Commissions!

Just like virtually all of my readers, Zach Manning and IntraRealty, Inc. are TREC licensees. Today they seem to be connected through ownership; not sure about 2006 when this case started.

 

2006 was the year that Manning and IntraRealty accepted a listing from HomeEq, to sell Texas property. HomeEq was a mortgage servicing company. HomeEq accepted a purchase offer from Karen Vicknair for $195,000 in 2007. While Karen’s contract was pending, HomEq transferred management of the property to Litton Loan Servicing. Manning and IntraRealty had no commission agreement with Litton.

 

Litton was unable to close the deal “. . . because it did not have the correct person to sign the deed.” So Karen terminated and received the return of her earnest money. Manning and IntraRealty then demanded that Litton pay a commission of $11,500. Litton refused to pay the commission since the property had not been conveyed.

 

So Manning and IntraRealty sued Litton. The trial court, based on a jury’s verdict, rendered judgment for Manning and IntraRealty for the $11,700 commission, plus $30,000 for attorney’s fees. The trial court concluded that a series of emails in 2007 constituted a legally binding contract for Litton to pay a commission if Manning and IntraRealty procured a ready, willing and able cash buyer.

 

Litton appealed, claiming that TREC statutes require a written agreement, signed by the party who is to pay the fee. Manning and IntraRealty relied on not only various emails, but also the Contract itself. The Contract did not specify a commission amount, although it did indicate that the obligations of the parties to compensate brokers were governed by separate written agreements.

 

Regardless, Manning and IntraRealty were unable to produce a written commission agreement, signed by Litton or its agent, obligating Litton to pay Manning and IntraRealty a stated fee based upon the conveyance of an identified property.

 

Relying on the strict interpretation of the Texas Real Estate License Act and consistent with many other Texas appellate decisions, the Texas Court of Appeals overturned the judgment of the trial court and rendered judgment for Litton. Without a written commission agreement signed by the party who is obligated to make payment, Texas laws were not satisfied and Litton owed nothing.

 

Litton wins. Manning and IntraRealty loses.

 

See Litton Loan Servicing LP v. Manning and IntraRealty Inc.; No. 05-10-00675-CV; Texas Court of Appeals - Dallas; April 26, 2012.

 

Lessons learned:

 

1.      Commission agreements must be in writing and signed by the party obligated to pay the fee!

 

2.      Commission agreements must identify the broker to whom the fee is payable!

 

3.      Commission agreements must identify the property that is the subject of the transaction!

 

 

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

Tenants: Beware the Build-To-Suit

I love Supreme Court case opinions. The Supremes don’t take on commercial real estate cases very often. But when they do, we always receive a well-reasoned, uber-researched opinion.

And sometimes the Supremes are right!

More than 10 years ago ECO Resources, Inc., entered into a build-to-suit lease with its landlord TA / Sugar Land-ECO, Ltd. for the construction of a 32,000 s.f. office and lab. TASL then agreed to sell the property to Ashford Partners, Ltd. Closing was within 30 days after the commencement date of the ECO lease.

Construction was completed in about six months. ECO accepted the building as “substantially complete,” but submitted to TASL an 8-page punch list of items in need of repair. As required by the lease, ECO then executed an Estoppel Certificate (verifying the validity of the lease and other similar matters). TASL doubtless submitted the Estoppel to Ashford. Then TASL sold the building to Ashford two weeks later.

ECO’s building problems started two years later. Water collected under the foundation, evidently caused by the failure to caulk between the tilt wall panels below grade.

Ashford spent more than $313,000 to repair the problem, and then sued the construction contractor TASL had used and ECO. The claim against the contractor was settled. However, ECO filed a counterclaim against Ashford for breach of lease, and ECO did not abandon its claim.

At trial the jury found that ECO had been damaged because the value of its lease was diminished. The trial court rendered judgment for ECO against Ashford for almost $1.5 million.

Ashford appealed. The Court of Appeals concurred with the trial court, and accordingly affirmed the trial court’s judgment.

So Ashford appealed again, essentially claiming that since ECO complained of construction issues, Ashford had the building repaired and consequently ECO suffered no damages.

The Texas Supreme Court determined that the trial court and court of appeals had applied an improper damages test of the difference between rent and the value of the leasehold. Instead, the Supremes determined that the landlord’s obligations in the lease – to repair construction defects – had been adequately satisfied. Consequently, ECO had not been damaged and should not have prevailed in either the trial court or court of appeals.

The lower court judgment was reversed. Ashford wins. ECO loses.

See Ashford Partners Ltd. v ECO Resources Inc.; No. 10-0615; Supreme Court of the State of Texas; April 23, 2012.

Lessons learned:

1.  Build-to-suit leases are inherently risky for both landlord and tenant.

2.  If a tenant has a problem regarding construction that cannot be resolved, the tenant – at least in Texas – needs to argue this point in court: “business disruption.”

3.  If a landlord has a problem with a pesky tenant, the landlord – in Texas – should be able to respond with this statement in court: “I had it repaired.”

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

Loss Mitigation in Commercial Leasing

In 1997 the Supremes – no not those Supremes but rather the Texas Supreme Court – gave all of us involved in commercial real estate law the landmark opinion of Austin Hill Country v. Palisades Plaza. That case imparted a duty upon commercial landlords to attempt to lessen their losses when a tenant vacates. Previous law allowed the Landlord to do nothing, wait for the end of the lease term, and then sue the Tenant and Guarantor. Not to be outdone, our own Texas legislature liked the case so much they wrote a law about it in 1997 and it is still found today in our Texas Property Code.

That section of the Property Code has been litigated. A lot. Tenants use it to claim that their Landlord didn’t lessen their loss when the Tenant breached the lease. And then the Tenant inevitably claims that if only the Landlord had mitigated, surely the Landlord would have found a replacement tenant who would have covered all of Landlord’s losses.

Which brings us to this month’s case . . .

Mazin Zaid assumed a commercial lease from Weingarten Realty in 2005. In 2006 Zaid assigned the lease to new tenants, but Zaid was not released from his lease liability. The new tenants soon defaulted and were locked out. Weingarten sued Zaid for breach of the lease.

The jury agreed with Weingarten in the trial court, awarding Weingarten approximately $150,000 for unpaid rent, plus almost $50,000 in attorney’s fees for the trial. The trial court converted the verdict to judgment. Zaid appealed.

On appeal Zaid claimed that Weingarten did not follow Texas law because Weingarten did not attempt to lessen its losses. Weingarten, however, had senior leasing executive John Wise describe his efforts to find a replacement tenant. According to Wise, Weingarten placed a ‘for rent’ sign in the window. Wise personally made cold calls and left flyers with retailers, attended broker meetings, sent out e-mail blasts and showed the property to several potential tenants, explaining that the rental pricing was negotiable.

Zaid argued that he, Mazin Zaid, was the perfect replacement tenant. Zaid stated that had Weingarten permitted him to reclaim the property, pay the back rent, operate the business and continue the lease, Weingarten would have lost no rental income.

Weingarten countered by introducing evidence that Zaid had re-entered the property and removed his equipment, Zaid never mentioned in written correspondence with Weingarten that he wanted to resume possession of the premises, and that Zaid took no action in preparation of resuming operations at the restaurant.

Judgment was affirmed for Weingarten.

See Zaid v. Weingarten Realty Investors; No. 09-10-00225-CV; Court of Appeals, Ninth District of Texas; August 31, 2011.

Lessons learned:

1.      Landlords must attempt to lessen their losses after a tenant breaches the lease. Landlord’s duty to mitigate may not be waived.

2.      Landlords are not required to use extraordinary efforts to re-lease, unless the Lease states otherwise. Typically, reasonable efforts suffice.

3.      Landlords should check their Lease forms to exclude an obligation to re-lease the premises to the same tenant (or any affiliate) who just defaulted.

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

Part Two: Do Non-Representation Provisions Really Work?

Matlock Place Apartments, LP (it’s in Arlington Texas) was controlled by Hagop Kofdarali. Druce Properties, LLC purchased the apartments in 2004. Both were fairly sophisticated owner / operators, with at least some level of experience in managing  multi-family properties.

 

When Hagop’s sister initially purchased the property in 2002 the occupancy rate was only 40% - 50%. In 2002 and 2003 Hagop spent more than $500,000 in repair and remodel expenses, possibly as a condition to a $1.8 million loan.

 

Hagop then listed the property with a national brokerage firm. The firm prepared and distributed to Druce a marketing brochure which provided for a 93% occupancy rate and claimed “Major Rehab Just Completed.” Hagop, however, testified at trial that occupancy could fluctuate monthly anywhere from 80% - 93%, and that the rehabilitation was incomplete because the roof repairs and unit-interiors still required work.

 

Druce and Hagop signed a letter of intent for $2.4 million, which provided a 21-day inspection period as well as a $100,000 credit at closing for “repairs and maintenance.” Druce testified that he personally inspected the property and viewed 10 of the 99 units. He was satisfied with what he saw, and continued with the analysis.

 

After the contract was signed Druce received 1,500 – 2,000 pages of documents from the property manager. Included within the package were disclosures regarding delinquent rentals and serious criminal activities. Druce claims he did not notice them, since they were “buried” in the pile of paper.

 

Druce and Hagop closed the deal in July 2004. Druce evidently visited the property a few days before closing and noticed that it looked deserted. During that visit he also learned from an Arlington police officer that the area was well known for drug dealers, addicts and prostitutes. But he bought it anyway, claiming he was financially and emotionally invested in it, thinking that the income stream would be “gigantic.”

 

After closing the occupancy rate was between 58% and 78%. Druce spent $800,000 to rehabilitate the property, all in an effort to merely break even.

 

Druce, claiming he relied on Hagop’s representations as contained in the marketing piece and that such reps were untrue, brought a lawsuit seeking damages. The trial court entered Judgment against Hagop for approximately $2.4 million, finding that Hagop committed fraud by failure to disclose.

 

Hagop’s appeal was primarily centered around the theory that Druce could not have relied on anything that Hagop (or his broker) did or did not say or represent, because of the full-blown “as is, where is, non-reliance” clause in bold, upper case type in the Contract.

 

The Texas Court of Appeals in Fort Worth agreed with Hagop. Judgment reversed. Hagop wins. Druce loses. A properly worded “as is, where is, non-reliance” clause may still be effective in Texas.

 

See Matlock Place Apartments v. Druce; No. 02-09-00130; Court of Appeals, Second District of Texas; January 17, 2012.

 

Lessons learned:

 

1.      Recently, my son published an article evaluating the continuing effectiveness of “non-reliance” clauses in commercial real estate. Recent Texas Supreme Court authority indicated that such clauses are almost extinct. This Fort Worth Court, however, has a different view.

 

2.      Sellers should check their Contract forms to be sure they track the language of the “non-reliance” clause in this case as close as possible.

 

3.      Buyers should check their Contract forms to be sure they track the language of the Italian Cowboys case my son wrote about.

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

Do Non-Representation Provisions Really Work?

My son Jon Lautin is in law school at Boston University. He wrote this, and it is reprinted here with his permission.

Fraud is bad, and courts don’t like it.

Franceso Secchi and his wife Jane Secchi opened a restaurant called Italian Cowboy in Keystone Shopping Center, in Dallas. The land and building was owned by Prudential Insurance Company and had been previously leased to Hudson’s Grill. Evidently Hudson’s struggled to pay rent, and vacated.

The lease contained two clauses relevant to a claim later asserted by M/M Secchi: the first stated that the Secchis did not rely on any representations by Prudential except those stated in the lease (a “Merger” clause). The second contained an “Entire Agreement” clause stating that the lease constitutes the entire agreement and no changes are binding unless signed by both parties.

Before signing the lease the Secchis were assured by agents of the landlord that the building was new, had no problems, was in “perfect condition” and that the previous tenant had no issues with the building. However, immediately after moving in the Secchis noticed that there was a sewer stink permeating the building. After some investigating they discovered that the grease trap was improperly installed which caused the terrible smell.

Both the Secchis and Prudential attempted to fix the problem but were unsuccessful. Before Italian Cowboy was scheduled to open for business, the Secchis realized that the smell prevented the possibility of a successful restaurant. They stopped paying rent and sued Prudential for fraud and negligent misrepresentation. Prudential counterclaimed for breach of contract since the Secchis stopped paying rent.

Numerous facts allowed the Secchis to win approximately $600,000 in damages in trial court. The previous tenants of the building, also owners of a restaurant, notified Prudential of the foul smell long before the Secchis started lease negotiations. Nonetheless, the defendants claimed that they were not aware of the stench when confronted by the Secchis. Prudential reassured the Secchis numerous times before signing the lease that the building was in perfect condition. These statements, determined to be false in the trial court, were enough to prove fraud and negligent misrepresentation.

Or so the Secchis thought.

The Texas Court of Appeals disagreed and held that the lease barred claims for fraud and negligent misrepresentation. The Court of Appeals stated that not all “Representation” clauses bar fraud and negligent misrepresentation claims unless it is clear that both parties intend the clause to be binding. Reverting back to a fundamental principal of American contract law, the Court of Appeals decided that both the plaintiff and defendant had a “meeting of the minds” to bar all fraud claims. Furthermore, the Appellate Court held that there could be no fraud and negligent misrepresentation because the parties were experienced businesspeople and they had competent attorneys negotiating the contract. Therefore, the merger clause is binding since the evidence suggests the parties meant it to be binding.

Or so Prudential thought.

The Supreme Court of Texas reversed the Court of Appeals’ decision. The Supreme Court held that the language of the “Representation” and “Merger” clauses did not show intent to bar allegations of fraud and negligent misrepresentation. The Court further explained that even if the parties intended to release all claims of fraud, the clauses in the contract did not contain “clear and unequivocal language” to that effect.

The ruling in this case may indicate a change in direction for the Supreme Court of Texas. In a landmark case in 1997, Schulumberger Technology Corp. v. Swanson, the Court held that a particular contract with a similar “Representation” clause effectively barred all claims of fraud. While there are differences between the facts of the two cases, the Texas Supreme Court’s willingness to hear the Italian Cowboy case and its decision that fraud was not barred could show that Texas is following other states and taking a hard-line stance on fraud.

See Italian Cowboy Partners, Ltd. v. The Prudential Insurance Company of America; No. 08-0989; Supreme Court of Texas; April 15, 2011.

Lessons learned:

1.      Courts will usually allow a party to stop performing their obligations under a contract if that party was fraudulently induced into entering the contract.

2.      Including clauses that appear to bar fraud claims may not be sufficient to bar fraud claims.

3.      Courts, like juries, can be unpredictable.


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

For Sale Cheap – 545 Acres in Wood County

In November 2003 William Earl Norris and Martha Sue Norris decided to sell their farm to Eleanor Fox Davis. William and Martha signed not one, not two, but three – count ‘em three – contracts, all with Eleanor.

In the first contract M/M Norris agreed to sell 215 acres to Ms. Davis. Davis also had the right to acquire more acreage from M/M Norris, being the remainder of the 545-acre farm. In the second, Davis agreed to purchase 10 acres from Norris. The third contract was for approximately 210 acres. The parties closed on the second and third contracts, but left the first pending.

In 2006 Davis sent M/M Norris a letter announcing her intention to exercise the option in the first contract. Counsel for the Norris’ did not agree that Davis was entitled to purchase more property, and consequently M/M Norris did not appear at the time and place designated by Davis for closing.

Davis sued M/M Norris for specific performance or damages. Davis lost. Davis appealed.

The Texarkana Court of Appeals first stated that options must be clearly drafted and the purchaser must strictly comply. The Appellate Court concluded that the contract was unclear as to what, exactly, is required to exercise the option. This conclusion was based primarily on the handwritten statement in the contract that: “SELLER WILL HAVE 9 MONTHS NOTICE BEFORE BUYER WILL CLOSE,” coupled with some additional unclear provisions.

The handwritten clause followed a provision granting Davis “. . . an Option and First Right of Refusal until January 1, 2007 to purchase [the property].” But what is the correlation between the January 1, 2007 deadline and the 9-month notice provision? Must nine-month notice be issued before January 1, 2007, or must the closing be completed by January 1, 2007?

At the trial court M/M Norris won a summary judgment based on the single theory that Davis did not timely exercise the option. The Court of Appeals reversed the decision of the trial court, and remanded the case back to Wood County to figure out what the parties had contemplated to properly and timely exercise the purchase option.

See Davis v. Norris, 06-10-00093-CV, 6^th Court of Appeals, Texarkana; October 27, 2011.

Lessons learned:

1.  It appears that no brokers were involved. Thank goodness, since clearly all brokers and agents would have been sued.

2.  Option contracts are tricky. Do not draft option contracts, rights of first refusal, rights of first offer or anything similar, in contracts or leases. Or anywhere else for that matter. Even seasoned lawyers often make mistakes in this area.

3.  Review option language closely. Everything in an option provision must be spelled out with great particularity – timing, property description, pricing, review and due diligence periods, earnest monies or additional deposits, means by which notice must be furnished, title companies, closing documents, prorations, taxes, etc. Tricky stuff. Seriously.


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

SPECIAL ALERT! Adverse Possession Claimants Enter North Texas Residential Markets**

I learned of the problem last July. That was when the Dallas Morning News reported that an individual moved into a vacant Flower Mound property worth $340,000 and attempted to claim ownership. Kenneth Robinson paid nothing for the property. Robinson did not agree to pay off the existing mortgage. Robinson did not agree to pay rent, repair the property, “stage” the property for buyers, care for the property or make any other agreement. Robinson merely noticed the property was vacant, and moved in.

The DMN article gives some context for Robinson’s legal position.

Kenneth Robinson evidently noticed that the Waterford Park Estates property had been vacant for about a year. It seems that the owner may have lost interest in it, and then the owner’s lender filed bankruptcy in 2009. Perhaps the owner had no equity in it and elected to allow foreclosure – toss the lender the keys so to speak – but those facts are not given in the article. Maybe the owner assumed that the lender would foreclose quickly and was surprised that they did not and instead had their own financial difficulties which led to their bankruptcy.

But those facts were also not provided, so we can only guess why the owner vacated and the lender did not foreclose.

A few months ago Robinson moved his pool table into the dining room, installed his washer and dryer, and placed his bed and office equipment into the home. He turned on the utilities. And then he called the locksmith to change the locks. And hand him the new keys.

The neighbors expressed their unhappiness to Robinson in a meeting at the property. Robinson responded by calling the police. “I didn’t file charges against them” he reportedly said.

Ken Robinson Sr. did however file an “Affidavit of Adverse Possession” with the Denton County Clerk. I obtained a copy. In the Affidavit Robinson states “. . . I am claiming ownership of the above described property peaceably.”

Obviously a mere claim of ownership does not so easily defeat the true owner’s rights. Yet this is troubling because Texas adverse possession laws (sometimes called “squatter’s rights”) are complex and can be used to at least cause expensive problems to the true owner.

But wait – there’s more. Recently the Fort Worth Star-Telegram reported on similar filings in Tarrant County. Paul Roper filed virtually the same Affidavit with respect to Mansfield property, then Anthony Brown signed an identical Affidavit. Also for Mansfield property. Those two Affidavits of Adverse Possession – Roper and Brown – were filed on the same date with the Tarrant County Clerk. Same time too.

This ultimately led the Tarrant County District Attorney to instruct the Tarrant County Clerk to stop recording the Affidavits. Meanwhile, predictably, litigation has started.

Under Texas law, an individual can properly claim ownership if s/he occupies the property for a term of years. There are other requirements. The occupancy must be open, notorious, hostile and adverse to the true owner. Payment of real estate taxes can greatly help the “squatter’s” claim, but it is not a strict requirement.

Property owners and lenders need to be aware of this sticky problem, particularly if the owners and lenders are non-resident in Texas and trust others to check on their properties. The risk is reduced if occupants use property pursuant to written Leases. If, however, an occupant repudiates the Lease but continues to occupy the property, then that occupant might also attempt to file a “squatter’s claim” of adverse possession.

Lessons learned:

1. Check your properties constantly. Owners need to know your tenants and know who is in occupancy at all times. Lenders need to know their owners.

2. Check the local Deed Records constantly. You might find that an Affidavit of Adverse Possession has been filed. Or a tax lien. Judgment lien. Mechanic’s lien. Deed of Trust lien. There can be any number of surprises and the time to deal with them is now, before they ripen into a much larger problem.

3. Check your Leases constantly. Be sure that you have a complete (that means all exhibits, schedules, attachments, amendments and renewals) fully-signed Lease and Guaranty on file for each tenant.

** Full disclosure. Content for this article came from the Dallas Morning News, Fort Worth Star-Telegram, Denton County Clerk and Tarrant County Clerk. To my knowledge no allegations have been proven in a Court of Law and consequently, they are only allegations.



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

Have You Hugged Your Lawyer Today?

Graydon Howell and Inez Howell owned 43 lake lots at Lake Colorado City, Texas, and leased the lots to various tenants. The lots were ultimately sold to Providence Land Services, LLC in 2008, subject to the leases.

Evidently, the Howells elected to prepare the leases without the aid of an attorney. The duration of the leases was described in this clause: “For the sum of $_____, the receipt of which is hereby acknowledged, a like annual rental of $_____ payable each year on or before _________, Lessor will lease to Lessee the following described lot or parcel of ground on [the] shores of Lake Colorado City, for residential purposes only, for the period from this date until Indefinite . . .” [emphasis added.]

The trial court determined that “Indefinite,” in this context, meant 99 years from the date of lease execution. This was based, at least in part, upon the tenants’ evidence at trial of their substantial work to clear the lake lots for occupancy and substantial, expensive improvements with the expectation that the tenants would be allowed to pay rent and remain at the property for a long time.

Providence appealed.

The Texas Court of Appeals decided that “ ‘Indefinite’ is not synonymous with ‘infinity,’ ‘perpetual,’ or ‘forever.’ ” Since the leases have no stated end date, the tenancy is terminable by either party at any time. That ruling doubtless pleased Providence, but the tenants – not so much.

See Providence Land Services LLC v. Jones, No. 11-09-00298-CV, Texas 11th Court of Appeals, October 6, 2011.

Switching gears . . . William Norris and Martha Norris signed three different contracts to sell Wood County property to Eleanor Davis, all dated November 5, 2003. One contract closed and funded, but then a dispute arose regarding an option to purchase the balance of the farm. Davis sued Norris for specific performance and damages. Norris won in trial, and Davis appealed.

The option contract at issue allowed Davis to purchase the remainder of the 545 acre farm. Exhibit A to the Contract stated: “SELLER WILL HAVE 9 MONTHS NOTICE BEFORE BUYER WILL CLOSE.” Exhibit A also provided that Davis had the “. . . Option and First Right of Refusal until January 1, 2007 to purchase . . .” the option property.

Davis attempted to exercise the option on March 20, 2006, by sending a letter to Norris providing that the closing would be on December 20, 2006. This would seem to satisfy the Exhibit A requirements, except that the letter was not actually mailed until March 28, 2006.

The Texas Court of Appeals, however, decided that the notice clause was ambiguous. The notice provision did not state that the notice was a condition to the proper exercise of the option. The exact meaning of the January 1, 2007 date was also unclear to the Appellate Court.

The Texas Court of Appeals dispatched the case back to the trial court, to try, try again. See Davis v. Norris, No. 06-10-00093-CV, Texas 6th Court of Appeals, October 27, 2011.

Lessons learned:

1. Be sure the language you insert in a Contract or Lease is CRYSTAL clear.

2. Don’t forget that TREC laws and rules prohibit TREC licensees from practicing law. Only the parties and their attorneys can draft these types of legal terms and provisions. TREC licensees may not.

3. Sometimes it makes sense to get a lawyer involved – to be sure the parties’ intent is properly stated.


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

Real Estate Deals Must Be Written - - Are You Sure?

Tom Sibley is a Beaumont real estate lawyer, first licensed in Texas in 1964. Mr. Sibley formed a professional corporation in 1981, and he signed a commercial office Lease in 2001 for space in Beaumont on behalf of his PC. The Landlord – Brentwood Investment Development Company, LP, did not sign it. The appellate opinion does not give us any guidance as to why Brentwood failed to do so.

The Lease was for 4,072 square feet, 10 year term, $13.50 PSF for the first five years, $14.50 for the second five years, plus some ‘net’ expenses of approximately $1,272 per month.

Sibley PC moved in before October 1, 2001 – just about 10 years ago as I write this. For unstated reasons, Sibley did not make full rent payments for 38 months, to November 2005. In that period, Sibley only made partial rental payments in July, August and September 2005, according to Brentwood’s records.

Brentwood filed a lawsuit against Sibley PC in March 2008. Brentwood alleged that Sibley PC owed $214,993 in unpaid rent, plus other expenses. Brentwood won at trial; Sibley PC appealed.

Predictably, Sibley PC claimed at trial on appeal that there was no enforceable contract. The facts were clear and undisputed: Sibley signed the Lease; Brentwood did not.

The Appellate Court determined that the parties proceeded with the Lease as if it had been signed. Sibley PC occupied the space and operated a law firm from the premises. Sibley PC made a few rent payments. Brentwood maintained the building and common areas.

The Beaumont Court of Appeals then stated that “. . . the absence of a party’s signature does not necessarily destroy an otherwise valid contract [citation omitted]. A party may accept a contract, and indicate its intent to be bound to the terms by acts and conduct in accordance with the terms.”

Hmmm you say? Sounds logical you said? Well, do a Google search on Texas “black-letter” law on this point. Check out 26.01(b)(4) and (5) of the Texas Business & Commerce Code: http://www.statutes.legis.state.tx.us/Docs/BC/htm/BC.26.htm

The Sibley PC Lease had a 10-year term, so it is not excluded from the Statute of Frauds exception of 26.01(b)(5) or (6), regarding agreements with a term that is one year or less.

Texas law seems clear that for all leases with a term longer than one year, it must be in writing and signed to be enforceable. The Beaumont Court of Appeals is equally clear – no writing and no signature required in situations where the failure to sign appears to be inadvertent, and the parties performed as if there were an executed lease.

Brentwood Investment (the Landlord) wins. Sibley PC (the Tenant) loses. Thomas J. Sibley, P.C. v. Brentwood Investment Development Company, LP, No. 08-10-00033-CV, Texas 8th Court of Appeals, September 6, 2011.

Lessons learned:

1. Texas laws are written as statutes and govern our conduct in many areas, including business.

2. Texas judges and justices interpret those laws, and apply them to the facts of the case.

3. In a battle between law and doing what is fair and right, occasionally the law loses.

4. When the law loses to a just and correct decision, it may be difficult to thereafter plan future business decisions. Should you be guided by Texas law, or Texas judges and justices that may disregard Texas law?

5. If I had an answer to # 4, I would probably go to Tel Aviv because surely I could also resolve the mid-east conflict too.


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

Jury Decisions are Inviolate - - Right?

Do you remember from your US History or US Government class the text of the Seventh Amendment to the US Constitution (Bill of Rights)? In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any court of the United States, than according to the rules of the common law. Adopted in 1789, the Bill of Rights became effective through state ratification in 1791.

Is it coming back to you now? Recently Courts have become more willing to erode the power of juries and ignore the Constitutional prohibition from re-examining jury decisions. The case of Drury Southwest v. Louie Ledeaux is a good example.

Drury (as in Drury hotels) owned property in San Antonio, and leased some to Louie to operate Louie’s Mexican Hacienda Restaurant. Problems arose regarding a construction permit, signage, and Loop 410 highway access. So Louie met with Drury to consider changing the restaurant format, and Drury responded by changing the door locks and filing a lawsuit. It seems that Louie was not delinquent in the payment of rent, although that part is not clear from the Court’s opinion.

Louie counterclaimed for breach of contract and other matters. The Texas jury, hearing the evidence, awarded Louie $625,000 in actual damages. Drury appealed, stating that the evidence heard by the jury was insufficient for them to grant such a large award.

The Texas Court of Appeals analyzed Louie’s damages, tabulating a $95,000 loan from Sterling Bank, $50,000 line of credit also from Sterling Bank, $176,500 loan from American Equipment Finance, $18,000 bill owing to Sysco Foods, plus another $35,000 in signage expenses. The sums total approximately $375,000, not $625,000.

Louie argued that the difference of $250,000 was “sweat equity,” reflecting the value of Louie’s labor and the other owners who worked 14 to 16 hours a day to finish-out and then operate the restaurant. The Texas Court of Appeals, not persuaded by the “sweat equity” argument, could not readily find other evidence to support the balance of the $625,000 award. So instead of refusing to re-examine the jury decision (see the Seventh Amendment to the Bill of Rights!), the Appellate Court reversed the decision of the jury and trial court, and remanded for further proceedings.

Jury decisions inviolate? Not so much. Not anymore. Both trial and appellate Courts have shown a willingness to erode and disregard jury decisions in Texas and elsewhere. And we wonder why it is so difficult to get citizens to serve as jurors . . . sorry . . . I digress.

Drury Southwest, Inc. v. Louie Ledeaux #1, Inc., No. 04-10-00016-CV, Texas 4th Court of Appeals, July 6, 2011.

Lessons learned:

1. Jury decisions will be reviewed on appeal.

2. Jury decision may be overturned on appeal.

3. The Seventh Amendment is dying.


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

Oral Agreements are Unenforceable - - Right or Wrong?

John Ganim and Farouk ‘Frank’ Alattar were buddies who were looking for investment property. Together they found a 3,800 acre tract in Washington County, Texas. Alattar signed a Contract as “Frank Alattar, Trustee.” Then Frank and John negotiated and signed a limited partnership agreement, presumably to hold title to the acreage.

Despite signing the LP Agreement, a dispute arose whether it correctly identified the terms of their deal. So Frank notified John that he would not enter into a partnership, and that John had no interest in the property that would be acquired shortly by Frank. John sued Frank, and while the litigation was pending, the property was transferred to “Farouk Alattar, Trustee.”

John Ganim’s position at trial was that he and Frank Alattar agreed to purchase the property as partners, and the LP Agreement and related documents demonstrate that intent. Frank Alattar defended by claiming that he had no agreement to purchase the property with Ganim, and that he had purchased the property for himself and his family.

The jury believed John Ganim, and awarded almost $2.5 million in damages. Frank Alattar appealed.

The Texas Court of Appeals reversed and rendered a judgment for Alattar, finding that the Texas Statute of Frauds prohibited an oral agreement relating to the sale of real estate that did not contain the contract’s essential terms and the signature of the party to be charged.

John Ganim appealed.

Ganim argued to the Texas Supreme Court that his agreement with Alattar was for the joint acquisition of real property, and not subject to the Statute of Frauds.

The Statute of Frauds - Chapter 26 of the Texas Business and Commerce Code - requires that all contracts for the sale of real estate must be in writing. However, the Supreme Court interpreted that law to mean that an agreement between two or more persons for the joint acquisition of land is not a contract for the sale of real estate, and consequently is an exception to the Statute of Frauds.

To support its position, the Texas Supreme Court reached back to a case decided in 1851, and in the event any of us were unconvinced, the Supremes found further support in a secondary case of 1888.

John Ganim wins a seven-year litigation battle. Farouk Alattar loses, although with the economy in a deep recession one can only wonder who truly won and who really lost.

Ganim v. Alattar, No. 10-0592, Supreme Court of Texas, June 25, 2011.

Lessons learned:

1. Oral agreements are typically unenforceable, except when the Texas Supreme Court says otherwise.

2. The Texas Supreme Court says that oral joint venture types of agreements can be enforceable.

3. It is difficult to argue with any decision that uses case authority from 1851 as its foundation.

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

Anyone Still Care About Brokerage Commissions?

Michael Neary and St. John’s Holdings, Inc. brought a lawsuit to collect brokerage fees in connection with the sale of eight apartment complexes to Comunidad Corporation. The Contract did not contain a provision regarding brokerage fees. Neary was a licensed real estate broker. SJH was wholly owned by Neary. SJH had assigned his commissions to SJH, but SJH did not hold a corporate brokerage license issued by TREC.

Neary and SJH claimed that a “Term Sheet” plus several email messages constituted a contract. And that the Sellers breached that contract. And as a consequence, that Neary and SJH were entitled to collect brokerage fees.

The Term Sheet was signed. However, immediately above the signature lines is the sentence: “This term sheet is a guideline only, and is not binding [emphasis added].” Various emails did not definitively state the brokerage fee either, as the fee was evidently the subject of hot negotiation.

Doubtless it gave Neary and SJH little comfort when the Dallas Appellate Court wrote that “. . . strict compliance with the [Texas Real Estate License Act] is required; the agreement to pay a real estate commission must be in writing or it is not enforceable.” The Appellate Court then defined the term “not binding” to roughly mean, yes you guessed it correctly, “not binding.”

The Appellate Court determined, much like the trial court, that the Term Sheet and emails represent at most an effort to negotiate an agreement regarding brokerage fees and other matters. As such those documents do not constitute a signed, written memorandum as contemplated by the TRELA.

Owners win. Brokers lose. See Neary and St. John’s Holdings, Inc. v. Mikob Properties, Inc.; 05-09-01175-CV (5th Texas Court of Appeals, Dallas, opinion filed May 9, 2011).

Lessons learned:

1. Texas real estate commission agreements must be in writing.

2. Texas real estate commission agreements must be signed.

3. Texas real estate commission agreements must be in writing and signed.

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

Whoops! I May Have Made a Mistake

In August 2004 Hazel Berry, Evelyn Mebane and Rebecca Robinson entered into a contract to sell 176 acres in Scurry County, Texas to Cynthia Gail for $80,000. The contract reserved to the sellers all minerals and royalties. When the deal closed in September 2004, however, the deed did not contain a mineral reservation. It appeared to be an oversight as the attorney who prepared the contract and the deed did not compare the two.

One of the sellers sued Gail, claiming a legal theory of “mutual mistake,” and asked that the court reform the deed by adding the mineral reservation effective as of the date of closing. The trial court agreed. Cynthia Gail appealed.

Gail’s testimony was that: (a) this is not a case of mutual mistake; (b) contract negotiations continued after the contract was signed; (c) Gail believed that the contract would be later amended; (d) although the contract contained a mineral exception, in actuality there was no definitive agreement on that point; and (e) Gail believed the absence of a mineral reservation in the deed meant that the Sellers had agreed to amend the contract to remove the mineral reservation.

Gail also submitted an Affidavit, generally claiming that the absence of a mineral reservation in the deed was not a mistake, but rather reflected the intent of the parties.

The Texas Court of Appeals had little difficulty dismissing all of Gail’s arguments, relying instead on the legal principle that a party is entitled to reformation of a deed when it proves that it reached an agreement with the other party, but the deed does not reflect the true agreement due to mutual mistake. Unilateral mistake by one side (Berry and Mebane), and knowledge of that mistake by the other side (Gail), is equivalent to mutual mistake.

The contract contained a mineral reservation. The deed did not. The lawyer who failed to insert the reservation in the deed testified that it was an inadvertent failure. A scrivener’s failure to follow the precise terms of a contract equals a mutual mistake. Judgment affirmed for Mebane and Berry.

Gail v. Berry; 11-09-00299-CV (11th Texas Court of Appeals, decided April 16, 2011).

Lessons learned:

1. Everybody makes mistakes.

2. Lawyers make mistakes.

3. Mutual mistakes can be corrected. Unilateral mistakes cannot.


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

Lease Mitigation

Mitchell Rudder Properties, LP sued GKG.Net, Inc. for breach of a commercial lease agreement. The jury awarded judgment to Rudder, and GKG appealed to the Houston Court of Appeals.

GKG had extended its lease until March 31, 2013. In 2006 GKG defaulted and Rudder took possession. At the time of the default GKG was paying $13.56 PSF per year.
Rudder quickly signed a replacement lease with World Savings Bank. World was later acquired by Wachovia. The replacement lease had a term through 2011, but World also reserved for itself a ‘kick-out’ or ‘knockout’ clause, where World could buy out of the last two years. Also, World reserved a five-year extension option.

Litigation was asserted by Rudder against GKG in 2006 for past due rents, diminished rents relative to the World lease, future rents for the unexpired original lease term (2011 World lease vs. 2013 GKG lease), and costs. Rudder was awarded damages in all categories requested, in addition to $314,123 for the two-year period of time after expiration of the World Lease.

GKG appealed only the $314k component, claiming that the jury improperly failed to grant an offset for the value of the lease during the two year period. Rudder’s property manager had testified in court that “. . . nobody that I know as an investor that would buy that tenth year – or year 11 and the last 3 months of 12 as an income stream for anything when they’d [World Savings] had already vacated the building. So we didn’t assign any value to that.”

The Houston Court of Appeals reviewed a pivotal 1997 Texas Supreme Court ruling, and more current case authority, and concluded that “. . . the reasonable cash market value of a lease for its unexpired term means the reasonable cash market value of the property – not the reasonable cash market value of the lease that has been breached.” Really the Court had little choice, because to do otherwise would mean that breaching tenants would never be entitled a fair market value offset for the balance of the lease term – that the remaining lease term is always worth zero.

In a further erosion of jury decisions, the Houston Court of Appeals therefore held that there is no evidence to support the jury’s decision that the reasonable cash market value for the remainder of GKG’s term is zero, and that Rudder was entitled to the full rental value of $314,123. The trial court’s judgment was reversed and the case returned to court for a new trial.

Lessons learned:

1. A really good lawyer is going to fight really hard for every penny due you.
2. The residual years of a long-term commercial lease have value.
3. It is the non-waivable duty of a Texas landlord to mitigate its losses for the entire duration of the lease term.

I don’t know what happened as I was not personally involved, but surely Rudder would have been more pleased to allow GKG some type of rental offset for the two-year gap period at the end of the term, then have to start over with a new trial.

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

100% Interest May Not Always Be Usurious

PLEASE BE CAREFUL WITH THIS INFORMATION AS THIS CASE WAS DECIDED ON A VERY NARROW, SPECIFIC SET OF UNIQUE FACTS. USURY IS A SERIOUS MATTER AND THE PENALTIES CAN BE SEVERE. ALL PROMISSORY NOTES SHOULD BE PREPARED BY ATTORNEYS.

In October 2002 Roy Threlkeld borrowed $200,000 from Gregory Urech. The promissory note that Threlkeld signed provided for interest at the rate of 100% per annum. Yes you read that correctly – 100%.

Threlkeld defaulted, so Urech contacted an attorney. In December 2003, based on instructions from his lawyer, Urech sent Threlkeld a “correction letter,” basically reducing the interest rate to 18%. In October 2007 Urech filed a lawsuit to collect the outstanding balance of principal and interest.

Threlkeld defended by asserting that the maximum rate of interest should have been 18%, and that a note with a stated interest rate in excess of 18% was usurious. In some circumstances a successful claim of usury under Texas law can result in the forfeiture of both principal and interest. It was Threlkeld’s position that Urech should have reformed the usurious interest rate of 100% within 60 days after the date that Urech learned that the interest rate was excessive, and that Urech knew of the usury issue at the time the note was signed in 2002.

Therefore, Threlkeld argued, the interest rate was not timely corrected.

Urech responded by claiming he is not an attorney, was 23 years old when the funds were loaned in 2002, first learned of the usury issue when he hired his lawyer in 2003, and delivered the “correction letter” 53 days later which is within the 60-day statutory period. Urech further stated he timely sent the correction letter and was entitled to recover interest at 18% from the inception of the loan, and that the loan was not usurious.

The trial court determined that, although in 2002 Urech was a recent college graduate with a degree in international banking, there was not substantial evidence concluding that Urech knew of the usury matter before he was so-advised by his lawyer in 2003. Once he was advised, he took prompt corrective action as required by Texas law to reduce the interest rate so it was not usurious.

On November 17, 2010, the Texas Court of Appeals agreed with Urech, and approved his “correction letter” and collection of 18% interest – the maximum in Texas law. See Threlkeld v. Urech; 05-09-00631-CV.

PLEASE BE CAREFUL WITH THIS INFORMATION AS THIS CASE WAS DECIDED ON A VERY NARROW, SPECIFIC SET OF UNIQUE FACTS. USURY IS A SERIOUS MATTER AND THE PENALTIES CAN BE SEVERE. ALL PROMISSORY NOTES SHOULD BE PREPARED BY ATTORNEYS.

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

No Contract + No License = No Commission

I have been an attorney for almost 30 years now. During that time I have represented REALTORS®, brokers and sales agents, and their industry trade associations. Although Texas law never changed regarding licensure and contractual requirements, the issue of commissions continues to be litigated in every conceivable way in Texas. Inevitably the results are the same.

Here is the latest case demonstrating the futility of attempting to extract a commission from a party that has not signed a Commission Agreement and disputes a lawful obligation to pay it. In this case, the “broker” did not maintain a license from the Texas Real Estate Commission either.

Expo Motorcars, evidently the purveyor of exotic cars in Houston as I determined from their website (check the 2009 Spyker C8 Spider: http://www.expomc.com/invsys/details2.php?id=8685 which can be yours for only $209,995 + TTL), required more space. Jorge Lujan, sales manager at Expo, contacted Peter Jacobson to find a larger parcel. Lujan introduced Jacobson to Michael Kim, president of Expo, and there may have been an oral agreement that Jacobson would be paid a three percent fee if Expo purchased the property Jacobson located.

Jacobson found a property and started negotiations with the owner. As Lujan and Jacobson were meeting at lunch to develop a letter of intent, Kim called to inform Jacobson that his services were no longer required.

When Jacobson ultimately discovered that Expo had moved to the property Jacobson had located, Jacobson demanded his fee. It wasn’t paid, and a lawsuit resulted.

The Houston trial court awarded Jacobson damages of $45,000, based on a $1.5 million purchase price, attorney’s fees, pre-judgment interest and post-judgment interest. Expo appealed.

The Houston Court of Appeals determined that Jacobson’s actions in attempting to locate suitable real estate for purchase or lease required licensure under the Texas Real Estate License Act, if no statutory exemption was applicable. The Court of Appeals further allowed that the TRELA also required a written contract obligating the defendant to pay a real estate commission or fee.

Mr. Jacobson possessed neither a brokerage license nor a written contract. Since there was no applicable exemption (such as the attorney-exemption), the trial court’s judgment in favor of Mr. Jacobson was reversed and rendered instead for Expo and Michael Kim.

See Expo Holdings, LP v. Jacobson, 2010 WL 3307454 (Houston Court of Appeals – 14th Dist. 2010).

Bottom line:

1. Only brokers may lawfully charge and receive commissions or fees for real estate brokerage activity in Texas, assuming some very narrow exceptions are inapplicable.

2. Brokers may not lawfully collect real estate commissions or fees absent a written contract.

3. BTW it is a Class A misdemeanor in Texas if one acts as a broker or sales agent without appropriate licensure, or exemption from licensure. Check Texas Occupations Code 1101.758.

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

Beware the Mob

Recently I had an opportunity to look, again, at a Texas Landlord’s obligation to mitigate its damages when a Tenant breaches a Lease. It’s hard to believe we have had this law since 1997 – almost 15 years now. And before that date we had appellate case decisions that led to Texas Property Code 91.006.

In September 2005, MOB 90 of Texas, LP, leased commercial property to Nejemie Alter MD’s professional association. The property was in the Corpus Christi area, intended to be used as a medical office for five years. Alter personally guaranteed the lease obligation. Virtually no rent was paid during 2006, so MOB filed an eviction lawsuit against Alter.

Alter vacated in January 2007, and claimed that he only owed rental through that date. MOB had a different theory in mind, and claimed that Alter owed rental through the date of trial. The monthly rent was $4,677. Rental owing through the date that Alter vacated was $36,782, and that amount was not in dispute.

MOB requested judgment for $93,220. Alter contested that amount, claiming that MOB failed to properly mitigate damages, as required by the Texas law.

Alter testified that as he passed by the MOB property there were no signs posted that the property was available to lease. To his knowledge, there were no visible efforts undertaken by MOB to re-lease the premises. Alter further testified that after he defaulted he attempted to negotiate a deal with MOB involving lesser space. Alter claimed that he was willing to pay weekly amounts.

At trial MOB’s counsel called the property manager as a witness. Jean Shivers testified that typically for-lease signage was not used in medical office building settings. Shivers stated she had shown the premises three times since Alter was evicted, and that she had not leased any space in MOB’s building since January 2007 – the date that Alter vacated.

Shivers also testified that she listed the premises on both Loopnet and Costar, kept in contact with personnel at Doctor’s Regional Hospital, and that it was hardly unusual for it to take an extended period of time to re-lease commercial premises.

In any event, the Nueces County trial court entered judgment for MOB, but only for $36,782. MOB appealed.

The Corpus Christi Court of Appeals, citing a landmark 1997 Texas Supreme Court decision, discussed the duty of a Texas landlord to take objectively reasonable efforts to mitigate damages and find a suitable replacement tenant, when the tenant breaches a lease and abandons the property. A Texas landlord is not required to take all known efforts or accept an unsuitable tenant.

The trial court was of the view that MOB failed to adequately mitigate because MOB refused to work with Alter, who had defaulted on the Lease. The trial court also concluded that MOB’s efforts to mitigate by online listings, showing the property to those who expressed an interest and contacting the hospital administrators were insufficient.

The Court of Appeals disagreed, finding that since Alter did not prove that MOB’s failure to mitigate damaged Alter in any way, the trial court made a mistake and MOB was owed $93,220 in back rent through the date of trial. The Court of Appeals also saw no duty of a Texas landlord to renegotiate its lease with a defaulting tenant. See MOB 90 of Texas, LP v. Nejemie Alter MD, PA (Texas Court of Appeals – Corpus Christi-Edinburg 2009).

MOB wins, Dr. Alter loses.

Bottom line:

1. Texas landlords must mitigate their damages. When practical I recommend signage, in addition to other objectively reasonable efforts. In that manner tenants can at least observe some of your efforts.

2. There is nothing in this case or the mitigation law which precludes Texas landlords from clearly defining their mitigation burden in the lease. Note, however, that Texas landlords may not force or allow a tenant to waive the landlord’s burden of mitigation.

3. Beware the MOB.

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

Be Careful with Contract Definitions

In August 2004, TC Dallas #1, LP bought an office building from Republic Underwriters Insurance Company for $20 million. TC intended to redevelop the property, but it could not do so until Dallas National Bank vacated. To make the deal, Republic agreed to share TC’s early lease termination expenses and the costs of operating and managing the building until the Bank moved out.

Instead of redevelopment, TC instead elected to sell the property 10 months later for $16 million, to SCA 2727 Turtle Creek LP. TC retained in its contract with SCA the right to receive compensation from Republic as stated in the first contract. As well the second contract provided that the reduced purchase price reflected a $6 million reduction from the intended price, called a “bank credit,” which was defined as the amount by which the intended purchase price was reduced to compensate SCA for the risk in accepting title subject to the tenancy of Dallas National Bank, as well as anticipated lease termination expenses and operational costs of the property as an occupied building.

The second contract then reserved for SCA the exclusive right to negotiate lease termination fees. For reasons not explained in the appellate decision, the second contract obligated SCA to pay the anticipated Bank lease termination fees to TC. It was then TC’s duty in the second contract to remit such fees to the Bank.

Using the second contract’s procedures regarding the Bank lease termination fee, SCA wired $2 million to TC, and TC wired $2 million to the Bank. Actually the fee was not really for a lease termination, but rather the Bank was paid for a release of its right to renew the lease term through 2014.

TC then sued Republic, demanding reimbursement for portions of the $2 million paid to Dallas National Bank, as well as the $6 million “bank credit” and other expenses.

Republic asserted in the trial court that it had no obligation to reimburse TC for such expenses. The trial court agreed. TC Dallas #1, LP appealed.

The Dallas Court of Appeals, deferring at one point to Webster’s Third New International Dictionary for guidance, rejected TC’s appeal. Using the strict language of the first contract regarding “lease termination costs,” and “expenses and disbursements,” the Court of Appeals ruled that the monies paid and credit offered in the secondary contract did not exactly match the definitional phrases in the first contract.

TC lost, again. See TC Dallas #1, LP v. Republic Underwriters Insurance Company, Dallas Court of Appeals, July 21, 2010.

Bottom line:

1.       Definitional phrases in contracts are really important.

2.       Definitional phrases in contracts are vitally important.

3.       Definitional phrases in contracts are critically important.

Yes I know there is some repetition, but I thought it was important enough to repeat.

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

Buyer Beware: Always Check Vesting Deeds

In February 2006 Summit Electric Supply Co., Inc. agreed to sell a five-acre parcel of property located at Manana Drive and IH-35 in Dallas to Saeed Mahboubi. Those of us who live or work in Dallas might guess the highest and best use for that property just by the location. Nonetheless, the Contract of Purchase and Sale prohibited use of the property as a sexually oriented business.

Mahboubi assigned the Contract to Semira Rezaie. Rezaie then entered into a Contract to flip the parcel to Jerry Spencer, LP.

The first closing was on August 4, 2006. Summit signed a Deed conveying the property to Rezaie. The Deed contained a clause restricting use of the property as a SOB. Because the first Deed failed to contain a proper legal description, the corrected Deed was not recorded until August 25, 2006, three weeks after closing.

The second closing was also on August 4. At that closing, Rezaie conveyed the property to Spencer, without exceptions or restrictions. The second Deed was recorded on August 7, 2006 – 18 days before the first Deed.

Spencer leased the property to 2327 Manana, LLC, who posted a notice on the front door announcing its intent to operate a SOB. Then the litigation started.

Spencer and Manana argued in trial court that they could not be held responsible for compliance with the SOB restriction, because the Deed containing that restriction was not recorded in Dallas County until weeks after they had completed their purchase and lease. Since the Deed from Rezaie did not contain the restriction, they argued, then surely Texas law would not / could not stop them from operating a SOB at the site.

Spencer and Manana lost. They appealed.

On June 25, 2010, the Dallas Court of Appeals affirmed the trial court’s judgment. The Court of Appeals had little trouble concluding that a real estate purchaser is bound by every matter contained in or disclosed by any instrument which forms an essential link in the chain of title, even though Spencer and Manana had never read the documents. Essentially, if Spencer and Manana closed their transaction without reviewing the immediately preceding deed in the chain – the ‘vesting deed’ – then Spencer and Manana did so at their own peril.

Not addressed in the case due to procedural matters were the claims against the broker who represented all of the buyers, and possibly failed to disclose the inclusion of the restrictive clause in the first deed. Also not addressed were possible claims against the title company, who may have insured the secondary transaction without reference to the restrictive covenant contained in the Summit / Rezaie deed.

Bottom line:

1.  Demand to see the Vesting Deed. Check it for restrictions. Particularly in flip transactions where closings are occurring quickly.

2.  If possible, get representations and indemnities in Contracts and Leases, obligating the Seller / Landlord to certify that the property can be used as the Purchaser / Tenant requires.

3.  If you have actual knowledge about a latent defect or material condition, immediately disclose it to your principal in writing.

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

Move Your Residence or Business Near the Airport at Your Own Peril

83 Houston residents near Bush Intercontinental Airport sued the City of Houston. A new runway resulted in increased airplane traffic and the owners determined that living near the airport was untenable. So the owners argued that their properties had been taken by “inverse condemnation,” and they should be compensated for their loss.

The City won the case in trial court. The homeowners appealed.

The Houston Court of Appeals used a 1946 United States Supreme Court case to guide them. In that case, the property owners operated a chicken ranch but were forced to close their business when military planes were flying only 63 feet about the barn. Six to 10 chickens were killed daily by flying into the walls from fright. Egg production suffered. The owners were unable to sleep and became nervous and frightened, and were entitled to compensation.

Our Texas Supreme Court decided a case in 2002 where the plaintiff owned commercial property near the Austin-Bergstrom International Airport, and intended to use it as a landfill, but was unable to do so because of airplane traffic. The plaintiff sued the City of Austin for taking-by-overflight. The trial court awarded a judgment to the plaintiff, but the Texas Supreme Court reversed it because the property could maintain its use as a landfill.

The Texas Supreme Court focused on the concept of “unsuitability” in their 2002 decision. A mere impairment does not necessarily equate to unsuitability. Landfills, subject to zoning and other laws, can be anywhere.

The 83 Houston residents had not claimed that their residences were uninhabitable. Instead, they stated that conversations were impossible, TV reception was bad, sleep was interrupted, children and pets were frightened, nervous and irritable, and it was difficult to entertain friends or speak on the phone.

But the residents did not relocate. This could have been because no one would buy their properties, but that sidebar issue was not addressed in the Houston case.

And so the Houston Court of Appeals had no choice but to follow Texas Supreme Court precedent in the April 2010 case of Alewine v. City of Houston. Since the properties were still capable of use as residences, the plaintiffs must lose. Expect an appeal to the Supreme Court.

Bottom line:

1. If you move your residence or business near an airport, don’t expect to be compensated by the government when the airport expands.

2. If you are asking the government for compensation anyway, tell your lawyer to use the “unsuitable” word in the lawsuit.

3. Let’s just use the KISS principle here: don’t move near an airport.

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

Beware the ROFR

Cecil Hicks gave Tim Castille a right of first refusal (“ROFR”) to buy a four acre parcel of land in Wheeler County, Texas. A small portion of the four acres was leased to American Tower. To trigger Castille’s ROFR, Hicks sent Castille a letter providing that Hicks intended to sell only the small portion of the property that was leased to American Tower for $50,000.

Castille did not exercise his ROFR, but instead brought a lawsuit claiming that Hicks had no right to subdivide the four-acre parcel and sell pieces. Instead, Castille argued, the ROFR applied to all four acres. Predictably, Hicks did not read the RFOR in that manner.

The Wheeler County trial court agreed with Castille and refused to allow Hicks to subdivide his acreage. So Hicks appealed.

The Amarillo Court of Appeals reviewed Texas cases that generally disfavor restraints against a property owner’s ability to mortgage, lease or sell it. As well there was no language in the ROFR prohibiting Hicks from partitioning his property or otherwise permitting Castille to require a sale of all four acres and nothing less.

Simply put, the ROFR did not address the issue.

On April 14, 2010, the Amarillo Court of Appeals reversed the decision of the Wheeler County court, holding that Hicks had the right to sell all or less than all four acres, as Hicks determined was appropriate, provided the third party (American Tower’s) offer was: (a) commercially reasonable; (b) submitted in good faith; and (c) not designed specifically to defeat Castille’s ROFR.

Bottom line:

1. ROFRs, purchase and lease options, right of first offers ("ROFO"s) and similar provisions can be (and usually are!) difficult to properly draft.

2. Texas Courts are reluctant to overly burden property owners.

3. Sometimes commercial brokers are accused of finding a “straw” buyer or tenant to feign an interest in property, so that a ROFR, option or ROFO is triggered and the option holder is forced to buy or lease. If the offer of the “straw” buyer or tenant is not legitimate or does not meet the three-part test described in this case, then the ROFR, option or ROFO may not be properly triggered.

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

Real Estate Fraud

William Myre engaged an engineer to prepare a plat for Hunt County property he owned. Although there were no drainage plans as required by county regulators, Hunt County approved it anyway and the property became Cole Estates. Thereafter, Craig Development, Inc. purchased Cole Estates from Myre.

Carl Meletio and others bought some Cole Estates lots from Craig Development, Inc. (“CDI”) between 2000 and 2002. Cole Estates became a residential subdivision.

Some of the properties in Cole Estates flooded during significant rainstorms between 2002 and 2006. Meletio sued CDI and Myre. The jury determined that Myre had committed fraud by failing to disclose to Meletio and others that Cole Estates might be inundated by floodwaters. Judgment was rendered for Meletio, and Myre appealed.

In the appeal Myre claimed that he could not have committed fraud, since he did not owe a duty of disclosure to the individuals to whom he did not sell property. Myre reminded the appellate court that he sold the property to CDI, not Meletio. Myre served only as the developer, and claimed that Myre’s duties were owed only to CDI. Therefore, if the property owners were damaged their recourse should be directed against CDI, not Myre.

The 5th District Court of Appeals ratified Texas law that “. . . a seller is under a duty to disclose materials facts that would not be discoverable by the exercise of ordinary care and due diligence by the purchaser, or that a reasonable investigation and inquiry would not uncover.” The Court cited a case providing that a party cannot be guilty of fraudulently concealing facts of which he is not aware.

Finding that Myre had no relationship with any of the plaintiffs and therefore Myre had no duty of disclosure to them, the Court concluded that Myre could not be liable for fraud. The fraud portion of the judgment was reversed. See Myre v. Meletio, 05-08-00576, Fifth District Court of Appeals, Dallas Division; judgment rendered February 26, 2010.

Bottom line:
 
1. Real estate disclosure duties are typically owed to property purchasers and tenants by their immediate sellers and landlords.
 
2. Disclosure duties are also owed by brokers and agents to their principals and to their opposing parties as well.
 
3. It is surprising that real estate brokers and agents were not sued. If CDI’s broker and agent were sued in this case, both the trial court and appellate court could have asserted liability against them if they had knowledge of the flooding issue, and failed to disclose.

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

Commercial Lease Enforceability - Landlord v. Tenant

May a Landlord enforce a lease obligating the tenant to operate a nightclub or bar, when the tenant cannot obtain a liquor license? Merry Homes, Inc. thought so. Chi Hung Luu thought differently.

The Houston trial court entered a judgment declaring the commercial lease void for illegality, since Luu could not obtain a liquor license. Evidently the Bellaire site was too close to a school and hospital. The Houston trial court awarded Luu $6,000 for the security deposit, and $25,300 in attorneys fees. Merry Homes – the landlord – appealed.

In June 2005 Luu signed a 5-year Lease. The use clause provided that Luu may only use the premises to operate a nightclub or bar, and “for no other purpose.” The Lease also stated that Luu could not use the premises for any activity that violates laws.

Luu promptly submitted his liquor application to the City of Houston after the Lease was signed. The application was denied. The site was within 300 feet from a public school and a public hospital, and consequently, no nightclub / bar license would be issued. The City suggested that Luu might qualify under the “restaurant exception” rules, but Luu chose not to do so because of the expense of installing a full kitchen.

Luu requested the return of his deposit and termination of the Lease. Merry Homes refused.

Luu never occupied the premises. Instead he sued Merry Homes, requesting a judicial determination that the purpose of the Lease was impossibly frustrated, and therefore the Lease must be terminated.

The Houston Court of Appeals decided on February 19, 2010, that both the Houston trial court and Chi Hung Luu were correct. Mr. Luu could not legally perform his obligations in the Lease. A contract to fulfill an obligation which cannot be performed without violating law is void. The Lease was terminated by the Court.

Bottom line:
 
1.  Be careful with use clauses. It may have been better for the Landlord to offer some flexibility in that provision.
2.  The Landlord may have enjoyed a better position if it had clarified that rent was due regardless of Tenant’s use or non-use of the premises.
3.  A provision in a Lease stating that the Tenant has fully explored compliance with all laws and is satisfied might also have helped this Landlord.

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

Commercial Foreclosures and Correction Deeds

It is rare that The Supremes review a real estate case. But in December 2009 the Texas Supreme Court decided Myrad Properties vs. LaSalle Bank. The case was about a timely subject – Texas foreclosure.

Myrad financed two apartment communities in Killeen with LaSalle Bank NA’s predecessor. Myrad signed a $1 million note and a deed of trust. The deed of trust was recorded in Bell County. The deed of trust contained separate property descriptions for both the Casa Grande Apartments and La Casa Apartments.

Myrad defaulted. LaSalle Bank posted a notice of foreclosure upon only the Casa Grande property. At the foreclosure auction in Bell County, the substitute trustee read only the property description for Casa Grande. LaSalle was the only bidder, offering almost $1 million.

LaSalle received and recorded a substitute trustee’s deed for the Casa Grande property.

Two days later Myrad sued LaSalle, to keep it from filing a correction deed covering the La Casa property. When LaSalle filed it anyway, Myrad asserted that LaSalle owned only the Casa Grande property, while Myrad retained ownership of La Casa free of LaSalle’s deed of trust lien.

Both the trial court and court of appeals held that LaSalle’s correction deed was effective to transfer ownership of both Casa Grande and La Casa to LaSalle.

The Texas Supreme Court reviewed the history of correction deeds and determined that such deeds can be used to correct minor defects and imperfections. However, correction deeds cannot be used to convey additional, separate properties. The correction deed filed by LaSalle was void.

Bottom line:
1. Foreclosures are risky business.
2. Purchasers at foreclosure auctions sometimes make mistakes. So do lenders. Trustees too.
3. Be wary of correction deeds.


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