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