Dire15,2

Developments in REAL

ESTATE

TM

Volume 15, Issue 2

Seth G. Weissman, Editor

New Georgia Supreme Court Rule Protects Sellers, Builders and Real Estate Licensees

By Seth G. Weissman The Georgia Supreme Court continues to be tough on plaintiffs who argue that alleged verbal misrepresentations control over the terms of a signed written contract between the parties.

In the recent case of Legacy Academy et al. v. Mamilove, the Reymonds bought a daycare franchise from the Turners (Legacy Academy). The Continued on page 2

A Commercial Tenant Files for Bankruptcy; What Now?

By David S. Klein

ALSO IN THIS ISSUE Negligent Subcontractors Unreachable No More Page 3 Brokers - Want to Protect Your Commission?

Page 4

Imagine owning a fully occupied commercial building.

One of your tenants has been paying rent and CAM fees without issue. Then the tenant is late on a payment, maybe two or three. One day you open up the mail to find a notice from a court you have never heard of that says the tenant has filed for bankruptcy, that an automatic stay is in effect, and that you are listed as a creditor in his bankruptcy estate. Obviously, this type of notice is not

something you ignore. But what does all of this mean?

The Bankruptcy Code and the Automatic Stay The United States Constitution authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.� The bankruptcy code is therefore a set of Continued on page 6

New Georgia Supreme Court Rule Protects Sellers, Builders and Real Estate Licensees Continued from page 1

Turners gave the Reymonds a pro forma earnings claim showing that a new franchisee would have approximately $260,000 in net income after the first year and $440,000 in net income after each of the second and third years. Based on this, the Reymonds invested more than $2.2 million in the franchise and building a day care center. The actual returns in the first three years were a net loss of $212,300, a net gain of $103,692 and a net gain of $66,507. Obviously, the actual financial returns were much less than what was shown in the pro forma. The Reymonds sued the Turners on a variety of different claims including fraud. They won at the trial court even though the contract contained an entire agreement clause stating that this was the entire agreement of the parties.

It is well settled law in Georgia that a party who has the capacity and opportunity to read a written contract and does not, cannot successfully assert a

On appeal, the Turners argued that they did not commit fraud because the franchise agreement signed by the Reymonds specifically stated that the franchisee had not received any representations of potential income or earnings capabilities from Legacy prior to signing the franchise agreement. Legacy also argued that the Reymonds were estopped as a matter of law from asserting their fraud claim because it was undisputed that the Reymonds failed to read the franchise agreement.

The Georgia Supreme Court ruled that it is well settled law in Georgia that a party who has the capacity and opportunity to read a written contract and does not, cannot successfully assert a fraud claim based on verbal representations that differ from the terms of the contract.

fraud claim based on

In fact, the Court found that the only type of fraud that can relieve a party of his obligation

verbal representations

to read a written contract and be bound by its terms is a fraud claim that prevents a party

that differ from the terms of the contract.

from reading the contract.

This decision of the Georgia Supreme Court helps protect builders, sellers and real estate licensees all of whom are occasionally accused of making misrepresentations that differ from the terms of the written contract. With this decision, the Supreme Court appears to be moving more firmly to the position that the contract controls and representations outside of the contract simply do not count.

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Negligent Subcontractors Unreachable No More

By David Rusnak

In commercial settings, until late

granted summary judgment to the

last year, a subcontractor or sub-

grading contractor and subcontractor

subcontractor that did not directly

on the negligent construction claims,

contract with an owner or developer

citing a lack of contractual privity as a

could not be directly sued for negligent

bar to direct claims against the grading

construction by the owner or developer

contractor and subcontractor. On appeal,

unless the owner or developer could

without any mention of the Economic Loss

find a way around the Economic Loss

Rule or any exception to that rule (though

Rule. In other words, subcontractors

one may have existed due to damage

and sub-subcontractors could not be

to other work), the Georgia Court of

sued directly for negligent work (other

Appeals reversed the trial court, holding

than for breach of warranty) unless

that an owner, who was not in privity, may

the defective work injured a person or

maintain a direct negligent construction

damaged work other than the defective

claim against subcontractors. The Court

work itself.

of Appeals reasoned that privity was not required because construction-related

Why? Because our courts reasoned

negligence claims exist independently of

that if the defective work caused only

a claim for breach of contract and that

a loss of value or use of the defective

there was an independent duty implied

work, and the only damage was the

by law to perform work in accord with

cost of repairing the defective work,

industry standards that gave rise to a

the owner or developer was merely

direct cause of action.

suing for the benefit of his bargain. And, to sue for the benefit of the bargain, our courts required a direct contractual relationship. This

What does this mean to a commercial owner or developer?

general rule, however, had two exceptions: where there had been an

It means there may be someone else that an owner or

accident that caused damage to the work and an unreasonable risk

developer can sue directly for the cost of repairing defective

of injury to persons and other property; and, where there had been a

work without having to search for an exception to the

misrepresentation (under certain, limited circumstances) to a person

Economic Loss Rule. Is this a material change in the law: Yes, it is.

or limited class of persons for whom the information was intended,

General contractors go out of business. Insurers and sureties refuse to pay

either directly or indirectly.

for or perform repairs for various reasons. But, now, a subcontractor or sub-subcontractor who actually performed the defective work, and perhaps

This may no longer be true, at least in commercial matters.

is able to pay for repairs, can be sued directly for negligent construction, even if there was no damage to work other than the subcontractor’s own

In Jai Ganesh Lodging, Inc. v. David M. Smith, Inc. 328 Ga.App. 713

defective work, no one was physically hurt, and there was no accident that

(2014), a hotel owner sued both the grading contractor and grading

threatened injury to persons of other property. The holding in Jai Ganesh

subcontractor under various theories, including negligent construction,

Lodging, Inc. may even mean that an owner or developer, who does not

after the hotel, pool and parking lot settled badly, causing damage.

want to sue the general contractor for business reasons, can jump over

The hotel owner did not have a contract with either. The trial court

the general contractor and sue the subcontractor directly.

Developments in Real Estate™

3

Brokers Want to Protect Your Commission?

By Seth G. Weissman

In a real estate transaction full of variables, two constants are: 1) buyers

selling broker to get written confirmation directly from the seller specifying

and sellers want a win-win deal, and 2) no one is happy about paying

the seller’s obligation to pay the commission and the amount.

the broker’s commission. A real estate broker in Georgia should be aware of the three ways to claim a commission if a legal dispute arises.

Brokers using the GAR Purchase and Sale Agreement may pursue a

Brokers should also know what they can and should do to protect their

commission claim jointly or independently and therefore each broker

rights to payment and limit liability to others.

can make an independent business decision whether to file suit for his commission. With current tight financing contingencies, commission

I. Contractual Claim

claims in court against a defaulting buyer may become more likely. It

The first way to create a valid and enforceable commission claim is

may be prudent to discuss this commission liability with a buyer who is

through an express agreement between the parties for the broker to

preparing to walk from a deal.

be paid a fixed commission in exchange for providing certain services.

Although it is not necessary for a purchase and sale contract to contain The GAR Listing Agreements and Buyer Brokerage Agreements are

a commission provision, if the parties agree, a commission provision can

express agreements which entitle a broker to a commission, and can

be included. However, if the contract and the brokerage agreements

provide a contractual basis for a commission claim. These agreements

provide for different commission amounts, the amount in the contract

reflect the Georgia custom that the seller pays the commission. To insure

will likely control. Therefore, brokers should review the contract and

a valid claim, the agreements must specify the amount of commission

monitor all changes in the contract for reduced commission amounts.

to be paid. The GAR agreements also provide a contractual basis for

This is especially important in short sale transactions where lenders often

the division of the commission between the listing and selling brokers.

ask listing brokers to reduce their commissions via contract changes.

The agreements provide that the listing broker will share the commission with the selling broker, and importantly, the amount or percentage split

Georgia courts have indicated that an oral commission agreement

must be stated in the documents. Since the GAR listing agreements state

can be enforced under specific conditions. Nevertheless, the National

that the cooperating broker is a third party beneficiary, coop brokers

Association of REALTORS® Code of Ethics provides that REALTORS® must

who are not directly in contract with the seller have a basis to pursue a

ensure all agreements relating to real estate transactions are in writing.

claim against a defaulting seller for their commission. Under the GAR

Prudent brokers will always document commission agreements in writing.

agreements, the buyer is not responsible for the unpaid commission of a defaulting seller unless the buyer specifically agrees to be obligated.

With respect to disputes between themselves, brokers are ethically bound

If the brokers agree at any time to reduce the commission, they should

to make the interests of their clients primary, and they should not let

sign a written agreement stating whether the reduction is out of one

a commission dispute disrupt the transaction. Since brokers who are

share or shared pro rata.

REALTORS© are required to submit all contractual commission disputes among themselves to arbitration, they will generally arbitrate the dispute

An MLS listing may function as a cooperative brokerage agreement

after closing if they cannot reach an amicable resolution. Brokers are not

between the brokers. However, if the selling broker is not a member of the

required to arbitrate commission disputes with a buyer or seller.

listing MLS, the selling broker must be sure to have a written agreement with the listing broker specifying the division of the commission. Further,

Of course, any commission lawsuit must make economic sense,

if the seller is not represented by a listing broker, it is important for the

considering the cost of litigation and the amount of commission at

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issue. Smaller commission claims of $15,000 or less can be brought in

A court will consider many factors and will intensively examine the

small claims court. Regardless of the forum, a broker should understand

transaction to determine if a broker is the procuring cause of the sale.

that commission claims often invite counterclaims for negligence back

The measure of damages is the amount of commission which a broker

against the broker. Examples of such claimed negligence could include a

would customarily be owed. Obviously, a broker’s chance of success in

broker’s failure to adequately explain and monitor transaction timelines,

pursuing a procuring cause claim will be greatly increased if the broker

sufficiently document all communication and activities, or ensure that

meticulously documents his time and efforts for the transaction and can

all conditions and steps of a transaction are addressed on a buyer’s or

produce these records to the court.

seller’s behalf. One way for brokers to protect themselves from claims of negligence is to document all activities relating to a transaction, such

III. Quantum Meruit

as including notes of conversations in the transaction file, and regularly

The third way to create a valid commission claim is under the theory of

reviewing the file to ensure that all issues have been addressed and

quantum meruit. As with procuring cause, claims for quantum meruit

documented.

arise in the absence of an express oral or written agreement governing how much and when a broker will be paid. The theory is basically that

II. Procuring Cause

when someone renders a valuable service to another and the recipient

The second way to create a valid commission claim is under the

knowingly accepts the service, the law will imply a promise to pay the

“procuring cause” theory. This type of claim can be brought when

reasonable value of the service. The amount of a broker’s quantum

there is no express agreement (written or oral) or an agreement is

meruit claim will be the reasonable value of the broker’s services as

incomplete. These claims can arise out of open listing agreements,

measured by a standard of how a reasonable recipient would value the

in which there is no express agreement detailing the amount of the

services performed. This amount may or may not be the commission

commission or what services have to be rendered in order for the

the broker was expecting. A broker can therefore bring a quantum

commission to be owed.

meruit claim in court even though he was not the procuring cause of the sale, but the measure of damages may not be the same. Again, a

To prove a procuring cause claim, a broker must show that during the

successful quantum meruit claim will hinge upon the availability of clear

course of the agency, the agent procured a buyer, ready, willing and able

and complete records that document the actions of the broker and the

to purchase the property on the seller’s terms without contingencies. If

responses of other parties.

the broker is not involved in the closing, the broker must show that there were negotiations still pending between the broker and the prospective

The Moral of the Story

purchaser and that the owner was aware the negotiations were still

From the outset of the agency relationship, a broker should be mindful

pending at the time the owner consummated the sale. However, where

of the legal requirements for a valid commission claim and be careful

the owner knowingly interferes with the negotiations between the buyer

that his claim can withstand legal challenges. Further, a broker should

and the broker, it is unnecessary to show that negotiations were pending

always keep very good records and document all the activities that occur

when the sale was consummated. The broker can make a case by

in the relationship. With advance planning and knowledge, a broker

showing that negotiations were set in motion through his efforts, that he

can avoid the courtroom completely or make necessary visits to court

performed every service required by his employment which was possible

short and successful.

to perform, and that the failure on his part to personally consummate the sale was due to the interference of the owner.

Developments in Real Estate™

5

A Commercial Tenant Files for Bankruptcy; What Now? Continued from page 1

federal laws and rules, which apply, for the most part, uniformly in bankruptcy courts across the country. At the moment the tenant files bankruptcy, something called the automatic stay takes effect. In most instances, an order from the bankruptcy court is not needed; it is simply the filing of the bankruptcy which triggers the automatic stay.

The automatic stay generally prohibits the commencement, continuance, enforcement, or appeal of actions and judgments, against a tenant for the collection of a claim that arose prior to the bankruptcy filing. You must stop anything that could even slightly be considered a collection action. For example, do not send a letter to the tenant about its failure to allow you access to the premises, do not call the tenant to ask why it has not tendered March rent, and absolutely do not file an eviction or other state court action against the tenant. If you have knowledge of the automatic stay, anything deemed a

If the lease expired

collection action could subject you to damages, including the payment of the tenant’s attorney fees.

prior to the tenant filing

And what about that provision of the lease that says the tenant is in default if it files for bankruptcy?

for bankruptcy and the tenant is no longer in the premises, you are in the best position. You may, however, need to ask the court for permission if the tenant left personal property in the premises.

The bankruptcy code treats that type of provision as an unenforceable event of default.

However, do not worry too much, because there are protections for developers, owners, and property management companies that are forced to deal with a tenant that files for bankruptcy. Below is a general discussion about scenarios frequently encountered when a tenant with a commercial lease files for bankruptcy.

A pre-petition expired lease where the tenant is no longer in the premises If the lease expired prior to the tenant filing for bankruptcy and the tenant is no longer in the premises, you are in the best position. The bankruptcy code provides commercial landlords with an exception to the automatic stay which allows you to take action against a tenant “under a lease of nonresidential real property that has terminated by the expiration of the stated term of the lease before the commencement of or during a case under [the bankruptcy code] to obtain possession of such property.” This means that you may take possession of the premises without having to move for relief from the automatic stay.

As discussed in more detail below, you may, however, need to ask the court for permission if the tenant left personal property in the premises.

A pre-petition terminated lease where the tenant remains in the premises If you terminated the lease prior to the tenant filing bankruptcy but the tenant remains in the premises, you are in a good position. The best practice is to file a motion with the bankruptcy court asking that the automatic stay be lifted so you may exercise your state law remedies against the tenant. If the court grants the motion, then you may send the tenant a letter demanding immediate possession of the premises and file an eviction. Once you receive an order from the court, you may contact the sheriff to arrange for the tenant’s personal property to be removed from the premises. You do, however, need to be aware of any liens against the tenant’s personal property. You also need to determine if the personal property is part of the bankruptcy estate. Usually a call to the tenant’s bankruptcy attorney or the bankruptcy trustee will resolve these issues. But you may need to ask the court for additional permission to remove the tenant’s property if its attorney or the trustee will not allow you to do so.

Assuming or rejecting an unexpired lease If the lease is still in effect at the time the tenant files for bankruptcy, the situation is a bit more

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complicated. If the tenant filed a chapter 7 or chapter 11 bankruptcy (only individuals may file a chapter 13 bankruptcy, so a discussion about that type of filing is generally not relevant in the context of a commercial lease), the tenant (in a chapter 11) or a trustee (in a chapter 7 or chapter 11) has 120-days to accept or reject a lease, subject to the court’s approval. The court may allow an additional 90 days for the decision to be made, but only if good cause is shown. You should never assume that a tenant or trustee will automatically reject the lease. For example, if the premises is profitable, the trustee may want to sublease the premises, or the tenant in a chapter 11 case may want to sell its leasehold interest to another party in order to fund a reorganization plan. The decision differs from case to case.

If the tenant or trustee rejects the lease, or fails to meet the 120-day deadline to assume or reject the lease, then he must immediately surrender the premises to you. If the tenant or trustee fails to do so, a motion to compel rejection or a motion for relief from the automatic stay may need to be filed with the Court.

If the tenant or trustee assumes the lease, he or she must cure all defaults or at least provide adequate assurances that the defaults will be promptly cured. The tenant or trustee must also provide the Court with adequate assurance that he or she will perform all future obligations under the lease.

Regardless of the decision at the end of the 120-day period (or longer if the tenant or bankruptcy trustee asks the court for more time), the lease must not go into default post-petition. If the tenant defaults, then you may file a motion for relief from the automatic stay.

Unpaid rent and other fees As discussed above, if the tenant or trustee assumes the lease, unpaid pre-petition rent and other fees

If you terminated the lease prior to the tenant

must be remedied. However, if the lease is rejected, unpaid pre-petition rent and other fees, as well

filing bankruptcy but

as damages related to the rejection of the lease, become a general unsecured claim in the bankruptcy.

the tenant remains in

This means in a chapter 7 case that you will receive a fractional distribution from the trustee who will

the premises, you are

liquidate the tenant’s assets. If the tenant has no assets, then you will not receive a distribution and the unpaid pre-petition rent and other fees are discharged. In a chapter 11, the tenant may propose

in a good position.

a repayment of those amounts.

File a motion with the

Post-petition unpaid rent and other fees generally become an administrative priority claim, which is

bankruptcy court asking

paid before the general unsecured claims. The administrative claim is generally limited to scenarios

that the automatic stay be

where it can be shown that the bankruptcy estate benefitted from the use of the premises. Regardless of whether you have a general unsecured claim, an administrative priority claim, or both, it is important

lifted so you may exercise

to be aware of the deadline to file your proof of claim.

your state law remedies against the tenant. If the

Security Deposits If you are holding a security deposit, do not automatically apply it to unpaid rent and other fees. Instead,

court grants the motion,

the bankruptcy code treats a landlord as holding a secured claim to the extent of its security deposit.

then you may send the

You must move for relief from the automatic stay before applying the security deposit to unpaid rent and other fees owed by the tenant. If the security deposit exceeds the amount of unpaid rent and other

tenant a letter demanding

fees, then you may be compelled to turn over a portion of the security deposit to the bankruptcy estate.

immediate possession of the premises and file an

Conclusion When a tenant files bankruptcy, a number of unfamiliar laws and rules immediately come into play.

eviction.

It is important that you react promptly to any type of notice received from a bankruptcy court. In addition, a business cannot represent itself in bankruptcy court, so the filing of any motions must be handled by an attorney.

Developments in Real Estate™

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About the Editor

WNCW Offices

SETH G. WEISSMAN

Seth Weissman represents developers, builders, investors and real estate brokers.

He is co-author of The Red Book on Real Estate Contracts in Georgia, Secrets of Winning the Real Estate Negotiation Game and Zoning and Land Use Law in Georgia.

The Red Book is a highly regarded legal reference used by real estate brokers and agents. As general counsel to Georgia REALTORS®, Seth drafts the standard real estate forms used by REALTORS® throughout Georgia.

In addition to a law degree, Seth has a master’s degree in city and regional planning and is a Professor of City Planning in the College of Architecture at the Georgia Institute of Technology. Seth has used this additional knowledge to draft the legal documents for complex real estate developments, including vertical and horizontal mixeduse developments, residential condominiums, office condominiums and master planned communities, senior communities and themed developments. As a result, he is considered a leading authority on new urbanism. You may reach Seth at sethweissman@wncwlaw.com or at 404-926-4505.

This Issue’s Contributors DAVID RUSNAK David Rusnak practices in the areas of state and federal litigation and arbitration, concentrating his practice in commercial real estate, landlord-tenant, and construction dispute resolution, as well as complex business and lending litigation. He represents national, regional and local developers, property owners, engineering firms and contractors, as well as other commercial concerns in all facets of commercial litigation and landlord-tenant disputes. Contact him at davidrusnak@wncwlaw.com or at 404-926-4686.

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Buckhead One Alliance Center, 4th Floor 3500 Lenox Road Atlanta, Georgia 30326 404-926-4500 Fax: 404-926-4730 email: buckhead@wncwlaw.com

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Perimeter 5909 Peachtree Dunwoody Road Suite 820 Atlanta, Georgia 30328 404-926-4990 Fax: 404-926-4871 email: perimeter@wncwlaw.com

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Cumming 1080 Sanders Road Suite 300 Cumming, Georgia 30041 404-279-4080 Fax: 404-279-4180 email: cumming@wncwlaw.com

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Sugarloaf 1745 North Brown Road Suite 100 Lawrenceville, Georgia 30043 404-279-4050 Fax: 404-279-4150 email: sugarloaf@wncwlaw.com

♦ East Cobb 1225 Johnson Ferry Road Suite 100 Marietta, Georgia 30068 404-279-4020 Fax: 404-279-4120 email: ecobb@wncwlaw.com

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West Cobb 3475 Dallas Highway Suite 510 Marietta, Georgia 30064 404-279-4015 Fax: 404-279-4115 email: westcobb@wncwlaw.com

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McDonough 1935 Pennsylvania Avenue McDonough, Georgia 30253 770-632-2715 Fax: 770-632-2716 email: mcdonough@wncwlaw.com

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Woodstock 1198 Buckhead Crossing Suite B Woodstock, Georgia 30189 404-279-4010 Fax: 404-279-4110 email: woodstock@wncwlaw.com

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Midtown 999 Peachtree Street, NE Suite 855 Atlanta, Georgia 30309 404-279-4075 Fax: 404-279-4175 email: midtown@wncwlaw.com

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North Fulton 11675 Rainwater Drive Suite 150 Alpharetta, Georgia 30009 404-279-4040 Fax: 404-279-4140 email: northfulton@wncwlaw.com

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Peachtree City 500 Westpark Drive Suite 150 Peachtree City, Georgia 30269 770-632-2715 Fax: 770-632-2716 email: peachtreecity@wncwlaw.com

DAVID S. KLEIN David S. Klein frequently practices in bankruptcy courts throughout Georgia. He also represents commercial landlords and property management companies that have been forced to confront issues arising out of a tenant’s bankruptcy filing. For additional information, contact David S. Klein by e-mail at davidklein@wncwlaw.com or by phone at 404-926-4644.

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