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.