Wednesday, July 17, 2013

Jumpin' Jack's Party Shack

In 2006 Jim and Jeneane Cremer formed Jumpin’ Jack’s Party Shack, Inc., to operate a children’s party center. The Cremers found a warehouse in Tyler owned by Morris Hallman, and signed a four year lease.

The leased premises consisted of a 20 x 20 foot sheet metal over steel frame air-conditioned office, with an attached 50 x 80 foot warehouse structure. The warehouse portion was not air conditioned, and contained only a bare concrete floor and open-air roof extension. It had been previously used as a car wash bay.

The Cremers spent $36,950 for dirt work, concrete and materials to make a 50 x 50 foot warehouse extension and enclose it. Also the Cremers expended another $115,000 to install six air conditioning units, HVAC duct work, lighting, plumbing, toilets, cabinets, party rooms and more offices.

In December 2010 – the end of the lease term – the Cremers removed the six air conditioning units, HVAC ducts, lighting, kitchen and bathroom fixtures, doors, door jambs, insulation, electrical wiring and sheetrock as they vacated the buildings. All of those components had been installed by the Cremers after the beginning of the lease term.

Morris Hallman was not pleased and sued the Cremers. Hallman’s position was that the Cremers had no right to remove valuable improvements, and by doing so, Hallman was substantially damaged.

The trial court ruled for Hallman, finding that in the lease agreement “. . . the parties expressly agreed that at the expiration of the lease, improvements to the property made by lessees . . . belonged to lessor, Morris L. Hallman, and were to be returned to the lessor by the lessees in good operation condition.”

The trial court awarded Hallman damages of $67,339. Cremers appealed.

The Appellate Court took a hard look at the 2006 lease, particularly focusing on the obligation of the tenants to repair everything the tenants installed, modified, replaced or added. Otherwise, if the landlord had installed it (meaning: it was in the buildings when the Cremers received the keys), then it was the landlord’s obligation to repair and maintain.

Due to procedural issues, the argument that Cremers installed trade fixtures into the buildings which became permanently annexed and incorporated into the real estate, was not litigated. Presumably the outcome might have been different.

But – based on the pleadings before the Court of Appeals – Cremers win; Hallman loses. Cremers had the right to remove the improvements they installed, much to Hallman’s disappointment and financial loss, as the Court of Appeals concluded that the trial court had not properly analyzed the 2006 lease agreement.

See Cremers v. Hallman; No. 06-13-00011-CV; Texas 6th Court of Appeals, May 16, 2013.

Lessons learned:

1.      Commercial leasing is inordinately difficult. Purchase and Sale Agreements are easier. Leasing is like a marriage. Sometimes a beautiful partnership is formed. Other times not so much.

2.      Don’t assume that the lease form you are using contains all the concepts that are important to you, the landlord and the tenant. Or the lenders financing the project or tenant’s leasehold interest. Even the ‘boilerplate’ clauses can be incomplete, confusing, or MIA.

3.      It’s unfortunate this Texas Appellate Court did not fully address the issue of trade fixtures and permanent annexation into the realty. But, regardless, if it’s important to you then be sure it is properly stated in your lease!

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

Wednesday, July 3, 2013

ROFRs and Options

Ben Jarvis and Calvin Smith jointly owned a 12-acre parcel in Smith County, Texas. Jarvis owned 2/3rds; Smith owned 1/3rd. In Texas law this made them ‘cotenants.’

In 1998 the parties negotiated a partition of the property, with the added requirement that Jarvis would receive an option to buy Smith’s parcel should he elect to sell it. Jarvis and Smith exchanged deeds to divide the property into 8-acre and 4-acre tracts. And Smith signed a notarized document granting to Jarvis an option to buy Smith’s parcel.

The document provided that if Smith decided to sell it and received an acceptable offer, Smith would submit the offer to Jarvis who had 30 days to accept it and then purchase the property on the same terms. Someone – presumably Jarvis – had the foresight to record it in the Smith County Deed Records.

In December 2007 Smith entered into a contract to sell his 4-acre piece to Robert Peltier for $80,000. Smith signed a Deed to Peltier the following month when the deal closed. The title commitment issued to Peltier prior to closing provided that the parcel was burdened by the instrument that Smith had signed.

So clearly Robert Peltier knew (or should have known) of the pre-existing rights of Jarvis. But Peltier bought it anyway.

It took two more years for Jarvis to learn that the parcel had been sold. Immediately on discovery, he sent both Smith and Peltier a letter attempting to exercise his option. In his letter he asked for a copy of the Closing Statement, cancelled check and title policy “. . . before declining or accepting any offer.” That statement followed the one in which he wrote “At this time, I would like to exercise the option.”

Yes those two statements seem inconsistent. But stay tuned and you’ll find out what Jarvis was really trying to say.

When neither Smith nor Peltier sent Jarvis the intel he requested, Jarvis filed suit against both of them. The trial court granted judgment for Smith and Peltier. Jarvis appealed.

The Court of Appeals looked hard at the document Smith signed. Jarvis contended that it gave him a right of first refusal, meaning, if Smith decided to sell the property then Smith was required to allow Jarvis the opportunity to buy it on the same terms as offered by the purchaser. In other words, a preemptive right. We know it as a “ROFR.”

Peltier and Smith argued, however, that Jarvis was furnished an option, being a privilege that the owner grants to another to buy the piece at a fixed price and at a definite time. And that Jarvis failed to properly and timely exercise his option because he did not send unconditional notice of the exercise within 30 days after he learned of the sale.

Jarvis responded that he did everything he could to find out the purchase price within the 30-day period, but neither Peltier nor Smith would give him the data he needed to make the final decision and remove the condition. Ultimately, Jarvis said, he was able to learn the purchase price only by filing a lawsuit and conducting discovery.

The Court of Appeals evaluated the differences between a ROFR and an option and concluded that Jarvis was the beneficiary of a lawful ROFR. Jarvis was not required to unconditionally exercise the ROFR when the purchase price was neither apparent nor forthcoming. The Court of Appeals concluded that the trial court erroneously granted judgment for Peltier and Smith.

The judgment for Peltier and Smith was reversed. Jarvis had an enforceable ROFR. Ben Jarvis wins. Robert Peltier and Calvin Smith lose.

See Jarvis v. Peltier; No 12-12-00180-CV; Texas 12th Court of Appeals, April 24, 2013.

Lessons learned:

1.      It can be difficult to draft an enforceable ROFR, ROFO (right of first option) and other similar agreements. Look here if you want more info on the differences between the two: We use those concepts in both leasing and contracting for the purchase and sale of property.

2.      It can also be challenging to properly preserve and exercise a ROFR or ROFO.

3.      Jarvis was smart to record his ROFR in the Smith County Deed Records. In doing so, he preserved recourse against future buyers and lenders of Calvin Smith.

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