Thursday, April 27, 2017

Good Faith & Fair Dealing




 
First, let me explain how this month’s topic landed on my desk and in your email inbox folder. I am a licensed lawyer in both Texas and New York. As such, my clients come from a diverse geographic area. Property owners, tenants, landlords, developers, brokers, agents and property managers in New York have a different view of The Way Things Work then we do in Texas.

Some of their differing views of TWTW relate to an obligation of good faith and fair dealing. And, this duty (or, non-duty) then trickles down to the choice of law clause found in virtually every Contract and Lease.

Let me [try to] explain by using a recent case to illustrate.

Hilfiker Square owns land in which Thrifty Payless is a tenant. Recorded covenants prohibit construction without first obtaining 90% consent of the those who own and those who occupy the shopping center.

In 2010 Hilfiker had an opportunity to sign a long-term ground lease with a restaurant tenant. In 2011 Hilfiker started to request the needed consents in order to proceed with development and leasing.

All parties including the City agreed to the plan. But not Thrifty. Thrifty objected to the plan for three distinct reasons – parking utilization, driveway operations, and visibility.

Hilfiker engaged a third-party engineering firm and a third-party architectural firm to analyze and address these concerns. Each specialist concluded that development would not materially impact Thrifty’s parking, driveways, or visibility.

Undaunted, Thrifty still refused to consent. So Hilfiker sued Thrifty Payless, alleging that Thrifty breached an implied covenant of good faith and fair dealing by depriving Hilfiker of its opportunity to enter into the ground lease with the restaurant-tenant. Hilfiker claims that its damages are $1.6 million, which corresponds to the amount the ground lease area would be worth if it were developed as projected.

Thrifty defended by claiming that the recorded covenants grant to Thrifty the absolute right to prevent Hilfiker from building a restaurant at Hilfiker Shopping Center. No reasons required. Consequently, Thrifty requested that the Court toss the case.

This case comes to us from Salem Oregon, and so far the only portion that has been litigated to completion is Thrifty’s request that the Court dismiss the lawsuit.

The Oregon Court found that Oregon law imposes a duty of good faith and fair dealing in the performance and enforcement of every contract. The purpose, writes the Court, is to prohibit improper behavior and ensure the parties will refrain from any act that would have the effect of destroying or injuring the right of the other party to receive the “fruits” of the contract.

I suppose that Oregon contracts bear “fruit.” But that’s a digression.

From there, it wasn’t a far stretch for the Oregon Court to conclude that Hilfiker had a reasonable expectation that Thrifty would negotiate, reasonably and in good faith, concerning any proposed amendments to the recorded covenants as long as such amendments are not materially adverse to Thrifty’s financial interest.

And so Hilfiker’s claim withstands Thrifty’s Motion to Dismiss. See Hilfiker Square, LLC v. Thrifty Payless, Inc., 6:16-cv-01855-MC; District Court of Oregon; November 29, 2016: https://casetext.com/case/hilfiker-square-llc-v-thrifty-payless-inc.

This is the place where I stress that Oregon’s laws are different than those in Texas, at least on this point. Texans don’t have a duty of good faith and fair dealing with respect to real estate purchases, sales, leasing, management, and development, unless that obligation is inserted into the document or unless a special relationship exists between the parties.

But Texas real estate brokers and agents do have a similar, implied duty!

Lessons learned:

1.      The laws of each State (take Louisiana, as an extreme example) can be radically different than other States. See above.

2.      This case illustrates why contracting parties need to be smart about the boilerplate choice of law clause hidden on Page 23 of the Contract or Lease. Depending on the clarity of your crystal ball, selecting Texas in that section may backfire.


3.      The B/L: Some “standard” Contract and Lease provisions deserve attention and consideration. The choice of laws clause, often overlooked, might require more scrutiny.

                                                                                    Stuart A. Lautin, Esq.*

               * Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
                  Texas Board of Legal Specialization

                 Licensed in the States of Texas and New York

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

Friday, March 31, 2017

Oral Contracts - Binding or Not?




 
We have all been told that oral agreements are not binding. But don’t tell that to David Reyes and Sonia Valenzuela.

In 1993 David and Sonia approached Annette Burrus and inquired about buying one of her lots in Tornillo Texas. Tornillo is a colonia in El Paso County, on the border, with a population of 1,568 as of the last census.

Burrus claims she advised them that she had no lots for sale, but instead she offered to rent them a portion of her 11-acre tract. Burrus offered to purchase a mobile home of their choice, which she would move to the property at her expense. Thereafter, David and Sonia and their children could rent the mobile home and the lot from Burrus on a month-to-month basis.

Burrus purchased a mobile home as selected by David and Sonia, and had the home moved to the lot. David and Sonia paid $500 before moving into the mobile home in September 1994, and thereafter paid $200 per month. For 17 years.

Although Burrus saw the relationship as Landlord and Tenant (but evidently Burrus neither repaired nor maintained any portions of the lot and home), David and Sonia believed that they had agreed to purchase the mobile home from Burrus for $21,000, that their initial $500 payment was a down payment on the lot, and that the $200 monthly payments were to be applied as principal and interest on a seller-financed Note.

As would be the case in a contract for deed transaction, David and Sonia anticipated they would receive full title to both the mobile home and lot from Burrus once they paid off the loan.

Shortly after they moved in, David and Sonia erected a chain link fence around the perimeter of the lot, installed plumbing fixtures, lighting and ceramic tiles in the home, built a shed and dog kennel and planted trees. Then they added a porch and several rooms to the mobile home, moved the home to the center of the lot and paid to have a concrete slab poured on which to build the additions.

In all, David and Sonia spent over $22,000 in materials for the improvements with no reimbursement from Burrus.

In March 2011 Burrus began negotiating to sell her acreage to Tornillo DTP VI, LLC, which included the lot where David and Sonia were living. Evidently Tornillo DTP was buying the property to lease it to Dollar General, which intended to build a retail store at the site.

Burrus signed a contract with Tornillo DTP in January 2012, in which she would receive $90,000 for the sale, with a closing date in February 2012. After Burrus informed David and Sonia of the closing, demolition crews hired by Tornillo DTP came onto their property and began removing improvements including the fence, trees and dog kennel. So David and Sonia sued both Burrus and Tornillo in April 2012, attempting to stop the demolition.

David and Sonia resolved their dispute with Tornillo DTP, then turned their gun turrets towards Burrus. The jury determined that an oral agreement existed for Burrus to sell her property to David and Sonia, Burrus breached the agreement, and David and Sonia were damaged.

The trial court entered judgment awarding David and Sonia $70,000 in damages, $92,000 in attorney’s fees and $23,000 related to Burrus’ failure to render annual accounting statements as provided by Texas’ contract for deed statutes.

Burrus appealed, contending that oral agreements regarding real estate are prohibited in Texas.

The appellate court first concluded that ordinary real estate transactions in Texas must be written. But also that there were exceptions to that rule when valuable and unreimbursed improvements were made to the property, and when fairness and equity requires Courts to enforce an unwritten agreement.

I’ll spare you the 23-page single-spaced analysis written by the Court, but you can already guess the outcome. The trial court’s judgment for David and Sonia is affirmed.

See Burrus v. Reyes, Case No. 08-14-00265-CV, Texas Court of Appeals, 8th District, March 8, 2017: http://scholar.google.com/scholar_case?case=18368523796023647491&q=burrus+v.+reyes&hl=en&as_sdt=6,44.   

Lessons learned:

1.      Beware the oral agreement. Yes Texas law still says that real estate agreements regarding the purchase and sale of property must be written. And yet judges and juries can still find a way to ignore the law.

2.      The oral-agreements-are-not-binding-in-Texas-theory is even more problematic regarding leasing, where real estate leases for a term of one year or less need not be written. That can be particularly dangerous in the context of short-term executive office leasing, short-term warehouse leasing or a “holiday” lease of retail space.


3.      The B/L: If for no other reason than clarity, get it in writing!

                                                                                    Stuart A. Lautin, Esq.*

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

Tuesday, February 28, 2017

Use Clauses in Commercial Leasing


It is hardly unusual for tenants to require special licenses to conduct their business, in addition to Certificates of Occupancy and zoning compliance. Bars need liquor licenses from the Texas Alcoholic Beverage Commission. Banks need licenses from the Texas Department of Banking or similar federal authority. Racetracks require licenses from The Texas Racing Commission. Chiropractors must have licensure from the Texas Board of Chiropractic Examiners.

And so on for surveyors, architects, physicians, veterinarians, engineers, lawyers, dentists, accountants, brokers, medical facilities, pest eradication companies, repair shops using oil or hazardous substances, fuel dispensing, etc.

But what happens when the tenant signs the Lease, and then is unable to secure the license? What if the tenant doesn’t try [very hard] – should the tenant be excused?

Bre Mariner Conway Crossings, LLC, as Landlord, entered into a five-year commercial Lease with Genuinely Loving Childcare, LLC, as tenant. The Lease provided that tenant could use the premises solely for the purpose of operating a child day care center for up to 35 pre-school children.

The target space consisted of 2800 SF in an Orlando shopping center. The Lease further provided that the tenant must use its best efforts to keep the children inside the premises and prevent them from loitering in the common areas.

In Florida, the operation of a child care center that cares for more than five children requires licensure from the Department of Children and Families. The Florida legislature has set minimum standards for licensure, including that the child care center must have at least 45 SF of outdoor play area per child. Drop-in childcare and urban child care centers are exempt.

The urban child care center designation which permits the substitution of indoor play space for outdoor play area, requires written documentation from the local governing body that the area where the child care center is located has been declared urban.

Evidently the Lease was signed at the end of 2013 or beginning of 2014. In January 2014 the Florida Department of Children and Families denied tenant a permanent license because the Department did not believe the child care center was located in an urban area. The Department did, however offer a provisional license with the understanding that an outdoor play area would be required for permanent licensure.

Using the provisional license, Tenant opened the child care center in February 2014. Unable to obtain a permanent license, tenant abandoned the premises in February 2015, only one year into a five-year commercial lease term, when tenant’s provisional license expired and no further renewals were permitted by operation of Florida law.

The landlord sued Genuinely Loving Childcare, LLC and its Guarantors, and obtained a judgment in trial court for eviction and damages. Tenant appealed the damages portion of the award.

The Appellate Court reviewed the evidence and tenant’s affirmative defenses of: (a) impossibility; (b) impracticality; and (c) frustration of purpose. The thread that connects them all is foreseeability at the inception of the Lease. The Court determined that “if a risk was foreseeable at the inception of the lease, then there exists an inference that the risk was either allocated by the contract or was assumed by the party.”

Landlord used that argument to Landlord’s benefit, stating that tenant’s defenses are insufficient because the risk tenant would not obtain a license was foreseen and allocated by the Lease to tenant. However, the Court concluded that the Lease provisions did not explicitly allocate the risk that the Department of Children and Families would deny tenant the urban designation and a permanent license without outdoor play space.

Due to a Lease that is ambiguous on this point, the Appellate Court reversed the final Judgment and dispatched the case to the lower court to determine the intent of the parties regarding the licensure issue.

See Genuinely Loving Childcare, LLC vs. Bre Mariner Crossings, LLC, Case No. 5D15-4168, District Court of Appeal of Florida, 5th District, January 13, 2017: https://scholar.google.com/scholar_case?case=9889607525199014198&q=genuinely+loving+childcare+v.+bre+mariner&hl=en&as_sdt=6,44&as_vis=1.  

Lessons learned:

1.      Failure to explicitly allocate the risk of licensure is a common problem in commercial leasing. If a tenant is unable to secure its license, it might assert a position of “frustration of purpose,” meaning that if the tenant cannot open or continue its business due to matters outside of its control, perhaps it should not remain liable for lease obligations.

2.      Landlords, conversely, may insist that Landlord was not operating the business inside the four walls. It’s tenant’s business and there is no one better than tenant to process the applications, overcome objections and secure necessary licensure.

3.      The B/L: In your Lease Agreements provide for not only how the premises will be used, but if it is subject to special licensure to be obtained by tenant and tenant is unable to obtain the license, or perhaps tenant secures the license but not for the duration of the lease term, then also state what happens in those circumstances too. Does the tenant remain liable? For the full remainder of the term? Is there an exit strategy for the tenant where it can terminate the Lease by payment of a set amount?

                                                                                    Stuart A. Lautin, Esq.*

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

Monday, January 30, 2017

Are Emails Binding?


Prentis Tomlinson is the President and CEO of PetroGulf, Ltd. Petro was formed to trade oil commodities from Iraq with regional markets. In 2009 Tomlinson met with John Khoury, seeking investment into Petro. Khoury invested $400,000.

Khoury, unhappy with the performance of his investment, met with Tomlinson in early 2012 to discuss Petro’s failure to disclose financial information. In that meeting, Tomlinson agreed to personally repay Khoury the $400k debt over a four or five-year period.

A week later Khoury sent an email to Tomlinson summarizing the meeting. Tomlinson replied by email with, in addition to other text: “We are in agreement.”

When Tomlinson failed to make the payments, Khoury brought a lawsuit. Tomlinson’s defense was that any recovery for breach of contract was barred by the Texas Statute of Frauds, which requires that many agreements must be in writing and signed to be enforceable.

At trial, Tomlinson admitted sending the email but claimed that his response of being in agreement referred to an agreement different from the terms identified in the email to which he replied.

The jury concluded that Tomlinson had obligated himself to repay the $400k investment, and that Tomlinson has breached that agreement. The jury found in favor of John Khoury on all claims and awarded him $400k plus attorneys fees.

Tomlinson then asked the trial court to enter a Judgment disregarding the jury’s verdict on the $400k breach of contract claim. The trial court, likely accepting Tomlinson’s position that emails do not satisfy the Texas Statute of Frauds, agreed and in doing so, gutted the jury’s verdict.

John Khoury appealed.

The Texas Appellate Court reviewed the Texas Statute of Frauds, providing that debt agreements must be written and signed. You can read it at TBCC 26.01(a)(1) and (2), and 26.01(b)(2): http://www.statutes.legis.state.tx.us/Docs/BC/htm/BC.26.htm.

Seems clear enough. The law requires a signed writing. There was no written paper agreement; there was no signature.

However, there was an email chain that basically ended with “We are in agreement.” The last email from Tomlinson does not contain Tomlinson’s name in the body of the text he wrote. But his name and email address do appear in the “From” field of the email.

The Appellate Court started by evaluating the Uniform Electronic Transactions Act as adopted in Texas at TBCC 322.001 – 021: http://www.statutes.legis.state.tx.us/Docs/BC/htm/BC.322.htm. UETA was added 10 years ago to remove barriers to electronic transactions by setting an expansive view of what constitutes electronic writings, records and signatures. The goal was to adopt our now-common practice of foregoing paper in favor of emails, texts and similar.

It took the Court three full single-line pages to analyze this one issue and conclude that a signature block in an email performs the same authenticating function as a “From” field. Consequently,  the Court concluded that the email satisfied the definition of a writing and signature; the Statute of Frauds could not be used to avoid enforcement of the agreement.

John Khoury won his appeal; Prentis Tomlinson owes him $400,000 plus attorneys fees. Whether or not Khoury will be able to collect his Judgment is an entirely different matter. See Khoury v. Tomlinson, Case No. 01-16-00006-CV, First District Harris County Court of Appeals, December 22, 2016: https://casetext.com/case/khoury-v-tomlinson.

Lessons learned:

1.      Our Texas Statute of Frauds has been hijacked. Writings and signatures are no longer strictly required. Emails can be sufficient to create binding agreements

2.      If emails suffice, then I suppose so do texts, social media, chat rooms, bulletin boards and similar e-platforms where one can identify who is communicating and agreements can be made electronically without paper or ink signatures.

3.      However – the Fort Worth Court of Appeals reached an opposite conclusion in 2011 and decided that an email was insufficient to serve as a “signature.” See Cunningham v. Zurich American Ins Co: http://caselaw.findlaw.com/tx-court-of-appeals/1580444.html.

4.      The B/L: be careful with email agreements and instead, until we have more guidance from our legislators or Supreme Court, insist on old-fashioned, ink-signed contracts, leases, amendments, loan docs, release and settlement agreements, and everything else related to what we do. Don’t type “agreed” in an email or similar unless you are prepared to be bound.

                                                                                    Stuart A. Lautin, Esq.

 

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