Tell Me Again Why I Can't Lease It for Income?

Ken Tarr bought a house in the Timberwood Park subdivision of San Antonio in 2012. In 2014, when his employer transferred him to Houston, he began leasing his San Antonio home for short durations.

In the summer and fall of 2014 Ken entered into 31short-term rental agreements ranging from one to seven days, totaling ~ 102 days. Ken did not lease rooms separately, but rather leased the entire home each time.

In the same time period Ken was notified by the Timberwood Park Owners Association Inc., that he would be fined if he continued to use the house as a rental property.

Predictably, Ken was fined so he scheduled a meeting with the Association’s board to review and appeal their decision.

Ken lost the hearing before the Association’s board in September 2014. To avoid paying the fines but primarily to continue his use of his property for income purposes, Ken sued the Association, seeking a declaration that the Restrictive Covenants imposed by Timberwood did not prohibit his leasing activity.

The Association responded by claiming that there were no facts at issue, and that the Association was entitled to a Judgment by operation of law. The Court agreed with the Association and rendered Judgment for the Association.

Ken appealed.

The Restrictive Covenant reviewed on appeal stated substantially “All tracts shall be used solely for residential purposes . . .” That gave Ken the ammunition to claim that indeed his property was being used a residence. A leased one. But still – it was built for human habitation and, humans were, well, habitating [yes I know English grammarians are going to yell at me for converting that noun into a verb. But it happened. It’s the new me, in a new year.]

The Association replied that Ken’s short-term renters are not “residents” and are not using the property for “residential purposes,” but rather they are transients using the property temporarily. And the Association further argued that a temporary residential use does not equal the “residential purpose” mandate.

The Texas Appellate Court determined that if a person comes to a place temporarily, without any intention of making that place his of her home, then that place is not considered the person’s residence. And from there, it wasn’t a far stretch for the Texas Appellate Court to conclude that the lease of a home to be used for transient purposes is not in compliance with the restrictive covenant that it be used solely for residential purposes.

Perhaps sensing an appeal to the Supreme Court, the Texas Court of Appeals also noted that the Austin Court of Appeals came to the opposite conclusion in 2015, holding that a covenant requiring use “for single family residential purposes” was fatally ambiguous.

Regardless, the 4^th Texas Court of Appeals affirmed the trial court’s Judgment. Ken Tarr lost and may not rent his property, at least not in the manner he had been leasing it. Timberwood Park Owners Association Inc. wins again.

See Kenneth Tarr v. Timberwood Park Owners Association Inc.; Texas 4^th Court of Appeals, San Antonio; Case Number 04-16-00022-CV; November 16, 2016: http://caselaw.findlaw.com/tx-court-of-appeals/1754436.html.

Lessons learned:

1.      I have clients, some institutional, that need to lease residential properties where restrictive covenants might be read in a manner to prohibit that activity. We have different appellate decisions across the State. Our Texas Supreme Court needs to accept a case and give us some definite guidance.

2.      Texas brokers and agents enter the danger zone when they assume that their clients are purchasing property for their own residential use. But even if that is the stated purpose, the clients still need to be aware if covenants are in existence that could impede later leasing activities. Things change.

3.      The problem is amplified when principals are buying properties with the stated intent of converting them to income-producing. Beware, my Texas cadres, and review the covenants before the Contract is signed, so that buyers are making an informed, educated and intelligent decision!

                                                                                    Stuart A. Lautin, Esq.*

 

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

 

 

Real Estate Fraud

William Myre engaged an engineer to prepare a plat for Hunt County property he owned. Although there were no drainage plans as required by county regulators, Hunt County approved it anyway and the property became Cole Estates. Thereafter, Craig Development, Inc. purchased Cole Estates from Myre.

Carl Meletio and others bought some Cole Estates lots from Craig Development, Inc. (“CDI”) between 2000 and 2002. Cole Estates became a residential subdivision.

Some of the properties in Cole Estates flooded during significant rainstorms between 2002 and 2006. Meletio sued CDI and Myre. The jury determined that Myre had committed fraud by failing to disclose to Meletio and others that Cole Estates might be inundated by floodwaters. Judgment was rendered for Meletio, and Myre appealed.

In the appeal Myre claimed that he could not have committed fraud, since he did not owe a duty of disclosure to the individuals to whom he did not sell property. Myre reminded the appellate court that he sold the property to CDI, not Meletio. Myre served only as the developer, and claimed that Myre’s duties were owed only to CDI. Therefore, if the property owners were damaged their recourse should be directed against CDI, not Myre.

The 5th District Court of Appeals ratified Texas law that “. . . a seller is under a duty to disclose materials facts that would not be discoverable by the exercise of ordinary care and due diligence by the purchaser, or that a reasonable investigation and inquiry would not uncover.” The Court cited a case providing that a party cannot be guilty of fraudulently concealing facts of which he is not aware.

Finding that Myre had no relationship with any of the plaintiffs and therefore Myre had no duty of disclosure to them, the Court concluded that Myre could not be liable for fraud. The fraud portion of the judgment was reversed. See Myre v. Meletio, 05-08-00576, Fifth District Court of Appeals, Dallas Division; judgment rendered February 26, 2010.

Bottom line:
 
1. Real estate disclosure duties are typically owed to property purchasers and tenants by their immediate sellers and landlords.
 
2. Disclosure duties are also owed by brokers and agents to their principals and to their opposing parties as well.
 
3. It is surprising that real estate brokers and agents were not sued. If CDI’s broker and agent were sued in this case, both the trial court and appellate court could have asserted liability against them if they had knowledge of the flooding issue, and failed to disclose.

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