Month: February 2021

Will Landlords’ Casualty Paragraphs be a hot issue for Second Avenue businesses? (It looks like they already are.)

The real estate market has been so hot in Nashville over the past 6-7 years that, any time an old building in an in-demand area burns down, I’ve wondered if the culprit was a crafty real estate developer looking to build a high-rise condo. (Kidding, of course.)

But, as matter of law, a disaster can provide a landlord a way out of a long-term lease (whether they’re happy to be out or not), where the premises are fully destroyed.

I thought of this today, when reading the Nashville Post article Old Spaghetti Factory loses lease after 40-year run. Per local news, after total destruction of the building on Second Avenue, the landlord “will be terminating the lease agreement, although the restaurant reportedly has 16 years remaining on that lease.” The article notes that the restaurant is offering to spend more than $1 million of its own money to help rehab the space.

Seems unfair, right? It may be, but it’s probably allowed under the Lease.

Most commercial leases have a “Casualty” section, which dictates what happens when rental premises are totally destroyed, whether by fire, earthquake, or some other huge event.

Those provisions generally require the Landlord to restore the premises to substantially the condition that existed prior to the disaster. If the Landlord does that, then the Tenant is most likely stuck in the Lease. (Yes, even if losing the use its rented space during the repair period kills the Tenant’s business.)

Having said that, the provisions also generally give the Landlord an “out,” if the destruction is so total that the premises can’t easily be restored. In making this determination, a number of factors are considered, including if the cost to restore the building exceeds the ultimate value (and/or insurance money), if the Landlord’s lenders scoop up all the insurance money, the lease is near the end of the term, or if would take too long to restore (180 days from the event is a common measure).

In most cases, the landlord is motivated to repair or rebuild quickly, hoping to get the tenant back in the space–and back paying rent–as soon as possible.

There is no indication in the story whether the landlord here is relying on a similar provision or what types of other issues exist.

It may be that the cost to restore this historic building is so high that the landlord can’t (or isn’t financially ready to) quickly go into rebuilding mode. If the lease uses a typical 180 day requirement, the owner may know that there’s no way to do it in that time with all the special challenges presented by this terrorist event and during a global pandemic.

A skeptic would wonder if this owner wants to renovate a building to a newer, better use (like condos, offices, etc.) or may want to get rid of a long term–possibly below market–lease.

Leases are just like any other contracts. The plain text of their terms control. But, casualty provisions are a rarely negotiated point. When I prepare leases for commercial real estate, it’s often a few paragraphs at the end that I review quickly and move on.

But, when they do apply, it’s a big deal. Just like COVID got every Nashville commercial real estate attorney talking about force majeure, maybe this situation will get us negotiating casualty paragraphs.

In the end, though, yes, this is probably allowed under the lease.

Tennessee is set to increase homestead exemption in 2021

The Tennessee Legislature is, again, considering debtor-friendly changes to the homestead exemption statute.

The one most likely to pass is House Bill 1185, which seeks to increase Tennessee’s homestead exemption from the existing $5,000 to $35,000 for single homeowners and from $7,500 to $52,500 for jointly owned property.

Before you complain too much about that proposal, consider Senate Bill 566, which provides an unlimited exemption for a judgment debtor’s residential real property (and, after the debtor’s death, it passes to the heirs).

Similar proposals were made in 2019, in 2020, and also in 2012 (and a number of times in between). So far, all such efforts have failed, but I believe this is the year that the Tennessee homestead exemption is increased.

Back in 2019, I talked about the importance of exemptions for debtors, since exemptions can preserve and protect a basic necessity level of assets for debtors (picture the clothes on their back, a few thousand dollars in the bank, a car, tools).

As I wrote in 2019, though, “if this new law passes, the downfallen debtor can keep 100% of the equity in his $750,000 house entirely out of the reach of creditors.” I then said:

Wait a second. Is this law designed to protect downtrodden debtors seeking a fresh start in life (who very probably do not have high value real property at all) or, maybe, is it designed to protect high income individuals whose businesses fail?

Because that’s all this proposed law does. It grants fairly absolute protection to the high value real property owned by judgment debtors in Tennessee, and all the garnishments, levies, liens, and bankruptcies will never touch a penny of that equity.

I feel the same way about these new proposals. If we’re talking about protecting the working poor and preserving the necessities of life from garnishment, let’s start somewhere other than $750k of equity in a mansion. Let’s talk about debt relief measures, eviction support, access to justice, etc.

But, these new laws aren’t about basic necessities of life for poor people. Most poor people don’t live in lien-free mansions. Instead, these new measures are being lobbied for by the construction industry.

These are bad proposals. Unless you’re a debtors with big, lien-free McMansion. Then, sure, it’s a great new law.

Bankers: Are your Judgments expiring?

Tennessee judgments expire after ten years.

All those judgments you took during the Great Recession are coming up for renewal. If you don’t affirmatively ask the court for an extension, they just go away.

And, all those builders, contractors, investors, and so many others who were broke in 2010/2011 but who turned things around when Nashville real estate, business, and construction boomed in 2015 (and beyond)?

They’ve been waiting. Hoping that you’d forget about them. Hoping that you’d do nothing to renew your judgment.

Part of what makes this Creditors Rights blog so popular is that I keep it an objective discussion of the law. You don’t see me use it to solicit business. (Well, overtly.)

But, for today, I’ll say this: If you have a box of judgments that you haven’t touched for years…Call or e-mail me immediately. There may still be time.

I’m seeing it happen every day. Big judgments are expiring, and debtors are ridding themselves of millions dollars’ worth of judgment liens.

Once upon a time, the creditor probably got frustrated by the dead-ends (or maybe the expensive lawyers spinning their wheels while billing by the hour). Those old files got put in a file cabinet. Maybe the banker switched banks. Maybe the bank got sold.

But, if you don’t dust off those old files, you are probably leaving money on the table. If you haven’t looked at those old files lately, it may be too late.

Reformation may save you, but tech experts warn against “cut and pasting” document automation

During her presentation on legal tech at the TBA’s 2020 Creditors Practice Forum, Lori Gonzalez conducted an audience poll on what document-automation technology everybody was using.

The creditors’ bar must be an old-school crowd. Overwhelmingly, the most common practice was to: (1) find a similar existing document on your system in Microsoft format; and (2) cut-and-paste the old terms in the forms to match the new terms.

Lori told everybody to stop doing that.

In a recent decision, the Tennessee Court of Appeals explained why. The case is Franklin Real Estate Group, Inc. v. Spero Dei Church, No. M2019-01691-COA-R3-CV (Tenn. Ct. App., Jan. 27, 2021).

There, a real estate broker was working with property owner to sell their church building. Later, the owner asked the broker to, also, assist them in finding a property to buy.

The broker was smart to recognize the need to get a signed “seller’s” agreement; but, in preparing it, the broker “used language from the Seller’s Agreement as a template, simply substituting ‘Seller’ for ‘Buyer’ where appropriate to make the Agreement conform to a standard buyer’s agent agreement.” A classic cut-and-paste document creation.

As the legal tech experts said can happen, the broker missed a cut and paste. And, it happened in a very important paragraph–the one that defined the situation where the broker would get paid. Due to error, the final version awarded a broker a commission only where the Buyer bought a property from a “Seller/Landlord who has been introduced to the property…by Broker.”

It’s such non-sense that you almost read it the way it should have been written, but, in short, the broker would get paid if the client-Buyer bought a property from a Seller who was introduced to his own (the Seller’s) property by the broker. So, basically, if the broker found a Seller who didn’t know they owned the property and the broker was the one to tell the Seller about their property, the broker gets paid.

Total non-sense, and it’s inconsistent with the broker and client’s contemporaneous emails about the engagement.

You know how the rest of the story goes. The buyer ended up buying a property that the broker assisted on, but, for many reasons, didn’t pay a commission.

In defense, the buyer argued that the provision was drafted so poorly that it was unenforceable–that it was “void for vagueness.” The Court noted that “[i]t is a fundamental rule of law that an alleged contract which is so vague, indefinite and uncertain as to place the meaning and intent of the parties in the realm of speculation is void and unenforceable.” See Four Eights, L.L.C. v. Salem, 194 S.W.3d 484, 486 (Tenn. Ct. App. 2005).

But, while the Court agreed that the provision was “illogical,” it went on to find that the rest contract is certain and clear, except for this one provision, which is merely “the result of a mistake.” Instead, the Court decided, the real question is “whether the mistake ..is subject to reformation so that the contract conforms to the true intention of the parties.”

Courts are to enforce contracts as written, but “the law’s strong policy favoring the enforcement of contracts as written must occasionally give way and grant courts the power to alter the terms of a written contract where, at the time it was executed, both parties were operating under a mutual mistake of fact or law regarding a basic assumption underlying the bargain.”

This is called reformation, which seeks “to make the contract conform to the real intention of the parties.” The elements are:

(1) the parties reached a prior agreement regarding some aspect of the bargain; (2) they intended the prior agreement to be included in the written contract; (3) the written contract materially differs from the prior agreement; and (4) the variation between the prior agreement and the written contract is not the result of gross negligence on the part of the party seeking reformation.

The Court then considered many factors, including the the purpose of parties’ overall transactions, relationship, and related communications about the contract.

When I looked at the elements, though, I wondered about “gross negligence.” I mean, if missing a critical word in a contract that you drafted isn’t that, then what is?

The Court addressed that issue head on, finding that the drafting error was not “gross negligence.” The Court wrote, errors resulting from “inattention” are not “categorical exemption[s]” to reformation. If drafting errors were exceptions, then reformation would never be available to correct typographical mistakes.

In the end, it turned out fine for the broker, after, of course, years of litigation.

Listen to Lori on this point, consider a more advanced technology for your document automation. Because no lawyer wants to have to defend their work as “sure, it’s inattentive, but…”