Now Tell Me Again: How Big Is That Property?

Bowen Zhu and Jain Yu contracted to buy a house in Harris County for $180,000. Seemingly, they intended to live there. But for this purpose it doesn’t matter.

The seller, listing agent, Harris County Appraisal District and Kai Lam all represented that the house had 2,722 square feet of living area. Kai Lam was the TREC-licensed broker representing Zhu and Yu. When Zhu and Yu initially viewed the property, Zhu told Lam that the house seemed smaller than 2,722 SF, but Lam assured Zhu that it only seemed smaller because it had an open floor plan.

On the day before closing Zhu told Lam he wanted to back out of the deal. Zhu claims that Lam told him he would get sued if he changed his mind. Lam gave Zhu a 1% purchase price rebate, and Lam persuaded the seller to discount the purchase price by $250 as a further inducement for Zhu to close.

After the closing and at Zhu’s request, the Harris County Appraisal Districted re-measured the house and found that its living area was only 1,967 square feet. The difference of 755 square feet is approximately 28% less than the square footage as represented to Zhu and Yu.

On a straight square footage basis, it is conceivable that Zhu and Yu paid $50,000 too much for the property.

The buyers sued Lam, Lam’s brokerage company Housesold Realty, Inc., the seller, the seller’s listing agent and others. All parties were dismissed (perhaps they settled?) but for Lam and HRI.

Finding no genuine issues of material fact, the trial court granted summary judgment for the broker Lam and his brokerage company HRI. Zhu and Yu appealed.

The buyers did not properly appeal the issue of monetary damages, and instead claimed that “damages are effectively presumed in this case.” Zhu and Yu’s testimony that the house had a value of $140,000 was given no probative value by the trial court. Also, it appears there was no expert testimony on this point, and so Zhu and Yu’s opinion of market value, without supporting comparables or other credible evidence, was merely conclusory, unsubstantiated and unreliable.

Since no authority was cited and since the buyers did not raise the argument in their response to Lam’s request for judgment in the trial court, the Court of Appeals had no choice but to forego awarding Zhu and Yu any compensation.

Buyers did, however, properly perfect their appeal regarding Lam’s and HRI’s breach of fiduciary duty owing to Zhu and Yu. To prevail under Texas law, the buyers must prove: (1) a fiduciary duty existed between Buyers and Lam; (2) Lam breached that duty; and (3) Buyers were damaged.

Lam and HRI defended the claim of breach of duty by asserting that Lam did not know the actual square footage, and that under Texas law Lam was neither required to measure nor investigate the size of the home.

Zhu and Yu were unable to prove that Lam knew or should have known the house was substantially smaller than 2,722 SF. Instead, the evidence seemed to show that Lam merely repeated what he was told from the seller and listing agent, and what he discovered by reviewing the HCAD website.

And Lam was correct on this point: unlike California and some other states, under 1992 Texas case law authority Lam had no duty to measure the property or further investigate.

The trial court’s Judgment was affirmed for Kai Lam and Housesold Realty, Inc. See Zhu v. Lam; No. 14-13-00368-CV, Texas Court of Appeals – Houston 14^th District, March 18, 2014. The broker won; the buyers lost; Lam did not breach his fiduciary duty to the Buyers by merely repeating information he had gained from the seller and public sources.

Lessons learned:

1.  Yes it is true that the broker was vindicated. However, a close reading of the appellate decision leads me to think this could have gone badly for the broker just as easily if the damages issue was properly presented.

2.  Don’t offer square footage representations. If you must do so, then clarify in writing that they are not your representations but rather come from the seller, appraiser, landlord, Central Appraisal District records or some other (hopefully public) source. And, that the buyers / tenants should independently verify the data before making any decisions.

3.  I don’t have a third lesson learned. It just felt a little, je ne sais quoi, empty without some text here.

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

Brokerage Commissions [redux]

Dean A. Smith Sales, Inc. (out of Pflugerville – what is the right way to pronounce Pflugerville anyway) entered into a listing agreement with Metal Systems, Inc. Dean, as broker, was engaged in 2008 to sell Metal’s business for $4.5 million, which amount included real estate owned by Metal.

Two years later Dean sued Metal for $160k in damages. The trial court ruled for Metal. Dean appealed.

The Listing Agreement stated that Dean was to receive a 7% commission if real estate was included. Evidently, although not specifically stated, when Metal learned that Dean did not have a TREC issued real estate brokerage license Metal refused to pay.

One can only assume that real estate was included in the deal. And the license issue was the cause of the non-payment.

Dean first argued that the transaction did not involve real estate, so no TREC license was required. However, the listing agreement stated otherwise.

Argument Number Two was that there was an oral amendment to the written listing agreement, removing real estate from it. Dean Smith submitted an affidavit stating that:

“I never had any expectation of a commission for the sale of real estate . . . The sale . . . was expected to be a stock transfer . . . The sales price listed in the contract was based on the value of the business without any real estate.”

The Court of Appeals used Dean’s own Listing Agreement against him to refute this contention.

The Court then evaluated the Texas Real Estate License Act regarding commission claims. Section 1101.806(b) of the TRELA states that a party may not collect a real estate commission unless the party proves it was a license holder at the time the act [for which a commission became payable] was commenced.

And so the Court of Appeals concluded: (a) a listing agreement was signed; (b) the listing agreement provided for the disposition of real estate (and fairly, other assets too); (c) real estate services were provided by Dean as defined by the TRELA; and (d) Dean did not hold a brokerage license issued by TREC.

Do you recall the previous article about quantum meruit? Well, of great interest to me anyway, the Court teased us with that as Argument Number Three, but then dismissed it on a technicality.

So, Metal Systems, Inc. wins again, and Dean A. Smith Sales, Inc. loses again.

See Dean A. Smith Sales, Inc. v. Metal Systems, Inc.; 05-11-01449-CV; Texas Court of Appeals 5^th District, Dallas; March 11, 2013.

Lessons learned:

1.      If you want to get paid a commission for a deal involving real estate, you’d better have a TREC brokerage license. And a written commission agreement too. Which describes the property with specificity.

2.      Business brokers not holding TREC licenses might be wise to engage TREC brokers for the real estate component of the deal.


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