Categories
Creditors Rights

From Commercial Lender to Residential Landlord: The Protecting Tenants at Foreclosure Act

On May 20, 2009, the United States Congress enacted the Protecting Tenants at Foreclosure Act (APTA@) which grants specific rights to residential tenants affected by foreclosure. The PTA is federal law that acts as a minimum requirement for foreclosing lenders with any additional state requirements left unaffected. Congress, in the midst of the recent Aforeclosure crisis,@ sought to enact the PTA to protect unsuspecting/innocent tenants by imposing restrictions on a foreclosing lender=s ability to evict a holdover tenant upon foreclosure. As noble a cause as it may have been, the PTA has resulted in significant post-foreclosure obstacles to lenders.

 

Requirements under PTA

 

Prior to the enactment of PTA, a residential tenant occupying a foreclosed property could be required to vacate the property on 30 days notice, under Texas law. If the tenant failed to vacate upon the expiration of 30 days, the foreclosing lender could then proceed with an eviction action. Under the PTA, a foreclosing lender is now required to provide a residential tenant remaining in the foreclosed property a minimum of 90 days to vacate. The PTA further mandates that a foreclosing lender takes title to a foreclosed property subject to an existing lease. In short, a foreclosing lender Asteps into the shoes@ of the prior landlord/borrower and assumes all of the rights, duties, and obligations under the existing lease. Therefore, if a foreclosed property is occupied by a residential tenant who is under a lease that is protected by the PTA, the lender must honor that lease for its term. Although the tenant under the existing lease must continue to make monthly rental payments, this results in a clear obstacle to the foreclosing lender=s ability to market and sell the property. The PTA allows such a property to be sold to an Ainvestor@ who agrees to honor the existing lease or to an Aend user@ (owner-occupant). A sale to an Ainvestor@ or Aend user,@ however, does not relieve the foreclosing lender of the duty to give the tenant 90 days notice to vacate.

 

Not all residential tenants or leases are protected under the PTA. There are situations in which the occupant of a foreclosed property does not rise to the level of a Atenant@ under the PTA and is therefore is not entitled to its protections. These occupants include, but may not be limited to, the child, spouse, or parent of the defaulting borrower. Moreover, not all leases will actually qualify as a Alease@ protected under the PTA if: (1) the lease was not negotiated at arms-length; (2) the lease is not for fair-market rent; or (3) the lease was not entered into prior to foreclosure. These situations, however, are highly fact intensive and need to be addressed on a case by case basis to ensure that the foreclosing lender is not only protecting its rights against opportunistic Atenants,@ but also complying with the PTA as to not violate the rights of protected tenants under legitimate leases. Although it may be eloquently asserted at times, it is important to note that the PTA does not provide protections to the owner/borrower on which the lender has foreclosed.

 

Real Effects of PTA on Foreclosing Lenders

 

One of the most significant effects of the PTA is that a foreclosing lender is now forced into the residential landlord business with all its attendant obligations and responsibilities. These obligations include, but are not limited to, yard/building maintenance, repairs, payment of water utilities, and safety requirements such as installation and maintenance of smoke detectors. In addition, foreclosing lenders need a strong and experienced local agent to collect rental payments and manage the property. Tenants may require a 24 hour local contact for emergency matters, and the local agent needs to be able to make decisions (such as hiring plumber or electrician) on nights and weekends without waiting for the lender=s office to open the next business day. Foreclosing lenders must also be mindful of the physical condition of the property, including the installation and maintenance of any security devices required by Texas law. These obligations alone are enough to cause concern, but what happens when these obligations remain without the reciprocal obligation of the tenant to actually pay rent to the foreclosing lender?

 

In the higher-end Aspec@ house market, it is not uncommon for the tenant to pre-pay lease payments for up to a year. This in turn causes substantial economic issues for a foreclosing lender. For example, a lender forecloses on a property in June 2011 that is under a written lease term from January 2011 through December 2011 and the tenant has already pre-paid rent for one year to the defaulting borrower/landlord per the terms of the lease. As a result, the lender is forced to allow the tenant (assuming the tenant is not otherwise in default under the lease) to remain in the property Arent free@ for six months. To add insult to injury, the lease terms may require that the landlord is responsible for yard maintenance and water. Now, a commercial lender has essentially been transformed into a residential landlord with no rent stream and yet saddled with maintenance expenses and obligations.

 

Minimizing the Impact of PTA

 

Many foreclosing lenders have discovered that Acash for keys@ provides a clean, cost-effective means of obtaining a vacant property in order to prepare and market the property for sale prior to the expiration of 90 days. Although the pre-paid tenant in the above example is not likely to accept a Acash for keys@ deal, many tenants under a month-to month lease or an expired lease are all too happy to hand over the keys for a reasonable sum (this sum should be determined by the foreclosing lender via a cost/benefit analysis based on factors unique to the specific case). To a foreclosing lender, the idea of passing out money to an occupant of property already owned by the lender may be of little attraction, but given the requirements under the PTA and the possibility of a quick sale to a third-party, Acash for keys@ can provide a sensible solution to the post-foreclosure problems created by the statute.

 

Prior to foreclosure, lenders should be aware of the status of the property and whether it is occupied by a residential tenant who will be protected under the PTA (often, commercial builders will lease properties that they are unable to sell without notifying the lender). Many times copies of any leases can be obtained by request to the borrower or borrower=s counsel. Knowing the terms of a lease in connection with a property prior to foreclosure can provide invaluable information to a foreclosing lender and may even affect the liquidation strategy depending on the terms and whether rent has been pre-paid as in the above example.

 

There are numerous nuances to the PTA and an infinite number of directions a case can take upon foreclosure of a property that involves a residential tenant. This article is aimed merely to provide a general overview of the statute=s requirements and a sample of its effects. As with all situations involving a new area of law, there are many legal issues that may arise at different stages of the foreclosure process involving property with residential tenants, and each and every issue requires examination and analysis to ensure that the foreclosing lender=s rights are maintained and the tenant=s rights are protected within the confines of the law.

 

Author: By Michael P. Menton

Categories
Business Counsel Services

Mitigating the Risks of Misclassifying Employees as Independent Contractors

Dental practices, medical practices, real estate agencies, and several other industries routinely utilize independent contractors to staff their operations. Whether inadvertently or not, businesses commonly misclassify employees as independent contractors. The independent contractor relationship provides several key benefits to businesses, with potential cost savings and liability protections.

For example, from a cost perspective, classifying workers as independent contractors rather than employees allows a business to avoid various employee-related expenses, including worker’s compensation insurance, unemployment compensation insurance, state and federal employment taxes, and various employee benefits. From a liability perspective, independent contractors pose less of a threat of asserting first-party claims—i.e., those by workers against the business—because independent contractors are afforded significantly less protection under federal and state employment laws than traditional employees. Independent contractors also pose less liability risk on third-party claims because a business generally is not liable for the tortious acts or omissions of its independent contractors, whereas an employer generally can be held vicariously liable for its employees.

While these benefits often lead businesses to classify their workers as independent contractors, the unfortunate reality is that many "independent contractors" are not truly independent contractors in the eyes of the law. The Department of Labor, in its recent "misclassification initiative," has begun to crack down on employee misclassification. The consequences of the Department of Labor, a court, or another governmental entity finding that an employer has misclassified its workers as independent contractors may be grave for the employer, with such rulings often resulting in a "one-two punch" to the employer in the form of substantial penalties (such as Department of Labor or IRS fines) followed by employee lawsuits over health benefits, overtime pay, and retirement contributions.

Properly classifying workers can be tricky, especially in industries where roles are not always clear. For example, while real estate agents generally tend to be independent contractors when actually selling real estate, an agent who also wears another hat for a brokerage (e.g., as an office manager) may need to be classified as an employee in that other role. Misclassification is also common among associate dentists of dental practices and associate physicians of medical practices, where an associate’s professional qualifications may suggest an independent contractor relationship but the level of control or other factors may require classification as employees.

Unfortunately, there is simply no "bright line" legal test to determine whether a worker is an employee or an independent contractor. The IRS, the Department of Labor, and common law courts each use their own tests and consider different factors in reaching conclusions as to a party’s true employment status. Nevertheless, several important factors are present in nearly every independent contractor analysis regardless of the governing authority.

For example, key factors include (1) the scope and extent of control the employer may exercise over the worker, (2) the extent to which the worker is economically dependent on the employer, (3) the relative investment of the worker in the business, (4) the manner in which the worker is compensated, (5) the location and instrumentalities of the worker, and (6) the duration of the worker’s relationship. No single factor is determinative of the employee relationship. Rather, evaluating whether a worker has been misclassified as an independent contractor involves weighing of these and other factors in light of the facts of a given case.

The upside to the situation is that, despite the Department of Labor’s recent initiative and similar enforcement activities by the IRS and other agencies, businesses may avoid the pitfalls of misclassification with careful planning. For example, dental practices may still be able to employ associates as independent contractors with minimal fear of judicial or governmental reclassification by utilizing creative structuring of an associate’s employment. Careful consideration of the various employee status factors, with guidance from counsel where the analysis may be less clear, can help significantly minimize a practice’s risk of exposure to the severe penalties associated with employee misclassification.

In addition, further risk mitigation is available in the form of the IRS’s Voluntary Classification Settlement Program (VCSP). As the name suggests, the VCSP permits an employer to voluntarily reclassify its workers as employees and, as a result, exempts such employers from IRS employment tax audits for prior years with respect to the reclassified workers. Additionally, the program allows employers to make significantly reduced settlement payments to the IRS in lieu of paying all of the back taxes it would otherwise owe.

In light of the potentially severe consequences of worker misclassification and the Department of Labor’s crack down on the issue, it is more critical than ever for businesses to carefully plan and reconsider their employment structures and take necessary steps to mitigate the risk of unnecessary exposure to liability for employee misclassification.

Authors – Michael S. Byrd and Michael R. Steinmark

Categories
Commercial Litigation

Dispute Resolution Terms in Contracts: A Trial Lawyer’s Perspective

When parties negotiate and draft a contract, litigation is usually the furthest thing on their minds. The substantive terms of the transaction, specifically those related to pricing and performance, warrant most of the attention because the underlying deal is the very reason for the contract in the first place.

 

Frequently, terms related to enforcement are relegated to the miscellaneous or general sections, and often are treated as boilerplate, meaning they may get rubberstamped when all the other terms are complete. However, it is worth taking an extra moment or two to review these provisions as if you were a "Monday morning quarterback" or had the benefit of 20/20 hindsight after a disagreement takes place. Doing so will ensure that your rights to enforce or defend the core terms of the contract are not jeopardized.

 

To this end, here is a summary of the terms that trial lawyers will typically consult immediately when evaluating a dispute involving a breach of contract:

 


· Waiver of Jury Trials. Parties to a contract may waive their right to a trial by jury. The Texas Supreme Court holds that such a waiver does not violate public policy as long as the waiver is voluntarily, knowing, and made with full awareness of the consequences of it. The more conspicuous, i.e., eye-popping, the waiver, the more likely it is to be enforced.

 

· Merger or Integration Clause. This states that the contract expresses the entire agreement between the parties and that all prior understandings, representations or commitments are merged into the contract. This clause prevents a party from trying to vary the contract’s terms after it is signed. It can also contain an anti-fraud provision whereby the parties agree that neither party relied on any statements or representations made during the negotiation or drafting phases that are not contained in the contract. This limits a party from attempting to claim that it was mislead or tricked into signing the contract, or attempting to introduce evidence of oral or even written agreements outside the "four corners" of the contract.

 

· Choice of Law, Forum Selection, and Venue Selection. A choice of law clause allows contracting parties to pick the state whose law will apply. Texas law permits these clauses, which are useful when the parties reside in different states or when performance of the contract crosses state lines. Importantly, this does not necessarily mean that the actual lawsuit will occur in that same state. This is where forum selection comes into play. A forum selection clause is an agreement that the lawsuit must take place in a specified jurisdiction, such as Texas or another state. Texas law generally enforces such provisions as long as the jurisdiction is not unreasonable, inconvenient, or against public policy. Venue selection involves selecting where within the jurisdiction the lawsuit will occur. For example, a venue selection clause would specify a county in Texas in which the lawsuit must take place. It is more difficult to enforce venue selection because Texas courts hold that venue is fixed by law. Often times, contracting parties will still indirectly choose a venue by picking one of the locations that would be permissible under Texas law or by providing that the contract is to be performed within a certain venue.

 

· Alternative Dispute Resolution. Texas’s public policy encourages parties to try to resolve their disputes out of court. Therefore, contracts can, and often do, contain a provision requiring alternative dispute resolution, such as meditation, before litigation can be filed.

 

· Statute of Limitations. The law sets a time limit for a party to file a lawsuit after a wrong occurs, which is known as the statute of limitations. When the time period starts and ends depends on the facts of each particular case. Contracting parties can agree to reduce the deadline by which a party must file a lawsuit to as little as one-year.

 

· Damages. Texas law permits contracting parties to agree on damages should a breach occur. This includes agreeing to limit or reduce the amount of damages to which a party would normally be entitled; agreeing to an exclusive remedy; agreeing to equitable relief, such as an injunction, even if it might not otherwise be available; or agreeing to a set amount of damages, otherwise known as liquidated damages.

 

· Interpretation. Texas law enforces unambiguous contracts according to the plain meaning of their words. Should the interpretation of a contract be called into question, however, the contract generally will be interpreted against its drafter. This rule can be avoided with a provision that states that no term of the contract will be interpreted in favor or against any of the parties for any reason.

 

These are not the only provisions that can impact a lawsuit, but the above are the types of terms a trial lawyer will look for when assessing a party’s ability to successfully enforce or defend a contract. Such provisions should be reviewed with an attorney before entering into a contract to ensure that you are put in the best position possible if a dispute arises.

 Author- Daniel P. Tobin

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