New Chancery lawsuit spotlights struggles for Airbnb companies in Nashville

As you’d expect, COVID-19 and the related travel restrictions have had a catastrophic impact on the travel and hospitality industry. In Nashville, rental income for once wildly-lucrative Airbnb properties evaporated in an instant.

Consider Stay Alfred, a hospitality start-up based in Spokane, Washington that had 2,500 units in 33 cities, which closed its doors in April and is now subject to a receivership action.

In Nashville (and in Memphis), Stay Alfred had a number of buildings where it controlled nearly all the units, such as the shiny 505 Tower in downtown Nashville, as well as other prime locations in both cities. By April, Stay Alfred had left those buildings entirely.

Now, it appears that Sonder USA, Inc. may be headed toward a similar fate. Sonder manages over 12,000 rental units in 28 cities, generally for short and medium term rentals. In its most recent efforts to obtain private equity, Sonder provided a valuation of $1.3 billion.

Yesterday, in Davidson County Chancery Court, a Georgia developer filed a breach of contract lawsuit against Sonder over its failure to take possession of 101 units in a residential building in Nashville’s Hillsboro Village, located at 1620 21st Avenue South.

In this deal, the Plaintiff-developer agreed to purchase the 101 units in December 2019, many of which were already rented out to long term tenants. As those existing tenants either left or were forced out, the developer would then lease those units to Sonder, which Sonder would then manage as short term rentals. Under the Lease, Sonder would pay the developer annual rent of “$2,641,387.32.”

What could go wrong in Nashville real estate in 2020, right?

Per the Complaint, in April 2020, when Sonder was scheduled to take possession of the first batch of units, Sonder immediately went into default. Sonder claimed defenses of force majeure and impossibility of performance and frustration of purpose.

When Sonder failed to take possession or pay, Plaintiff filed this action, seeking $2 million in current and future rents. This is going to be an interesting case, since the parties seemed to go into this venture, jointly, in December. If so, then why does all of the risk shift to the lessor-defendant? Does the nature of the business relationship mean that Plaintiff and Defendant both should bear the risks?

I live in Hillsboro Village, so this one is a bit personal for me. This is my neighborhood, which is a bustling area of families, Vanderbilt workers (school and hospital), and college kids. It’s a residential community, not a vacation or party destination.

Housing is scarce. And getting more and more expensive.

As somebody who has lived in this neighborhood for over ten years, it’s irritating that these out-of-town companies created a business model to convert limited, scarce housing assets into STR properties by forcing residents out of their leases and out of the building.

Think about if you’re a grad student or doctor at Vandy, and you love your apartment. It’s right there next to your school/work, next to Luke Bryan’s steakhouse (which really is delightful), and next to Dragon Park. Sounds great, right? But, when you get to month 10-11 of your lease, you get a notice from the new owner that they want you out; the entire building is converting to vacation rentals.

I’m sure the developer would say that the “market dictates the highest and best use of property.” Let’s hope our new economy sends its own message to these opportunistic developers who want to convert our residential space into a hotel / vacation rentals. One that our local government is clearly afraid to send.

Maybe an empty building where all the long term tenants were forced out will send that message.

For what it’s worth, that message may have been received. As of the time of this posting, a great number of the units in Village 21 are now available for long term leases.

Davidson County Chancery Court has scheduled an actual trial that will be conducted via Zoom.

Mark your calendars: On April 28, 2020, Chancellor Lyle of the Davidson County Chancery Courts has scheduled a trial to be conducted via Zoom! (Full text: Lyle Order re Zoom trial).

For the past 5 weeks, Tennessee courts have been closed for most in-person proceedings, but, during that time, many courts have conducted telephonic or video “non-evidentiary” hearings. This is the first instance that I’m aware of that a civil court is conducting a real bench trial with witnesses and exhibits.

The underlying facts are interesting, from a creditor’s rights perspective.

The lawsuit seeks a declaration of the validity of a mechanic’s lien asserted on a Gulfstream GV  (a/k/a a “G5”) private jet, via both a recorded lien in the Davidson County Register of Deeds and with the Federal Aviation Administration Registry.  Per the Complaint, the plaintiff bought the jet from an actual Sheikh.

gulfstream g5(Note for the non-Sheikhs out there: Retail value for new G5s can be between $36MM and $48MM).

The Defendant / lien-claimant is a marketing firm in Kentucky that claimed a mechanic’s lien on the jet for sales marketing services provided to the Sheikh.

(I’ll reserve my thoughts on the validity of a mechanic’s lien when no actual physical improvements are provided, but I will note that, generally, the lien claimant has to show actual improvements to the property. Cases on aircraft liens have held that “gas for refueling” doesn’t even qualify, since gas doesn’t provide an actual improvement to the aircraft.)

This one will be really interesting, both substantively and procedurally.

 

 

COVID forces old-school lawyers to embrace new technology

Tennessee Courts get yanked into the 21st Century. This week, I’ve had two telephonic court hearings.  They’ve both been a little strange.

On one, I called the Clerk’s office, who then gave me the Judge’s cell phone number. When I called the Judge on her cell phone, she was pretty clearly on a walk outside.

On the other, the court set up a call-in line for the docket call, with about 25 attorneys waiting for their specific matter to be called. When my matter was called, about 6 attorneys all spoke at once.

When my matter was over, I stayed on the line and listened to the next argument (on mute) to see how it flows and to plan for when I have to conduct my own complicated hearing. I learned that there is definitely an art to effective presentation via a phone call.  Also, it was weird, just silently lurking. A Bloomberg news reporter listened in on a similar court hearing, and she described it as “uncomfortable and oddly voyeuristic.”

I think all this can be figured out, but there’s definitely going to be learning curve.  The Tennessee Supreme Court conducted oral arguments via video this past week, and those went well.

Although, if I were one of the lawyers arguing, I would have 100% had to stand up for my presentation.

tn sup cort

Personally, I’m not looking forward to more telephone or video hearings. I go to court a lot, and there’s so much you pick up by physically present in the courtroom, whether it’s a good read on the judge’s demeanor that day, on opposing counsel, or just the ability to be physically present when you’re making a huge argument for a client.

There is simply so much that goes into oral argument, and there’s so little of that in a phone call.

Zoom. Maybe we don’t need to see each other.  Speaking of how technology maybe doesn’t always make things better, when all this first hit, everybody wanted to do a Zoom call. But, then, after a week of seeing the decorations in everybody’s guest bedroom, we sort of figured out that all this could have been done via conference call.

Personally, I can’t decide where I look: at who is speaking; at myself (which I’m usually doing); or directly at the camera. Bonus points to the participants who just leave their camera off the whole time.

Either way, I guess I fall in the middle on this app. In some situations, it makes sense to be able to see the person and get a read of their social cues or to establish a rapport. For example, I represent a large class of clients on a matter, and I like to communicate with them via video so they can see me and my team.

Slack.  I acknowledge that I sound like a curmudgeon.  So, to counteract that, I’ll provide a whole-hearted endorsement of Slack, the real time messaging platform.  It seems like a really effective and well-done way to manage work teams.

Side-note: If you’re navigating all of this, I can’t recommend the Lawyerist website enough, as well as the Lawyerist podcast.  It’s run by a group of very smart lawyers, and they constantly talk about remote work, law firm management, and law tech and innovations.

I really enjoy all that they do on that site to educate lawyers.

New Developments versus Custom and Habit. It’s hard to tell how much of this is temporary or here to stay. Some part of that answer will depend on the Court leadership forcing all counties to fully embrace the new rules, policies, and technology.

Yesterday, we were figuring out how to get a garnishment form notarized with all of us spread out over town.  One of the lawyers on the e-mail chain correctly pointed out that Tenn. R. Civ. P. 72 and the brand new Supreme Court Orders allow for /e/-signatures and declarations in place of a notarized signature.

This was a garnishment, though, in a very small county, one that probably hasn’t read the Order from last week, and where the front desk clerk would take one look at the form, see the lack of a notarized signature, and potentially reject the filing.

This is what makes collections so different than other aspects of the law. Once you get the judgment, instead of dealing mainly with a judge, you’re mostly dealing with court clerk staff. You can be technically and legally correct, but, if you don’t follow their habit and custom?

Long story short, we got it notarized. Our goal wasn’t to be right. It was to get our garnishment issued.

My hope for all of this is that the Administrative Office of the Courts establishes a commission to look at all these issues and to anticipate as many of these issues that could arise in the future. And I hope that they don’t just pick the usual same people from the usual same big law firms to participate. Those lawyers don’t talk to clerks. They don’t file e-file documents. They don’t go to court on all kinds of matters.

The decisions that are being made today may set the policies and procedures across the state for years, and it’ll be interesting to see what changes implemented during this pandemic become the new custom and practice.