RED LETTER ALERT - TEXAS TENANTS MAY BE FOUND LIABLE FOR DAMAGES THEY DID NOT CAUSE!

Carmen White signed a Texas Apartment Association residential lease. Section 12 provided that Carmen must reimburse the landlord for all damages caused to the apartment community by her negligence and also caused by any other party not due to landlord’s negligence or fault.

Carmen received a new washer and dryer from her parents. She was able to connect the washer but she could not connect the dryer because the cord sparked and the circuit breaker tripped. So at Carmen’s request an apartment employee connected the dryer for her.

It was only a few days later that Carmen’s apartment and adjoining units were destroyed in a fire that originated in Carmen’s unit. Evidently Carmen was using the dryer to separate allergens from dry and unwashed items.

The fire started in the dryer. The casualty loss was over $83,000.

Philadelphia Indemnity paid the claim and demanded reimbursement from Carmen. When payment was not forthcoming, Philly Indemnity brought a lawsuit against her for negligence and breach of contract.

At trial, the jury found that Carmen breached the lease agreement by failing to pay for the loss (recall that an employee of the Landlord installed Carmen’s dryer!). The jury awarded $93,000+ to Philly Indemnity.

Carmen petitioned the trial court for judgment in favor of Carmen notwithstanding the jury’s decision. The trial court agreed with Carmen without specifying the reasons, and essentially ignored the jury’s verdict.

Carmen won; Philly Indemnity appealed.

The Texas Court of Appeals affirmed the trial court’s decision that the jury was wrong, based on the reasoning that the reimbursement provision in the TAA Lease was void. The Court of Appeals reasoned that it is against Texas public policy to hold residential tenants liable for the conduct of others over whom such tenants have no control. Such as the Landlord’s employee who negligently installed the dryer.

Philly Indemnity appealed again.

The Texas Supreme Court evaluated the facts and Lease. In a 36-page opinion, the Court concluded that: (a) the general rule in Texas is that parties may contract as they wish if there is no violation of law or offense to Texas public policy; (b) Texas landlords may impose virtually unlimited liability upon their tenants; (c) the reimbursement policy is enforceable; but (d) essential facts were not properly developed in the trial court.

The Supremes sent the case back to the trial court to find those missing “essential facts,” but in doing so the Supremes also advised that while the Court of Appeals’ conclusion may have been correct, their reasoning was not. Meaning, because the facts were not properly developed the Court of Appeals affirmation of the trial court’s Judgment was correct, but their reasoning that the repair reimbursement clause was void because it violated Texas policy was incorrect.

Whew. Complicated stuff. No wonder it took 36 pages to explain.

So far, Carmen White has won at every turn. See Philadelphia Indemnity Insurance v. White; Cause No. 14-0086; Texas Supreme Court; May 13, 2016: http://docs.texasappellate.com/scotx/op/14-0086/2016-05-13.guzman.pdf.

Lessons learned:

1.      I was surprised at this outcome. Every other year when our Texas legislature meets we get more laws in favor of consumers in all areas, including residential leasing. It doesn’t comport with our Texas system of favoring residential consumers to hold such tenants liable for virtually anything that happens at the community, as long as it was not caused by Landlord’s negligence.

2.      Seemingly Texas landlords may now impose further obligations on their tenants, including liability for matters beyond the control of those tenants. If our 2017 legislature doesn’t fix this problem, then based on this new Supreme Court authority a Texas residential tenant may now be found liable for a multi-million dollar loss which the tenant did not cause.

3.      Perhaps property managers should require substantial renters’ insurance from all tenants as a condition to allowing the tenants to move into the dwelling. Because as a matter of practicality, few residential tenants would be able to pay for the loss.

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

Jackin' with Effective Dates

Pursuant to a Lease of September 3, 2004, Sidney Wicks leased various commercial properties in Addison Texas to Transcontinental Realty Investors. On May 17, 2006, Sidney formed the Sidney Wicks Revocable Trust and assigned all of his properties to the Trust. The assignment was not made in the traditional form of Deed, but rather in a more general form of “Assignment and Declaration,” which presumably was not recorded with the Dallas County Clerk.

TRI began making rental payments to the Trust on receipt of the Assignment and Declaration.

On December 2, 2010, Sidney filed a lawsuit against TRI for breach of the Lease, then later amended it to substitute the Trust as the Plaintiff instead of Sidney. TRI answered the lawsuit by contending that the Trust lacked standing to assert claims, stating that Sidney should have been the correct party – not his Trust – as Sidney failed to convey his property interests by Deed.

TRI’s point was that the 2006 Assignment and Declaration is not effective in Texas to transfer ownership in real estate. Only Deeds in Texas would suffice for that purpose. And, if the Assignment and Declaration is ineffective, then the Trust lacked standing or capacity to sue TRI as only Sidney would have that right.

On July 1, 2011, the trial court granted the Trust’s Motion for Judgment, finding that there were no material issues of fact in controversy, and that the Trust was entitled to Judgment by operation of Texas law.

The trial court did not deal with damages though, and reserved that issue for a jury trial to be conducted more than one year later.

On September 6, 2011, Sidney executed and recorded a General Warranty Deed which transferred his real estate to the Trust. On the same date Sidney also executed an “Assignment and Assumption of Lease.” Both the Assignment and the Deed stated that although the documents were signed on September 6, 2011, they each had an “effective date” of May 17, 2006. Over five years prior to the date that each was executed and the Deed recorded.

Having already won Round One, the issue of damages owed by TRI to the Trust proceeded to a jury trial. In October 2012 the jury determined in Round Two that TRI owed the Trust $1 million plus interest, attorney’s fees and expenses.

The trial court converted the jury’s award to Final Judgment. TRI appealed.

TRI again claimed that the Trust lacked standing in Court. That Sidney failed to timely sign and record a Deed to the Trust. That using an artificial “effective date” was not lawful. And that Sidney would have been the proper party in interest at the time of the lawsuit. Not the Trust.

The Trust countered by arguing that there was no provision in Sidney’s Lease with TRI requiring that an assignment would only be effective upon execution. And, consequently, Sidney was not prevented from executing the docs in 2011, with a 2006 “effective date.”

The Appellate Court agreed with the Trust. Sidney’s Trust won and Transcontinental Realty Investors lost. See Transcontinental Realty Investors, Inc. v. Sidney Wicks, Trustee of the Sidney Wicks Revocable Trust; No. 05-13-00362-CV; Texas Court of Appeals; 5^th District; August 5, 2014.

Lessons learned:

1.  I see this issue often. Parties want to make documents “effective” as of a date that is not identical to the date the documents were actually signed, notarized and / or recorded. Title companies see this daily. In my world, the documents and the Settlement Statements very rarely line up 100% with the actual date of closing / funding / recording.

2.  This appellate decision makes clear that, at least in Texas and assuming there is no prohibition against it in documents already signed by the parties, using an artificial “effective date” can be lawful.

3.  Practice Point: Although using an “effective date” that does not exactly line up with the “execution date” may be Ok generally, I suspect it may not be acceptable for tax purposes, including federal income tax, Texas franchise / margin tax, Texas sales tax, and even local ad valorem tax. Be careful and get professional advice before you go jackin’ with effective dates.

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