impression that most States have a similar process. The lien power of contractors, subcontractors, laborers, material providers, architects, surveyors, engineers, and similar labor and service providers, can be derived from States’ constitutions and supplemented by statutes. Perhaps this is a reflection of our agrarian-based USA societies from 200+ years ago, and the desires of those State legislators who wrote the constitutions and statutes to support the workers and laborers who were (and still are) pivotal to our economic success. 

3.      Conversely, you are a contractor, engineer, architect, laborer, surveyor, custom manufacturer, or material provider, and you haven’t been paid? Happy news, you may not be too late to assert your rights, even if the real estate has been sold. Mortgaged. Leased. Foreclosed by others. 

                                                                        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, February 28, 2024

IS PROCURING CAUSE [STILL] A THING?

            Catalyst Strategic is a consulting firm that advises companies regarding mergers, acquisitions, and similar. Three Diamond Capital is an equipment rental company based in Houston. Three Diamond engaged Catalyst to help with a sale of its company, and executed a contract accordingly. But in October 2018, Three Diamond decided to stop pursuing a sale and ended the agreement. 

            Still, the two companies continued a working relationship. And in 2019, Three Diamond again sought a buyer and executed another engagement agreement with Catalyst. That agreement stated that Three Diamond would pay Catalyst $25k per calendar quarter, plus a commission upon the sale of Three Diamond. The commission was payable if the deal was concluded from the date of the agreement through the 18th month following the date of termination of the agreement. 

            Due to the onset of COVID-19, Three Diamond terminated its contract with Catalyst in March 2020. 

            The rental industry recovered, so the CEO of Three Diamond contacted the CEO of Herc Rentals. Herc had initially been sourced through the efforts of Catalyst during the term of the agreement. This time Herc agreed to purchase Three Diamond for $190 million; the deal closed in August 2021. 

            Three Diamond refused to pay Catalyst the separate fee, even though the transaction took place within 18 months after Three Diamond terminated the contract with Catalyst. So Catalyst sued Three Diamond for breach of contract. 

            The trial court determined that Catalyst substantially performed its obligations, and granted judgment for Catalyst. Three Diamond filed a motion for reconsideration, premised on the ‘procuring cause’ doctrine in Texas. The trial court, unmoved by Three Diamond’s request, awarded Catalyst close to $4 million, plus interest. 

            Three Diamond appealed. 

            The Appellate Court reminded us that the procuring cause doctrine is a ‘settled and plain’ rule in Texas, as announced in a Texas Supreme Court case of 2022. Its function is to credit a broker or agent for a commission-generating sale when a buyer is produced through the efforts of a broker or agent. As a consequence, the commission entitlement vests at the moment of procurement, not when the deal closes. 

            The theory of ‘procuring cause’ is only operational when there is no contract that governs how to handle post-termination commissions. Contractual silence, however, leaves the procuring cause doctrine intact. 

            In this situation, the Catalyst contract contained a ‘robust accounting’ of fees, interim fees, completion fees, and post-termination commissions; there is no claim that the agreement was silent on these points. 

            So, although the procuring cause doctrine is indeed still very much a thing, at least in Texas, it is inapplicable here as the contract is crystal clear. 

            Catalyst must win; Three Diamond will lose. See Catalyst Strategic Advisors LLC v Three Diamond Capital SBC LLC; US 5th Circuit Court of Appeals No. 23-20030; February 22, 2024: https://casetext.com/case/catalyst-strategic-advisors-llc-v-three-diamond-capital-sbc-llc. 

Questions / Issues: 

1.      Be careful. Although the ‘procuring cause’ doctrine may be alive and well, there are statutes that supplant it. As just one example, it is not enough for a real estate broker or sales agent to be the procuring cause of a deal in many States; strict licensure and other requirements must be met before the agent or broker may assert a lawful claim for commission entitlement. 

2.      Further, and although not addressed in this Opinion because there was no need to do so, most States have adopted statutes of fraud that generally preclude oral agreements above a minimum threshold amount, like $500. Do not make the mistake of concluding that a solid argument for a ‘procuring cause’ entitlement means that a written contract is not needed. 

                                                                        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, 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.