Texas Law
Texas Commercial Real Estate Law
- Commercial Real Estate Law
Commercial Real Estate Law
Corporate real estate transactions invariably have far-reaching business and economic repercussions. This chapter explains frequently-used real estate terminology and considers some of the issues common to commercial real estate transactions in Texas. Landlord liability for personal injuries occurring on business property is discussed in the Personal Injury Defense Law: Professional Malpractice Chapter. The Real Estate Law Chapter covers residential real estate, dealing with real estate agents, and landlord-tenant issues.
Terminology
A stumbling block for many persons entering the real estate market is the unfamiliar terminology frequently used by real estate professionals. Real estate law uses many old terms and concepts because many real estate laws have ancient roots. However, many rights and responsibilities regarding real estate have evolved and have been updated over time as societal and business needs have changed. The following are some of the most frequently encountered real estate terms.
Assessment
An assessment is a value placed on real property for purposes of levying local property taxes. Real estate taxes are calculated by multiplying the assessed value of a piece of property by the tax rate. Taxable value is calculated by subtracting any allowable exemptions from the appraised value of the property to determine net appraised value, multiplying the net appraised value by the assessment ration to determine assessed value, and then subtracting any allowable exemptions from the assessed value to determine taxable value. Most properties are reassessed periodically, but a property's assessed value may not be the same as its actual market value.
Co-Ownership
Co-ownership is ownership of property by more than one person. The common ways in which two or more parties can co-own a piece of property in Texas are joint tenancy, tenancy in common, and community property, all of which are discussed below. Although there are advantages to co-owning property, there are drawbacks as well. If co-owners cannot agree on use, sale, or possession of a piece of property, they may have to go to court to resolve the matter in a partition action. In a partition action a joint tenant or tenant in common asks the court to split the property in a fair and just manner. A particular action dissolved the cotenancy, but does not change the title to the property. Each person will be given a specific share of the property to be used to the exclusion of any other cotenants who previously had equal possession rights.
Community Property
In Texas, a husband and wife can hold property together as joint tenants or tenants in common, or the property may be "community property." No two of these forms of ownership can exist at the same time. A husband and wife also can own property separately. Separate property consists of property owned or claimed by a spouse before marriage; property acquired by a spouse during marriage by gift, devise, or descent; and damages for personal injuries received by a spouse during marriage, except any recovery for loss of earning capacity during the marriage. Community property consists of all property other than separate property acquired by either spouse during marriage.
Each spouse has the sole management, control, and disposition of his or her separate property. In addition, each spouse has the sole management, control, and disposition of the community property that he or she would have owned if single. Any other community property, such as mixed or combined community property (which neither spouse would have owned if single), is subject to the joint management, control, and disposition of the husband and wife. Spouses can provide otherwise by power of attorney in writing or other agreement.
Deed
A deed is a written instrument that transfers the title of property from one person to another. The two most common types of deeds are general warranty deeds and quitclaim deeds, both discussed below.
Deed Restriction
Deed restrictions usually are imposed on a buyer of land when the property is sold. The restrictions are included in the seller's deed to the buyer. Restrictions may be imposed by a property developer to maintain certain standards. Restrictions may include limits on the color a building may be painted, what kind of trees may be planted, or the size of structures that may be built on the property. Deed restrictions also may be known as covenants or conditions.
Easement
An easement is the right to use another person's land for a particular purpose. There are many forms of easements. Public utility companies frequently have utility easements that permit them to run gas, water, or electrical lines through another owner's property. The owner of property near a lake might buy from the owner of lakeshore property an easement to cross his or her property to access the lake. A person who owns property that is landlocked may receive an easement from an adjacent land owner to have access in and out of the property. This kind of easement also is called a right-of-way.
Encumbrance
An encumbrance is an obligation attached to a piece of real property. It is not an ownership interest, but is a right or interest held by a party who is not the owner of the property. Property may be bought and sold even though there are encumbrances attached to the property. Because encumbrances attach to property, not to property owners, a person who buys property with an encumbrance is bound by the encumbrance. Easements, deed restrictions, and liens are examples of encumbrances.
General Warranty Deed
Generally, in Texas, title is transferred by a general warranty deed. A general warranty deed provides the greatest protection to the purchaser because the seller pledges or warrants that he or she legally owns the property and that there are no outstanding liens, mortgages, or other encumbrances against it. A warranty deed is also a guaranty of title, which means that the seller may be held liable for damages if the buyer discovers that the title is defective. A warranty deed is no substitute for title insurance, however, as a warranty from a seller who later dies or goes bankrupt may have little, if any, value. Texas provides a statutory form for use as a general warranty deed, but any form is acceptable so long as it conforms to the law.
Joint Tenancy
Joint tenancy is a form of co-ownership. Although it is a common way for a husband and wife to own property, there is no requirement that joint tenants be married to one another or that there be only two joint tenants. Each individual owner in joint tenancy has a right to sell, encumber, and possess the entire property.
Unlike many states, Texas does not allow joint tenants to automatically enjoy a right of survivorship. Under Texas law, if one joint tenant dies before the tenancy is severed, the interest owned by the deceased joint tenant does not survive to the remaining joint tenants, but instead passes by will or intestacy. Joint tenants may agree in writing, however, that the interest of any joint owner who dies will pass to the surviving joint tenants, but no such agreement is inferred from the fact that the property is held in joint ownership.
Lien
A lien is a charge against property that provides security for a debt or obligation of the property owner. The lien holder does not own the property. The owner of property may voluntarily agree to a lien, such as by taking out a mortgage, or a lien can be imposed, such as for nonpayment of taxes. One of the most common liens is the mechanics lien, which may arise when someone furnishes labor or materials to improve a piece of property. If the worker or supplier is not paid by the property owner, he or she files an affidavit with the county clerk and sends a copy to the property owner. A mechanics lien may be foreclosed only on judgment of a court ordering sale of the property subject to the lien.
Quitclaim Deed
A quitclaim deed is a special type of deed that relinquishes to the buyer whatever interest the seller may have in the property. If the seller is the sole owner of the property, the quitclaim deed is enough to transfer title, but the buyer takes a risk by accepting a quitclaim deed because it offers the buyer no guarantee that the title is valid. Quitclaim deeds are used frequently during the property settlement phase of marriage dissolutions.
Recording
In Texas, real estate owners and parties with real estate interests may file with the county all documents affecting their interest in property in order to give public notice of the interest. Although valid title passes without recording any documents, a buyer could later lose the property to a subsequent buyer who purchases the property without notice of the earlier buyer's interest. To prevent such an occurrence, it always is wise to file all documents relating to property ownership or interest. Titles in Texas are registered under the abstract system. An abstract of title is a record of all the interest entries for that property.
Special Assessment
A special assessment is a tax levied on a piece of property to pay for improvements that benefit the particular property, such as streets, sidewalks, and street lighting. Special assessments are liens on the property until they are paid.
Sublease
Subleasing means having someone else take over a tenant's rights and obligations under a lease before the original lease expires. Under Texas law, a tenant may not sublet a unit to any other person without the prior consent of the landlord. A landlord may, however, waive the right to prior consent. If subletting is allowed and the new tenant does not pay rent, damages the unit, leaves before the lease expires, or breaches another condition of the lease, the landlord may hold the original tenant responsible. The original tenant then may sue the new tenant for those costs.
Tenancy in Common
Tenancy in common is a form of co-ownership. Tenants in common, like joint tenants, share the right to possess, sell, and encumber the property. Upon the death of a tenant in common, that person's ownership interest passes to his or her heirs as part of his or her estate.
Title
Title to real estate is the right to, or ownership of, property. Title may refer to the actual ownership or to the documentary evidence of that ownership. In order to sell a piece of property, all title matters must be cleared. Usually, this is accomplished through a title search, in which a diligent search is made of all records relating to the property to determine whether the owner is authorized to sell the property and whether there are any claims against it. If any defects in title are discovered during the title search, the seller usually is given time to cure the defect. Title insurance often is taken out to protect against any hidden defects in the title. There are two types of title insurance, one that protects the lender's interest in the property, and one that protects the owner's interest.
Purchasing Real Estate
Many real estate transactions are fairly complex. Because a purchaser later may be held liable for such things as environmental hazards or injuries caused due to the condition of the structure, it is imperative that a prospective buyer make a thorough investigation of the property before buying. A good purchase agreement should provide the buyer with ample opportunity to assess such risks. If the purchaser is acquiring rental property, it is his or her responsibility to verify the terms of rental agreements, and to explore any claims tenants may have against the seller, because such claims later may become the legal responsibility of the purchaser. An experienced real estate attorney should be able to adequately advise on the many issues of concern to parties buying real estate.
Of increasing concern to businesses are environmental hazards that may come with acquiring real estate. Leaking underground oil storage tanks or hazardous emissions, for example, may become the cleanup responsibility of a new owner under state and federal environmental laws. Even a new owner who neither contributed to, nor knew of the contamination, may be required to pay for the cost of cleanup.
Mortgage Financing
Many attorneys practicing real estate law spend a substantial portion of their practices negotiating mortgages secured by real property. These negotiations often are quite complex. Mortgage financing for new real estate can be as difficult to obtain for an established business as for one that is starting up. To help move the process along, a business often has to give up a degree of control over business decisions that affect the property. A lender may want to impose liabilities for the property onto the borrower, while at the same time retaining a say in how the property is managed. It is important for a borrower to try and retain as much flexibility and control as is possible. For example, a borrower may want to retain control of insurance proceeds in the event of damage to the property so that the property can be restored, while a lender may want to require that such proceeds go toward debt owed.
Foreclosure
Foreclosure is a legal action in which property that has been used as security for a debt is sold in order to pay off that debt. It must be initiated by the grantor of the mortgage, must occur in the county in which the property is located, and must follow a default by the debtor on the terms of the mortgage. Mortgages provide for foreclosure in order to give lenders the right to recover the money they previously lent. In Texas, some mortgages include a power-of-sale clause that gives the lender authority to conduct a foreclosure sale without taking the matter to court. In certain circumstances, the lender may accept the deed to the property in lieu of foreclosure.
Leasing Real Estate
Under Texas law, a lease is any written or oral agreement between a landlord and tenant that establishes or modifies the terms, conditions, rules or other provisions regarding the use and occupancy of property. If the lease is an agreement to rent the property for an unspecified length of time, it is considered a periodic tenancy, or month-to-month lease. This type of lease continues for successive rent-paying periods until the landlord or tenant provides the other with a notice to terminate. A term lease is a rental agreement specifying a definite time period. Term leases are almost always written. If the parties to the term lease do not state when and how notice of termination is required, the lease automatically ends on the last day of the time period.
Negotiating a Lease
Many businesses will have specific needs that are not satisfied by a standardized lease agreement, such as the operating expenses provisions of the lease. It is in a property owner's best interest to prepare a written agreement that addresses both parties' rights and responsibilities in the event problems arise.
The following items should be addressed in every rental agreement:
- Amount of and conditions for returning the security deposit
- Who is responsible for maintaining fixtures, appliances, and common areas of the property and what standards apply
- Renewal rights at the end of the lease
- Cancellation rights
- Circumstances under which the owner can enter leased premises
- Who is obligated to insure the property and which party is named beneficiary under any insurance policy
- Subleasing rights or prohibitions
- Any restrictions on the rental of adjacent space
Security Deposit
Landlords have the right to insist that renters pay a security deposit before moving in. The security deposit is used to pay for any damage beyond ordinary wear and tear that the tenant might do to the rental property, or to satisfy any debts between the tenant and landlord. The deposit cannot be used by the renter to pay rent. There is no limit to how much the landlord may require for a security deposit. The landlord may increase the security deposit at any time during a periodic lease if the tenant is given proper notice, which generally is one rental period plus one day. If the lease is a term lease, no changes may be made to the deposit until the lease comes up for renewal or the parties agree otherwise.
At the end of the tenancy, the landlord must return the deposit to the renter within 30 days to the forwarding address provided in writing by the renter. A requirement that a residential tenant give advance notice of termination as a condition for refunding the security deposit is effective only if the requirement is underlined or is printed in conspicuous bold print in the lease. Before returning the security deposit, the landlord may deduct the amount of the deposit necessary to repair damages (beyond normal wear and tear) and any charges for which the tenant is legally liable under the terms of the lease or as a result of breaching the lease. The landlord then must give any remaining balance of the security deposit to the tenant with a written description and itemized list of all deductions.
Real Estate Development
In the past, there were no controls over how a property owner could use his or her land. But as the population grew and cities became more crowded, the number of controls on land use became more and more extensive. Today, almost every city and town has some type of land use plan. A property owner has many land ownership rights, but these rights also are restricted by controls from the local, state and federal government. In any real estate transaction, it is important to understand exactly what regulations apply to certain properties and to the rights of the property owners.
Construction Contracts
Construction contracts are a highly specialized subcategory of contract law. Most construction projects involve many parties, each with unique expectations, deadlines, and responsibilities. Architects, engineers, contractors, subcontractors, and lenders all have to understand their rights and responsibilities. Failure to have an experienced real estate attorney negotiate and draft documents can lead to numerous headaches and unplanned expenses. Good planning should include discussion of mechanics liens, periodic inspections, bonding, timetables, and appropriate rewards or punishments for early or late completion.
Zoning
Zoning regulations are a particular type of land use control. Their purpose is to control and regulate development and growth of a community in a way that is best for the general public. They attempt to accomplish this task by dividing a community into areas (zones) that can be used only for certain purposes.
Zones generally are divided into several basic categories--residential, business, industrial, and other purposes. Most cities further divide property into much more intricate specifications, such as single-family houses within a residential area, or zones that allow for the building of condominiums or apartments. Furthermore, an industrial section of a city might be split between areas zoned for light-industrial and heavy-industrial operations. In Texas, in addition to zoning land for certain purposes, municipalities also may regulate characteristics such as the height, number of stories, and size of buildings, and the percentage of the lot that may be occupied.
It is important to find out exactly how a property is zoned, for this could have serious consequences on how the property can be used both at the present time and in the future. Zoning ordinances are changed through amendments. Such changes can be sought by an individual property owner or by local governments. The changes must be determined to be in the best interest of the community, and the opinions of persons affected must be sought through public hearings.
Another way to seek relief from zoning laws is through the form of a special use permit. Such permits make exceptions for uses of property that are not otherwise allowed under the zoning laws. Other ways around zoning laws include exemptions, which exempt a certain area of land from certain zoning requirements, and spot zoning, which rezone a small area or even one plot of land. These exceptions are allowed only if they benefit the community.
Land Use Law
In addition to zoning laws, there are other laws that mandate how a building can be built, how big or small it can be, and where it may be placed on the property. These specifications may be laid out in local regulations or in building codes. Building codes are developed to protect public health and safety. To ensure compliance with building codes, many municipalities require that property owners obtain building permits before they begin any type of construction or development. This way the city can ensure that the proposed building meets the applicable codes before construction begins. Another way communities enforce codes is by issuing certificates of occupancy that allow legal occupancy in buildings that pass code requirements.
On shorelines, the state adds other rules regarding the size and shape of buildings as well as their location on lots to these local regulations. The additional regulations are intended to avoid adverse environmental consequences resulting from building construction.
Other kinds of land-use regulations serve to protect the environment. Any development that may have an effect on the environment must conform to local, state, and federal regulations. For example, the National Environmental Policy Act is a federal law that requires environmental impact statements and state approval for projects that could adversely affect the environment. Such statements detail the effects of projects on areas such as air and water quality, safety, and wildlife.
Water Law
With the purchase or sale of real estate comes air rights, mineral rights, and water rights. Water rights include the use of underground water as well as water that touches the owner's property. Landowners whose property touches flowing water are "riparian owners," which means they have the right to use the bordering water for reasonable and beneficial use, such as boating, swimming, and other recreational purposes. Riparian owners may not, however, legally divert the water to land that does not adjoin the stream or lake. An owner also may not use the adjoining water in a way that affects the quality or availability of the water further upstream, downstream, or down the coast. Thus, an owner may not pollute the water or change its flow. Texas has extensive laws relating to water rights, and this should be kept in mind before taking any action that will have a significant impact on any water source.
Resources
Stuart M. Saft, Commercial Real Estate Transactions (Shepard's/McGraw Hill, Inc., Colorado Springs, CO, 2d ed. 1995).
Contact the State Bar of Texas, P.O. Box 12487, Austin, Texas, 78711-2487 (mailing address), 1414 Colorado Street, Austin, Texas 78701 (street address), (800) 204-2222 or (512) 463-1463, for copies of these publications: Homeowner's Rights and Tenants Rights Handbook.
The Office of the Attorney General, Research & Legal Support Division, P.O. Box 12548, Austin, Texas 78711-2548, publishes Your Tenant Rights, a free brochure.
The Texas Commission on Human Rights, Fair Housing Unit, P.O. Box 13493, Austin, Texas 78711, (800) 735-2989 (TDD) or (512) 437-3450, publishes Your Fair Housing Rights, a free brochure.