Friday, April 30, 2021

TITLE INSURANCE V1

             I’ve been writing blog articles for over 10 years, but I have never written about title insurance. The time is nigh.

             Hall CA-NV funded the renovation of the Cal-Neva Lodge & Casino, near Lake Tahoe. Before Hall agreed to finance the project, the property owner engaged Penta Building Group to conduct some preliminary work.

            Hall knew of the contract, so Hall had Penta subordinate Penta’s construction liens to Hall’s finance documents. Based at least in part on that subordination, Hall then authorized $29 million in debt financing, for which Hall received a mortgage.

            At the same time Hall obtained a lender policy of title insurance from Old Republic. In doing so, Hall agreed to remove the standard Covered Risk 11(a) in the ALTA policy form. That provision protects the insured against losses sustained because of lack of priority of the insured mortgage.

            The project continued but the loan became out of balance due to significant change orders. Hall stopped advancing funds after the owner stopped obtaining additional equity. Penta, however, continued its work for months later.

            Finding itself unpaid, Penta started foreclosure on its mechanic’s lien claims, claiming super-priority over Hall because Penta’s liens related back to Penta’s initial work which predated Hall’s construction loan. Hall received partial payment for its debt position, and then filed claims against Old Republic since Old Republic was unwilling to indemnify Hall for a loss of almost $5 million.

            The federal district court concluded that Penta’s liens were for unpaid work incurred before the policy date, and the policy afforded no coverage to Hall due to the deletion of Covered Risk 11(a). The court entered judgment for Old Republic. Hall appealed.

            In the US Court of Appeals, Hall contended that other provisions of the title policy offer Hall insurance for this claim. Old Republic responded that Hall agreed to remove the one portion of the policy that would have protected Hall – Covered Risk 11(a).

            And further to that point, Old Republic offered that not only did Hall agree to remove Covered Risk 11(a) but Hall also agreed to ALTA endorsement 32-06, which provides that the policy does not insure against losses due to mechanic’s liens arising from services not designated for payment in the construction loan finance documents.

            Old Republic wins, again. Hall loses, again. See Hall CA-NV, LLC v. Old Republic National Title Insurance Company; Cause 20-10268, US Court of Appeals, 5th Circuit, March 10, 2021: https://scholar.google.com/scholar_case?case=14431452547442516413&hl=en&as_sdt=6&as_vis=1&oi=scholarr.           

            Lessons / Questions / Observations:

  1. Lesson: Title insurance, often overlooked because it is arcane, abstruse, obscure, abstract, abstruse, and generally no fun to read and comprehend, is critically important. Title insurance companies write policies to protect themselves and limit their exposure. Those policies must be negotiated by property purchasers and their lenders.
  1. Observation: Why, you may ask, did Hall not seek recovery from the property owner? Although not clearly stated in the appellate opinion, it appears Hall may have done so but the owner’s bankruptcy precluded Hall from collecting all that was owing, leaving a balance under $5 million. And as a consequence, Hall then turned its gun turrets to Old Republic.
  1. Questions: Do you know how to review title insurance, both from the owner’s and lender’s perspectives? Are there people on your team who are tasked with this important job? Are you working with an experienced title agent who can offer helpful guidance?

                                                                                    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, April 2, 2021

REFUSING TO ALLOW A SUBLEASE

 

            H&B Realty leased a car lot to JJ Cars for a five-year term starting July 1, 2011. John Mokarzel, owner of JJ Cars, guaranteed the Lease obligations. JJ Cars was successful initially. But by February 2013 JJ Cars was in financial distress.

            John decided to close his business and sublet. From February 2013 until October 2015, three different businesses subleased the property from JJ Cars. Approval for the first and third was obtained from H&B’s owner Sterling Boyington. Evidently Boyington never objected to the second sublet although he knew of it and may have furnished tacit consent, if not actual approval.

            In November 2015 JJ Cars sought formal consent from H&B to sublease the property to Wholesale Motors. Boyington refused, claiming he disliked Wholesale’s owner, Dave McGovern.

            As a consequence, JJ Cars stopped paying rent. H&B evicted JJ Cars in March 2016, only a few months before the term was set to expire anyway. H&B sold the property two weeks later.

            Several months after the sale H&B filed a lawsuit against JJ Cars and John Mokarzel, alleging breach of the Lease and seeking damages for six months of rent. JJ Cars defended by claiming that H&B breached the Lease by refusing to allow the sublease to Wholesale Motors, and H&B failed to mitigate its damages.

            The trial court concluded that although JJ Cars failed to pay rent, H&B breached the Lease by unreasonably withholding its consent to allow the sublease to Wholesale Motors. The court further determined that H&B did not mitigate damages after JJ stopped paying rental. The court entered judgment in favor of JJ Cars and John Mokarzel, concluding that their breach – failure to pay rent – was excused by H&B’s Lease defaults – unreasonably withholding consent to sublease to Wholesale Motors and failing to mitigate damages.

            H&B Realty appealed.

            The Court of Appeals examined Article XIII of the Lease, and found that: (a) JJ Cars could not sublease without H&B Realty’s consent; (b) H&B could not unreasonably withhold its consent to a request for sublease; (c) H&B had the right to review each proposed subtenant’s credit, business experience, and financial statement; and (d) each subtenant had to agree to abide by the terms of the Lease.

            From there, the examination of the record revealed that no documents of Wholesale Motors were furnished to H&B. John Mokarzel testified that, simply put, H&B’s owner Sterling Boyington did not like Dave McGovern, owner of Wholesale Motors. Due to Boyington’s dislike of McGovern, there was no purpose in delivering documents and financial statements, and agreeing to abide by the terms of the Lease.

            The Court of Appeals determined that Boyington’s refusal to consider Wholesale Motors as a subtenant was a breach of Landlord’s duty to not unreasonably withhold consent. That breach ended any chance of JJ Cars to use the property in a way that would continue to generate income to pay rent.

            Boyington’s breach was material, and excused JJ Car’s failure to pay rent.

            JJ Cars wins again. See H&B Realty, LLC v. JJ Cars, LLC; Case 2021-ME-14, Maine Supreme Court; March 23, 2021: https://law.justia.com/cases/maine/supreme-court/2021/2021-me-14.html.           

            Lessons / Questions / Observations:

  1. Observation: Most commercial Leases require Landlord’s approval before a Tenant can assign or sublease. Some prohibit subleasing and assigning entirely. It seems inconsistent that a Landlord can prevent a financially distressed Tenant from assigning or subleasing, and yet not be found liable for failure to mitigate damages when the Tenant could not pay rent.
  1. Lesson: From this Court’s perspective, it is not enough for a commercial Landlord to reject a sublease application simply because the Landlord dislikes the owner of the proposed assignee or sublessee. If this Landlord had used the pretext of declining Wholesale Motors due to one of the reasons stated in the Lease (credit, business experience, financial statement), it likely would have sufficed and the outcome reversed.
  1. Questions: What does your Lease form say about Lease assignments and Premises subleases? Do the laws of your State add an overlay to that analysis? Will your Courts uphold the right of a Landlord to unequivocally say NO, then successfully chase the Tenant and Guarantor for damages?

                                                                                    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.