USURY: TEXAS STYLE

             American Pearl Group operates in the credit card payment processing industry. National Payment Systems submits merchant processing applications and receives a percentage of the transaction fees. Pearl sells NPS’s services in exchange for a share of the payments received by NPS. 

            Pearl has similar arrangements with other intermediaries. Which generates a stream of fees in Pearl’s portfolio. 

            In May 2019, NPS loaned $375k to Pearl, to be repaid with interest over 42 months. The Loan Agreement obligated Pearl to repay $685k, pursuant to a schedule allocating each month’s payment between principal and interest. The schedule required increasing total monthly payments with constant principal and escalating interest. 

            In March 2022, Pearl sued NPS, claiming usury. NPS defended by using the “spreading doctrine.” The district court calculated interest by spreading it over the term of the loan in equal parts, as authorized by Supreme Court precedent of 1937 and later codified. In the “equal parts” method of “spreading,” usury interest boundaries are calculated by multiplying the total principal by the statutory maximum interest rate and then by the term of the loan. 

            Using that method, the district court multiplied $375k (NPS loan principal) by 28% (maximum Texas legal interest rate for commercial loans) and by 3.5 years, to calculate a maximum allowable interest of $367k. Because that figure – the usury boundary using these variable amounts – was more than the $310k interest payments actually specified in the Loan Agreement’s schedule, the district court found no usury violation.

             Judgment was rendered for NPS. Pearl appealed. 

            Pearl contends that 25-year-old revisions to Texas laws require courts to apply the “actuarial method” for each usury analysis, and make calculations based on declining principal balances for each payment period. Not based on the initial total principal amount. 

            Using Pearl’s “actuarial method,” the total permissible interest would be $207k. Which would render usurious the $310k in interest charged by NPS. 

            Texas Finance Code 306.004(a) requires that usage of the “actuarial method” is employed to determine if a loan is usurious. However, the phrase “actuarial method” is not defined in that statute, or elsewhere in the Finance Code. 

            This failure sent the Supremes to Black’s Law Dictionary. BLD defines “actuarial method” as a means to determine interest by using the loan’s annual percentage rate to separately calculate the finance charge for each payment period. Which is quite different from Texas’ predecessor usury statute, requiring the “equal parts” method. 

            This led the Supremes to examine legislative history. The Texas Legislature changed the language in 1999 to address commercial loans and loans secured by real property: https://statutes.capitol.texas.gov/Docs/FI/pdf/FI.306.pdf. It seems that no one thought to assert usury challenges after 1999, predicated on the new text changing “equal parts” to “actuarial method.” 

            However, commencing Sept 1, 1999, if a Texas commercial loan provides for periodic principal payments, then using the “actuarial method” of spreading requires courts to base their interest calculations on the declining principal balance for each payment period. And as a consequence, the NPS Loan is usurious. 

            The Supreme Court answered YES to the certified question presented to it by the US Court of Appeals for the Fifth Circuit. Which likely means that Pearl wins, NPS loses, and many Texas lenders are nervous. 

            See American Pearl Group, LLC v. National Payment Systems, LLC; Texas Supreme Court; Cause No. 24-0759; May 23, 2025: https://cases.justia.com/texas/supreme-court/2025-24-0759.pdf?ts=1748009667. 

            The concept of usury is abstruse and although easily defined, can be difficult to calculate. This case may result in more usury challenges. In some situations, a successful usury challenge can lead to the forfeiture of not only interest but principal too. 

            Regulatory issues, too. 

            To avoid future problems, lenders may need to audit their loan portfolios to gauge exposure and offer corrections. 

                                                                        Stuart A. Lautin, Esq.* 

* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York

DEED RESTRICTION FAILURE

         Almost 40 years ago, the State of Texas acquired over 10,000 tracts of land for construction of the Superconducting Super Collider. After Congress defunded the project, the State tasked the Texas General Land Office with selling the parcels. 

        In 1988 the State sold approximately 100 acres to David Lemon. The deeds restricted the property to residential use, stating “no more than two residences may be built on any five acre tract.” 

         In 2019 the assemblage was sold to a developer who proposed 73 residences on the lots, with each to be between one and two acres in size. The Planning & Zoning Commission of the City of Waxahachie approved the final plat of Sunset Meadows, with its 73 lots. 

         Following approval by P&Z, the developer submitted the plat to the Ellis County Commissioners’ Court for consideration. After a 30-day period passed, the plat was approved by operation of law since the Court elected not to take any action. 

       Towards the end of 2020 the developer started grading and excavating. At that time three adjacent landowners formed an Association to enforce the original 1988 deed restrictions. The Association then asserted claims for declaratory and injunctive relief, based on the premise that the restrictions limit the 100-acre parcel to no more than 40 residences, each two of which must be on a tract of at least five acres. 

     The trial court granted judgment for the Association, finding that the restrictions limit development to no more than two residences on each five-acre tract, and holding that the developer’s plan to create 73 lots with each containing a residential structure is violative of the 1988 restrictions. 

        The developer appealed. The Texas Court of Appeals affirmed. 

        The developer appealed to the Supreme Court of Texas. 

       The high Court determined that the restriction limits density of residential development, not tract size. But it was drafted as an incomplete density restriction. The Court concludes that the developer is incorrect in reading the restriction to apply only to tracts of exactly five acres, as this leaves no room for reasonable implications. 

         Further, the developer is also incorrect to suggest that the restriction applies only to tracts of five or more acres. 

         And, not to omit the Association, the Court finds that it is incorrect in arguing that the restrictions set a minimum useable tract size of five acres so that no residential structure can be built on small parcels. Tract size and development density are two distinct variables that affect land use, and a restriction on one cannot always be read as a restriction on both. 

       The conclusion reached is that deed restrictions must be clear and implications must be reasonable. As written, these restrictions do not prohibit the owner of a parcel less than five acres from building one residence. But the same restrictions will disallow construction of two or more residences on a sub-five-acre parcel. 

      In closing, the Court states that the parties to the 1988 deed could easily have negotiated for a minimum tract size, if they wanted to avoid a crowded subdivision. But they did not and the Supreme Court is unwilling to impose it now merely because it appears to be incomplete. Or inadequate. 

         Likely both. 

     The Judgment is reversed; the developer may proceed. See EIS Development v. Buena Vista Association; Texas Supreme Court; Cause No. 23-0365; June 13, 2025: https://law.justia.com/cases/texas/supreme-court/2025/23-0365-0.html. 

     Random PS thought: Texas has a statute which provides that a restrictive covenant must be “liberally construed to give effect to its purposes and intent.” See TPC 202.003(a): https://statutes.capitol.texas.gov/Docs/PR/pdf/PR.202.pdf. The Supremes determined that not even this law will save an otherwise ambiguous deed restriction. 

                                                                        Stuart A. Lautin, Esq.*

* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York

AS IS PROVISION VS. FRAUD

             Nabeel Hussain bought residential property in 2017, but used it to sell pre-owned cars. Change in use happens routinely in Houston, where there is no public zoning. 

            IYKYK. 

            Hussain wanted to convert the residence into a 2,900 SF auto dealership and office in 2019. Before this type of conversion project can commence, the City of Houston requires building permits, and before it can be occupied again, certificates of occupancy. 

            Hussain’s construction plans were denied twice due to noncompliance with the Houston City Code and its regulations. Regardless, Hussain started construction anyway in 2020. 

            In 2021 a prospective buyer reviewed an advertisement offering the property for sale. The marketing piece represented that the property was an office building and park lot, used for the sale of pre-owned cars and trucks. The advert also represented that the property sale included “state-of-the-art cameras and security units.” 

            The buyer was familiar with this industry, as it was then operating its own used car dealership on rented property. So the buyer contacted Hussain and expressed interest in relocating their car lot from their rented property to the office and sales lot owned by Hussain. 

            The buyer toured the property and noted that it was being used as a car lot. The buyer also observed offices, equipment, furnishings, and persons working at the property who were identified as employees of “Houston Direct Auto.” 

            When questions were asked of Hussain about a certificate of occupancy, the buyer was informed that a C/O had been issued but the document had been misplaced. 

            So the buyer’s affiliate, Euro Property LLC, entered into a Contract in July 2021 with Hussain’s company to purchase the property for $1.6 million. The Contract included a provision that Euro was accepting the property “AS IS WHERE IS.” In addition, Euro was granted a 20-day feasibility period to inspect the property. 

            The contract also included the conveyance of the security cameras and systems without additional cost. 

            Hussain’s company furnished a Seller’s Disclosure document. In it, seller represented that there were no material physical defects, or conditions that violated laws or ordinances. 

            Hussain did not disclose to Euro that: (a) the City of Houston denied construction plans to convert the property from residential to commercial; (b) Hussain proceeded with construction anyway; (c) the property never received a construction permit; (d) the property never received a certificate of occupancy; and (e) using the property for a commercial purpose without a C/O violated City of Houston Ordinances. 

            After Closing, Euro discovered that the property did not have a C/O. The City of Houston required changes and corrections to material defects before it would issue a C/O. Euro hired contractors and paid $120,000 to complete the repairs and remediation efforts, resulting in the final and successful issuance of a C/O. 

            Euro was unable to use the property as a car lot after Closing for a year. Which meant that Euro’s tenant – Auto Selection – refused to pay rent, to Euro’s loss of $220,000. 

            Following Closing, Euro learned that Hussain had removed all cameras and security systems. Replacement of the equipment cost Euro $18,000. 

            Litigation was asserted in 2022 for fraud. The trial court entered a default judgment against the seller. The remaining defendants filed a motion for summary judgment, which the trial court granted. 

            Euro appealed. 

            To prevail on a fraud claim, Euro would need to present evidence of a false representation of a material fact, made to induce the person to enter into a contract and relied on by that person. Or, a false promise to do an act, if the false promise is material, made with the intent of not fulfilling it, made to induce a person to enter into a contract, and relied on by that person. 

            Hussain argued there could be no liability since the contract contained an “AS IS WHERE IS” clause. While it is true that a valid “as is” clause can negate the causation element as a matter of law, it is also true that a buyer is not bound by an “as is” provision induced by fraudulent representation or concealment of material information. 

            Hussain represented to Euro that the property had a C/O. Hussain knew otherwise. Hussain also knew that it was vital that Euro acquire only property that had a valid C/O. 

            The “AS IS WHERE IS” clause will not overcome fraud and concealment of important facts. Euro wins; Hussain loses; the trial court’s judgment in favor of Hussain is reversed. 

            See Euro Property LLC v. Hussain and Franco; Case No. 14-24-00170-CV; Texas 14^th Court of Appeals; April 29, 2025: https://cases.justia.com/texas/fourteenth-court-of-appeals/2025-14-24-00170-cv.pdf?ts=1745931286. 

                                                                        Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York

FAILURE TO DISCLOSE, ROUND NEXT

            Jacqueline and Thomas Onions hired real estate agent Laura Kopchynski to list their South Carolina property for sale. Sellers indicated in a Disclosure Form that there was no fungus at the property.

            Laura quickly found buyers, who obtained an inspection report noting the ground is damp and not covered by a vapor barrier in a crawl space. The buyers then engaged Andy Ward, an exterminator, who found elevated moisture conditions of 20-25%, evidence of wood decay fungi and visible damage.

            Sellers engaged a handyman to repair the crawl space, install a vapor barrier, and related work.

            As closing approached, the first buyers hired other exterminators to prepare a report. Again, an elevated wood moisture content of 20-25% was found. For reasons unrelated to the property condition, the first buyers terminated their contract.

            Laura went back to work and procured Rory and Kimberly Isaac as the next buyers. Laura offered to send the last inspection report to M/M Isaac, but their agent declined this offer. Regardless, Sellers furnished M/M Isaac with their previous Disclosure Form.

Seller’s previous Disclosure Form indicated the absence of fungus.

            Sellers and M/M Isaac signed a contract. The new buyers hired an inspector, who noted there was no evidence of fungus and the moisture content was not excessive at 8-18%.

            M/M Isaac closed on the Property. Two days later, heavy rainfall flooded the crawl space. M/M Isaac hired Andy to inspect it. Andy found moisture of 27-32%, active fungi, and related damage.

            M/M Isaac asserted a claim against Laura for fraud, negligence, and negligent misrepresentation. The trial court granted summary judgment for Laura on all counts, noting that M/M Isaac had relied on their own inspection, which they had commissioned, when they closed the purchase. The trial court further determined that Buyers could not hold Laura responsible for inaccuracies in that report.

            Buyers appealed.

            The court of appeals reversed the judgment of the trial court regarding negligent misrepresentation and allowed M/M Isaac to prevail on that count.

            So Laura appealed.

            The Supreme Court started with an analysis of negligent misrepresentation. There are six elements that must be established: (1) defendant made a false representation to plaintiff; (2) defendant had a pecuniary interest in making the statement; (3) defendant owed a duty of care to communicate truthful information to plaintiff; (4) defendant breached that duty; (5) plaintiff justifiably relied on the representation; and (6) plaintiff was damaged as a result of reliance on the representation.

            The Court then stated that “There is no liability for casual statements, representations as to matters of law, or matters which plaintiff could ascertain on his own in the exercise of due diligence” [italics added by yours truly].

            As a real estate licensee, Laura owed a duty to M/M Isaac to be truthful. That duty, however, does not obligate Laura to inspect property to confirm or deny statements made by Sellers. And as a consequence, the Court determined that M/M Isaac cannot claim that they reasonably relied on any representation of Laura concerning the condition of the Property.

            The judgment of the court of appeals is reversed. The judgment of the trial court is reinstated. Laura wins again. See Isaac v. Onions and Kopchynski; Supreme Court of South Carolina, Case 2023-001462; April 23, 2025: https://cases.justia.com/south-carolina/supreme-court/2025-28274.pdf?ts=1745419292.           

Questions / Issues:

 

1.         But Wait, What About the Duty to Disclose? Other States require the full disclosure of all material conditions and latent defects actually known to a licensee and principal. Was this duty adequately discharged here?

2.         But Wait, Don’t REALTORS® Have a Duty to be Truthful? I don’t know if Laura is a REALTOR® or not; the fact that she is a South Carolina licensee does not necessarily mean she is also a member of the National Association of REALTORS® or one of its local boards. But if she is . . . then REALTORS® must be “honest and truthful in their real estate communications.” See Article 12, National Association of REALTORS® Code of Ethics and Standards of Practice effective January 1, 2025: https://www.nar.realtor/sites/default/files/2024-12/2025-COE-Standards-of-Practice-2024-12-24.pdf. 

3.         But Wait, Don’t REALTORS® Have a Duty to Disclose all Pertinent Facts? REALTORS® must “avoid misrepresentation or concealment of pertinent facts relating to the property or the transaction.” However, REALTORS® do not have an obligation to discover latent defects. See Article 2 and related Standards of Practice, National Association of REALTORS® Code of Ethics and Standards of Practice effective January 1, 2025: https://www.nar.realtor/sites/default/files/2024-12/2025-COE-Standards-of-Practice-2024-12-24.pdf.

 

                                                                        Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial and Residential Real Estate Law,

Texas Board of Legal Specialization

Licensed in the States of Texas and New York

REALTY OR PERSONALTY?

    There are matters of law that have forever remained unclear. And presumably, always will be.

 

    Pornography vs. obscenity is one. Limitations to constitutionally-protected free speech are another.

 

     Realty vs. personalty is a third.

 

            Bryce Corp operates a manufacturing plant in Searcy, Arkansas. Bryce makes flexible packaging, such as potato chip bags and zip pouches. As part of the production process, the Searcy plant operates an 80-foot-long industrial lamination line with multiple machines.

 

            A roll of unlaminated material is placed on a spindle. The material is then unwound and fed through a series of machines for lamination. At the end, another machine rewinds the laminated material into a new roll.

 

            This last machine is a “rewinder.”

 

            In 2010 a new rewinder was purchased from Bobst Italia, transported to the Searcy plant in sections, and assembled there over a 10-day period with the help of a forklift. The machine weighed 10 tons and was affixed to the floor of the Searcy plant with metal ties. The rewinder’s electrical and air pressure systems were then connected to the plant’s systems to make the rewinder operational.

 

            Vernon Holland worked at the Searcy plant as a laminator helper. In November 2016 the material on the lamination line became miswound, and production was stopped. Vernon opened the rewinder and entered the machine to fix the issue.

 

            When Vernon entered the rewinder, one of the two spindles was still turning. While pulling the miswound film, Vernon backed into the turning spindle and was propelled through the rewinder.

 

            Vernon died in May 2017 as a consequence of his injuries.

 

            Robert Cearley, the personal representative of Vernon’s estate, sued Bobst Group North America, the equipment manufacturer’s affiliate. Bobst’s primary defense was based on a statute of repose.

 

            The district court granted Bobst’s motion for summary judgment. Cearley appealed.

 

            Arkansas has a statute of repose for claims arising from personal injury or wrongful death caused by construction defects. The statute provides that all claims must be asserted within four years after substantial completion of the improvement to real property.

 

            As a consequence, Cearley’s case could proceed only if the lamination equipment is personal property. However, if it constitutes real property, then Cearley’s case must fail as the claim was not filed within four years after the new rewinder became “an improvement to real property.”

 

            The Court of Appeals determined that the machinery: (a) was affixed to the real property, (b) furthers the purpose of the realty, and (c) was designed for long-term use in connection with the real estate. As a consequence, the machinery is a permanent improvement to the realty for purposes of the statute of repose.

 

            The lamination machine was determined to be realty. Not personalty. This conclusion was reached although the equipment was secured to the floor only with metal ties.

 

            Since the equipment was incorporated into the (and thus becomes) realty, the statute of repose applies. Claims involving this rewinder, installed in 2010, must be asserted by 2014.

 

            Not 2023.

 

Cearley loses; Bobst Group NA again prevails. See Cearley v. Bobst Group North America; US Court of Appeals, 8^th Circuit; Case No. 23-1101; February 21, 2025:  https://cases.justia.com/federal/appellate-courts/ca8/23-1101/23-1101-2025-02-21.pdf?ts=1740155438.

 

            Questions / Issues:

 

1.         Why Is This Realty? This case gives little guidance about its conclusion. The only elements to justify this result are that the machinery: (a) was “affixed” to the real property; (b) “furthers the purpose” of the realty, and (c) was designed for long-term use in connection with the real property.

 

            While (c) is undoubtedly true, one must wonder what evidence was submitted and compelled the Court of Appeals to find that (a) and (b) are also true. Because all we know from the appellate decision is that the equipment was secured to the floor with metal ties. Then, electrical and air pressure systems were connected.

 

2.         Alt-Recourse. Is it possible that the Court took judicial notice of parallel litigation asserted by Cearley against Siemens and others, and perhaps assumed that Cearley would prevail there?

 

3.         Practice Point. This Court finds that a large, expensive, but replaceable fixture lost its character as personalty and instead was converted to realty at installation. I am unconvinced that other courts would follow a similar path.

 

Regardless, the message is that timely filing of claims is essential. Ignoring or missing these deadlines can prove to be a fatal mistake.

 

                                                                        Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial and Residential Real Estate Law,

Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York 

TENANT ESTOPPEL CERTS REDUX

         While working with commercial real estate buyers, sellers, landlords, tenants, title agents, and lenders, I am often asked to assist in developing Estoppel Certificates. Properly worded Estoppel Certificates assure no claims or defaults exist in critical third-party documents.

            The need for clear, current Certificates looms large when buying or leasing income-producing property. Transaction parties and their lenders need to know there are no significant issues regarding those whose financial obligations make the investment worthy, and to cover title and survey matters.

 Usually the estoppel request relates to tenants, but sometimes the signatories are other parties who have an interest in the asset such as option beneficiaries, easement estate holders, prime and ground lessors, mortgagees, past owners, HOAs and POAs, those responsible for shared amenities, and similar.

            Sometimes an exact form of Estoppel is attached to a purchase and sale agreement and Seller or Landlord must furnish it as a condition to Closing. In other situations the parties agree to cooperate to obtain Certificates before Closing or within an inspection period.

            In 2022 CEZ entered into a contract with 755 N Prior Ave. The agreement provided that for $26 million CEZ would purchase from 755 a building occupied by commercial tenants.

The contract obligated 755 to “reasonably cooperate” with CEZ to obtain tenant estoppel certificates.

            Before Closing the parties discovered errors in the square footage measurements of tenants’ units. These measurements were used to assess and collect base rents, common area maintenance charges for taxes, insurance, OpEx, property management fees, and other amounts identified in the leases. Because of these errors some tenants owed base rent and others owed additional NNN reimbursements.

            Some owed both rent and expenses.

            Due to the computational errors determined as a function of the new measurements, the parties agreed to reduce the purchase price to $15.1 million. Closing was scheduled for October 30, 2023.

            As Closing approached, CEZ asked to delay Closing to February or March 2024, while suggesting that tenants needed to be notified that lease rental rates would increase after the purchase was concluded. The opinion doesn’t clearly state it, but the implication is that CEZ proposed that the form of Estoppel Certificate reflect the new rate structure.

            755 refused. 755 asserted that its duty to “reasonably cooperate” did not include addressing CEZ’s requests, which – 755 claimed – would have necessitated the pre-Closing renegotiation of lease terms of almost 50 tenant leases.

            755 believed that 755 had already assumed responsibility for rental deficits caused by the erroneous measurements, which was reflected in the 40% purchase price deduction provided in the Contract amendment. Consequently there was no need to further address the issue in the Estoppel Certificates.

            The matter was not resolved. On the date set for Closing CEZ demanded that 755 furnish satisfactory Estoppel Certificates. When Estoppel Certificates were not delivered and the deal failed to close, 755 notified CEZ of its intent to terminate the Contract.

            CEZ sued 755 in November 2023 for breach of contract and to prevent 755 from terminating it. The district court denied CEZ’s request for preliminary injunction.

            CEZ appealed.

            The Appellate Court reviewed the factors required to issue an injunction. And agreed with the district court.

            There was no abuse of discretion and even assuming the possibility of irreparable harm, CEZ failed to demonstrate a probability of a successful outcome at trial. 755 prevails. See CEZ Prior LLC v 755 N Prior Ave LLC; US Court of Appeals, 8^th Circuit; Case No. 24-1389; January 24, 2025: https://law.justia.com/cases/federal/appellate-courts/ca8/24-1389/24-1389-2025-01-24.html.

            Questions / Issues:

1.         For Want of a Nail. The contracting parties failed to agree upon an exact form of Estoppel and attach it as an exhibit to the Contract. All that remained of this mission-critical issue was an obligation of the parties to reasonably cooperate. It could have been dangerous for CEZ (and its lenders) to proceed without the minimal assurances in a properly worded Estoppel Certificate.

2.         Purchase Price Reduction. Danger of a missing or incomplete Estoppel Certificate notwithstanding, wasn’t the purpose of a 40% purchase price reduction intended to serve as an incentive for overlooking the estoppel requirement? And if that is correct, why didn’t the contract amendment waive that obligation, or otherwise address it by attaching a form of Certificate?

3.         Practice Point. Be sure your Contracts have both an Estoppel Certificate form attached as an exhibit as well as language requiring insertion of such additional provisions as buyer or tenant (or its lenders or the title agent) may require after site inspections and review of diligence docs. If the executed Certificates don’t contain what is needed or reveal issues, then properly drafted Contracts should give buyers and tenants the right to exit and recover all earnest monies and deposits.

 

                                                                        Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial and Residential Real Estate Law,

Texas Board of Legal Specialization

Licensed in the States of Texas and New York

 

 

CAN AN UNRECORDED AGREEMENT BE AN EASEMENT?

             425 Soledad bought an office building in 2005 from a Seller who owned an adjacent hotel and parking garage. At Closing, Buyer and Seller executed a parking agreement, reserving 150 parking spaces on the fourth floor of the garage for office occupants. 

            The parking agreement stated that it would “run with the land and inure to the benefit of, and be binding upon, [the parties] and their respective successors and assigns in title.” For reasons unstated in the Opinion, the agreement was not recorded in the County’s real property records. 

            In 2006 HEI San Antonio Hotel purchased the adjacent parking garage and hotel in a financed transaction. The loan included a $33 million A-Note and $26 million B-Note both payable to Merrill Lynch, secured by a mortgage on the garage and hotel property. 

            Merrill Lynch requested an estoppel from the office owner to the effect that the parking agreement remained in full force and effect. 

            Cypress Real Estate then purchased the B-Note from Merrill Lynch in 2008, without representation by Merrill Lynch regarding the parking agreement. The parking agreement was contained in materials delivered to Cypress. 

            In 2010 Cypress placed the hotel and garage into a receivership through an action in State district court. Cypress formed an affiliate – CRVI – to buy the garage and hotel from the receiver. 

            Then in 2016 an office tenant requested garage space for its occupants. CRVI refused, so the office owner, 425 Soledad, asserted litigation to enforce the parking agreement through a judicial declaration. 

            425 Soledad’s principal claim was that the parking agreement runs with and continues to burden ownership of the parking garage. Like an easement. CRVI asserted that the parking agreement was merely an agreement between two contracting parties, not an easement, and not binding against other parties. 

            Recall that the parking agreement was never recorded with the County Clerk. 

            The trial court concluded that, although unrecorded, the parking agreement is an enforceable easement. And further, knowledge of its existence was imputed to CRVI because “there was enough information to trigger reasonable inquiry by a prudent purchaser . . . which inquiry would have led to the discovery of the parking agreement.” 

            CRVI appealed. 

            The court of appeals agreed with the trial court’s conclusion that the unrecorded parking agreement is an easement, but found that 425 Soledad could not enforce it against CRVI. The court of appeals relied on Texas Property Code Section 13.001(a), which provides that an unrecorded interest in real property “is void as to a creditor or to a subsequent purchaser for a valuable consideration without notice.” 

            425 Soledad appealed. 

            The Supreme Court focused on several issues. But one is prominent – notice. Following the chain of ownership, Merrill Lynch had actual notice of the parking agreement because it requested that 425 Soledad confirm that the agreement remained “in full force and effect.” The closing binder from Merrill Lynch, available to both Cypress and CRVI, contained materials that revealed the existence of the parking agreement. 

            The Supremes concluded that CRVI possessed sufficient information to cause a reasonable person to inquire further. And that CRVI is held to the knowledge such an inquiry would have revealed. 

            CRVI had received multiple appraisals describing the parking agreement. HEI had a copy of it, but CRVI never requested it. One charged with the duty of conducting diligence may not ignore readily available facts (to paraphrase the Supremes). 

            Because the parking agreement was unrecorded, a subsequent buyer or lender without notice of it would take the property free of it. But in this case, CRVI had a duty to inquire. The facts available to CRVI, if examined, would have revealed the agreement. The agreement was drafted in a manner that was intended to bind future property owners and lenders. 

            Consequently, even though unrecorded, the parking agreement satisfies all easement requirements, regardless of the Texas Property Code. At least between the parties that are before the Supreme Court of Texas. 

            The judgment of the court of appeals is reversed; the unrecorded parking agreement is an easement and binds CRVI. 425 Soledad wins; CRVI loses. See 425 Soledad v CRVI Riverwalk; No. 23-0344; Texas Supreme Court; December 31, 2024: https://cases.justia.com/texas/supreme-court/2024-23-0344.pdf?ts=1735657823. 

            Questions / Issues: 

1.         Why Didn’t 425 Soledad Record It? It seems clear that 425 Soledad needed the right to use the 4^th floor of the parking garage for its office tenants. I am struggling with the reasons why 425 didn’t record it. Further, why 425’s mortgage lenders didn’t require it. And I see no ability of 425 to include it as an insured estate in the owner policy of title insurance obtained by 425 at the time of purchase, as well as the title policies issued to 425’s lenders. 

2.         Supercharged Diligence Obligation. Some may read this case to conclude that a right to review documents is equal to an obligation to review documents, which then imputes knowledge to the person who may have failed to review everything in the binders, data room, online, or on-site. After all, this is now Supreme Court authority from a State that understands commerce. 

3.         This Slope Has a High Moisture Content. Is it reasonable to charge a buyer or lender with knowledge of matters unknown to the lender or buyer, which could have been discovered before Closing with a more stringent review? Instead, shouldn’t the aggrieved buyer or lender seek post-Closing recourse against the party with whom they have privity, that failed to disclose? 

4.         And What of the Legislation? Texas Property Code 13.001(a) provides that only recorded documents bind creditors and buyers. The current version of the law was enacted in 1983. Why – he asks rhetorically – is it ignored? 

                                                                        Stuart A. Lautin, Esq.*

* Board Certified, Commercial and Residential Real Estate Law, Texas Board of Legal Specialization

 

Licensed in the States of Texas and New York