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.

Corporate Fraud - Or Not?

TransPecos Banks made a series of loans to Roger Jones in 1998 - 2001. As collateral, Jodi Strobach (Mr. Jones’ daughter) pledged a 220-acre farm she owned, and Jodi also assigned the Bank the right to receive farm subsidy payments from the USDA.

Another loan made by Roger to the Bank was secured by six more tracts of land owned by both Roger and Jodi. Those mortgages were all subordinate in position to other lenders, including the SBA, Farmers Home Administration and Farm Credit Bank of Texas.

Roger fell behind on his loan payment in 2003. So a Bank officer agreed to a two-step plan to refinance all of Jones’ loans.

The first step was to have Jodi form a new corporation into which she would transfer her 220-acre farm together with two other tracts of land she owned.

The second step was to have the new corporation obtain a loan from the Bank, secured by those three tracts of land and by the USDA farm subsidy payments.

Evidently the Bank was responsible for devising the plan, the Bank prepared all of the documents and Jodi merely showed up at the Bank to sign the documents as requested by her father and the Bank.

To implement the plan, Jodi formed Jones-Strobach Farms, Inc. as a Texas corporation in February 2003. Jodi and Roger were named as Directors; Jodi was the President while Roger was the Treasurer and Registered Agent. Jodi maintained 100% ownership of the stock, and Roger had no involvement after it was formed.

A few days after filing the Articles of Incorporation with the Texas Secretary of State, Jodi signed a Warranty Deed transferring her interest in the three tracts of land to the new corporation, and in March 2003, the Bank made two loans of $160,000 each to the new corporation and Roger.

The corporate Note was signed by Jodi in her capacity as President of the corporation. As well, Jodi signed a Mortgage in her corporate capacity as President, pledging to the Bank the three tracts of land now owned by the corporation.

The 2003 loans were kept current through 2007. However, the loans became delinquent and the Bank foreclosed in May 2008 on all the loans.

In December 2008 the Bank sent a demand letter to the corporation, advising that $31,000 remained due and owing. In 2012 the Bank sued Jodi, attempting to hold her personally liable for the balance owed on the corporation’s 2003 loan.

Both Jodi and the Bank agreed that Jodi had signed the loan as the corporation’s President, never intending for Jodi to be personally liable. Remember that Jodi had not signed a personal Guaranty or anything similar.

The Bank’s theory, however, was that Jodi formed Jones-Strobach Farms, Inc., as a sham corporation with valueless assets, in order to defraud the Bank, with no intent of ever repaying the debt and with the sole goal of avoiding personal liability.

At trial, Jodi claimed she could not be held personally liable for the debts of the corporation which she had formed solely at the Bank’s request. The trial court ruled for Jodi; the Bank appealed.

The Court of Appeals reviewed the uncontradicted evidence that the Bank had devised the plan, prepared all the documents and asked of Jodi only that she come to the Bank to sign the new loan papers. There were no false representations and there was no false information that induced the Bank into making the 2003 loan to the corporation.

The Bank was, as determined by the Court of Appeals, fully aware of the circumstances when it accepted the highly-encumbered land as collateral for the 2003 loans. Regardless, the Bank suggested the plan, implemented and papered it. Consequently, the Court of Appeals had little trouble affirming the Judgment of the trial court.

 Jodi Strobach was not personally liable for a corporate loan she did not guarantee. Jodi won again.

 See TransPecos Banks v. Strobach; Cause No. 08-14-00059-CV; Tex. App. Dist. 8; May 2, 2016: http://law.justia.com/cases/texas/eighth-court-of-appeals/2016/08-14-00059-cv.html.   

 Lessons learned:

 

1.      It is a powerful tool to form and use corporations, limited partnerships and limited liability companies. Texas Courts get it, and if there is no fraud then neither the shareholders, the directors nor the officers will be held liable for the civil debts of the entity or each other while it is properly formed and maintained.

 2.      One might wonder if perhaps this outcome could have been different if this was a plan formed and implemented by Jodi, instead of the Bank. As well, presumably there would have been no lawsuit if Jodi had signed a personal Guaranty that was properly drafted.

3.      While entities are useful to hold and mortgage real estate, the same theory applies to brokerage businesses. A properly formed and maintained entity should insulate the owners of the company from the debts and obligations of the entity and its shareholders or members, and as such is highly recommended.

 

                                                                                    Stuart A. Lautin, Esq.*

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

 

 

                       

 

Something Different

Virtually all of my posts have been about core real estate issues. This is not.

In the past when real estate investors needed a new entity, we routinely formed limited partnerships. There was a distinct tax advantage in doing so.

That dynamic changed when our Texas legislature amended the laws. Since limited partnerships became taxable in Texas like all other entities, lawyers shifted to forming limited liability companies as the entity of choice.

This post is about an ex-member of a Texas LLC. I hope you will find it relevant, since virtually all of the real estate entities I work with involve LLCs, and members entering and exiting.

Mark Davis was formerly a member of Highland Coryell Ranch, LLC, a Texas limited liability company. He relinquished his membership in 2005 but later wanted to inspect the books and records of the LLC.

Highland refused. Mark sued.

The trial court entered a Judgment denying Mark the right to access the books and records of Highland. Mark appealed.

Texas law is clear on this point, and allows each owner or member to examine the books and records. Mark Davis asked for a judicial interpretation that the terms “member” and “owner” relate to both present and past members and owners. Highland argued, and the trial court agreed, that those terms refer to only current members and owners.

The Texas Business Organization Code defines both terms. A member means a person who is a member or has been admitted as a member. And, an owner is a member. It seems that the trial court did not find the definitions in the TOC, or perhaps overlooked them.

With that, the Court of Appeals had little trouble reversing the Judgment of the trial court.

Mark Davis wins. Highland must cough up the books and records.

See Davis v. Highland Coryell Ranch LLC; Cause No. 07-15-00269-CV; Tex. App. Dist. 7; April 21, 2016: http://www.texaslawyer.com/id=1202754314762/Davis-v-Highland-Coryell-Ranch-LLC-071500269CV-TexApp-Dist7-03282016?slreturn=20160325193643.  

Lessons learned:

1.      There is confusion about the rights of LLC members and the ability of the members to inspect the accounts of the LLC. Those rights remain with the members even after they sell or cancel their membership interests.

2.      The right way to handle the exit of Mr. Davis should have been in a Settlement Agreement, where Mr. Davis specifically released his entitlement to inspect records of Highland. Apparently that did not happen.

3.      Another means to handle this might be to limit the rights of inspection of the members in a Company Agreement or Operating Agreement, particularly when the members are, well, no longer members. Evidently that did not happen either.

 

 

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

Agency Authority

Buddy and Jaret Casteel owned and operated “The Hog Pen” in Leakey Texas, located on property owned by Amelia Stayton. On July 8, 2011, Jaret Casteel and Melissa Baugh (Stayton’s sister) signed a commercial lease in which Baugh was identified as the “Landlord / Lessor / Agent.” The lease term ended July 14, 2012, and then renewed on a month-to-month basis for several more years.

My investigation reveals that today The Hog Pen sells sausage on a stick, smoked boudain (both links and fried boudain balls with cheese), t-shirts, coffee, brisket, koozies, firewood and tubes: http://www.thehogpenstore.com/.

Leakey Texas evidently is known as a place to and from which bikers ride. There is mention of Ranch Roads 335, 336 and 337, but it does not resonate with yours truly.

But I digress.

On August 11, 2014, Baugh sent the Casteels a notice to vacate since the property was in the process of being sold. Consequently, Baugh requested the Casteels to vacate by September 15, 2014.

Jaret and Stayton communicated several times in September 2014. Jaret asked first to buy the property, then to delay the lease termination for 45-60 more days.

On September 16, 2014, Baugh’s counsel send another notice to vacate to the Casteels, giving them 11 more days to relocate.

Circumstances must have changed after the date of that letter, as on September 18, 2014 Baugh and the Casteels signed a handwritten lease for a 10-year term starting September 14, 2014, ending September 14, 2024.

Counsel for Amelia Stayton (recall that Stayton is the actual owner of this property) then weighed in with yet another notice to vacate, this time by September 27, 2014. And when the Casteels did not vacate, Stayton asserted an eviction lawsuit on October 6, 2014.

 The case proceeded to trial in Justice Court in Real County, Texas. The Justice of the Peace entered a Judgment that Stayton may recover possession of The Hog Pen from Casteels.

 The Casteels appealed to the County Court of Real County for a new trial. The County Court also signed a Judgment awarding Stayton possession. So Casteels again appealed.

 In the last appeal the Casteels conceded that Baugh lacked actual authority to act as Stayton’s agent when Baugh signed the 10-year lease. However, the Casteels claimed that the evidence was insufficient to provide that Baugh lacked apparent authority to lease the property as Stayton’s agent.

 Actual authority vs. apparent authority. That is all the separated the Casteels from a binding 10-year lease to operate The Hog Pen in Leakey, Texas.

 The Court of Appeals reviewed the evidence tendered in the trial court to the effect that Baugh had no authority to renew the lease after September 15, 2014. The Court evaluated the various notifications and communications, and questioned if the Casteels attempted to confirm Baugh’s authority to lease the property after September 15, 2014.

 Finding that “. . . because the evidence that the Casteels had notice of the limitations of Baugh’s power was undisputed . . .” the Court held that the evidence tendered in the trial was legally and factually sufficient to support the trial court’s judgment. In short, the Court of Appeals was not going to challenge those who reviewed and weighed the authority evidence in the trial court.

 Stayton wins again (for the third time). Casteels lose again (for the third time).

See Casteel v. Stayton; Cause No. 14-15-00273-CV; Tex. App. Dist. 4; March 23, 2016: http://www.morelaw.com/verdicts/case.asp?n=04-15-00273-CV&s=TX&d=88657.

Lessons learned:

1.      Based on this case, property sellers, buyers, landlords and tenants have every right to question the authority of the opposing brokers and agents.

2.      Anticipating the question, brokers and agents might consider asking their principals to sign a “to whom it may concern” letter which brokers and agents might be able to distribute to opposing parties, to end the discussion before it begins.

3.      Principals dealing with other persons or entities whom they believe to also be principals can easily verify property ownership to be sure. As Dallas County examples, I use both DCAD (http://www.dallascad.org/) and Dallas OPR (https://roamdallaspropertyrecords.com/). Virtually all counties have something similar, and the fees vary between free and a few shekels for an online search.

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

It's Hug Your Lawyer Day!

Edward Sherman dba Find It Apartment Locators and Citi Homes operated multiple apartment locating businesses. Datril Boston occasionally worked for Ed, locating apartments for tenants in exchange for fees paid by the apartment owners and managers.

Datril ultimately obtained his own TREC license and created Apartment Express LLC dba Mr. Day Rents. The Texas Comptroller’s website shows that Apartment Express LLC was formed in Texas in April 2010, and is still “active” today with a Houston address.

Datril then offered to finance Ed’s receivables. We call this ‘factoring.’ That relationship lasted about one year.

Ed eventually grew concerned that Datril was collecting and cashing checks from apartment communities, rather than applying them in payment for the factored invoices. Ed investigated, so Datril stopped making advance payments to Ed, and sent statements directly to apartment complexes on invoices against which Datril had advanced monies to Ed.

Ed was the first to the Courthouse. Datril’s attorney filed an Answer, but then withdrew from further representing Datril.

Datril hired Attorney v2. However, v2 also withdrew from the case and at no point after that were Datril or Mr. Day Rents (remember it was a dba for a Texas entity) represented by legal counsel.

At trial, Ed appeared without a lawyer. Evidently Datril also did not have an attorney. Neither party offered opening or closing statements, or attempted to introduce evidence on behalf of Mr. Day Rents.

Ed Sherman lost to Datril Boston and Mr. Day Rents in trial court. Ed appealed.

On appeal, one compelling argument advanced by Ed was that Mr. Day Rents, as a Texas limited liability company, should have been represented by a lawyer in the trial court. Since Mr. Day Rents was not represented by an attorney,  Datril Boston had no right to present a claim, defend a position or otherwise represent Mr. Day Rents, the entity he likely owned.

And further, that Datril’s attempt to represent a limited liability company had no legal effect as Datril was attempting to practice law in Texas without a license to do so.

The Court of Appeals agreed. Datril Boston had no right to represent his entity in County Court.

Ed Sherman wins. Datril Boston loses.

See Edward Sherman v. Datril Boston; Cause No. 14-14-00764-CV; Tex. App. Dist. 14; January 28, 2016.

Lessons learned:

1.      Except in limited circumstances in Texas Small Claims Court, all entities must be represented by attorneys in Texas courts. To do otherwise jeopardizes the positions advanced by the individual on behalf of the entity.

 2.      As well, the State Bar of Texas takes a dim view of those attempting to practice law in Texas, without a license to do so.

3.      On the other hand, all Courts in Texas are 100% open and accessible to all individuals representing themselves. Not that I would ever recommend that. Just sayin’ is all.

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

Agreement to Agree

Ray Fischer owned a tax-consulting business called Corporate Tax Management, Inc., and negotiated to sell the business assets to Mark Boozer and Jerrod Raymond. In 2007, the parties signed an Asset Purchase Agreement in which Fischer agreed to sell his business to CTMI, LLC, an entity created by Boozer and Raymond to own the assets and operate the business.

The purchase price was $900,000, subject to adjustments, to be paid in a series of payments over several years. The first payment of $300,000 was paid to Fischer at the 2007 closing. The balance consisted of “earn-out” payments over a four year term, one for each of the years in which Fischer was employed by CTMI.

Payments were timely made in 2007, 2008 and 2009. The 2010 payment consisting of the final earn-out included an additional component based on revenues that CTMI would receive after 2010 for work performed in 2010 but not completed by year’s end.

Regarding the 2010 work payable by CTMI to Fischer in 2011, the parties agreed in their Asset Purchase Agreement that the percentage of completion “will have to be mutually agreed upon” by CTMI and Fischer. That provision – the percentage of completion will have to be mutually agreed upon – generated a lawsuit.

CTMI asserted in the litigation that the 2010 adjustment clause was unenforceable because it provided that future completion percentages “will have to be mutually agreed upon,” and Texas law provides that agreements to agree in the future are unenforceable because they lack definition and specificity.

In June 2011 the trial court entered judgment for Ray Fischer, declaring that the 2010 adjustment was not an unenforceable agreement to agree. Fischer won.

CTMI appealed to the Texas Court of Appeals.

The Court of Appeals reversed the decision of the trial court, and rendered judgment that the 2010 was an unenforceable agreement to agree. CTMI won.

Fischer appealed to the Texas Supreme Court.

The Supreme Court started its analysis by stating that contract terms must be definite and certain as to terms that are material and essential to the parties’ agreement. The Court then applied these principles to the CTMI – Fischer facts.

The Court reasoned that CTMI and Fischer intended a reasonable price since a formula was used to compute amounts owing in previous years. And then the Court determined that the Contract also intended that parties should engage in the same process in 2011 as they did in previous years.

Consequently, the Supreme Court of the State of Texas held that the trial court’s Judgment was correct and the Texas Court of Appeals was mistaken. So the Judgment of the Court of Appeals was reversed, and the Judgment of the trial court was reinstated.

Fischer wins. CTMI loses.

See Fischer v. CTMI; Cause No. 13-0977-CV; Texas Supreme Court; January 21, 2016.

Lessons learned:

1.      This is the first “agreement to agree” case I can recall reading where the Contract was upheld.

 

2.      Don’t put yourself and your clients in this position. Use formulas and algorithms if needed to specify how and when future monies will be tabulated and paid, but don’t trust that Courts will uphold a contractual provision that is ambiguous, confusing or overly-complex.

3.      Despite the ruling of this Court – do not count on “agreements to agree” to be enforceable in Texas. In this unique situation, the Supreme Court was able to look back on four years of timely contractual performance and used that as a springboard for the one remaining payment. Without that history, this Contract would likely have failed.

 

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.

Fun with Percentage Rental Clauses

In 1993, Ralphs Grocery Company signed a 20-40 year lease with Midtown Shopping Center Associates for 53,000 square feet in a Los Angeles shopping center. Under the lease, Ralphs is required to pay an annual base rental rate of almost $1 million per year, plus 1.25% of gross sales over $31 million.

The lease defines “gross sales” as the amount of the sales price, whether or not for cash or upon credit, of all merchandise and goods, and the charges for services sold on or delivered from the shopping center property. The lease excludes 15 items from gross sales, including sales tax, deposits on returned items, refunds and credits for defective items, sales from other stores, interest and credit card charges, sales from lottery tickets and coin-operated devices, coupons, commercial sales of scrap materials and bulk sales consisting of inventory, fixtures and equipment.

Also excluded are “. . . discounts allowed to any customer pursuant to any customary and reasonable policy adopted by Ralphs . . .”

Ralphs created a Rewards program in 1997 intended to encourage and reward customer loyalty. In this program, Ralphs charges two prices for merchandise: (1) a higher price paid by customers who do not participate in the Rewards program; and (2) a lower price paid by customers who sign up for the customer loyalty program.
 
Paper transaction receipts generated at the check-out stand detail what Rewards customers would have been charged without the program discounts, and calculates their “savings.” The program has been quite successful: transactions by Rewards customers account for 97% of all transactions at Ralphs.

Ralphs provided Midtown yearly statements reflecting what it believed constituted “gross sales” from the Midtown store, using the amount Rewards customers actually paid rather than the amount they would have paid for the same items had they not participated in the loyalty program. When Midtown expressed its view that Ralphs was under-reporting “gross sales” by excluding the amounts Rewards customers could have been charged, Ralphs filed a lawsuit against Midtown.

The trial court concluded that “gross sales” was based on sales prices Rewards customers would have paid absent the program discounts. Accordingly, the court awarded Midtown $305,000.

Ralphs appealed.

The Court of Appeals determined that a reasonable, fair and just definition of “gross sales” is one that looks to the amounts Ralphs actually charges its customers, as opposed to the hypothetical amount Ralphs opts not to charge them.

The Court of Appeals also found that the Rewards program is a discount pursuant to a “customary and reasonable policy” adopted by Ralphs, as specifically contemplated by the lease even though it was created four years after the lease was signed.
        

The Judgment of the trial court is reversed. The term “gross sales” in the Ralphs – Midtown lease does not include amounts Ralphs never charged its Rewards customers. Consequently, Ralphs owes no additional rental.

See Ralphs Grocery Company v. Midtown Shopping Center Associates; No. B252292; California Court of Appeal, Second Appellate District, Division Two; June 17, 2015.

Lesson learned: It is difficult in commercial leasing to anticipate every issue that will occur over a 20 or 40 year lease term. Gross sales clauses are constantly being  probed and tested, as are CAM triple-net pass-through clauses of taxes since Texas franchise and margin taxes didn’t exist seven years ago. Be extra careful when you are addressing percentage-of-gross-sales and expense reimbursement provisions.

 

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

CONDITIONAL RENTAL PAYMENTS ARE A GOOD IDEA-NOT!

In September 2007, Llyasah Dupree dba 360 Degree Beauty Academy leased commercial property from Boniuk Interests, Ltd. in northwest Houston, to use as a beauty and cosmetology school. The Lease included a provision allowing Dupree an ample opportunity to tender monthly rental payments before Boniuk could consider the failure to be an event of default.

Dupree struggled to pay the rent installments which varied from $700 to $6,000 per month plus triple net expenses, making sporadic payments in 2010 but no payments in March, May, July, November and December. Some of Dupree’s checks in that period included a note, asking Boniuk to hold the checks without deposit for several weeks and Dupree would call Boniuk when the checks would clear.

In January 2011 Boniuk had enough, and sent Dupree a notice of default. Boniuk changed the door locks in March 2011.

Dupree obtained a Writ of Re-Entry from the JP Court 10 days later. At the hearing convened two days after, the JP determined that Boniuk had permissibly locked Dupree out of the premises.

So Dupree sued Boniuk in 2013, asserting claims for breach of the Lease, wrongful eviction, retaliatory eviction, fraud and violations of the Texas Deceptive Trade Practices – Consumer Protection Act. Boniuk filed a counterclaim for breach of the Lease and other related matters.

The trial court awarded Boniuk almost $120,000 in damages, interest, $15,000 in attorney’s fees and court costs. Dupree appealed.

On appeal, Dupree claimed that she had timely paid rental by tendering payment checks and Boniuk had the authority under the Lease to deposit the checks. Dupree further argued that Boniuk’s failure to deposit the tendered checks meant that Boniuk lacked the evidence that the checks were not adequately funded.

And, consequently, no evidence of NSF checks meant Dupree was not in Lease default and Boniuk had no right to evict.

The Court of Appeals determined that the notes attached to each check converted an unconditional offer to pay an amount due on a specified debt to a conditional offer. As such, the rental payment funds were not made immediately available to Boniuk.

Rental payments, as stipulated in the Lease, must be unconditional.

The Court of Appeals further found that Boniuk was not required to undertake special efforts to acquire possession of the rent funds. Placing restrictive notes on the checks improperly burdened Boniuk, and was sufficient evidence of a Lease default.

Boniuk Interests, having proven various Lease defaults, wins again; Llyasah Dupree lost once more. See Llysah Dupree dba 360 Degree Beauty Academy v. Boniuk Interests, Ltd.; No. 01-14-00864-CV; Texas Court of Appeals, 1^st District; August 4, 2015.

Lesson learned: If you are a property owner or represent landlords as a property manager or agent, do not accept checks with restrictive endorsements or payment instructions. Although you may ultimately prevail, it may also take you two or three years of litigation to prove your point.

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

                                                                                   

Tax Forfeiture

In 1995 Urban Retreat leased space in a retail center from BPMT, LLC, to operate its day spa business. Urban continued to lease the property for more than 10 years, executing renewals and lease extensions. The most recent extension was signed in 2006, and extended the lease to April 30, 2011.

Francie Willis signed the lease extension solely in her capacity as an officer of Urban. Evidently there were no personal guarantees.

Urban’s corporate charter was forfeited by the Secretary of the State of Texas on July 30, 2010. Urban made no further rental payments from August 2010 until the end of the lease on April 30, 2011. The total rental owing in that nine-month period was $112,735. Some of the rental was composed of base rent; other obligations pertained to payment of triple net charges.

BPMT sued Urban Retreat for delinquent rent. Because Urban’s corporate privileges were forfeited for failure to pay franchise taxes, BPMT also sued Francie Willis, Urban’s President.

The theory of liability pursued by BPMT against Willis was that since Urban’s corporate privileges were forfeited, Willis became liable for the entity’s debts. See Texas Tax Code 171.255(a): http://www.statutes.legis.state.tx.us/Docs/TX/htm/TX.171.htm.

The trial court ruled for BPMT and held Willis liable for $38,327, being a portion of the rent owed by Urban Retreat between 2010 and 2011, and conditionally, $45,000 in attorney’s fees.

Willis appealed, claiming that the tax laws did not have the effect of imposing personal liability on her in this situation involving base rental with CAM reimbursements and triple net annual adjustments.

The tax statute imposes liability on a corporation’s officers for “. . . each debt of the corporation created or incurred in this state after the date on which the report, tax or penalty is due . . . [emphasis added]” Willis argued that the lease agreement provided for a debt that was “created or incurred” in 2006 – four years before corporate privileges were forfeited.

BPMT advanced the position that the debt in this situation was uncertain due to the application of triple net charges, and consequently, was not known until after forfeiture. And as a consequence, Willis is personally liable.

The appellate Court evaluated the meaning of “debt” in Texas law by reviewing not only previous Texas cases but also citing both Black’s Law Dictionary (debt is liability on a claim) as well as Merriam Webster Collegiate Dictionary (debt is an obligation or something owed).

Ultimately the Court concluded that a “debt” is created at the time a lease agreement is signed, even if the amount of the debt is uncertain. Accordingly Urban Retreat’s debt was created in 2006 – well before the corporate forfeiture of privileges in 2010.

Willis is not liable under the tax code for Urban Retreat’s leasing debts created in 2006 and subsequent forfeiture of corporate privileges in 2010. Willis wins; BPMT loses. See Francie Willis v. BPMT, LLC; Cause No. 01-14-00537-XC; Texas Court of Appeals 1st District; July 23, 2015.

Lessons learned:

1.  Practice Point: Don’t put yourself in this position and don’t allow your principals to do so either. It’s easy enough to check the standing of Texas business entities: https://mycpa.cpa.state.tx.us/coa/Index.html.

2.  Practice Point: Want to go above and beyond for your clients? Mark your calendars to check their standing with the Texas Comptroller annually, maybe on the anniversary of the closing or lease execution. Send them annual updates that all is well, or maybe something fell through the cracks. Be proactive!

3.  NTCAR Expo: I sure enjoyed visiting with many of you at the Expo on September 2. Thanks for stopping by!

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

Deed Reformation

Michael and Billie Cade sold Barbara Cosgrove over two acres of land in 2006. The Special Provisions clause stated “Sellers to retain all mineral rights.” But the Deed did not contain any reservations and instead conveyed the property to Cosgrove in fee simple.

The Cades had leased the mineral estate to Dale Resources, which was succeeded by Chesapeake Energy. In 2009 and 2010, Chesapeake sent the Cades lease payments. In late 2010, Chesapeake advised Michael Cade that there was a problem with the Deed’s mineral reservation.

So the Cades investigated, then sent a demand letter to Cosgrove asking her to issue a correction deed. Cosgrove refused, and replied instead that the statute of limitations had expired and barred any claims the Cades might have over the 2006 Deed.

In February 2011, the Cades sued Cosgrove claiming that Cades owned the mineral interests and Cosgrove breached the 2006 Contract by failure to execute a correction deed. Cosgrove defended by claiming that the statute of limitations had expired and the merger doctrine applied to this situation. And as a consequence, the Cades had no lawful claim against Cosgrove.

The trial court ruled that the statute of limitations did indeed apply, and denied the request to reform the Deed by adding a mineral reservation in favor of the Cades. Cosgrove then sought attorney’s fees from the trial court, which the trial court denied.

Both parties appealed. Cosgrove wanted attorney’s fees. The Cades wanted the Deed they signed to be judicially corrected to include a mineral reservation.

The Court of Appeals reversed the trial court’s judgment for Cosgrove and continued to deny her reimbursement for attorney’s fees. Cosgrove appealed to the Texas Supreme Court.

At this juncture there were two primary issues before the Supreme Court: (1) Should the Deed be corrected to reserve mineral rights; and if so (2) Is Cosgrove entitled to reimbursement for attorneys fees?

The Texas Supreme Court started their analysis with a presumption that every grantor (seller) knows of defects in a Deed that result from mutual mistake, because grantors are the ones who sign the Deed. In our Texas land conveyancing custom, grantees (buyers) very rarely sign or approve deeds. Only grantors do so.

Indeed (pun strictly intended), some grantees do not even see the Deed until months after closing and recordation while others never see it.

The Supremes then decided that “Parties are charged as a matter of law with knowledge of an unambiguous deed’s material omissions from the date of its execution, and the statute of limitations runs from that date.” The Cades had actual knowledge of the deed’s omissions at the time of execution. They were charged with knowledge of what was included and excluded.

When a mineral reservation is completely omitted from a deed, the error is obvious. As such, it is irrefutable because “. . . the conspicuousness of the mistake shatters any argument to the contrary [emphasis added].”

The Supremes left open the possibility that a fraud claim might yield a different result. However – in this case anyway – there was no claim of fraud.

Cosgrove owns fee simple title without a mineral reservation, and the opportunity for deed correction by a Texas Court expired with the statute of limitations. Cosgrove wins; Cades lose.

See Barbara Cosgrove v. Michael Cade and Billie Cade; Cause No. 14-0346; Texas Supreme Court; July 20, 2015.

Lessons learned:

1.  Practice Point: The party signing the Deed is charged with knowledge of its contents. If the Grantor has a problem, then the Grantor better raise it quickly. Although not stated in this decision, presumably the same logic applies with other docs that are signed by only one party (like Bills of Sale, Estoppels, Assignments and Bonds, for examples).

2.  Practice Point: Before closing, critically compare the proposed Deed to the Purchase and Sale Agreement, all Amendments, title commitment and vesting deed. If you are even 1% unsure, get a real estate lawyer to assist. Deed challenges in Texas just became much more difficult after the date of this decision – July 20, 2015.

3. Find Me: The NTCAR Expo is September 2 this year. Look for me there under the banner “IPSE DIXIT.”

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

Ipse Dixit!

DZM, Inc. leased retail space in a shopping mall to a tenant, to operate a poker room and social club. The tenant paid DZM rent from August 2005 to October 2005, but did not pay rental in November. So DZM changed the door locks.

Richie Garren asserted that he leased poker tables, chairs, poker supplies, electronics, decorations and other items to the social-club tenant for $1,000 per month. And that DZM effectively converted Garren’s property by changing door locks and refusing to return the items to Garren.

So Garren sued DZM. The jury determined that DZM had indeed converted Garren’s property, and awarded $12,500 in damages.

DZM appealed, not really to protest the issue of conversion, but instead to assert that the evidence was insufficient to prove an exact damages amount.

The appellate court found a recent Supreme Court case allowing a property owner to testify to its value. The owner in this unique situation doesn’t have to be a qualified expert to furnish an opinion. But rather the theory is that no one would know value better than the owner whose property was just wrongfully taken.

However, the owner’s testimony is judged by the same standards as expert testimony. States the court: “. . . an owner’s property valuation may not be based solely on the owner’s ipse dixit [emphasis in the original case opinion].”

Ipse dixit. Yes the court wrote that. You can’t make that up. My assumption is that all my loyal readers know the meaning. Well, for the one new reader who doesn’t (and yes I had to look it up too), I won’t keep you waiting: “he, himself, said it.”

That strikes yours truly as a rather arbitrary, dogmatic statement. Much like “well that’s just the way it has been so that’s the way it will be.” Sorta.

Anyway, back to the case. A property owner must provide the factual basis on which her / his opinion rests. It is not enough to simply claim “that’s what my stuff is worth because I just told you that’s why my stuff is worth."

Garren submitted some invoices and purchase receipts as indicia of fair market value. But this property was hardly new; it had been used by the poker room for some period of time. Evidently depreciation was not a factor, at least not to Garren anyway.

Because Garren was unable to furnish legally sufficient evidence that the property had any fair market value at the time of the conversion, the Judgment of the trial court was reversed. DZM, Inc. (real property landlord) wins; Richie Garren (personal property lessor) loses.

See DZM, Inc. v. Richie Garren; Cause No. 14-14-00040-CV; Texas Court of Appeals, 14th District - Houston; June 25, 2015.

Lessons learned:

1.  I offer much free advice at www.avvo.com. It’s my pro bono efforts. There are questions almost daily about property conversion. For those who have similar issues, this is an important case to understand that property valuations offered by the owner can be challenged.

2.  The NTCAR Expo is September 2 this year. I plan to make a new sign. Look for me there under the banner “IPSE DIXIT.”

3.  Practice Point: When you go home tonight, tell your spouse / significant other / dog IPSE DIXIT. Then send me an email and let me know how that went for you. I’m going to try it too. If there’s another Counsel Corner from me next month, I either lived or someone is ghost-writing.

4.  Bonus Lesson: ~ 10 years to litigate a case with a value of $12,500? Really?

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