January 1, 2022
Happy 2022 New Year from John Cowherd
Often strait roads are best, other times it takes windy paths to achieve a lofty goal. I am here to help my clients to navigate unfamiliar legal routes and obstacles in 2022. Wishing you much health and success in the coming year.
– John C. Cowherd
September 2, 2014
Accepting a New Contract During an Earnest Money Deposit Dispute
On July 31, 2014, I posted about a recent Fairfax Circuit Court opinion concerning Earnest Money Deposits (“EMD’s”). The seller, Sagatov Builders, LLC, sued buyer Christian Hunt. Mr. Hunt had entered into a contract and later failed to make the EMD or complete closing. The Court refused to allow the seller to sue the buyer for the unpaid deposit amount, finding it to constitute an unenforceable penalty.
Recently, an anonymous visitor typed a question into the search feature of this blog, rephrased as follows: “If there is a pending dispute over an EMD, can the seller accept another contract on the same property?” In other words, what are the risks of having two unreleased contracts simultaneously on the same property? In the Sagatov case, the seller used a marked-up, outdated realtor association form as a template for a transaction conducted apparently without brokers. Since the buyer never made the EMD, that wasn’t a classic earnest money dispute. The visitor’s question intriguingly takes a step back and asks how the EMD dispute implicates fundamental contract issues.
Today’s post explores this visitor’s question. This reminds me of a personal experience I had over a year ago. My wife (then fiancée) and I were under contract to purchase a home in Fairfax County, Virginia. We made the EMD. Our home inspector discovered a below-grade crawl space suffering from significant water intrusion problems. Our agent provided our home inspection report to the seller along with a request for release of the EMD. We resolved the dispute by using the home inspection contingency to get out of the contract. We were able to get our EMD back without having to send lawyer letters or go to court. Once we decided to ask for the release, we didn’t care what the sellers did with the house once we moved on, so long as we weren’t involved. However, some buyers may attempt to tie up the disposition of the real estate in order to gain leverage in getting their EMD back. Buyers and sellers can disagree over whether a contingency is still available.
While the circumstances and wording of each contract dispute are different, this visitor’s question brings a few thoughts to mind:
- Conflict Avoidance. Sellers and their agents get their money by selling the house to a willing buyer, not by engaging in EMD disputes. If the buyer doesn’t want to go to closing, then there you are. Yes, the parties (and their agents) time is lost in a failed deal. There is a time value to money. However, usually it is in their best interests to undo the deal and move on. EMD disputes that can’t be amicably resolved end up in Court, possibly going to trial. Some cases continue for months or even years.
- Role of EMD. After the contract and deposit are made, any dispute between the buyer, seller and/or their agents implicates the EMD as a potential remedy for a default. The timing and circumstances of the underlying default are usually determinative.
- Materiality of Buyer’s Default. A seller cannot take a deposit, repudiate a signed contract on a flimsy pretense, pocket the EMD and then move on to the next potential purchaser.
- Available Remedies. The judge will seek to interpret facts of the case according to the terms of the contract. An example of the language of a contract that may be used in Virginia is available here. The Court can do one of any number of things, including (a) forcing an unwilling party to go forward with the sale, (b) undoing the deal and returning the parties to the original positions or (c) awarding money damages as compensation.
- Waiver Issues. Usually, buyers don’t back out unless they discover some defect or simply can’t close due to circumstances, such as not having the money. If the buyer demands a release of a contract and refuses to go to closing, it will be hard for them to expect the seller to keep the property off the market. Likewise, if a seller accepts a new contract, then the seller cannot reasonably expect the buyer to purchase the house.
- Mitigation of Loss. Under some circumstances, the seller may be under a duty to find a replacement buyer. For example, the seller may claim the deposit on the premise that changing market conditions will result in a lower subsequent sale. Or, the seller may claim damages on the theory that it will suffer losses related to having to keep the property on the market. It is unreasonable for a seller to incur avoidable losses and then seek compensation for them from the backing out buyer.
- Failure to Timely Close. If the parties are close to closing, the seller may consider waiting until the closing date passes. The buyer’s failure to prepare for and go to closing prejudices expectations on their part that the property be kept off the market.
- Professional Regulation. The Real Estate Board regulates the conduct of real estate licensees. Agents may have professional duties under their own agreements with the parties and the particular circumstances of the dispute.
In the event that parties to a real estate sales contract cannot amicably resolve disputes over the disposition of the property or the EMD, they are well advised to contact a qualified attorney for counsel and representation.
I took the featured photograph in Shenandoah County, Virginia. It is just for fun and does not depict any of the properties discussed on this blog.
July 31, 2014
Earnest Money Deposit as Liquidated Damages
Your typical disputes over an earnest money deposit as liquidated damages in residential real estate sales go something like this: Home buyers decide to submit a contract and an earnest money deposit as an offer to purchase the property. Before closing, the buyer cannot find financing or discovers a defect with the home. If the buyer still has a contingency she can exercise to get out of the contract, then usually there is not a problem with return of the deposit. Where the seller is worried about finding another buyer and there is no applicable contingency, there might be a dispute over who is entitled to the escrowed funds. In scenarios falling within this classic dilemma, the common fact is that the realtor, seller or some other escrow agent holds the buyer’s funds until they are dispersed pursuant to the sales contract.
What if the buyer signs the contract but never submits the deposit and does not go to closing? Can the buyer still be liable to the seller in the deposit amount? The Circuit Court of Fairfax County, Virginia, recently held that contract default language in a National Association of Realtors form was unenforceable as written under this scenario.
In April 2012, Sagatov Builders, LLC entered into a contract to sell Christian Hunt a residential property in Willow Creek Estates in Oakton, Virginia. The contract required Mr. Hunt to submit a $50,000 deposit within 5 days of the issuance of the building permit. The seller submitted the approved building permit to Mr. Hunt in September 2012. According to the Complaint, Mr. Hunt failed to make the deposit or to go to closing. According to Redfin.com, the property was sold on Dec. 13, 2013 for $2,775,000. Perhaps Sagatov suffered some expenses and inconveniences associated with having the property tied up with Mr. Hunt during peak home selling months. Sagatov’s website has an advertisement for the completed property, including pictures and a description. In April 2014, Sagatov Builders filed a lawsuit against Mr. Hunt for the unpaid $50,000.00 deposit as liquidated damages for his breach of the contract.
Why is Sagatov seeking the deposit amount as liquidated damages instead of a calculation of actual damages suffered? The parties used a National Association of Realtors Sales Contract for Land form No. W-48C (VA) dated 6/95. Section 21, entitled, “Default,” provides that:
If the Purchaser is in default, the Seller shall have all legal and equitable remedies, retaining the Deposit until such time as those damages are ascertained, or the Seller may elect to terminate the contract and declare the Deposit forfeited as liquidated damages and not as a penalty …. If the Seller does not elect to accept the Deposit as liquidated damages, the Deposit may not be the limit of the Purchaser’s liability in the event of a default.
On its face, this provision would seem to give the seller the option of retaining the deposit as liquidated damages and/or going after the buyer for additional damages. What are “Liquidated Damages” in Virginia? Attorney Lee Berlik defines them in his blog post as:
[T]he amount of which has been agreed upon in advance by the contracting parties. When a contract contains a liquidated-damages provision, the amount of damages in the event of a breach is either specified, or a precise method for determining the sum of damages is laid out. This is often done in situations where the parties agree that the harm likely to be caused by a breach would be difficult or impossible to measure with any precision, so they agree on a figure in advance and dispense with the time and effort that would otherwise be involved in proving compensatory damages at trial.
Rather than litigating a hot mess of damages issues, parties can stipulate to liquidated damages in their contracts. So long as the liquidated amounts are not deemed a “penalty” by the Court, these provisions are enforceable. A few months ago I posted an article to this blog about how Courts seek to avoid imposing similar penalties in construing commercial lease acceleration of rents provisions.
The liquidated damages provisions in the real estate form that came before Fairfax Circuit Court Judge Charles Maxfield presented a new twist on the liquidated damages vs. improper penalty debate. Upon the buyer’s default, these provisions gave the Seller the option of electing the liquidated damages or seeking some other amount of damages.
Judge Maxfield declared the liquidated damages option in the contract to be unenforceable because:
- It isn’t a true stipulation to liquidated damages because of its elective characteristics; and
- Even if it was, it is a “penalty” because it would only be exercised if actual damages were less than the deposit amount.
I think that the drafters of the form (leaving aside for a moment the changes made by Sagatov and Hunt) contemplated that an escrowed deposit would become a potential source for payment of damages in the event of default. These default terms seem focused on avoiding a scenario where the escrow agent would have to release the deposit, only to watch an aggrieved party chase after those released funds in court. They seem to have tried to create a right to draw on an escrow in the event of a breach.
Virginia Lawyers Weekly reports that Sagatov will have an opportunity to re-draft its pleadings based on the Court’s ruling. It will be interesting if this case ultimately goes up on appeal to the Supreme Court of Virginia.
If the $50,000 deposit had been actually escrowed, would the Court’s interpretation and application of these Default terms be any different? If actual damages were less than $50,000, would drawing the whole amount constitute a “penalty?” What if expenses dealing with the dispute, such as attorney’s fees, were incurred by the seller?
April 16, 2014
Unlicensed Real Estate Agent Costs Brokerage $6.6 Million Commission
What tasks can real estate brokerages assign to employees lacking a real estate license? What risks does a brokerage run from allowing unlicensed agents to manage relationships with clients and other parties to the transaction? On April 4, 2014, Judge Anthony Trenga decided that a prominent commercial broker forfeited a $6.6 million dollar commission because a leading member of its team lacked a Virginia salesperson’s license. This blog post discusses how the brokerage lost the commission on account of the unlicensed manager.
The Hoffman Town Center is a 56 acre mixed-use development in Alexandria, Virginia. (Yours truly lived in Alexandria for 9 years. AMC Hoffman was my local movie theater. I ran across the finish line in the George Washington’s Birthday 10K race at the Town Center.)
The Landlord, Hoffman Family, LLC, sought office tenants for the development. In August 2007, Hoffman retained Jones Lang LaSalle Americas, Inc. (“JLL”) as its leasing agent. JLL itself has a valid Virginia broker’s license.
In October 2007, Arthur M. Turowski retired from the U.S. General Services Administration. JLL hired him as a Senior Vice President and assigned him to manage the Hoffman account. Torowski saw an opportunity to lease the property to the National Science Foundation. He marketed the property to the GSA, who successfully bid on behalf of the NSF. Turowski negotiated with GSA and city officials. He signed documents on behalf of JLL. In May 2013, Turowski achieved a $330 million lease for his client from the federal government. The NSF will be an anchor tenant in the development. See Jonathan O’Connell, Wash. Post, Judge Rules for Developer in $6.6 million National Science Foundation Suit.
Mr. Turowski helped Hoffman outshine other suitors and land a sought-after tenant. Unfortunately JLL made one oversight: Turowski lacked a real estate agent’s license while performing the work. Hoffman discovered this fact while defending a lawsuit brought by JLL for payment of the $6.6 million dollar commission (JLL rejected Hoffman’s offer of $1 million).
In its ruling, the U.S. District Court for the Eastern District of Virginia discussed the broad scope of activities for which Virginia law requires a license:
1. Activities Requiring a Licence. The legal definition of “real estate salesperson” is “clearly intended to capture the realities and breadth of activities that make up the leasing process.” This strengthens the real estate sales profession by recognizing business realities and restricting the scope of activities unlicensed persons may engage in. Va. Code Sect. 54.1-2101 “Negotiation” is a broad professional activity not limited to agreeing to a property and a price and signing documents.
2. Activities Not Requiring a License. The Virginia Code provides for a narrow set of activities an employee of a broker may do without a license, such as (a) showing apartments if the employee also works on the premises (b) providing prospective tenants with information about properties, (c) accepting applications to lease and (d) accepting security deposits and rents. Va. Code Sect. 54.1-2103(C). These do not include relationship management and negotiation on behalf of a client. JLL’s lawyers argued that Turowski did not engage in activities requiring a license. If that was the case, what licensee-level work earned the commission? The opinion notes that GSA opted to deal with some matters with Hoffman directly because JLL represented other landlords competing for the NSF tenant.
Judge Trenga found that Virginia law required Turowski to hold a license to work under JLL’s agreement with the Hoffman Family. Since he did not, the Court denied JLL’s request for any portion of the commission. The Court observed that a realtor agreement between an unlicensed agent and a client is void. JLL did have a broker’s license and Hoffman’s contract was with JLL. However, Virginia law does not allow brokers to use unlicensed employees as sales persons. The Court decided that JLL’s use of Turowski voided its commission. Even if a listing agreement is valid at the time it was signed, if the brokerage performs under it through an unlicensed salesperson, that performance violates public policy and voids the commission.
The opinion does not discuss whether any other JLL personnel worked on the Hoffman account. I wonder whether JLL would have received a monetary award if licensed sales persons performed some of the work? Perhaps the outcome would have been less harsh if Turowski was not the leader?
Could a licensed real estate sales persons have achieved a greater result for Hoffman? The opinion does not discuss specific damages that arose out of JLL’s failure to use licensed sales persons in performance of the agreement. The underlying agreement was not per se void. In the end, Hoffman got a $330 million lease negotiated by an (unlicensed) agent with deep familiarity with the agency he negotiated with. Unless the verdict is disturbed on appeal, Hoffman does not have to pay anything except its attorney’s fees defending this suit.
Daniel Sernovitz of the Washington Business Journal observes that this litigation gave both the developer and the broker black eyes. Sernovitz points out that JLL’s lawsuit cast a cloud over the project. The possibility of reversal on appeal keeps a shadow of doubt on whether Hoffman will have an extra $6.6 million to help finance the next phase in the development. Lastly, the Hoffman-JLL relationship was mutually beneficial prior to this fee dispute. JLL’s relationships could procure additional tenants. Hoffman may have to rely upon other brokerages moving forward.
Do you think that use of an unlicensed real estate agent presents the same risk to residential brokers?
case cite: Jones Lang LaSalle Americas, Inc. v. Hoffman Family, LLC, No. 1:13-cv-01011-AJT, 2014 WestLaw 1365793 (E.D. Va. Apr. 4, 2014)(Trenga, J.).
February 14, 2014
George Clooney, Ken Shigley & Legal Case Selection
“Accept only cases you would be willing to take to trial.” Ken Shigley, past president of the Georgia Bar, included this in his 10 Resolutions for Trial Lawyers in 2014. There are millions of ways that lawyers convince themselves to accept a questionable case:
- “The case might lead to larger, stronger cases in the future.”
- “I’ll settle it if it seems weaker when I learn more of the details.”
- “The client seems to have an ability to pay.”
- “I don’t normally take these types of cases, but any generalist could handle it.”
- “I’ll withdraw if the client relationship deteriorates.”
Every client with a meritorious case deserves a lawyer committed to zealous advocacy. To the lawyer, the case represents an investment of time, reputation and firm resources. The larger the case, the greater the professional investment. Unfortunately, in a competitive marketplace, lawyers frequently feel pressure to accept cases that aren’t a good fit for them. However, it might be easier to agree to take a weak case than to favorably withdraw or settle it later.
In many ways, Shigley’s #1 Resolution applies to clients as well. A client may go to a lawyer with a problem. The lawyer may respond with questions, insights and a litigation proposal not anticipated by the client. Moving forward with a real estate lawsuit is usually a major decision, requiring substantial investment of time and resources that tends to escalate over the months or years prior to resolution. An expert faces the same challenges.
How does a client, lawyer or expert know whether she is willing to commit to take a case through trial (and beyond, if necessary)? This is particularly important in real estate cases where the remedy may involve more than an award of damages to one side or the other. Present and future property interests may be at stake.
In the movie theater, lawyers like fixer “Michael Clayton” or divorce attorney Miles Massey from “Intolerable Cruelty” have glib answers. George Clooney, the actor portraying both of these fictional attorneys, recently gave an interview with the Washington Post to promote his latest film, “The Monuments Men.” Ann Hornaday, February 6, 2014, “George Clooney Uses His Star Power to Keep Part of Old Hollywood Alive.” Although Ms. Hornaday seems too glowing at times in praise of Clooney, I agree with her basic assessment:
“There might not be another actor alive who so thoroughly personifies movie stardom, or deploys it so adroitly — as commodity, means of production and public trust.”
In the interview, Clooney describes how he learned the hard way which movie roles to accept or decline.
1. Choose the “Screenplay,” Not Just a Role:
In 1997, Clooney starred in “Batman & Robin,” an admittedly disastrous installment in an otherwise successful franchise: “Until [Batman & Robin], I had just been an actor . . . I had only been an actor in a TV series, and then I got ‘E.R.'” E.R. made Clooney a household name. Batman set his reputation back:
“And after I got killed for ‘Batman & Robin,’ I realized I’m not going to be held responsible just for the part anymore, I’m going to be held responsible for the movie. And literally, I just stopped. And I said, It now has to be only screenplay. Because you cannot make a good film from a bad screenplay.”
Prior to Batman, he simply looked at the part offered to him in a film. Batman taught him how being a leader or a star requires a larger commitment.
A lawyer must present his client’s case compellingly for the jury at trial. Preparing for trial requires roles: client representative, witnesses, testifying experts, jury consultants, first-chair litigator, second-chair litigator, legal assistant, general counsel, insurance counsel, and so on. The litigation equivalent to a screenplay is the outline containing all of the arguments, statements and examination questions. Unlike movies and T.V., a lawyer cannot script the behavior of any actor in the drama other than himself. Neither the lawyer or the client have a complete trial outline to go over in the initial client interview. At that point, the lawyer may receive some anticipated witness testimony and exhibit documents, but probably not all of the facts and issues. The initial case evaluation is extremely important. There is no better way to make a preliminary evaluation than in an opening memorandum.
The challenges of initial case evaluation illustrate the value of a specialized litigator to the client. Preparing a detailed proposal or opening memorandum is a feasible time investment to a professional in a niche. Reducing the initial case evaluation to a written summary allows the lawyer and client to visualize the proposed role within the larger “screenplay” and the likelihood of a win-win. BIind acceptance of larger roles in big budget matters may lead to a “Batman & Robin” result.
2. Leading a Team Through the Darkness:
Law schools do not focus on leadership and management in the core curriculum. Law firms typically structure around collegial authority, originations and billable hours. How can lawyers become great leaders and team-builders?
In addition to choosing films based on the screenplay, Clooney forged relationships with great directors such as the Coen brothers and Steven Soderbergh. In 2006, Clooney and his partners formed Smokehouse Pictures for the purpose of making movies missing from Hollywood’s contemporary repertoire. “We want it to be low-budget, dark, screwy…..We like that world a lot.” These personnel decisions may not be based on the easiest way to fill roles. Nor are they dependent upon celebrity and institutional relationships. Creative partnerships and budgets lay the groundwork for success.
3. The Lawyer’s Niche and Initial Assessment:
What can be learned from Ken Shipley and George Clooney’s resolutions? Neither of them say, “Only accept roles that guarantee or promise success.” The decision to accept or decline a role hinges on commitment to the project and others, especially the client. A litigator niched in a particular jurisdiction and practice area is best positioned to make this commitment. He is more prepared to develop a preliminary “screenplay” and draw from a network of other professionals.
photo credit: Josh Jensen via photopin cc
January 31, 2014
Cold Temperatures in a Slow Economy: Insurance Claims from Frozen Pipes in Unoccupied Buildings
NBC News reported Wednesday that home insurance claims for damage resulting from frozen pipes are so high that insurers are hiring temporary adjusters to handle increased claims:
“We anticipate a large spike in frozen pipe claims,” said Peter Foley, the [American Insurance Association’s] vice president for claims. “In Washington, D.C., some of my colleagues have already had them in their own homes.”
Jan. 29, 2014, Cold Man Winter Strikes Water Pipes; Insurers Deluged, Kelly Harry & Steve James, NBC News.
What State Farm describes as a “catastrophe” comes while many families & communities struggle to make ends meet under the current economic conditions. These insurance claims can run as high as $15,000 in residential dwellings. A commercial property or multi-family housing can sustain even greater damages.
In many communities in Virginia, homes and commercial buildings remain vacant this winter because the local real estate market has not yet come back or the properties are only used seasonally. Frozen pipe damage is compounded in vacant buildings because:
- Few occupants take precautions to protect pipes from bursting before they move out of a building.
- Usually no one checks up on an unoccupied building when it is extremely cold. If there is a landlord, property manager, bank or other institutional investor, they aren’t likely to give a vacant building individual attention.
- No one is there to observe the damage as it develops, so greater drywall, carpet, mold, and other damage can occur.
These types of problems tend to result in litigation between the owners, banks, neighbors and insurance companies. This blog post explores three recent cases:
Hiring a Property Manager: Panda East Restaurant, Massachusetts
From 1987-2006, Issac Chow owned and operated the Panda East restaurant in Northampton, MA. Mr. Chow also purchased a house in Hadley, MA, for his employees to live in. While the restaurant was in business, Richard Lau managed both the restaurant and the house. When Panda East went out of business, all of its employees moved out of the house. Chow instructed Lau to keep the heat on in the Hadley house during the winter of 2006-07. Unfortunately, that winter the house suffered damage from burst frozen pipes. An inspector determined that the heat had been turned off. The flooding ruined carpets, furniture and drywall throughout the house.
Mr. Chow brought suit against Merrimack Mutual Fire Insurance Company in Massachusetts. On appeal, the Court could not determine what Chow did, if anything, to engage Lau as property manager for the house after the restaurant closed down. Since the employment relationship between Chow and Lau was unclear, the Court could not determine who was negligent. Chow v. Merrimack Mut. Fire Ins. Co., 83 Mass. App. Ct. 622 (2013). The Panda East case shows that:
- Cold winters are a time bomb to an unoccupied house (or other building) not winterized to prevent frozen pipes.
- Owners must consider retaining a manager or house-sitter for properties that “go dark.”
- Written property management agreements work better than verbal directions. A contract document can clearly define the scope of the manager’s responsibility.
Homeowner’s Negligence: Potomac, Maryland
In addition to suing the insurance company, some lawyers try to sue public utilities for damages arising from frozen pipes in an abandoned home. Izatullo Khosmukhamedov and Zoulfia Issaeva brought a lawsuit against Potomac Electric Power Co. (PEPCO) for leaving the electricity on in their unoccupied house, which later suffered damage from burst frozen pipes.
These Plaintiffs primarily lived in Moscow, Russia. This couple owned a second home in Potomac, Maryland. Apparently, they grew tired of paying the heating and electric bills. After a stay in October 2008, they sought to turn all of these services off. In the following winter, the pipes in the house froze, burst and caused extensive damage. They made no effort to winterize, heat the property, turn off the water main or drain the pipes. In their lawsuit, they argued that PEPCO failed to completely turn-off the electricity, thus allowing the well water pump to push water into the house, intensifying the damage.
The Federal judge in Maryland dismissed their claims on summary judgment before trial, observing that:
It is well-settled, both in Maryland and other jurisdictions, that a property owner can reasonably foresee the danger that water pipes may freeze in the winter and breaches the duty of ordinary care by failing to adequately heat and/or drain them.
Koshmukhamedov v. PEPCO, No. 8:11-cv-00449-AW (D. Md. Feb. 19, 2013)
Judge Williams dismissed Plaintiffs’ claim against PEPCO. This case illustrates skepticism shown to Plaintiffs in frozen pipe cases where they failed to take reasonable precautions.
Most residential property insurance policies specifically exclude coverage if the property goes unoccupied. In a related case, this couple also sued their property insurer, State Farm. The same judge decided that the home was “unoccupied” and thus excluded from coverage by the terms of the policy. Koshmukhamedov v. State Farm Fire & Cas. Co., 946 F. Supp. 2d 443 (D. Md. May 28. 2013)
Insurance Claims in Foreclosure: Holiday Inn Express, Burnet, Texas
On our road trip, dear reader, we first warmed ourselves up with an a la carte dim sum brunch in Massachusetts. For lunch, we had a backfin crabcake in Maryland. The last stop on our trip takes us to a beef brisket dinner in central Texas. Our final case study shows how cashflow and property damage can compound problems for a business owner facing foreclosure. This double whammy presents special challenges to the bank and property insurer as well.
In late 2009, a Holiday Inn Express franchisee stopped making its mortgage payments to the bank that had lent the money for the purchase of the hotel building in Burnet, Texas. On January 9, 2010, the hotel suffered extensive damage from frozen pipes. On January 28, 2010, the bank sent the owner a foreclosure notice. A few days later, the property insurer sent the owner and bank a payment check. This was not cashed due to the disputes between the bank and owner. The owner and the insurance company could not agree on a proper estimate for the damage from the frozen pipes.
On March 2, 2010, the bank foreclosed on the property and purchased it at the sale. The hotelier then sued the bank, insurance company and the subsequent purchaser. The former owner sued the insurance company for not fully compensating for the damage he alleged to be $133,681.62. The Court of Appeals of Texas focused on relevant language in the insurance company’s contract with the owner and the Bank’s loan documents for the hotel. Lenders typically require borrowers to maintain adequate insurance on the property. That way, the loan is adequately secured in the event that damage and default occur around the same time. Usually, a lender’s rights to the security under the loan documents are limited to the principal, interest and other indebtedness owed. A claim for insurance proceeds comes into play to the extent the foreclosure sale price does not satisfy the sums of money owed to the bank.
In Virginia, the foreclosure trustee must file an accounting with the commissioner of accounts that reconciles the indebtedness, sale price and other credits and debits that the bank is entitled to under the loan documents and law. Each state has its own foreclosure procedures.
The Texas Court of Appeals explained that the Bank was only entitled to any portion of the insurance claim proceeds necessary to satisfy any deficiency after the foreclosure. It appears that the Court sought to avoid a windfall to any party seeking to muscle the proceeds during the chaotic foreclosure period. Peacock Hospitality, Inc. d/b/a Holiday Inn Express-Burnet, 419 S.W.3d 649 (Ct. App. Tex. Nov. 27, 2013)
Neither foreclosures nor frozen pipe damage occur in a vacuum. An exceptionally focused owner might take measures to prevent catastrophic damage to a distressed property in an attempt to fetch the highest possible foreclosure sale price. When a property is in financial distress, its owners and lenders must also attend to any signficant insurance claims that may become an element of the foreclosure accounting.
These three cases illustrate why, as attorney Jim Autry says, “An abandoned building is more of a liability than an asset.” Frozen pipes present a serious threat to the value and habitability of unoccupied homes and commercial buildings. Except for a few “hot” areas, much of Virginia (and the country at large) has a significant inventory of uninhabited homes and commercial properties. This winter’s cold spells present unique challenges to property managers, water utilities, banks, owners and insurance companies. When a family or business must negotiate with more than one of these parties to resolve legal issues surrounding a distressed property, an experienced attorney can provide critical counseling and representation.
Ryan D Riley via photopin cc (for demonstrative purposes only and does not depict any of the actual properties described in this article)
January 13, 2014
Reel Property: Hitchcock’s Skin Game
A working-class family is wrongfully evicted from their rental homes and may lose their jobs. A neighboring landowner and his shrewd agent try to stop the sharp-dealing landlord from destroying property values with industrial air pollution. Can they successfully escalate conflict without unintended fallout?
This is the subject of Alfred Hitchcock’s early film, “The Skin Game” (1931). The Skin Game is based on a play by John Galsworthy, a British lawyer who found a second career as a writer. Mr. Hillcrist (C.V. France) is an old-money landowner at odds with Mr. Hornblower (Edmund Gwenn), a nouveau-riche industrialist. Hillcrist objects to Hornblower’s purchase of neighboring pristine countryside for the construction of new smoke-belching factories. The two battle over competing visions for the Deepwater community in a series of increasingly sharp business practices. The Hillcrests’ agent, Mr. Dawker (Edward Chapman) plays an easily overlooked role in this dark comedy.
Jocelyn Codner observes in her blog, The Hitchcock Haul, that The Skin Game speaks to contemporary controversies surrounding land use, fracking and class warfare. Contemporary audiences may identify with the film in additional ways. The Skin Game’s audience remembers the horrors of global war. Worldwide recession brought high unemployment. Fear and desperation hide in the film’s shadowy scenes. These emotions unfold in total war between the neighboring landowners with tragic, unintended consequences. Tenants’ and neighbors’ rights versus job creation.
The aggressive business practices in the movie are frequent, rash and ill-considered. I found myself counting all of the legal claims and defenses that could potentially be brought in Court (this post makes no effort to interpret the facts under 1931 British law). Spoilers follow, but they are 83 years in the making!
- Violation of Covenants. In order to build new factories, Mr. Hornblower violated a covenant he made to Hillcrist when he turned out long-standing residential tenants. In Virginia, that would likely unfold as a contested unlawful detainer (eviction) action. Since the parties did not end up in Court, I assume that the Hillcrists failed to make the covenant legally enforceable.
- Bid Rigging. A mutually coveted parcel of land goes to a public auction. Ominously, the auction house’s lawyer reads the conditions of sale so softly that only the front row can hear. The Hornblowers and Hillcrists bid in concert with their own secret bidding agents to confuse their opponent and hike the price. Hornblower wins. Hitchcock uses quick camera work and multiple angles to build suspense and simulate confusion.
- Fraud. Hornblower’s daughter-in-law Chloe (Phyllis Konstam) has a secret past that includes employment by men to help them secure divorces premised upon adultery. This doesn’t come up much in the era of non-fault divorce, but giving false testimony for hire is sanctionable.
- Conspiracy. The Hillcrists’ estate agent, Mr. Dawker discovers Chloe’s past from her former client. Mrs. Hillcrist and Mr. Dawker decide to use the secret to extort Mr. Hornblower into selling them the contested parcel at a loss. The parties anticipated that disclosure of the secret would destroy Chloe’s marriage with the young Hornblower. The consideration of a sale from Hornblower to Hillcrist consisted of both (a) a written contract for cash and (b) a secret unwritten agreement not to reveal Chloe’s past.
- Breach of Contract: Upon pressure by the young Hornblower, Mr. Dawker violates the secret unwritten non-disclosure agreement and likely his fiduciary duties to the Hillcrists.
- Professionalism. In contemporary transactions, one would expect Mr. Dawker to be a licensed real estate agent. His role in the bid rigging and the conspiracy would potentially expose him to disciplinary action by the Real Estate Board.
- Assault. In a fit of rage, Mr. Hornblower throws his hands on Mr. Hillcrist’s neck.
- Defense of Unclean Hands: Although the evicted tenants temporarily get their cottage back, this victory falls flat because of the greater tragedy which brings Mr. Hillcrist remorse. Unclean hands foul the initial nobility of their cause.
Was there a moment when a more trusted advisor, be it a realtor, attorney, or friend, could have helped Hillcrest settle the dispute? The loud passions of the warring families obscure Mr. Dawker’s fateful role as agent in the “Skin Game.” In the final scene, loggers chop down one of the Hillcrists’ oldest trees. What goes around, comes around.
December 23, 2013
Navigating the Walk Through Part II – Inspection Contingencies in Real Estate Contracts
Check Your Contract for Your Inspection Rights & Duties:
Many real estate contracts impose a right or duty to inspect and approve the development of a property before going to closing. Many contracts for custom homes or commercial developments contemplate that the parties will walk through the property prior to consummating the purchase. If you have a right under a contract, failure to exercise that right may potentially waive a future claim for a defect that reasonable exercise of the right of inspection would have discovered.
If the contract provision discusses preparation of a punch-list or inspection report based upon the inspection, both parties are well advised to take notes (on old-fashioned pads of paper or discretely using the camera in your phone or tablet) for later use in negotiating the inspection report.
If the transaction involves loans, the bank will require an independent appraisal. A shrewd investor takes heed of a professional appraisal, but does not allow it to substitute for her own review. Appraisals usually focus on a comparative analysis of the property with other properties with similar general characteristics, and do not look at the property from the perspective of having to live or work in it on a long term basis.
Home Inspection Industry in Virginia:
Many real estate purchasers use hired professional inspectors to help spot issues during walk-throughs. Most contracts for purchase of a home advise buyers of the opportunity to seek out the counsel of various types of professionals that may aid the inspection process.
Note that in Virginia, a home inspector does not have to be board-certified to do business as one. Currently, the Commonwealth of Virginia provides home inspectors with the opportunity to certify themselves. Home inspectors not certified by the state are forbidden from holding themselves out as certified if they are not, but they may continue to lawfully market their services as a home inspector.
In the purchase of a residential property, a Virginia certified home inspector or an inspector who is a licensed Virginia contractor, is likely to possess the basic qualifications. Various professional organizations, such as the American Society of Home Inspectors, provide members with credentialing opportunities as well. Bear in mind that these professionals can only advise you of what you see and prepare a report. What actions to take based on this information is subject to negotiation between the buyer and seller.
The home inspection process may result in a list of items that the seller agrees to fix by a certain date. When the seller informs the buyer that the repairs are complete, this shifts responsibility somewhat back to the buyer to confirm that the changes are acceptable. In the event of a dispute, the Court will likely ascribe weight to those contracts and lists signed off on by the parties.
Reality TV Home Buying vs. Preparing for a Real Future:
Today’s investors and professionals have greater access to information about real estate than ever before. Whether you are going to use the property for business, personal or public purposes, you don’t need years of specialized experience to know what to look for in a walk through – only you know what questions you need answered.
Your own goals will provide you with a starting point for preparing a walk-through checklist. The issues to focus on in the walk-through are different for each situation, but the important thing is to have a plan of what to look for based on the matters at issue. Furthermore, a walk-through will provide you with certainty and a firm basis for negotiating the outcomes desirable to your business. Your family will live with the visceral effect of entering the property every day. Make the most of your walk-through before you buy, sell or lease your investment.
December 19, 2013
Navigating the Walk Through – Part I
From the moment the first person piled up rocks or rough-hewn timber to distinguish his farmland from the neighbors’, real estate has been visually-oriented. In the business of real estate, the walk-through of the premises provides you with an eyes-wide-open basis for due diligence and negotiation in sales, leases and dispute resolution. In the age of internet videos, Smartphone photography, Google maps, engineer drawings and online public land records, it is possible to learn much about a property without actually visiting it. However, real estate professionals still swear to the value of a real walk-through when your property is going through a transition. A photograph or video recording of a property may identify a desirable asset or potential problem without the time consuming task of driving to a location and talking a look. However, any kind of recording, photograph, drawing or description is at best a useful abstract of the property at a specific moment in time. If an entrepreneur desires to lease or purchase a property for purposes of operation of a unique business activity there, it is unlikely that a set of records could illustrate whether the property can fit her creative purpose. It is difficult to communicate with another party regarding a unique property concern without looking first.
Many buyers, tenants and lenders are drawn towards relying upon the representations of other people when entering into contracts. Business relationships do need trust in order to bear fruit. However, if someone insists that you make a decision without significant investigation, slow things down. The general rule in Virginia is caveat emptor –let the buyer beware. The law expects folks to be reasonably wary when it comes to entering into contracts. Further, once a party begins to conduct an investigation of matters underlying a contractual decision, the burden is on him or her to complete that investigation to the extent warranted by the situation. Of course, if the other party knowingly conceals a problem with real estate, the purchaser may have a basis to void the contract. After the fact, the burden of proving any kind of deceit would fall on the party suffering the harm. Generally speaking, the law expects parties entering into real estate contracts to do so reasonably self-informed about the subject property and the terms of the contract itself.
Part II of this post will explore the inspection process in more detail.