Thursday, May 31, 2012

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.

Tuesday, May 15, 2012

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.


Wednesday, May 2, 2012

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.