Wednesday, August 1, 2018

Commercial Lease Security Deposits

Our Texas Courts rarely give us insight into the interpretation of commercial lease security deposits laws. Until recently. New guidance awaits.

In August 2010 ProLogis Texas II leased real property in Sugar Land, Texas, to Daryl Flood Logistics. Daryl Flood assigned the lease to FP Stores in 2013, who, in turn, subleased part of it to Tramontina US in 2014.

I intuitively like Tramontina; they have an interesting spiced, citrus-glazed short rib recipe on their website: Ok so that was a minor digression and possibly reflects my ADD. I’ll take another pill now . . .

Tramontina paid FP a $50,000 sublease security deposit. The sublease required FP to refund the deposit, less proper deductions, within 60 days after Tramontina vacated.

The Master Lease between ProLogis and FP Stores terminated March 8, 2015, so by operation of law – the sublease also terminated. FP vacated but Tramontina stayed, as the direct tenant of ProLogis.

A week after termination Tramontina sent a letter to FP with Tramontina’s new forwarding address and demand to return the deposit within the time allowed by Texas law. Regardless, more than two months elapsed without either a return of the deposit or tender of an accounting that would provide for deposit offsets.

Tramontina sued FP for the refund of its security deposit, which by law is required to be returned within 60 days if a shorter time is not otherwise provided in the sublease. See Texas Property Code 93.011: That same law states that a landlord can be liable for triple damages if the monies are not timely returned, or otherwise a written description of damages and itemization of charges is not timely furnished.

The trial court agreed with Tramontina’s position and awarded Tramontina $150,100 ($50,000 times three, plus $100 statutory damages – exactly as stipulated in the Texas Property Code) and $25,000 in attorney’s fees.

FP appealed.

The Court of Appeals found – surprise to no one – virtually no cases on point in Texas regarding commercial leases although we have had this law for 29 years. So the Court reviewed parallel Texas statutes that are relevant to residential security deposits.

In doing so, the Court decided that the landlord must prove its good faith to avoid liability for treble damages. Good faith, the Court determined, is “honesty in fact in the conduct or transaction concerned” and that the landlord did not intend to deprive the tenant of its rights or of a lawfully due refund.

From there, it was a short stretch to determine that FP had presented at least some evidence that it had intended to act in good faith.

Judgment for Tramontina is reversed; the case is returned to trial court for a do-over. See FP Stores, Inc. v. Tramontina US, Inc.; No 01-16-00031-CV; Court of Appeals of Texas, Houston (1st District), December 29, 2016:    

Lessons Learned / Questions Asked:

1.                  This landlord was not found responsible for triple damages. But in doing so, it had to defend a lawsuit in trial court, appeal to the Texas Court of Appeals, and if the litigation was not settled, endure yet another trial back in the district court of Fort Bend County. What do you think this landlord spent in attorney’s fees - $100k? To save $50k?

2.                  While there is honor in defending your position, there is also a substantial cost in doing so. My assumption is that FP would have been *far ahead if it would have timely complied with Texas laws and the Sublease terms.

3.                  In my experience, the landlords that are most at risk are the ones that do not routinely engage in commercial real estate leasing. They don’t know the laws; they don’t have appropriate accounting procedures for deposit return. Brokers can help rookie landlords and tenants by tracking the termination dates of leases and subleases, and then making all parties aware that the security deposits must be timely processed.

                                                                                    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

Higier Allen & Lautin, PC
2711 N. Haskell Avenue, Suite 2400
Dallas Texas 75204
P: 972.716.1888

Wednesday, June 27, 2018

Lease Guaranty v 2.0

Faith and True Christian Center, Inc. entered a commercial Lease with USA Real Estate-2, LLC, in which Faith leased space from USA for church activities. The Lease was for five years beginning September 1, 2007. When the Lease was executed the church’s pastor and president, Anthony Harrison and his wife, executed a personal Guaranty along with other persons in leadership positions at the church.

The Guaranties were accepted by USA Real Estate, after it had reviewed and approved federal and state tax returns of the Guarantors.

None of the Guarantors had any ownership interest in Faith; none of them were “commercially sophisticated” as observed by the circuit court.

In any event, evidently Faith was suffering from financial problems so Pastor Harrison sought a Lease extension in exchange for lowering the monthly rental and extending the term for three more years. Harrison did not seek the consent of the other Guarantors who may have objected had they known of Harrison’s plan.

Unfortunately, three years after the Lease was extended Faith was unable to pay the reduced rent. Consequently, Faith and USA Real Estate agreed that Faith would vacate the property eight months before expiration of the Lease term.

After Faith vacated, USA Real Estate asserted a lawsuit against Faith, Pastor Harrison and the other Guarantors. The claims against Pastor Harrison and his wife were dismissed due to a bankruptcy discharge. The litigation continued against Steve Carter and the remaining Guarantors.

At the conclusion of the trial, the circuit court found that Carter and the remaining Guarantors did not consent to the Lease extension amendment. And consequently, Carter and the Guarantors were not liable for rental due under the Lease extension amendment.

USA Real Estate appealed.

The Appellate Court accepted the evidence that the Guarantors did not know of the Lease extension amendment until they were sued. And that date was almost four years after the amendment was executed.

The issue presented to the Court related solely to the language of the Lease and Guaranty.

The Lease stated that no notice to the Guarantors is required with respect to an indulgence, modification, alteration, or accommodation. USA Real Estate focused on the word modification and claimed that a modification is similar to a Lease amendment.

The Appellate Court looked high and low for language in the Lease or Guaranty providing for extensions without the Guarantors’ specific consent. Failing to locate that exact provision, the Court determined that the terms “Lease modification” and “Lease extension” were sufficiently different.

The Court then concluded that absent the formal written consent of the Guarantors to the Lease extension, the Guarantors could not be liable for rental during the Lease extension period.

Judgment for the Guarantors is affirmed; the Guarantors are not liable for rental during the extension period. See USA Real Estate-2, LLC v. Carter; No 2648; Maryland Court of Special Appeals, January 12, 2018:    

Lessons Learned / Questions Asked:

1.      Most commercial Leases are also guaranteed by one or more Guarantors, right? And experienced Guarantors often negotiate and change the text of the Guaranty Agreements, yes?

2.      Both before and after edits, does your Lease Guaranty Agreement provide for the ongoing / continuing duty of the Guarantors without requiring their written consent?

3.      This lawsuit could possibly have been avoided if the Landlord or its agents had obtained execution of the Lease amendment by the Guarantors. And – the Guarantors could not have complained that they were surprised and only learned of the *not* modification when the lawsuit was asserted. Best practice suggests that Landlords and property managers always obtain the written consent of the Guarantors to all extensions, amendments, modifications, renewals, novations, and adjustments, regardless of the text of your Guaranty Agreements.

                                                                                    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

Thursday, May 31, 2018

Insurance Sucks

Hate reviewing insurance provisions? Or even worse, do you ignore them entirely? You are not alone.

I love reading insurance policies. Said no one, ever.

But based on this new case, you may want to reconsider that strategy.

Sierra Equipment leased heavy construction equipment to LWL Management. The lease agreement required LWL to insure the leased equipment, deliver a copy of the insurance policy to Sierra, and obtain a policy in form and content satisfactory to Sierra.

The lease agreement did not require that the policy name Sierra as an additional insured, or contain a loss payable clause listing Sierra.

LWL filed for bankruptcy about a year after Sierra and LWL had entered in the lease agreement. After the filing, Lexington Insurance Company issued a property insurance policy with LWL as a named insured. The policy did not mention Sierra.

During the bankruptcy proceedings, Sierra discovered that much of its equipment had been damaged, lost, or destroyed. Sierra sought payment from LWL. When nothing came of Sierra’s claim, Sierra made demand for payment upon Lexington, and then ultimately filed a lawsuit against Lexington.

Sierra asserted in the litigation a claim for insurance proceeds for the loss of and damage to Sierra’s equipment. The district court dismissed Sierra’s claim, concluding that Lexington was out of luck since the policy did not name Sierra as an additional insured.

Sierra appealed.

In the Circuit Court, Sierra claimed that the insurance policy was intended to benefit the equipment lessor and consequently, Sierra was entitled to tap the policy proceeds.

The Circuit Court reviewed the equipment lease and determined that LWL was not required to obtain insurance with a loss payable clause to Sierra. And, since the Lexington policy did not contain such a clause, Sierra would not be entitled to access the policy proceeds.

Lexington Insurance Company wins. See Sierra Equipment, Inc. v. Lexington Insurance Co.; No 17-10076; US Court of Appeals, Fifth Circuit, May 15, 2018:   

Lessons Learned / Questions Asked:

1.      I’ll wager the commercial leases you use obligate both the LL and T to maintain insurance coverages. Further, those same provisions state that the other party must be named as an “additional insured,” with a “loss payable” clause or similar verbiage.

2.      Further, I’ll bet that even your commercial purchase and sale agreements obligate the buyer to provide insurance during the due diligence period, to insure the seller against liabilities and damages created by the buyer’s on-site inspection of the property.

3.      Are you checking to be sure that not only are the insurance coverages properly stated in the policies or certificates, but that your interests are properly secured by naming your entity as “loss payee” and “additional insured”? Because based on this case, the failure to do so may prove catastrophic if you need insurance proceeds to cover a substantial loss, but they are not available to you due to administrative or management oversight.

                                                                                    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

Monday, April 30, 2018

Automated External Defibrillators

Lupo Vine Street, LP owns a multi-unit commercial building. In 2011 Lupo entered into a five-year lease with Wild Card Boxing Club for two units, consisting of 5,000 square feet of space. Wild Card started business operations there as a Boxing Club / Athletic Club.

Lupo never had any ownership interest in Wild Card’s business.

On January 30, 2016, Omorishanla Olayinka was working out with a trainer at Wild Card when he suffered a fatal heart attack. Wild Card did not have an AED on the premises.

Olayinka’s surviving spouse Maryam Day and their daughter, Ayodele Omotolani Ifatosin Olayinka and Olayinka’s estate filed a lawsuit against Wild Card, its owner Freddie Roach, and Lupo. The petition alleged negligence based upon the failure to maintain an AED.

Lupo claimed it had no duty to furnish the premises with an AED or to ensure the gym owner did so. The trial court agreed, and entered judgment in favor of Lupo.

Plaintiffs appealed.

Olayinka’s family contend on appeal that Lupo was required to either provide an AED at the premises it leased to Wild Card, or to require that Wild Card obtain and maintain an AED as a condition to the lease. Plaintiffs believe that Lupo’s failure to do so meant that Lupo was negligent and should be responsible in damages to Plaintiffs.

The Appellate Court reviewed cases obligating commercial landlords to be sure that the premises are reasonably safe at the beginning of the tenancy. The analysis of when or if a duty arises has several elements: (1) foreseeability of harm; (2) degree of certainty that an injury was suffered; (3) closeness of the connection between the defendant’s conduct and injury suffered; (4) blame attached to the defendant’s conduct; (5) policy to prevent future harm; (6) extent of the burden to the defendant of imposing a duty to exercise care; (7) consequences to the community of imposing a duty to exercise care; and (8) availability, cost, and prevalence of insurance for the risk involved.

The Court also concluded that the chief element in determining whether defendant owes a duty is the foreseeability of the risk. And the second critical factor is the relative burden of imposing that duty. If the burden of providing a safety or security measure is onerous, a heightened or high degree of foreseeability of the danger is required.

Lupo reminded the Court that merely providing an AED does not end the duty, if indeed a duty exists. Rather, the AED must be constantly maintained, charged, recharged and tested, and personnel must be trained not only to properly utilize and service the AEDs, but also to administer CPR.

Further, as a landlord Lupo has relinquished possession of the premises to Wild Card. Requiring Lupo to constantly enter the premises to inquire if the AED had been used, charged, recharged, tested, and examine Wild Card’s AED and CPR training of its personnel far exceeds the typical obligations of a commercial landlord.

The Appellate Court concluded that a landlord cannot be held responsible for all damages inherent in a dangerous business. Lupo wins. See Maryam Day v. Lupo Vine Street, LP.; No B282996; California Court of Appeal; 2nd District; Division Four, April 11, 2018:,44.  

Lessons Learned / Questions Asked:

1.      Dust off your commercial lease boilerplate provisions. Hopefully your lease obligates tenants to fully conform with all private deed restrictions, zoning, municipal ordinances, county regulations, state statutes, and federal laws regarding all matters including health and safety.

2.      Does your lease form entitle the landlord and its agents to enter, to not only make repairs or show the premises to a lender, purchaser, or prospective tenant, but rather just to assure that tenant is discharging all of its obligations?

3.      Does your insurance cover this risk with affordable deductibles and loss retentions? Do your tenants share not only the premiums but also the deductibles if you are required to assert or defend a claim?

                                                                                    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