BROKERAGE LICENSING – A SURPRISE ENDING

            Sara Ladd owns two vacation properties. To supplement her income and after her employment as a digital marketer ended, she leased the first in 2009 and the second in 2013. Using her job experience, she created an online system to reserve the rental units.

            Neighbors learned of her success and asked her to manage their properties too. In 2013 Sara formed a business entity and in 2016 she launched a corresponding website.

            Sara’s objective was to “take the hassle out of short-term vacation rentals by handling all of the marketing and logistics that property owners would otherwise have to coordinate themselves.”

            Sara Ladd acted as an independent contractor, and entered into written contracts with second home, vacation property owners. In those contracts, she agreed to market her clients’ properties on the internet, respond to inquiries, coordinate bookings, manage billings, accept and account for rent payments and security deposits, pay herself a commission and remit the remainder to her clients, and cause the property to be properly cleaned between rentals.

            Those same contracts obligated her clients to execute a Lease with tenants identified by Sara, provide a list of available dates, coordinate rental rates with Sara, certify that the property was legally compliant, pay all applicable taxes, maintain short-term rental liability insurance, provide a list of household rules and instructions, and stock the property with necessary supplies.

            Sara Ladd was not a party to the Leases.

            Sara managed her business entity by herself. Most business operations were conducted from her home. Her fees were modest – perhaps a few hundred dollars. Sara Ladd never managed more than five clients’ properties at any one time.

            Her services did not include identifying target properties or assisting her clients to buy or sell properties.

            In January 2017 the Bureau charged with administration of the Real Estate Licensing and Regulation Act called Sara to inform her that she had been reported for the unlicensed practice of real estate. Sara Ladd reviewed the laws and, after determining that her short-term vacation property management services were covered by the statute and licensure was required, she closed her property management business to avoid civil and criminal sanctions.

            Sara then filed a lawsuit against the State claiming that the licensing requirements violated her substantive due process rights because they impose unlawful burdens on her right to pursue her chosen occupation.

            In ruling for the State, the trial court dismissed Sara’s complaint, holding that the State’s brokerage licensing requirements are constitutional and applicable to Sara. The underlying reasoning supported the court’s decision that the purpose of licensing is “to protect buyers and sellers of real estate, the most expensive item many persons ever buy or sell, from abuse by persons engaged in the business.” [I added the underscoring]

            Sara Ladd appealed, challenging the trial court’s reasoning that, without consideration of her limited services, application of the State’s licensing requirements bear a substantial relationship to the stated purpose of “protecting buyers and seller . . . from abuse.” And further, as applied to her unique and non-traditional situation, application of the licensing statutes were unduly burdensome and patently beyond the necessities of the case.

            Basically, Sara argued that her limited services allow her to challenge occupational licensing laws in a manner that full-service brokers could not.

            To satisfy the State’s licensing requirements, Sara would minimally need to undertake 315 hours of irrelevant coursework and pass two exams on real estate practices that do not bear a relation to her ability to provide safe and quality short-term vacation property management services. The classes and exams can take three years to conclude.

Sara Ladd also argued that the ‘brick and mortar’ office requirement is archaic and bears no relation to her online, home-based business.

            The Supreme Court held that the licensing requirements, as applied to Sara Ladd, are unconstitutional, and further, that the laws are unreasonable, unduly oppressive, and patently beyond the necessities of her situation.

            I wasn’t expecting this.

See Sara Ladd v. Real Estate Commission; Case No. J-71-2019; Supreme Court of Pennsylvania; May 19, 2020: https://law.justia.com/cases/pennsylvania/supreme-court/2020/33-map-2018.html.

           

            Lessons Learned / Questions Asked / Issues Presented:

1. Lesson / Question: You thought that real estate brokerage / sales agency licensing statutes could not effectively be contested? Yeah, me too.

2. Issue: Will this cause similar challenges in other jurisdictions and force State legislators to respond, or risk the possibility that Courts will rewrite their laws?

3. Issue: Does this kick open the door to other ‘niche’ limited real estate service providers that now require licensure? Apartment locators? Short-term leasing? Property management without property sales, purchases, or leases?

                                                                                                                  Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,

Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Higier Allen & Lautin, PC

2711 N. Haskell Avenue, Suite 2400

Dallas Texas 75204

P: 972.716.1888

E: slautin@higierallen.com

W: www.higierallen.com

MORE ON TENANT ESTOPPEL CERTIFICATES

           Expo Properties and Merchants Properties own an office building in Frederick, Maryland, which was leased to Experient. When the lease term ended, disputes arose regarding who should pay for work to restore the premises.

            To complete the purchase, Expo and Merchants relied on a Tenant Estoppel Certificate they received several years prior, signed by Experient. Litigation followed.

            The 20 year leasing history is relevant.

            In March 1994 owner John Laughlin leased the premises to tenant Galaxy Registration for a five year term with a renewal option. Two lease amendments were signed. The first related to construction of a 25,700 SF addition and lease term extension. The second adjusted the rent and further extended the lease term.

            Laughlin wrote a letter to Galaxy in May 1998 attempting to clarify that Galaxy is responsible for the expenses of a new fire protection system. That letter was not counter-signed by Galaxy.

            In 2002 Laughlin and Galaxy executed a third lease amendment providing for another renewal term, and confirming that Galaxy had changed its name to Expo Exchange.

            Laughlin sold the property in 2004 to new owner Expo Properties (not to be confused with tenant Expo Exchange). In 2005 landlord Expo Properties and tenant Expo Exchange executed a fourth lease amendment, demising additional space of 11,150 SF to Expo Exchange.

            The fourth lease amendment provided that the new 11,150 SF space would be rented to tenant Expo Exchange on a “triple net” basis. There is no similar language in the Lease or any of the signed amendments.

            Merchants Properties succeeded Expo Properties as owner in 2006. As part of the acquisition, tenant Expo Exchange executed an Estoppel Certificate on July 18, 2006, for the benefit of Merchants. Merchants’ lender likely also required an Estoppel to support various loan covenants and for underwriting purposes.

            The Estoppel Certificate signed by Expo Exchange provided that Laughlin’s 1998 letter was a “clarification,” and that “Tenant acknowledges that all repairs . . . are the responsibility of Tenant . . .”

            Next, Defendant Experient succeeded Expo Exchange as the tenant at the Maryland property.

            In 2011 Landlord executed yet another lease amendment – number five – with tenant Experient. That document, in its recitals, identifies the Lease Agreement, four subsequent lease amendments, and the Estoppel Certificate of July 18, 2006.

            Experient elected to vacate the leased premises and issued notice in 2012. The Landlord requested various inspection reports of the Tenant, which reports were sent to Landlord in January 2013. Landlord responded by sending out its own inspectors.

            Landlord’s inspectors prepared a detailed assessment, which in turn was sent to Tenant in May 2013 with a request that Tenant perform all repairs. Tenant did not do so, and vacated in July 2013. So Landlords Merchants and Expo sued Tenant Experient for damages.

            Defendant Experient’s defense was premised on its belief that neither the 1998 Letter nor the Estoppel Certificate amended the Lease, and as a consequence, Experient was not responsible for additional repairs or Plaintiff’s damages. Plaintiffs Merchants and Expo thought overwise.

            The district court agreed with Defendant Experient that neither the Estoppel Certificate nor the 1998 Letter amended the Lease. Plaintiffs Merchants and Expo appealed.

            The Court of Appeals looked hard at the Letter – not counter-signed by the Tenant – and the Estoppel Certificate – which did not contain any form of lease modification or amendment language. The heart of the issue was “mutual assent” to modify the Lease, which evidently was lacking in both instruments.

            The Court found it significant that both the 1998 Letter and Estoppel Certificate were signed by only one party. The Court noted that the Lease required amendments to be signed by both Landlord and Tenant. And that all of the docs captioned “Amendment” were, in turn, duly signed by both Landlord and Tenant.

            There was no evidence of Landlord’s and Tenant’s intent to be bound by the 1998 Letter and Estoppel Certificate. Lacking mutual assent, neither the Estoppel Certificate nor the 1998 Letter modified the Lease and its various fully-executed-by-all-parties Amendments.

            Plaintiffs-Appellants contended that mutual assent is irrelevant to the analysis with regard to the Estoppel Certificate, since such Certificates are routinely only signed by tenants but substantially relied on by buyers, investors, and lenders across the USA. The Court was not moved, holding that “If an estoppel certificate does not explicitly modify the terms of the lease, it is not a mechanism by which a lease agreement may be modified.”

            The Court’s conclusion: “Plaintiffs sued to enforce promises that the Defendant never made.” Tenant-Defendant Experient wins and is only liable for the obligations contained in writing duly executed by Landlord and Tenant. See Expo Properties, LLC and Merchants Properties, LLC v. Experient, Inc.; Case No. 19-1750; US Court of Appeals, 4^th Circuit; April 15, 2020: https://law.justia.com/cases/federal/appellate-courts/ca4/19-1750/19-1750-2020-04-15.html.

           

            Lessons Learned / Questions Asked:

1. Lesson / Question: Does your Lease Amendment contain recitals which specify by name and date all docs signed previously? Of course it does. It might be helpful to state, in the main text of the Amendment, that all recitals are incorporated and bind all parties.

2. Lesson: Is your Estoppel Certificate intended to be signed by both Tenant and Landlord? I didn’t think so – neither is mine. Time to change and add signatures for Landlord too, and consider also adding a provision that all referenced documents amend the original Lease and control conflicting provisions in the original Lease.

3. Issue: This well-reasoned appellate decision holds that buyers and lenders cannot 100% rely on the statements contained in a Tenant Estoppel Certificate. Careful buyers, investors and lenders may now need to investigate further, as mere reliance on Estoppel Certificates may no longer be sufficient to satisfy underwriting requirements.

                                                                                                           Stuart A. Lautin, Esq.*