Tuesday, December 1, 2015

Closing Extension SNAFU

On January 28, 2013, KIT Projects entered into a Contract to purchase real estate from PLT Partnership. Closing was initially scheduled for March 26, 2013. Then it was extended two days to March 28, 2013.
On March 28 Buyer did not have the funds to close, so Buyer asked Seller for an extension – until April 30, 2013. Both Seller and Buyer signed and delivered an extension Amendment. It provides “In consideration for this 30 day extension, Buyer agrees to pay an additional $10,000 extension fee directly to [Seller]. This fee is non-refundable and not applicable to the sales price.”

A check was delivered to Seller on March 28. Also delivered was a suggestion that the check was not good. So Seller told Buyer that the check could be held for a few days, to give Buyer an opportunity to fund the check.

The check was deposited on April 3. Seller signed the Amendment on April 4. The check bounced on April 8. Buyer never replaced the check with good funds, although Buyer offered to do so on April 9. 

In the afternoon of April 9 Seller delivered to Buyer a letter by email stating that “there is no existing contractual agreement” between the two parties.

Buyer asserted a lawsuit to force Seller to honor the terms of the Contract and sell the property to Buyer. Seller denied that it had breached the Contract, claiming that Seller had the right to terminate the Contract since the $10k check bounced. The trial court agreed with Seller.

Buyer appealed.

On appeal, Buyer asserted that the consideration for the amendment was Buyer’s promise to pay the $10k extension fee. Seller asserted that the consideration was the $10k payment. The difference in Texas law, is a covenant vs. a condition.

The Court of Appeals recast Seller’s argument as an assertion that the payment was a condition to the extension of the closing date. We call this a condition precedent in law.

To determine if a condition precedent existed, the Court looked hard at the amendment for terms such as provided that, on condition that, if _______, then ________ and similar.
If no such language is used, the terms will typically be a covenant. Not a condition. When a covenant is breached, the contract is valid but a party has a claim or lawsuit for damages. When a condition is breached, the entire contract may be forfeited.

Courts do not favor conditions as they tend to have unintended and overly harsh consequences.

This Court of Appeals had little difficulty determining that the language used was indicative of a covenant, not a condition. And yes there was still ample consideration although the check failed, as consideration “. . . may consist of a benefit to one party or of a detriment to the other party.”

The Court concluded that the consideration for the extension of the closing date was Buyer’s agreement to pay, rather than Buyer’s tender of lawful payment. The Judgment of the trial court is reversed. The case is remanded back to the trial court for a do-over, but with instructions to the trial court that the Amendment did not fail just because Buyer’s check was rubber.

See KIT Projects, LLC v. PLT Partnership; Cause No. 14-14-00118-CV; Texas Court of Appeals; 14th District; November 19, 2015.

            Lessons learned:

1.      If the parties intend to be allowed to terminate a Contract based on non-performance, there must be consistent provisions.

2.      Typically a Seller or Landlord will prefer a condition for the Buyer or Tenant’s obligations, and a covenant for the Seller or Landlord’s duties. And of course vice versa when you are representing a Buyer or Tenant.

3.      Still confused? You are not alone. Be sure your principal has an experienced Texas real estate attorney who knows the difference.

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

Tuesday, October 27, 2015

Fun with Percentage Rental Clauses

In 1993, Ralphs Grocery Company signed a 20-40 year lease with Midtown Shopping Center Associates for 53,000 square feet in a Los Angeles shopping center. Under the lease, Ralphs is required to pay an annual base rental rate of almost $1 million per year, plus 1.25% of gross sales over $31 million.

The lease defines “gross sales” as the amount of the sales price, whether or not for cash or upon credit, of all merchandise and goods, and the charges for services sold on or delivered from the shopping center property. The lease excludes 15 items from gross sales, including sales tax, deposits on returned items, refunds and credits for defective items, sales from other stores, interest and credit card charges, sales from lottery tickets and coin-operated devices, coupons, commercial sales of scrap materials and bulk sales consisting of inventory, fixtures and equipment.

Also excluded are “. . . discounts allowed to any customer pursuant to any customary and reasonable policy adopted by Ralphs . . .”

Ralphs created a Rewards program in 1997 intended to encourage and reward customer loyalty. In this program, Ralphs charges two prices for merchandise: (1) a higher price paid by customers who do not participate in the Rewards program; and (2) a lower price paid by customers who sign up for the customer loyalty program.
Paper transaction receipts generated at the check-out stand detail what Rewards customers would have been charged without the program discounts, and calculates their “savings.” The program has been quite successful: transactions by Rewards customers account for 97% of all transactions at Ralphs.

Ralphs provided Midtown yearly statements reflecting what it believed constituted “gross sales” from the Midtown store, using the amount Rewards customers actually paid rather than the amount they would have paid for the same items had they not participated in the loyalty program. When Midtown expressed its view that Ralphs was under-reporting “gross sales” by excluding the amounts Rewards customers could have been charged, Ralphs filed a lawsuit against Midtown.

The trial court concluded that “gross sales” was based on sales prices Rewards customers would have paid absent the program discounts. Accordingly, the court awarded Midtown $305,000.

Ralphs appealed.

The Court of Appeals determined that a reasonable, fair and just definition of “gross sales” is one that looks to the amounts Ralphs actually charges its customers, as opposed to the hypothetical amount Ralphs opts not to charge them.

The Court of Appeals also found that the Rewards program is a discount pursuant to a “customary and reasonable policy” adopted by Ralphs, as specifically contemplated by the lease even though it was created four years after the lease was signed.
The Judgment of the trial court is reversed. The term “gross sales” in the Ralphs – Midtown lease does not include amounts Ralphs never charged its Rewards customers. Consequently, Ralphs owes no additional rental.

See Ralphs Grocery Company v. Midtown Shopping Center Associates; No. B252292; California Court of Appeal, Second Appellate District, Division Two; June 17, 2015.

Lesson learned: It is difficult in commercial leasing to anticipate every issue that will occur over a 20 or 40 year lease term. Gross sales clauses are constantly being  probed and tested, as are CAM triple-net pass-through clauses of taxes since Texas franchise and margin taxes didn’t exist seven years ago. Be extra careful when you are addressing percentage-of-gross-sales and expense reimbursement provisions.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

Wednesday, September 30, 2015


In September 2007, Llyasah Dupree dba 360 Degree Beauty Academy leased commercial property from Boniuk Interests, Ltd. in northwest Houston, to use as a beauty and cosmetology school. The Lease included a provision allowing Dupree an ample opportunity to tender monthly rental payments before Boniuk could consider the failure to be an event of default.

Dupree struggled to pay the rent installments which varied from $700 to $6,000 per month plus triple net expenses, making sporadic payments in 2010 but no payments in March, May, July, November and December. Some of Dupree’s checks in that period included a note, asking Boniuk to hold the checks without deposit for several weeks and Dupree would call Boniuk when the checks would clear.

In January 2011 Boniuk had enough, and sent Dupree a notice of default. Boniuk changed the door locks in March 2011.

Dupree obtained a Writ of Re-Entry from the JP Court 10 days later. At the hearing convened two days after, the JP determined that Boniuk had permissibly locked Dupree out of the premises.

So Dupree sued Boniuk in 2013, asserting claims for breach of the Lease, wrongful eviction, retaliatory eviction, fraud and violations of the Texas Deceptive Trade Practices – Consumer Protection Act. Boniuk filed a counterclaim for breach of the Lease and other related matters.

The trial court awarded Boniuk almost $120,000 in damages, interest, $15,000 in attorney’s fees and court costs. Dupree appealed.

On appeal, Dupree claimed that she had timely paid rental by tendering payment checks and Boniuk had the authority under the Lease to deposit the checks. Dupree further argued that Boniuk’s failure to deposit the tendered checks meant that Boniuk lacked the evidence that the checks were not adequately funded.

And, consequently, no evidence of NSF checks meant Dupree was not in Lease default and Boniuk had no right to evict.

The Court of Appeals determined that the notes attached to each check converted an unconditional offer to pay an amount due on a specified debt to a conditional offer. As such, the rental payment funds were not made immediately available to Boniuk.

Rental payments, as stipulated in the Lease, must be unconditional.

The Court of Appeals further found that Boniuk was not required to undertake special efforts to acquire possession of the rent funds. Placing restrictive notes on the checks improperly burdened Boniuk, and was sufficient evidence of a Lease default.

Boniuk Interests, having proven various Lease defaults, wins again; Llyasah Dupree lost once more. See Llysah Dupree dba 360 Degree Beauty Academy v. Boniuk Interests, Ltd.; No. 01-14-00864-CV; Texas Court of Appeals, 1st District; August 4, 2015.

Lesson learned: If you are a property owner or represent landlords as a property manager or agent, do not accept checks with restrictive endorsements or payment instructions. Although you may ultimately prevail, it may also take you two or three years of litigation to prove your point.

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

Wednesday, September 2, 2015

Tax Forfeiture

In 1995 Urban Retreat leased space in a retail center from BPMT, LLC, to operate its day spa business. Urban continued to lease the property for more than 10 years, executing renewals and lease extensions. The most recent extension was signed in 2006, and extended the lease to April 30, 2011.

Francie Willis signed the lease extension solely in her capacity as an officer of Urban. Evidently there were no personal guarantees.

Urban’s corporate charter was forfeited by the Secretary of the State of Texas on July 30, 2010. Urban made no further rental payments from August 2010 until the end of the lease on April 30, 2011. The total rental owing in that nine-month period was $112,735. Some of the rental was composed of base rent; other obligations pertained to payment of triple net charges.

BPMT sued Urban Retreat for delinquent rent. Because Urban’s corporate privileges were forfeited for failure to pay franchise taxes, BPMT also sued Francie Willis, Urban’s President.

The theory of liability pursued by BPMT against Willis was that since Urban’s corporate privileges were forfeited, Willis became liable for the entity’s debts. See Texas Tax Code 171.255(a): http://www.statutes.legis.state.tx.us/Docs/TX/htm/TX.171.htm.

The trial court ruled for BPMT and held Willis liable for $38,327, being a portion of the rent owed by Urban Retreat between 2010 and 2011, and conditionally, $45,000 in attorney’s fees.

Willis appealed, claiming that the tax laws did not have the effect of imposing personal liability on her in this situation involving base rental with CAM reimbursements and triple net annual adjustments.

The tax statute imposes liability on a corporation’s officers for “. . . each debt of the corporation created or incurred in this state after the date on which the report, tax or penalty is due . . . [emphasis added]” Willis argued that the lease agreement provided for a debt that was “created or incurred” in 2006 – four years before corporate privileges were forfeited.

BPMT advanced the position that the debt in this situation was uncertain due to the application of triple net charges, and consequently, was not known until after forfeiture. And as a consequence, Willis is personally liable.

The appellate Court evaluated the meaning of “debt” in Texas law by reviewing not only previous Texas cases but also citing both Black’s Law Dictionary (debt is liability on a claim) as well as Merriam Webster Collegiate Dictionary (debt is an obligation or something owed).

Ultimately the Court concluded that a “debt” is created at the time a lease agreement is signed, even if the amount of the debt is uncertain. Accordingly Urban Retreat’s debt was created in 2006 – well before the corporate forfeiture of privileges in 2010.

Willis is not liable under the tax code for Urban Retreat’s leasing debts created in 2006 and subsequent forfeiture of corporate privileges in 2010. Willis wins; BPMT loses. See Francie Willis v. BPMT, LLC; Cause No. 01-14-00537-XC; Texas Court of Appeals 1st District; July 23, 2015.

Lessons learned:

1.  Practice Point: Don’t put yourself in this position and don’t allow your principals to do so either. It’s easy enough to check the standing of Texas business entities: https://mycpa.cpa.state.tx.us/coa/Index.html.

2.  Practice Point: Want to go above and beyond for your clients? Mark your calendars to check their standing with the Texas Comptroller annually, maybe on the anniversary of the closing or lease execution. Send them annual updates that all is well, or maybe something fell through the cracks. Be proactive!

3.  NTCAR Expo: I sure enjoyed visiting with many of you at the Expo on September 2. Thanks for stopping by!

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

Friday, July 31, 2015

Deed Reformation

Michael and Billie Cade sold Barbara Cosgrove over two acres of land in 2006. The Special Provisions clause stated “Sellers to retain all mineral rights.” But the Deed did not contain any reservations and instead conveyed the property to Cosgrove in fee simple.

The Cades had leased the mineral estate to Dale Resources, which was succeeded by Chesapeake Energy. In 2009 and 2010, Chesapeake sent the Cades lease payments. In late 2010, Chesapeake advised Michael Cade that there was a problem with the Deed’s mineral reservation.

So the Cades investigated, then sent a demand letter to Cosgrove asking her to issue a correction deed. Cosgrove refused, and replied instead that the statute of limitations had expired and barred any claims the Cades might have over the 2006 Deed.

In February 2011, the Cades sued Cosgrove claiming that Cades owned the mineral interests and Cosgrove breached the 2006 Contract by failure to execute a correction deed. Cosgrove defended by claiming that the statute of limitations had expired and the merger doctrine applied to this situation. And as a consequence, the Cades had no lawful claim against Cosgrove.

The trial court ruled that the statute of limitations did indeed apply, and denied the request to reform the Deed by adding a mineral reservation in favor of the Cades. Cosgrove then sought attorney’s fees from the trial court, which the trial court denied.

Both parties appealed. Cosgrove wanted attorney’s fees. The Cades wanted the Deed they signed to be judicially corrected to include a mineral reservation.

The Court of Appeals reversed the trial court’s judgment for Cosgrove and continued to deny her reimbursement for attorney’s fees. Cosgrove appealed to the Texas Supreme Court.

At this juncture there were two primary issues before the Supreme Court: (1) Should the Deed be corrected to reserve mineral rights; and if so (2) Is Cosgrove entitled to reimbursement for attorneys fees?

The Texas Supreme Court started their analysis with a presumption that every grantor (seller) knows of defects in a Deed that result from mutual mistake, because grantors are the ones who sign the Deed. In our Texas land conveyancing custom, grantees (buyers) very rarely sign or approve deeds. Only grantors do so.

Indeed (pun strictly intended), some grantees do not even see the Deed until months after closing and recordation while others never see it.

The Supremes then decided that “Parties are charged as a matter of law with knowledge of an unambiguous deed’s material omissions from the date of its execution, and the statute of limitations runs from that date.” The Cades had actual knowledge of the deed’s omissions at the time of execution. They were charged with knowledge of what was included and excluded.

When a mineral reservation is completely omitted from a deed, the error is obvious. As such, it is irrefutable because “. . . the conspicuousness of the mistake shatters any argument to the contrary [emphasis added].”

The Supremes left open the possibility that a fraud claim might yield a different result. However – in this case anyway – there was no claim of fraud.

Cosgrove owns fee simple title without a mineral reservation, and the opportunity for deed correction by a Texas Court expired with the statute of limitations. Cosgrove wins; Cades lose.

See Barbara Cosgrove v. Michael Cade and Billie Cade; Cause No. 14-0346; Texas Supreme Court; July 20, 2015.

Lessons learned:

1.  Practice Point: The party signing the Deed is charged with knowledge of its contents. If the Grantor has a problem, then the Grantor better raise it quickly. Although not stated in this decision, presumably the same logic applies with other docs that are signed by only one party (like Bills of Sale, Estoppels, Assignments and Bonds, for examples).

2.  Practice Point: Before closing, critically compare the proposed Deed to the Purchase and Sale Agreement, all Amendments, title commitment and vesting deed. If you are even 1% unsure, get a real estate lawyer to assist. Deed challenges in Texas just became much more difficult after the date of this decision – July 20, 2015.

3. Find Me: The NTCAR Expo is September 2 this year. Look for me there under the banner “IPSE DIXIT.”

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

Wednesday, July 1, 2015

Ipse Dixit!

DZM, Inc. leased retail space in a shopping mall to a tenant, to operate a poker room and social club. The tenant paid DZM rent from August 2005 to October 2005, but did not pay rental in November. So DZM changed the door locks.

Richie Garren asserted that he leased poker tables, chairs, poker supplies, electronics, decorations and other items to the social-club tenant for $1,000 per month. And that DZM effectively converted Garren’s property by changing door locks and refusing to return the items to Garren.

So Garren sued DZM. The jury determined that DZM had indeed converted Garren’s property, and awarded $12,500 in damages.

DZM appealed, not really to protest the issue of conversion, but instead to assert that the evidence was insufficient to prove an exact damages amount.

The appellate court found a recent Supreme Court case allowing a property owner to testify to its value. The owner in this unique situation doesn’t have to be a qualified expert to furnish an opinion. But rather the theory is that no one would know value better than the owner whose property was just wrongfully taken.

However, the owner’s testimony is judged by the same standards as expert testimony. States the court: “. . . an owner’s property valuation may not be based solely on the owner’s ipse dixit [emphasis in the original case opinion].”

Ipse dixit. Yes the court wrote that. You can’t make that up. My assumption is that all my loyal readers know the meaning. Well, for the one new reader who doesn’t (and yes I had to look it up too), I won’t keep you waiting: “he, himself, said it.”

That strikes yours truly as a rather arbitrary, dogmatic statement. Much like “well that’s just the way it has been so that’s the way it will be.” Sorta.

Anyway, back to the case. A property owner must provide the factual basis on which her / his opinion rests. It is not enough to simply claim “that’s what my stuff is worth because I just told you that’s why my stuff is worth."

Garren submitted some invoices and purchase receipts as indicia of fair market value. But this property was hardly new; it had been used by the poker room for some period of time. Evidently depreciation was not a factor, at least not to Garren anyway.

Because Garren was unable to furnish legally sufficient evidence that the property had any fair market value at the time of the conversion, the Judgment of the trial court was reversed. DZM, Inc. (real property landlord) wins; Richie Garren (personal property lessor) loses.

See DZM, Inc. v. Richie Garren; Cause No. 14-14-00040-CV; Texas Court of Appeals, 14th District - Houston; June 25, 2015.

Lessons learned:

1.  I offer much free advice at www.avvo.com. It’s my pro bono efforts. There are questions almost daily about property conversion. For those who have similar issues, this is an important case to understand that property valuations offered by the owner can be challenged.

2.  The NTCAR Expo is September 2 this year. I plan to make a new sign. Look for me there under the banner “IPSE DIXIT.”

3.  Practice Point: When you go home tonight, tell your spouse / significant other / dog IPSE DIXIT. Then send me an email and let me know how that went for you. I’m going to try it too. If there’s another Counsel Corner from me next month, I either lived or someone is ghost-writing.

4.  Bonus Lesson: ~ 10 years to litigate a case with a value of $12,500? Really?

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

Monday, June 1, 2015

Doctrine of Merger

In the late 1980s Joseph and Genevieve Roche starting work on the Roche Family Winery outside the City of Sonoma on Highway 121. By 2005 the winery went bust, and the property was offered for sale.

On November 15, 2006, Ram’s Gate Winery LLC entered into a contract to buy the winery property. The Roches agreed to provide a full disclosure of all information known to them regarding the property condition within 10 days.

Ram’s Gate evidently approved the condition of the property, and the deal closed on December 14, 2006. Four years later Ram’s Gate sued the Roches and the brokers involved in the purchase, alleging that the Roches failed to provide information within their possession relating to earthquake issues.

Ram’s Gate alleges it learned in mid-2007 about an active fault line on the property, which had been documented in two reports available to the Roches, being a site plan prepared in 1987-1988 and a geological study of 1987. Both identified a fault trace on the land, which required the Roches to relocate the winery building to provide a 50-foot setback.

The Roches contend that Ram’s Gate either knew or should have known about the earthquake issues before closing, as the two reports were in the Sonoma County files.

The Roches filed a Motion for Summary Judgment, claiming that since the Purchase Agreement did not specifically provide that the warranty relating to disclosures would survive closing, those obligations “merged” into the deed and could not properly be the subject of a claim.

On March 1, 2013 the court granted the Roches’ Motion for Summary Judgment, stating that the representations and warranties made in the agreement are extinguished as of the closing date, unless the Contract specifically stated they would survive. Ram’s Gate appealed.

This Federal Appellate Court started by focusing on the intent of the parties. In doing so, the Court determined that the contractual terms were inconsistent with the Deed. And that the Deed was “. . . a rather pedestrian instrument addressing only ‘the mechanics of transferring title’ and containing a legal description of the property conveyed.”

From there, the Court analyzed the balance of the Contract. As in most commercial contracts, the Court found that some portions of the Contract specifically provided for post-closing survival, while many others were silent. However, from there the Court concluded that the fact that several paragraphs in the Contract provided for survival does not mean that no other provision could survive without a similar recital.

Although a basic legal doctrine of “merger” states that those matters excluded from the Deed and not continued within a “survival” recital in the Purchase Agreement are forever extinguished, this Appellate Court rejected the concept of integration. Instead, this Court concurred with Ram’s Gate that the Roches should have disclosed the existence of fault trace lines within the buyer’s due diligence period. The Roches could not now escape that obligation by using the “Doctrine of Merger” inherent in all commercial real estate closings.

See Ram’s Gate Winery, LLC v. Joseph G. Roche; Nos. A139189 and A141090; US Court of Appeals, 1st Circuit, Division 4; April 9, 2015.

Lessons learned:

1.      I’ve been doing this a long time. A really long time. I was pretty sure I knew the doctrines of merger and integration, particularly as applied to commercial real estate. Maybe this is a rogue opinion (it’s from California after all), but still.

2.      And yet there’s another way to look at this that makes sense. Forget integration and merger. Instead, focus on the issues created where the Seller (could also be a Landlord) fails to disclose material conditions to the Buyer / Tenant in the period of time before the Buyer / Tenant becomes committed to do the deal. In that context, this outcome is logical.

3.      Practice Point: Disclose more, not less. Keep written records of your disclosures. Don’t assume that the buyer / tenant had knowledge of a defect or condition, and factored that into the decision to close or go forward with the deal, unless you furnished that intel to the buyer / tenant.

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

Monday, May 4, 2015

More Mistaken Moments

Last month I discussed how a mistake in a Contract can destroy it. This month I present Part Two.

On December 15, 2008, David Duckworth borrowed $1.1 million from the State Bank of Toulon. The bank’s loan officer prepared loan docs.

The Note was dated and signed December 15, 2008, but the Security Agreement was dated two days earlier – December 13, 2008. The Note referenced the Security Agreement. But the Security Agreement had a critical mistake. It stated that it secured a Note dated December 13, 2008. Not December 15, 2008.

There was no Note dated December 13, 2008.

David Duckworth filed a Chapter 7 bankruptcy petition, and the Trustee defended the Bank’s position that the mistaken date did not defeat the Bank’s secured position. The bankruptcy court issued two decisions in favor of the Bank, essentially validating the Bank’s collateral position.

The Trustee appealed both decisions to the US District Court, where the appeals were assigned to different judges. Both district judges affirmed, and the Trustee again appealed.

The Trustee’s basic argument was that extrinsic testimony (we call this “parol evidence”) should not used to correct the mistake in the Security Agreement. And that the Bank’s error should not be overlooked.

The Bank claimed an enforceable security interest, and even if there was a mistake it was readily apparent to anyone who had reviewed the papers. And, that it was a minor error. Also, that there was no question but that the Bank had loaned Duckworth $1.1 million, Duckworth had signed a Note and Security Agreement, Duckworth had defaulted and filed bankruptcy, and the Bank needed to seize its collateral under its Security Agreement.

The US Court of Appeals reviewed the Security Agreement and concluded that the Security Agreement could not secure the December 15 Note. The Court then further concluded that although the parol evidence rule could have fixed the mistake as between the Bank and Duckworth, the same legal theory could not be used against the bankruptcy trustee to correct the error.

The Appellate Court reasoned that bankruptcy trustees are in the unique position of maximizing the recovery of unsecured creditors. To assist in the job, trustees exercise a “strong-arm power,” which allows them to avoid secured interests that a subsequent creditor could have avoided.

Further, bankruptcy trustees  may “. . . void security interests because of defects that need not have misled, or even have been capable of misleading, anyone.”

And so the US Appellate Court determined that the mistaken identification of the debt to be secured cannot be corrected against the US bankruptcy trustee by using outside-the-contract testimony or evidence. The judgments of both US District Courts were reversed. The Trustee wins as the debt is converted from secured to unsecured; the Bank loses its collateral.

See In Re: David L. Duckworth; State Bank of Toulon v. Charles E. Covey, Trustee; No. 1:13-cv-01258-JBM and 1:13-cv-01087-JES; US Court of Appeals, 7th Circuit; November 21, 2014.

Lessons learned:

1.         Proofread your Leases, Contracts, correspondence, emails, texts, listings, buyer and tenant rep agreements, brokerage contracts, commission agreements, everything. Read it all closely. Then wait at least one hour before you read it again.

2.         Catch a mistake somewhere, even a minor one? Fix it now via an Amendment. If the previous doc was recorded (think Deed, Memo of Lease, Deed of Trust, etc.), then be sure the Amendment is also recorded.

3.         Practice Point: On the really important stuff, enlist the help of a buddy to proofread too.

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

Thursday, April 2, 2015

Whoops Moments

Case One

In 2007 the Charles R. Tips Family Trust and the Hazel W. Tips Family Trust signed a Note to Patriot Bank. The Note was secured by Harris County real estate pursuant to a Deed of Trust and Security Agreement. Charles Watkins, Trustee of both Trusts, also guaranteed the debt.

The Note, Deed of Trust and Guaranty Agreement all described the principal amount of the loan as:

This language appears five times in the three documents, in exactly the same format each time.

The Trusts made Note payments of approx $600,000. The bank sold the note to PB Commercial, LLC, who sold the property at foreclosure auction for $874,125.

PB, as plaintiff in the lawsuit against the Trusts and Watkins, filed a Motion for Summary Judgment. Assuming an initial principal balance of $1.7 million, PB calculated a deficiency balance of $815,214.

The Trusts and Watkins responded by claiming that the original principal amount was $1,007,000, and that words prevail over numbers when there is a conflict. According to the Trusts and Watkins, after application of the past payments and foreclosure proceeds, the note was fully satisfied and PB collected a surplus of $189,111, which amount should be returned to the Trusts.

The trial court granted PB’s Motion and awarded PB damages of $815,214 plus interest, court costs and attorney’s fees. The Trusts and Watkins appealed.

After concluding that the loan documents were *not* ambiguous, the Court found that the written words control over the numerals – a difference of $693,000.  The Court made this conclusion even after reviewing PB’s evidence that the borrowers had received the full $1.7 million from Patriot Bank, not $1,007,000.

Conclusion: The amount due was determined by the written words, not the numerals. The trial court’s Judgment is reversed and replaced with a new Judgment that the principal amount of the loan was $1,007,000. See Charles R. Tips Family Trust v. PB Commercial, LLC; No. 01-13-00449-CV; Texas Court of Appeals, 1st District; March 25, 2015.

Case Two

On December 15, 2008, David Duckworth borrowed $1.1 million for the State Bank of Toulon. The Note was dated and signed December 15, but the Security Agreement was dated two days earlier – December 13, 2008.

The Security Agreement properly reflected the debt to be secured, but the identification had a critical mistake. The Security Agreement said that it secured a Note dated December 13, 2008. But there was no note of that date.

Duckworth filed a Chapter 7 bankruptcy petition in 2010. The bankruptcy court held that the mistaken date in the security agreement did not defeat the bank’s security interest. The trustee appealed, claiming that the mistaken date in the Security Agreement defeated the bank’s collateral interest.

The bank contended that the Security Agreement is enforceable, and extrinsic testimony will show clearly that the parties intended the Security Agreement to reflect the proper date of the Note. And that the Security Agreement could easily be changed by the Court – we call this ‘reformed’ – to reflect the proper date.

This Federal Court then concluded, and I’ll spare you the meat-grinder details, that the mistaken identity of the debt to be secured cannot be corrected against the bankruptcy trustee. The judgments of the district court were reversed. The Trustee wins; the Bank loses. See In Re: David L. Duckworth; State Bank of Toulon v. Charles E. Covey, Trustee; No. 1:13-cv-01258-JBM and 1:13-cv-01087-JES; US Court of Appeals, 7th Circuit; November 21, 2014.

Lessons learned:

1.  In the past, I followed the ancient tradition of using both words and numerals in the docs I prepared. I quit that practice. Now I just use numerals - $1,245,882. No more words. Too many opportunities for a mistake by using words. And inevitably when there is a mistake, it’s in the words – not the numerals.

2.  Proofread your Leases, Contracts, correspondence, emails, texts, listings, buyer or tenant rep agreements, brokerage contracts, commission agreements, everything. Read it all closely. Then wait at least one hour before you read it again.

3.  Practice Point: On the really important stuff, enlist the help of a buddy to proofread too. 

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

Wednesday, March 4, 2015

Commercial Due Diligence. Or Not?

Jane Tang and her company Virginia Oak Venture, LLC brought a lawsuit regarding the purchase of a McKinney Texas apartment community. Ms. Tang was of the view that the amount paid was far in excess of its value.

Tang alleged that the defendants (for my purposes, sellers, broker and agent) severely over-represented the cash flow expected to be derived, and misrepresented the extent of repairs. Tang also contends that she was defrauded by a real estate salesman, his broker, and the prior owners.

The Collin County trial court rendered partial summary judgments in favor of some of the defendants. A jury trial followed against the remaining defendants, all of which ultimately resulted in a loss to Tang.

So she appealed.

With specific reference to the salesperson O.D. Fought, Jr., Tang argued that Fought grossly misrepresented the occupancy levels of the property, its income and expenses, supplied false data to the appraiser and lender, hid from Tang the existence of accurate rent rolls, financial data and a previous purchase of the property for half the price some 10 months earlier, and more.

Tang argued that Fought represented both Seller and Tang, and as such, owed fiduciary duties to both. As evidence to support that conclusion, Tang alleged that Fought located an attorney to create Tang’s LLC, agreed to be personally named as its registered agent, drove her to see 10 properties he was attempting to sell, directed her to a particular lender, and prepared all the documents involved in the deal.

Fought contended that he was merely working hard on the seller’s behalf to sell the apartments, and that he was never acting as Tang’s agent. Evidently the jury believed him.

The evidence furnished to the jury regarding rent rolls and income streams may have been accurate and largely correct as of the month of the sale, although it could also have been misleading. There was indeed evidence of high occupancy levels, but that circumstance changed after the expiration of “signup specials.” There was also the possibility that some evicted residents were allowed to reoccupy apartments, and thus become tenants yet once again.

More confusion followed Fought’s possible misrepresentations about the condition of the property, but it is possible that the jury deemed none of such matters material and disregarded such possible misrepresentations.

Tang then alleged that Fought and his broker committed fraud, since it was alleged that Fought only partially disclosed accurate rent rolls, financial statements and the property’s condition.

The Appellate Court’s analysis of the fraud claim against the sales agent was short-lived, since “. . . Tang made no effort to make an independent investigation to determine the physical condition of the property, the value of the apartment complex, the circumstances of occupancy levels, or other pertinent factors she should have taken into account when making the decision to purchase.”

The Appellate Court found no reason to disagree with the jury’s decisions, so the Defendants prevailed again. See Virginia Oak Venture, LLC and Jane Tang v. O.D. Fought, Jr., et al; No. 06-13-00076-CV; Texas Court of Appeals, 6th District; February 7, 2015.

Lessons learned:

1.  In the past, my stock suggestion to brokers and agents was to encourage the buyers and tenants to conduct as much due diligence as possible within the option period, by hiring independent professionals not suggested by the agents and brokers. In this situation the buyer evidently did none of that, but still the broker and agents were able to adequately defend a claim.

2.  However, I would like to believe that if the buyer had undertaken the normal due diligence I suggest of all buyers and tenants, she would have discovered some or all of these issues and either would not have made the decision to purchase or would have seriously negotiated the purchase price. Southward.

3.  Practice Point: Make clear to all parties who you represent. Do it at the inception – ‘first contact rule’ – but then there is nothing that precludes you from reminding the parties several more times before and at closing, in writing. Keep copies too.

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

Wednesday, February 4, 2015

Leasehold Construction Goes Bad

Body Bar, LLC, desired to open an upscale Pilates studio and juice bar in Plano, Texas. So Body Bar signed a lease for commercial property owned by Regency Centers. It was Body Bar’s responsibility to construct the studio and bar. Regency was obligated to pay $25,000 of the cost after successful completion.

Body Bar engaged Denco CS Corp as its general contractor.

Denco’s completion was delayed due to the City of Plano’s determination that portions of the construction plans failed to meet Plano’s health code ordinances. To complete on time, Denco’s employees, contractors and subcontractors worked overtime and on weekends. Those efforts increased the cost of the project by ~ $29,000.

Denco sent Body Bar a bill for the excess. Body Bar refused to pay. Denco recorded mechanic’s liens in Collin County. Body Bar sued Denco for breach of contract, improper “cloud on title” by recordation of wrongful Mechanic’s Lien Affidavits, and other theories.

Denco responded by filing counterclaims of its own against Body Bar, seeking to recover its added $29k in cost overruns through a legal theory of unjust enrichment, and asking the District Court to allow Denco to foreclose its liens.

The Collin County District Court ruled for Body Bar and entered Judgment accordingly. Denco appealed.

Part of the appeal was based on Denco’s request to foreclose its liens. And that, dear reader, is the purpose of this article. Denco claimed it had two valid liens: one based on the Texas Constitution, the other based on Texas statutes.

The Appellate Court analyzed the lien affidavits and compared them to the facts presented. Evidently the affidavits claimed liens only against the owner’s fee simple interest in the property. Not Body Bar’s leasehold estate.

That’s a big difference.

The Appellate Court first determined that in order to perfect a Texas Constitutional lien on the property owner, there must be a direct contract between the lien claimant and the property owner. There was no such direct link. Recall that Denco was engaged directly by Body Bar. Not Regency.

Next, the Appellate Court determined that in order to perfect a Texas statutory lien on the owner’s fee simple interest as an “original contractor,” there also must be a direct contract between the lien claimant and the property owner. Again, there was no such direct link. See above.

Denco then argued that Body Bar was acting as the agent for the property owner. Since liability imputes from agent to principal, this would have the desired effect of binding the property owner to the construction contract. And if that is true, then the lien affidavits were valid because Denco was dealing with the agent for the owner. And the actions taken by an agent bind the principal, absent unusual circumstances not at issue in this case.

Unfortunately for Denco, they submitted no evidence on that point for the Appellate Court to consider.

No surprises here. Not yet anyway. Here comes the surprise.

The Appellate decision implies that the lien affidavits should have attached to Body Bar’s leasehold estate. That would be consistent with Texas law and appellate decisions. And then for some reason not explained in the Opinion, the Court does not indicate that Denco’s liens were valid, but only as against Body Bar’s lease.

Perhaps the lien filings were made late. Perhaps statutory notice of the filings weren’t timely served. Maybe the lien filings made clear that Denco was only interested in a lien against the property owner’s title, not Body Bar’s lease. Maybe the Court did not feel the need to explain leasehold lien attachment theory further, since Denco was not going to be allowed to foreclose anyway. Perhaps I misread the Opinion. All of this is unclear.

The Appellate Court mostly agreed with the tenant Body Bar, but also gave Denco some relief too. See Denco CS Corp v. Body Bar, LLC; No. 06-14-11122-CV; Texas Court of Appeals, 6th District; January 8, 2015.

Lessons learned:

1.  Contractors engaged by tenants routinely file liens when they get stiffed. Those liens, if completed properly, sent to the tenant timely, and if they otherwise satisfy all statutory requirements, are valid and attach to the tenant’s leasehold estate.

2.  Contractors or their lawyers will argue that the liens also attach to the property owner’s fee simple estate. The theory is that since the improvements ultimately benefit the property owner, then the tenant was merely acting as the agent for the principal. And the principal was the landlord.

3.  Practice Point: Whether representing a Texas landlord or tenant, know that payment and performance bonds can be purchased by the contractor to avoid a lien filing from attaching to any interest in land. Typically the cost is low, ~ 2% of the full construction cost. Either (or both) the landlord or the tenant might consider requiring their contractors to obtain and deliver the bonds before the contractors commence work at the job site. These could be obligations contained in the Lease and construction contracts.

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

Wednesday, January 7, 2015

Did You Say What You Mean? Did You Mean What You Said? (Part One)

Jeff Carpenter owned a 15-acre parcel of raw land in Charlotte, North Carolina. In 2006 Jeff transferred two acres to an entity he controlled, Pavilion, and Pavilion leased the two acres to CVS Pharmacy. Jeff agreed to place a restriction in the CVS Lease on the future use of Jeff’s remaining tract, to entice CVS to sign the Lease by granting CVS an exclusive pharmacy use.

Pavilion sold the CVS tract in 2008 to Sonny Boy. At that time Jeff implemented the exclusive restriction on the remainder of the 15-acre tract with a restrictive covenant, as Jeff and CVS previously agreed two years prior. The balance of Jeff’s larger tract had not yet been developed.

The recorded covenant essentially stated that during the term of the CVS Lease, no portion of the balance of the 15-acre parcel could be leased or used as a drug store or pharmacy.

In 2012 Jeff contracted to sell the restricted remainder parcel to Charlotte Pavilion Road Retail Investment, LLC and WLA Enterprises, Inc. Charlotte Pavilion and WLA simultaneously contracted to purchase an adjacent, unrestricted tract of land from Charter Properties. The developers planned to lease the Charter parcel to Wal-Mart for construction of a retail store that would sell, among other items, drugs and pharmaceuticals. The developers intended to use Jeff’s 13-acre tract for parking and access for customers to the Wal-Mart and other retail stores.

So, although Wal-Mart would share the parking lot with other retail businesses, Wal-Mart customers would be expected to park on Jeff’s parcel to access the Wal-Mart store. In which, again, the customers could purchase items in direct competition with CVS.

When CVS learned that the developers intended to construct a parking lot on the restricted tract for use by Wal-Mart, CVS informed the developers that such use would violate the restrictive covenant. So the developers sued CVS and Sonny Boy, asking the Court for an Order to the effect that their proposed parking lot development plans did not violate the restriction.

In January 2014 the trial court granted the developers’ request, and entered Judgment holding that the proposed construction of a parking lot and use for Wal-Mart customers would not violate the terms of the restrictive covenant.

CVS and Sonny Boy appealed.

CVS  and Sonny Boy likely knew they were in trouble when the Appellate Court immediately took the position that North Carolina courts use a strict construction rule to interpret restrictive covenants, and that such covenants are not favored in North Carolina law. It was of no help to CVS that the Court stated that covenants are not enforceable unless clear and unambiguous.

Then, it was time to closely examine the language of the restriction. The restrictive covenant prohibited the construction of a building that is used for the sale of drugs, vitamins, health and beauty aids, or as a pharmacy. The covenant banned various business activities, but not incidental purposes (such as parking for a restricted use).

The North Carolina Appellate Court concluded that construction of a parking lot and access easement on Jeff’s parcel, to serve Wal-Mart’s customers on an adjacent and non-restricted tract, was not violative of Jeff’s restriction although such customers would be purchasing from Wal-Mart at least some items that were directly described in the CVS restriction.

The Appellate Court agreed with the developers Charlotte Pavilion Road and WLA Enterprises. The developers won and CVS lost. See Charlotte Pavilion Road Retail Investment vs. North Carolina CVS; No. COA14-658; North Carolina Court of Appeals; December 16, 2014.

Lessons learned:

1.      Commercial leasing is one of the most difficult things I do, and most of my colleagues feel the same. It is incredibly difficult to forecast issues and draft provisions for every possible contingency over the life of a 10 or 25 year lease. And, some leases have terms that are 99 years. If we could cover every possible issue that might arise, the Lease would be three inches thick, no one would read it and no one would sign it.

2.      Restrictive covenants are inherently tricky because courts don’t like them and uses change over time. Did any of us imagine the advent of lottery sales in 1991 or e-cigarettes in 2003? How many older retail leases prohibit “gambling” and how many office leases prohibit “smoking”? Do you think those provisions preclude lottery sales and e-cigs?

3.      Practice Point: Stay tuned for Part Two. In that installment I will evaluate how Texas deals with this issue. There may be some surprises.

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