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Commercial Litigation Firm News

Tenants’ Rights under Unrecorded Leases

Protection of private property rights is fundamental under Texas law. Applications of this principle to landlords are com­monly seen and understood, but Texas law also affords sub­stantial safeguards to tenants and their leasehold estate in­terests. Awareness of these rights can be critical in a variety of contexts.

In eminent domain takings as well as purchase and sale trans­actions, for example, disputes often arise when a lessee's rights are overlooked and in­fringed due to an unrecorded lease. Recording a real prop­erty instrument, such as a lease, in the real property re­cords of the county in which the property is located pro­vides constructive notice of the lease. Just like actual, subjec­tive knowledge of a lease, this constructive record notice is effective for enforcing leasehold rights against third parties, such as condemning authorities or purchasers of landlords' inter­ests.

But parties frequently do not want to record a lease in its entirety for a variety of rea­sons, including protecting the confidentiality of negotiated lease terms (e.g., rent) in highly competitive industries. If a lease is not recorded, a condemning authority or sub­sequent purchaser may claim it is not bound by the lease. Is this the end of the road for the lessee—i.e., does failing to record the lease leave the lessee completely exposed?

No.

While recording the lease itself provides the greatest protection, there are other ways a lessee can establish constructive notice and en­force its rights. For example, the lessee can record a memorandum of lease—a notice of the existence of the lease stating only certain ex­cerpted terms of the lease. The minimum requirements include a legal description of the property, the term of the lease, and the signatures of the landlord and tenant. It is up to the parties' discretion what additional terms, if any, to include.

A third party, such as a con­demning authority or pur­chaser of the landlord's inter­est, is charged with notice of all terms expressly stated in the recorded memorandum of lease. But Texas law goes further, providing that a third party will also be charged with notice of any other material facts that a reasonable inquiry would have disclosed.  Thus, even if the memorandum of lease leaves out certain terms of the lease, such as a right of first refusal granted to the tenant, a third party can still be deemed to have notice of those terms and the subject to other enforcement.

Even if neither a lease nor memorandum of lease is recorded, however, the lessee may still be able to protects its rights by establishing possession f the lease in an open, visible, exclusive, and unequivocal manner.  For example, an outdoor advertiser could show it has continuously maintained a billboard on the property to establish its rights as tenant under a ground lease.  Likewise, a commercial tenant could show construction or operation of a business on the property as open, visible, excusive, and unequivocal possession under an unrecorded lease.

Third parties may be charged with notice not only of the rights openly and visibly exer­cised (such as rights of posses­sion and use), but also all other terms of the lease (such as a right of first refusal). This is because the third party may be deemed to have enough notice to require further rea­sonable inquiry, from which all lease terms could have been discovered, just as with a memorandum of lease. Thus, while it is generally advisable to record a lease or memo­randum of lease, a tenant need not necessarily give up hope for enforcing its rights simply due to an unrecorded lease.

By J. Allen Smith & Michael R. Steinmark

Categories
Firm News

Rising Stars

The publishers of Texas Monthly magazine have again recognized the accomplish­ments of SettlePou attor­neys. For the second year in a row, Michael Byrd was selected for the publisher's Rising Stars list, joined this year by Michael Steinmark. The announcement of these awards comes just a few months after Allen Smith of SettlePou was selected for the publisher's 2009 Super Lawyers list for the third straight year.

TexasSuper Lawyers, Rising Stars Edition is described by the publisher as a "listing of top lawyers who are under 40 years old… or who have been in practice 10 years or less." Selection is limited to only 2.5 percent of all lawyers in Texas, and is based on the collection and evaluation of objective criteria on 12 indica­tors of peer recognition and professional achievement.

Michael Byrd is a shareholder at SettlePou and Chair of its Business Counsel Services practice group. He has been practicing law since 1995 and focuses his practice on health care and private business.

 Michael Steinmark is an asso­ciate in SettlePou's Commer­cial Litigation and Insurance

Defense practice groups. He has been practicing law since 2005.SettlePou's two Rising Stars can be found on pages 5, 26, and 34 of the 2010 TexasSuper Lawyers, Rising Stars  Edition magazine, and at www.superlawyers.com/texas.

Categories
Real Estate

Property Owners and Brokers-Ensure You Understand What Entitles a Broker to a Commission

Real estate brokers plan an important role in a real estate transaction.  However, sometimes the parties do not have a clear picture as to how and when a broker is to be compensated for his or her role, which can lead to tiresome and costly disputes.  All parties to a real estate transaction should have a clear picture as to the elements that entitle a broker to a commission so the parties have appropriate expectations from the beginning of the transaction.

In Texas, there are three pri­mary criteria that a broker must meet to be entitled to a commission. First, a broker's claim to a commission must be based upon the employment of the broker by the party from whom the commission is claimed (i.e., the property owner). Second, any commis­sion agreement for the pur­chase of real property is sub­ject to the Texas "statute of frauds," which requires that the agreement to be in writing in order to be enforceable. Un­der the Texas statute, an agreement for leasing real property is included in the definition of “an agreement for the purchase of real property.” Third, in order to collect a commission, a broker must also prove that he or she performed the service contemplated by the terms of the employment.

Most commission disputes can be quickly resolved by evaluat­ing the first two criteria. If a broker seeking a commission does not have a written com­mission agreement, executed by the party against whom he or she seeks a commission, the broker is not likely to be successful in a claim for such commission. The evaluation of the third criterion, regard­ing broker performance, can be a much more involved process.

Generally, most commission agreements provide that a broker may earn a commis­sion in one of three ways:

  1. Procuring a valid, enforceable and executed contract (whether a purchase contract or a lease) on terms agreed by the property owner;
  2. Procuring a purchaser to whom the sale is, in fact, completed; or
  3. Much less common, by producing a prospective purchaser/tenant that is ready, able, and willing to purchase/lease.

In the context of these three options, it is clear that a party employing a broker must carefully review the terms of agreement to be sure that it understands the services for which it contracted. An agreement in which the bro­ker merely produces a "purchaser/tenant that is ready, able and willing to pur­chase/lease" could prove costly and unproductive to the property owner if the con­templated transaction is not ultimately completed – though this may be the default provi­sion in many broker-created forms. Likewise, broker-created terms will often pro­vide (if the property owner does not review and object otherwise) that the commis­sion is earned once the pur­chase contract is entered into (without regard to if the clos­ing actually occurs). What benefit is a ready purchaser or prospective tenant to an owner, or even an executed purchase contract if the prop­erty is not ultimately sold or if the lease is not executed?

A further consideration when evaluating a leasing brokerage agreement is potential future commissions. These usually arise during lease extensions or premises expansions. Logi­cally, if the lease is extended, the landlord receives more income from the tenant brought in by the given broker. However, landlords should ensure that brokers collecting commissions for extensions or expansions, particularly those contem­plated in the original lease document, are actively in­volved in negotiating, coordi­nating and documenting the process in order to earn any commission. A carefully drafted brokerage agreement should provide that the bro­ker does not receive an ef­fort-free stream of commis­sions simply because the leas­ing relationship continues to flourish and should document what the landlord expects to occur for the broker to earn his or her commission on re­newals or extensions.

Determining what should constitute being “actively involved” can be a key issue when commissions are to be paid to the broker on a lease renewal or extension.   Clarifying the agreement to state that the broker must be actively involved in the negotiations of renewal terms (e.g., the renewal rate and other terms) provides some guidance.  However, even with the preceding language, a landlord may need to also consider the possibility/desirability of a commission being paid on a renewal where the renewal rate is calculated through a predetermined process.  For example, if the renewal rate is to be determined by appraisers selected by the parties, should the brokers, while being otherwise involved in the discussions, received the same commission they would receive on a renewal where they helped actually negotiate the renewal rate.

The parties should also spe­cifically review and agree on the timing of when the com­missions (or portions thereof) are to be paid. In the event of a purchase and sale transaction, the commission provi­sion would typically state the commission is "paid at closing, but not otherwise". In the event of a new lease, it is oftenpaid in two installments -50% within a certain number of days following execution of the lease and 50% within a certain number of days follow­ing the tenant's occupation of the leased premises. A prop­erty owner should always review such provision to avoid the potential headache of pay­ing a broker commissions for a tenant who, since lease exe­cution, for whatever reasons,fails to take possession or has ceased operations and will not be paying the rent to the landlord.

Carefully reviewing and negotiating a proposed commission agreement in light of these considerations can help the parties avoid conflict and frustration later in the process.

By Jeff Mosteller and Brian H. Baker