Texas Real Estate Blog

Is Good/Bad Faith Really An Issue In Contracts?

April 27, 2011
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I am often approached by clients to consider whether or not they can enforce a breach of contract based upon some sort of violation of an implied duty of good faith and fair dealing. Granted, most of these situations end up in the classic “he said -she said” /hearsay category, however, every so often, one actually  has a semblance of  merit. My initial review entails a thorough review of the contract in question to determine if I can find a breach of  some definite covenant or obligation of the defaulting party or possibly a violation of a specific representation and/or warranty. If  I cannot find a rep or warranty breach or a breach of a specific covenant, I am then relegated to the facts and the hope that my client’s version of the facts is clearer and more convincing than the other side’s. It’s really a classic scenario. Client gets raw deal or hosed on the financial end and, while there is no clear violation of the express terms of the contract, client is livid that other party has stuck it to them. So, absent a clear breech, does client have a case? Possibly –(how’s that for a legal response?).  This article addresses standard representations and warranties in most contracts, resolutions to the negotiation of same and ways to secure performance.SP-#3397075-v1-Purchase_and_Sale_Agreements_in_Troubled_Ti… However, the article also addresses the concept of good faith and fair dealing. This concept, which is usually not included in most contracts, certainly deserves a second (and third) look .

Speaking of bad faith and unfair dealing, I am sure most of you were aware of the threatened class action against Taco Bell, based upon allegations that Taco Bell’s “meat’ was slightly short of being real meat ( I am a fan of their bean burritos so I never gave it much of a thought). Well, despite the extensive and exhaustive research done by the plaintiff’s law firm, it was ultimately determined that the “meat” was (suprise-surprise) actually meat! Because of the horrible publicity, legal defense costs etc…Taco Bell has gone on the offensive against the Alabama law firm that started the mess. http://blogs.wsj.com/law/2011/04/27/on-fair-play-and-turnabout-taco-bell-might-sue-firm-that-sued-it/?mod=WSJBlog I don’t know about you but I am rooting for the Chihuaha on this one! Viva Taco Bell!

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Let’s Do a Deal?

April 19, 2011
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First, I must apologize for missing my post last week. I had  great excuse. I was golfing with clients. By the time i hit the ground running on Tuesday, I was so far behind in my work (yes, it happens from time to time) that I had to bag the post for the week. Nevertheless, I am back with my riveting expose on all matters that are real estate. As such, I decided to share an article with you on forming joint ventures (partnerships). I know, I know, who the heck is doing joint ventures these days? Well, frankly, nobody, but why should that stop us from revisiting all the principles, terms and conditions that go into a well drafted joint venture agreement. This article addresses the terms, conditions and issues generally addressed when developers and investors launch into the development of a commercial tract of real estate.SP-#3381858-v1-Partnerships_and_LLCs It’s titled this way for filing purposes but it refers directly to JV agreements. No matter what you call this relationship, make no bones about the fact that this is a partnership, pure and simple (well not that simple). When I advise a client who is all giddy about investing in this “can’t lose” deal,  I make sure that, before we dive into the deal points (which typically make no sense what so ever), I advise the client, based on my experience, that, before they launch into this endeavor, they need to understand that this is eerily similar to getting married. I expressly warn them (as to the partners themselves) that if these are not people with whom you would do this deal absent a written agreement , then you may want to seriously consider cooling your heals. Just like in any marriage, the adage (vow), “In Sickness and In Health” bears true for a business partnership. The only problem is that the health part is easy. It’s the sickness part (foreclosure, restructure or bankruptcy) that tests the true mettle of the relationship. If your prospective partners are the types that will stick with you through thick and thin then, by all means, go for it and use the JV agreement as a viable and workable pre-nup. But, if that is not the case then I gently advise them to run for the hills. Hopefully, I will able to dispense some of this valuable and sage advice in the near future.

Speaking of development, also attached is a cool tool for those of you, like me, who enjoy wasting loads of time on the internet. It is an interactive map that shows where the population is moving. http://www.forbes.com/2010/06/04/migration-moving-wealthy-interactive-counties-map.html Needless to say, Detroit may not be the best place for your next venture. Have a great week!


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What’s In a Site Plan?

April 4, 2011
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Believe it or not, one of the many documents I review at the inception of a development project is the Site Plan. It happens to be one of my favorite documents because it reflects the dream that the developer has for its project, not to mention minor things like reciprocal easements, utilities, set back lines and other minutia. As such, it is very important to pay special attention to the details of the plan from both the developer’s and tenant’s perspective because, once approved by the local authorities, it can be very difficult (if not impossible) to alter at a later date. There is usually a tremendous amount of work put into the preparation of the plan. Not only must it be drafted and re-drafted by the architect, it must also bear the scrutiny of local planning officials, commissions and, in many cases, the city council. So, I have included this  article which details  the basic  requirements and issues (current and future)that must be addressed when preparing the plan. Site_Plan 

Speaking about detail and preparation, close to this date, way back in 1867, a man by the name of Christopher Sholes invented a machine that would drastically change the way Americans communicate. This machine was known as the “typewriter”. It would provide women with a stepping stone into “business”. It would be the magic stone of hard-boiled police reporters and foreign correspondents and would be the antecedent of the word processor and the PC computer. It would be blamed for carpal tunnel syndrome.

However, the typewriter could not be blamed for “typos” until it was functional.  Sholes initially had all of the letters in alphabetical order. As a result, every time he tried to type, the hammers would jam together as they approached the ribbon. He tried ergo-mechanics because he thought that, possibly, the use of too frequently used letters was causing the jamming. So, he jumbled the letters up.  However, no matter how much he jumbled the letters, his proto-typists continued to jam the machine. In the end, he studied the hand movements of his typists and ultimately set the letters in a very difficult format to slow the typists and prevent the jamming. It worked. Unfortunately, Sholes ran out of money and had to sell his rights to the typewriter to the Remington Arms Company (who we hear had some success with the device).  Now you know the rest of the story! While all this time I thought the type setting was some insidious intent to cause me to flunk my high school typewriting class, there was actually a method to Shole’s madness. I just thank the Lord for spell check!


A Primer on LEED

March 28, 2011
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In this post, I am going to focus on an area of the real estate practice that, generally, no one likes to address. In  every major document used in a real estate transaction from loan docs to leases to sale/purchase agreements, the issue of environmental compliance must be discussed. Usually the documents require the delivery of environmental reports or set out detailed environmental reps and warranties on behalf of the borrower, tenant or seller, as the case may be. While it’s usually a boring topic, it is, none the less, extremely important to make sure there is environmental compliance by the parties because environmental hiccups are expensive tar babies. However, this post is not about the dark side of the environmental nightmare; rather, this post will focus on opportunities to developers to construct environmentally sound projects and, potentially, rake in some cash as a result thereof. To be perfectly honest, I have not had much experience with LEED certified projects as (we all know) development has been a little down over the past couple of years. However, whenever this market  comes back (and it will!), LEED compliant projects present an opportunity to developers from a strategic and economic standpoint.  This article is a primer on LEED compliance and benefits. A Primer on LEED It generally applies to multi-use projects but once you read the article you will get the idea. Whether attorneys and developers like it or not, LEED will be a major aspect of future developments as Cities and other governmental entities begin to adopt these requirements as part of their building requirements. Nevertheless, should developers involve LEED certified  real estate professionals in the process, they should be able to comply and possibly reap some economic benefits at the same time.

Speaking of a project that was not LEED compliant, on this date, in 1979, the struggle between human response and technology safeguards took a strange turn. It began with a sudden flash of lights and blare of alarms in a control room at a nuclear power facility on Three Mile Island. These alarms were warning that the water pump had shut down. The pump fed water into the steam generator. With no new water coming in, and the reactor core turning more of the existing water into more steam, the pressure began to build. Automatic safety devices sensed the pressure and began to shut down the nuclear reactor. The pressure remained high since the reactor cools slowly. So, the next auto safety device kicked in. It was a flow valve that drained some of the water and pressure from the hot water reserve tanks. However, this valve failed to close as designed. Not to worry. The computer detected the leak and turned on some pumps to replace the water. Enter the human factor and time to worry. Someone saw the tank refilled by the pump and overrode the computer, shutting the pump off. With the other valve still open, the water continued to drain and the core became exposed and overheated. The fuel jackets began to melt and nuclear pellets spilled into the water. Now we had a crisis.

While no one was ever killed at Three Mile Island, the media furor prevented the building of another nuclear reactor in the US for the next 32 years. Coincidentally, the hit movie “China Syndrome” had opened around the nation just 2 weeks earlier.


Don’t Fence Me In (Or Out)

March 21, 2011
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Whenever I represent a landlord or a tenant in a retail lease matter, I always come away with a better understanding of the “bottom line”, “end of the day”, “crux of the matter” perspective of each party in the transaction. In fact, while lease negotiations can be tedious and complex, the real fun comes into play when the parties get down to the “lick log” on what they really want and need for their respective operations. This always comes into play when we get past the mundane insurance and work letter provisions and launch right into exclusivity and radius clauses. These issues get very sticky because the parameters of these restrictions and covenants can, literally, make or break either party. For example, if a tenant is not protected by some form of exclusivity, it may very well find itself with a direct competitor in the center which would potentially dilute it’s customer base. On the other hand, if the landlord does not restrict the tenant from opening another operation within a certain radius of the center, it could risk the loss of valuable percentage rents or, worse yet, base rent it the tenant fails and opts to focus it’s efforts on the sister store.  This article Exclusive_Covenants_and_Radius_Clauses is a basic, but great summary, of the issues  landlords  and tenants must consider and address in this area. My point, at the beginning of this post, is  when we get to this part of the lease we really find out where the “rubber meets the road” because it is at this point we delve into the pure economics of the relationship and determine pretty quickly who has the leverage and who is just “blowing smoke”.  One of the best examples of the importance of these provisions has to be Subway. Subway just became the largest (in numbers of units) fast food chain in the world. http://online.wsj.com/article/SB10001424052748703386704576186432177464052.html Think about it. The next time you take your kids to a Subway, notice the make-up of the tenant mix in a center where a Subway is located. See many, or any, other sandwich shops? On the other hand, how far do you have to go to find another Subway if you don’t happen to like the decor of the one you are patronizing? See where I am going?  Therein lies the importance of these provisions. Eat fresh!!


The Art Of The Deal (“Negotiation Strategies”)

March 14, 2011
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With Spring (Hay) Fever in full bloom, I thought I might diverge from straight real estate talk this week and share with you an article that divulges some of the negotiation tactics employed by lawyer friends of mine.SP-#3359658-v1-Basic_Theories__Approaches_&_Techniques_of_… I thought this was a particularly interesting article because, after reading it, I finally woke up and realized that many, if not all, of these tactics had been used quite successfully on me. I will admit that, while these tactics are certainly permissable in most negotiations, a lot  of this is simply not my style as I prefer to treat opposing counsel and adverse parties with the same professional courtesy  as I would expect from them; however, it certainly is a good overview of strategies used by many of my colleagues. So, when your lawyer tells you that the other side is simply blowing smoke up you know where and has no real intention of killing the most important deal of your life you can rest somewhat assured that he/she has been down this road before or, quite possibly, read my post!

Speaking of blowing smoke, I could not resist sharing with you the ingenious tactics being employed by poor Charlie in his recently filed action against WB. http://www.law.com/jsp/cc/PubArticleCC.jsp?id=1202485762180&Sheen_Cites_Private_Attorney_General_Clause_in_Suing_Shows_Producers=&src=EMC-Email&et=editorial&bu=Corporate%20Counsel&pt=Corporate%20Counsel%20Daily%20Alerts&cn=cc20110314&kw=Charlie%20Sheen%20Tussles%20With%20a%20Frightening%20%27800-Pound%20Gorilla%27  Now I am beginning to feel sorry for his lawyers.


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Securing Lease Obligations-Double Edged Sword?

March 8, 2011
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I am acutely aware of the fact that any lease that can be inked in this economic climate is generally a huge deal and any attempt to shore up the lease with guaranties and other security measures is generally met with disdain assuming the tenant is in the catbird’s seat in the deal. However, this dilemma is a double-edged sword as I also know that requiring a tenant to provide additional security for a lease accomplishes two things. First, it certainly forces the tenant to become fully engaged in its business where it has risk and skin in the game and, second, it flushes out a lot of bad apples who simply want to take a flyer on the landlord’s property without the added incentive to perform. For example, one of the ways we, as attorneys, flush out serious clients is to simply ask for a retainer. The speed and willingness of the delivery (or lack thereof) of the retainer is a good indication of the credit worthiness of the new client. Clients who have balked at delivering retainers of any amount have generally treated payment of their legal bills the same way. As such, the concept also applies in a lease situation, especially where the landlord is forced to cough up funds for tenant improvements. So for your reading enjoyment, edification and as a sure cure for insomnia, following  is link to a well drafted article summarizing the various ways to secure the performance of a lease. Lease_Guaranties_and_Other_Techniques_ I think this is an excellent desk reference for any real estate professional who deals with leasing issues.

Now, speaking of swords in a historic sense, there once was a man named “Dionysius’ (let’s just call him “Dion”) who on, or about, this date in 385 BC  in Syracuse (Greece not NY) granted a famous wish. Apparently Dion was the all-knowing, all-seeing and all ruling tyrant of Syracuse. Dion had a servant named “Damocles” who continuously wore  him out about how lucky and privileged he was to live so regally. Well, after a few years of this incessant brown-nosing, Dion granted his servant a day of pampering. He was bathed, massaged, primped and preened for a full day with a massive banquet held in his honor at the end of the day. While he sat at the head of the table enjoying a bountiful feast, he noticed that none of his subjects would look him in the eye. All of a sudden, he looked over his head and there Dion had hung a massive razor-sharp sword which was dangling and swaying back and forth by a single horsehair. When Damocles tried to get up, Dion had him forcibly restrained and said,” My friend, Damocles how do you enjoy the role of tyrant?” Ergo, the phrase “Sword of Damocles” took a meaning that has lasted for over 2000 years. It actually has several lessons-don’t envy the other guy-death or anger may strike at any minute-and playing the tyrant is not really as rewarding as it may seem and may cost you friends.

While lease guaranties and the like may not rise to the level of a “Sword of Damocles”, I thought it was a pretty entertaining  story.


Lease Provisions That (“May”) Matter

March 1, 2011
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Whenever I represent a client in a transaction, I do my best to get the client to actually read the documents they are being asked to sign. However, how can I blame a client for glossing over provisions they don’t even understand? I have been known to punt whole paragraphs that even I did not understand to other attorneys (see last week’s post). So, this week I took a stab at identifying certain provisions of a lease that merit closer review, especially in the current real estate environment. This excellent summary, borrowed from a colleague and modified by me, emphasizes that some of the “boiler plate” provisions which are ignored in good financial times, are actually very important and can have a significant impact on the relationship of a landlord and tenant when the “you know what” hits the fan. SP-#3345547-v1-Ten_Lease_Provisions_That_Require_Attention_in_Today_s_Market_(w_picture) Of course, there are many other provisions that come into play as well (such as “use” provisions) but these are a good starting point.

It’s been a few weeks since I commented on marketing and sales. For those of you who are involved in business development for your firm or company, this article lends some encouragement for those hard to crack prospects.http://blog.aceofsales.com/blog/2011/2/26/selling-to-tough-customers-fence-sitters.html


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10 Key “Yawn” Insurance Questions For Leases (and other Contracts)

February 22, 2011
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I absolutely dread reading, and dealing with, the insurance provisions of leases and other contracts. My disdain for these provisions probably stems from the fact that I don’t understand them and have no standard by which to compare them to what is typically required or needed for the premises in question. However, I recently ran across an article that hits the high spots and gives good, practical and measurable ways to address the issues inherent in these provisions Insurance Basics for Landlords and Tenants As a practical matter, one of the first things I always do when reviewing a lease or other contract for a client (other than making them read the darn thing) is to copy the insurance section and have them forward that section to their own insurer for review and comment. Generally, their insurer will be able to shed some light on whether the provisions are reasonable, necessary and/or standard and, hopefully, offer a sensible and  economical solution for the client. In more complex real estate transactions such as those involving construction, I always lean on our construction/surety lawyers (and clients) for direction as these areas always seem to be in flux.

I can’t let this week go by without paying homage to “President’s Day”. I don’t care if you are politically liberal, conservative or somewhere in between  or otherwise, this is pretty funny3915_20110222_102410970


SNDA’s—-Gesundheit!

February 14, 2011
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A “Subordination, Non-Disturbance and Attornment Agreement” is an agreement that is executed between a lender, landlord and tenant as part of a lease transaction whereby, essentially, the tenant is protected from the termination of it’s lease upon a foreclosure of the lender’s lien (landlord’s loan). I address the SNDA in detail in my article found at SP-#3328973-v1-Visiting_and_Re-Visiting_Subordination__Non-Disturbance_and_Attornment_Agreements It’s an extremely important document because if the lease is subordinate (later in time) to the lender’s lien, a foreclosure will, in most states, extinguish the lease. While it’s always been an important document, it has received much more attention in our struggling real estate market due to the tenuous financial condition of many landlord’s. In fact, most leases simply require that the landlord deliver this agreement to the tenant at some point after execution of the lease. The problem with scenario is that this obligation is often an easily forgotten post closing item which does not raise its ugly head until there is a foreclosure of the tenant’s premises. In fact, I just finalized a lease transaction where we heavily  negotiated the SNDA because we were dealing with a Special Servicer.  Ergo– the landlord’s loan was in the process of re-structure and the potential for foreclosure in the near future was a real possibility. Best case is to get the SNDA executed and delivered by all three parties concurrently with the execution of the lease. That way everybody can go forward with warm and fuzzy feelings!

Speaking of warm and fuzzy feelings, today is a very special day in the hearts and wallets of every couple in love and CEO’s of greeting card companies and confectionery vendors (sorry for the image above–I could not resist!) The importance of this day, aka, “Saint Valentines Day” was hammered into my head over 20 years ago when, on the eve of a closing for one of my largest clients, I was forced to contact my bride and attempt to move our romantic dinner date to another night. She immediately informed me that I was to tell this “bell weather” client to go to “H-E double toothpicks”, because today was Valentine’s Day! Needless to say, I got the message.  Actually, V-Day was originally a religious holiday established by the Pope in 496 AD in honor of one or more Christian martyrs (Saint Valentine being the most notable). It was eventually deleted from the Roman calendar in 1969 by Pope Paul VI (unmarried of course) but remains a popular (to some) day on which lovers express their love for each other by presenting flowers, offering confectionery and sending greeting cards. Frankly, I celebrate V-day every day—just ask my wife!


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    Steve Watten


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