Use Clauses in Commercial Leasing

It is hardly unusual for tenants to require special licenses to conduct their business, in addition to Certificates of Occupancy and zoning compliance. Bars need liquor licenses from the Texas Alcoholic Beverage Commission. Banks need licenses from the Texas Department of Banking or similar federal authority. Racetracks require licenses from The Texas Racing Commission. Chiropractors must have licensure from the Texas Board of Chiropractic Examiners.

And so on for surveyors, architects, physicians, veterinarians, engineers, lawyers, dentists, accountants, brokers, medical facilities, pest eradication companies, repair shops using oil or hazardous substances, fuel dispensing, etc.

But what happens when the tenant signs the Lease, and then is unable to secure the license? What if the tenant doesn’t try [very hard] – should the tenant be excused?

Bre Mariner Conway Crossings, LLC, as Landlord, entered into a five-year commercial Lease with Genuinely Loving Childcare, LLC, as tenant. The Lease provided that tenant could use the premises solely for the purpose of operating a child day care center for up to 35 pre-school children.

The target space consisted of 2800 SF in an Orlando shopping center. The Lease further provided that the tenant must use its best efforts to keep the children inside the premises and prevent them from loitering in the common areas.

In Florida, the operation of a child care center that cares for more than five children requires licensure from the Department of Children and Families. The Florida legislature has set minimum standards for licensure, including that the child care center must have at least 45 SF of outdoor play area per child. Drop-in childcare and urban child care centers are exempt.

The urban child care center designation which permits the substitution of indoor play space for outdoor play area, requires written documentation from the local governing body that the area where the child care center is located has been declared urban.

Evidently the Lease was signed at the end of 2013 or beginning of 2014. In January 2014 the Florida Department of Children and Families denied tenant a permanent license because the Department did not believe the child care center was located in an urban area. The Department did, however offer a provisional license with the understanding that an outdoor play area would be required for permanent licensure.

Using the provisional license, Tenant opened the child care center in February 2014. Unable to obtain a permanent license, tenant abandoned the premises in February 2015, only one year into a five-year commercial lease term, when tenant’s provisional license expired and no further renewals were permitted by operation of Florida law.

The landlord sued Genuinely Loving Childcare, LLC and its Guarantors, and obtained a judgment in trial court for eviction and damages. Tenant appealed the damages portion of the award.

The Appellate Court reviewed the evidence and tenant’s affirmative defenses of: (a) impossibility; (b) impracticality; and (c) frustration of purpose. The thread that connects them all is foreseeability at the inception of the Lease. The Court determined that “if a risk was foreseeable at the inception of the lease, then there exists an inference that the risk was either allocated by the contract or was assumed by the party.”

Landlord used that argument to Landlord’s benefit, stating that tenant’s defenses are insufficient because the risk tenant would not obtain a license was foreseen and allocated by the Lease to tenant. However, the Court concluded that the Lease provisions did not explicitly allocate the risk that the Department of Children and Families would deny tenant the urban designation and a permanent license without outdoor play space.

Due to a Lease that is ambiguous on this point, the Appellate Court reversed the final Judgment and dispatched the case to the lower court to determine the intent of the parties regarding the licensure issue.

See Genuinely Loving Childcare, LLC vs. Bre Mariner Crossings, LLC, Case No. 5D15-4168, District Court of Appeal of Florida, 5^th District, January 13, 2017: https://scholar.google.com/scholar_case?case=9889607525199014198&q=genuinely+loving+childcare+v.+bre+mariner&hl=en&as_sdt=6,44&as_vis=1.  

Lessons learned:

1.      Failure to explicitly allocate the risk of licensure is a common problem in commercial leasing. If a tenant is unable to secure its license, it might assert a position of “frustration of purpose,” meaning that if the tenant cannot open or continue its business due to matters outside of its control, perhaps it should not remain liable for lease obligations.

2.      Landlords, conversely, may insist that Landlord was not operating the business inside the four walls. It’s tenant’s business and there is no one better than tenant to process the applications, overcome objections and secure necessary licensure.

3.      The B/L: In your Lease Agreements provide for not only how the premises will be used, but if it is subject to special licensure to be obtained by tenant and tenant is unable to obtain the license, or perhaps tenant secures the license but not for the duration of the lease term, then also state what happens in those circumstances too. Does the tenant remain liable? For the full remainder of the term? Is there an exit strategy for the tenant where it can terminate the Lease by payment of a set amount?

                                                                                    Stuart A. Lautin, Esq.*

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

It Must be Written - Correct?

Bobby Miller agreed to purchase two acres of land in Cass County from Leorris Thomas. Under the terms of the deal, Bobby was to pay Thomas’ mortgage on the property. When it was paid in full, Bobby would own the property.

The contract was oral. Not written.

Bobby claimed that he had a conversation in 2003 with his brother-in-law Thomas, to the effect that if Bobby paid off the notes then Bobby would become the owner. Bobby said they shook hands to confirm their deal.

Evidently Bobby did not know how much was owing, to whom it was payable, or how long it would take to pay off the debt. Regardless, Bobby started making payments to TEXAR Federal Credit Union of $113.76 per month. Bobby also paid the property taxes.

The target property contained two water wells and a house, which Thyra Miller (Bobby’s wife) described as “condemned.” Regardless, Bobby elected to repair the dilapidated home, and spent approximately $30,000 to do so.

He also repaired the water wells, completing all renovations in 2006. Thomas, owner of a barbeque restaurant near the property, was aware of the work.

Cass County property records established that the property was appraised for $13,490 in 2003, and $35,460 in 2009.

Leorris Thomas hired an attorney in 2007, who sent a notice to M/M Miller that Thomas had elected to terminate their “verbal lease agreement,” and that M/M Miller needed to vacate the premises.

M/M Miller did not vacate. Instead, they continued to remit monthly payments to the Credit Union until 2009 when Thyra Miller vacated because, as she states, Thomas was harassing her. At that juncture, the note balance might have been approximately $3,100, and M/M Miller had been paying property taxes for six years.

After Thyra moved out, Thomas sold the property to Clay Jiles and a Deed was executed and recorded. That prompted M/M Miller to file a lawsuit.

The primary defense asserted by Thomas was that the Texas Statute of Frauds requires that real estate sales contracts must be written. See Texas Business & Commerce Code Section 26.01(b)(4): http://www.statutes.legis.state.tx.us/Docs/BC/htm/BC.26.htm. Indeed, that is precisely what the law requires.

The jury returned a verdict providing that Thomas agreed to deed two acres of property to Millers in exchange for Millers paying off a loan Thomas owed to TEXAR Federal Credit Union; M/M Miller repaired and improved the property; M/M Miller made six year of tax and mortgage payments; M/M Miller had occupied the property; and M/M Miller were entitled to damages.

The trial court entered Judgment for M/M Miller based on the verdict for $40,000+. Leorris Thomas appealed.

The Appellate Court reviewed the Texas Statute of Frauds requiring that all real estate sales contracts must be written, and initially agreed that indeed the contract did not satisfy the Statute.

However, the Court found an exception to the Statute of Frauds. If a literal reading of the Statute would amount to a “ . . .virtual fraud in the sense that the party acting in reliance on the [oral] contract has suffered a substantial detriment for which he has no adequate remedy, . . .” then justice will not allow a party to benefit merely because the contract was not written.

It is unknown if Bobby Miller will be able to collect his $40,000+ Judgment. Regardless, Bobby Miller wins again.

See Thomas v. Miller; Cause No. 16-15-00095-CV; Tex. App. 6^th Dist.; June 28, 2016: http://law.justia.com/cases/texas/sixth-court-of-appeals/2016/06-15-00095-cv.html.  

Lessons learned:

1.      Texas law clearly states that real estate contracts must be written. Clearly. As near as I can detect, we’ve had this law since 1967, likely much longer.

2.      Sometimes, not everything goes the way it is planned. If someone is going to benefit at someone else’s detriment, Texas judges are willing to pitch the law and focus on doing what is fair, regardless of what the law provides. I like that.

3.      Although Texas judges might be willing to bend Texas statutes to assure the proper outcome, that may not help M/M Miller this time. Given the depth of debtor-exemptions available to Mr. Thomas, I will be shocked if M/M Miller recover the $40k Judgment amount, or even an amount close to it. Hope I’m wrong. Do you want to see the list of Texas statutory exemptions including two guns, two horses, mules or donkeys, saddles, blankets and bridles for each, 12 cattle, 120 chickens, 60 other types of livestock, one motor vehicle (yes I was surprised the law does not say TRUCK instead of motor vehicle), one bible and more? You can read it here: http://www.statutes.legis.state.tx.us/Docs/PR/htm/PR.42.htm.

                                                                                Stuart A. Lautin, Esq.

 

 

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

 

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.

Contested Eviction

Aurora Borunda mortgaged her property with Financial Freedom Senior Funding Corp. in 2007, granting a $117,000 Deed of Trust. Financial Freedom had the right to accelerate the debt upon Borunda’s death – a typical event of default in most mortgages.

The Deed of Trust also stated that if the property is sold at foreclosure, any person holding possession shall immediately surrender the property to the buyer at the foreclosure sale. And if they do not surrender it, that person is a “tenant at sufferance” and may be removed by writ of possession.

Those are also typical provisions in virtually all Texas mortgages.

Aurora Borunda died on September 21, 2011. The property was sold at foreclosure to The Federal National Mortgage Association on January 8, 2013. You know TFNMA as Fannie Mae.

Aurora’s daughter Linda Borunda continued to reside at the property. So Fannie Mae sent Linda a written demand for possession on January 25, 2013, and then filed an eviction lawsuit on February 8.

The Justice Court granted Judgment for the Plaintiff Fannie Mae. Linda appealed.

At a new trial in El Paso, the County Court also granted Judgment for Fannie. Linda Borunda appealed. Again.

Linda claimed that the El Paso County Court lacked jurisdiction because of a title dispute and as a consequence, the Deed of Trust’s tenancy-at-sufferance clause is unenforceable against her. Specifically, Linda claimed that Financial Freedom violated the terms of the Deed of Trust by failing to provide her with adequate notice of the foreclosure sale.

As a result of the inadequate notice and according to Linda, Financial Freedom had no right to conduct the foreclosure sale. If Linda was correct in her assertion, then Fannie Mae’s interest is void and it had no authority to cause Linda to be evicted because only property owners and their managers may evict.

The Court readily admitted that Linda might have raised a legitimate title issue. However, defects in the foreclosure process are not relevant to eviction claims. Such defects must be raised separately. In another lawsuit. In District Court.

Fannie Mae’s Deed granted by Financial Freedom at the foreclosure sale is sufficient evidence of ownership for purposes of an eviction case. Title defects in the foreclosure sale as between Financial Freedom and Fannie Mae are not recognizable in the limited eviction proceeding as between Linda and deed-holder Fannie Mae.

Fannie Mae bought the property at a foreclosure sale. The underlying Deed of Trust had a tenant-at-sufferance clause that could allow a Justice Court to determine the right of immediate possession independently of title.

Fannie Mae wins. Again.

Linda Borunda loses. Again.

See Borunda v. Federal National Mortgage Association; Cause No. 08-13-00331-CV; Texas Court of Appeals; 8^th District; December 8, 2015.

Lessons learned:

1.      We handle many tenant evictions at my Firm. This El Paso Court easily ruled for the Landlord / property purchaser. However, I have seen other courts struggle with this issue and this is why it is a favored strategy of tenants to claim a title defect in an eviction lawsuit.

2.      In order to avoid a lawsuit over a possession issue that could take years to resolve, our smart landlord-clients offer “cash for keys” to some tenants who are particularly difficult. This can work well to expedite a tenant’s exit from the property.

Happy New Year to all my faithful readers!!                                                                                   S

Stuart A. Lautin, Esq.*

*Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Higier Allen & Lautin, PC
2711 N. Haskell Avenue, Suite 2400
Dallas Texas 75204
P: 972.716.1888
E: slautin@higierallen.com
W: www.higierallen.com


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

Closing Extension SNAFU

On January 28, 2013, KIT Projects entered into a Contract to purchase real estate from PLT Partnership. Closing was initially scheduled for March 26, 2013. Then it was extended two days to March 28, 2013.
 
On March 28 Buyer did not have the funds to close, so Buyer asked Seller for an extension – until April 30, 2013. Both Seller and Buyer signed and delivered an extension Amendment. It provides “In consideration for this 30 day extension, Buyer agrees to pay an additional $10,000 extension fee directly to [Seller]. This fee is non-refundable and not applicable to the sales price.”

A check was delivered to Seller on March 28. Also delivered was a suggestion that the check was not good. So Seller told Buyer that the check could be held for a few days, to give Buyer an opportunity to fund the check.

The check was deposited on April 3. Seller signed the Amendment on April 4. The check bounced on April 8. Buyer never replaced the check with good funds, although Buyer offered to do so on April 9. 

In the afternoon of April 9 Seller delivered to Buyer a letter by email stating that “there is no existing contractual agreement” between the two parties.

Buyer asserted a lawsuit to force Seller to honor the terms of the Contract and sell the property to Buyer. Seller denied that it had breached the Contract, claiming that Seller had the right to terminate the Contract since the $10k check bounced. The trial court agreed with Seller.

Buyer appealed.

On appeal, Buyer asserted that the consideration for the amendment was Buyer’s promise to pay the $10k extension fee. Seller asserted that the consideration was the $10k payment. The difference in Texas law, is a covenant vs. a condition.

The Court of Appeals recast Seller’s argument as an assertion that the payment was a condition to the extension of the closing date. We call this a condition precedent in law.

To determine if a condition precedent existed, the Court looked hard at the amendment for terms such as provided that, on condition that, if _______, then ________ and similar.
 
If no such language is used, the terms will typically be a covenant. Not a condition. When a covenant is breached, the contract is valid but a party has a claim or lawsuit for damages. When a condition is breached, the entire contract may be forfeited.

Courts do not favor conditions as they tend to have unintended and overly harsh consequences.

This Court of Appeals had little difficulty determining that the language used was indicative of a covenant, not a condition. And yes there was still ample consideration although the check failed, as consideration “. . . may consist of a benefit to one party or of a detriment to the other party.”

The Court concluded that the consideration for the extension of the closing date was Buyer’s agreement to pay, rather than Buyer’s tender of lawful payment. The Judgment of the trial court is reversed. The case is remanded back to the trial court for a do-over, but with instructions to the trial court that the Amendment did not fail just because Buyer’s check was rubber.

See KIT Projects, LLC v. PLT Partnership; Cause No. 14-14-00118-CV; Texas Court of Appeals; 14^th District; November 19, 2015.

            Lessons learned:

1.      If the parties intend to be allowed to terminate a Contract based on non-performance, there must be consistent provisions.

2.      Typically a Seller or Landlord will prefer a condition for the Buyer or Tenant’s obligations, and a covenant for the Seller or Landlord’s duties. And of course vice versa when you are representing a Buyer or Tenant.

3.      Still confused? You are not alone. Be sure your principal has an experienced Texas real estate attorney who knows the difference.

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

How Not to Evict

Jessica Briones was a tenant at Brazos Bend Villa Apartments, Richmond, Texas (has Richmond been subsumed by Houston yet?). She had occupied her unit since January 2007. Jessica’s lease obligated Brazos to furnish her 10 days notice to discuss with Brazos a possible breach or allegation of lease termination, before Brazos could take any action adverse to her possession.

Evidently Brazos was concerned that Jessica was using or possessing marijuana in her apartment, so on April 30, 2012, Brazos furnished Jessica notice of lease termination coupled with a written statement that she had the right to meet with a property manager within 10 days to discuss the termination. The notice also demanded that she vacate by June 1, 2012. Jessica did not go gentle into that good night (that’s from a famous villanelle written by Dylan Thomas a century ago . . . oh never mind).

Consequently, on June 6, 2012, Brazos filed a lawsuit for eviction in JP Court in Fort Bend County. Brazos won so Jessica appealed.

The appeal was heard in Fort Bend County Court At Law, where according to Texas procedural rules both parties were granted an entirely new trial. A full-on mulligan. Brazos again won a Judgment for exclusive possession, plus attorneys’ fees of $2,950 through trial, and $10,000 for an appeal to the next level.

Brazos then obtained a Writ of Possession placing Brazos in possession of Jessica’s apartment. Regardless of the fact that Jessica was now on the outside of the apartment community, she again appealed claiming that Brazos failed to furnish her proper notice.

Basically, Jessica’s position was that Brazos was required to furnish her 10 days in which to discuss any alleged breach with Brazos before demanding that she vacate. And that the notice given, being a lease termination coupled with a statement that she could discuss the termination with a manager within the next following 10 days, did not comport with the Lease she had signed and both parties had honored in the previous five years.

The appellate court agreed with Jessica. Brazos was required to furnish Jessica at least two written notices. The first should have given her 10 days to discuss the proposed breach or lease termination with a property manager. The second should have given Jessica notice that her lease was terminated and she needed to vacate if she wanted to avoid legal proceedings.

Jessica won; Brazos lost. See Jessica Briones v. Brazos Bend Villa Apartments; No. 14-12-01125-CV; Texas Court of Appeals; 14^th District; September 9, 2014.

Lessons learned:

1.      Even when tenants have been removed from the premises – voluntarily or involuntarily – they may still litigate and if they lose, then they may appeal. It’s an interesting dichotomy in law that protects rights of tenants. And if you consider it, there can be no other logical way as appeals take years to conclude. This one was completed in a bit more than two years, but a further appeal to the Texas Supreme Court would have added two more years.

2.      We handle many tenant evictions here. It is a rarity that the notices furnished to the tenants 100% comply with the lease and laws. Property managers use preprinted eviction forms and they work well for normal evictions where the tenant doesn’t pay rent. However, those same notices often are insufficient when the lease obligates the Landlord to furnish notices and opportunities to cure defaults before the lease can be terminated. Or when tenant’s breach is not related to the failure to pay rent, but is something unusual instead.

3.      Read your form lease. Do it now. Find all the ways the tenant can breach and make a list. Is it complete? Then review the lease to determine what steps the landlord must take before terminating the lease. Another list. After that – one more task – find out exactly what type of notice must be furnished before you can terminate a lease, to whom it must be given, by whom, how it is to be posted / mailed / delivered, at what address must it be posted, delivered or sent, and at what timing interval. Then, compare it to Texas laws. And make a final list.

Are you satisfied?

See http://law.onecle.com/texas/property/92.0081.00.html for residential self-help rules.
See http://law.onecle.com/texas/property/93.002.00.html for commercial self-help rules.
See http//law.onecle.com/texas/property/91.001.00.html, http://www.statutes.legis.state.tx.us/Docs/PR/htm/PR.24.htm and https://www.supreme.courts.state.tx.us/rules/trcp/trcp_part_5.pdf for Texas rules that apply to both residential and commercial judicial evictions.

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

Hate It When This Happens

In June 2004 AGF Spring Creek / Coit II, Ltd. leased office space in Richardson Texas to Atrium Executive Business Centers Richardson, LLC

Later there were three Lease Amendments. Each was signed by Curtis for the tenant, as its President or CEO. The last Amendment extended the lease term into 2015.

Atrium, however, was never formed. Instead, Curtis formed “AEBC-Richardson, Inc.” After formation, AEBC occupied the leased premises and operated a business there for six years. Although AEBC offered executive suites at the leased premises to subtenants, it was Atrium that was shown as the tenant in the Lease and all Amendments, and Dawn Curtis signed each on behalf of Atrium, not AEBC.

In March 2010 Curtis sent an email to representatives of the Landlord stating that revenues were too low to continue in operations, and asking AGF to handle the details of the pending lease default. No further rent was paid and AGF terminated the Lease by written notice issued later that month.

In April 2010 AGF initiated a lawsuit against Dawn Curtis individually for breach of the 2004 Lease, as extended and amended. AGF contended that although Atrium was the named tenant, in fact (and in law) Atrium never existed as it was never formed. And consequently, Dawn Curtis was 100% liable as if she had signed an unconditional Guaranty.

The jury entered a verdict in favor of AGF in trial court, and the judge converted it into a Judgment. Curtis appealed.

On appeal Curtis acknowledged her mistake in failing to change the name of the tenant on the Lease, and her further mistakes in signing the Lease Amendments as President of an LLC that did not exist. She requested however that the Court overlook these mistakes and instead impose a lease agreement between AGF and AEBC through the action and conduct of the parties.

To support her argument, Curtis provided evidence that reimbursement of the tenant’s move-in expenses, all rental payments, fax transmissions, insurance policies, sales and use tax permits and subtenancy agreements with executive suite customers were all made in the name of AEBC rather than Atrium, and further – that Landlord was aware of these documents and payments.

However, Landlord refuted those arguments by stating that the Lease was unambiguous. Atrium Executive Business Centers Richardson, LLC was identified as the Tenant. Not AEBC-Richardson, Inc. The Lease also contained an “incorporation” clause providing that the Lease could not be altered, waived, amended or extended unless by written agreement.

Obviously changing the identity of one of the parties to the Lease is serious business and not easily accomplished without a written agreement between both parties.

Curtis’ lawyers found an interesting case from Fort Worth. An Appeals Court decided in 1997 that, in a similar situation as this case, “a promoter is relieved of personal liability only when the corporation subsequently adopts the contract either expressly or by accepting its benefits.”

But in our case the entity was never formed, and could not “subsequently adopt” the Lease. AEBC was ultimately formed. Not Atrium. And if Landlord had sued AEBC for breach of Lease, AEBC could have easily defended claiming it never signed the Lease or any of the modifications or anything else (such as a Lease Guaranty) leading to imposition of liability against AEBC.

Ultimately the Appeals Court overturned the lower court’s judgment, but due to entirely other issues: the jury had miscalculated the proper amount of the award. So while I must truthfully tell you that Curtis won this round, I must also conclude that if this case isn’t settled but instead is retried, Curtis will surely lose again.

See Curtis v. AGF Spring Creek / Coit II, Ltd.; No. 15-12-00429-CV; Texas 14^th Court of Appeals, August 28, 2013.

Lessons learned:

1.  Dawn Curtis made the cardinal mistake of signing an important legal document on behalf of an entity before the entity was formed. I see this problem daily. Ok daily is an exaggeration, but I see it very often.

2.  If a document is signed for a non-existent entity, personal liability is typically imposed upon the person signing. There is a way to finesse this when you know the entity has not yet been formed. Write in a special provision eliminating all personal liability once the entity has been formed and evidence of formation and adoption by the new entity is sent to the other parties who have signed the contract.

3.  Practice Tip: When I encounter an entity (whether as a client, adverse party, service provider, vendor, etc.) I check to be sure it is formed in its state of organization, and qualified to do business in Texas. Typically I start here. It’s a free search: https://ourcpa.cpa.state.tx.us/coa/Index.html. Then if it will be a client or adverse party, I’ll dig further, but be prepared to pay $1 per search: https://direct.sos.state.tx.us/acct/acct-login.asp.

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

Jumpin' Jack's Party Shack

In 2006 Jim and Jeneane Cremer formed Jumpin’ Jack’s Party Shack, Inc., to operate a children’s party center. The Cremers found a warehouse in Tyler owned by Morris Hallman, and signed a four year lease.

The leased premises consisted of a 20 x 20 foot sheet metal over steel frame air-conditioned office, with an attached 50 x 80 foot warehouse structure. The warehouse portion was not air conditioned, and contained only a bare concrete floor and open-air roof extension. It had been previously used as a car wash bay.

The Cremers spent $36,950 for dirt work, concrete and materials to make a 50 x 50 foot warehouse extension and enclose it. Also the Cremers expended another $115,000 to install six air conditioning units, HVAC duct work, lighting, plumbing, toilets, cabinets, party rooms and more offices.

In December 2010 – the end of the lease term – the Cremers removed the six air conditioning units, HVAC ducts, lighting, kitchen and bathroom fixtures, doors, door jambs, insulation, electrical wiring and sheetrock as they vacated the buildings. All of those components had been installed by the Cremers after the beginning of the lease term.

Morris Hallman was not pleased and sued the Cremers. Hallman’s position was that the Cremers had no right to remove valuable improvements, and by doing so, Hallman was substantially damaged.

The trial court ruled for Hallman, finding that in the lease agreement “. . . the parties expressly agreed that at the expiration of the lease, improvements to the property made by lessees . . . belonged to lessor, Morris L. Hallman, and were to be returned to the lessor by the lessees in good operation condition.”

The trial court awarded Hallman damages of $67,339. Cremers appealed.

The Appellate Court took a hard look at the 2006 lease, particularly focusing on the obligation of the tenants to repair everything the tenants installed, modified, replaced or added. Otherwise, if the landlord had installed it (meaning: it was in the buildings when the Cremers received the keys), then it was the landlord’s obligation to repair and maintain.

Due to procedural issues, the argument that Cremers installed trade fixtures into the buildings which became permanently annexed and incorporated into the real estate, was not litigated. Presumably the outcome might have been different.

But – based on the pleadings before the Court of Appeals – Cremers win; Hallman loses. Cremers had the right to remove the improvements they installed, much to Hallman’s disappointment and financial loss, as the Court of Appeals concluded that the trial court had not properly analyzed the 2006 lease agreement.

See Cremers v. Hallman; No. 06-13-00011-CV; Texas 6^th Court of Appeals, May 16, 2013.

Lessons learned:

1.      Commercial leasing is inordinately difficult. Purchase and Sale Agreements are easier. Leasing is like a marriage. Sometimes a beautiful partnership is formed. Other times not so much.

2.      Don’t assume that the lease form you are using contains all the concepts that are important to you, the landlord and the tenant. Or the lenders financing the project or tenant’s leasehold interest. Even the ‘boilerplate’ clauses can be incomplete, confusing, or MIA.

3.      It’s unfortunate this Texas Appellate Court did not fully address the issue of trade fixtures and permanent annexation into the realty. But, regardless, if it’s important to you then be sure it is properly stated in your lease!


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

Loss Mitigation in Commercial Leasing

In 1997 the Supremes – no not those Supremes but rather the Texas Supreme Court – gave all of us involved in commercial real estate law the landmark opinion of Austin Hill Country v. Palisades Plaza. That case imparted a duty upon commercial landlords to attempt to lessen their losses when a tenant vacates. Previous law allowed the Landlord to do nothing, wait for the end of the lease term, and then sue the Tenant and Guarantor. Not to be outdone, our own Texas legislature liked the case so much they wrote a law about it in 1997 and it is still found today in our Texas Property Code.

That section of the Property Code has been litigated. A lot. Tenants use it to claim that their Landlord didn’t lessen their loss when the Tenant breached the lease. And then the Tenant inevitably claims that if only the Landlord had mitigated, surely the Landlord would have found a replacement tenant who would have covered all of Landlord’s losses.

Which brings us to this month’s case . . .

Mazin Zaid assumed a commercial lease from Weingarten Realty in 2005. In 2006 Zaid assigned the lease to new tenants, but Zaid was not released from his lease liability. The new tenants soon defaulted and were locked out. Weingarten sued Zaid for breach of the lease.

The jury agreed with Weingarten in the trial court, awarding Weingarten approximately $150,000 for unpaid rent, plus almost $50,000 in attorney’s fees for the trial. The trial court converted the verdict to judgment. Zaid appealed.

On appeal Zaid claimed that Weingarten did not follow Texas law because Weingarten did not attempt to lessen its losses. Weingarten, however, had senior leasing executive John Wise describe his efforts to find a replacement tenant. According to Wise, Weingarten placed a ‘for rent’ sign in the window. Wise personally made cold calls and left flyers with retailers, attended broker meetings, sent out e-mail blasts and showed the property to several potential tenants, explaining that the rental pricing was negotiable.

Zaid argued that he, Mazin Zaid, was the perfect replacement tenant. Zaid stated that had Weingarten permitted him to reclaim the property, pay the back rent, operate the business and continue the lease, Weingarten would have lost no rental income.

Weingarten countered by introducing evidence that Zaid had re-entered the property and removed his equipment, Zaid never mentioned in written correspondence with Weingarten that he wanted to resume possession of the premises, and that Zaid took no action in preparation of resuming operations at the restaurant.

Judgment was affirmed for Weingarten.

See Zaid v. Weingarten Realty Investors; No. 09-10-00225-CV; Court of Appeals, Ninth District of Texas; August 31, 2011.

Lessons learned:

1.      Landlords must attempt to lessen their losses after a tenant breaches the lease. Landlord’s duty to mitigate may not be waived.

2.      Landlords are not required to use extraordinary efforts to re-lease, unless the Lease states otherwise. Typically, reasonable efforts suffice.

3.      Landlords should check their Lease forms to exclude an obligation to re-lease the premises to the same tenant (or any affiliate) who just defaulted.

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