Articles Posted in Real Estate Law

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According to the American Land Title Association, the first reported private transfer fee covenant was created to pay money to the Sierra Club and the National Audubon Society in order to fund an open space preserve. Since then, developers and homeowners’ associations alike have borrowed the mechanism to generate a form of income that was previously unavailable. Over the past decade, private transfer fee covenants have been heavily used in California and Texas, prompting lawmakers to consider banning the provisions altogether.

In 2007, the Texas Legislature addressed private transfer fees in Section 5.017 of the Texas Property Code. The provision provides that a deed restriction on residential property that requires the buyer to pay a third party a fee in connection with his purchase of the property is unenforceable. However, the statute’s broad prohibition of private transfer fee covenants has a few major exceptions. Texas’ private transfer fee prohibition does not apply to 1) property owners’ associations, 2) certain not-profit organizations, and 3) governmental entities.

Texas’ approach is not without criticism. First, many argue that the law does not go far enough because it only applies to residential property. Commercial developers are free to include private transfer fee covenants in the deeds of commercial property. Second, private transfer fees are legal and enforceable if made payable to homeowners’ associations. Some find fees payable to homeowners’ associations to be less objectionable than fees payable to the developer. After all, the money goes to improve common property and maintain the premises. On the other hand, homeowners complain that they already pay homeowners’ association monthly dues. What gives the HOA a right to 1% of their home’s purchase price?

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Imagine buying your dream house and everything is going swimmingly. The closing date approaches, but you notice something odd in the paperwork. A “reconveyance fee” is listed as a deed restriction and requires all future buyers over the next ninety-nine years to pay one percent of the home’s sales price as a “transfer fee” to a homeowners’ association.

Over the past decade, thousands of Texas home buyers have found these strange “reconveyance fee” and “transfer fee” provisions in their dream home’s deed. Commonly referred to as “private transfer fee covenants,” these types of fees are completely foreign to most home buyers and sellers.

A private transfer fee covenant is a fee payable to a private third party (frequently the property’s developer or the local homeowners’ association) which becomes due every time the property is sold to a new buyer. These fees frequently purport to continue for ninety-nine years, and they are usually recorded in the county records or included as a covenant in the deed for every home in a new subdivision. The transfer fee is usually 1% of the final sales price, and either the home’s buyer or the home’s seller could be required to pay it.

If the fee goes unpaid, the private party who is entitled to the fee can obtain a lien against the property in the amount of the total unpaid fee, plus interest. The lien remains on the property and can create a cloud on the property’s title, which makes the property unmarketable.

If this system sounds crazy to you, you’re not alone. Many states have completely banned private transfer fees, and the federal government is also considering taking action. The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, recently proposed a rule that would prohibit Fannie, Freddie, and all federal home loan banks from investing in mortgages that carry private transfer-fee covenants.
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As a Texas real estate attorney representing buyers, sellers, lenders, developers, and occasionally brokers, in Texas, I have sometimes been accused of sounding like a broken record in advising my clients. My oft-repeated mantra is: “Read the document thoroughly, and then read it again”. Even if the document is one I have prepared for my client, it is essential that the client review the document to make sure it expresses their intentions. After everything is signed, it is often too late to ask questions. A recent Texas Court of Appeals case illustrates the perils of signing a contract without reviewing it thoroughly beforehand.In the case of ERA Realty Group, Inc. v. Advocates for Children and Families, Inc., the Texas Thirteenth Court of Appeals considered a commission agreement between ERA and a local advocacy group. The agreement was a preprinted form, with blanks filled in by typewriter by an ERA employee. As the Court explains: “The (agreement) contains a commission calculation if Advocates purchases property and also a commission calculation if Advocates leases property. No lease calculation is selected, although the number “6” is typed before the phrase, ‘% of all rents to be paid over the term of the lease.’ Clearly, the instruction to ‘check only one box’ was not followed because no box is checked. The agreement, therefore, can be read in one of two ways: (1) as providing for a lease commission because the number “6” is typed, or (2) as making no provision for a lease commission because no box is checked.” Because ERA had prepared the agreement, the Court construed the commission agreement against ERA and held that the agreement did not provide for a commission for leases.

As a result, ERA was not only denied it’s request for a commission, it was also ordered to pay $15,000.00 in attorney’s fees to the Defendant advocacy group. Actually, it’s hard to understand why ERA would bring a lawsuit based on this agreement, rather than simply admitting a mistake had been made and resolving to read those form commission agreements more thoroughly next time. The publicity from this suit probably hurt ERA much more than the commission would have benefited them had they won!

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One of the things I love about being a Texas real estate and development lawyer is that Texans are so open to innovative real estate developments. Practicing real estate and development law in Texas is great fun and very satisfying for this reason. A recent real estate development in Texas illustrates the point: co-housing, while not invented in Texas, has come to Texas. As a recent article by Bob Moos in the Dallas Morning News online entitled “Co-Housing Catching On in U.S.” explains, the first elder co-housing development in Texas is being built in Duncanville, Texas, called Wildflower Village.The members of the Village have been meeting together over the past two years to get to know one another, and to design their community. Some arguments have occurred, but they also meet socially to have fun as well. They like to arrive at decisions by consensus, rather than a “majority rules” vote. The development is limited to adults over 50 years of age. They plan to individually own their own single-story home. However, they will collectively own a common building that will have a gourmet kitchen, dining room, living area, home theater, craft room and two guest bedrooms.

This is an incredible concept and I wish them all the best of luck. They have gotten to know each other before they even hired a builder or an architect, and so have created a community for themselves, meaning “community” in the sense of a village with neighbors and friends, not just buildings. For more information, visit their website.

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I have represented developers and investors in Texas real estate developments for over thirty years. I have been blessed with clients who are fabulous people to work with, and Texas development law is always challenging and interesting. There is one thing that is guaranteed to make both my clients and I tear our hair out however: arbitrary and capricious municipal governments and code enforcement personnel. They are not all that way, by any means: most Texas city government officials and personnel are highly professional. However, if you practice development law in Texas long enough, you will find that the few bad apples cause you more effort than all the others combined.

There is a game some municipal governments play called “Yes, that’s what we promised then, but it’s different now”. The case of Continental Homes of Texas, L.P. v. City of San Antonio, decided recently by the Texas Fourth Court of Civil Appeals in San Antonio, illustrates what I mean. In 2002, the owners of a ranch, (located outside the San Antonio city limits but within its extra-territorial jurisdiction), received a “Vested Rights Permit” in return for giving the City a parcel of land for a gas metering station. The Permit had an effective date of 1991 and basically said that the ranch would be subject only to City ordinances and rules as of 1991, and not any passed thereafter. Importantly, the Permit had no expiration date.In 2003, the City passed a Tree Preservation Ordinance, which required developers to, among other things, request a permit from the City Arborist before cutting trees, and to perform mitigation (i.e., plant new trees) if trees were going to be removed. In 2005, Continental bought part of the original ranch, and submitted a Master Development Plan to the City. The Plan was approved, but in a side letter, the City told Continental that Continental’s Master Tree Stand Delineation was rejected, and further noted that the project will be subject to the City’s Tree Preservation ordinance. In 2006, while Continental was clearing at the site, it was served with a temporary restraining order obtained by the City, stopping all work on the grounds that Continental was violating the Tree Preservation Ordinance.

The City argued that the Vested Rights Permit had become “dormant”! The trial court decided for the City. The Court of Appeals reversed the trial court decision, and quite rightly held that the Vested Rights Permit controlled, and since the City’s tree ordinance was passed after the date of the Vested Rights Permit, the tree ordinance did not apply to this property. Appropriately, the City had to pay Continental’s attorney’s fees. If I were a San Antonio taxpayer, I would be furious that my tax dollars financed a suit like this!

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As a Texas real estate lawyer representing developers, builders and investors in Texas, I have found that my clients benefit from the availability of “alternate dispute resolution” remedies in their contracts. These remedies, such as mediation and arbitration, can result in satisfactory outcomes to disputes, without the cost of extended litigation. A recent Texas Supreme Court case illustrates that the contract remedy of arbitration can be waived, however.

In the case of Perry Homes, Inc. v. Robert and Jane Cull, the Culls sued their homebuilder for structural and drainage defects in the home built by Perry Homes. Initially, Perry Homes requested that the dispute be submitted to arbitration, but the Culls resisted. A ruling was never obtained by either party from the trial court on whether the case must be submitted to arbitration. The Culls then engaged in a course of extended (and expensive) discovery for 14 months. Four days before trial, the Culls requested that arbitration be ordered. The trial court ordered arbitration, and the arbitration resulted in an $800,000.00 award to the Culls.The Texas Supreme Court states that: “(the Culls) got extensive discovery under one set of rules and then sought to arbitrate the case under another. They delayed disposition by switching to arbitration when trial was imminent and arbitration was not. They got the court to order discovery for them and then limited their opponents’ rights to appellate review. Such manipulation of litigation for one party’s advantage and another’s detriment is precisely the kind of inherent unfairness that constitutes prejudice under federal and state law.” As a result,the Texas Supreme Court set aside the award, and sent the case back to the trial court for a trial, on the grounds that the Culls had waived their right to arbitrate this dispute.

While arbitration is often less expensive than discovery and trial, it has some downside: discovery and the scope of appeal is substantially limited in an arbitration proceeding. That’s why it is faster and costs less. The moral here for clients and lawyers: the case should be analyzed in the beginning, to determine whether trial or arbitration is the best remedy. Once you embark down the path of discovery and trial, the arbitration door is going to swing shut!

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As a Texas attorney representing both builders and construction companies in Texas on one hand, and Texas consumers of construction services on the other, I have had occasion to litigate a number of cases in which construction defects were the central issue in the case. I learned long ago (because I had some great mentors when I was a new lawyer), that when I represented a Plaintiff in a suit to recover damages for a construction defect, the claim should be characterized as both a breach of contract as well as breach of warranty. It always seemed redundant to me, but a recent case illustrates that it may not be. Consider the case of Medical City Dallas Ltd. v. Carlisle Corporation, decided recently by the Dallas Court of Appeals and subsequently heard by the Texas Supreme Court.

Medical City purchased a membrane type roofing system from Carlisle Corporation. Within a short time, the roof began to leak. Initially, Carlisle performed repairs. When the repairs appeared not to cure the leaks, Medical City obtained the advice of a roofing expert, who examined the membrane and determined that it was failing. Medical City requested that the roof be replaced, and when Carlisle failed to respond, this litigation ensued.The opinion of the Dallas Court of Appeals held that a breach of warranty was different than a breach of contract, and in particular, a breach of warranty did not support an award of attorneys fees to the damaged party, even though the Texas Civil Practices and Remedies Code Section 38.001 clearly allows the injured party in a breach of contract case to recover attorneys fees. Since Medical City’s pleadings contained only a claim for breach a warranty, the Dallas Court of Appeals held that it could not recover attorneys fees, only its damages.

The Texas Supreme Court opinion reversed this decision, and concluded that since a written warranty is a type of written contract, Texas Civil Practices and Remedies Code Section 38.001(8) supports an award of attorneys fees for breach of a written warranty.

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Texas attorneys representing developers, homeowners and contractors, and in fact any attorney who is drafting a contract for a client, should make note of a recent case by the 4th Court of Appeals in San Antonio, Texas.

In the recent case of San Antonio Properties L.P. v. PSRA Investments, Inc., the Seller of an apartment complex was held liable for fraud for its representations as to the financial condition of the apartments, even though the contract of sale contained language that the Buyer agreed to “…accept the Property in its current condition, as is, after having inspected the Property to Buyer’s satisfaction.” The evidence showed that the Seller had provided the apartments’ operating statements to the Buyer, but had omitted from those financial documents the substantial amounts spent by the Seller in capital expenditures and repairs.The resulting operating statement (minus the capital expenditures) showed that the apartments made money. When the capital expenditures were added back in, the apartments lost money. The Court held that the “as-is” clause in this contract did not prevent the Seller from being liable to the Buyer for fraud due to the intentionally inaccurate financial documents provided to the Buyer. The Court notes that “…even sophisticated buyers have the right to rely on the veracity of the financial information provided to them by the sellers.”

I often see Texas real estate attorneys and their clients placing a great deal of reliance on the “as-is” clause in their contracts. This case suggests that this reliance may be misplaced, and will certainly not be a shield against actual deception.

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I have served as an attorney representing both rural water companies and real estate developers in Texas for quite a few years. Very often, my representation involves negotiating “nonstandard service” contracts. These are contracts governing the conditions, terms and costs under which a rural water company will extend water service to a new development. At best, there is a bit of built-in tension between the two groups: real estate developers are appropriately mindful of their bottom line and want to minimize the costs and restrictions of obtaining water service, while rural water companies have legitimate concerns that their capital costs will be paid and that some amount of warranty service is covered. I emphasize to all my clients, whether they are real estate developers or rural water companies, that their agreements must be reduced to writing, to insure there is no misunderstanding in what can very often be a complex negotiation.A recent case, BCY Water Supply Corp. v. Residential Investments, Inc., illustrates the pitfalls when one or the other of the parties involved takes action based on (often misunderstood) oral statements. This case, decided by the 12th Court of Appeals in Tyler, Texas, involved a small rural water company serving Anderson County, Texas. The Plaintiff was a real estate developer who was the considering the purchase of a small tract of land within the water company’s service area. The developer came by the water company’s office, and visited with the water company’s bookkeeper and maintenance man. The developer questioned the maintenance man about the availability of water for the property the developer was thinking of buying. According to the developer, the maintenance man said that there would be “no problem” getting water service to the property. The maintenance man, on the other hand, testified that the developer requested a single meter at the property, and that he told the developer that, while he did not see a problem serving a single meter, all requests for service had to be directed to and approved by the board of directors and that the board might require capital improvements before service could be approved. The developer bought the property, and when he applied for service, the board of directors of the water company told him that he would have to install a new line prior to water service being supplied. The developer claimed that the representations by the maintenance man were negligent and sued the water company for denial of service.

The Court of Appeals held for the water company, ultimately. However, this litigation probably cost this small rural water company and its members dearly. The decision represents something I emphasize often to my rural water company clients: educate all your staff, whether office staff, maintenance people or operators, that whenever someone asks about the availability of water, always, and I mean always, tell them that they will have to talk to the manager of the company or the President of the board of directors. Do not guess, do not speculate and do not surmise. The maintenance man for this company was probably just trying to be helpful to this developer, and a lawsuit was the result.

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As a real estate and development attorney in east Texas, I have represented Texas property or homeowners associations (HOAs) on quite a number of occasions. My legal services for my homeowner association clients have ranged from preparation of corporate documents and restrictive covenants, to mediating disputes, to overseeing annual meetings, to filing and collecting assessment liens, to litigation to enforce deed restrictions. As any lawyer who has represented HOAs knows, few things engender as much conflict and heated debate as interpretations of restrictive covenants among the members of the HOA. A recent case illustrates this situation.

In Jennings v. Bindseil, the Texas Court of Appeals in Austin considered just such a dispute. The neighborhood in question, in rural Comal County, Texas, had restrictive covenants in place. One of the restrictions prohibited mobile homes. The Defendant, Jennings, purchased a modular home, which was delivered in sections and assembled on Jennings property. The other members of the HOA cried foul, claiming that a modular home is the same thing as a mobile home, and sued Jennings for the removal of the structure.

The Court considers that modular and mobile housing (the term “mobile”, as the Court notes, has been replaced by the term “manufactured” housing) are governed by different codes, differ as to their foundation requirements (modular houses must be placed on a permanent foundation) and in titles (titles are issued for mobile homes but not for modular housing). Because the case had been decided in the trial court on a motion for summary judgment (in other words, there had been no evidentiary hearing as to the details of the Defendant’s house), the Court of Appeals reversed the summary judgment against the Defendant and sent the case back to the trial court for an evidentiary hearing.This case illustrates what happens when older deed restrictions (drafted and filed before modular housing became widely available) come up against more recent technology. The truth is, mobile or manufactured housing is different from modular housing in many ways. However, while there is high end modular housing that is quite tasteful, some modular houses look not much nicer than manufactured or mobile homes, and are sometimes made of the cheapest of materials. If the other owners in this subdivision had spent substantial amounts of money on site-built homes, and the Defendant’s home was of the cheap variety, it is understandable why they would be upset. The lesson for HOAs and their attorneys is clear: review your deed restrictions or restrictive covenants periodically, and update them to keep up with changing technologies.