Bill Deron bought a 100-acre tract next to a creek outside the City of Houston. Deron planned to build a subdivision where some of the homes abut a creek. The other homes would sit about 15 feet higher than the creekside homes. Deron disclosed to the creekside buyers that they needed flood insurance. But he did not tell any other home buyers to purchase flood insurance. Hurricane Harvey dumped so much rain on the neighborhood that all of the homes in Deron’s neighborhood flooded. Homeowners soon learned that the entire neighborhood sat in a floodplain. Did Deron have a duty to disclose whether the development or any part thereof is in a floodplain or even do something more? What about the government entity who approves the development? Continue Reading Washed Away: What Rights Do You Have When Your Home is Flooded?
Vlad “Dracula” Smith was looking for some new digs big enough to accommodate his growing family. While searching the MLS listings, Dracula stumbled across a castle belonging to Victor “Frankenstein” Jones. Little did Dracula know, but the castle was widely reported to be haunted. “Frankenstein” had even made the front page of the local paper when he reported the haunting to the local paper and Reader’s Digest last Halloween. However, in negotiations for the sale of his castle, Frankenstein, and his broker, failed to tell Dracula about the newspaper and magazine articles. When Dracula later learned of the stories, he sued Frankenstein for rescission and damages. Did Frankenstein have a duty to disclose the haunting to Dracula? Continue Reading Duty to Disclose that a House for Sale is Haunted?
Because of Hurricane Harvey, oil and gas production company Gonzales Energy and its owner Paunscho are treading water. Rising hurricane flood waters destroyed his files, water-logged his computers and ruined office equipment in their downtown leased offices preventing Gonzales Energy from servicing its wells, pipelines and royalty owners. As flood waters recede, Paunscho wants to know what rent relief he gets for premises so severely damaged he can’t use them. Landlord Lester “Les” Orr is trying to figure out if he can collect rent anyway and, if not, how he will make his mortgage payments. Who has the upper hand?
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
A 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
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?
Over 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:
- income taxes;
- local taxes (do you owe hotel occupancy taxes?);
- property taxes (do I keep my homestead exemption?);
- homeowner’s insurance (does my policy cover me for tenants?); and
- 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:
- you rented the home for 14 days or less during the year; and
- 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.
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.
This 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.
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 – 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.
 The Texas statute contains a defined, exclusive list of “dangerous wild animals.”