Commercial LeaseThe holidays and new year are busy times for businesses which may be locating or moving into leased retail, office, or industrial space. These businesses spend extensive time and resources choosing the right broker, location, and tenant mix. Finding the right location is not the end of the endeavor. Before occupying the leased space, a commercial lease will have to be negotiated.

The terms of the commercial lease will govern the financial relationship between the business and the landlord. The lease will determine the tenant’s occupancy rights. The lease will establish how the parties deal with default and termination. The lease will supply the base upon which the business operates for years to come. It is important that the tenant understand the terms contained within the lease and how the lease will impact its business.

Commercial leasing is a complicated process which involves hundreds of business, practical, and legal considerations. This article will address just a few of the legal issues which are typically found in a commercial lease and shed some light on how they may apply to a tenant.

Parties, Legal Description, and Term

Most commercial leases will be for a term in excess of a period of one year. As such, the statute of frauds requires that the lease be in writing, signed by the party who is to be bound, contain an identifiable legal description of the property being leased, and contain all material terms between the parties. Absent these requirements being met or an exception, the lease will be unenforceable.

The tenancy may be for a fixed term or periodic. For reasons of certainty, most commercial leases are for a fixed term. Periodic tenancies may arise where the lease does not provide for a fixed term, but is for a period to period at the will of the parties. A month to month lease is an example of a periodic tenancy. Where a lease allows either party to have a right of termination, a periodic tenancy is not created so long as the lease is otherwise specifies a definite term.

Execution, Delivery, and Recordation

For a lease term in excess of one year, it must be signed by the parties to be enforceable. The person signing the lease must have authority to do so. Representatives of a business entity should have a resolution or minutes from the governing authority. A common mistake is made where an individual signs a lease on behalf of a business being conducted under an assumed name or “DBA” (doing business as). An individual cannot bind a DBA entity because a DBA is no more than an assumed or trade name of that individual and has no separate legal existence. Also, where an individual signs a lease on behalf of a business entity that is not in existence or fails to indicate the capacity or position in which the individual is signing, the individual may become personal liable for the lease obligations.

Delivery is an essential element to bind the parties to the lease. No particular act or words are necessary. Typically, delivery will be shown by the parties’ actions in conformity with the lease regardless of whether physical delivery has occurred.

Recordation is not a necessary element of an enforceable lease. Recordation is simply a method of providing actual or constructive notice to third parties of the tenant’s leasehold interest. So long as there is physical evidence of the tenant’s occupancy, recordation is unnecessary. If the lease will be effective prior to the tenant’s physical possession, it may be advisable to file a memorandum of lease in the county real property records.

Rent

Rent appears self-evident. It is the compensation received by the landlord for allowing the tenant to use and occupy the leased premises. In a commercial lease the tenant typically has other financial obligations such as paying the taxes, insurance, and maintenance costs. The term “rent” does not necessarily include these other financial obligations unless those payments are determined to be part of the rent.

Permitted and Exclusive Use

The landlord will control the use of the leased premises. This is particularly important where the leased premises is a part of a larger commercial development. The landlord will control the “tenant mix” through the use restrictions contained in each lease. The landlord may also create restrictive covenants applicable to the entire commercial development. Tenants must ensure that its intended business operations do not violate the lease or covenants.

Tenants may want to ensure that other tenants within the commercial development are not allowed to operate similar businesses. This is done through exclusive use provisions. Care should be taken that appropriate remedies are provided for a breach of an exclusive use clause. Otherwise, a tenant may find themselves in litigation over the tenant’s intended and specified use.

R. Scott Alagood is board certified in Commercial and Residential Real Estate Law and can be reached at alagood@dentonlaw.com and http://www.dentonlaw.com.

 

……THIS ARTICLE WILL CONTINUE IN NEXT MONTH’S EDITION

R. Scott Alagood is board certified in Commercial and Residential Real Estate Law and can be reached at alagood@dentonlaw.com and http://www.dentonlaw.com.

Receiverships PicturesA receivership is an equitable and legal remedy that may be used to acquire possession of property by a court appointed party known as a receiver. A receiver’s powers are derived directly from the appointing court. The receiver is a disinterested party who represents and protects the interests of all other persons for the receivership property.

A court appointed receiver is an extremely harsh remedy. The remedy allows the State to take possession and control of private property and place it in the hands of a third party. A court will appoint a receiver only if there are no other less harsh remedies available.

Basis for Receivership.

A receivership in Texas may be installed under rules of equity (“fairness”) or pursuant to a specific statute. Under equity, a receivership must be “ancillary” to an otherwise apparently valid claim or remedy and to protect or preserve property during the pendency of a lawsuit. Where the receivership arises out of a statute, it doesn’t matter if ancillary claims exist.

Types of Receiverships.

Equitable Receiverships. A court may appoint a receiver in any case in which a receiver may be appointed under the rules of equity.

General Receivership Statute. Chapter 64 of the Texas Civil Practice & Remedies Code allows a court to appoint a receiver under any of the following circumstances:

  • Action by vendor to vacate a fraudulent purchase of property;
  • Action by creditor to subject any property or fund to his claim;
  • Action between partners or other jointly owning or interested in any property or fund;
  • Action by a mortgagee for foreclosure and sale of mortgaged property; or
  • Corporation that is insolvent, or is in imminent danger of insolvency, has been dissolved, or has forfeited its corporate rights.

Family Law Receiverships. In conjunction with a divorce proceeding, a court may appoint a receiver as a temporary order for the preservation and protection of spousal property.

Post Judgment Receiverships. Judgment creditors may seek the appointment of a receiver to assist in the satisfaction of a judgment in certain circumstances.

Business Entity Receiverships. A receiver may be appointed for a corporation that is insolvent, is in imminent danger of insolvency, has been dissolved, or has forfeited its corporate rights. The Texas Business Organizations Code deals with the appointment or a receiver for any domestic entity (including corporations, partnerships, limited liability companies, and associations) or its property.

Mineral Receiverships. A receiver may be appointed where a mineral interest or mineral leasehold interest is owned by a nonresident or absent defendant, and upon the application of a person who has a vested, contingent, or possible interest in land or an estate subject to a contingent future interest in order to lease the land for development pending the vesting of the contingent interest.

Congregational Receiverships. A receiver may be appointed for a religious congregation which had maintained regular forms of work and worship in a community at regular intervals, but ceased to function in such capacities for at least one year.

Receiver Qualifications.

To qualify as a receiver a candidate must be a citizen and qualified voter of Texas at the time of the appointment. A candidate must not be a party, attorney, or other person interested in the action in which the receiver is sought.

Appointment Procedures.

Absent the appointment of a receiver upon the court’s own motion, a party seeking such appointment must file an application with a court having proper jurisdiction over the subject matter of the suit. Except in certain extreme circumstances, notice and opportunity to be heard must be provided to all adverse parties prior to the appointment. An ex parte appointment should rarely be sought, and very well may constitute an unlawful taking of property the Texas and U.S. Constitution.

The receiver must take an oath to faithfully perform all duties of the receivership and execute a good and sufficient bond.  The applicant must file a bond approved by the clerk payable to the defendant in an amount determined by the court. A court may dispense with the issuance of the applicant’s bond in a divorce.

Receivership Powers and Duties.

A receiver may take charge and keep possession of receivership property, receive rents, collect and compromise demands, make transfers, and perform other acts as authorized by the court. The act of the receiver does not bind the receivership property unless first authorized and subsequently approved by the court.

Following the appointment, a receiver must take an inventory of the property received and report it to the court. Where a party or other person subject to the receivership fails to release possession of receivership property, the receiver may bring an action to obtain possession.

A receiver may only sell the interest that it has in the receivership property at the time the receiver was appointed. Any receiver sale is a judicial sale and must be authorized and confirmed by the court before title will transfer.

Once all property has been disposed of and all proceeds distributed, then the receiver should be discharged. The final discharge order should include the final accounting of the receivership, a determination of the receiver’s fees, the restoration of any remaining property to the rightful owners, and a final discharge the receiver.

Scott Alagood is board certified in Commercial and Residential Real Estate Law by the Texas Board of Legal Specialization and can be reached at alagood@dentonlaw.com and http://www.dentonlaw.com.

foreclosure3Many residential properties are subject to mandatory property owners associations which may have the power to impose regular and special assessments against owners and properties within the subdivision. In response to some real or perceived injustices on the part of property owners associations, the Texas legislature enacted the Texas Residential Property Owners Protection Act (the “Act”) in 2001. The Act became effective on January 1, 2002. The Act may be found in Chapter 209 of the Texas Property Code.

The purpose of the Act is to provide guidelines for the operation of property owners associations and specific protections for the homeowners residing in these communities. The Act only applies to mandatory membership in a property owners association in a residential subdivision that is subject to restrictions or other provisions authorizing the collection of regular or special assessments on all or a majority of the subdivision property.

While the Act contains important protections for property owners, it also mandates certain restrictions and procedural requirements for the foreclosure of a property association‘s lien for assessments. For example, foreclosure is not available for a lien solely comprised of fines, attorney’s fees, or amounts added for costs of producing association records. Foreclosure of an assessment lien may only be obtained by court order through an expedited process. Notice of the date and time of a conducted foreclosure sale must be sent to the owner and each lienholder of record within 30 days following the sale. The notice must be sent by certified mail and must inform the owner and record lienholder of their right to redeem the property. Within 30 days after the association sends the prior notice, it must record an affidavit in the county real property records stating the date on which the notice was sent and a legal description of the property which was foreclosed.

The owner or any record lienholder may redeem the foreclosed property from a purchaser at the sale within 180 days after the date the association mails written notice of the sale to the owner and record lienholder. An owner or lienholder may extend the redemption period by sending by certified mail a written request to redeem the property to the purchaser on or before the last day of the redemption period. The extended period lasts for 10 days after the purchaser provides the owner or lienholder written notice of the redemption amounts. A record lienholder may not redeem the property prior to 90 days after the date the association mailed the notice, and only if the owner has not redeemed the property. The purchaser of the property at a foreclosure sale may not transfer the property to anyone other than the lot owner during the redemption period.

To redeem the property, the owner or lienholder must first pay to the purchaser applicable items required by statute, including all amounts due the association through and after the date of sale, interest, costs, attorney’s fees, mortgage payments, maintenance and leasing costs, ad valorem taxes, recording fees, costs of eviction, and the acquisition price of the property (less any applicable credits). If the owner timely redeems the property, the purchaser must execute and deliver to the owner or lienholder a deed transferring the property. If the purchaser refuses to execute or deliver the deed after a proper redemption, the owner or lienholder may bring an action against the purchaser and may recover its reasonable attorney’s fees for the successful prosecution of such action. Property that is redeemed continues to be subject to all liens and encumbrances which existed prior to the foreclosure.

Where an owner or lienholder fails to timely redeem the property by filing the deed or recording an affidavit stating that the property has been redeemed, the right of redemption against a bona fide purchaser for value expires after the redemption period. Where an owner makes partial payment of the redemption amount to the association, but fails to pay all other amounts before the expiration of the redemption period, the association must refund the partial payments within 30 days thereafter.

It is not uncommon for the costs, expenses, interest, and attorney’s fees portions of the redemption amounts to far exceed the original assessments upon which payment is sought. As an owner, immediate action should be taken to address any claims for past due assessments. Certified mail should be accepted, opened, read, and immediately addressed. Service of process of any lawsuit should always be immediately reviewed and appropriately handled by qualified legal counsel.

R. Scott Alagood is board certified by the Texas Board of Legal Specialization in Commercial and Residential Real Estate Law. Scott can be reached at alagood@dentonlaw.com and http://www.dentonlaw.com.<

As social media expands at an exponential rate and communication to the masses is made as easy as a click of a button, the world is spewing their thoughts, views, and opinions for everyone to see.  Can such statements come back to haunt the party making them.  Certainly, in many different ways.  Just ask Donald Sterling.

However, when do statements rise to conduct which may place the party making the statements in jeopardy of being sued for fraud.  Fraud or misrepresentation claims must be based on false statements.  So long as a statement consists of “pure” opinion, it cannot constitute a false representation.  Purity in anything is hard to find.  Purity is not so much a condition fixed in time and space, but an ideal or a standard that may be sought after.  Like perfection, it is a pursuit and not something that is necessarily attainable.

It is also difficult to determine whether a statement is one of “opinion” or “fact”.  Webster’s definition of opinion is “a belief stronger than an impression and less strong than positive knowledge.”  Courts seem to follow this definition in most instances.  Courts group “opinions” along with “judgments”, “probabilities”, and “expectations”.  Therefore, statements made about matters that fall short of positive knowledge should not be actionable as an “opinion”.

 There are a few exceptions to the general rule that “opinions” are not actionable fraud or misrepresentations.  These exceptions are: 1) opinions the speaker knows to be false; 2) opinions mixed with false statements of fact; 3) and opinions based on special knowledge.

 The first exception is creates a situation that is difficult to prove in court.  The party accused of making an actionable misrepresentation is put in the position having to prove that although their opinion was wrong, they didn’t know it at the time.  This situation requires the party asserting the exception to prove a negative, which is difficult if not impossible.  So at best, the party ends up testifying that they didn’t know their opinion was untruthful, hopefully backed up by some sensible rationale, and hope that there isn’t any direct or circumstantial evidence to the contrary.  Otherwise, the simple fact of making an incorrect opinion may be enough to allow the fact finder to imply knowledge of the untruthful nature of the statement.

 The second exception is fairly self-explanatory.  Where a party expresses an opinion mixed with statements of fact that are false, the opinion portion of the statement will not clothe the false facts with any protection.  Reliance upon the false facts by the other party will support an action for fraud.  Further, where facts are included with “opinion”, such “opinion” cannot be considered “pure”.

 The final exception relates to opinions based on special knowledge.  Special knowledge means knowledge of specific facts that underlie the false opinion.  However, many courts appear to often confuse special knowledge with special expertise held by persons such as doctors, lawyers, or engineers.  In practice, this exception often makes it difficult for the accused to use the “opinion” defense where the accused party is significantly more sophisticated than the other party to whom the statement was made.  When correctly applied, this exception will negate the “opinion” defense if the party making the statement has actual knowledge of or special access to particular facts underlying the false statement and the party relying upon such statement does not have such knowledge or access.

 Making false statements of opinion can place a party in potentially hot water.   To reduce the chances of being sued for fraud for incorrect statements, consider the following suggestions.  Make it clear when you are expressing an opinion that you are only expressing “your opinion”.  Phrases such as “in my opinion”, “I believe”, “speaking for myself”, or “I think”, will help bolster an argument that the statement was not a statement of fact, but instead an “opinion”.  Be certain that any factual statements are correct and you have the ability to justify their accuracy.  Indicate that you are not sure if that is the case.  In real estate or stock transactions, false statements of fact can create liability even if you honestly believed them at the time.  Give the other party access to the same information you have utilized in forming your opinion or statement of fact.  Give them the opportunity to review it for themselves.  Do what you can to encourage them to look into the subject for themselves.

 Finally, be careful who you talk to and how you disseminate information.  Know your intended audience, and realize that in today’s world, everyone is listening.

 R. Scott Alagood is board certified in Commercial and Residential Real Estate Law by the Texas Board of Legal Specialization.  Scott can be reached at alagood@dentonlaw.com and http://www.dentonlaw.com.

 

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It is very likely at some point everyone will require the services of an attorney.   Choosing an attorney can be a complicated and stressful event. Here are a few tips that may assist you in choosing the right attorney.

 

  1. State Bar of Texas. The State Bar of Texas website provides a search for attorneys by name and law firm, geographical area, practice area, specialty certification, specialty services provided, and law school attended. www.TexasBar.com. You can also call toll free at (800) 204-2222. The State Bar operates a statewide referral service. For general information, the State Bar can be extremely helpful.
  2. Martindale-Hubble®. Martindale-Hubble® publishes specific information about attorneys who choose to advertise with their service. www.martindale.com. Each listed attorney has the opportunity to be rated by their peers. Martindale’s Peer Review Ratings™ provides an indicator of a lawyer’s high ethical standards and professional ability as determined by other members of the bar and judiciary.   The rating is based on a scale of 1 being the lowest and 5 being the highest. A rating of AV Preeminent® (4.5-5.0) means that peers have ranked the attorney at the highest level of professional excellence and ethical standards. BV Distinguished® (3.0-4.4) is an excellent rating for a lawyer with some experience.   Rated® (1.0-2.9) evidences that the lawyer has met a very high criteria of general ethical standards. Not all attorneys are rated, and that simple fact shouldn’t be used to necessarily pass on choosing an unrated attorney. There are well qualified attorneys who simply choose not to advertise with this service. With that said, the Peer Review Rating® system provides a good indication of an attorney’s qualifications and ethical standards.
  3. Texas Board of Legal Specialization. While there are over 70,000 attorneys licensed to practice in Texas, only about 7,000 have been recognized as Board Certified® specialists in at least one of twenty-21 areas of the law. www.tbls.org. Board Certified® attorneys are the only attorneys in Texas allowed to represent themselves as a specialist in a select area of the law. The process to become Board Certified® is voluntary and can only occur after an attorney has been licensed for at least five years and has a minimum of three years experience in a particular specialty area. Before an attorney can become Board Certified®, that attorney must have established qualifications reviewed by colleagues and judges familiar with the attorney and the area of specialty, and must have passed all testing required by the Texas Board of Legal Specialization in the specialty area. Board Certified® attorneys must reapply for certification every five years. To maintain certification, an attorney must attend additional continuing legal education beyond that required by the State Bar of Texas for licensing. Again, not all attorneys are certified. The sole fact that an attorney is not certified does not mean that such attorney does not possess the requisite experience, skill, and ethical standards to handle a particular matter. However, certification does mean that the attorney has been vetted by other attorneys and judges and is deemed to be an expert in his or her particular field of law.
  4. Personal or Business Referrals. Many times, the best information you can achieve in searching for an attorney is through individuals or businesses familiar with a particular attorney or law firm. While referrals are an easy and quick way to find an attorney, care should be taken to make your own evaluation of the referred attorney through each of the three services set forth above, reviewing the attorney’s or firm’s website, and looking at other sources of information on the attorney or firm through a general internet search. Additional on-line information may be found at LinkedIn®, Avvo, Lawyers.com™, FindLaw®, Texas Super Lawyers®, and local bar association websites.
  5. Find the Attorney Right for You. Attorneys are as diverse as the people and organizations that they represent. Choose an attorney that fits your budget as well as need. Financial terms should be discussed and completely understood. Be wary of unwritten terms of representation. Ask detailed questions about the attorney’s experience, qualifications, and disciplinary history. Practical implications should be discussed along with legal options. Potential conflicts should be discussed.   Ensure that your choice has the time to handle your matter. Find out how they will correspond with you. Ask how soon they will return phone calls or e-mails. No question is dumb. Attorneys are people who bring their own experiences and personalities into any representation. Hire one that fits you and your legal needs.

 

R. Scott Alagood is board certified in Commercial and Residential Real Estate Law by the Texas Board of Specialization and can be reached at alagood@dentonlaw.com or http://www.dentonlaw.com.
 

Land usePrivate land use restrictions are frequently found in planned community developments. Such restrictions may regulate the land use, as well as the size, location, quality, cost, and composition of the improvements constructed on the land. They may exist on both residential and commercial real property. So long as the restrictions are not against public policy and are imposed in an otherwise legal manner, an owner may restrict its property as it desires.

However, restrictions may not limit the use or prevent the assignability of the property to any person on the basis of race, color, religion, or national origin. Additionally, state and federal law prohibits the use of restrictions to discriminate against persons with handicaps or disabilities. Any restriction which prohibits the use of the land is not enforceable. Restrictions may not require the use of wood shingles on residential properties.

Restrictions are typically imposed on land by the owner through the use of signed and filed documents which may be referred to as deed restrictions; restrictive covenants, conditions and restrictions; easements; and servitudes. Instruments creating restrictions typically are for a limited duration and may provide for a mechanism to renew or extend them beyond the initial period. A restriction must contain an exact description of the land upon which the restriction is being imposed.

Restrictions may terminate automatically or through a process set forth in the instrument. Courts have refused to enforce restrictions where substantial violations exist and such amount to an abandonment or waiver of the right to enforce them. However, the violations must be so great as to place the average person on notice of such abandonment or waiver. For example, where a subdivision may be restricted to only allow metal ornate fencing, but 75% of the lot owners have built wooden privacy fencing, and an abandonment or waiver of that particular restriction. The number, nature, and severity of the violation, prior acts of enforcement, and whether it is still reasonably possible to utilize the benefits intended by the restriction are factors which will be considered.

Courts may not enforce restrictions where there has been a substantial change in the restricted property or the area surrounding the property such that enforcement of the restriction is no longer possible. Such change must be so drastic that the purpose of the restriction may no longer be achieved. Typically, this situation occurs when a long time residential neighborhood or area over the years becomes commercial in nature. However, the single factor that a lot may be more valuable as commercial does not necessarily entitle the owner to avoid residential use restrictions placed on the property.

Additionally, an action for breach of a restrictive covenant may be barred by the four-year statute of limitations. The statute begins to run on the beach of the covenant. However, if the initial breach is so insubstantial or inconsequential that the purpose of the covenant may still be realized, the statute does not begin to run until the violation becomes significant.

Government and other entities with the power of eminent domain may acquire property free of restrictive covenants through the eminent domain process. In utilizing such rights, the condemning authority may be required to pay compensation to other affected land owners for the removal of the restrictions. Sale of property for delinquent ad valorem taxes does not invalidate any restrictions on the land sold.

Municipalities may enact zoning ordinances for the general welfare of the community. Such ordinances may not destroy or impair otherwise valid restrictive covenants. Where the restrictive covenant is less restrictive that the zoning ordinance, the zoning ordinance will govern the particular land use. Where the restrictive is more stringent than the zoning ordinance, the use must comply with restrictive covenant. For example, where an otherwise valid private restriction limits the use of property for residential purposes, but the property is thereafter zoned commercial, the restriction will be enforced limiting the use of the property for residential purposes. Zoning ordinances may not enlarge private restrictions.

For residential restrictions, there may be state statutes which govern the applicability, enforceability, and extension of the restrictions based upon the population of the County and/or the municipality in which the land is located. In the situations, care should be taken that the appropriate statutes are reviewed. Chapter 202 of the Texas Property Code governs the construction and enforcement of restrictive covenants. Chapter 209 of the Texas Property Code deals with residential restrictions which authorize a property owner’s association to collect assessments and impose liens against property within a subdivision. Section 5.006(a) of the Texas Property Code requires a court to award reasonable attorney’s fees to a prevailing Plaintiff for a breach of a restrictive covenant.

R. Scott Alagood is board certified in Commercial and Residential Real Estate Law by the Texas Board of Specialization and can be reached at alagood@dentonlaw.com or http://www.dentonlaw.com.

Alagood & Cartwright Shake Hands

Whether looking to sell or buy a business, certain issues should be taken into consideration.  First, it is important to determine what type of business organization is involved.  These include sole proprietorships, partnerships (general and limited), corporations, and limited liability companies.

A qualified tax advisor (CPA or tax attorney) should be consulted to determine the tax consequences resulting from the transaction.  The tax advisor may assist in determining how to structure the sale.  The seller needs to consider (1) how much, if any, gain or loss will be recognized by the seller; and (2) the character of the gain or loss as ordinary or capital.  For the buyer, it is important that the purchase price be properly allocated among the assets or ownership interest purchased.  An allocation will establish the purchaser’s cost basis in the asset or ownership interest used for future taxable events such as determining gain or loss and depreciation deductions and recaptures.

The type of sales transaction must be evaluated in order to determine the tax consequences and structure of the sale.  Sales of sole proprietorships involve the transfer of assets and the allocation of existing and future liabilities of the business.  With business organizations, the transaction may be structured as an asset purchase (similar to the sole proprietorship) or a sale of the ownership interest in the business entity (such as stock, membership interests, and partnership interests).  When a sale involves an ownership interest, careful consideration should be paid to the governing documents and public filings to ensure that the sale is allowed and does not trigger other agreements or restrictions which may interfere with the intended sale, such as superior rights of purchase by the entity or other owners of the entity.

For sales involving entities, the governing documents should be reviewed to determine who has the authority to approve the sale.  Financial records should be analyzed to determine what, if any, liabilities of the business that the purchaser will assume as well as valuing the business’ assets or intrinsic value.  A purchaser should carefully consider how an entity adheres (or fails to adhere) to the formalities associated with operating as a business organization.  In some instances, failure to adhere to these formalities may be used by a court to disregard the entity to place liability directly with the owner.

The purchaser may want a covenant by the seller not to compete in the same type of business being sold for a stated time and area following the sale.  There are strict limitations on the enforcement of “covenants not to compete”.  Parties are well advised to retain a qualified attorney to document the agreement.  If the purchaser wants to retain any of the seller’s employees following the sale, then employment agreements and retirement plans must also be addressed, particularly for key employees.  It may be important to negotiate covenants not to compete with key employees as well.  For certain businesses, intangible property rights may be a significant reason that the business is being acquired.  These include copyrights, trademarks, service marks, and trade names.

The parties may use contractual indemnification provisions to allocate liabilities of the business.  However, without assurance that there is any funding underlying the contractual promises, such provisions may not provide the parties with any meaningful remedy.  A percentage of the purchase price may be withheld or additional sums placed in escrow for a specified period of time following closing to provide security for the parties’ indemnification promises.

Governmental regulations, private restrictions, and real estate issues must be considered.  Securities and antitrust laws may have to be addressed.  Franchise laws may apply to businesses which are subject to franchise agreements.  Businesses such as bars and restaurants must deal with licensing and permitting issues with the Texas Alcoholic Beverage Commission and local health departments.  Unemployment compensation, insurance, and workman’s compensation may also need to be addressed.  Additional regulations or requirements associated with the purchase of a professional business to legally operate the business will have to be considered.

In short, there are numerous and sometimes complicated issues which may arise with the sale of a business.  Both sellers and purchasers should ensure that well qualified consultants are used to assist them with the transaction.

R. Scott Alagood is board certified in Commercial and Residential Real Estate Law by the Texas Board of Specialization and can be reached at alagood@dentonlaw.com or http://www.dentonlaw.com.

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Image With the economy beginning to pick up, new housing starts and sales of existing homes seem to be on the upswing as well.  It is important to know what duties the seller has in disclosing the physical condition of a home, and to what extent a buyer may rely upon such disclosures in purchasing real property.  Depending on the type of property being sold, commercial, residential, farm & ranch, unimproved, etc…., the required disclosures vary to some extent.  This article will solely focus on the required disclosures involved in the sale of residential real estate.

“Residential real estate” is defined as a single dwelling unit of residential real property located in Texas.  Section 5.008 of the Texas Property Code governs a seller’s duty to disclose the condition of residential real estate.  You may review the promulgated disclosure form on the Contract Forms tab of the Texas Real Estate Commissioner’s website found at http://www.trec.state.tx.us.

The disclosures required by Section 5.008, include (1) the presence and condition of equipment, fixtures and improvements; (2) the presence or absence of working smoke detectors; (3) defects in walls, foundations, plumbing, electrical, or other major components of the property, including “structural” components; (4) potential problems with termite damage, flooding, aluminum wiring, asbestos, or lead-based paint; (5) whether any item, equipment, or system is in need of repair; and (6) other items affecting the property such as alterations or repairs made without permits or non-compliance with codes, deed restrictions, common areas, and lawsuits.

For “lawsuits”, Section 5.008 only requires the disclosure of “pending” lawsuits at the time the disclosure is made, and does not require disclosure of previous suits which have been dismissed, settled, or completed through final judgment.

Disclosure of “structural” repairs includes any repairs performed to the load-bearing portion of a residence, and includes the foundation, walls, and roof. Repairs to cabinets, sinks, bathroom fixtures, and drywall not caused by a failure in the structural portion of the residence are not required to be disclosed as “structural” repairs.  Other areas of Section 5.008 may require the disclosure of repairs for those items.

A seller is not required to disclose to a potential buyer any deaths on the property that are unrelated to a physical condition associated with the property, or AIDS or HIV-related health problems of previous occupants.

The seller’s disclosure notice must be completed to the best of the seller’s knowledge and belief as of the date of completion and signature.  If there are items, components, or repairs which are not known by the seller on that date and time, the seller must indicate that fact.  There is no legal obligation of a seller to conduct an investigation into matters of which the seller has no knowledge nor any continuing obligation to disclose matters that are later discovered.  Also, a seller’s disclosure notice is not a warranty or guarantee by the seller of the physical condition of the property or dwelling.

However, particular attention should be paid to the form of the disclosure notice being used.  Some residential real estate sales contracts promulgated by real estate trade associations may include disclosures which go beyond those required by Section 5.008.  It is important to read each form of disclosure closely and make sure that each response is true and correct at the time and date such is being made.  Although not required by law, supporting documentation of any disclosed defect or repair may assist the seller in later defending against allegations of misrepresentation or deceptive trade practices.

Also, unless the real estate agent or broker has actual knowledge of a misrepresentation contained in the seller’s disclosure notice and fails to bring such to the attention of the buyer or the buyer’s agent, a seller’s real estate agent or broker is not legally responsible for any misrepresentations made by the seller in its disclosure notice.

Certain types of residential real estate sales transactions are exempted from providing a disclosure notice.  These include (1) court ordered sales; (2) transfers by a bankruptcy trustee; (3) deeds in lieu of foreclosure; (4) judicial and non-judicial foreclosure sales; (5) sales by a fiduciary or administrator of a decedent’s estate, guardianship, conservatorship, or trust; (6) transfers between co-owners; (7) transfers to a spouse or heir; (8) transfers incident to a divorce; (9) transfers to or from a governmental entity; (10) new residences which have not been previously occupied; and (11) where the value of the dwelling does not exceed five percent of the value of the property.

Finally, where a seller fails to provide a disclosure notice to a buyer, the buyer’s sole remedy is to terminate the contract for any reason within seven days from buyer’s receipt of the notice.

R. Scott Alagood is board certified by the Texas Board of Legal Specialization in both Commercial and Residential Real Estate Law and may be reached at alagood@dentonlaw.com or www.dentonlaw.com.

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OvertimeOverhead.  It’s a challenge facing employers and employees.  For many businesses, labor cost is the single greatest overhead expense.  Unfortunately, many employers try cutting corners that they should not, in particular in the area of overtime wages.  The Fair Labor Standards Act (or FLSA) is a federal labor law that requires employers to pay overtime compensation (at time-and-a-half) to employees who are not exempt under the Act for all hours worked over a prescribed threshold period (typically, 40 hours per week).  Most employees are non-exempt, meaning that they are entitled to overtime pay.  The most common exceptions to this rule involve some administrative, executive and professional employees, computer professionals, outside sales employees, and certain retail employees.  Liability exists under the FLSA even for unintentional violations.

But what if a business only employs a few people?  Is the business exempt from paying overtime?  The answer is no. Unlike many other federal laws, the FSLA does not depend upon the number of persons employed.  Instead, the FLSA covers businesses engaged in commerce or in the production of goods for commerce (i.e., handling, selling, or otherwise working, on goods or materials that have been moved in or produced for commerce).  The FLSA’s coverage is very broad, and the courts typically interpret it that way.

But what about salaried managers and individuals that have really important sounding, executive job titles?  Are they exempt?  If the manager’s/executive’s salary is less than $100,000.00, then the inquiry typically focuses on the nature of the job and how the employee performs it.  For example, if the employee cannot hire or fire other employees, or does not regularly direct the work of at least 2 employees, overtime must usually be paid.

But what about salaried employees?  Does overtime get factored into their pay?  The answer is typically yes, in most instances overtime is still required.

Is it acceptable for an employer to get around overtime by allowing the employee to volunteer their time?  No.  The FLSA does not recognize “voluntary unpaid overtime” or “donated time” as legitimate exceptions to avoid paying overtime.

What about a signed, written agreement with the employee waiving any claim they might have to overtime?  Is that acceptable?  Under the FLSA, such agreements are null, void and completely unenforceable.

Is comp time an acceptable alternative to paying overtime?  For a governmental employer, probably so.  In the private sector, comp time is generally not permissible.  It should be noted that a private employer may adjust an employee’s schedule within the same week to ensure that their total hours worked do not exceed 40 hours.  However, overtime hours may not be averaged out over a longer period of time except in exceedingly narrow cases of certain employees of residential care facilities.   Otherwise, any overtime worked within a workweek must be paid for that workweek.

Is overtime required to be paid to an independent contractor?  If a worker is truly an independent contractor, then overtime may be avoided.  The problem is that too often employers get cute, slap an independent contractor label on the worker, but then treat them as if they are employees.  If workers are truly employees, regardless of the title they hold, and if they work more than 40 hours in a workweek, the employer must pay the worker overtime pay if they do not qualify for an overtime exemption.  There is no way to contract around that.  There is no piece of paper and no amount of explanation that will overcome the finding of an employment relationship if the Department of Labor or the IRS, or a state employment security agency, determines that an employer/employee relationship exists.  For this reason, employers must be very familiar with the various tests for determining whether a worker is an employee or an independent contractor.  The controlling factor is whether the employer controls the details of how the person’s services are performed.

At the end of the day, uncertainly under the FLSA can cause serious problems.  Court’s may award an affected employee damages, including unpaid base wages, overtime pay (at time-and-a-half), liquidated damages of an amount equal to all of the employee’s unpaid wages and overtime pay, attorney’s fees, and court costs.  So for both employers and employees, care should be taken to make sure that the FLSA is followed and overtime is paid where required.

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reversemortgage7_zps4a2074baTexas allows lenders to make “reverse mortgages” which are secured by a borrower’s homestead.  A reverse mortgage is an instrument that allows a borrower to borrow money against the equity in his or her home in a single installment, in annuity-like installments, or a line-of-credit available on demand.  Like home equity loans, reverse mortgages are subject to a litany of state constitutional restrictions.

A reverse mortgage may only be created voluntarily by the borrower through a written contract.  Each owner and each owner’s spouse must join and consent to the reverse mortgage.  A reverse mortgage may not be made unless the borrower or borrower’s spouse is at least 62 years of age at the time the loan is made.

If the reverse mortgage provides for the annuity-like string of payments, those payments must be made at regularly scheduled intervals.  However, the lender may also make advances on the borrower’s behalf where the borrower fails to pay taxes and assessments, insurance, repairs to the secured dwelling, or any lien with priority over the reverse mortgage.  The proceeds received from a reverse mortgage may be used for anything.  A reverse mortgage will accrue interest at either a fixed or variable rate of interest which may be compounded during the term of the loan.  Most reverse mortgages will accrue interest at a variable rate.  Interest on interest is permitted, and will typically compound monthly.  However, during the term of the loan, there are no monthly repayment requirements.  The principal balance and accrued interest do not become due and payable until one of the following occur:

  • All borrowers have died;
  • The property securing the loan is sold or transferred;
  • All borrowers cease occupying the secured property for longer than 12 consecutive months without prior written approval of the lender;
  • The borrower defaults on an obligation specified in the loan documents to repair and maintain the secured property, pay taxes and assessments, or insure the secured property;
  • The borrower commits actual fraud in connection with the loan; or
  • The borrower fails to maintain the priority of the reverse mortgage after receiving notice from the lender and an opportunity to cure.

Unless voluntarily repaid, when the note becomes due the lender may only satisfy the outstanding balance of principal and accrued interest from foreclosure of the secured property.  Reverse mortgages may only be foreclosed through a lawsuit for judicial foreclosure or an expedited legal proceeding allowing foreclosure under the deed of trust.  Neither the note nor any deficiency occurring from the foreclosure sale may be satisfied from the borrower’s estate.  Said another way, the borrower is not personally liable for the repayment of the loan.

A reverse mortgage may not be made unless the borrower and each owner receive counseling regarding the advisability and availability of reverse mortgages and other financial alternatives.  The borrower and each owner must attest in writing that they each received the required counseling.  If the lender fails to make any required loan advances after receiving notice from the borrower, then the lender forfeits all principal and interest on the reverse mortgage.

Reverse mortgages are not for everyone.  Since the loan will not be typically repaid until after the death of the borrower or the sale of the home, family and heirs should be consulted before entering into the loan.  Life insurance may be an available option to use to pay off the reverse mortgage upon the borrower’s death.  Reverse mortgages may include high closing costs.  Because of a life expectancy factor in the loan repayment formula, less money will be available from the loan for younger borrowers.  Also, if a reverse mortgage is obtained, seniors may be prohibited from receiving available deferrals of ad valorem taxes.

Available alternative options to a reverse mortgage may include:

  • Cashing out whole or variable life insurance policies on the borrower;
  • Obtaining a home equity loan;
  • Selling or leasing the property; or
  • Applying for tax credits and tax abatements for seniors.

While no one plans to run out of money during retirement, the longer folks live, the harder it becomes to sustain the necessary income to provide for living expenses.  A reverse mortgage is one option that may be considered for seniors needing addition income.  However, care should be taken to make sure that all of the resulting consequences have been considered before entering into a reverse mortgage.

Amendments to the Texas Constitution concerning reverse mortgages are currently scheduled for approval during the November 5, 2013, general election.  If approval, these amendments will become effective upon proclamation by Governor Perry.

R. Scott Alagood is board certified in Residential and Commercial Real Estate Law by the Texas Board of Legal Specialization.  Scott may be contacted at alagood@dentonlaw.com and http://www.dentonlaw.com.

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