Leasehold Construction Goes Bad

Body Bar, LLC, desired to open an upscale Pilates studio and juice bar in Plano, Texas. So Body Bar signed a lease for commercial property owned by Regency Centers. It was Body Bar’s responsibility to construct the studio and bar. Regency was obligated to pay $25,000 of the cost after successful completion.

Body Bar engaged Denco CS Corp as its general contractor.

Denco’s completion was delayed due to the City of Plano’s determination that portions of the construction plans failed to meet Plano’s health code ordinances. To complete on time, Denco’s employees, contractors and subcontractors worked overtime and on weekends. Those efforts increased the cost of the project by ~ $29,000.

Denco sent Body Bar a bill for the excess. Body Bar refused to pay. Denco recorded mechanic’s liens in Collin County. Body Bar sued Denco for breach of contract, improper “cloud on title” by recordation of wrongful Mechanic’s Lien Affidavits, and other theories.

Denco responded by filing counterclaims of its own against Body Bar, seeking to recover its added $29k in cost overruns through a legal theory of unjust enrichment, and asking the District Court to allow Denco to foreclose its liens.

The Collin County District Court ruled for Body Bar and entered Judgment accordingly. Denco appealed.

Part of the appeal was based on Denco’s request to foreclose its liens. And that, dear reader, is the purpose of this article. Denco claimed it had two valid liens: one based on the Texas Constitution, the other based on Texas statutes.

The Appellate Court analyzed the lien affidavits and compared them to the facts presented. Evidently the affidavits claimed liens only against the owner’s fee simple interest in the property. Not Body Bar’s leasehold estate.

That’s a big difference.

The Appellate Court first determined that in order to perfect a Texas Constitutional lien on the property owner, there must be a direct contract between the lien claimant and the property owner. There was no such direct link. Recall that Denco was engaged directly by Body Bar. Not Regency.

Next, the Appellate Court determined that in order to perfect a Texas statutory lien on the owner’s fee simple interest as an “original contractor,” there also must be a direct contract between the lien claimant and the property owner. Again, there was no such direct link. See above.

Denco then argued that Body Bar was acting as the agent for the property owner. Since liability imputes from agent to principal, this would have the desired effect of binding the property owner to the construction contract. And if that is true, then the lien affidavits were valid because Denco was dealing with the agent for the owner. And the actions taken by an agent bind the principal, absent unusual circumstances not at issue in this case.

Unfortunately for Denco, they submitted no evidence on that point for the Appellate Court to consider.

No surprises here. Not yet anyway. Here comes the surprise.

The Appellate decision implies that the lien affidavits should have attached to Body Bar’s leasehold estate. That would be consistent with Texas law and appellate decisions. And then for some reason not explained in the Opinion, the Court does not indicate that Denco’s liens were valid, but only as against Body Bar’s lease.

Perhaps the lien filings were made late. Perhaps statutory notice of the filings weren’t timely served. Maybe the lien filings made clear that Denco was only interested in a lien against the property owner’s title, not Body Bar’s lease. Maybe the Court did not feel the need to explain leasehold lien attachment theory further, since Denco was not going to be allowed to foreclose anyway. Perhaps I misread the Opinion. All of this is unclear.

The Appellate Court mostly agreed with the tenant Body Bar, but also gave Denco some relief too. See Denco CS Corp v. Body Bar, LLC; No. 06-14-11122-CV; Texas Court of Appeals, 6^th District; January 8, 2015.

Lessons learned:

1.  Contractors engaged by tenants routinely file liens when they get stiffed. Those liens, if completed properly, sent to the tenant timely, and if they otherwise satisfy all statutory requirements, are valid and attach to the tenant’s leasehold estate.

2.  Contractors or their lawyers will argue that the liens also attach to the property owner’s fee simple estate. The theory is that since the improvements ultimately benefit the property owner, then the tenant was merely acting as the agent for the principal. And the principal was the landlord.

3.  Practice Point: Whether representing a Texas landlord or tenant, know that payment and performance bonds can be purchased by the contractor to avoid a lien filing from attaching to any interest in land. Typically the cost is low, ~ 2% of the full construction cost. Either (or both) the landlord or the tenant might consider requiring their contractors to obtain and deliver the bonds before the contractors commence work at the job site. These could be obligations contained in the Lease and construction contracts.

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

8.00% interest = 00.00% or maybe 5.00%

In 2008 Aneita Weaver loaned her nephew John Jamar $193,000 so that John could purchase a Harris County townhouse. The two parties prepared and signed a loan agreement, without the help of lawyers or title agents. That was their first (well maybe their second) mistake.

The funds were loaned at 8.00% interest for one year. Jamar was supposed to pay Weaver $1,400 per month during the term of the loan, which by my math establishes an amortization of 31.5 years.

The loan agreement stated: “If the . . . property does not sell [by January 1, 2010, then] . . . Aneita J. Weaver has the right to assume the title to the property free and clear from John Jamar, for the balance of the loan.”

Seriously. That’s what it says.

Jamar neither sold the property by January 1, 2010, nor did he make his payments to Weaver. So Weaver sued, asking the trial court for specific performance under the loan agreement, unpaid interest at the stated rate of 8.00% and attorney’s fees.

Weaver sued because Jamar did not sign a Deed of Trust, which would have otherwise allowed her to foreclose. Without a Deed of Trust Weaver’s only choices were to ignore the default or assert a lawsuit and ask the Court to force Jamar to convey the property to her.

Weaver won the case. The trial court ordered Jamar to convey the Property to Weaver. However, Weaver did not receive 8.00% interest in the Judgment. Instead, the trial court awarded her only 5.00% interest on all post-judgment amounts.

So Weaver appealed.

The Appellate Court looked at the security clause and focused on Weaver’s right to “. . . assume the title to the property . . . for the balance of the loan.”

The Court decided that the everyday meaning of “balance” includes principal and interest. And that Weaver’s exercise of her right to get title to the townhouse extinguished the balance of the loan, including interest.

So, Weaver’s interest rate of 8.00% was reduced to 00%. However, once the Judgment was entered by the trial court, the full Judgment amount accrued interest at the statutorily-mandated rate of 5.00%. Which wasn’t quite as painful. But still.

All of this pain was caused by the preparation by the parties of their own loan agreement, written with terms and provisions they could understand. And we can appreciate that.

But the other side is that Weaver was inadequately protected. I shudder to think of her legal expenses to clean up this mess, when a properly worded Promissory Note and Deed of Trust would likely have avoided both courthouses entirely.

See Weaver v. Jamar; 14-11-00516-CV; Texas Court of Appeals 14^th District; October 30, 2012.

Lessons learned:

1.      Loan documents written by non-lawyers cause problems.

2.      Loan docs with problems generate lawsuits.

3.      Lawsuits keep lawyers employed.

4.      It is probable that Weaver and Jamar could have avoided the Courthouse if they had proper loan docs.

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

How Not to Foreclose

Lawrence Mathis owned and operated a commercial laser printing and direct mail business in Austin. In March 2000 he bought a 20,000 SF building, and arranged SBA financing. A first lien Note for $440,000 (approx. 50% of the purchase price) was given to Norwest Bank, NA, and SBA through its affiliate CenTex Certified Development Corporation accepted a second lien Note for $365,000 (approx. 40% of the purchase price).

Mathis had difficulty servicing the debts and he started making late payments in 2003. In 2006, CenTex acquired the Norwest Note. At that time, Mathis was still several months behind on his payments.

For years Mathis continued to make late payments, and CenTex continued to accept them. Until 2009. In February 2009 Mathis sent CenTex a check for three installment payments. This was the first time that a payment was rejected, but not until April 2009. Shortly thereafter CenTex sent Mathis a letter of intent to foreclose on the property in May 2009.

Mathis sued to stop the foreclosure, claiming the debt was improperly accelerated. And as a consequence, CenTex had no right to foreclose. The trial court initially granted Mathis’ request to stop the foreclosure, but at a full trial in 2010 the court reversed itself and ruled for CenTex.

Displeased with that final Judgment, Mathis appealed.

While Texas law requires notice of intent to accelerate a real estate debt, it can also be waived if done so properly. At least with regard to commercial transactions. The waiver must be clear and unequivocal. And from my experience, most commercial loans contain a full waiver clause, giving the lender the option to send a notice of intent to accelerate the debt and opportunity to cure a default, or bypassing it and instead sending a notice of foreclosure.

It is also my experience that many times the notice waiver can be negotiated and eliminated. Then, lenders are forced to give a written notice of intent to accelerate and an opportunity to cure the default before acceleration. But the loan docs in this case did not contain the type of clause that would have been of great benefit to Mathis. Instead, the scales were tilted in the lender’s behalf.

The Texas Court of Appeals looked at the waiver provision in the Note and the waiver provision in the Deed of Trust. They were not the same. The waiver provision in the Note appeared to be ‘clear and unequivocal.’ But not so in the Deed of Trust. The Deed of Trust stated: “If [Mathis] defaults . . . and the default continues after [Lender] gives [Mathis] notice of the default and the time within which it must be cured, as may be required by law or by written agreement . . .”

Feeling confused by the two clauses, the Court of Appeals concluded that the waiver provisions in the Note and Deed of Trust could not be rectified. Absent clear and unequivocal evidence that the Lender and Mathis intended to waive any formal requirement to send notice of default and intent to accelerate the debt before foreclosure, the Judgment of the trial court was reversed because the attempted Note acceleration was ineffective.

Mathis wins. CenTex loses. Well not really. All CenTex has to do now is to send out a notice of intent to accelerate, then accelerate the debt and foreclose next month. But I digress.

See Mathis v. DCR Mortgage III Sub I L.L.C.; 08-10-00310-CV; Texas Court of Appeals 8^th District; October 10, 2012.

Lessons learned:

1.      Be wary of commercial loan docs. Yes they are one-sided and intended to be so. But that doesn’t mean that Borrowers must be in default the moment they sign the docs. Many lenders are willing to make reasonable accommodations. But you have to know what to ask for. And then ask.

2.      Texas law will usually help consumer-borrowers and residential tenants. Not so in a commercial context. Don’t count on Texas laws helping you. Many provisions that are non-waivable in Texas consumer and residential law are waivable in Texas commercial law.

3.      Exercise your Democratic right / obligation. Even if you are a Republican. Vote!

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