Doctrine of Merger

In the late 1980s Joseph and Genevieve Roche starting work on the Roche Family Winery outside the City of Sonoma on Highway 121. By 2005 the winery went bust, and the property was offered for sale.

On November 15, 2006, Ram’s Gate Winery LLC entered into a contract to buy the winery property. The Roches agreed to provide a full disclosure of all information known to them regarding the property condition within 10 days.

Ram’s Gate evidently approved the condition of the property, and the deal closed on December 14, 2006. Four years later Ram’s Gate sued the Roches and the brokers involved in the purchase, alleging that the Roches failed to provide information within their possession relating to earthquake issues.

Ram’s Gate alleges it learned in mid-2007 about an active fault line on the property, which had been documented in two reports available to the Roches, being a site plan prepared in 1987-1988 and a geological study of 1987. Both identified a fault trace on the land, which required the Roches to relocate the winery building to provide a 50-foot setback.

The Roches contend that Ram’s Gate either knew or should have known about the earthquake issues before closing, as the two reports were in the Sonoma County files.

The Roches filed a Motion for Summary Judgment, claiming that since the Purchase Agreement did not specifically provide that the warranty relating to disclosures would survive closing, those obligations “merged” into the deed and could not properly be the subject of a claim.

On March 1, 2013 the court granted the Roches’ Motion for Summary Judgment, stating that the representations and warranties made in the agreement are extinguished as of the closing date, unless the Contract specifically stated they would survive. Ram’s Gate appealed.

This Federal Appellate Court started by focusing on the intent of the parties. In doing so, the Court determined that the contractual terms were inconsistent with the Deed. And that the Deed was “. . . a rather pedestrian instrument addressing only ‘the mechanics of transferring title’ and containing a legal description of the property conveyed.”

From there, the Court analyzed the balance of the Contract. As in most commercial contracts, the Court found that some portions of the Contract specifically provided for post-closing survival, while many others were silent. However, from there the Court concluded that the fact that several paragraphs in the Contract provided for survival does not mean that no other provision could survive without a similar recital.

Although a basic legal doctrine of “merger” states that those matters excluded from the Deed and not continued within a “survival” recital in the Purchase Agreement are forever extinguished, this Appellate Court rejected the concept of integration. Instead, this Court concurred with Ram’s Gate that the Roches should have disclosed the existence of fault trace lines within the buyer’s due diligence period. The Roches could not now escape that obligation by using the “Doctrine of Merger” inherent in all commercial real estate closings.

See Ram’s Gate Winery, LLC v. Joseph G. Roche; Nos. A139189 and A141090; US Court of Appeals, 1^st Circuit, Division 4; April 9, 2015.

Lessons learned:

1.      I’ve been doing this a long time. A really long time. I was pretty sure I knew the doctrines of merger and integration, particularly as applied to commercial real estate. Maybe this is a rogue opinion (it’s from California after all), but still.

2.      And yet there’s another way to look at this that makes sense. Forget integration and merger. Instead, focus on the issues created where the Seller (could also be a Landlord) fails to disclose material conditions to the Buyer / Tenant in the period of time before the Buyer / Tenant becomes committed to do the deal. In that context, this outcome is logical.

3.      Practice Point: Disclose more, not less. Keep written records of your disclosures. Don’t assume that the buyer / tenant had knowledge of a defect or condition, and factored that into the decision to close or go forward with the deal, unless you furnished that intel to the buyer / tenant.

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

More Mistaken Moments

Last month I discussed how a mistake in a Contract can destroy it. This month I present Part Two.

On December 15, 2008, David Duckworth borrowed $1.1 million from the State Bank of Toulon. The bank’s loan officer prepared loan docs.

The Note was dated and signed December 15, 2008, but the Security Agreement was dated two days earlier – December 13, 2008. The Note referenced the Security Agreement. But the Security Agreement had a critical mistake. It stated that it secured a Note dated December 13, 2008. Not December 15, 2008.

There was no Note dated December 13, 2008.

David Duckworth filed a Chapter 7 bankruptcy petition, and the Trustee defended the Bank’s position that the mistaken date did not defeat the Bank’s secured position. The bankruptcy court issued two decisions in favor of the Bank, essentially validating the Bank’s collateral position.

The Trustee appealed both decisions to the US District Court, where the appeals were assigned to different judges. Both district judges affirmed, and the Trustee again appealed.

The Trustee’s basic argument was that extrinsic testimony (we call this “parol evidence”) should not used to correct the mistake in the Security Agreement. And that the Bank’s error should not be overlooked.

The Bank claimed an enforceable security interest, and even if there was a mistake it was readily apparent to anyone who had reviewed the papers. And, that it was a minor error. Also, that there was no question but that the Bank had loaned Duckworth $1.1 million, Duckworth had signed a Note and Security Agreement, Duckworth had defaulted and filed bankruptcy, and the Bank needed to seize its collateral under its Security Agreement.

The US Court of Appeals reviewed the Security Agreement and concluded that the Security Agreement could not secure the December 15 Note. The Court then further concluded that although the parol evidence rule could have fixed the mistake as between the Bank and Duckworth, the same legal theory could not be used against the bankruptcy trustee to correct the error.

The Appellate Court reasoned that bankruptcy trustees are in the unique position of maximizing the recovery of unsecured creditors. To assist in the job, trustees exercise a “strong-arm power,” which allows them to avoid secured interests that a subsequent creditor could have avoided.

Further, bankruptcy trustees  may “. . . void security interests because of defects that need not have misled, or even have been capable of misleading, anyone.”

And so the US Appellate Court determined that the mistaken identification of the debt to be secured cannot be corrected against the US bankruptcy trustee by using outside-the-contract testimony or evidence. The judgments of both US District Courts were reversed. The Trustee wins as the debt is converted from secured to unsecured; the Bank loses its collateral.

See In Re: David L. Duckworth; State Bank of Toulon v. Charles E. Covey, Trustee; No. 1:13-cv-01258-JBM and 1:13-cv-01087-JES; US Court of Appeals, 7th Circuit; November 21, 2014.

Lessons learned:

1.         Proofread your Leases, Contracts, correspondence, emails, texts, listings, buyer and tenant rep agreements, brokerage contracts, commission agreements, everything. Read it all closely. Then wait at least one hour before you read it again.

2.         Catch a mistake somewhere, even a minor one? Fix it now via an Amendment. If the previous doc was recorded (think Deed, Memo of Lease, Deed of Trust, etc.), then be sure the Amendment is also recorded.

3.         Practice Point: On the really important stuff, enlist the help of a buddy to proofread too.

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

Whoops Moments

Case One

In 2007 the Charles R. Tips Family Trust and the Hazel W. Tips Family Trust signed a Note to Patriot Bank. The Note was secured by Harris County real estate pursuant to a Deed of Trust and Security Agreement. Charles Watkins, Trustee of both Trusts, also guaranteed the debt.

The Note, Deed of Trust and Guaranty Agreement all described the principal amount of the loan as:

ONE MILLION SEVEN THOUSAND AND NO/100 ($1,700,000.00) DOLLARS.

This language appears five times in the three documents, in exactly the same format each time.

The Trusts made Note payments of approx $600,000. The bank sold the note to PB Commercial, LLC, who sold the property at foreclosure auction for $874,125.

PB, as plaintiff in the lawsuit against the Trusts and Watkins, filed a Motion for Summary Judgment. Assuming an initial principal balance of $1.7 million, PB calculated a deficiency balance of $815,214.

The Trusts and Watkins responded by claiming that the original principal amount was $1,007,000, and that words prevail over numbers when there is a conflict. According to the Trusts and Watkins, after application of the past payments and foreclosure proceeds, the note was fully satisfied and PB collected a surplus of $189,111, which amount should be returned to the Trusts.

The trial court granted PB’s Motion and awarded PB damages of $815,214 plus interest, court costs and attorney’s fees. The Trusts and Watkins appealed.

After concluding that the loan documents were *not* ambiguous, the Court found that the written words control over the numerals – a difference of $693,000.  The Court made this conclusion even after reviewing PB’s evidence that the borrowers had received the full $1.7 million from Patriot Bank, not $1,007,000.

Conclusion: The amount due was determined by the written words, not the numerals. The trial court’s Judgment is reversed and replaced with a new Judgment that the principal amount of the loan was $1,007,000. See Charles R. Tips Family Trust v. PB Commercial, LLC; No. 01-13-00449-CV; Texas Court of Appeals, 1^st District; March 25, 2015.

Case Two

On December 15, 2008, David Duckworth borrowed $1.1 million for the State Bank of Toulon. The Note was dated and signed December 15, but the Security Agreement was dated two days earlier – December 13, 2008.

The Security Agreement properly reflected the debt to be secured, but the identification had a critical mistake. The Security Agreement said that it secured a Note dated December 13, 2008. But there was no note of that date.

Duckworth filed a Chapter 7 bankruptcy petition in 2010. The bankruptcy court held that the mistaken date in the security agreement did not defeat the bank’s security interest. The trustee appealed, claiming that the mistaken date in the Security Agreement defeated the bank’s collateral interest.

The bank contended that the Security Agreement is enforceable, and extrinsic testimony will show clearly that the parties intended the Security Agreement to reflect the proper date of the Note. And that the Security Agreement could easily be changed by the Court – we call this ‘reformed’ – to reflect the proper date.

This Federal Court then concluded, and I’ll spare you the meat-grinder details, that the mistaken identity of the debt to be secured cannot be corrected against the bankruptcy trustee. The judgments of the district court were reversed. The Trustee wins; the Bank loses. See In Re: David L. Duckworth; State Bank of Toulon v. Charles E. Covey, Trustee; No. 1:13-cv-01258-JBM and 1:13-cv-01087-JES; US Court of Appeals, 7^th Circuit; November 21, 2014.

Lessons learned:

1.  In the past, I followed the ancient tradition of using both words and numerals in the docs I prepared. I quit that practice. Now I just use numerals - $1,245,882. No more words. Too many opportunities for a mistake by using words. And inevitably when there is a mistake, it’s in the words – not the numerals.

2.  Proofread your Leases, Contracts, correspondence, emails, texts, listings, buyer or tenant rep agreements, brokerage contracts, commission agreements, everything. Read it all closely. Then wait at least one hour before you read it again.

3.  Practice Point: On the really important stuff, enlist the help of a buddy to proofread too. 

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

Commercial Due Diligence. Or Not?

Jane Tang and her company Virginia Oak Venture, LLC brought a lawsuit regarding the purchase of a McKinney Texas apartment community. Ms. Tang was of the view that the amount paid was far in excess of its value.

Tang alleged that the defendants (for my purposes, sellers, broker and agent) severely over-represented the cash flow expected to be derived, and misrepresented the extent of repairs. Tang also contends that she was defrauded by a real estate salesman, his broker, and the prior owners.

The Collin County trial court rendered partial summary judgments in favor of some of the defendants. A jury trial followed against the remaining defendants, all of which ultimately resulted in a loss to Tang.

So she appealed.

With specific reference to the salesperson O.D. Fought, Jr., Tang argued that Fought grossly misrepresented the occupancy levels of the property, its income and expenses, supplied false data to the appraiser and lender, hid from Tang the existence of accurate rent rolls, financial data and a previous purchase of the property for half the price some 10 months earlier, and more.

Tang argued that Fought represented both Seller and Tang, and as such, owed fiduciary duties to both. As evidence to support that conclusion, Tang alleged that Fought located an attorney to create Tang’s LLC, agreed to be personally named as its registered agent, drove her to see 10 properties he was attempting to sell, directed her to a particular lender, and prepared all the documents involved in the deal.

Fought contended that he was merely working hard on the seller’s behalf to sell the apartments, and that he was never acting as Tang’s agent. Evidently the jury believed him.

The evidence furnished to the jury regarding rent rolls and income streams may have been accurate and largely correct as of the month of the sale, although it could also have been misleading. There was indeed evidence of high occupancy levels, but that circumstance changed after the expiration of “signup specials.” There was also the possibility that some evicted residents were allowed to reoccupy apartments, and thus become tenants yet once again.

More confusion followed Fought’s possible misrepresentations about the condition of the property, but it is possible that the jury deemed none of such matters material and disregarded such possible misrepresentations.

Tang then alleged that Fought and his broker committed fraud, since it was alleged that Fought only partially disclosed accurate rent rolls, financial statements and the property’s condition.

The Appellate Court’s analysis of the fraud claim against the sales agent was short-lived, since “. . . Tang made no effort to make an independent investigation to determine the physical condition of the property, the value of the apartment complex, the circumstances of occupancy levels, or other pertinent factors she should have taken into account when making the decision to purchase.”

The Appellate Court found no reason to disagree with the jury’s decisions, so the Defendants prevailed again. See Virginia Oak Venture, LLC and Jane Tang v. O.D. Fought, Jr., et al; No. 06-13-00076-CV; Texas Court of Appeals, 6th District; February 7, 2015.

Lessons learned:

1.  In the past, my stock suggestion to brokers and agents was to encourage the buyers and tenants to conduct as much due diligence as possible within the option period, by hiring independent professionals not suggested by the agents and brokers. In this situation the buyer evidently did none of that, but still the broker and agents were able to adequately defend a claim.

2.  However, I would like to believe that if the buyer had undertaken the normal due diligence I suggest of all buyers and tenants, she would have discovered some or all of these issues and either would not have made the decision to purchase or would have seriously negotiated the purchase price. Southward.

3.  Practice Point: Make clear to all parties who you represent. Do it at the inception – ‘first contact rule’ – but then there is nothing that precludes you from reminding the parties several more times before and at closing, in writing. Keep copies too.

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

Leasehold Construction Goes Bad

Body Bar, LLC, desired to open an upscale Pilates studio and juice bar in Plano, Texas. So Body Bar signed a lease for commercial property owned by Regency Centers. It was Body Bar’s responsibility to construct the studio and bar. Regency was obligated to pay $25,000 of the cost after successful completion.

Body Bar engaged Denco CS Corp as its general contractor.

Denco’s completion was delayed due to the City of Plano’s determination that portions of the construction plans failed to meet Plano’s health code ordinances. To complete on time, Denco’s employees, contractors and subcontractors worked overtime and on weekends. Those efforts increased the cost of the project by ~ $29,000.

Denco sent Body Bar a bill for the excess. Body Bar refused to pay. Denco recorded mechanic’s liens in Collin County. Body Bar sued Denco for breach of contract, improper “cloud on title” by recordation of wrongful Mechanic’s Lien Affidavits, and other theories.

Denco responded by filing counterclaims of its own against Body Bar, seeking to recover its added $29k in cost overruns through a legal theory of unjust enrichment, and asking the District Court to allow Denco to foreclose its liens.

The Collin County District Court ruled for Body Bar and entered Judgment accordingly. Denco appealed.

Part of the appeal was based on Denco’s request to foreclose its liens. And that, dear reader, is the purpose of this article. Denco claimed it had two valid liens: one based on the Texas Constitution, the other based on Texas statutes.

The Appellate Court analyzed the lien affidavits and compared them to the facts presented. Evidently the affidavits claimed liens only against the owner’s fee simple interest in the property. Not Body Bar’s leasehold estate.

That’s a big difference.

The Appellate Court first determined that in order to perfect a Texas Constitutional lien on the property owner, there must be a direct contract between the lien claimant and the property owner. There was no such direct link. Recall that Denco was engaged directly by Body Bar. Not Regency.

Next, the Appellate Court determined that in order to perfect a Texas statutory lien on the owner’s fee simple interest as an “original contractor,” there also must be a direct contract between the lien claimant and the property owner. Again, there was no such direct link. See above.

Denco then argued that Body Bar was acting as the agent for the property owner. Since liability imputes from agent to principal, this would have the desired effect of binding the property owner to the construction contract. And if that is true, then the lien affidavits were valid because Denco was dealing with the agent for the owner. And the actions taken by an agent bind the principal, absent unusual circumstances not at issue in this case.

Unfortunately for Denco, they submitted no evidence on that point for the Appellate Court to consider.

No surprises here. Not yet anyway. Here comes the surprise.

The Appellate decision implies that the lien affidavits should have attached to Body Bar’s leasehold estate. That would be consistent with Texas law and appellate decisions. And then for some reason not explained in the Opinion, the Court does not indicate that Denco’s liens were valid, but only as against Body Bar’s lease.

Perhaps the lien filings were made late. Perhaps statutory notice of the filings weren’t timely served. Maybe the lien filings made clear that Denco was only interested in a lien against the property owner’s title, not Body Bar’s lease. Maybe the Court did not feel the need to explain leasehold lien attachment theory further, since Denco was not going to be allowed to foreclose anyway. Perhaps I misread the Opinion. All of this is unclear.

The Appellate Court mostly agreed with the tenant Body Bar, but also gave Denco some relief too. See Denco CS Corp v. Body Bar, LLC; No. 06-14-11122-CV; Texas Court of Appeals, 6^th District; January 8, 2015.

Lessons learned:

1.  Contractors engaged by tenants routinely file liens when they get stiffed. Those liens, if completed properly, sent to the tenant timely, and if they otherwise satisfy all statutory requirements, are valid and attach to the tenant’s leasehold estate.

2.  Contractors or their lawyers will argue that the liens also attach to the property owner’s fee simple estate. The theory is that since the improvements ultimately benefit the property owner, then the tenant was merely acting as the agent for the principal. And the principal was the landlord.

3.  Practice Point: Whether representing a Texas landlord or tenant, know that payment and performance bonds can be purchased by the contractor to avoid a lien filing from attaching to any interest in land. Typically the cost is low, ~ 2% of the full construction cost. Either (or both) the landlord or the tenant might consider requiring their contractors to obtain and deliver the bonds before the contractors commence work at the job site. These could be obligations contained in the Lease and construction contracts.

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

Did You Say What You Mean? Did You Mean What You Said? (Part One)

Jeff Carpenter owned a 15-acre parcel of raw land in Charlotte, North Carolina. In 2006 Jeff transferred two acres to an entity he controlled, Pavilion, and Pavilion leased the two acres to CVS Pharmacy. Jeff agreed to place a restriction in the CVS Lease on the future use of Jeff’s remaining tract, to entice CVS to sign the Lease by granting CVS an exclusive pharmacy use.

Pavilion sold the CVS tract in 2008 to Sonny Boy. At that time Jeff implemented the exclusive restriction on the remainder of the 15-acre tract with a restrictive covenant, as Jeff and CVS previously agreed two years prior. The balance of Jeff’s larger tract had not yet been developed.

The recorded covenant essentially stated that during the term of the CVS Lease, no portion of the balance of the 15-acre parcel could be leased or used as a drug store or pharmacy.

In 2012 Jeff contracted to sell the restricted remainder parcel to Charlotte Pavilion Road Retail Investment, LLC and WLA Enterprises, Inc. Charlotte Pavilion and WLA simultaneously contracted to purchase an adjacent, unrestricted tract of land from Charter Properties. The developers planned to lease the Charter parcel to Wal-Mart for construction of a retail store that would sell, among other items, drugs and pharmaceuticals. The developers intended to use Jeff’s 13-acre tract for parking and access for customers to the Wal-Mart and other retail stores.

So, although Wal-Mart would share the parking lot with other retail businesses, Wal-Mart customers would be expected to park on Jeff’s parcel to access the Wal-Mart store. In which, again, the customers could purchase items in direct competition with CVS.

When CVS learned that the developers intended to construct a parking lot on the restricted tract for use by Wal-Mart, CVS informed the developers that such use would violate the restrictive covenant. So the developers sued CVS and Sonny Boy, asking the Court for an Order to the effect that their proposed parking lot development plans did not violate the restriction.

In January 2014 the trial court granted the developers’ request, and entered Judgment holding that the proposed construction of a parking lot and use for Wal-Mart customers would not violate the terms of the restrictive covenant.

CVS and Sonny Boy appealed.

CVS  and Sonny Boy likely knew they were in trouble when the Appellate Court immediately took the position that North Carolina courts use a strict construction rule to interpret restrictive covenants, and that such covenants are not favored in North Carolina law. It was of no help to CVS that the Court stated that covenants are not enforceable unless clear and unambiguous.

Then, it was time to closely examine the language of the restriction. The restrictive covenant prohibited the construction of a building that is used for the sale of drugs, vitamins, health and beauty aids, or as a pharmacy. The covenant banned various business activities, but not incidental purposes (such as parking for a restricted use).

The North Carolina Appellate Court concluded that construction of a parking lot and access easement on Jeff’s parcel, to serve Wal-Mart’s customers on an adjacent and non-restricted tract, was not violative of Jeff’s restriction although such customers would be purchasing from Wal-Mart at least some items that were directly described in the CVS restriction.

The Appellate Court agreed with the developers Charlotte Pavilion Road and WLA Enterprises. The developers won and CVS lost. See Charlotte Pavilion Road Retail Investment vs. North Carolina CVS; No. COA14-658; North Carolina Court of Appeals; December 16, 2014.

Lessons learned:

1.      Commercial leasing is one of the most difficult things I do, and most of my colleagues feel the same. It is incredibly difficult to forecast issues and draft provisions for every possible contingency over the life of a 10 or 25 year lease. And, some leases have terms that are 99 years. If we could cover every possible issue that might arise, the Lease would be three inches thick, no one would read it and no one would sign it.

2.      Restrictive covenants are inherently tricky because courts don’t like them and uses change over time. Did any of us imagine the advent of lottery sales in 1991 or e-cigarettes in 2003? How many older retail leases prohibit “gambling” and how many office leases prohibit “smoking”? Do you think those provisions preclude lottery sales and e-cigs?

3.      Practice Point: Stay tuned for Part Two. In that installment I will evaluate how Texas deals with this issue. There may be some surprises.


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

When Friends Become Business Partners

Carlo and Denise Bazan went into business with their long time friend, Luis Muoz, by opening a restaurant in Laredo called Vamp Ultra Lounge & Café. Two years later Luis sued Carlo and Denise, claiming they had wrongfully taken money from the café.

The partnership decision was made when Carlo, Denis and Luis were vacationing together in Cancun in 2008. A year later they signed a contract designating Denise as the Manager of their new enterprise. But as a matter of practicality, Denise delegated her management duties to Carlo.

According to the contract, the Bazans owned a 50% interest in the business, and Luis owned the remaining 50%. Initially, Luis contributed $80,000 to buy an existing nightclub, while Bazans contributed $15,000 which was used to remodel.

The business opened on October 31, 2009. Carlo collected cover charges at the door and installed cash controls in a point-of-sale system. It seems Luis may not have been consulted and expressed his displeasure about the cover charges, and his unhappiness was likely accelerated when Denise and Carlo started paying themselves a salary without Luis’ consent.

Record-keeping was poor or non-existent as cash receipts were counted at Denise’s residence. More often they were not counted at all. Distributions were made, also without Luis’ consent or participation, to Carlo and Denise.

The business did not make bank deposits for months, and as a consequence, bank accounts were frozen. When questioned, Carlo claimed that vendors, staff and DJs were paid by cash and that explained whey receipts were not deposited at the bank.

Finally, Luis asserted a lawsuit against Carlo and Denise. It seemed the business was making $60,000 to $70,000 a month, but the bank records only reflected deposits of $20,000 per month.

A jury found in favor of Luis on his claims for breach of contract, breach of fiduciary duty and fraud. The jury awarded Luis $120,000 and the trial court converted the jury award into Judgment.

Denise and Carlo appealed.

In a lengthy decision, the Court of Appeals found there was ample evidence of fraud committed by the Bazans’ failure to disclose information. Business partners owe fiduciary duties to each other – the same high standard that brokers and agents owe to their principals.

There was a special relationship of trust, confidence and loyalty in the café business. As such, Carlo and Denise had a duty to disclose material information to Luis.

Secretly taking money from the business breaches that duty, and supports the jury’s finding of fraud by nondisclosure.

The Appellate Court agreed with the Luis. Luis Muoz won and the Bazans lost. See Bazan v. Muoz; No. 04-13-00184-CV; Texas Court of Appeals; 4^th District; November 5, 2014.

Lessons learned:

1.      It’s not newsworthy to state that friends don’t always make good business partners. In fact, I see the opposite is also true: sometimes friends make the best business partners. But, be sure that the relationship is properly documented.

2.      This appellate decision states something we all know – the highest duties in law are imposed upon those who have a special relationship or duty of trust. Like brokers and agents. Breach of that duty means a lawsuit.

3.      Practice Point: All parties in a business venture should have their own separate lawyers. When that is not possible, at least be sure that the Contract has a provision where anyone who needs to exit can do so.

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

Jackin' with Effective Dates

Pursuant to a Lease of September 3, 2004, Sidney Wicks leased various commercial properties in Addison Texas to Transcontinental Realty Investors. On May 17, 2006, Sidney formed the Sidney Wicks Revocable Trust and assigned all of his properties to the Trust. The assignment was not made in the traditional form of Deed, but rather in a more general form of “Assignment and Declaration,” which presumably was not recorded with the Dallas County Clerk.

TRI began making rental payments to the Trust on receipt of the Assignment and Declaration.

On December 2, 2010, Sidney filed a lawsuit against TRI for breach of the Lease, then later amended it to substitute the Trust as the Plaintiff instead of Sidney. TRI answered the lawsuit by contending that the Trust lacked standing to assert claims, stating that Sidney should have been the correct party – not his Trust – as Sidney failed to convey his property interests by Deed.

TRI’s point was that the 2006 Assignment and Declaration is not effective in Texas to transfer ownership in real estate. Only Deeds in Texas would suffice for that purpose. And, if the Assignment and Declaration is ineffective, then the Trust lacked standing or capacity to sue TRI as only Sidney would have that right.

On July 1, 2011, the trial court granted the Trust’s Motion for Judgment, finding that there were no material issues of fact in controversy, and that the Trust was entitled to Judgment by operation of Texas law.

The trial court did not deal with damages though, and reserved that issue for a jury trial to be conducted more than one year later.

On September 6, 2011, Sidney executed and recorded a General Warranty Deed which transferred his real estate to the Trust. On the same date Sidney also executed an “Assignment and Assumption of Lease.” Both the Assignment and the Deed stated that although the documents were signed on September 6, 2011, they each had an “effective date” of May 17, 2006. Over five years prior to the date that each was executed and the Deed recorded.

Having already won Round One, the issue of damages owed by TRI to the Trust proceeded to a jury trial. In October 2012 the jury determined in Round Two that TRI owed the Trust $1 million plus interest, attorney’s fees and expenses.

The trial court converted the jury’s award to Final Judgment. TRI appealed.

TRI again claimed that the Trust lacked standing in Court. That Sidney failed to timely sign and record a Deed to the Trust. That using an artificial “effective date” was not lawful. And that Sidney would have been the proper party in interest at the time of the lawsuit. Not the Trust.

The Trust countered by arguing that there was no provision in Sidney’s Lease with TRI requiring that an assignment would only be effective upon execution. And, consequently, Sidney was not prevented from executing the docs in 2011, with a 2006 “effective date.”

The Appellate Court agreed with the Trust. Sidney’s Trust won and Transcontinental Realty Investors lost. See Transcontinental Realty Investors, Inc. v. Sidney Wicks, Trustee of the Sidney Wicks Revocable Trust; No. 05-13-00362-CV; Texas Court of Appeals; 5^th District; August 5, 2014.

Lessons learned:

1.  I see this issue often. Parties want to make documents “effective” as of a date that is not identical to the date the documents were actually signed, notarized and / or recorded. Title companies see this daily. In my world, the documents and the Settlement Statements very rarely line up 100% with the actual date of closing / funding / recording.

2.  This appellate decision makes clear that, at least in Texas and assuming there is no prohibition against it in documents already signed by the parties, using an artificial “effective date” can be lawful.

3.  Practice Point: Although using an “effective date” that does not exactly line up with the “execution date” may be Ok generally, I suspect it may not be acceptable for tax purposes, including federal income tax, Texas franchise / margin tax, Texas sales tax, and even local ad valorem tax. Be careful and get professional advice before you go jackin’ with effective dates.

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

How Not to Evict

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

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

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

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

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

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

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

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

Lessons learned:

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

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

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

Are you satisfied?

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

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

Commercial Leasing (times two)

1.  Arbitration

On March 15, 2001, 175 Broad Street LLC (landlord) entered into a five-year lease with The Nead Organization, Inc. (tenant) for 12,017 SF in a commercial building. The lease was amended and extended in September 2005.

The holdover provision stated that if Nead continued occupancy after March 31, 2011 without the Landlord’s consent, then Nead would pay double the amount of base rent.

Nead was evidently not ready to vacate by the end of the stated lease term. Nead actually paid double rent from April through July 2011, but then stopped paying rental altogether. Nead ultimately vacated the premises on August 16, 2011.

175 Broad sued Nead for breach of the lease. 175 Broad alleged that Nead vacated the premises without proper notice, failed to pay rental and other charges, neglected to remove fixtures and failed to restore the premises to its original condition. 175 Broad alleged total damages of $224,468.

Shortly after 175 Broad filed its lawsuit, Nead asked the court to dismiss the complaint, citing a mandatory arbitration provision contained in the lease. 175 Broad defended by claiming that the arbitration provision was not intended to cover money disputes.

The court agreed with Nead and dismissed the lawsuit. 175 Broad appealed.

The Court of Appeals reviewed the arbitration section closely, which stated: “All disputes under this Lease, other than those relating to the payment of rent or other charges by Tenant, must be submitted to arbitration.”

Concluding that a part of the dispute related to rent but other claims did not, the Court of Appeals agreed that, regardless, the case must be dismissed to allow the parties to pursue arbitration.

The tenant Nead won and the lawsuit was dismissed. See 175 Broad Street, LLC v. The Nead Organization, Inc.; Docket No. A-3600-11T4; Superior Court of New Jersey – Appellate Division; January 10, 2013.

The results of the arbitration were not publicized.

2.  The Pain of Non-Payment

N. Providence LLC leased property to The Great Atlantic & Pacific Tea Company, Inc. Some of you will recognize the tenant as “A&P.” In the Lease, A&P promised to construct a new grocery store for itself in the shopping center, and Providence agreed to pay A&P a construction allowance of $1.9 million within 90 days following the date that A&P opened its store.

A&P opened for business on September 24, 2010, thereby giving Providence 90 days or until December 23, 2010 to pay the construction allowance. Providence secured a loan from UBS and advised A&P that it was ready to fund the $1.9 million allowance.

All was proceeding well. Until A&P filed bankruptcy on December 21, 2010. UBS informed A&P it was prepared to fund the construction allowance as soon as A&P assumed the Lease in the context of the bankruptcy proceeding.

A&P then assumed the Lease. Six months later. On June 22, 2011.

The first obvious result was that the construction allowance wasn’t funded within the 90-day window. The second not-so-obvious result was that A&P withheld all rent and other charges from December 23, 2010 (the last day to properly fund the construction allowance) until September 29, 2011 – being the date the allowance was finally paid.

Providence filed a lawsuit against A&P, claiming that the $1.9 million allowance must be reduced by the amount of rent withheld. The court ruled for A&P in holding that the Lease plainly stated no rental was due until the construction allowance was paid.

Providence appealed.

It took 20 pages for the appellate court to decide that indeed A&P had the right to withhold rent payments to Providence. And that A&P’s bankruptcy filing and delayed receipt of the construction allowance had saved A&P a substantial sum. See The Great Atlantic & Pacific Tea Company, Inc. . N. Providence, LLC; Case No. 13-CV-5588 (CS); United States District Court – Southern District of New York; April 28, 2014.

And this makes me wonder if the A&P bankruptcy filing was followed by Providence’s bankruptcy filing. How many landlords can survive without rental payments for nine months relative to a ‘big box’ lease?

Lessons learned:

1.      I am not a big fan of arbitration and usually I work to delete the provision regardless of the side I am representing. Yes a case can be resolved faster in arbitration, but at significantly greater expense and then the winner receives an “Award” which is unenforceable without filing litigation too. I prefer litigation over arbitration. But even when arbitration is appropriate, be careful how the provision is drafted to avoid unintended results.

2.      The A&P case involved two uber-sophisticated parties, yet the offset / abatement language wasn’t as clear as it might have been to prevent this catastrophic result. Lawyers and parties cannot think through every possible scenario. Such as the tenant’s bankruptcy that delayed the landlord’s construction allowance payment and the unintended results that followed.

3.      Do you see the relationship between these two cases? I should have captioned this article *Unintended Consequences*.

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

Commissions Reboot!!!

In September 2010 Buffy Lawrence and Reyna Realty executed a listing agreement. The listing agreement engaged Reyna for three months to market and sell her property, in exchange for a 5% commission, to be shared with a cooperating broker if one was used in the deal by the buyer.

Although the listing term ended December 31, 2010, Reyna Realty’s broker continued to list the property, post signage and generally market the property after it expired. Buffy never objected to these continuing services and efforts.

Reyna Realty received an offer to purchase the property and assisted Buffy by negotiating a higher purchase price. The deal was poised to close in March 2011, and the Seller’s Statement provided for a commission payment to Reyna. Buffy, however, instructed the title agent to reduce the commission amount by 30%. Reyna rejected this proposal, so Buffy withdrew her offer and refused to pay Reyna anything.

The purchase and sale funded, and in October 2011 Reyna Realty sued Buffy Lawrence to recover a real estate commission. Reyna Realty attached the Purchase and Sale Contract to Reyna’s lawsuit pleadings, which Contract contained a statement to the effect that “all obligations of the payment of brokers’ fees are contained in separate written agreements.”

It was Reyna’s position that although the stated listing term had indeed expired three months before the sale date, both the Contract and Settlement Statement contained written evidence of an extension of the listing at least through the date of sale.

Buffy defended Reyna’s claim by using a statute of frauds defense. Basically, that defense means that all commission obligations in the State of Texas must be in writing, signed by the party obligated to pay it, and no oral or unwritten modifications are typically allowed.

The trial court awarded Reyna its commission of $14,440, plus $36,000 in attorney’s fees. Buffy appealed.

The Appellate Court, looking at the initial Listing Agreement, Purchase and Sale Agreement and Settlement Statement, concluded that the documents constituted a written extension agreement and defeated a statute of frauds defense. Similarly, even though the Seller’s Statement that was eventually signed provided no compensation to Reyna Realty, it still indicated that Reyna Realty was serving as the broker for the Seller.

And further, Buffy had willingly accepted the benefits of the services offered by Reyna Realty, which services were beneficial to Buffy.

From there it was an easy leap to legal conclusions of “ratification” and “non-repudiation.”

Judgment for Reyna Realty was affirmed. Reyna wins; Buffy Lawrence loses. See Lawrence v. The Reyna Realty Group; Cause No. 01-13-00819-CV; Court of Appeals of Texas, First District, Houston Division; May 15, 2014.

Lessons learned:

1.      Reyna Realty forgot to get its listing agreement extended, or maybe Reyna made the request but Buffy Lawrence was unwilling to sign it. Either way, if the listing agreement had been properly extended then one might assume that a lawsuit would not have been necessary and Reyna would have been paid in full at closing.

2.      While this case was ultimately won by the broker, a slight variation in facts would yield a different result. If the broker’s name was not included in the Purchase and Sale Agreement, then I suspect Buffy would have prevailed.

3.      Do not assume that just because you continue working for a principal’s benefit after the expiration of your contract that you will get paid if your efforts result in a closing. Get it in writing, *before* expiration of your agreement.

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

Commissions! Commissions!! COMMISSIONS!!!

So. My 50^th Counsel’s Corner article. Seems appropriate that this article should be about that which is nearest and dearest to the hearts of my readers . . . commissions!

James Murphy was licensed as a Texas real estate broker. He sued Reed Williams (not a licensee) for a brokerage commission regarding the sale of five tracts of property in the Frisco Medical Center subdivision.

Murphy was working with the Sellers in 2010 to secure financing for their Frisco Medical Center properties. When Murphy learned that the Sellers might consider marketing the properties, he approached Jim Williams to request authority to serve as their broker.

Reed Williams was a Vice President of the general partner entity of the various Sellers. Jim Williams (Reed’s father) was the President of one of the Sellers, and was the individual who initially discussed an exclusive listing agreement with Murphy.

Murphy was given limited authority to market the properties, but only to one prospect. Either that prospect or an affiliate of the prospect then contacted Healthcare Realty Trust to present the purchase opportunity. Healthcare was not approved as a prospective buyer, and James Murphy had no authority to consent to the delivery of information from the prospect or affiliate to Healthcare.

Evidently Healthcare then approached representatives of the Sellers directly including Reed Williams, and the target parcels were sold to Healthcare at the end of 2010. For $133 million. Since no commissions were paid to James Murphy, Murphy sued Reed Williams and others for various claims including tortious interference with contract or contractual expectation.

James Murphy likely felt that he prepared or delivered the information and materials that ultimately found their way to the purchaser, and at least in part may have induced the purchaser to close the deal. And consequently, absent Murphy’s actions, the target properties may not have been sold.

The Collin County trial court, concluding that Williams had the better case, entered a Judgment for the Reed Williams. James Murphy appealed.

On appeal Murphy contended that Reed Williams acted as an unlicensed broker and interfered with Murphy’s expectation to receive a commission. Reed Williams defended the claim by stating that his limited actions in the deal did not constitute brokerage activities.

The first part of Texas law regarding brokerage is clear. A person may not recover a commission unless that person is a licensed broker, the agreement is in writing and the agreement is signed by the person obligated to make the payment.

The second part of Texas law is more obscure. Brokers are allowed by law to sue each other for “. . . interference with business relationships.” See Texas Occupations Code 1101.806(a)(2): http://law.onecle.com/texas/occupations/1101.806.00.html.

The facts in this case establish that Reed Williams was not acting as a broker. Even James Murphy admitted as much in his pleadings. As such, the Court of Appeals had little trouble finding that Murphy was not entitled to a judgment against Reed Williams.

And why did this case get my attention? Because James Murphy and his lawyers cleverly used an obscure portion of Texas law and coupled it with a novel theory that one does not have to hold a brokerage license in Texas to act as a broker. As by analogy one does not have to hold a driver’s permit to drive an 18-wheel truck, or hold a pilot’s license to fly a helicopter.

All of those actions require licenses and permits to do them lawfully, but even without a license or permit one who is flying a plane is still, well, flying the plane.

So, Murphy and his lawyer constructed an argument that if Williams’ actions constituted brokerage, then his license status was irrelevant and Murphy should be able to sue one who acts as a broker (licensed or not) and interferes with business relationships. That, so the argument goes, was the purpose of Section 1101.806(a)(2).

Regardless of licensure status, James Murphy was unable to show that Reed Williams was acting as a broker. So, the Court of Appeals did not need to delve further. Judgment affirmed for Reed Williams. See Murphy v. Williams; Cause No. 05-12-1730-CV; Court of Appeals of Texas, Fifth District, Dallas Division; May 5, 2014.

Post-script:

This case may be appealed to the Supreme Court of Texas. Stay tuned.

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