Texas Law Defines Real Estate-Specific Fraud, and Contains Meaningful Remedies for Defrauded Victims

San Antonio Texas Real Estate Attorney Trey Wilson wrote:

Real estate fraud is so prevalent in Texas that our lawmakers enacted an individual statute dedicated to defining fraud, and setting forth the remedies available to victims.  The statute is often overlooked because it is not in the Texas Property Code, but rather, is nestled away in Chapter 27 of the Texas Business & Commerce Code. 

The statute -- located at Section 27.01 of the Texas Business & Commerce Code -- was originally adopted in 1967, but amended in 1983 to provide more "teeth." Violations of the statute are frequently referred to as acts of "statutory fraud," in contrast to more "traditional" types of fraudulent representations, which are generally characterized as "common law fraud."  Many lawsuits arising from fraudulent behavior in a real estate transaction (whether by active misrepresentation or failure to disclose) allege both "common law fraud" and "statutory fraud." 

Section 27.01(a) defines fraud "in a transaction involving real estate (or stock...)" as consisting of:

(1) false representation of a past or existing material fact, when the false representation is
(A) made to a person for the purpose of inducing that person to enter into a contract; and
(B) relied on by that person in entering into that contract; OR

(2) false promise to do an act, when the false promise is
(A) material;
(B) made with the intention of not fulfilling it;
(C) made to a person for the purpose of inducing that person to enter into a contract; and
(D) relied on by that person in entering into that contract.

As is clear from the plain language of subsection (a), the statute is implicated only in those instances where falsehood is material, made for the purposes of inducing entry into a contract, and actually results in entry into a contract involving real estate.

Subsection (b) declares that a person "who makes a false representation or false promise commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for actual damages." Though not referenced in the statute, Texas law defines "actual damages" as both "direct" and "consequential" damages. Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 816 (Tex.1997); Henry S. Miller Co. v. Bynum, 836 S.W.2d 160, 163 (Tex.1992) (Phillips, C.J., concurring).

Subsection (c) applies to situations where a person commits fraud (as defined in subsection (a)) "with actual awareness," and prescribes "exemplary damages" (also commonly referred to as "punitive damages") for such conduct. Subsection (c) further provides that "actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness." This reduces the victim's burden of proving the mindset of the fraudster.

Subsection (d) contains what I like to call a "derivative liability element," meaning that fraud can also occur by knowing complicity with another person's fraudulent conduct. This subsection provides that "a person who (1) has actual awareness of the falsity of a representation or promise made by another person and (2) fails to disclose the falsity of the representation or promise to the person defrauded, and (3) benefits from the false representation or promise commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages." As with subsection (c), "actual awareness" of someone else's fraud under subsection (d) "may be inferred where objective manifestations indicate that a person acted with actual awareness."

Subsection (e) of the statute contains some of the real "teeth" and allows a victim who has been defrauded under the statute to recover the following damages (in addition to the damages defined in subsections (a-d))

• reasonable and necessary attorney's fees
• expert witness fees
• costs for copies of depositions, and 
• costs of court.

If you have been a victim of real estate fraud, and have entered into a contract for the purchase, sale or exchange of real estate, you should contact an experienced real estate lawyer who understands the Texas laws pertaining to the rights and remedies of defrauded victims.  While the statute described in this post provides meaningful remedies, its elements can be challenging to prove.

New TAR Forms for Residential Leasing, Management, Seller's Disclosures and Others Take Effect on January 1, 2014

San Antonio Texas Real Estate Attorney Trey Wilson wrote:

The Texas Association of Realtors has revised many of its existing forms and released other new ones, which take effect Jan. 1, 2014. Among the revised and new residential and property management forms are:

•  Residential Lease – TAR 2001
• Residential Lease Application – TAR 2003
• Pet Agreement – TAR 2004
• Extension of Residential Lease – TAR 2005
• Residential Lease Inventory and Condition Form – TAR 2006
• Residential Lease for a Multi-Family Property Unit – TAR 2011
• Residential Leasing and Property Management Agreement – TAR 2201
• Addendum for Authorization to Act for Owner Before Owners’ Association – TAR 2205
• Notice Terminating Right of Occupancy – TAR 2208
• Notice to Tenant of Change in Management and Accountability for Security Deposit - TAR 2210
• Model Tenant Selection Criteria Form  
• Early Termination of Residential Lease – TAR 2012
• Notice of Termination of Residential Leasing and Property Management Agreement – TAR 2222
• In addition, the Agreement for Application Deposit and Hold on Property (TAR 2009) has been removed from the TAR Forms Library.

A summary of the changes can be found HERE.

Headquartered in Austin, the TAR is the state-level organization for REALTORS® in Texas. It was established in 1920 and has grown to more than 80,000 members. TAR is the largest professional-membership association in Texas. 

"Undoing" a Real Estate Sale -- the Remedy of Rescission

San Antonio Texas Real Estate Attorney Trey Wilson wrote:

Sometimes when real estate contracts go bad -- really bad -- and fraud or mistake is involved, suing for damages is not enough. This scenario occurs when a recently-bought/sold property is not fit for the buyer's intended purpose, is not as described in the contract, or otherwise would result in an unjust enrichment to the non-complaining party to the contract.  Under these circumstances, the equitable remedy of RESCISSION may be be appropriate as a cure for a breach of contract.

"Rescission is an equitable remedy that seeks to set aside an otherwise legal contract due to fraud, mistake, or for some other reason when it is necessary to avoid unjust enrichment of the non complaining party to the contract, so that the parties thereto may be restored, insofar as is possible, to the status or position they were in prior to execution of the contract." City of The Colony v. North Tex. Mun. Water Dist., 272 S.W.3d 699, 732 (Tex. App. Fort Worth 2008, pet. dism'd)(citations omitted). As an equitable remedy for breach of contract, rescission serves to "undo" the contract in lieu of monetary damages that would be inadequate to compensate the complaining party. Id. (discussing rescission as a contract remedy); Humphrey v. Camelot Ret. Cmty., 893 S.W.2d 55, 59 (Tex. App.-Corpus Christi 1994, no writ) ("Rescission is an equitable remedy that operates to set aside a contract that is legally valid but is marred by fraud, mistake, or for some other reason, the court must set it aside to avoid unjust enrichment."); see also Nelson v. Najm, 127 S.W.3d 170, 176 (Tex. App.-Houston [1st Dist.] 2003, pet. denied) ("Texas courts have long held under general principles of common-law fraud that one who is induced by fraud to enter into a contract has a choice of remedies: he may either recover his monetary damages flowing from the fraud or he may elect the equitable remedy of rescission in lieu of damages and demand a return of any amount paid.")

"Restitution," means the act of restoring or a condition of being restored. WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY.  Rescission is merely the "common, shorthand name" for the composite remedy of rescission and restitution. RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 54 cmt. a (2011). Rescission is a form of restitution that applies if the transaction may still be unwound; if it cannot, a plaintiff may sue for damages. See id. § 37 cmt. a. Thus, "[r]escission is one of the principal asset-based remedies in restitution," and it "restore[s] the parties to the status quo ante by unwinding the contractual exchange instead of pressing it forward." Id.

But rescission is not a one-way street. It requires a mutual restoration and accounting, in which each party restores property received from the other. Id.§ 37 comment d. "Rescission is mutual: a plaintiff seeking to be restored to the status quo ante must likewise restore to the defendant whatever the plaintiff has received in the transaction."); see also Kennedy, 143 S.W.2d at 585.  Thus, it is generally limited to cases in which counter-restitution by the claimant will restore the defendant to the status quo ante. RESTATEMENT § 54(3).

In a real estate context RESCISSION generally refers to a conveyance (by deed) of real property from the Buyer back to the Seller, and a refund by the Seller of the Buyer's purchase money.  In this regard, the sale has been "undone" or "unwounded," and the parties are restored to their positions immediately preceding the sale.

Obtaining an award of (or agreement for) rescission can be complicated. And, like all equitable remedies, the party seeking rescission must have "clean hands," and must timely request the remedy. 

Supreme Court Rules in Decade-long Commercial Lease Dispute - Tenant at Sufferance Not Liable for Breach of Terminated Lease

TENANT REMAINED IN POSSESSION FOR 6 YEARS AFTER IT LOST ITS LEASE WHEN THE PROPERTY WAS SOLD IN FORECLOSURE

San Antonio Texas Real Estate Attorney Trey Wilson wrote:  Sometimes truth is stranger and more entertaining than fiction!  The Texas Supreme Court, in November 2013, issued its opinion in Coinmach Corp. vs. Aspenwood Apartment Corp. -- a decade-long commercial lease dispute involving a coin-operated laundry machine operator and a Houston apartment complex owner.

Although the facts of the case are somewhat convoluted, the gist of the dispute is: following entry (in 1980, renewed in 1989) of a long-term Commercial Lease of an apartment complex's laundry room (in which machines were operated by the tenant), the owner of the complex lost the property to foreclosure (in 1994). Additional sales of the property occurred, and the "new" owner terminated the Lease and sought to evict the laundry operator (and its machines) from the complex' laundry room.  Even after various eviction proceedings and appeals, the tenant refused to vacate. Ultimately, a suit for damages and declaratory relief was filed in state district court in 1998.

Counterclaims were filed in the suit, and in 2000, a jury returned a verdict against the tenant for $1,500,000.00 consisting of actual damages, DTPA treble damages, exemplary damages, attorney’s fees, and prejudgment interest. Following the verdict, the tenant vacated the premises, but requested a new trial.

When the trial court granted the new trial, the complex owner (Aspenwood)  reasserted all of its prior claims except for statutory and common law fraud, while the tenant (Coinmach) continued to deny liability but dropped all of its counterclaims. In May 2007, the trial court ruled ethat the foreclosure sale terminated the lease and that Coinmach became a tenant at sufferance. Based on these holdings, the court struck all of Aspenwood’s breach of contract claims. In June 2008, the trial court ruled that Aspenwood was not a "consumer" under the DTPA and that Coinmach had a possessory interest in the property from the time of foreclosure until it vacated the premises in 2000, and concluding that the effect of its legal rulings was to preclude Aspenwood’s remaining claims as a matter of law. The court thus entered judgment that Aspenwood take nothing on its claims. [AUTHOR's NOTE:  In other words, Aspenwoods $1.5m jury verdict from 2000 had been reduced to ZERO].

The Court of Appeals modified the trial court's Judgment, and further appeal was taken to the Texas Supreme Court. The Supreme Court ruled:

(1) a tenant at sufferance cannot be liable for breach of the previously-terminated lease agreement; 

(2) a tenant at sufferance is a trespasser and can be liable in tort (although the extent of liability depends on the nature of the trespass), including, in this case, tortious interference with prospective business relations; 

(3) the tenant in this case cannot be liable under the DTPA because the property owner was not a consumer; and 

(4) the property owner in this case cannot recover under the UDJA.

The first 3 of these rulings are significant with respect to the measure of damages that can be received in a Texas breach of lease lawsuit. The 4th ruling -- concerning the Declaratory Judgments Act is case-specific and immaterial for the purposes of this Texas Real Estate Law Blog.

Significant to this post is the first ruling (i.e. that a tenant at sufferance cannot be liable for breach of a previously terminated lease -- even where that tenant was a party to the lease).   

A tenant at sufferance is “[a] tenant who has been in lawful possession of property and wrongfully remains as a holdover after the tenant’s interest has expired.” BLACK’S LAW DICTIONARY 1605 (9th ed. 2009); see also Bockelmann v. Marynick, 788 S.W.2d 569, 571 (Tex. 1990) (“A tenant who remains in possession of the premises after termination of the lease occupies ‘wrongfully’ and is said to have a tenancy at sufferance.”). The defining characteristic of a tenancy at sufferance is the lack of the landlord’s consent to the tenant’s continued possession of the premises. A tenant at sufferance is distinguishable from a 'holdover tenant," who is party that remains in the property after a lease term, but without objection from the landlord.

In its ruling, the Supreme Court held because the foreclosure terminated Coinmach’s prior lease agreement, and because: (i) the lease did not contain a holdover provision, (ii) the parties did not expressly or impliedly form a new agreement, and (iii) Aspenwood did not consent to Coinmach’s continued possession, then Coinmach became a tenant at sufferance. The legal significance of a tenant at sufferance (by that term's very definition) is that  no agreement between Aspenwood and Coinmach ever existed. Resultantly, Coinmach could not have (and did not) incur liability for breach of any lease. 

In the words of the Court: "Coinmach cannot be liable for breaching a contract that did not exist."

But the Court's ruling was more expansive than just the parties' particular dispute, and clarified the rights, generally, of tenants at sufferance vis-a-vis landlords:

We hold that chapter 24’s procedural protections do not grant to tenants at sufferance any legal interests in or possessory rights to the property at issue; rather, the statute provides procedural protections that apply once the tenant has lost, or allegedly lost, all legal interests and possessory rights. Although the landlord must comply with the statute’s procedural requirements to evict the tenant at sufferance, eviction is allowed only if the tenant has no remaining legal or possessory interest, which makes the tenant a tenant at sufferance." 

This commentator predicts that the holding quoted above will have far-reaching implications in breach of lease lawsuits, and will bring additional clarity to the rights of tenants facing evictions.

Broker/Agent Is Generally Not a "Party" to Real Estate Purchase and Sale Agreement

San Antonio Texas Real Estate Attorney Trey Wilson wrote:

With increasing frequency, unhappy parties (usually a Buyer) to a real estate transaction are filing lawsuits for breach of the real estate Purchase and Sale Agreement pertaining to certain property. The suits generally allege that the opposing party to the contract (usually the Seller) has, in some manner, breached the buy/sell contract.  I've observed a recent trend in these suits whereby the  real estate broker(s) who represented the party who committed the alleged breach is also named as a Defendant. 

Breach of the real estate purchase contract is a viable cause of action where a Seller (or even a Buyer) has failed to perform an obligation under the contract. However, the only proper defendant in a breach of contract suit is an actual party to the underlying contract. The real estate agent merely representing a party to the contract (whether Buyer or Seller) is almost never a party to the contract, itself. This distinction is legally significant.

In order to prevail in a breach of contract lawsuit in Texas (whether the underlying contract relates to real estate or not) a Plaintiff must establish each/all of the following elements:

(1) the existence of a valid contract, 
(2) the plaintiff performed or tendered performance, 
(3) the defendant breached the terms of the contract, and 
(4) the plaintiff suffered damages as a result of the defendant's breach. 

Transworld Leasing Corp. v. Wells Fargo Auto Fin., LLC, No. 04-12-00036-CV, 2012 WL 4578591, at *3 (Tex. App.-San Antonio 2012, pet. denied); McLaughlin, Inc. v. Northstar Drilling Tech., Inc., 138 S.W.3d 24, 27 (Tex. App.-San Antonio 2004, no pet.). 

Further, Texas law holds that parties form a binding contract only when the following elements are present: (1) an offer; (2) an acceptance in strict compliance with the terms of the offer; (3) a meeting of the minds; (4) each party's consent to the terms; and (5) the execution and delivery of the contract with the intent that it be mutual and binding. Williams v. Unifund CCR Partners Assignee of Citibank, 264 S.W.3d 231, 236 (Tex. App.-Houston [1st Dist.] 2008, no pet.).

A real estate broker almost never forms or enters into a binding contract with any party other than the party he or she represents as their client. In addition, he or she is usually not the offeror/accepter/signatory to a Real Estate Purchase Contract. As such, breach of contract suits are very rarely proper against brokers, where the contract that has allegedly been breached is one for the purchase and/or sale of real estate. This is the case because a Plaintiff in a breach of a real estate contract suit can almost never prove the first element --  " the existence of a valid contract" -- as that element applies to a real estate broker.

This is not to say that a real estate broker (and/or her agent) cannot be liable for negligence, misrepresentation, fraud, breach of fiduciary or other legal duties and/or other improper conduct related to the sale or purchase of real property. Those claims, however, are distinguishable from the duties of a party to the real estate buy/sell contract, itself. Further, the character of a cause of action that may lie against a Texas real estate licensee depends largely on which party is asserting the claim, and the nature of that party's legal relationship with the real estate broker/agent. 

Exceptions to Requirement of Signed, Written Real Estate Commission Agreement Are Extremely Narrow

San Antonio Texas Real Estate Attorney Trey Wilson wrote:

Back in October, I wrote a post on this blog discussing the requirement that commission agreements be in writing and signed before they may be enforced by Texas courts.  Since that time, I have received several inquires -- primarily from commercial real estate  brokers --  concerning whether there exist exceptions to this general proposition.  The short answer is:  "Not really, and where they do exist, the exceptions are extremely narrow."

THE LAW

As previously discussed, the Texas Real Estate Licensing Act ("RELA"), which is codified in the Texas Occupations Code mandates that a "person may not maintain an action in this state to recover a commission for the sale or purchase of real estate unless the promise or agreement on which the action is based, or a memorandum, is in writing and signed by the party against whom the action is brought or by a person authorized by that party to sign the document." Tex. Occ. Code Ann. § 1101.806(c). This requirement of a writing evidencing the commission agreement is often referred to as RELA's "statute of frauds."

Texas courts have routinely held that to comply with this provision, the memorandum or agreement must: 

"(1) be in writing and must be signed by the person to be charged with the commission; 

(2) promise that a definite commission will be paid, or must refer to a written commission schedule; 

(3) state the name of the broker to whom the commission is to be paid; and 

(4) either itself or by reference to some other existing writing, identify with reasonable certainty the land to be conveyed." 

See Lathem v. Kruse, 290 S.W.3d 922, 925 (Tex. App.-Dallas 2009, no pet.). Moreover, the Texas Supreme Court has cautioned that the statutory requirements are "clear and unequivocal," and that mandated that courts should construe them strictly. Trammel Crow Co. No. 60 v. Harkinson, 944 S.W.2d 631, 636-37 (Tex. 1997) (construing predecessor statute that was nearly identically worded and warning that if broker proceeds without written agreements, he "does so at his or her own peril").

THE EXCEPTION(S)

There do exist a few Texas cases in which courts have applied an exception to the general rule, but in each of those cases, there existed some signed writing between the parties to evidence a commission agreement.  

Notably, an exception has not been employed to excuse the complete absence of a written commission agreement, or to establish the amount of a commission not memorialized in a commission agreement. See Parkinson, 944 S.W.2d at 635 (explaining that statute requires a written commission agreement because "[t]he obligation to pay and the amount of that commission are subject to misrepresentation"). Thus, the exceptions are very narrow in scope.

PARTIAL PERFORMANCE DOCTRINE

In Carmack v. Beltway Dev. Co., 701 S.W.2d 37, 41-42 (Tex. App.-Dallas 1985, no writ) the Dallas Court of Appeals applied the "partial performance doctrine"  in requiring a development company to pay a commission to a broker who located a commercial tenant for a developer-owned property. In that case, the developer had signed a written commission agreement that lacked only a precise identification of the property.  After reviewing the "well-recognized" partial performance exception to the general statute of frauds, the court observed, "When one party fully performs a contract, the Statute of Frauds may be unavailable to the other party if he knowingly accepts the benefits and partly performs." Id. at 40. 

The Carmack court expressly noted that "documentary evidence exists establishing the existence and terms of the agreement" between the broker and  developer, and that "the [written] commission agreement, itself, establishes: (1) that the broker fully performed its obligation by procuring a tenant for property, (2) the developer/property owner acknowledged his reciprocal obligation to pay the commission, and (3) the exact amount of commission is determined by reference to the rentals provided in the lease.

Thus, the Carmack court carefully limited its holding to provide only that under the "doctrine of partial performance," a written real estate commission agreement that fails to describe the property with precision may be enforced by the broker notwithstanding RELA's statute of frauds when: (1) the broker has fully performed; (2) the other party has knowingly accepted the broker's services by completing the transaction arranged by the broker and receiving benefits from that transaction; (3) the other party has acknowledged in writing his obligation for a commission; and (4) documentary evidence establishes the amount of the commission due. Id. at 41-42. 

Similarly, in Collins v. Beste, 840 S.W.2d 788, 792 (Tex. App.-Fort Worth 1992, writ denied), the Ft. Worth Court of Appeals was confronted with a commission dispute arising from a series of terminated written agreements, whereunder Beste was hired to provide leasing and marketing services for Collins' real estate properties. In that case, Collins contended that the employment/commission contracts violatde the statute of frauds because the commission amounts and the properties' legal descriptions were not contained in a single writing.

Relying on the doctrine of partial performance the Court ruled that Beste had established an exception to the statute of frauds, because: Beste fully performed; Collins accepted the sales and received benefits from them; Collins signed the commission agreement; and the employment agreement specified the commission amount. 

CONCLUSION

Ultimately, an exception to RELA's statute of frauds will only be recognized where there exists evidence establishing the existence of an agreement and its terms, and that the party acting in reliance on the contract would suffer a substantial detriment for which he has no adequate remedy, and the other party, if permitted to plead the statute of frauds, would reap an unearned benefit. An exception will not be recognized in circumstances where no written agreement exists (at all) and/or where an agreement fails to state with reasonable certainty the amount of the commission to be paid.

Brokers are well advised to obtain signed commission agreements with their clients at the outset of the relationship, and to keep those agreement current (through amendments, extensions and otherwise).