Wednesday, December 21, 2016

Tell Me Again Why I Can't Lease It for Income?

Ken Tarr bought a house in the Timberwood Park subdivision of San Antonio in 2012. In 2014, when his employer transferred him to Houston, he began leasing his San Antonio home for short durations.

In the summer and fall of 2014 Ken entered into 31short-term rental agreements ranging from one to seven days, totaling ~ 102 days. Ken did not lease rooms separately, but rather leased the entire home each time.

In the same time period Ken was notified by the Timberwood Park Owners Association Inc., that he would be fined if he continued to use the house as a rental property.

Predictably, Ken was fined so he scheduled a meeting with the Association’s board to review and appeal their decision.

Ken lost the hearing before the Association’s board in September 2014. To avoid paying the fines but primarily to continue his use of his property for income purposes, Ken sued the Association, seeking a declaration that the Restrictive Covenants imposed by Timberwood did not prohibit his leasing activity.

The Association responded by claiming that there were no facts at issue, and that the Association was entitled to a Judgment by operation of law. The Court agreed with the Association and rendered Judgment for the Association.

Ken appealed.

The Restrictive Covenant reviewed on appeal stated substantially “All tracts shall be used solely for residential purposes . . .” That gave Ken the ammunition to claim that indeed his property was being used a residence. A leased one. But still – it was built for human habitation and, humans were, well, habitating [yes I know English grammarians are going to yell at me for converting that noun into a verb. But it happened. It’s the new me, in a new year.]

The Association replied that Ken’s short-term renters are not “residents” and are not using the property for “residential purposes,” but rather they are transients using the property temporarily. And the Association further argued that a temporary residential use does not equal the “residential purpose” mandate.

The Texas Appellate Court determined that if a person comes to a place temporarily, without any intention of making that place his of her home, then that place is not considered the person’s residence. And from there, it wasn’t a far stretch for the Texas Appellate Court to conclude that the lease of a home to be used for transient purposes is not in compliance with the restrictive covenant that it be used solely for residential purposes.

Perhaps sensing an appeal to the Supreme Court, the Texas Court of Appeals also noted that the Austin Court of Appeals came to the opposite conclusion in 2015, holding that a covenant requiring use “for single family residential purposes” was fatally ambiguous.

Regardless, the 4th Texas Court of Appeals affirmed the trial court’s Judgment. Ken Tarr lost and may not rent his property, at least not in the manner he had been leasing it. Timberwood Park Owners Association Inc. wins again.

See Kenneth Tarr v. Timberwood Park Owners Association Inc.; Texas 4th Court of Appeals, San Antonio; Case Number 04-16-00022-CV; November 16, 2016:

Lessons learned:

1.      I have clients, some institutional, that need to lease residential properties where restrictive covenants might be read in a manner to prohibit that activity. We have different appellate decisions across the State. Our Texas Supreme Court needs to accept a case and give us some definite guidance.

2.      Texas brokers and agents enter the danger zone when they assume that their clients are purchasing property for their own residential use. But even if that is the stated purpose, the clients still need to be aware if covenants are in existence that could impede later leasing activities. Things change.

3.      The problem is amplified when principals are buying properties with the stated intent of converting them to income-producing. Beware, my Texas cadres, and review the covenants before the Contract is signed, so that buyers are making an informed, educated and intelligent decision!

                                                                                    Stuart A. Lautin, Esq.*

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



Thursday, December 1, 2016

Whoops I May Have Renovated the Wrong Property....

Ravi Prasad received notice of a public auction from the County. Ravi, a retired chemical engineer who was in the real estate flipping business, was interested in Parcel 8-C, identified as 17211 Shands Road. A photograph on the property card showed that the lot was improved with a residence.

The residence shown, however, was owned by William and Elnora Washington. The Washington's house is located two lots north of Parcel 8-C. The street address for Will and Elnora’s house is 17201 Shands Road, but was incorrectly marked on the front of the house and mailbox as 17211 Shands.

William testified that 17211 was the original address when it was owned by his mother. When Will purchased it in 2004, he learned the address had been changed to 17201, but he never altered the fourth digit on the house or mailbox.

The Washington house had been vacant at all times relevant to this case.

Ravi viewed the Washington house prior to the tax sale, thinking it was Parcel 8-C. Although Ravi obtained a County tax map showing the physical location of both Parcel 8-C and the Washington property, Ravi drove instead to the Washington home for his inspection.

Ravi’s $11,000 bid for Parcel 8-C was accepted, and soon after Ravi began renovating Will and Elnora’s house instead of Parcel 8-C. He expended more than $23,500 before he received a letter from an attorney engaged by the Washingtons, suggesting he might cease his efforts to improve a property he did not own.

Will and Elnora Washington refused to pay Ravi Prasad for the work completed, so Ravi sued M/M Washington for damages.

Ravi claimed at trial that Will and Elnora had been unjustly enriched due to Ravi’s efforts. And, if the Washingtons had not displayed the wrong address on their house, “upon which both he and the County ‘obviously’ relied,” then none of this would have occurred.

Ravi further argued that although he did not conduct a title search, obtain a title commitment or title policy, if he had done so the result would have been the same since a title analysis would not have revealed that Ravi had inspected the wrong property and was confused as to the exact location of Parcel 8-C.

The Washingtons asserted that Ravi was not entitled to damages since the Washingtons did not know their property was being renovated. Recall that the property was vacant at the time.

The trial court found that it would be inequitable to allow the Washingtons to receive the value of Ravi’s renovations, regardless of the Washingtons’ testimony that their property was vacant. And that they did not gain knowledge of the repairs until two months after commencement. And at that time they promptly engaged an attorney to advise Ravi to stop his efforts.

The trial court entered Judgment for Ravi in the amount he expended on the house – $23,508 – and also imposed a lien on the Washingtons’ property for that amount.

Will and Elnora appealed.

The Supreme Court took a different approach, finding that Ravi had at least imputed knowledge (we call this constructive notice) that he was renovating property he did not own. Ravi’s foreclosure Deed clearly identified Parcel 8-C. Ravi had no legal right to rely on mailbox numbers and similar. Further, a property tax map in Ravi’s possession identified both Parcel 8-C and the Washingtons’ property, located a bit north of 8-C.

The trial court’s Judgment was reversed. William and Elnora Washington win and they can keep Ravi’s improvements without a duty to pay for them. See Washington v. Prasad; Record No. 151783; Supreme Court of Virginia; October 27, 2016:,44.

Lessons learned:

1.      Foreclosures are inherently risky business. My savvy foreclosure buyer-clients will not bid more than 50% of fair market value, due to bumps in the road like this one.

2.      Mailbox numbers and addresses painted on curbs, or nailed to the fences and front and back walls, are not binding for this type of property identification purpose. County Maps and Plats should have been more carefully reviewed.

3.      Although there wasn’t much text about this in the Supreme Court opinion, I believe a different outcome would have been reached had the Washingtons known that someone was working hard to improve their property. Perhaps this is one of those rare moments where ignorance is bliss. But I also believe that Will and Elnora expended far more than the value of the improvements to defend and appeal the case to the Supreme Court.

                                                                                    Stuart A. Lautin, Esq.
                  Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.