Tom Sibley is a Beaumont real estate lawyer, first licensed in Texas in 1964. Mr. Sibley formed a professional corporation in 1981, and he signed a commercial office Lease in 2001 for space in Beaumont on behalf of his PC. The Landlord – Brentwood Investment Development Company, LP, did not sign it. The appellate opinion does not give us any guidance as to why Brentwood failed to do so.
The Lease was for 4,072 square feet, 10 year term, $13.50 PSF for the first five years, $14.50 for the second five years, plus some ‘net’ expenses of approximately $1,272 per month.
Sibley PC moved in before October 1, 2001 – just about 10 years ago as I write this. For unstated reasons, Sibley did not make full rent payments for 38 months, to November 2005. In that period, Sibley only made partial rental payments in July, August and September 2005, according to Brentwood’s records.
Brentwood filed a lawsuit against Sibley PC in March 2008. Brentwood alleged that Sibley PC owed $214,993 in unpaid rent, plus other expenses. Brentwood won at trial; Sibley PC appealed.
Predictably, Sibley PC claimed at trial on appeal that there was no enforceable contract. The facts were clear and undisputed: Sibley signed the Lease; Brentwood did not.
The Appellate Court determined that the parties proceeded with the Lease as if it had been signed. Sibley PC occupied the space and operated a law firm from the premises. Sibley PC made a few rent payments. Brentwood maintained the building and common areas.
The Beaumont Court of Appeals then stated that “. . . the absence of a party’s signature does not necessarily destroy an otherwise valid contract [citation omitted]. A party may accept a contract, and indicate its intent to be bound to the terms by acts and conduct in accordance with the terms.”
Hmmm you say? Sounds logical you said? Well, do a Google search on Texas “black-letter” law on this point. Check out 26.01(b)(4) and (5) of the Texas Business & Commerce Code: http://www.statutes.legis.state.tx.us/Docs/BC/htm/BC.26.htm
The Sibley PC Lease had a 10-year term, so it is not excluded from the Statute of Frauds exception of 26.01(b)(5) or (6), regarding agreements with a term that is one year or less.
Texas law seems clear that for all leases with a term longer than one year, it must be in writing and signed to be enforceable. The Beaumont Court of Appeals is equally clear – no writing and no signature required in situations where the failure to sign appears to be inadvertent, and the parties performed as if there were an executed lease.
Brentwood Investment (the Landlord) wins. Sibley PC (the Tenant) loses. Thomas J. Sibley, P.C. v. Brentwood Investment Development Company, LP, No. 08-10-00033-CV, Texas 8th Court of Appeals, September 6, 2011.
Lessons learned:
1. Texas laws are written as statutes and govern our conduct in many areas, including business.
2. Texas judges and justices interpret those laws, and apply them to the facts of the case.
3. In a battle between law and doing what is fair and right, occasionally the law loses.
4. When the law loses to a just and correct decision, it may be difficult to thereafter plan future business decisions. Should you be guided by Texas law, or Texas judges and justices that may disregard Texas law?
5. If I had an answer to # 4, I would probably go to Tel Aviv because surely I could also resolve the mid-east conflict too.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Monday, August 20, 2012
Tuesday, August 7, 2012
Jury Decisions are Inviolate - - Right?
Do you remember from your US History or US Government class the text of the Seventh Amendment to the US Constitution (Bill of Rights)? In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any court of the United States, than according to the rules of the common law. Adopted in 1789, the Bill of Rights became effective through state ratification in 1791.
Is it coming back to you now? Recently Courts have become more willing to erode the power of juries and ignore the Constitutional prohibition from re-examining jury decisions. The case of Drury Southwest v. Louie Ledeaux is a good example.
Drury (as in Drury hotels) owned property in San Antonio, and leased some to Louie to operate Louie’s Mexican Hacienda Restaurant. Problems arose regarding a construction permit, signage, and Loop 410 highway access. So Louie met with Drury to consider changing the restaurant format, and Drury responded by changing the door locks and filing a lawsuit. It seems that Louie was not delinquent in the payment of rent, although that part is not clear from the Court’s opinion.
Louie counterclaimed for breach of contract and other matters. The Texas jury, hearing the evidence, awarded Louie $625,000 in actual damages. Drury appealed, stating that the evidence heard by the jury was insufficient for them to grant such a large award.
The Texas Court of Appeals analyzed Louie’s damages, tabulating a $95,000 loan from Sterling Bank, $50,000 line of credit also from Sterling Bank, $176,500 loan from American Equipment Finance, $18,000 bill owing to Sysco Foods, plus another $35,000 in signage expenses. The sums total approximately $375,000, not $625,000.
Louie argued that the difference of $250,000 was “sweat equity,” reflecting the value of Louie’s labor and the other owners who worked 14 to 16 hours a day to finish-out and then operate the restaurant. The Texas Court of Appeals, not persuaded by the “sweat equity” argument, could not readily find other evidence to support the balance of the $625,000 award. So instead of refusing to re-examine the jury decision (see the Seventh Amendment to the Bill of Rights!), the Appellate Court reversed the decision of the jury and trial court, and remanded for further proceedings.
Jury decisions inviolate? Not so much. Not anymore. Both trial and appellate Courts have shown a willingness to erode and disregard jury decisions in Texas and elsewhere. And we wonder why it is so difficult to get citizens to serve as jurors . . . sorry . . . I digress.
Drury Southwest, Inc. v. Louie Ledeaux #1, Inc., No. 04-10-00016-CV, Texas 4th Court of Appeals, July 6, 2011.
Lessons learned:
1. Jury decisions will be reviewed on appeal.
2. Jury decision may be overturned on appeal.
3. The Seventh Amendment is dying.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Is it coming back to you now? Recently Courts have become more willing to erode the power of juries and ignore the Constitutional prohibition from re-examining jury decisions. The case of Drury Southwest v. Louie Ledeaux is a good example.
Drury (as in Drury hotels) owned property in San Antonio, and leased some to Louie to operate Louie’s Mexican Hacienda Restaurant. Problems arose regarding a construction permit, signage, and Loop 410 highway access. So Louie met with Drury to consider changing the restaurant format, and Drury responded by changing the door locks and filing a lawsuit. It seems that Louie was not delinquent in the payment of rent, although that part is not clear from the Court’s opinion.
Louie counterclaimed for breach of contract and other matters. The Texas jury, hearing the evidence, awarded Louie $625,000 in actual damages. Drury appealed, stating that the evidence heard by the jury was insufficient for them to grant such a large award.
The Texas Court of Appeals analyzed Louie’s damages, tabulating a $95,000 loan from Sterling Bank, $50,000 line of credit also from Sterling Bank, $176,500 loan from American Equipment Finance, $18,000 bill owing to Sysco Foods, plus another $35,000 in signage expenses. The sums total approximately $375,000, not $625,000.
Louie argued that the difference of $250,000 was “sweat equity,” reflecting the value of Louie’s labor and the other owners who worked 14 to 16 hours a day to finish-out and then operate the restaurant. The Texas Court of Appeals, not persuaded by the “sweat equity” argument, could not readily find other evidence to support the balance of the $625,000 award. So instead of refusing to re-examine the jury decision (see the Seventh Amendment to the Bill of Rights!), the Appellate Court reversed the decision of the jury and trial court, and remanded for further proceedings.
Jury decisions inviolate? Not so much. Not anymore. Both trial and appellate Courts have shown a willingness to erode and disregard jury decisions in Texas and elsewhere. And we wonder why it is so difficult to get citizens to serve as jurors . . . sorry . . . I digress.
Drury Southwest, Inc. v. Louie Ledeaux #1, Inc., No. 04-10-00016-CV, Texas 4th Court of Appeals, July 6, 2011.
Lessons learned:
1. Jury decisions will be reviewed on appeal.
2. Jury decision may be overturned on appeal.
3. The Seventh Amendment is dying.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Tuesday, July 17, 2012
Oral Agreements are Unenforceable - - Right or Wrong?
John Ganim and Farouk ‘Frank’ Alattar were buddies who were looking for investment property. Together they found a 3,800 acre tract in Washington County, Texas. Alattar signed a Contract as “Frank Alattar, Trustee.” Then Frank and John negotiated and signed a limited partnership agreement, presumably to hold title to the acreage.
Despite signing the LP Agreement, a dispute arose whether it correctly identified the terms of their deal. So Frank notified John that he would not enter into a partnership, and that John had no interest in the property that would be acquired shortly by Frank. John sued Frank, and while the litigation was pending, the property was transferred to “Farouk Alattar, Trustee.”
John Ganim’s position at trial was that he and Frank Alattar agreed to purchase the property as partners, and the LP Agreement and related documents demonstrate that intent. Frank Alattar defended by claiming that he had no agreement to purchase the property with Ganim, and that he had purchased the property for himself and his family.
The jury believed John Ganim, and awarded almost $2.5 million in damages. Frank Alattar appealed.
The Texas Court of Appeals reversed and rendered a judgment for Alattar, finding that the Texas Statute of Frauds prohibited an oral agreement relating to the sale of real estate that did not contain the contract’s essential terms and the signature of the party to be charged.
John Ganim appealed.
Ganim argued to the Texas Supreme Court that his agreement with Alattar was for the joint acquisition of real property, and not subject to the Statute of Frauds.
The Statute of Frauds - Chapter 26 of the Texas Business and Commerce Code - requires that all contracts for the sale of real estate must be in writing. However, the Supreme Court interpreted that law to mean that an agreement between two or more persons for the joint acquisition of land is not a contract for the sale of real estate, and consequently is an exception to the Statute of Frauds.
To support its position, the Texas Supreme Court reached back to a case decided in 1851, and in the event any of us were unconvinced, the Supremes found further support in a secondary case of 1888.
John Ganim wins a seven-year litigation battle. Farouk Alattar loses, although with the economy in a deep recession one can only wonder who truly won and who really lost.
Ganim v. Alattar, No. 10-0592, Supreme Court of Texas, June 25, 2011.
Lessons learned:
1. Oral agreements are typically unenforceable, except when the Texas Supreme Court says otherwise.
2. The Texas Supreme Court says that oral joint venture types of agreements can be enforceable.
3. It is difficult to argue with any decision that uses case authority from 1851 as its foundation.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Despite signing the LP Agreement, a dispute arose whether it correctly identified the terms of their deal. So Frank notified John that he would not enter into a partnership, and that John had no interest in the property that would be acquired shortly by Frank. John sued Frank, and while the litigation was pending, the property was transferred to “Farouk Alattar, Trustee.”
John Ganim’s position at trial was that he and Frank Alattar agreed to purchase the property as partners, and the LP Agreement and related documents demonstrate that intent. Frank Alattar defended by claiming that he had no agreement to purchase the property with Ganim, and that he had purchased the property for himself and his family.
The jury believed John Ganim, and awarded almost $2.5 million in damages. Frank Alattar appealed.
The Texas Court of Appeals reversed and rendered a judgment for Alattar, finding that the Texas Statute of Frauds prohibited an oral agreement relating to the sale of real estate that did not contain the contract’s essential terms and the signature of the party to be charged.
John Ganim appealed.
Ganim argued to the Texas Supreme Court that his agreement with Alattar was for the joint acquisition of real property, and not subject to the Statute of Frauds.
The Statute of Frauds - Chapter 26 of the Texas Business and Commerce Code - requires that all contracts for the sale of real estate must be in writing. However, the Supreme Court interpreted that law to mean that an agreement between two or more persons for the joint acquisition of land is not a contract for the sale of real estate, and consequently is an exception to the Statute of Frauds.
To support its position, the Texas Supreme Court reached back to a case decided in 1851, and in the event any of us were unconvinced, the Supremes found further support in a secondary case of 1888.
John Ganim wins a seven-year litigation battle. Farouk Alattar loses, although with the economy in a deep recession one can only wonder who truly won and who really lost.
Ganim v. Alattar, No. 10-0592, Supreme Court of Texas, June 25, 2011.
Lessons learned:
1. Oral agreements are typically unenforceable, except when the Texas Supreme Court says otherwise.
2. The Texas Supreme Court says that oral joint venture types of agreements can be enforceable.
3. It is difficult to argue with any decision that uses case authority from 1851 as its foundation.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Thursday, June 28, 2012
Anyone Still Care About Brokerage Commissions?
Michael Neary and St. John’s Holdings, Inc. brought a lawsuit to collect brokerage fees in connection with the sale of eight apartment complexes to Comunidad Corporation. The Contract did not contain a provision regarding brokerage fees. Neary was a licensed real estate broker. SJH was wholly owned by Neary. SJH had assigned his commissions to SJH, but SJH did not hold a corporate brokerage license issued by TREC.
Neary and SJH claimed that a “Term Sheet” plus several email messages constituted a contract. And that the Sellers breached that contract. And as a consequence, that Neary and SJH were entitled to collect brokerage fees.
The Term Sheet was signed. However, immediately above the signature lines is the sentence: “This term sheet is a guideline only, and is not binding [emphasis added].” Various emails did not definitively state the brokerage fee either, as the fee was evidently the subject of hot negotiation.
Doubtless it gave Neary and SJH little comfort when the Dallas Appellate Court wrote that “. . . strict compliance with the [Texas Real Estate License Act] is required; the agreement to pay a real estate commission must be in writing or it is not enforceable.” The Appellate Court then defined the term “not binding” to roughly mean, yes you guessed it correctly, “not binding.”
The Appellate Court determined, much like the trial court, that the Term Sheet and emails represent at most an effort to negotiate an agreement regarding brokerage fees and other matters. As such those documents do not constitute a signed, written memorandum as contemplated by the TRELA.
Owners win. Brokers lose. See Neary and St. John’s Holdings, Inc. v. Mikob Properties, Inc.; 05-09-01175-CV (5th Texas Court of Appeals, Dallas, opinion filed May 9, 2011).
Lessons learned:
1. Texas real estate commission agreements must be in writing.
2. Texas real estate commission agreements must be signed.
3. Texas real estate commission agreements must be in writing and signed.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Neary and SJH claimed that a “Term Sheet” plus several email messages constituted a contract. And that the Sellers breached that contract. And as a consequence, that Neary and SJH were entitled to collect brokerage fees.
The Term Sheet was signed. However, immediately above the signature lines is the sentence: “This term sheet is a guideline only, and is not binding [emphasis added].” Various emails did not definitively state the brokerage fee either, as the fee was evidently the subject of hot negotiation.
Doubtless it gave Neary and SJH little comfort when the Dallas Appellate Court wrote that “. . . strict compliance with the [Texas Real Estate License Act] is required; the agreement to pay a real estate commission must be in writing or it is not enforceable.” The Appellate Court then defined the term “not binding” to roughly mean, yes you guessed it correctly, “not binding.”
The Appellate Court determined, much like the trial court, that the Term Sheet and emails represent at most an effort to negotiate an agreement regarding brokerage fees and other matters. As such those documents do not constitute a signed, written memorandum as contemplated by the TRELA.
Owners win. Brokers lose. See Neary and St. John’s Holdings, Inc. v. Mikob Properties, Inc.; 05-09-01175-CV (5th Texas Court of Appeals, Dallas, opinion filed May 9, 2011).
Lessons learned:
1. Texas real estate commission agreements must be in writing.
2. Texas real estate commission agreements must be signed.
3. Texas real estate commission agreements must be in writing and signed.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Monday, June 11, 2012
Whoops! I May Have Made a Mistake
In August 2004 Hazel Berry, Evelyn Mebane and Rebecca Robinson entered into a contract to sell 176 acres in Scurry County, Texas to Cynthia Gail for $80,000. The contract reserved to the sellers all minerals and royalties. When the deal closed in September 2004, however, the deed did not contain a mineral reservation. It appeared to be an oversight as the attorney who prepared the contract and the deed did not compare the two.
One of the sellers sued Gail, claiming a legal theory of “mutual mistake,” and asked that the court reform the deed by adding the mineral reservation effective as of the date of closing. The trial court agreed. Cynthia Gail appealed.
Gail’s testimony was that: (a) this is not a case of mutual mistake; (b) contract negotiations continued after the contract was signed; (c) Gail believed that the contract would be later amended; (d) although the contract contained a mineral exception, in actuality there was no definitive agreement on that point; and (e) Gail believed the absence of a mineral reservation in the deed meant that the Sellers had agreed to amend the contract to remove the mineral reservation.
Gail also submitted an Affidavit, generally claiming that the absence of a mineral reservation in the deed was not a mistake, but rather reflected the intent of the parties.
The Texas Court of Appeals had little difficulty dismissing all of Gail’s arguments, relying instead on the legal principle that a party is entitled to reformation of a deed when it proves that it reached an agreement with the other party, but the deed does not reflect the true agreement due to mutual mistake. Unilateral mistake by one side (Berry and Mebane), and knowledge of that mistake by the other side (Gail), is equivalent to mutual mistake.
The contract contained a mineral reservation. The deed did not. The lawyer who failed to insert the reservation in the deed testified that it was an inadvertent failure. A scrivener’s failure to follow the precise terms of a contract equals a mutual mistake. Judgment affirmed for Mebane and Berry.
Gail v. Berry; 11-09-00299-CV (11th Texas Court of Appeals, decided April 16, 2011).
Lessons learned:
1. Everybody makes mistakes.
2. Lawyers make mistakes.
3. Mutual mistakes can be corrected. Unilateral mistakes cannot.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
One of the sellers sued Gail, claiming a legal theory of “mutual mistake,” and asked that the court reform the deed by adding the mineral reservation effective as of the date of closing. The trial court agreed. Cynthia Gail appealed.
Gail’s testimony was that: (a) this is not a case of mutual mistake; (b) contract negotiations continued after the contract was signed; (c) Gail believed that the contract would be later amended; (d) although the contract contained a mineral exception, in actuality there was no definitive agreement on that point; and (e) Gail believed the absence of a mineral reservation in the deed meant that the Sellers had agreed to amend the contract to remove the mineral reservation.
Gail also submitted an Affidavit, generally claiming that the absence of a mineral reservation in the deed was not a mistake, but rather reflected the intent of the parties.
The Texas Court of Appeals had little difficulty dismissing all of Gail’s arguments, relying instead on the legal principle that a party is entitled to reformation of a deed when it proves that it reached an agreement with the other party, but the deed does not reflect the true agreement due to mutual mistake. Unilateral mistake by one side (Berry and Mebane), and knowledge of that mistake by the other side (Gail), is equivalent to mutual mistake.
The contract contained a mineral reservation. The deed did not. The lawyer who failed to insert the reservation in the deed testified that it was an inadvertent failure. A scrivener’s failure to follow the precise terms of a contract equals a mutual mistake. Judgment affirmed for Mebane and Berry.
Gail v. Berry; 11-09-00299-CV (11th Texas Court of Appeals, decided April 16, 2011).
Lessons learned:
1. Everybody makes mistakes.
2. Lawyers make mistakes.
3. Mutual mistakes can be corrected. Unilateral mistakes cannot.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Thursday, May 31, 2012
Lease Mitigation
Mitchell Rudder Properties, LP sued GKG.Net, Inc. for breach of a commercial lease agreement. The jury awarded judgment to Rudder, and GKG appealed to the Houston Court of Appeals.
GKG had extended its lease until March 31, 2013. In 2006 GKG defaulted and Rudder took possession. At the time of the default GKG was paying $13.56 PSF per year.
Rudder quickly signed a replacement lease with World Savings Bank. World was later acquired by Wachovia. The replacement lease had a term through 2011, but World also reserved for itself a ‘kick-out’ or ‘knockout’ clause, where World could buy out of the last two years. Also, World reserved a five-year extension option.
Litigation was asserted by Rudder against GKG in 2006 for past due rents, diminished rents relative to the World lease, future rents for the unexpired original lease term (2011 World lease vs. 2013 GKG lease), and costs. Rudder was awarded damages in all categories requested, in addition to $314,123 for the two-year period of time after expiration of the World Lease.
GKG appealed only the $314k component, claiming that the jury improperly failed to grant an offset for the value of the lease during the two year period. Rudder’s property manager had testified in court that “. . . nobody that I know as an investor that would buy that tenth year – or year 11 and the last 3 months of 12 as an income stream for anything when they’d [World Savings] had already vacated the building. So we didn’t assign any value to that.”
The Houston Court of Appeals reviewed a pivotal 1997 Texas Supreme Court ruling, and more current case authority, and concluded that “. . . the reasonable cash market value of a lease for its unexpired term means the reasonable cash market value of the property – not the reasonable cash market value of the lease that has been breached.” Really the Court had little choice, because to do otherwise would mean that breaching tenants would never be entitled a fair market value offset for the balance of the lease term – that the remaining lease term is always worth zero.
In a further erosion of jury decisions, the Houston Court of Appeals therefore held that there is no evidence to support the jury’s decision that the reasonable cash market value for the remainder of GKG’s term is zero, and that Rudder was entitled to the full rental value of $314,123. The trial court’s judgment was reversed and the case returned to court for a new trial.
Lessons learned:
1. A really good lawyer is going to fight really hard for every penny due you.
2. The residual years of a long-term commercial lease have value.
3. It is the non-waivable duty of a Texas landlord to mitigate its losses for the entire duration of the lease term.
I don’t know what happened as I was not personally involved, but surely Rudder would have been more pleased to allow GKG some type of rental offset for the two-year gap period at the end of the term, then have to start over with a new trial.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
GKG had extended its lease until March 31, 2013. In 2006 GKG defaulted and Rudder took possession. At the time of the default GKG was paying $13.56 PSF per year.
Rudder quickly signed a replacement lease with World Savings Bank. World was later acquired by Wachovia. The replacement lease had a term through 2011, but World also reserved for itself a ‘kick-out’ or ‘knockout’ clause, where World could buy out of the last two years. Also, World reserved a five-year extension option.
Litigation was asserted by Rudder against GKG in 2006 for past due rents, diminished rents relative to the World lease, future rents for the unexpired original lease term (2011 World lease vs. 2013 GKG lease), and costs. Rudder was awarded damages in all categories requested, in addition to $314,123 for the two-year period of time after expiration of the World Lease.
GKG appealed only the $314k component, claiming that the jury improperly failed to grant an offset for the value of the lease during the two year period. Rudder’s property manager had testified in court that “. . . nobody that I know as an investor that would buy that tenth year – or year 11 and the last 3 months of 12 as an income stream for anything when they’d [World Savings] had already vacated the building. So we didn’t assign any value to that.”
The Houston Court of Appeals reviewed a pivotal 1997 Texas Supreme Court ruling, and more current case authority, and concluded that “. . . the reasonable cash market value of a lease for its unexpired term means the reasonable cash market value of the property – not the reasonable cash market value of the lease that has been breached.” Really the Court had little choice, because to do otherwise would mean that breaching tenants would never be entitled a fair market value offset for the balance of the lease term – that the remaining lease term is always worth zero.
In a further erosion of jury decisions, the Houston Court of Appeals therefore held that there is no evidence to support the jury’s decision that the reasonable cash market value for the remainder of GKG’s term is zero, and that Rudder was entitled to the full rental value of $314,123. The trial court’s judgment was reversed and the case returned to court for a new trial.
Lessons learned:
1. A really good lawyer is going to fight really hard for every penny due you.
2. The residual years of a long-term commercial lease have value.
3. It is the non-waivable duty of a Texas landlord to mitigate its losses for the entire duration of the lease term.
I don’t know what happened as I was not personally involved, but surely Rudder would have been more pleased to allow GKG some type of rental offset for the two-year gap period at the end of the term, then have to start over with a new trial.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Tuesday, May 15, 2012
100% Interest May Not Always Be Usurious
PLEASE BE CAREFUL WITH THIS INFORMATION AS THIS CASE WAS DECIDED ON A VERY NARROW, SPECIFIC SET OF UNIQUE FACTS. USURY IS A SERIOUS MATTER AND THE PENALTIES CAN BE SEVERE. ALL PROMISSORY NOTES SHOULD BE PREPARED BY ATTORNEYS.
In October 2002 Roy Threlkeld borrowed $200,000 from Gregory Urech. The promissory note that Threlkeld signed provided for interest at the rate of 100% per annum. Yes you read that correctly – 100%.
Threlkeld defaulted, so Urech contacted an attorney. In December 2003, based on instructions from his lawyer, Urech sent Threlkeld a “correction letter,” basically reducing the interest rate to 18%. In October 2007 Urech filed a lawsuit to collect the outstanding balance of principal and interest.
Threlkeld defended by asserting that the maximum rate of interest should have been 18%, and that a note with a stated interest rate in excess of 18% was usurious. In some circumstances a successful claim of usury under Texas law can result in the forfeiture of both principal and interest. It was Threlkeld’s position that Urech should have reformed the usurious interest rate of 100% within 60 days after the date that Urech learned that the interest rate was excessive, and that Urech knew of the usury issue at the time the note was signed in 2002.
Therefore, Threlkeld argued, the interest rate was not timely corrected.
Urech responded by claiming he is not an attorney, was 23 years old when the funds were loaned in 2002, first learned of the usury issue when he hired his lawyer in 2003, and delivered the “correction letter” 53 days later which is within the 60-day statutory period. Urech further stated he timely sent the correction letter and was entitled to recover interest at 18% from the inception of the loan, and that the loan was not usurious.
The trial court determined that, although in 2002 Urech was a recent college graduate with a degree in international banking, there was not substantial evidence concluding that Urech knew of the usury matter before he was so-advised by his lawyer in 2003. Once he was advised, he took prompt corrective action as required by Texas law to reduce the interest rate so it was not usurious.
On November 17, 2010, the Texas Court of Appeals agreed with Urech, and approved his “correction letter” and collection of 18% interest – the maximum in Texas law. See Threlkeld v. Urech; 05-09-00631-CV.
PLEASE BE CAREFUL WITH THIS INFORMATION AS THIS CASE WAS DECIDED ON A VERY NARROW, SPECIFIC SET OF UNIQUE FACTS. USURY IS A SERIOUS MATTER AND THE PENALTIES CAN BE SEVERE. ALL PROMISSORY NOTES SHOULD BE PREPARED BY ATTORNEYS.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
In October 2002 Roy Threlkeld borrowed $200,000 from Gregory Urech. The promissory note that Threlkeld signed provided for interest at the rate of 100% per annum. Yes you read that correctly – 100%.
Threlkeld defaulted, so Urech contacted an attorney. In December 2003, based on instructions from his lawyer, Urech sent Threlkeld a “correction letter,” basically reducing the interest rate to 18%. In October 2007 Urech filed a lawsuit to collect the outstanding balance of principal and interest.
Threlkeld defended by asserting that the maximum rate of interest should have been 18%, and that a note with a stated interest rate in excess of 18% was usurious. In some circumstances a successful claim of usury under Texas law can result in the forfeiture of both principal and interest. It was Threlkeld’s position that Urech should have reformed the usurious interest rate of 100% within 60 days after the date that Urech learned that the interest rate was excessive, and that Urech knew of the usury issue at the time the note was signed in 2002.
Therefore, Threlkeld argued, the interest rate was not timely corrected.
Urech responded by claiming he is not an attorney, was 23 years old when the funds were loaned in 2002, first learned of the usury issue when he hired his lawyer in 2003, and delivered the “correction letter” 53 days later which is within the 60-day statutory period. Urech further stated he timely sent the correction letter and was entitled to recover interest at 18% from the inception of the loan, and that the loan was not usurious.
The trial court determined that, although in 2002 Urech was a recent college graduate with a degree in international banking, there was not substantial evidence concluding that Urech knew of the usury matter before he was so-advised by his lawyer in 2003. Once he was advised, he took prompt corrective action as required by Texas law to reduce the interest rate so it was not usurious.
On November 17, 2010, the Texas Court of Appeals agreed with Urech, and approved his “correction letter” and collection of 18% interest – the maximum in Texas law. See Threlkeld v. Urech; 05-09-00631-CV.
PLEASE BE CAREFUL WITH THIS INFORMATION AS THIS CASE WAS DECIDED ON A VERY NARROW, SPECIFIC SET OF UNIQUE FACTS. USURY IS A SERIOUS MATTER AND THE PENALTIES CAN BE SEVERE. ALL PROMISSORY NOTES SHOULD BE PREPARED BY ATTORNEYS.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Wednesday, May 2, 2012
No Contract + No License = No Commission
I have been an attorney for almost 30 years now. During that time I have represented REALTORS®, brokers and sales agents, and their industry trade associations. Although Texas law never changed regarding licensure and contractual requirements, the issue of commissions continues to be litigated in every conceivable way in Texas. Inevitably the results are the same.
Here is the latest case demonstrating the futility of attempting to extract a commission from a party that has not signed a Commission Agreement and disputes a lawful obligation to pay it. In this case, the “broker” did not maintain a license from the Texas Real Estate Commission either.
Expo Motorcars, evidently the purveyor of exotic cars in Houston as I determined from their website (check the 2009 Spyker C8 Spider: http://www.expomc.com/invsys/details2.php?id=8685 which can be yours for only $209,995 + TTL), required more space. Jorge Lujan, sales manager at Expo, contacted Peter Jacobson to find a larger parcel. Lujan introduced Jacobson to Michael Kim, president of Expo, and there may have been an oral agreement that Jacobson would be paid a three percent fee if Expo purchased the property Jacobson located.
Jacobson found a property and started negotiations with the owner. As Lujan and Jacobson were meeting at lunch to develop a letter of intent, Kim called to inform Jacobson that his services were no longer required.
When Jacobson ultimately discovered that Expo had moved to the property Jacobson had located, Jacobson demanded his fee. It wasn’t paid, and a lawsuit resulted.
The Houston trial court awarded Jacobson damages of $45,000, based on a $1.5 million purchase price, attorney’s fees, pre-judgment interest and post-judgment interest. Expo appealed.
The Houston Court of Appeals determined that Jacobson’s actions in attempting to locate suitable real estate for purchase or lease required licensure under the Texas Real Estate License Act, if no statutory exemption was applicable. The Court of Appeals further allowed that the TRELA also required a written contract obligating the defendant to pay a real estate commission or fee.
Mr. Jacobson possessed neither a brokerage license nor a written contract. Since there was no applicable exemption (such as the attorney-exemption), the trial court’s judgment in favor of Mr. Jacobson was reversed and rendered instead for Expo and Michael Kim.
See Expo Holdings, LP v. Jacobson, 2010 WL 3307454 (Houston Court of Appeals – 14th Dist. 2010).
Bottom line:
1. Only brokers may lawfully charge and receive commissions or fees for real estate brokerage activity in Texas, assuming some very narrow exceptions are inapplicable.
2. Brokers may not lawfully collect real estate commissions or fees absent a written contract.
3. BTW it is a Class A misdemeanor in Texas if one acts as a broker or sales agent without appropriate licensure, or exemption from licensure. Check Texas Occupations Code 1101.758.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Here is the latest case demonstrating the futility of attempting to extract a commission from a party that has not signed a Commission Agreement and disputes a lawful obligation to pay it. In this case, the “broker” did not maintain a license from the Texas Real Estate Commission either.
Expo Motorcars, evidently the purveyor of exotic cars in Houston as I determined from their website (check the 2009 Spyker C8 Spider: http://www.expomc.com/invsys/details2.php?id=8685 which can be yours for only $209,995 + TTL), required more space. Jorge Lujan, sales manager at Expo, contacted Peter Jacobson to find a larger parcel. Lujan introduced Jacobson to Michael Kim, president of Expo, and there may have been an oral agreement that Jacobson would be paid a three percent fee if Expo purchased the property Jacobson located.
Jacobson found a property and started negotiations with the owner. As Lujan and Jacobson were meeting at lunch to develop a letter of intent, Kim called to inform Jacobson that his services were no longer required.
When Jacobson ultimately discovered that Expo had moved to the property Jacobson had located, Jacobson demanded his fee. It wasn’t paid, and a lawsuit resulted.
The Houston trial court awarded Jacobson damages of $45,000, based on a $1.5 million purchase price, attorney’s fees, pre-judgment interest and post-judgment interest. Expo appealed.
The Houston Court of Appeals determined that Jacobson’s actions in attempting to locate suitable real estate for purchase or lease required licensure under the Texas Real Estate License Act, if no statutory exemption was applicable. The Court of Appeals further allowed that the TRELA also required a written contract obligating the defendant to pay a real estate commission or fee.
Mr. Jacobson possessed neither a brokerage license nor a written contract. Since there was no applicable exemption (such as the attorney-exemption), the trial court’s judgment in favor of Mr. Jacobson was reversed and rendered instead for Expo and Michael Kim.
See Expo Holdings, LP v. Jacobson, 2010 WL 3307454 (Houston Court of Appeals – 14th Dist. 2010).
Bottom line:
1. Only brokers may lawfully charge and receive commissions or fees for real estate brokerage activity in Texas, assuming some very narrow exceptions are inapplicable.
2. Brokers may not lawfully collect real estate commissions or fees absent a written contract.
3. BTW it is a Class A misdemeanor in Texas if one acts as a broker or sales agent without appropriate licensure, or exemption from licensure. Check Texas Occupations Code 1101.758.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Wednesday, April 18, 2012
Beware the Mob
Recently I had an opportunity to look, again, at a Texas Landlord’s obligation to mitigate its damages when a Tenant breaches a Lease. It’s hard to believe we have had this law since 1997 – almost 15 years now. And before that date we had appellate case decisions that led to Texas Property Code 91.006.
In September 2005, MOB 90 of Texas, LP, leased commercial property to Nejemie Alter MD’s professional association. The property was in the Corpus Christi area, intended to be used as a medical office for five years. Alter personally guaranteed the lease obligation. Virtually no rent was paid during 2006, so MOB filed an eviction lawsuit against Alter.
Alter vacated in January 2007, and claimed that he only owed rental through that date. MOB had a different theory in mind, and claimed that Alter owed rental through the date of trial. The monthly rent was $4,677. Rental owing through the date that Alter vacated was $36,782, and that amount was not in dispute.
MOB requested judgment for $93,220. Alter contested that amount, claiming that MOB failed to properly mitigate damages, as required by the Texas law.
Alter testified that as he passed by the MOB property there were no signs posted that the property was available to lease. To his knowledge, there were no visible efforts undertaken by MOB to re-lease the premises. Alter further testified that after he defaulted he attempted to negotiate a deal with MOB involving lesser space. Alter claimed that he was willing to pay weekly amounts.
At trial MOB’s counsel called the property manager as a witness. Jean Shivers testified that typically for-lease signage was not used in medical office building settings. Shivers stated she had shown the premises three times since Alter was evicted, and that she had not leased any space in MOB’s building since January 2007 – the date that Alter vacated.
Shivers also testified that she listed the premises on both Loopnet and Costar, kept in contact with personnel at Doctor’s Regional Hospital, and that it was hardly unusual for it to take an extended period of time to re-lease commercial premises.
In any event, the Nueces County trial court entered judgment for MOB, but only for $36,782. MOB appealed.
The Corpus Christi Court of Appeals, citing a landmark 1997 Texas Supreme Court decision, discussed the duty of a Texas landlord to take objectively reasonable efforts to mitigate damages and find a suitable replacement tenant, when the tenant breaches a lease and abandons the property. A Texas landlord is not required to take all known efforts or accept an unsuitable tenant.
The trial court was of the view that MOB failed to adequately mitigate because MOB refused to work with Alter, who had defaulted on the Lease. The trial court also concluded that MOB’s efforts to mitigate by online listings, showing the property to those who expressed an interest and contacting the hospital administrators were insufficient.
The Court of Appeals disagreed, finding that since Alter did not prove that MOB’s failure to mitigate damaged Alter in any way, the trial court made a mistake and MOB was owed $93,220 in back rent through the date of trial. The Court of Appeals also saw no duty of a Texas landlord to renegotiate its lease with a defaulting tenant. See MOB 90 of Texas, LP v. Nejemie Alter MD, PA (Texas Court of Appeals – Corpus Christi-Edinburg 2009).
MOB wins, Dr. Alter loses.
Bottom line:
1. Texas landlords must mitigate their damages. When practical I recommend signage, in addition to other objectively reasonable efforts. In that manner tenants can at least observe some of your efforts.
2. There is nothing in this case or the mitigation law which precludes Texas landlords from clearly defining their mitigation burden in the lease. Note, however, that Texas landlords may not force or allow a tenant to waive the landlord’s burden of mitigation.
3. Beware the MOB.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
In September 2005, MOB 90 of Texas, LP, leased commercial property to Nejemie Alter MD’s professional association. The property was in the Corpus Christi area, intended to be used as a medical office for five years. Alter personally guaranteed the lease obligation. Virtually no rent was paid during 2006, so MOB filed an eviction lawsuit against Alter.
Alter vacated in January 2007, and claimed that he only owed rental through that date. MOB had a different theory in mind, and claimed that Alter owed rental through the date of trial. The monthly rent was $4,677. Rental owing through the date that Alter vacated was $36,782, and that amount was not in dispute.
MOB requested judgment for $93,220. Alter contested that amount, claiming that MOB failed to properly mitigate damages, as required by the Texas law.
Alter testified that as he passed by the MOB property there were no signs posted that the property was available to lease. To his knowledge, there were no visible efforts undertaken by MOB to re-lease the premises. Alter further testified that after he defaulted he attempted to negotiate a deal with MOB involving lesser space. Alter claimed that he was willing to pay weekly amounts.
At trial MOB’s counsel called the property manager as a witness. Jean Shivers testified that typically for-lease signage was not used in medical office building settings. Shivers stated she had shown the premises three times since Alter was evicted, and that she had not leased any space in MOB’s building since January 2007 – the date that Alter vacated.
Shivers also testified that she listed the premises on both Loopnet and Costar, kept in contact with personnel at Doctor’s Regional Hospital, and that it was hardly unusual for it to take an extended period of time to re-lease commercial premises.
In any event, the Nueces County trial court entered judgment for MOB, but only for $36,782. MOB appealed.
The Corpus Christi Court of Appeals, citing a landmark 1997 Texas Supreme Court decision, discussed the duty of a Texas landlord to take objectively reasonable efforts to mitigate damages and find a suitable replacement tenant, when the tenant breaches a lease and abandons the property. A Texas landlord is not required to take all known efforts or accept an unsuitable tenant.
The trial court was of the view that MOB failed to adequately mitigate because MOB refused to work with Alter, who had defaulted on the Lease. The trial court also concluded that MOB’s efforts to mitigate by online listings, showing the property to those who expressed an interest and contacting the hospital administrators were insufficient.
The Court of Appeals disagreed, finding that since Alter did not prove that MOB’s failure to mitigate damaged Alter in any way, the trial court made a mistake and MOB was owed $93,220 in back rent through the date of trial. The Court of Appeals also saw no duty of a Texas landlord to renegotiate its lease with a defaulting tenant. See MOB 90 of Texas, LP v. Nejemie Alter MD, PA (Texas Court of Appeals – Corpus Christi-Edinburg 2009).
MOB wins, Dr. Alter loses.
Bottom line:
1. Texas landlords must mitigate their damages. When practical I recommend signage, in addition to other objectively reasonable efforts. In that manner tenants can at least observe some of your efforts.
2. There is nothing in this case or the mitigation law which precludes Texas landlords from clearly defining their mitigation burden in the lease. Note, however, that Texas landlords may not force or allow a tenant to waive the landlord’s burden of mitigation.
3. Beware the MOB.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Tuesday, April 3, 2012
Be Careful with Contract Definitions
In August 2004, TC Dallas #1, LP bought an office building from Republic Underwriters Insurance Company for $20 million. TC intended to redevelop the property, but it could not do so until Dallas National Bank vacated. To make the deal, Republic agreed to share TC’s early lease termination expenses and the costs of operating and managing the building until the Bank moved out.
Instead of redevelopment, TC instead elected to sell the property 10 months later for $16 million, to SCA 2727 Turtle Creek LP. TC retained in its contract with SCA the right to receive compensation from Republic as stated in the first contract. As well the second contract provided that the reduced purchase price reflected a $6 million reduction from the intended price, called a “bank credit,” which was defined as the amount by which the intended purchase price was reduced to compensate SCA for the risk in accepting title subject to the tenancy of Dallas National Bank, as well as anticipated lease termination expenses and operational costs of the property as an occupied building.
The second contract then reserved for SCA the exclusive right to negotiate lease termination fees. For reasons not explained in the appellate decision, the second contract obligated SCA to pay the anticipated Bank lease termination fees to TC. It was then TC’s duty in the second contract to remit such fees to the Bank.
Using the second contract’s procedures regarding the Bank lease termination fee, SCA wired $2 million to TC, and TC wired $2 million to the Bank. Actually the fee was not really for a lease termination, but rather the Bank was paid for a release of its right to renew the lease term through 2014.
TC then sued Republic, demanding reimbursement for portions of the $2 million paid to Dallas National Bank, as well as the $6 million “bank credit” and other expenses.
Republic asserted in the trial court that it had no obligation to reimburse TC for such expenses. The trial court agreed. TC Dallas #1, LP appealed.
The Dallas Court of Appeals, deferring at one point to Webster’s Third New International Dictionary for guidance, rejected TC’s appeal. Using the strict language of the first contract regarding “lease termination costs,” and “expenses and disbursements,” the Court of Appeals ruled that the monies paid and credit offered in the secondary contract did not exactly match the definitional phrases in the first contract.
TC lost, again. See TC Dallas #1, LP v. Republic Underwriters Insurance Company,Dallas
Bottom line:
1. Definitional phrases in contracts are really important.
2. Definitional phrases in contracts are vitally important.
3. Definitional phrases in contracts are critically important.
Yes I know there is some repetition, but I thought it was important enough to repeat.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Instead of redevelopment, TC instead elected to sell the property 10 months later for $16 million, to SCA 2727 Turtle Creek LP. TC retained in its contract with SCA the right to receive compensation from Republic as stated in the first contract. As well the second contract provided that the reduced purchase price reflected a $6 million reduction from the intended price, called a “bank credit,” which was defined as the amount by which the intended purchase price was reduced to compensate SCA for the risk in accepting title subject to the tenancy of Dallas National Bank, as well as anticipated lease termination expenses and operational costs of the property as an occupied building.
The second contract then reserved for SCA the exclusive right to negotiate lease termination fees. For reasons not explained in the appellate decision, the second contract obligated SCA to pay the anticipated Bank lease termination fees to TC. It was then TC’s duty in the second contract to remit such fees to the Bank.
Using the second contract’s procedures regarding the Bank lease termination fee, SCA wired $2 million to TC, and TC wired $2 million to the Bank. Actually the fee was not really for a lease termination, but rather the Bank was paid for a release of its right to renew the lease term through 2014.
TC then sued Republic, demanding reimbursement for portions of the $2 million paid to Dallas National Bank, as well as the $6 million “bank credit” and other expenses.
Republic asserted in the trial court that it had no obligation to reimburse TC for such expenses. The trial court agreed. TC Dallas #1, LP appealed.
The Dallas Court of Appeals, deferring at one point to Webster’s Third New International Dictionary for guidance, rejected TC’s appeal. Using the strict language of the first contract regarding “lease termination costs,” and “expenses and disbursements,” the Court of Appeals ruled that the monies paid and credit offered in the secondary contract did not exactly match the definitional phrases in the first contract.
TC lost, again. See TC Dallas #1, LP v. Republic Underwriters Insurance Company,
Bottom line:
1. Definitional phrases in contracts are really important.
2. Definitional phrases in contracts are vitally important.
3. Definitional phrases in contracts are critically important.
Yes I know there is some repetition, but I thought it was important enough to repeat.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Tuesday, March 20, 2012
Buyer Beware: Always Check Vesting Deeds
In February 2006 Summit Electric Supply Co., Inc. agreed to sell a five-acre parcel of property located at Manana Drive and IH-35 in Dallas Dallas Sale
Mahboubi assigned the Contract to Semira Rezaie. Rezaie then entered into a Contract to flip the parcel to Jerry Spencer, LP.
The first closing was on August 4, 2006.Summit
The second closing was also on August 4. At that closing, Rezaie conveyed the property to Spencer, without exceptions or restrictions. The second Deed was recorded on August 7, 2006 – 18 days before the first Deed.
Spencer leased the property to 2327 Manana, LLC, who posted a notice on the front door announcing its intent to operate a SOB. Then the litigation started.
Spencer and Manana argued in trial court that they could not be held responsible for compliance with the SOB restriction, because the Deed containing that restriction was not recorded inDallas County Texas
Spencer and Manana lost. They appealed.
On June 25, 2010, the Dallas Court of Appeals affirmed the trial court’s judgment. The Court of Appeals had little trouble concluding that a real estate purchaser is bound by every matter contained in or disclosed by any instrument which forms an essential link in the chain of title, even though Spencer and Manana had never read the documents. Essentially, if Spencer and Manana closed their transaction without reviewing the immediately preceding deed in the chain – the ‘vesting deed’ – then Spencer and Manana did so at their own peril.
Not addressed in the case due to procedural matters were the claims against the broker who represented all of the buyers, and possibly failed to disclose the inclusion of the restrictive clause in the first deed. Also not addressed were possible claims against the title company, who may have insured the secondary transaction without reference to the restrictive covenant contained in theSummit
Bottom line:
1. Demand to see the Vesting Deed. Check it for restrictions. Particularly in flip transactions where closings are occurring quickly.
2. If possible, get representations and indemnities in Contracts and Leases, obligating the Seller / Landlord to certify that the property can be used as the Purchaser / Tenant requires.
3. If you have actual knowledge about a latent defect or material condition, immediately disclose it to your principal in writing.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Mahboubi assigned the Contract to Semira Rezaie. Rezaie then entered into a Contract to flip the parcel to Jerry Spencer, LP.
The first closing was on August 4, 2006.
The second closing was also on August 4. At that closing, Rezaie conveyed the property to Spencer, without exceptions or restrictions. The second Deed was recorded on August 7, 2006 – 18 days before the first Deed.
Spencer leased the property to 2327 Manana, LLC, who posted a notice on the front door announcing its intent to operate a SOB. Then the litigation started.
Spencer and Manana argued in trial court that they could not be held responsible for compliance with the SOB restriction, because the Deed containing that restriction was not recorded in
Spencer and Manana lost. They appealed.
On June 25, 2010, the Dallas Court of Appeals affirmed the trial court’s judgment. The Court of Appeals had little trouble concluding that a real estate purchaser is bound by every matter contained in or disclosed by any instrument which forms an essential link in the chain of title, even though Spencer and Manana had never read the documents. Essentially, if Spencer and Manana closed their transaction without reviewing the immediately preceding deed in the chain – the ‘vesting deed’ – then Spencer and Manana did so at their own peril.
Not addressed in the case due to procedural matters were the claims against the broker who represented all of the buyers, and possibly failed to disclose the inclusion of the restrictive clause in the first deed. Also not addressed were possible claims against the title company, who may have insured the secondary transaction without reference to the restrictive covenant contained in the
Bottom line:
1. Demand to see the Vesting Deed. Check it for restrictions. Particularly in flip transactions where closings are occurring quickly.
2. If possible, get representations and indemnities in Contracts and Leases, obligating the Seller / Landlord to certify that the property can be used as the Purchaser / Tenant requires.
3. If you have actual knowledge about a latent defect or material condition, immediately disclose it to your principal in writing.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Monday, March 5, 2012
Move Your Residence or Business Near the Airport at Your Own Peril
83 Houston residents near Bush Intercontinental Airport sued the City of Houston. A new runway resulted in increased airplane traffic and the owners determined that living near the airport was untenable. So the owners argued that their properties had been taken by “inverse condemnation,” and they should be compensated for their loss.
The City won the case in trial court. The homeowners appealed.
The Houston Court of Appeals used a 1946 United States Supreme Court case to guide them. In that case, the property owners operated a chicken ranch but were forced to close their business when military planes were flying only 63 feet about the barn. Six to 10 chickens were killed daily by flying into the walls from fright. Egg production suffered. The owners were unable to sleep and became nervous and frightened, and were entitled to compensation.
Our Texas Supreme Court decided a case in 2002 where the plaintiff owned commercial property near the Austin-Bergstrom International Airport, and intended to use it as a landfill, but was unable to do so because of airplane traffic. The plaintiff sued the City of Austin for taking-by-overflight. The trial court awarded a judgment to the plaintiff, but the Texas Supreme Court reversed it because the property could maintain its use as a landfill.
The Texas Supreme Court focused on the concept of “unsuitability” in their 2002 decision. A mere impairment does not necessarily equate to unsuitability. Landfills, subject to zoning and other laws, can be anywhere.
The 83 Houston residents had not claimed that their residences were uninhabitable. Instead, they stated that conversations were impossible, TV reception was bad, sleep was interrupted, children and pets were frightened, nervous and irritable, and it was difficult to entertain friends or speak on the phone.
But the residents did not relocate. This could have been because no one would buy their properties, but that sidebar issue was not addressed in the Houston case.
And so the Houston Court of Appeals had no choice but to follow Texas Supreme Court precedent in the April 2010 case of Alewine v. City of Houston. Since the properties were still capable of use as residences, the plaintiffs must lose. Expect an appeal to the Supreme Court.
Bottom line:
1. If you move your residence or business near an airport, don’t expect to be compensated by the government when the airport expands.
2. If you are asking the government for compensation anyway, tell your lawyer to use the “unsuitable” word in the lawsuit.
3. Let’s just use the KISS principle here: don’t move near an airport.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
The City won the case in trial court. The homeowners appealed.
The Houston Court of Appeals used a 1946 United States Supreme Court case to guide them. In that case, the property owners operated a chicken ranch but were forced to close their business when military planes were flying only 63 feet about the barn. Six to 10 chickens were killed daily by flying into the walls from fright. Egg production suffered. The owners were unable to sleep and became nervous and frightened, and were entitled to compensation.
Our Texas Supreme Court decided a case in 2002 where the plaintiff owned commercial property near the Austin-Bergstrom International Airport, and intended to use it as a landfill, but was unable to do so because of airplane traffic. The plaintiff sued the City of Austin for taking-by-overflight. The trial court awarded a judgment to the plaintiff, but the Texas Supreme Court reversed it because the property could maintain its use as a landfill.
The Texas Supreme Court focused on the concept of “unsuitability” in their 2002 decision. A mere impairment does not necessarily equate to unsuitability. Landfills, subject to zoning and other laws, can be anywhere.
The 83 Houston residents had not claimed that their residences were uninhabitable. Instead, they stated that conversations were impossible, TV reception was bad, sleep was interrupted, children and pets were frightened, nervous and irritable, and it was difficult to entertain friends or speak on the phone.
But the residents did not relocate. This could have been because no one would buy their properties, but that sidebar issue was not addressed in the Houston case.
And so the Houston Court of Appeals had no choice but to follow Texas Supreme Court precedent in the April 2010 case of Alewine v. City of Houston. Since the properties were still capable of use as residences, the plaintiffs must lose. Expect an appeal to the Supreme Court.
Bottom line:
1. If you move your residence or business near an airport, don’t expect to be compensated by the government when the airport expands.
2. If you are asking the government for compensation anyway, tell your lawyer to use the “unsuitable” word in the lawsuit.
3. Let’s just use the KISS principle here: don’t move near an airport.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Wednesday, February 15, 2012
Beware the ROFR
Cecil Hicks gave Tim Castille a right of first refusal (“ROFR”) to buy a four acre parcel of land in Wheeler County, Texas. A small portion of the four acres was leased to American Tower. To trigger Castille’s ROFR, Hicks sent Castille a letter providing that Hicks intended to sell only the small portion of the property that was leased to American Tower for $50,000.
Castille did not exercise his ROFR, but instead brought a lawsuit claiming that Hicks had no right to subdivide the four-acre parcel and sell pieces. Instead, Castille argued, the ROFR applied to all four acres. Predictably, Hicks did not read the RFOR in that manner.
The Wheeler County trial court agreed with Castille and refused to allow Hicks to subdivide his acreage. So Hicks appealed.
The Amarillo Court of Appeals reviewed Texas cases that generally disfavor restraints against a property owner’s ability to mortgage, lease or sell it. As well there was no language in the ROFR prohibiting Hicks from partitioning his property or otherwise permitting Castille to require a sale of all four acres and nothing less.
Simply put, the ROFR did not address the issue.
On April 14, 2010, the Amarillo Court of Appeals reversed the decision of the Wheeler County court, holding that Hicks had the right to sell all or less than all four acres, as Hicks determined was appropriate, provided the third party (American Tower’s) offer was: (a) commercially reasonable; (b) submitted in good faith; and (c) not designed specifically to defeat Castille’s ROFR.
Bottom line:
1. ROFRs, purchase and lease options, right of first offers ("ROFO"s) and similar provisions can be (and usually are!) difficult to properly draft.
2. Texas Courts are reluctant to overly burden property owners.
3. Sometimes commercial brokers are accused of finding a “straw” buyer or tenant to feign an interest in property, so that a ROFR, option or ROFO is triggered and the option holder is forced to buy or lease. If the offer of the “straw” buyer or tenant is not legitimate or does not meet the three-part test described in this case, then the ROFR, option or ROFO may not be properly triggered.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Castille did not exercise his ROFR, but instead brought a lawsuit claiming that Hicks had no right to subdivide the four-acre parcel and sell pieces. Instead, Castille argued, the ROFR applied to all four acres. Predictably, Hicks did not read the RFOR in that manner.
The Wheeler County trial court agreed with Castille and refused to allow Hicks to subdivide his acreage. So Hicks appealed.
The Amarillo Court of Appeals reviewed Texas cases that generally disfavor restraints against a property owner’s ability to mortgage, lease or sell it. As well there was no language in the ROFR prohibiting Hicks from partitioning his property or otherwise permitting Castille to require a sale of all four acres and nothing less.
Simply put, the ROFR did not address the issue.
On April 14, 2010, the Amarillo Court of Appeals reversed the decision of the Wheeler County court, holding that Hicks had the right to sell all or less than all four acres, as Hicks determined was appropriate, provided the third party (American Tower’s) offer was: (a) commercially reasonable; (b) submitted in good faith; and (c) not designed specifically to defeat Castille’s ROFR.
Bottom line:
1. ROFRs, purchase and lease options, right of first offers ("ROFO"s) and similar provisions can be (and usually are!) difficult to properly draft.
2. Texas Courts are reluctant to overly burden property owners.
3. Sometimes commercial brokers are accused of finding a “straw” buyer or tenant to feign an interest in property, so that a ROFR, option or ROFO is triggered and the option holder is forced to buy or lease. If the offer of the “straw” buyer or tenant is not legitimate or does not meet the three-part test described in this case, then the ROFR, option or ROFO may not be properly triggered.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Tuesday, January 31, 2012
Real Estate Fraud
William Myre engaged an engineer to prepare a plat for Hunt County property he owned. Although there were no drainage plans as required by county regulators, Hunt County approved it anyway and the property became Cole Estates. Thereafter, Craig Development, Inc. purchased Cole Estates from Myre.
Carl Meletio and others bought some Cole Estates lots from Craig Development, Inc. (“CDI”) between 2000 and 2002. Cole Estates became a residential subdivision.
Some of the properties in Cole Estates flooded during significant rainstorms between 2002 and 2006. Meletio sued CDI and Myre. The jury determined that Myre had committed fraud by failing to disclose to Meletio and others that Cole Estates might be inundated by floodwaters. Judgment was rendered for Meletio, and Myre appealed.
In the appeal Myre claimed that he could not have committed fraud, since he did not owe a duty of disclosure to the individuals to whom he did not sell property. Myre reminded the appellate court that he sold the property to CDI, not Meletio. Myre served only as the developer, and claimed that Myre’s duties were owed only to CDI. Therefore, if the property owners were damaged their recourse should be directed against CDI, not Myre.
The 5th District Court of Appeals ratified Texas law that “. . . a seller is under a duty to disclose materials facts that would not be discoverable by the exercise of ordinary care and due diligence by the purchaser, or that a reasonable investigation and inquiry would not uncover.” The Court cited a case providing that a party cannot be guilty of fraudulently concealing facts of which he is not aware.
Finding that Myre had no relationship with any of the plaintiffs and therefore Myre had no duty of disclosure to them, the Court concluded that Myre could not be liable for fraud. The fraud portion of the judgment was reversed. See Myre v. Meletio, 05-08-00576, Fifth District Court of Appeals, Dallas Division; judgment rendered February 26, 2010.
Bottom line:
1. Real estate disclosure duties are typically owed to property purchasers and tenants by their immediate sellers and landlords.
2. Disclosure duties are also owed by brokers and agents to their principals and to their opposing parties as well.
3. It is surprising that real estate brokers and agents were not sued. If CDI’s broker and agent were sued in this case, both the trial court and appellate court could have asserted liability against them if they had knowledge of the flooding issue, and failed to disclose.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Carl Meletio and others bought some Cole Estates lots from Craig Development, Inc. (“CDI”) between 2000 and 2002. Cole Estates became a residential subdivision.
Some of the properties in Cole Estates flooded during significant rainstorms between 2002 and 2006. Meletio sued CDI and Myre. The jury determined that Myre had committed fraud by failing to disclose to Meletio and others that Cole Estates might be inundated by floodwaters. Judgment was rendered for Meletio, and Myre appealed.
In the appeal Myre claimed that he could not have committed fraud, since he did not owe a duty of disclosure to the individuals to whom he did not sell property. Myre reminded the appellate court that he sold the property to CDI, not Meletio. Myre served only as the developer, and claimed that Myre’s duties were owed only to CDI. Therefore, if the property owners were damaged their recourse should be directed against CDI, not Myre.
The 5th District Court of Appeals ratified Texas law that “. . . a seller is under a duty to disclose materials facts that would not be discoverable by the exercise of ordinary care and due diligence by the purchaser, or that a reasonable investigation and inquiry would not uncover.” The Court cited a case providing that a party cannot be guilty of fraudulently concealing facts of which he is not aware.
Finding that Myre had no relationship with any of the plaintiffs and therefore Myre had no duty of disclosure to them, the Court concluded that Myre could not be liable for fraud. The fraud portion of the judgment was reversed. See Myre v. Meletio, 05-08-00576, Fifth District Court of Appeals, Dallas Division; judgment rendered February 26, 2010.
Bottom line:
1. Real estate disclosure duties are typically owed to property purchasers and tenants by their immediate sellers and landlords.
2. Disclosure duties are also owed by brokers and agents to their principals and to their opposing parties as well.
3. It is surprising that real estate brokers and agents were not sued. If CDI’s broker and agent were sued in this case, both the trial court and appellate court could have asserted liability against them if they had knowledge of the flooding issue, and failed to disclose.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Monday, January 16, 2012
Commercial Lease Enforceability - Landlord v. Tenant
May a Landlord enforce a lease obligating the tenant to operate a nightclub or bar, when the tenant cannot obtain a liquor license? Merry Homes, Inc. thought so. Chi Hung Luu thought differently.
The Houston trial court entered a judgment declaring the commercial lease void for illegality, since Luu could not obtain a liquor license. Evidently the Bellaire site was too close to a school and hospital. The Houston trial court awarded Luu $6,000 for the security deposit, and $25,300 in attorneys fees. Merry Homes – the landlord – appealed.
In June 2005 Luu signed a 5-year Lease. The use clause provided that Luu may only use the premises to operate a nightclub or bar, and “for no other purpose.” The Lease also stated that Luu could not use the premises for any activity that violates laws.
Luu promptly submitted his liquor application to the City of Houston after the Lease was signed. The application was denied. The site was within 300 feet from a public school and a public hospital, and consequently, no nightclub / bar license would be issued. The City suggested that Luu might qualify under the “restaurant exception” rules, but Luu chose not to do so because of the expense of installing a full kitchen.
Luu requested the return of his deposit and termination of the Lease. Merry Homes refused.
Luu never occupied the premises. Instead he sued Merry Homes, requesting a judicial determination that the purpose of the Lease was impossibly frustrated, and therefore the Lease must be terminated.
The Houston Court of Appeals decided on February 19, 2010, that both the Houston trial court and Chi Hung Luu were correct. Mr. Luu could not legally perform his obligations in the Lease. A contract to fulfill an obligation which cannot be performed without violating law is void. The Lease was terminated by the Court.
Bottom line:
1. Be careful with use clauses. It may have been better for the Landlord to offer some flexibility in that provision.
2. The Landlord may have enjoyed a better position if it had clarified that rent was due regardless of Tenant’s use or non-use of the premises.
3. A provision in a Lease stating that the Tenant has fully explored compliance with all laws and is satisfied might also have helped this Landlord.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
The Houston trial court entered a judgment declaring the commercial lease void for illegality, since Luu could not obtain a liquor license. Evidently the Bellaire site was too close to a school and hospital. The Houston trial court awarded Luu $6,000 for the security deposit, and $25,300 in attorneys fees. Merry Homes – the landlord – appealed.
In June 2005 Luu signed a 5-year Lease. The use clause provided that Luu may only use the premises to operate a nightclub or bar, and “for no other purpose.” The Lease also stated that Luu could not use the premises for any activity that violates laws.
Luu promptly submitted his liquor application to the City of Houston after the Lease was signed. The application was denied. The site was within 300 feet from a public school and a public hospital, and consequently, no nightclub / bar license would be issued. The City suggested that Luu might qualify under the “restaurant exception” rules, but Luu chose not to do so because of the expense of installing a full kitchen.
Luu requested the return of his deposit and termination of the Lease. Merry Homes refused.
Luu never occupied the premises. Instead he sued Merry Homes, requesting a judicial determination that the purpose of the Lease was impossibly frustrated, and therefore the Lease must be terminated.
The Houston Court of Appeals decided on February 19, 2010, that both the Houston trial court and Chi Hung Luu were correct. Mr. Luu could not legally perform his obligations in the Lease. A contract to fulfill an obligation which cannot be performed without violating law is void. The Lease was terminated by the Court.
Bottom line:
1. Be careful with use clauses. It may have been better for the Landlord to offer some flexibility in that provision.
2. The Landlord may have enjoyed a better position if it had clarified that rent was due regardless of Tenant’s use or non-use of the premises.
3. A provision in a Lease stating that the Tenant has fully explored compliance with all laws and is satisfied might also have helped this Landlord.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Tuesday, January 3, 2012
Commercial Foreclosures and Correction Deeds
It is rare that The Supremes review a real estate case. But in December 2009 the Texas Supreme Court decided Myrad Properties vs. LaSalle Bank. The case was about a timely subject – Texas foreclosure.
Myrad financed two apartment communities in Killeen with LaSalle Bank NA’s predecessor. Myrad signed a $1 million note and a deed of trust. The deed of trust was recorded in Bell County. The deed of trust contained separate property descriptions for both the Casa Grande Apartments and La Casa Apartments.
Myrad defaulted. LaSalle Bank posted a notice of foreclosure upon only the Casa Grande property. At the foreclosure auction in Bell County, the substitute trustee read only the property description for Casa Grande. LaSalle was the only bidder, offering almost $1 million.
LaSalle received and recorded a substitute trustee’s deed for the Casa Grande property.
Two days later Myrad sued LaSalle, to keep it from filing a correction deed covering the La Casa property. When LaSalle filed it anyway, Myrad asserted that LaSalle owned only the Casa Grande property, while Myrad retained ownership of La Casa free of LaSalle’s deed of trust lien.
Both the trial court and court of appeals held that LaSalle’s correction deed was effective to transfer ownership of both Casa Grande and La Casa to LaSalle.
The Texas Supreme Court reviewed the history of correction deeds and determined that such deeds can be used to correct minor defects and imperfections. However, correction deeds cannot be used to convey additional, separate properties. The correction deed filed by LaSalle was void.
Bottom line:
1. Foreclosures are risky business.
2. Purchasers at foreclosure auctions sometimes make mistakes. So do lenders. Trustees too.
3. Be wary of correction deeds.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
Tuesday, December 20, 2011
Forming New Entities as Commercial Tenant or Buyer
Typically forming a new entity to serve as a commercial tenant or buyer is a good idea. But not always.
In 1986 Dick’s Last Resort, as tenant, signed a Lease forDallas West End ) to replace the old one and serve as the new tenant.
Presumably the Landlord did not recognize the Tenant’s intentions.
In 2005 the restaurant relocated without the Landlord’s consent and rent payments ceased. The Landlord sued Dick’s West End for breach of the lease, but also alleged that Dick’s Last Resort was liable under a little-used legal theory called “piercing the corporate veil.” That theory imposes liability by ignoring the corporate structure, when the corporate form has been used as part of an unfair device to achieve an inequitable result. Typical allegations include fraud and evasion of existing legal obligations.
The 44th Judicial District Court of Dallas, in a jury trial, awarded Judgment to the Landlord against all defendants. Dick’s Last Resort, Dick’sWest End and various other defendants appealed.
Testimony from a Dick’s principal indicated that Dick’sWest End was purposefully formed as a no-asset company, so that it could close the restaurant and leave the Landlord with the remedy of pursuing an insolvent tenant. The jury, after receiving evidence that Dick’s: (i) moved the restaurant only three blocks away, (ii) was paying rent at half the cost of the initial Lease, and (iii) was in continual operation with the same employees, equipment and operating company from the date of the relocation through the date of trial, concluded that Dick’s Last Resort had perpetrated a fraud. The jury would not let Dick’s Last Resort escape liability by forming a shell entity and transferring to it the tenant’s interest in the Lease.
The Judgment of the trial court was upheld in a recent appellate decision.
Bottom line:
1. Be careful when you form a new entity for a singular purpose.
2. Be careful when you give deposition testimony, written statements or Court testimony.
3. Juries and Judges do not favor escaping liability by playing the entity shell game.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
In 1986 Dick’s Last Resort, as tenant, signed a Lease for
Presumably the Landlord did not recognize the Tenant’s intentions.
In 2005 the restaurant relocated without the Landlord’s consent and rent payments ceased. The Landlord sued Dick’s West End for breach of the lease, but also alleged that Dick’s Last Resort was liable under a little-used legal theory called “piercing the corporate veil.” That theory imposes liability by ignoring the corporate structure, when the corporate form has been used as part of an unfair device to achieve an inequitable result. Typical allegations include fraud and evasion of existing legal obligations.
The 44th Judicial District Court of Dallas, in a jury trial, awarded Judgment to the Landlord against all defendants. Dick’s Last Resort, Dick’s
Testimony from a Dick’s principal indicated that Dick’s
The Judgment of the trial court was upheld in a recent appellate decision.
Bottom line:
1. Be careful when you form a new entity for a singular purpose.
2. Be careful when you give deposition testimony, written statements or Court testimony.
3. Juries and Judges do not favor escaping liability by playing the entity shell game.
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