LEASE PROVISION PROTECTING LANDLORD FROM ITS OWN NEGLIGENT ACTS UPHELD

By Michael J. Stewart

SUMMARY:  Tenant's property was damaged through the Landlord's alleged negligent acts occurring on adjacent space.  Tenant was denied any recovery from Landlord because the lease contained an indemnity provision requiring Tenant to indemnify Landlord "for any loss" arising out of any cause . . . premises."

In the case of Planters Gin Company v. Federal Compress Company, Inc. et al., the Supreme Court of Tennessee decided that an indemnity provision in a lease agreement, whereby the landlord was held harmless for "any liability or loss" arising out of the "use of the premises," was sufficient to bar recovery by the tenant for damages to the tenant's personal property that resulted from the landlord's alleged negligence in maintaining the premises.  The Planters Gin case involved a situation where the tenant, Planters Gin, leased two large bays (Bays #1 and #2) from the landlord, Federal Compress, in order to store cotton.  The two bays were located, along with an additional third bay (Bay #3), in a large warehouse building.  During a storm, the roof, that was allegedly improperly maintained, above Bay #3, collapsed and activated the sprinkler system.  The rainwater, along with the water from the sprinkler system, poured into Bay #3 and also penetrated Bays #1 and #2 causing damage to the cotton in the amount of $250,000.

The Court held that the landlord was not liable for the damages suffered by the tenant because of the existence of an indemnity provision contained in the "Damages and Accidents" section of the lease agreement.  The relevant portion of this provision stated:

Lessee agrees to hold harmless and indemnify Lessor from and against any liability or loss, including counsel fees incurred in good faith by the Lessor, arising out of any cause associated with Lessee's business or use of the premises.

The Court in supporting its decision relied on the legal principle that a court is to look to the intent of the parties when interpreting a contract.  The Court found that the indemnity provision was clear and unambiguous in setting forth the intent of the parties and as such would be upheld.  In making its ruling, the Court, however, did point out that the existence of an indemnity clause, like that set forth above, would not protect a landlord in all cases.  The Court noted that the negligent actions of a landlord may be classified to be so remote in nature that the indemnity provision would be inapplicable.  However, the Court did not clarify what types of actions would meet such a classification.

COMMENTS:  Pay attention to indemnity provisions.  Landlords and tenants should carefully consider the scope of indemnity provisions.  The purpose of indemnity provisions is to allocate risks.  The allocated risks then need to be evaluated in conjunction with the insurance and risk management requirements of the parties.
 

COMMUNITY RENEWAL TAX RELIEF ACT OF 2000

By W. King Copler

The Community Renewal Tax Relief Act of 2000 created 40 renewal communities eligible for special tax breaks.  Chattanooga is one of those communities.  Only certain areas of the city are eligible for special incentives.  The incentives include tax credits for jobs, enhanced equipment deductions and a revitalization deduction for certain commercial buildings.  To qualify for the revitalization deduction, a project must be allocated part of the deduction that is allocated to the community.  Up to 50% of qualified expenditures are deductible. There is also a capital gain exclusion for a qualified community asset.

You can get more information at www.hud.gov.  The site will also assist you in determining whether your property is within a revitalization zone.

If you have any questions regarding this program, please contact any member of our Real Estate Group.

BROKER’S DUTY TO SELLER REGARDING SHOWING ADDITIONAL LISTINGS

By Mike St. Charles

Can a broker show additional listings to a potential buyer even when the buyer has already entered into negotiations with the seller represented by the broker? 

This issue was recently addressed by a New York court. 

Mr. and Mrs. Sonnenschein listed a condominium apartment for sale on an exclusive basis with a real estate broker (the “Listing Broker”).  A real estate agent with another broker (the “Selling Broker”) showed the condominium to Mr. and Mrs. Tam, who verbally agreed to buy the apartment for $825,000.

Mr. Sonnenschein and the Selling Broker negotiated and signed a separate commission agreement.  He then sent a proposed contract of sale to the attorney for the Tams.  The Tams never signed the contract and did not make a down payment.  Prior to the Tams being submitted the proposed contract, another salesperson for the Selling Broker had shown the Tams a different apartment that had been listed exclusively with the Selling Broker.  The Tams decided to purchase the other apartment.

The Sonnenscheins sued the Selling Broker claiming that the Selling Broker became a broker as a result of signing the commission agreement and breached its duty to the Sonnenscheins by “arranging the sale of the other apartment.”  The jury found in favor of the Sonnenscheins and a judgment in the amount of $52,000 was awarded.

The Selling Broker appealed this verdict.  The appellate court found that the Selling Broker never assumed the role of a broker for Sonnenschein.  Moreover, the court said that “even assuming a broker/principal relationship developed over the course of dealings between (the parties), [the Sonnenscheins] failed to come forth with any proof that the [the Selling Broker] engaged in any conduct that would have amounted to a breach of fiduciary duty.”  Showing the Tams another apartment while serious negotiations were going on with the Sonnenscheins “would not constitute a breach of duty unless [the Selling Broker] had an obligation either to refuse the Tams’ request to see other properties or to decline to assist them in making an offer to the (other party).”

Comments:  This case illustrates the complexities in a broker’s obligations to parties to a real estate transaction.  While the end result in this litigation is consistent with the general practices in the real estate marketplace, recent history indicates that the principal-agent rules are “evolving” and this case is another example of the types of claims that are being made.

NOTICING NOTARIES
By Jay A. Young

One of the few requirements under Tennessee law for a deed of trust or similar collateral document to be enforceable against third parties is that the document be acknowledged by the maker or proved by two subscribing witnesses.  A deed of trust that is not properly acknowledged or witnessed is null and void as to other creditors and bona fide purchasers.  When a debtor experiences financial problems, one of the first items a bankruptcy trustee or competing creditor will examine is the form of the certificate of acknowledgment used by the secured creditor on its collateral documents.

The Tennessee statutes recommend certificate of acknowledgment forms for persons acknowledging their signature on their own behalf, and for persons acknowledging their signature made on behalf of another person or on behalf of a corporation or partnership.  The Tennessee statutes have for some time contained a “substantial compliance test” providing that the unintentional omission of any words in a certificate of acknowledgment does not make the document ineffective “if the substance of the authentication required by law is in the certificate.”  Unfortunately, substantial compliance has been found lacking in many cases where the certificate of acknowledgment failed to contain “magic words” from the recommended forms (such as a statement that the notary public is “personally acquainted” with the acknowledging party).  These cases limited the effect of the “substantial compliance” statute.

In 1987, the Tennessee General Assembly enacted a statute establishing an “intent test.”  This statute provides that “any certificate clearly evidencing an intent to authenticate, acknowledge or verify a document shall constitute a valid certificate of acknowledgment . . . no specific form or wording being required in such certificate.” 

Applying the intent test and the substantial compliance test described above, the Tennessee Supreme Court recently found effective a certificate of acknowledgment that omitted the “personally acquainted” language. 

Comments:  The Court’s decision is welcomed because it supports the proposition that the intent of the parties should be a controlling factor.  While this case substantially relaxes the pre-1987 requirements for certificates of acknowledgment, the statutorily recommended forms should continue to be used. 

Please contact us if you would like a copy of the recommended forms or a copy of the Tennessee Supreme Court decision.

TITLE INSURANCE – MAXIMIZING PROTECTION

By Mark Turner

Title insurance is a customary requirement in real estate transactions, providing protection to both buyer and lender.  The initial title commitment serves an important due diligence function by disclosing exceptions that could impair the use or marketability of the subject property.  The insurance policy issued subsequent to closing provides protection to the buyer or lender through the insurer’s agreement to reimburse the insured party for any losses it incurs that are not excepted or excluded from coverage.

Unfortunately, buyers and lenders do not always take full advantage of the available insurance coverage.  Failure to do so may result in an insurer’s refusal to cover claims in the future due to exceptions and exclusions from coverage set forth in the policy.  Accordingly, it is imperative for those seeking title insurance to make appropriate requests of the title agent after a commitment is issued to benefit from the fullest amount of coverage available.

For example, buyers and lenders should always ask the title insurance company to delete the standard, preprinted exceptions from the final title policy.  These exceptions appear in all title commitments and include exceptions for parties in possession, matters that an accurate survey would disclose, unrecorded mechanics’ liens and certain other items.  The title company will remove or limit these exceptions if provided with appropriate documentation.

A party may also improve its coverage by obtaining endorsements to its policy.  These endorsements can enhance a policy by eliminating exclusions to coverage or by providing affirmative coverage against exceptions listed on a policy.  For example, a party may obtain a “comprehensive endorsement” that insures against such matters as violations of restrictive covenants and existing encroachments.  There are also endorsements that enhance protection for lenders making variable rate loans and for purchasers buying under an installment contract, among other things.  A number of endorsements exist and should be considered based on the circumstances.

It is important for a lender or buyer to obtain the full benefit of title insurance coverage.  A knowledgeable real estate attorney can provide advice and assistance that may eliminate a number of unpleasant surprises that could otherwise occur in the future.

If you have questions about these cases or other real estate matters,
please contact a member of the Chambliss, Bahner & Stophel, P.C. Real Estate Group

This is an advertisement.  Certification as a Specialist in Real Estate Law by the Tennessee Commission on Continuing Legal Education and Specialization is not currently available.  None of the attorneys listed in this communication are certified in any area of Specialization.

© 2003 Chambliss, Bahner & Stophel, P.C.