ARE STRs DOA?

             In June 2018, Clyde Esplin decided to offer his residential property for rent on the Airbnb platform. Airbnb, like VRBO, HomeAway, and other competitors, offers short-term rentals (STRs) of private homes through an online booking service.

            The Lake Serene Property Owners Association was formed to enforce residential covenants. Clyde’s property was burdened by those covenants. The rules allowed property owners to rent their property without any specified minimum rental period. Those same rules also limited the use of the properties to residential purposes and prohibited use of the properties for trade or business.

            The POA discovered Clyde’s STR listing and sent him a series of letters and email warnings that the POA would issue fines and take legal action if Clyde continued in his desire to generate income from his STR. Then, the POA amended its ByLaws to prohibit property rentals for terms of less than six months.

            After that amendment, the POA filed a lawsuit seeking to prevent Clyde from using his dwelling as an STR.

            The trial court determined that Clyde’s use of his property was residential. Not commercial. And as a consequence, the court denied the request of the POA for an injunction.

            The trial court went further and determined that the amended ByLaws were invalid, as were all fines and assessments levied by the POA against Clyde.

            But wait there’s more.

            Then, the trial court reversed the POA’s requested injunction, and instead enjoined the POA from preventing Clyde from renting his property as an STR, harassing his tenants, and keeping them from using the common-area facilities.

            And still more.

            The trial court then prohibited the POA from calling the Sheriff’s office for help in enforcing the POA’s covenants.

            Given that crushing defeat, the POA had little choice but to appeal.

            The Appellate Court first evaluated the meaning of “residential purposes only.” Not finding a definition in the POA’s covenants, the Court determined that as long as the property is used a “place of abode,” it qualifies as a “residential purpose.” This is true even if the owner or property manager received rental income from an online payment, and the rental period is only one day.

            The Appellate Court next took aim at the restrictive covenants, concluding that “Generally, courts do not look with favor on restrictive covenants.” Not finding a specific prohibition against STRs, the Court found that Clyde’s proposed STR use of his residential property is allowed under the covenants.

            Finally, the legality of the Bylaws amendment was considered. The Appellate Court determined that the POA Board of Directors could not exercise authority in matters that are reserved for its members. Board members are not allowed to accomplish an “end-around of the covenants.”           

            Clyde wins. Again. The POA loses. Again. See Lake Serene Property Owners Association Inc. v. Esplin; Mississippi Supreme Court, Case No. 2020-CA-00689-SCT, March 10, 2022: https://scholar.google.com/scholar_case?case=15834690258425426403&q=lake+serene+property+v.+esplin&hl=en&as_sdt=6,44&as_vis=1.

            Lessons / Questions / Observations:

1.      Observation. STR use restrictions are being litigated now all over the USA. Cities and towns are also looking at ways to prevent STRs, and if that is not possible, then at least require municipal licenses, permits, and insurance.

2.      Lesson. It’s easy to read restrictive covenants and usage rules that prohibit commercial and business use of residential property, and conclude that STRs violate those covenants and rules. But based on this case and others, that may not be the proper analysis. Absent health and safety concerns generally regulated by cities, counties, and States, and matters of public policy such as fair housing typically regulated by the Federal laws and similar State statutes, Courts are reluctant to restrict the rights of property owners.

 

                                                                                    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

  

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

ARBITRATION COVENANTS

              In 2007 a residence was built and sold by US Home Corp to the original purchasers. The Deed contained a provision requiring mediation, and if not resolved, arbitration. Also contained in the Deed were covenants binding successors to the original buyers.

            The covenants were intended to “run with the land,” as stated in the Deed. That Deed was then recorded in the Official records of Lee County, Florida.

            The original purchasers sold the property in 2010 to Shane Hayslip. Shane’s deed states that the property is conveyed subject to all restrictions.

            Shane filed a lawsuit against US Home Corp in 2017, alleging that the stucco was improperly installed when the residence was built. The magistrate granted US Home’s request to compel arbitration. The circuit court entered an Order adopting the magistrate’s report and recommendation.

            Shane challenged the Order. On appeal, a decision was rendered that a valid arbitration agreement exists in the 2007 Deed which was a covenant “running with the land,” and as a consequence the courthouse doors were closed to Shane. The decision of the circuit court was affirmed.

            Shane could arbitrate. But not litigate.

            The district court then certified the issue to the Supreme Court of Florida as one of great importance.

            The Supreme Court found that real estate covenants are divisible into two major classes: (1) those that “run with the land” and bind the heirs and assigns of the original parties; and (2) personal covenants which bind only the original, contracting parties. As for the former, covenants that “run with the land” must “touch[es] and involve[s] the land.”

            Such covenants must “enhance the value of the property or render[s] it more convenient and beneficial to the owner,” as well as affect its occupation and enjoyment.

            At least in Florida, arbitration “affects the occupation and enjoyment of the house as it dictates the means by which [Shane] must seek to rectify building defects.” As well, the arbitration procedure also affects the “mode of enjoyment of the premises.”

            Because the means of dispute resolution is directly linked to the original contract, the Supreme Court concluded that the arbitration provision is binding on future owners. At least in Florida, arbitration covenants contained in a Deed will be enforced even after the property has been bought and sold more than once.

            US Home Corp wins; Shane Hayslip loses. See Hayslip v. US Home Corporation; Florida Supreme Court, Case No. SC19-1371, January 27, 2022: https://www.floridasupremecourt.org/content/download/824950/opinion/sc19-1371.pdf.

            Lessons / Questions / Observations:

1.      Question. What if this arbitration provision was not contained in the Deed but rather an unrecorded contract between the original parties, which stated that the provisions were binding upon the successors and assigns of the parties. Would Shane still be relegated to only arbitration?

2.      Observation. Does this holding make sense to you; do you agree that a recorded arbitration provision “touches and involves the land,” and “enhances the value of the property or renders it more convenient and beneficial to the owner”? Because I’m struggling with this.

3.      Lesson. All of us in the real estate industry read surveys and title commitments closely, particularly when representing commercial buyers and lenders. Large tenants too. Now add to the must-read list an analysis of all deeds in the chain of title, to determine if covenants have been recorded which may not be identified in the title commitment. Such as mandatory arbitration.

                                                                                                     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

  

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

* Board

OFFER AND ACCEPTANCE

              In 2015 South State Bank domesticated a judgment against Kyle Tauch for $4,635,877 plus interest. Then, the Bank started settlement negotiations with Kyle, culminating in Kyle’s offer to purchase the judgment for $1 million.

            At that juncture the debt was over $6 million. The Bank’s vice president responded to Kyle by email on April 11, 2016, rejected the offer, countered with $2 million, and stated that the Bank was poised to “look at other collection alternatives.”

            Kyle did not reply.

            The Bank then discussed the possibility of selling the Judgment to The Gobsmack Gift Trust. On April 13, still without receiving a response from Kyle, the Bank assigned the Judgment to the Trust. As consideration, the Bank would receive the first $3 million collected on the Judgment. The Trust would receive all excess sums.

            The Trust’s attorney made Kyle aware of the transfer at 4.27 pm on April 13. Kyle’s lawyer requested documentation of the assignment, which was furnished the same day at 5.23 pm.

            Kyle replied to the Bank at 6.12 pm on April 13 purporting to accept the Bank’s $2 million offer of April 11. On April 15 the Bank responded to advise Kyle that the Bank made Kyle’s attorney aware that the Judgment had been assigned before Kyle attempted to accept the previous settlement offer. And that the Bank’s offer was no longer capable of acceptance, as it had been revoked through subsequent actions taken by the Bank to accept another offer.

            Kyle denied that the settlement offer had been effectively revoked, and insisted that a valid settlement agreement had been formed. So the Trust sued Kyle seeking a declaration that Kyle’s April 13 acceptance of the Bank’s $2 million settlement offer was too late and not binding.

            Kyle asserted a counterclaim contending that he had a valid contract with the Bank, through timely offer and acceptance, to resolve the $6+ million debt for $2 million.

            The trial court granted summary judgment for the Trust, determining that Kyle’s acceptance was too late. Then the appeals started.

            The court of appeals reversed the judgment of the trial court, finding that Kyle’s acceptance was timely and formed a binding $2 million contract. Another appeal followed.

            It was time for the Supreme Court to weigh the facts and apply the laws. The first fundamental analysis involves the right of the one who makes an offer to retract it before it is accepted. Timely revocation removes the ability to accept the offer that had been extended.

            Typical revocations involve direct communications such as “Your counteroffer is rejected,” “My initial offer is no longer outstanding,” or similar. However, offers and counteroffers may also be rescinded based on “definition action [that is] inconsistent with an intention to enter into the proposed contract.”

            I’ll spare you 40 pages of text by concluding that the Bank’s settlement offer as previously extended to Kyle was revoked by the Bank’s later inconsistent action. And that the later inconsistent action became known to Kyle’s attorney before Kyle attempted to accept the then no-longer-outstanding-Bank-offer.

             The court of appeals’ judgment is reversed; the trial court’s judgment is reinstated. The Trust wins and Kyle Tauch loses. See Virginia Angel, Trustee for the Gobsmack Gift Trust v. Tauch; Texas Supreme Court, Case No. 19-0793, January 14, 2022: https://www.casemine.com/judgement/us/61e561af714d5896333b1be7.

            Lessons / Questions / Observations:

1.      Lesson. Possibly I would not be writing about counter-offer acceptance, rejection, and initial offer revocation if the Bank’s first email to Kyle stated that the Bank’s offer could be rescinded at any time before acceptance, without advance notice.

2.      Observation. Possibly I would not be writing about counter-offer acceptance, rejection, and initial offer revocation if the Bank had sent to Kyle, at the time of the Bank’s acceptance of the Trust’s offer, an email stating that all offers and counteroffers were withdrawn and terminated.

3.      Question. Have you ever extended a settlement offer, and then become engaged in protracted discussions with multiple offers and counter-offers? You might consider ending each email with a provision that you reserve the right to end all discussions and withdraw all offers without advance notice.

                                                                                    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

  

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

 

WHAT IS AN “ORDINARY COURSE” COVENANT?

              Dajia Insurance, a corporation organized under laws of the People’s Republic of China, owns Strategic Hotels & Resorts, a Delaware LLC, through an intermediary entity, AB Stable VIII. Strategic owns 15 other LLCs, each of which, in turn, own a luxury hotel in USA.

            After leadership changes and new regulations restricted Chinese companies from investing in non-China assets, Dajia decided to sell the hotels and instructed AB Stable to open bidding for Strategic in April 2019. Mirae Asset Financial Group from South Korea tendered a bid of $5.8 billion to acquire 100% of Strategic. During the purchase and sale process, Mirae created MAPS Hotels to buy and own Strategic.

            MAPS Hotel (Buyer) and AB Stable VIII (Seller), executed a Contract in September 2019. In it, Stable agreed to sell its membership interests in Strategic to MAPS Hotel after title issues were resolved.

            April 6, 2020 was the proposed closing date. But then, COVID 19 struck. Worldwide market upheaval was rampant by February 2020, which was the time that Goldman Sachs informed MAPS that previously committed financing is no longer available.

            Stable’s hotels business started to feel the effects of COVID 19 cancellations.

            As contractual negotiations stretched into March 2020, COVID 19 continued to wreak havoc on all markets, and debt funding became unavailable. Bridge lending seemed to be the only alternative, but even those lenders retreated.

            Due to travel decreases, Stable temporarily closed two USA hotels on March 24, 2020. Others continued to operate in a “closed but open” manner, offering only room service dining. All other amenities, such as restaurants, health clubs, pools, spas, lounges, valets, concierge, bellhops, and retail stores were closed.

            More than 5,200 full-time employees were either fired or furloughed by Stable. Remaining employees saw their work week shortened, and pay increases deferred.

            MAPS proposed delaying closing for three months. Stable insisted on closing by April 8, 2020, but otherwise Stable would consider a three-month extension if MAPS: (a) doubled its earnest money deposit; (b) agreed that all closing conditions were waived; (c) acknowledged that no further pricing adjustments would be considered; and (d) compensated Stable with an additional $400 million in funding costs.

            Stable’s extension proposal was rejected the day it was proposed.

            When MAPS failed to conclude the deal, Stable filed a lawsuit on April 27, 2020 for specific performance. MAP’s response was to terminate the Contract, claiming Stable had breached.

            Then, MAPS filed counterclaims.

            The lower court convened a trial in August 2020, at which the court concluded that Stable breached the “Ordinary Course Covenant” of the Contract by making “extraordinary changes to its business” that “departed radically from the normal and routine operation of the Hotels and were wholly inconsistent with past practice.”      

            The trial court found that it was Stable’s duty to maintain commercially reasonable levels of assets and services such as food and beverage, furniture, toiletries, amenities, and similar items required in luxury hotel operations.

            The trial court then determined that Stable had significantly altered the operations of the business, which were inconsistent with past practice.

            On appeal, Stable contends that the trial court should have permitted reasonable, industry-standard responses to systemic risks that MAPS was also experiencing at its own properties.           

            MAPS disagreed, claiming that the changes were a drastic departure from past practice. It was the appellate Court’s burden to determine what Buyer and Seller intended.

            Section 5.1 of the Contract obligated Seller, absent Buyer’s prior written consent, to continue business operations “consistent with past practices in all material respects.” Stable’s “closed but open” strategy was far from consistent with past practices.           

            Buyer (MAPS) wins; Seller (Stable) loses. See AB Stable VIII v. MAPS Hotels and Resorts; Case 71,2021; Supreme Court of Delaware; December 8, 2021: https://scholar.google.com/scholar_case?case=14725382340023764307&q=ab+stable+v.+maps+hotels&hl=en&as_sdt=6,44. 

            Lessons / Questions / Observations:

1.      Question. This Seller was confronting an absolute standard of continuing business operations as it had been in the past. What would have been the result if Seller had leeway to alter business practices if it was reasonable to do so, perhaps as evidenced by its industry peers?

2.      Lesson. Continuation of business operations is a standard clause in most Contracts. It’s high time to review those clauses, to be sure it is fair to both parties when unanticipated situations arise.

3.      Observation. Wishing all my readers a healthy and Happy New Year!

                                                                                    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

  

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

 

RENTAL ARBITRATION DISASTER

             California Union Square owns a 131,000 square foot building in San Francisco. Saks operated a department store there since 1991. The lease is over 100 pages long and consists of 24 articles, most of which contain both sections and subsections.

            The contract provides Saks an initial 25-year lease term, followed by five successive options to renew for 10 years each. Section 3.1 describes the initial rent, while Section 3(b) provides the process for determining rental in each renewal period.

            Renewal rents are intended to be reset to “Fair Market Rents,” which means “the open market rental value of the [property] for first-class retail use.” If the parties cannot agree on renewal rent, then Section 3.1(c) requires arbitration.

            As well, this lease form provides for “baseball arbitration,” in which each party proposes its own rent determination, and the arbitrator selects one of the two proposals. Section 3.1(c)(iv) states that both LL and T are obligated to equally share the fees and expenses of the arbitrator; each party pays its own attorney’s fees.

            However, Section 23.10 provides that the prevailing party in any action regarding the lease is entitled to receive from the other party all costs and expenses, including reasonable attorney’s fees.

            In January 2016 Saks exercised a 10-year renewal option. LL and T could not agree upon Fair Market Rent. The issue was dispatched to arbitration.

            A three-day arbitration hearing was convened one year later. The arbitrator issued an Award for the LL, estimating Fair Market Rent to be approximately $11 million per year. That number was closer to LL’s proposal then that offered by Saks, as LL had proposed $13.9 million while Saks had suggested $6.25 million.

            As a consequence, under the terms of “baseball arbitration” the annual rental for the new lease term would be $13.9 million.

            LL filed a lawsuit to confirm the award; Saks attempted to vacate it. The trial court granted Saks’ motion, finding that the arbitrator had exceeded his powers, and ordered a new arbitrator be appointed and the matter re-arbitrated.

            In October and November 2018, a four-day re-arbitration was held. The replacement arbitrator found in favor of Saks and ruled that the $6.25 million rent number proposed by Saks would serve as the Fair Market Rent.

            LL filed a lawsuit to vacate the Award. Saks defended and attempted to confirm it. Judgment was entered for Saks in June 2019.

            LL appealed.

            The Appellate Court affirmed the trial court’s decision confirming the arbitrator’s second award, in favor of Saks.

            LL appealed to the Supreme Court. But the Supremes refused to review it.

            Saks then moved to recover $1 million in attorneys’ fees for litigation expenses caused by the court proceedings. The trial court denied the request.

            Saks appealed.

            Ok so at this juncture I am supposed to write about what happened thereafter. But don’t you see – it doesn’t matter. Saks exercised its renewal option in 2016 and this issue has bounced up, down, and through arbitration and courts for five years now.

            It doesn’t appear poised to end.

            Still and yet, there will be some that need to know. To those I say: the trial court’s order denying Sak’s recovery of attorney’s fees is affirmed.  

            Saks won. Saks lost. Union Square won. Union Square lost. See California Union Square LP v. Saks & Company; California Court of Appeals, 1^st Appellate District, Division Three, October 29, 2021: https://law.justia.com/cases/california/court-of-appeal/2021/a162043.html.  

            Lessons / Questions / Observations:

1.      Observation. Non-lawyers do not understand that in arbitration an Award is issued at the conclusion. An Award is not a Judgment. A secondary procedure is required whereby lawyers seek to convert the Award to a Judgment, which can then be enforced by sheriffs, constables, marshals, and other law officers, through the issuance of writs, turnover orders, post-Judgment discovery, and legal collection mechanisms as offered by state law.

2.      Lesson. In that secondary step requesting conversion to Judgment, the Award can be contested. Even though it is supposed to be final and uncontroverted. If the dollars are large enough, a courthouse fight is coming. Again, this is after a “final” Award has been issued.

3.      Question. Then what benefit is arbitration? First, if the dispute is about something obtuse then presumably an arbitrator can be found who understands nuclear reactors. Second, there are no juries in arbitration, just one or more dispassionate subject-matter experts, so it is difficult to extract a punitive amount from the loser. Third, arbitration is supposed to be confidential. No one knows the outcome, or even that parties are engaged in a dispute. That is until the Award is converted to a Judgment. See above.

                                                                                    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

  

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