For over a decade On the Skware Toy Soldiers and its owners, Boo & Woo, the Skware brothers, have enjoyed the shopping traffic brought to their retail store that’s located in the same shopping center as Athletics Authoritiez, a popular sporting goods retailer. However, over the last couple of years the Skware brothers have seen their overall numbers of shoppers go down and, with slowing traffic, their gross sales revenue has dropped by over 15% – straight off the bottom line. Now, blaming E-Commerce woes, the news media (supported by local scuttlebutt) is suggesting that Authoritiez is on the ropes and may close its store. Can Boo & Woo do anything to save On the Skware? Continue Reading E-Commerce Disruption – Tenant’s Tizzy

Bench in bluebell fieldA huge fan of the Hill Country, Skare D. Katz buys a large piece of undeveloped land from the Solable Family outside of Austin.  Skare D. plans to build a ranch for retirement. One Saturday while Skare D. is visiting the property to visualize his plans, a woman shows up and stands underneath a large oak tree, staring at the ground.  Skare D. approaches the woman and asks her for her name.  The woman responds, “Inka Solable.”  When Scare D. asks Inka what she’s doing there, Inka responds, “This is where my great-grandfather is buried.  I come pay my respects every Saturday.”  Dumbfounded, Skare D. responds, “Ma’am, I appreciate that, but I own this property now.  I don’t want you coming by every Saturday.”  Inka replies, “I have a right under the law to access this property when I want.  I’ll see you in Court!”  Is Inka right? Continue Reading The Grave Reality of a Cemetery on Your Property

Apple iPhone 6s plus with Airbnb application on the screen.Following his transfer to Houston, Ruel Benda decided to keep his posh gated neighborhood Rodeo Drive house and started advertising it on AirBNB. His profits were so good that he began renting for 7 days or less. Insisting that Benda’s home use was commercial and not residential, a violation of his property owners association’s (POA) recorded  Covenants, Conditions and Restrictions, the POA fined him. Benda sued. Did he win? Can Benda continue to rent his house?

It depends. No, if Ruel Benda lived in San Antonio. Under these facts a San Antonio appellate court concluded that the POA deed restrictions prevented such rentals and granted the POA’s injunction denying further rentals.

Yes, if Benda lived in Austin where, under very similar facts, the Austin Court of Appeals found no violation of a restrictive covenant under similar circumstances, determining  that the covenant restricting homes to be used “for single family residential purposes” was ambiguous. The Austin court “resolve[d] the ambiguity against the Association and in favor of the [homeowner’s] free and unrestricted use of their property.” The San Antonio Court respectfully disagreed with the Austin Court of Appeals and did not find its reasoning persuasive.

Like Uber, the AirBNB kerfluffle has landed in the news in Chicago, Spokane, (requires a license) and even Arlington County near Washington, D.C. – just in time for Inauguration Day.  Even San Antonio is considering municipal regulations that would affect properties not otherwise subject to a property owner’s association.

Tilting the Scales in Your Favor. Avoid being surprised. If you are in a property owner’s association, read your documents. While many POAs have more detailed restrictions against short term rentals (STR) of POA homes, some enforce their rules and others don’t. Likewise, while smaller counties and cities are not actively enforcing requirements to report and pay hotel occupancy taxes upon home rentals, many cities like Austin, San Antonio and Houston are.                                                                                 

Under Texas law, an STR is rental of a property for less than 30 days and the guest is charged $15 or more per day. Texas hotel occupancy tax due to the Texas Comptroller is six percent of the room cost. Counties are authorized to impose a hotel occupancy tax also.

And, by the way, your income from the STR may well be taxable. As my colleague Drew York wrote a couple of months ago, whether the income is taxable depends upon a “Master Exception” to the Internal Revenue Code. Check out our September article Do I Owe Income Taxes When I Rent Out My Home?

Home for RentOver the summer, Brad Bevos’ company relocated him from Austin to Springfield, Illinois. A University of Texas alum and huge Longhorn football fan, the move bummed Brad because he won’t be able to attend home games this season.  Because hotels are scarce during home game weekends, and other special events at UT, Brad decides to list his downtown Austin apartment for rent on VRBO instead of selling it.  Brad manages to rent the apartment for 12 nights during the season for $2,400.   Brad doesn’t include this income on his tax return, and when he gets audited the IRS finds out about his side business.  Is Brad in trouble?

Issues to Look Out for When Renting Your Home

Many people now rent out their homes on VRBO or Airbnb websites to make extra income. Before entering the rental industry it’s best to understand how renting will affect your:

  1. income taxes;
  2. local taxes (do you owe hotel occupancy taxes?);
  3. property taxes (do I keep my homestead exemption?);
  4. homeowner’s insurance (does my policy cover me for tenants?); and
  5. whether you are complying with your HOA’s rules.

Do you owe the IRS?

It depends on how often you rent out your home during the year. The IRS has an exception – dubbed by some as the Master Exception for homeowners who rented out their Augusta homes during the Masters golf tournament – that permits you not to report rental income if:

  1. you rented the home for 14 days or less during the year; and
  2. you used the property yourself for 14 days or more during the year, or for more than 10% of the total days it is rented.You may be able to deduct some of your expenses to offset your rental income, so discuss with your tax advisor.

Does Brad owe the IRS?

No, because Brad rented out the house for less than 14 days, and he had lived there for more than 14 days before he was relocated. But, Brad will likely owe income taxes in future years if he rents for more than 14 days, or didn’t visit Austin for at least 14 days.

Tilting the Scales in Your Favor

Before getting into the rental business make sure you have a full understanding of the financial implications. If you are renting out a second home, you should consider hiring a rental management company who can handle day-to-day issues that arise, such as maintenance.

Franklin, a Senior at Fraternal State, is finally moving off campus to his own apartment with four of his buddies. Before Owen Ohner, the landlord, will approve their lease, he requires a personal guaranty from all the parents. The landlord’s rep Lyn Lackey assures Franklin’s Dad Milton Munney that the guaranty is “standard.” Could this be a problem for Milton?

Yes. The “standard” guaranty that Milton signs almost certainly guarantees his unconditional and absolute payment of the entire debt – whether Franklin’s frat friends and their parents pay or not. Worse yet, a “standard” guaranty waives all tenant defenses or rights of offset against the landlord, meaning Milton would have to pay in full and separately get reimbursement from the other parents. And, if Franklin has any claims against Ohner, they are not offset against Milton’s guaranty. Franklin must sue Ohner separately and then collect his judgment, without any right of offset landlord’s claims under the lease.

Separate Obligations

Under Texas law, the Guaranty and the Lease Agreement are separate undertakings. One who guaranties payment and waives the requirement that the holder of the note exhaust its rights against the maker, (1) becomes an absolute guarantor, (2) is primarily liable, and (3) waives all defenses and any requirement that the landlord first act against the lessees, or, in this case, any other guarantor. As a general rule, an absolute guaranty imposes liability on the guarantor even if the underlying obligation cannot be enforced against the principal.

Because Milton waived all affirmative defenses, he is liable on the guaranty even if the lease is unenforceable against his buddies because of some alleged breach.

Tilting the Scales in Your Favor

A personal guaranty is not likely to be avoided. Milton is better off co-signing the lease as a tenant than as a guarantor. A second option would be to modify the guaranty so that Milton is responsible only for Franklin’s twenty percent share of the lease – which is not likely. If all else fails, at least plan to meet with the parents of Franklin’s friends and talk about their views of the lease and the relative responsibilities of each. Good luck.

Business For SaleThis is the second installment of a series discussing potential pitfalls of which closely held business owners should be wary when they are trying to sell their business. Here’s a link to our first installment.

After a lifetime of pouring time and energy into growing and expanding, Pawlenty Energy, JR and Sue Ellen Pawlenty are ready to sell their business and retire. Having never sold anything of this magnitude, JR and Sue Ellen have no idea where to start to try to sell their company.  Even more challenging is that, until the money exchanges, they must continue to run their business. Marketing to sell their company will be a hassle that could negatively affect their operations, their personnel and their reputation both with their customers and with their vendors.  Their friend Nancy Noitall recommended that they hire a business broker to assist them in handling the sale.  Is this a good idea?

Benefits of a Business Broker

Business brokers can provide a valuable resource to sellers. For example, a business broker can mass market a company when the seller does not already have a prospective buyer lined up.  The broker also serves as the seller’s spokesperson, allowing the seller to concentrate on running the business instead of dealing with the daily distractions that arise from trying to get a deal done.  This includes screening prospective buyers to ensure they can afford the sales price.  A broker can also come up with a market value for the business based on the sales prices of similar businesses.

Risks of Using a Broker

Sellers face some risks using business brokers. Because a business broker is the seller’s spokesperson, the seller would likely be liable if the broker misrepresented the business to a buyer.  Business brokers also typically use form agreements for each transaction.  If there are unique aspects of the transaction, or the business, that are a material part of the sale, form agreements may not address those issues and create the potential for litigation between the buyer and seller down the road.

Should I Involve Other Professionals?

Yes. If you have an accountant, he or she can help you get your financial statements in order before you advertise your business for sale.  If your accountant did not previously do so, he or she may be able to audit your financial statements, which will improve your business’s value.  If you hire a broker, your broker can deal directly with your accountant on any questions from potential buyers about the company’s financials.

You should also involve an attorney who can review and advise you about the broker agreement. Your attorney can also review and revise the broker’s form sales contracts to try to protect you from certain risks if the sale fails.

What Should I Look For in a Broker?

If you want to hire a broker, you should look for someone who has a proven track record selling similar businesses, or who has experience in your industry. The broker should be willing to work with your financial and legal advisers.  Most importantly, you want a broker who puts your interests ahead of his or her fee.

Tilting the Scales in Your Favor

Whether you use a broker to help you sell your business depends on your personal circumstances. If you choose to use a broker, conduct a thorough background check, including references, of all potential candidates before hiring one.  You also need to make sure you have a clear understanding of how the broker is compensated under the broker agreement – which you should have an attorney review with you.

man with tiger

Phil Elliott, wide receiver for the North Dallas Bulls, posts a photograph on Instagram showing his new pet tiger hanging out in his backyard in Preston Hollow.  His post goes viral and becomes a hot news topic.  The next day, PETA claims Elliott’s tiger is illegal and requests the Dallas Police Department seize the tiger.  Can Elliott shake PETA’s attack?

Exotic Animal Regulations Across the Country.

The ability to own exotic pets varies across the country.  At least 14 states ban private individual citizens from owning exotic animals as pets.   Approximately 14 more states have some sort of licensing scheme requiring the owner to register the animal.  Other states have regulations covering the ownership of exotic animals, but do not require registration or may not have enforcement provisions.  This is a great summary of each state’s laws concerning exotic animals.

Texas’ Permit Requirements for Exotic Animals.

Texas prohibits private individuals from owning or having custody of a “dangerous wild animal” – such as a lion, tiger or bear[1]unless the person has a certificate of registration from either the city or county animal control department, or from the county sheriff if the county does not have an animal control department.  The registration certificate must be renewed annually.  The owner must also have at least $100,000 liability insurance coverage for the animal.  Additionally, the owner must immediately notify the animal control department or the sheriff if the animal escapes or attacks a human.

The failure to register a wild animal is a Class C misdemeanor for each day the animal is not registered.  This means the owner could be punished with a fine of $500 for each day.  Additionally, the city or county where the person keeps the wild animal may sue the owner and recover a civil penalty between $200 and $2,000 per day, plus attorney’s fees.

Tilting the Scales in Your Favor

Pets can be expensive, but exotic pets can be even more expensive if you fail to follow the rules.  So before you buy the cute capuchin monkey for your kids or significant other, make sure you take care of the paperwork to avoid any potential legal trouble.

[1] The Texas statute contains a defined, exclusive list of “dangerous wild animals.”

FORT COLLINS, CO, USA, JULY 24, 2014:  Airborne radio controlled DJI Phantom quadcopter drone with GoPro Hero 3  camera  on a gimbal mount.

Last month Tilting discussed whether Daisy Duke and her Uncle Jesse faced civil or criminal liability for shooting down Boss Hogg’s drone trespassing over their property. To recap: Daisy Duke was sunbathing by her Uncle Jesse’s pool when a drone owned by Boss Hogg began hovering over the pool area. Daisy freaked out, and Uncle Jesse shot the drone out of the sky. Later he learned that Boss Hogg took photos of Daisy. This month Tilting considers whether Boss Hogg is liable to the Dukes for trespassing and invasion of privacy.

Does flying a drone over someone’s property constitute trespassing?

Yes. Trespassing can occur in two ways: (1) a person physically enters another person’s land without permission; or (2) a person causes an object to enter another person’s land without permission. The fact that the drone is in the airspace above the property, and not on the ground, does not matter because the property owner owns a reasonable amount of airspace above the property. Drone operators are likely adhering to FAA guidelines that recommend flying a drone less than 400 feet off the ground. In effect, the FAA claims the airspace over 400 feet. Understandably the property owner claims the airspace under 400 feet. Thus, flying a drone invades that airspace, and constitutes a trespass.

What about Invasion of Privacy?

A party may have an invasion of privacy claim for “nonphysical invasions” such as spying or wiretapping. For example, setting up a video camera in someone’s bedroom is an invasion of privacy. The plaintiff must prove that the invasion of privacy was something that would severely offend, humiliate or outrage the ordinary person. Using a drone to photograph or videotape someone in their backyard will likely meet this standard.

Does a drone owner face civil liability?

Yes in two ways. Boss Hogg may be liable for trespass or invasion of privacy under common law. If the drone typically flies over the property for a short period of time, and the property owner does not usually incur any costs to remove the drone, damages are likely limited to mental anguish.

The Dukes also have a claim under a new statute passed by the Texas Legislature two years ago. The law creates a private cause of action against the drone owner or user for using a drone to capture an image of the property owner (or tenant) or their property and allows the property owner to recover $5,000 for all of the images captured during each trespass, or $10,000 if the drone owner/operator discloses, displays or distributes the images. Another benefit to property owners is that they can recover court costs and attorney’s fees, which would not otherwise be recoverable. Boss Hogg will find himself in big trouble for violating this new law.

There is potential criminal liability as well. The new Texas law adds misdemeanor offenses for the drone owner/operator who uses a drone to photograph or video another person or privately owned property.

Tilting the Scales in Your Favor

If you operate your drone responsibly you should avoid any potential legal crashes. It is best to make sure that if you fly your drone off your property, you fly it over public property or have the other property owner’s permission to fly on their land. Similarly, you should not take any photographs or video on private property without a person’s or property owner’s permission.

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Texan ranch owner Hugh Steerman (fondly known as “Gramps”) just received notice that his family’s fourth-generation, 2,000-acre, Rambling Steer Ranch is a possible pathway for the West Texas Rail from Fort Worth to El Paso. Gramps is concerned that the planned route will split the Rambling Steer, prohibiting cattle from being moved across the tracks to grass and water, and pressuring his wildlife harvest by introducing strange sound and light to the quiet. Can Gramps stop the train? If not, what can he expect?

Probably not. The best solution is to make the Rambling Steer Ranch appear less desirable than the other rail options or, and, failing that, to cut the best deal he can with West Texas Rail. A last resort is a lawsuit challenging the authority of West Texas Rail to condemn the property, and then challenging any damages awarded as being too little. A bare-bones overview of the condemnation process follows.

Adequate Compensation for Public Use

The Texas Constitution requires that adequate compensation be paid to landowners for property taken for public use through the exercise of the authority of Texas eminent domain. If acting under state eminent domain authority, constitutional amendments, effective January 2010, require a two-thirds supermajority of both houses of the Texas Legislature before eminent domain power can be delegated. If acting under the Federal Railroad Administration, federal eminent domain authority is slightly different, but the process is much the same. Assuming that West Texas Rail complied with the requirements for finding appropriate public use and public necessity under either Texas or federal eminent domain requirements for taking part of the Rambling Steer, and also gave timely notice of the required statement of landowner’s bill of rights, then what?

Negotiations with Condemnor

Now’s the time for Gramps to make his best pitch to West Texas Rail either to go around or to re-route to the outside boundary of the Rambling Steer to avoid depriving Gramps’ usage of the remaining property for grazing and water access, and for hunting. If West Texas Rail has the opportunity to re-align its rail along the Rambling Steer’s boundary, it will likely do so to avoid paying for additional damages to the remaining property and for the obvious public relations value of working with the existing landowners. If a mutual agreement cannot be reached, however, West Texas Rail will send to Gramps a final offer, with copies of a written appraisal, draft deed or easement, and the Texas Landowner’s Bill of Rights.

Special Commissioner’s Hearing

If the final offer is not accepted within fourteen days, West Texas Rail may initiate, but is not likely to act that quickly to file, a condemnation proceeding to exercise the power of eminent domain to transfer title to the property from Gramps to an entity duly empowered by the government. The condemnation lawsuit will be filed with the county court at law in the county where the Rambling Steer is located. A judge will appoint three disinterested real property owners in the county as special commissioners to assess damages only. The judge may accept special commissioners recommended by the litigating parties and may give each party an opportunity to challenge one of the court-appointed commissioners. The special commissioners must promptly schedule a hearing at the earliest practical time, but no earlier than the twentieth day after their appointment. Although not obligated to attend, Gramps (and any expert he may elect to use) may attend and testify as to the market value of the portion of the ranch being condemned, as well as to the damage that the rail project would cause to the remainder of the Rambling Steer. After the special commissioners render their decision, Gramps must file a written statement of objections in a timely manner if he disagrees with the decision.

Condemnor’s Right to Possession

After the conclusion of the special commissioners proceeding, West Texas Rail has the statutory right to obtain but, again, may choose to delay and to continue negotiating before taking possession of the property pending further litigation if: (a) it pays the money awarded either to Gramps or to the court, and (b) complies with related deposit and bonding requirements. If the court later rules that condemnation was wrongful, the temporarily displaced Gramps may recover damages if there was no right to condemn the Rambling Steer. If Gramps withdraws the deposited compensation, he waives all objections to the legality of the taking and may only contest the adequacy of the amount paid. If Gramps challenges the adequacy, and the county court at law judge later determines that the compensation paid was too high, Gramps must pay West Texas Rail back.

Tilting the Scales in Your Favor

If you receive notice of a condemnation proceeding possibly affecting your property, don’t ignore it. Instead, learn as much about the routes and the condemning authority as you can, possibly also investigating the condemnor’s eminent domain authority. Gather information identifying all the properties identified as likely candidates for the rail route and condemnation, particularly yours. Identify arguments that make your property less desirable than someone else’s and meet with an authorized condemnor representative on your property to point out the negative impacts of the proposed taking. Know that, for example, West Texas Rail will want to foster good will among those affected – they may be customers someday. If negotiations are unsuccessful, and you get to the special commissioners’ hearing, consider retaining counsel who will likely recommend hiring an expert witness. Even if you don’t get the damages award you seek from the special commissioners, you will probably want to have expert testimony before the county court judge.

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Drone with CameraTrying to avoid the sweltering heat, “Uncle Jesse” Duke was in the garage working on his moonshine operation when he heard a loud shriek in the backyard. He ran to the back to find his niece, Daisy, sunbathing by the pool. Daisy shouted, “That drone keeps hovering over the pool area looking toward me. Do something about it Uncle Jesse!” Uncle Jesse quickly ran back to the garage, grabbed his trusty shotgun, and blew the drone out of the sky. An hour later Sheriff Coltrane showed up at Jesse’s house and asked, “Jesse, did you shoot a drone?” Jesse responded, “You’re durn right I did.” Sheriff Coltrane replied, “Well Jesse, that was Boss Hogg’s $2,000 drone you destroyed. I’m sorry, but I’m gonna have to arrest you.” Jesse said, “I didn’t commit no crime Sheriff. It’s my American right to defend my property.” Is Jesse right?

Can You Lawfully Shoot Down a Drone over Your Property?

Two reported cases in New Jersey and Kentucky deal with shooting drones flying over private property. Both times the shooters were charged with criminal mischief and related misdemeanors. As a starting point, your homeowner’s property is both the dirt and your improvements, and also a reasonable amount of airspace necessary to utilize your property. While you can’t complain that the American Airlines flight at 30,000 feet is trespassing on your property, a drone that’s only 200 feet off the ground…? Well, that’s probably a different story…

Earlier Tilting articles mentioned that each state has a “castle doctrine.” Although it varies by state, the “Castle Doctrine” generally allows homeowners to protect themselves, and in some cases their property, with force.   Beyond the “Castle Doctrine” Texas has another law that permits a property owner to use “force” when the property owner reasonably believes it is necessary to prevent a trespass on their land.   Using that Texas statute, the conduct may be justified and criminal liability may be avoided where the homeowner used “deadly force” (i.e., a gun) to shoot down the drone.

What about civil liability?

The homeowner’s action may also be justified against civil liability if the homeowner can prove: (1) the trespassing Drone was not privileged to be above the homeowner’s property (such as to avoid an emergency); (2) the homeowner reasonably believed the trespass by the Drone can only be prevented or terminated by the force used; and (3) the homeowner either requested the trespass cease, or reasonably believed that request would be useless or that substantial harm would be done before the request can be made. But there is no clear cut answer at this time, and these defenses would be decided by a court or jury.

Tilting the Scales in Your Favor

While no one wants their privacy intruded upon, we do not recommend shooting a drone out of the sky. While you might have good legal arguments to justify your actions – and probably have a jury’s sympathy – it will still be a costly process, particularly when you may be one of the first cases of this kind in the state. Obviously, your liability exposure is compounded if you happen to miss the drone and hit another person or their property.

Having said that the drone owner does not necessarily get away scot-free. In 2013 the Texas Legislature passed a law that creates a private cause of action against the drone owner or user for using a drone to capture an image of the property owner (or tenant) or their property and allows the property owner to recover $5,000 for all of the images captured during each trespass, as well as court costs and attorney’s fees. The drone owner or user may also be liable to the homeowner for trespassing and for one of the torts of invasion of privacy (check out our other article this month “Can You Videotape Someone Else’s Conversation”). Next month we’ll explore this issue from the drone owner’s perspective, including federal regulations and recommendations for flying unmanned drones.