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.

Quantum Meruit [To know it is to love it]

Quantum meruit is of course a Latin phrase. It means “what one has earned.” In the context of contract law, it used something like “reasonable value of services."

Northeast Independent School District (San Antonio) hired STR Constructors to renovate a middle school. In turn, STR engaged Newman Tile as a subcontractor, to install about 3500 square feet of tile in the kitchen.

Problems arose between STR and Newman right away. STR demanded that Newman use epoxy grout to install the quarry tile. Newman insisted that its bid excluded epoxy grout. Under protest and claiming that epoxy grout and the added labor necessary to use it were unnecessary, Newman complied with STR’s instructions.

And then Newman submitted a change order seeking recovery of its added costs.

And then STR refused to pay it.

And then Newman sued STR for quantum meruit and breach of contract. Newman won in trial court; STR appealed.

We don’t get many cases involving quantum meruit, probably because appellate courts have told us for years that the remedy of being paid “the value of your services” is inapplicable when the parties have signed a contract. As STR and Newman did in this case.

Regardless, Newman claimed that it was entitled to quantum meruit damages – the value of its services – because STR and ultimately Northeast ISD accepted and retained the benefits of Newman’s work.

The evidence submitted by Newman was that it provided labor and materials for STR’s benefit, including additional mortar bed on the kitchen floor, blue bullnose tile as a finishing trim on a tile wall, epoxy grout, restocking fees, and weekend and overtime work. Newman submitted five Change Orders and Payment Requests aggregating approximately $25,000 for such labor and materials.

The Appeals Court determined that, if the trial court judgment is not upheld, STR would be unjustly enriched while Newman would be unfairly penalized. The Court then reviewed the [relatively] small claims submitted by Newman and compared to the overall contract price of $5.2 million paid by Northeast ISD.

And just to seal the deal, the Court concluded with “STR now seeks to escape liability on a contract it drafted by claiming that its behavior should be ignored because a strict construction of the contract imposes no liability on it.” In English I read that to mean that “STR had an airtight contract which Newman breached, but we are not going to let STR beat up a small subcontractor.”

The Appeals Court then ends with “STR, by [its] course of conduct, has violated the reasonable expectations and values that permeate business transactions.” Yes that is exactly what it says on the 8^th page. Serious.

Newman wins, again. STR loses, again. And good news for us lawyers – we have a new case on quantum meruit!

See STR Constructors Ltd v. Newman Tile, Inc.; 08-10-00210-CV; Texas Court of Appeals 8^th District, El Paso; February 20, 2013.

Lessons learned:

1.      The theory of “quantum meruit” still lives in Texas.

2.      Although not part of this case, you should know that TREC laws and rules prohibit real estate commission claims based on quantum meruit. In Texas you need a written commission agreement to be lawfully entitled to receive payment.

3.      Little guys confronting “The Machine” don’t always get beat up in Court. Thankfully.

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

Puffery vs. DTPA

Paul Kramer builds houses in Tarrant County. Expensive houses. He built a $2 million house for Melissa and Scot Hollmann.

As construction progressed, the house developed a moisture leak. Kramer sent an email to the Hollmanns telling them not to worry because it had been fixed.

After the Hollmanns moved into the house, it developed additional moisture problems involving the windows, HVAC and roof. The Hollmanns continued to receive assurances from Kramer, but when mold moved in the Hollmanns moved out.

And then in 2010 the lawsuits started.

Hollmanns asserted claims against the architect and several subcontractors, and then added Kramer for violations of the Texas Deceptive Trade Practices Act, breach of contract, breach of warranty and negligence. Most of the parties settled before trial, but not Paul Kramer.

The jury awarded approximately $1 million in damages to the Hollmanns after finding that Kramer engaged in false, misleading or deceptive acts. The trial court rendered judgment for the plaintiffs. Paul Kramer appealed.

Kramer’s appeal was primarily based on the theory of “puffery.” That is, that the statements he made and emails he sent contained merely his own opinions, not factual representations.

The trial court found that Kramer told the Hollmanns that the house would be a “magnificent home with a quality level rarely seen in Tarrant County,” that it would be a “kick butt house,” that “this is going to be a really great house,” that it would be “one of the finest homes in the city” and that the Hollmanns would be “pleased as punch.”

The Court of Appeals, perhaps after checking with Urban Dictionary or their 13-year old children, decided quickly that the term “kick butt house” and “pleased as punch” are slang terms comprising opinions, not statements of fact or factual representations.

The Court further advised that Kramer’s claim that the house will be “really great” is too indefinite to constitute an actionable misrepresentation.

Then the Court took a hard look at the other two statements made by Kramer: “magnificent home with a quality level rarely seen in Tarrant County,” and “one of the finest homes in the city.”

Careful evaluation and consideration of previous Texas appellate decisions led the Court of Appeals to decide that these statements were also subjective impressions and did not contain specific representations. Consequently and according to Texas law, all five statements were mere puffery and expressions of opinion – not representations of fact.

But wait there’s more. Kramer made other statements such as “Please don’t worry about the leak that was recently fixed,” and “We feel very strongly we have now identified the problem. Moisture in the walls by the leak will be handled immediately and will not pose a future problem . . . [T]he sills are the culprit” and “You can be sure that any nonsense associated with the resolution of all open issues will cease as of this moment.”

I think it was Kramer’s claim that “there is nothing inherently wrong with the house” that likely put the Hollmanns over the edge, after the house had been infested with mold. The Hollmanns vacated one month later.

The jury found that the latter statements were actionable under the DTPA. The trial court agreed, as did the Court of Appeals.

Hollmanns win. Kramer loses.

See Kramer v. Hollmann; 02-22-00136-CV; Texas Court of Appeals 2^nd District, Fort Worth; November 21, 2012.

Lessons learned:

1.      There is a thin line between statements of opinion and statements of fact or representations.

2.      Although not part of this case, TREC agents and brokers can be held liable and accountable for their statements of fact and misrepresentations, as can Texas property owners, builders, developers, contractors, sellers and landlords.

3.      Paul Kramer filed for bankruptcy protection on December 31, 2012, in Case Number 12-46996-DML-11, US Bankruptcy Court Northern District of Texas, Fort Worth Division. So, sometimes even when you are sure you have won . . . you haven’t really.


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

Oral deals aren't binding. Right?

David Duarte and Daniel Rojas were long-term friends. Duarte learned how to repair, maintain and program ATM machines. Knowing that Congress passed legislation permitting individuals to own and operate ATMs, Duarte sensed a sure-fire business.

David found several ATMs sitting in an El Paso warehouse. He bought one and approached Daniel about buying the others together. In the fall of 2002 they agreed to enter the ATM business together, splitting profits and losses equally.

So David Duarte testified.

Daniel Rojas had a different memory of the deal. Daniel recalled that he and David were not partners, but rather that Daniel was an independent contractor who was engaged to help David operate the ATM business.

For the initial three years the business was quite successful, but in May 2005 the parties were ready to end their relationship. Daniel told David he was keeping all of the ATMs and was going to pay David $1,000 per month. Duarte received a total of $2,500. Unhappy with the payout, David Duarte sued Daniel Rojas.

At trial Duarte presented evidence that the business was worth $420,000 and that he and Rojas had formed a lawful (but oral) general partnership. Duarte won the lawsuit. Rojas appealed.

Predictably, Rojas claimed that there was no evidence of a partnership.

The Court of Appeals determined that there are five factors to consider regarding the creation of a Texas general partnership: (1) right to receive profits; (2) intent to be partners; (3) right to participate in control of the business; (4) agreement to share losses or liabilities; and (5) agreement to contribute money or property to the business.

The Appellate Court evaluated all five factors and compared each to the facts as presented to the trial court. All five factors were proven to the satisfaction of the Appellate Court. Judgment was affirmed that a Texas oral partnership agreement existed and was enforceable.

And so, dear reader, I am sure you are wondering why this is newsworthy enough to place in my valuable blog. Right?

And here is the answer. Note the total, unmitigated absence of any facts or laws that the partnership agreement must be in writing. It’s not there. Purposefully. Texas law has always been, in my 30-year career and much longer, that general partnerships and joint ventures need not be written and signed to be enforceable.

Texas limited partnerships must be written and signed. Texas general partnerships and JVs – not so much.
See Rojas v. Duarte; 08-11-00072-CV; Texas Court of Appeals 8^th District, El Paso Texas; November 30, 2012.

Lessons learned:

1.      Texas general partnerships and joint ventures might be enforceable even though they are not written.

2.      Oral / verbal partnerships and JVs are tailor-made for problems. Be sure that all of your personal agreements to share income are written and suggest to your principals that they do the same (but without practicing law!).

3.      Best wishes for a healthy, happy and prosperous 2013!

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.

Sovereign Citizens

Jason Robert Williams allowed a default judgment to be entered against him in a nonpayment-of-rent case. Williams, represented by his brother “Julian Kevin: Williams” then sought to vacate the default judgment claiming that 2720 refused to credit his payment.

 

Jason had delivered to 2720 Realty, his Landlord, a “lawful Bill of Exchange.” It was a realistic looking but worthless money order.

 

2720 Realty deposited the instrument with its bank. It was returned uncashed and stamped “FRAUD.”

 

Jason appears to be part of a group of “Sovereign Citizens.” Sovereign Citizens have three basic beliefs. First, they adhere to the redemption theory, which is based on the premise that when the federal government abandoned the gold standard in 1933 it secretly pledged the physical bodies of its citizens as collateral to borrow money.

 

Second, Sovereign Citizens believe that the government created a fictitious entity for each citizen, and set up secret trust accounts through birth certificates and social security cards.

 

Third, SCs believe they can ‘redeem’ their birth certificates and in doing so, tap into their secret Treasury accounts. Using this theory, they further believe they can create money orders and sign drafts drawn on their Treasury Direct Accounts to pay for goods and services. And in this case, rent.

 

Marc Finkelstein, a Brooklyn Housing Court Judge, was not impressed and called the redemption theory “implausible,” “clearly nonsense,” “convoluted,” “peculiar,” “without merit,” and “equal parts revisionist legal history and conspiracy theory.”

 

Judge Finkelstein also allowed that “. . . Jason Robert: Williams will not prevail in this matter.” Unfortunately, Julian Kevin: Williams could not be reached for comment.

 

There have been numerous cases in the past few months in which the Sovereign Citizen theory has been advanced in eviction and other civil cases. At least in New York.

 

In Texas we have seen recently the specious public filings and recordations that mandated a fix by our Texas legislators. Even more recently we experienced “squatters” who thought they were gaining title to property by moving into vacant properties. Can the Sovereign Citizen movement – in the civil law context - be far behind?

 

See 2720 Realty v. Jason Robert Williams; L&T 077392/12; September 6, 2012.

 

Lessons learned (and one disclaimer):

 

1.      Beware the Sovereign Citizens. Terry Nichols, Oklahoma City bombing co-conspirator, was / is alleged to be a Sovereign Citizen.

 

2.      Sovereign Citizens may be using every means possible to disrupt America, including civil court proceedings.

 

3.      I tried diligently to review this case. I could not. It does not appear to be published in any manner. Consequently, these allegations are taken primarily from an article published in Texas Lawyer, and unless / until proven, should be assumed to be nothing more than allegations.

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

Note Guarantor vs. New Texas Laws

There was a foreclosure procedure used by lenders in Texas that increased leverage against borrowers. At foreclosure sales, some would offer a bid that was not only substantially less than the debt, but also significantly less than the property’s value. This created a deficiency balance. Lenders then decided to pursue the deficiency balance against the party that signed the Note. And, if / when applicable, the Guarantor.

 

Borrowers were unhappy. So, they lobbied their legislators. A fix was provided a few years ago. Our own Texas Property Code (yes THAT TPC – the one I am writing about constantly) was amended to provide some relief in the form of a fair market value offset. Check out 51.003 of the TPC.

 

Stated in its most simple manner, a debtor (borrower or guarantor) can complain that the lender bid an artificially low amount at the foreclosure sale, and created an inequitable deficiency balance. If the debtor is right, then through operation of TPC 51.003, the foreclosure sale bid is essentially increased to equal the property’s FMV as of the date of foreclosure.

 

And with that bit of introduction, here is today’s case.

 

Interstate 35/Chisam Road, LP and Malachi Development Corp loaned Villages LP $696,000. The Note was secured by a Deed of Trust on a Denton County property. Further securing the Note was a Guaranty signed by Mehrdad Moayedi.

 

When the gravy train . . . err umm the debt payments stopped, Villages foreclosed and bid $487,200. Villages then pursued Moayedi for $266,748 plus attorney’s fees and related expenses.

 

Moayedi defended the claim by citing the new provisions of the Texas Property Code and tendering evidence that the property had a FMV on the date of foreclosure of $840,000. I-35 responded by claiming that Moayedi had waived his right to rely on the Texas Property Code.

 

Moayedi had of course signed a Guaranty. The Guaranty did of course contain a waiver clause. However, the waiver clause did not specifically cite Section 51.003 of the TPC. And so – what lawyers dream about – a lawsuit was born.

 

The trial court sifted through most (maybe all) of this, and rendered a Judgment for Moayedi that since the Guaranty did not specifically waive his rights under 51.003, he was not liable for the uber-deficiency.

 

I-35 appealed.

 

The Dallas Court of Appeals evaluated the Note, property value, FMV, evidence, Texas laws, Texas cases and the potential that the Rangers might yet go to the World Series again. (That last part was a reading test.)

 

The Appellate Court concluded that the Guaranty did not need to specifically state “I WAIVE 51.003.” It was enough that Moayedi’s Guaranty Agreement waived “. . . any defense” and “. . . each and every defense . . .”

 

The trial court’s Judgment was reversed. I-35 wins. Moayedi loses.

 

See Interstate 35/ Chisam Road LP v. Moayedi; No. 05-11-00209-CV; Texas 5^th Court of Appeals; August 8, 2012.

 

Lessons learned:

 

1.      There are Texas laws to protect borrowers and guarantors against too-low foreclosure bids.

 

2.      The protections offered by those laws can be waived, at least in a commercial context.

 

3.      Don’t conclude that there is no waiver in place just because the loan documents do not specifically reference TPC 51.003.

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

Statute of Frauds!

In Texas a Statute of Frauds tells us that most contracts must be in writing. Actually in Texas real estate law we have two Statutes of Frauds. The ‘generic’ one is in the Business & Commerce Code. The one that is unique to real estate is in the Property Code.

But of course everyone knows this. Well not every one . . .

In January 2005 Randall May and Bill Buck (and others) signed a letter agreement regarding mineral rights in Leon County, Texas. Exhibit A was attached which provided a comprehensive description of four parcels of land, comprising 563 acres.

The letter agreement, however, also said that Buck would assign to May “. . . all the mineral rights and a 100-acre spacing centered around the David Morris Gas Unit # 1 in Leon County, Texas.”

Buck did not assign the mineral rights to May, so May filed a lawsuit. Buck defended based on a failure to satisfy the statute of frauds, meaning the letter agreement was unenforceable because the 100-acre parcel was not defined in the letter or in an attachment.

It appears that the issue at trial was not related to the location of David Morris Gas Unit # 1, but rather the boundaries of the 100-acre parcel. Predictably, one expert testified that he could not determine the location of the 100 acres. Now here’s a big surprise. The other expert said he could determine with reasonable certainty the shape and location of the 100 acres. I know you were shocked to read that.

Then the experts argued that the parcel was in the shape of “rectangular halo,” “donut” or “picture frame,” while others were of the belief that since the well bore was at the center, the spacing must resemble a circle, square or oblong.

You can’t make this stuff up.

The trial court ruled for Bill Buck and determined that the letter agreement failed. Because it did not satisfy the Texas statute of frauds.

Randall May appealed.

Texas law is about as clear as mud on this point. Basically, if enough data appears in the description that a person who is familiar with the area can find it, it is sufficient.

The Texas Court of Appeals concluded the description failed to meet the statute. And that made the letter agreement unenforceable. The Judgment of the trial court was affirmed.

Bill Buck wins. Again. Randall May lost. Again.

See May v. Buck; No. 05-09-01501-CV; Texas 5^th Court of Appeals; July 11, 2012.

Lessons learned:

1.      There are two Statutes of Frauds that relate to real property in Texas. Not just one.

2.      References in an agreement or lease or contract to attached exhibits work fine. Sometimes even drawings are sufficient. But simply stating a “100-acre space” or similar, without anything more, means the deal may fail if challenged.

3.      If the deal is challenged, and fails, bad things happen. Sellers, buyers, landlords, tenants, lenders and others are not happy. Unhappy people tend to sue those they think are responsible for their sense of unhappiness. Don’t be on the receiving end of unhappiness. Don’t be that person.

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

Easements!

Easements are not sexy. But they are a necessity when there is no direct access to a publicly-dedicated street or road.

 

Dawson-Conway Ranch, Ltd. owns 26,000 + acres north of Abilene in Shackelford County, Texas. The DC Ranch has its own facebook page: http://www.facebook.com/pages/Dawson-Conway-Ranch-Deer-Lease/198022160276484. Access is through Texas County Road 167, which ends at the NW quadrant of the ranch. Access through the remainder of the ranch is across the Clear Fork of the Brazos River. The Clear Fork also separates the Mark Harrington ranch from the DC Ranch.

 

Deposition testimony was that the river crossing (no bridge) is frequently impassable and always undependable, although the water is generally only one or two feet deep.

 

There was additional evidence that there were rough roads in the SW quadrant of the DC Ranch which were used to drill and access oil and gas wells.

 

Mark Harrington’s predecessors began leasing land on the Harrington ranch for mineral production in 1918. Guests and invitees of both ranches used whichever roads they could access, without interference, for many years. Since the properties were adjacent, it seems no one paid much attention to the owner of the property they were crossing.

 

The access to Mark Harrington’s property stopped in December 2007, when Harrington had enough of DC’s hunters throwing trash on his land, shooting his deer, and driving too fast on his roads. Or perhaps it was when a hunter shot a dog belonging to one of his managers. Either way, enough was enough.

 

So Harrington locked the gates. And DC sued Mark Harrington for access.

 

The trial court granted DC’s motion for summary judgment, holding that DC had established a ‘prescriptive’ easement across Harrington’s property. Harrington appealed.

 

In Texas, to obtain a prescriptive easement the use must be open, notorious, continuous, exclusive and adverse for at least 10 years. There is no exclusivity when a landowner and land-claimant both use the same road. A shared use is not adverse.

 

Perhaps sensing that DC would lose that argument, DC also claimed that it had an ‘implied easement by necessity by grant.’ Texas cases involving this type of easement require a “strict necessity” test, which means there is no other means of access. Although inconvenient and perhaps requiring a rowboat or at least sturdy waders and high-water pants, access to the DC Ranch could be maintained through Texas CR 167 and also across the pond.

 

Therefore, the judgment of the trial court was reversed and rendered for Mark Harrington that Dawson-Conway has no easement by prescription or necessity across the Harrington Ranch. Mere inconvenience and huge expense (such as bridge construction) do not, by themselves, grant legal access across a neighbor’s property in Texas.

 

See Harrington v. Dawson-County Ranch, Ltd.; No. 11-10-00124-CV; Texas 11^th Court of Appeals; June 4, 2012.

 

Lessons learned:

 

1.      Easements are critically important. Not only in ranchland, but also office, warehouse, shopping center, retail, and multi-family properties. Yes it is possible to sell / buy or lease land-locked property in our state. Unusual, but not impossible.

 

2.      Don’t assume that a property has access to roads. Check a title commitment and survey, then read each easement document.

 

3.      When easements are vital, get easement insurance from the title company. Usually there is no additional charge if the easement description is merely added to Schedule A of the title commitment and owner policy. And remember – title insurance is available not only in purchase and finance transactions, but leases too.

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

Commissions!

Just like virtually all of my readers, Zach Manning and IntraRealty, Inc. are TREC licensees. Today they seem to be connected through ownership; not sure about 2006 when this case started.

 

2006 was the year that Manning and IntraRealty accepted a listing from HomeEq, to sell Texas property. HomeEq was a mortgage servicing company. HomeEq accepted a purchase offer from Karen Vicknair for $195,000 in 2007. While Karen’s contract was pending, HomEq transferred management of the property to Litton Loan Servicing. Manning and IntraRealty had no commission agreement with Litton.

 

Litton was unable to close the deal “. . . because it did not have the correct person to sign the deed.” So Karen terminated and received the return of her earnest money. Manning and IntraRealty then demanded that Litton pay a commission of $11,500. Litton refused to pay the commission since the property had not been conveyed.

 

So Manning and IntraRealty sued Litton. The trial court, based on a jury’s verdict, rendered judgment for Manning and IntraRealty for the $11,700 commission, plus $30,000 for attorney’s fees. The trial court concluded that a series of emails in 2007 constituted a legally binding contract for Litton to pay a commission if Manning and IntraRealty procured a ready, willing and able cash buyer.

 

Litton appealed, claiming that TREC statutes require a written agreement, signed by the party who is to pay the fee. Manning and IntraRealty relied on not only various emails, but also the Contract itself. The Contract did not specify a commission amount, although it did indicate that the obligations of the parties to compensate brokers were governed by separate written agreements.

 

Regardless, Manning and IntraRealty were unable to produce a written commission agreement, signed by Litton or its agent, obligating Litton to pay Manning and IntraRealty a stated fee based upon the conveyance of an identified property.

 

Relying on the strict interpretation of the Texas Real Estate License Act and consistent with many other Texas appellate decisions, the Texas Court of Appeals overturned the judgment of the trial court and rendered judgment for Litton. Without a written commission agreement signed by the party who is obligated to make payment, Texas laws were not satisfied and Litton owed nothing.

 

Litton wins. Manning and IntraRealty loses.

 

See Litton Loan Servicing LP v. Manning and IntraRealty Inc.; No. 05-10-00675-CV; Texas Court of Appeals - Dallas; April 26, 2012.

 

Lessons learned:

 

1.      Commission agreements must be in writing and signed by the party obligated to pay the fee!

 

2.      Commission agreements must identify the broker to whom the fee is payable!

 

3.      Commission agreements must identify the property that is the subject of the transaction!

 

 

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

Tenants: Beware the Build-To-Suit

I love Supreme Court case opinions. The Supremes don’t take on commercial real estate cases very often. But when they do, we always receive a well-reasoned, uber-researched opinion.

And sometimes the Supremes are right!

More than 10 years ago ECO Resources, Inc., entered into a build-to-suit lease with its landlord TA / Sugar Land-ECO, Ltd. for the construction of a 32,000 s.f. office and lab. TASL then agreed to sell the property to Ashford Partners, Ltd. Closing was within 30 days after the commencement date of the ECO lease.

Construction was completed in about six months. ECO accepted the building as “substantially complete,” but submitted to TASL an 8-page punch list of items in need of repair. As required by the lease, ECO then executed an Estoppel Certificate (verifying the validity of the lease and other similar matters). TASL doubtless submitted the Estoppel to Ashford. Then TASL sold the building to Ashford two weeks later.

ECO’s building problems started two years later. Water collected under the foundation, evidently caused by the failure to caulk between the tilt wall panels below grade.

Ashford spent more than $313,000 to repair the problem, and then sued the construction contractor TASL had used and ECO. The claim against the contractor was settled. However, ECO filed a counterclaim against Ashford for breach of lease, and ECO did not abandon its claim.

At trial the jury found that ECO had been damaged because the value of its lease was diminished. The trial court rendered judgment for ECO against Ashford for almost $1.5 million.

Ashford appealed. The Court of Appeals concurred with the trial court, and accordingly affirmed the trial court’s judgment.

So Ashford appealed again, essentially claiming that since ECO complained of construction issues, Ashford had the building repaired and consequently ECO suffered no damages.

The Texas Supreme Court determined that the trial court and court of appeals had applied an improper damages test of the difference between rent and the value of the leasehold. Instead, the Supremes determined that the landlord’s obligations in the lease – to repair construction defects – had been adequately satisfied. Consequently, ECO had not been damaged and should not have prevailed in either the trial court or court of appeals.

The lower court judgment was reversed. Ashford wins. ECO loses.

See Ashford Partners Ltd. v ECO Resources Inc.; No. 10-0615; Supreme Court of the State of Texas; April 23, 2012.

Lessons learned:

1.  Build-to-suit leases are inherently risky for both landlord and tenant.

2.  If a tenant has a problem regarding construction that cannot be resolved, the tenant – at least in Texas – needs to argue this point in court: “business disruption.”

3.  If a landlord has a problem with a pesky tenant, the landlord – in Texas – should be able to respond with this statement in court: “I had it repaired.”

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.

Part Two: Do Non-Representation Provisions Really Work?

Matlock Place Apartments, LP (it’s in Arlington Texas) was controlled by Hagop Kofdarali. Druce Properties, LLC purchased the apartments in 2004. Both were fairly sophisticated owner / operators, with at least some level of experience in managing  multi-family properties.

 

When Hagop’s sister initially purchased the property in 2002 the occupancy rate was only 40% - 50%. In 2002 and 2003 Hagop spent more than $500,000 in repair and remodel expenses, possibly as a condition to a $1.8 million loan.

 

Hagop then listed the property with a national brokerage firm. The firm prepared and distributed to Druce a marketing brochure which provided for a 93% occupancy rate and claimed “Major Rehab Just Completed.” Hagop, however, testified at trial that occupancy could fluctuate monthly anywhere from 80% - 93%, and that the rehabilitation was incomplete because the roof repairs and unit-interiors still required work.

 

Druce and Hagop signed a letter of intent for $2.4 million, which provided a 21-day inspection period as well as a $100,000 credit at closing for “repairs and maintenance.” Druce testified that he personally inspected the property and viewed 10 of the 99 units. He was satisfied with what he saw, and continued with the analysis.

 

After the contract was signed Druce received 1,500 – 2,000 pages of documents from the property manager. Included within the package were disclosures regarding delinquent rentals and serious criminal activities. Druce claims he did not notice them, since they were “buried” in the pile of paper.

 

Druce and Hagop closed the deal in July 2004. Druce evidently visited the property a few days before closing and noticed that it looked deserted. During that visit he also learned from an Arlington police officer that the area was well known for drug dealers, addicts and prostitutes. But he bought it anyway, claiming he was financially and emotionally invested in it, thinking that the income stream would be “gigantic.”

 

After closing the occupancy rate was between 58% and 78%. Druce spent $800,000 to rehabilitate the property, all in an effort to merely break even.

 

Druce, claiming he relied on Hagop’s representations as contained in the marketing piece and that such reps were untrue, brought a lawsuit seeking damages. The trial court entered Judgment against Hagop for approximately $2.4 million, finding that Hagop committed fraud by failure to disclose.

 

Hagop’s appeal was primarily centered around the theory that Druce could not have relied on anything that Hagop (or his broker) did or did not say or represent, because of the full-blown “as is, where is, non-reliance” clause in bold, upper case type in the Contract.

 

The Texas Court of Appeals in Fort Worth agreed with Hagop. Judgment reversed. Hagop wins. Druce loses. A properly worded “as is, where is, non-reliance” clause may still be effective in Texas.

 

See Matlock Place Apartments v. Druce; No. 02-09-00130; Court of Appeals, Second District of Texas; January 17, 2012.

 

Lessons learned:

 

1.      Recently, my son published an article evaluating the continuing effectiveness of “non-reliance” clauses in commercial real estate. Recent Texas Supreme Court authority indicated that such clauses are almost extinct. This Fort Worth Court, however, has a different view.

 

2.      Sellers should check their Contract forms to be sure they track the language of the “non-reliance” clause in this case as close as possible.

 

3.      Buyers should check their Contract forms to be sure they track the language of the Italian Cowboys case my son wrote about.

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

Do Non-Representation Provisions Really Work?

My son Jon Lautin is in law school at Boston University. He wrote this, and it is reprinted here with his permission.

Fraud is bad, and courts don’t like it.

Franceso Secchi and his wife Jane Secchi opened a restaurant called Italian Cowboy in Keystone Shopping Center, in Dallas. The land and building was owned by Prudential Insurance Company and had been previously leased to Hudson’s Grill. Evidently Hudson’s struggled to pay rent, and vacated.

The lease contained two clauses relevant to a claim later asserted by M/M Secchi: the first stated that the Secchis did not rely on any representations by Prudential except those stated in the lease (a “Merger” clause). The second contained an “Entire Agreement” clause stating that the lease constitutes the entire agreement and no changes are binding unless signed by both parties.

Before signing the lease the Secchis were assured by agents of the landlord that the building was new, had no problems, was in “perfect condition” and that the previous tenant had no issues with the building. However, immediately after moving in the Secchis noticed that there was a sewer stink permeating the building. After some investigating they discovered that the grease trap was improperly installed which caused the terrible smell.

Both the Secchis and Prudential attempted to fix the problem but were unsuccessful. Before Italian Cowboy was scheduled to open for business, the Secchis realized that the smell prevented the possibility of a successful restaurant. They stopped paying rent and sued Prudential for fraud and negligent misrepresentation. Prudential counterclaimed for breach of contract since the Secchis stopped paying rent.

Numerous facts allowed the Secchis to win approximately $600,000 in damages in trial court. The previous tenants of the building, also owners of a restaurant, notified Prudential of the foul smell long before the Secchis started lease negotiations. Nonetheless, the defendants claimed that they were not aware of the stench when confronted by the Secchis. Prudential reassured the Secchis numerous times before signing the lease that the building was in perfect condition. These statements, determined to be false in the trial court, were enough to prove fraud and negligent misrepresentation.

Or so the Secchis thought.

The Texas Court of Appeals disagreed and held that the lease barred claims for fraud and negligent misrepresentation. The Court of Appeals stated that not all “Representation” clauses bar fraud and negligent misrepresentation claims unless it is clear that both parties intend the clause to be binding. Reverting back to a fundamental principal of American contract law, the Court of Appeals decided that both the plaintiff and defendant had a “meeting of the minds” to bar all fraud claims. Furthermore, the Appellate Court held that there could be no fraud and negligent misrepresentation because the parties were experienced businesspeople and they had competent attorneys negotiating the contract. Therefore, the merger clause is binding since the evidence suggests the parties meant it to be binding.

Or so Prudential thought.

The Supreme Court of Texas reversed the Court of Appeals’ decision. The Supreme Court held that the language of the “Representation” and “Merger” clauses did not show intent to bar allegations of fraud and negligent misrepresentation. The Court further explained that even if the parties intended to release all claims of fraud, the clauses in the contract did not contain “clear and unequivocal language” to that effect.

The ruling in this case may indicate a change in direction for the Supreme Court of Texas. In a landmark case in 1997, Schulumberger Technology Corp. v. Swanson, the Court held that a particular contract with a similar “Representation” clause effectively barred all claims of fraud. While there are differences between the facts of the two cases, the Texas Supreme Court’s willingness to hear the Italian Cowboy case and its decision that fraud was not barred could show that Texas is following other states and taking a hard-line stance on fraud.

See Italian Cowboy Partners, Ltd. v. The Prudential Insurance Company of America; No. 08-0989; Supreme Court of Texas; April 15, 2011.

Lessons learned:

1.      Courts will usually allow a party to stop performing their obligations under a contract if that party was fraudulently induced into entering the contract.

2.      Including clauses that appear to bar fraud claims may not be sufficient to bar fraud claims.

3.      Courts, like juries, can be unpredictable.


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

For Sale Cheap – 545 Acres in Wood County

In November 2003 William Earl Norris and Martha Sue Norris decided to sell their farm to Eleanor Fox Davis. William and Martha signed not one, not two, but three – count ‘em three – contracts, all with Eleanor.

In the first contract M/M Norris agreed to sell 215 acres to Ms. Davis. Davis also had the right to acquire more acreage from M/M Norris, being the remainder of the 545-acre farm. In the second, Davis agreed to purchase 10 acres from Norris. The third contract was for approximately 210 acres. The parties closed on the second and third contracts, but left the first pending.

In 2006 Davis sent M/M Norris a letter announcing her intention to exercise the option in the first contract. Counsel for the Norris’ did not agree that Davis was entitled to purchase more property, and consequently M/M Norris did not appear at the time and place designated by Davis for closing.

Davis sued M/M Norris for specific performance or damages. Davis lost. Davis appealed.

The Texarkana Court of Appeals first stated that options must be clearly drafted and the purchaser must strictly comply. The Appellate Court concluded that the contract was unclear as to what, exactly, is required to exercise the option. This conclusion was based primarily on the handwritten statement in the contract that: “SELLER WILL HAVE 9 MONTHS NOTICE BEFORE BUYER WILL CLOSE,” coupled with some additional unclear provisions.

The handwritten clause followed a provision granting Davis “. . . an Option and First Right of Refusal until January 1, 2007 to purchase [the property].” But what is the correlation between the January 1, 2007 deadline and the 9-month notice provision? Must nine-month notice be issued before January 1, 2007, or must the closing be completed by January 1, 2007?

At the trial court M/M Norris won a summary judgment based on the single theory that Davis did not timely exercise the option. The Court of Appeals reversed the decision of the trial court, and remanded the case back to Wood County to figure out what the parties had contemplated to properly and timely exercise the purchase option.

See Davis v. Norris, 06-10-00093-CV, 6^th Court of Appeals, Texarkana; October 27, 2011.

Lessons learned:

1.  It appears that no brokers were involved. Thank goodness, since clearly all brokers and agents would have been sued.

2.  Option contracts are tricky. Do not draft option contracts, rights of first refusal, rights of first offer or anything similar, in contracts or leases. Or anywhere else for that matter. Even seasoned lawyers often make mistakes in this area.

3.  Review option language closely. Everything in an option provision must be spelled out with great particularity – timing, property description, pricing, review and due diligence periods, earnest monies or additional deposits, means by which notice must be furnished, title companies, closing documents, prorations, taxes, etc. Tricky stuff. Seriously.


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

SPECIAL ALERT! Adverse Possession Claimants Enter North Texas Residential Markets**

I learned of the problem last July. That was when the Dallas Morning News reported that an individual moved into a vacant Flower Mound property worth $340,000 and attempted to claim ownership. Kenneth Robinson paid nothing for the property. Robinson did not agree to pay off the existing mortgage. Robinson did not agree to pay rent, repair the property, “stage” the property for buyers, care for the property or make any other agreement. Robinson merely noticed the property was vacant, and moved in.

The DMN article gives some context for Robinson’s legal position.

Kenneth Robinson evidently noticed that the Waterford Park Estates property had been vacant for about a year. It seems that the owner may have lost interest in it, and then the owner’s lender filed bankruptcy in 2009. Perhaps the owner had no equity in it and elected to allow foreclosure – toss the lender the keys so to speak – but those facts are not given in the article. Maybe the owner assumed that the lender would foreclose quickly and was surprised that they did not and instead had their own financial difficulties which led to their bankruptcy.

But those facts were also not provided, so we can only guess why the owner vacated and the lender did not foreclose.

A few months ago Robinson moved his pool table into the dining room, installed his washer and dryer, and placed his bed and office equipment into the home. He turned on the utilities. And then he called the locksmith to change the locks. And hand him the new keys.

The neighbors expressed their unhappiness to Robinson in a meeting at the property. Robinson responded by calling the police. “I didn’t file charges against them” he reportedly said.

Ken Robinson Sr. did however file an “Affidavit of Adverse Possession” with the Denton County Clerk. I obtained a copy. In the Affidavit Robinson states “. . . I am claiming ownership of the above described property peaceably.”

Obviously a mere claim of ownership does not so easily defeat the true owner’s rights. Yet this is troubling because Texas adverse possession laws (sometimes called “squatter’s rights”) are complex and can be used to at least cause expensive problems to the true owner.

But wait – there’s more. Recently the Fort Worth Star-Telegram reported on similar filings in Tarrant County. Paul Roper filed virtually the same Affidavit with respect to Mansfield property, then Anthony Brown signed an identical Affidavit. Also for Mansfield property. Those two Affidavits of Adverse Possession – Roper and Brown – were filed on the same date with the Tarrant County Clerk. Same time too.

This ultimately led the Tarrant County District Attorney to instruct the Tarrant County Clerk to stop recording the Affidavits. Meanwhile, predictably, litigation has started.

Under Texas law, an individual can properly claim ownership if s/he occupies the property for a term of years. There are other requirements. The occupancy must be open, notorious, hostile and adverse to the true owner. Payment of real estate taxes can greatly help the “squatter’s” claim, but it is not a strict requirement.

Property owners and lenders need to be aware of this sticky problem, particularly if the owners and lenders are non-resident in Texas and trust others to check on their properties. The risk is reduced if occupants use property pursuant to written Leases. If, however, an occupant repudiates the Lease but continues to occupy the property, then that occupant might also attempt to file a “squatter’s claim” of adverse possession.

Lessons learned:

1. Check your properties constantly. Owners need to know your tenants and know who is in occupancy at all times. Lenders need to know their owners.

2. Check the local Deed Records constantly. You might find that an Affidavit of Adverse Possession has been filed. Or a tax lien. Judgment lien. Mechanic’s lien. Deed of Trust lien. There can be any number of surprises and the time to deal with them is now, before they ripen into a much larger problem.

3. Check your Leases constantly. Be sure that you have a complete (that means all exhibits, schedules, attachments, amendments and renewals) fully-signed Lease and Guaranty on file for each tenant.

** Full disclosure. Content for this article came from the Dallas Morning News, Fort Worth Star-Telegram, Denton County Clerk and Tarrant County Clerk. To my knowledge no allegations have been proven in a Court of Law and consequently, they are only allegations.



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

Have You Hugged Your Lawyer Today?

Graydon Howell and Inez Howell owned 43 lake lots at Lake Colorado City, Texas, and leased the lots to various tenants. The lots were ultimately sold to Providence Land Services, LLC in 2008, subject to the leases.

Evidently, the Howells elected to prepare the leases without the aid of an attorney. The duration of the leases was described in this clause: “For the sum of $_____, the receipt of which is hereby acknowledged, a like annual rental of $_____ payable each year on or before _________, Lessor will lease to Lessee the following described lot or parcel of ground on [the] shores of Lake Colorado City, for residential purposes only, for the period from this date until Indefinite . . .” [emphasis added.]

The trial court determined that “Indefinite,” in this context, meant 99 years from the date of lease execution. This was based, at least in part, upon the tenants’ evidence at trial of their substantial work to clear the lake lots for occupancy and substantial, expensive improvements with the expectation that the tenants would be allowed to pay rent and remain at the property for a long time.

Providence appealed.

The Texas Court of Appeals decided that “ ‘Indefinite’ is not synonymous with ‘infinity,’ ‘perpetual,’ or ‘forever.’ ” Since the leases have no stated end date, the tenancy is terminable by either party at any time. That ruling doubtless pleased Providence, but the tenants – not so much.

See Providence Land Services LLC v. Jones, No. 11-09-00298-CV, Texas 11th Court of Appeals, October 6, 2011.

Switching gears . . . William Norris and Martha Norris signed three different contracts to sell Wood County property to Eleanor Davis, all dated November 5, 2003. One contract closed and funded, but then a dispute arose regarding an option to purchase the balance of the farm. Davis sued Norris for specific performance and damages. Norris won in trial, and Davis appealed.

The option contract at issue allowed Davis to purchase the remainder of the 545 acre farm. Exhibit A to the Contract stated: “SELLER WILL HAVE 9 MONTHS NOTICE BEFORE BUYER WILL CLOSE.” Exhibit A also provided that Davis had the “. . . Option and First Right of Refusal until January 1, 2007 to purchase . . .” the option property.

Davis attempted to exercise the option on March 20, 2006, by sending a letter to Norris providing that the closing would be on December 20, 2006. This would seem to satisfy the Exhibit A requirements, except that the letter was not actually mailed until March 28, 2006.

The Texas Court of Appeals, however, decided that the notice clause was ambiguous. The notice provision did not state that the notice was a condition to the proper exercise of the option. The exact meaning of the January 1, 2007 date was also unclear to the Appellate Court.

The Texas Court of Appeals dispatched the case back to the trial court, to try, try again. See Davis v. Norris, No. 06-10-00093-CV, Texas 6th Court of Appeals, October 27, 2011.

Lessons learned:

1. Be sure the language you insert in a Contract or Lease is CRYSTAL clear.

2. Don’t forget that TREC laws and rules prohibit TREC licensees from practicing law. Only the parties and their attorneys can draft these types of legal terms and provisions. TREC licensees may not.

3. Sometimes it makes sense to get a lawyer involved – to be sure the parties’ intent is properly stated.


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