Use Clauses in Commercial Leasing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lessons learned:

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

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

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

                                                                                    Stuart A. Lautin, Esq.*

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

Are Emails Binding?

Prentis Tomlinson is the President and CEO of PetroGulf, Ltd. Petro was formed to trade oil commodities from Iraq with regional markets. In 2009 Tomlinson met with John Khoury, seeking investment into Petro. Khoury invested $400,000.

Khoury, unhappy with the performance of his investment, met with Tomlinson in early 2012 to discuss Petro’s failure to disclose financial information. In that meeting, Tomlinson agreed to personally repay Khoury the $400k debt over a four or five-year period.

A week later Khoury sent an email to Tomlinson summarizing the meeting. Tomlinson replied by email with, in addition to other text: “We are in agreement.”

When Tomlinson failed to make the payments, Khoury brought a lawsuit. Tomlinson’s defense was that any recovery for breach of contract was barred by the Texas Statute of Frauds, which requires that many agreements must be in writing and signed to be enforceable.

At trial, Tomlinson admitted sending the email but claimed that his response of being in agreement referred to an agreement different from the terms identified in the email to which he replied.

The jury concluded that Tomlinson had obligated himself to repay the $400k investment, and that Tomlinson has breached that agreement. The jury found in favor of John Khoury on all claims and awarded him $400k plus attorneys fees.

Tomlinson then asked the trial court to enter a Judgment disregarding the jury’s verdict on the $400k breach of contract claim. The trial court, likely accepting Tomlinson’s position that emails do not satisfy the Texas Statute of Frauds, agreed and in doing so, gutted the jury’s verdict.

John Khoury appealed.

The Texas Appellate Court reviewed the Texas Statute of Frauds, providing that debt agreements must be written and signed. You can read it at TBCC 26.01(a)(1) and (2), and 26.01(b)(2): http://www.statutes.legis.state.tx.us/Docs/BC/htm/BC.26.htm.

Seems clear enough. The law requires a signed writing. There was no written paper agreement; there was no signature.

However, there was an email chain that basically ended with “We are in agreement.” The last email from Tomlinson does not contain Tomlinson’s name in the body of the text he wrote. But his name and email address do appear in the “From” field of the email.

The Appellate Court started by evaluating the Uniform Electronic Transactions Act as adopted in Texas at TBCC 322.001 – 021: http://www.statutes.legis.state.tx.us/Docs/BC/htm/BC.322.htm. UETA was added 10 years ago to remove barriers to electronic transactions by setting an expansive view of what constitutes electronic writings, records and signatures. The goal was to adopt our now-common practice of foregoing paper in favor of emails, texts and similar.

It took the Court three full single-line pages to analyze this one issue and conclude that a signature block in an email performs the same authenticating function as a “From” field. Consequently,  the Court concluded that the email satisfied the definition of a writing and signature; the Statute of Frauds could not be used to avoid enforcement of the agreement.

John Khoury won his appeal; Prentis Tomlinson owes him $400,000 plus attorneys fees. Whether or not Khoury will be able to collect his Judgment is an entirely different matter. See Khoury v. Tomlinson, Case No. 01-16-00006-CV, First District Harris County Court of Appeals, December 22, 2016: https://casetext.com/case/khoury-v-tomlinson.

Lessons learned:

1.      Our Texas Statute of Frauds has been hijacked. Writings and signatures are no longer strictly required. Emails can be sufficient to create binding agreements

2.      If emails suffice, then I suppose so do texts, social media, chat rooms, bulletin boards and similar e-platforms where one can identify who is communicating and agreements can be made electronically without paper or ink signatures.

3.      However – the Fort Worth Court of Appeals reached an opposite conclusion in 2011 and decided that an email was insufficient to serve as a “signature.” See Cunningham v. Zurich American Ins Co: http://caselaw.findlaw.com/tx-court-of-appeals/1580444.html.

4.      The B/L: be careful with email agreements and instead, until we have more guidance from our legislators or Supreme Court, insist on old-fashioned, ink-signed contracts, leases, amendments, loan docs, release and settlement agreements, and everything else related to what we do. Don’t type “agreed” in an email or similar unless you are prepared to be bound.

                                                                                    Stuart A. Lautin, Esq.

 

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

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

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

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

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

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

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

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

Ken appealed.

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

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

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

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

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

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

Lessons learned:

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

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

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

                                                                                    Stuart A. Lautin, Esq.*

 

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

 

 

Whoops I May Have Renovated the Wrong Property....

Ravi Prasad received notice of a public auction from the County. Ravi, a retired chemical engineer who was in the real estate flipping business, was interested in Parcel 8-C, identified as 17211 Shands Road. A photograph on the property card showed that the lot was improved with a residence.

The residence shown, however, was owned by William and Elnora Washington. The Washington's house is located two lots north of Parcel 8-C. The street address for Will and Elnora’s house is 17201 Shands Road, but was incorrectly marked on the front of the house and mailbox as 17211 Shands.

William testified that 17211 was the original address when it was owned by his mother. When Will purchased it in 2004, he learned the address had been changed to 17201, but he never altered the fourth digit on the house or mailbox.

The Washington house had been vacant at all times relevant to this case.

Ravi viewed the Washington house prior to the tax sale, thinking it was Parcel 8-C. Although Ravi obtained a County tax map showing the physical location of both Parcel 8-C and the Washington property, Ravi drove instead to the Washington home for his inspection.

Ravi’s $11,000 bid for Parcel 8-C was accepted, and soon after Ravi began renovating Will and Elnora’s house instead of Parcel 8-C. He expended more than $23,500 before he received a letter from an attorney engaged by the Washingtons, suggesting he might cease his efforts to improve a property he did not own.

Will and Elnora Washington refused to pay Ravi Prasad for the work completed, so Ravi sued M/M Washington for damages.

Ravi claimed at trial that Will and Elnora had been unjustly enriched due to Ravi’s efforts. And, if the Washingtons had not displayed the wrong address on their house, “upon which both he and the County ‘obviously’ relied,” then none of this would have occurred.

Ravi further argued that although he did not conduct a title search, obtain a title commitment or title policy, if he had done so the result would have been the same since a title analysis would not have revealed that Ravi had inspected the wrong property and was confused as to the exact location of Parcel 8-C.

The Washingtons asserted that Ravi was not entitled to damages since the Washingtons did not know their property was being renovated. Recall that the property was vacant at the time.

The trial court found that it would be inequitable to allow the Washingtons to receive the value of Ravi’s renovations, regardless of the Washingtons’ testimony that their property was vacant. And that they did not gain knowledge of the repairs until two months after commencement. And at that time they promptly engaged an attorney to advise Ravi to stop his efforts.

The trial court entered Judgment for Ravi in the amount he expended on the house – $23,508 – and also imposed a lien on the Washingtons’ property for that amount.

Will and Elnora appealed.

The Supreme Court took a different approach, finding that Ravi had at least imputed knowledge (we call this constructive notice) that he was renovating property he did not own. Ravi’s foreclosure Deed clearly identified Parcel 8-C. Ravi had no legal right to rely on mailbox numbers and similar. Further, a property tax map in Ravi’s possession identified both Parcel 8-C and the Washingtons’ property, located a bit north of 8-C.

The trial court’s Judgment was reversed. William and Elnora Washington win and they can keep Ravi’s improvements without a duty to pay for them. See Washington v. Prasad; Record No. 151783; Supreme Court of Virginia; October 27, 2016: http://scholar.google.com/scholar_case?case=10093304851191612435&q=washington+vs.+prasad&hl=en&as_sdt=6,44.

Lessons learned:

1.      Foreclosures are inherently risky business. My savvy foreclosure buyer-clients will not bid more than 50% of fair market value, due to bumps in the road like this one.

2.      Mailbox numbers and addresses painted on curbs, or nailed to the fences and front and back walls, are not binding for this type of property identification purpose. County Maps and Plats should have been more carefully reviewed.

3.      Although there wasn’t much text about this in the Supreme Court opinion, I believe a different outcome would have been reached had the Washingtons known that someone was working hard to improve their property. Perhaps this is one of those rare moments where ignorance is bliss. But I also believe that Will and Elnora expended far more than the value of the improvements to defend and appeal the case to the Supreme Court.

 

                                                                                    Stuart A. Lautin, Esq.

 

 

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

 

 

 

 

It Must be Written - Correct?

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

The contract was oral. Not written.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lessons learned:

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

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

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

                                                                                Stuart A. Lautin, Esq.

 

 

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

 

Feeling Sleepy?

Isaiah Rideaux robbed a pool hall at gunpoint. A Texas jury convicted him of aggravated robbery. The jury assessed punishment at life imprisonment. Isaiah appealed, claiming (among other matters) that a juror slept through a portion of his trial.

After attorneys for the State of Texas asked to approach the judge during the trial, the following exchange occurred:

COURT: Sorry. Tony, would you please wake the juror up.

BAILIFF: There we go.

COURT: Are you having trouble staying awake, ma’am?

JUROR: Mm-mm.

COURT: Pardon me?

JUROR: Mm-mm.

COURT: Well, I want you to do the best we can. We are about to take a lunch break, and I want you to stay awake and attentive to the testimony that’s going on in the Courtroom, please; all right? You understand?

 JUROR: Yes sir.

 COURT: All right, all right. You may proceed, Counsel.

When the court took a lunch break, Isaiah’s lawyers demanded a mistrial, claiming “I don’t know how long she was sleeping, but apparently she was obviously not paying attention.”

The trial court denied Isaiah’s request. So after the jury’s verdict was rendered, Isaiah appealed.

The Appellate Court reviewed the trial transcripts and concluded that the trial judge asked the bailiff to wake up a juror, the judge admonished the juror and the juror responded that she understood. Then it was lunch time.

The trial record did not reveal how much testimony the juror missed, if any.

The Appellate Court found a Texas appellate decision from 2014 holding that a trial court has “considerable discretion in deciding how to handle a sleeping juror.” However, the Appellate Court also noted that a juror who had “slept continuously through the trial” might present the need for a do-over.

Bottom line: Since Team Isaiah did not observe the juror sleeping very much, or if they did, they did not make the trial court aware of it, Isaiah’s appeal is denied and the verdict of the jury stands.

See Isaiah Rideaux v. The State of Texas; Cause No. 14-15-00317-CR; Tex. App. 14^th Dist.; June 28, 2016: http://law.justia.com/cases/texas/fourteenth-court-of-appeals/2016/14-15-00317-cr.html.  

Lessons learned:

1.      Yes this is a criminal law case, not directly related to real estate. But there’s something important going on here.

2.      Evidently it’s Ok, at least somewhat Ok, for jurors to sleep through portions of a trial. Did you know that? I did not. But I assume if it’s Ok for jurors to sleep through a criminal trial where the result might be imprisonment, it’s even more Ok for jurors to doze through a civil trial where the parties are arguing about money.

 

3.      When you are a litigant, help your attorney. S/he may be tunnel focused on impeaching a witness, offering evidence or defending objections. The term situational awareness applies to Courtrooms too.

 

                                                                                    Stuart A. Lautin, Esq.

 

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

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Lessons from a Used Car Lot

A used car case is relevant to Texas real estate. Trust me. Read on.

Christin Bishop needed a gently used car. In February 2012 she found a 2010 Kia Forte offered by Creditplex Auto Sales d/b/a Greenville Mitsubishi. This particular Kia had been purchased at auction a few months prior for $9,210, with the disclosure made to Creditplex that the car had suffered frame damage.

Christin and her mother Cynthia bought the car for $15,800. They financed the purchase with a 72-month loan at 17.95% interest (interest in excess of 18% in Texas may be usurious BTW). The Bishops also purchased a service contract for $1,500, but they failed to have the car inspected or obtain a Carfax report about the car before they bought it.

Presumably the car had a full-on “AS IS” sticker on the window. For some reason that remains elusive to me, this part of the text in the appellate opinion was deleted. No worries; let’s assume that the appropriate “AS IS” warning was printed for all to see.

Christin kept the car for about a year, then decided to trade it since she needed something larger to accommodate her children. She took the Kia to a local dealership to sell it, but the franchise refused to buy it because it had frame damage.

Oh yeah I forgot to tell you that Creditplex, relying on the “AS IS” language, did not disclose to Christin that the Kia had been wrecked before she bought it.

So Christin sued Creditplex, its general manager and owner for failure to disclose pivotal information she needed in order to make an informed decision. The trial court granted a verdict for Creditplex to the effect that “AS IS” meant “AS IS,” and the court entered judgment for Creditplex and the other defendants.

Christin appealed and continued her same argument: vendors should not be allowed to hide information from consumers to their detriment, simply by placing an “AS IS” sign on the products that are being sold. A compelling argument, truly, except that in Texas such “AS IS” disclaimers are difficult to overcome. Almost impossible, really.

Using various real estate cases, the defendants reminded the Court of Appeals that since at least 1995 Texas Courts have uniformly held that an “AS IS” disclaimer is effective, even though the consumer-buyer may be disadvantaged. Indeed, the Supreme Court of Texas has previously written that “by agreeing to purchase something ‘as is,’ a buyer agrees to make his own appraisal of the [deal] and accept the risk that he may be wrong.”

However, this Court of Appeals focused on the following circumstances: (1) Creditplex was experienced in used car sales but Christin was not; (2) Christin did not negotiate the price; (3) Christin was unsophisticated when compared to Creditplex; (4) the provisions of this “AS IS” clause were not crystal clear; (5) Creditplex chose not to disclose an obvious defect that materially diminished the value of the car; and (6) the “AS IS” provision was not negotiated, but rather was a ‘boiler-plate’ insertion.

The Court of Appeals sensed that the conduct of Creditplex may have been fraudulent, which can be a narrow exception to the Texas “AS IS” rule. Using the fraud theory, Christin wins and the judgment of the trial court is reversed. See Bishop v. Creditplex Auto Sales; Cause No. 05-15-00395-CV; Tex. App. 5^th Dist.; July 29, 2016: http://caselaw.findlaw.com/tx-court-of-appeals/1739567.html.

Lessons learned:

 1.      Yes this case is about a used car. No I don’t typically write about used cars or any other personal property. But – an exception had to be made.

 2.      This Texas Appellate Court used real estate appellate cases to determine that not all “AS IS” clauses work. A seller or landlord cannot simply paste an “AS IS” disclaimer in a contract or lease and assume that it will not be successfully challenged.

3.      If there is a major deception which the buyer / tenant could not have reasonably anticipated or avoided, and if there is a disparity in negotiating positions (as there always is in consumer transactions), then Texas Courts will find a way to deliver justice to the consumer. As they should, IMHO, not that anyone asked.

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

RED LETTER ALERT - TEXAS TENANTS MAY BE FOUND LIABLE FOR DAMAGES THEY DID NOT CAUSE!

Carmen White signed a Texas Apartment Association residential lease. Section 12 provided that Carmen must reimburse the landlord for all damages caused to the apartment community by her negligence and also caused by any other party not due to landlord’s negligence or fault.

Carmen received a new washer and dryer from her parents. She was able to connect the washer but she could not connect the dryer because the cord sparked and the circuit breaker tripped. So at Carmen’s request an apartment employee connected the dryer for her.

It was only a few days later that Carmen’s apartment and adjoining units were destroyed in a fire that originated in Carmen’s unit. Evidently Carmen was using the dryer to separate allergens from dry and unwashed items.

The fire started in the dryer. The casualty loss was over $83,000.

Philadelphia Indemnity paid the claim and demanded reimbursement from Carmen. When payment was not forthcoming, Philly Indemnity brought a lawsuit against her for negligence and breach of contract.

At trial, the jury found that Carmen breached the lease agreement by failing to pay for the loss (recall that an employee of the Landlord installed Carmen’s dryer!). The jury awarded $93,000+ to Philly Indemnity.

Carmen petitioned the trial court for judgment in favor of Carmen notwithstanding the jury’s decision. The trial court agreed with Carmen without specifying the reasons, and essentially ignored the jury’s verdict.

Carmen won; Philly Indemnity appealed.

The Texas Court of Appeals affirmed the trial court’s decision that the jury was wrong, based on the reasoning that the reimbursement provision in the TAA Lease was void. The Court of Appeals reasoned that it is against Texas public policy to hold residential tenants liable for the conduct of others over whom such tenants have no control. Such as the Landlord’s employee who negligently installed the dryer.

Philly Indemnity appealed again.

The Texas Supreme Court evaluated the facts and Lease. In a 36-page opinion, the Court concluded that: (a) the general rule in Texas is that parties may contract as they wish if there is no violation of law or offense to Texas public policy; (b) Texas landlords may impose virtually unlimited liability upon their tenants; (c) the reimbursement policy is enforceable; but (d) essential facts were not properly developed in the trial court.

The Supremes sent the case back to the trial court to find those missing “essential facts,” but in doing so the Supremes also advised that while the Court of Appeals’ conclusion may have been correct, their reasoning was not. Meaning, because the facts were not properly developed the Court of Appeals affirmation of the trial court’s Judgment was correct, but their reasoning that the repair reimbursement clause was void because it violated Texas policy was incorrect.

Whew. Complicated stuff. No wonder it took 36 pages to explain.

So far, Carmen White has won at every turn. See Philadelphia Indemnity Insurance v. White; Cause No. 14-0086; Texas Supreme Court; May 13, 2016: http://docs.texasappellate.com/scotx/op/14-0086/2016-05-13.guzman.pdf.

Lessons learned:

1.      I was surprised at this outcome. Every other year when our Texas legislature meets we get more laws in favor of consumers in all areas, including residential leasing. It doesn’t comport with our Texas system of favoring residential consumers to hold such tenants liable for virtually anything that happens at the community, as long as it was not caused by Landlord’s negligence.

2.      Seemingly Texas landlords may now impose further obligations on their tenants, including liability for matters beyond the control of those tenants. If our 2017 legislature doesn’t fix this problem, then based on this new Supreme Court authority a Texas residential tenant may now be found liable for a multi-million dollar loss which the tenant did not cause.

3.      Perhaps property managers should require substantial renters’ insurance from all tenants as a condition to allowing the tenants to move into the dwelling. Because as a matter of practicality, few residential tenants would be able to pay for the loss.

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

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.