Tag Archives: real estate law

Formation of Business Entities

calculator-178127_640There is no question that in situations other than personal homestead, it is extremely prudent to hold title to business or investment real estate in the name of a separate entity, and not the owner’s individual name.  Why? If properly set up, a separate entity can protect an individual from personal liability if an accident occurs on the property, certain operating expenses/debts, and other potential perils. Without such protection, an individual’s personal assets could be at risk if a lawsuit ensues and a judgment is issued against the landowner.

With today’s technology, it is easier than ever for an individual to attempt to set up their own business entity.  Forms are readily available on the internet, and the Secretary of State’s office hosts a website allowing for online registration and formation of a business entity.  Unfortunately, more times than not, individuals operating without competent legal assistance tend to choose incorrect or incomplete forms when attempting to document the matter themselves.

In a growing number of situations, individuals are merely filling out the required formation registration on the Secretary of State website. While this procedure may be enough to register the entity and obtain a Certificate of Formation from the State, a fully viable entity has not been formed.   Unless an actual Company Agreement (in the case of an LLC) or Bylaws (in the case of a corporation) are prepared, in addition to other necessary ancillary documents and corporate formalities, the validity of an entity could be easily attacked in the event of a lawsuit.  Opposing counsel would argue that without a full set of entity documents, the entity was in fact operating as a sham. Without the entity protection, the plaintiff would typically execute their judgment against the individual, and the individual’s non-exempt assets.

In order to realize the benefits of owning real estate under a separate business organization, it is critical to document the entity formation fully.  A qualified attorney should be able to assist in an efficient and cost-effective manner.

Contact Rattikin & Rattikin, LLP

Jack Rattikin, Jr., and Jeffrey A. Rattikin—the partners comprising Rattikin & Rattikin, LLP—have a combined 85-plus years of experience in all aspects of commercial and residential real estate law across the State of Texas. The firm continues a tradition of providing the most professional, ethical and up-to-date legal services available in the industry. In response to the growing needs of its clients, the firm has expanded its areas of practice to include a broad range of real estate and transactional services.

We would welcome the opportunity to assist you with your legal needs, and appreciate your interest in the Firm.

Copyright 2016 Jeffrey A. Rattikin, all rights reserved

Home Sales and Existing Leases: How to Deal With Current Tenants

hand-101003_640Although more common in commercial transactions, many residential transactions involve the sale of homes subject to existing leases and tenants. A potential buyer of a property in which a tenant currently resides should be aware of the legal status of such leases after closing, and be comfortable with rights and obligations imposed on them by the lease after closing.

For whatever reason, many folks believe that once a property sells, any existing lease automatically terminates, and the new buyer would have the right to immediate possession. This misunderstanding is obviously incorrect; an existing lease, whether written or oral, conveys a leasehold interest in the land that would be superior to any contractual rights that may arise thereafter. Therefore, anyone who goes under contract to buy the property, and ultimately closes on the purchase, would take title subject to the pre-existing lease. The new buyer would in effect step into the shoes of the seller as landlord until the term of the lease has expired. Yes, the new buyer would be entitled to future rent payments made under the lease, but would also be responsible for any obligations and promises the previous owner may have agreed to under the lease.

Because the new buyer will be saddled with the rights and obligations due under the lease, it is imperative that the buyer conduct sufficient due diligence to understand what they are taking on. What does the buyer need to know? For starters, what are the basic terms? Length, amount of rent, rights to renew or purchase, responsibility for repairs, maintenance, taxes, insurance, and the like, are all important. Are the tenants current on rent? Has the tenant pre-paid any rent? The last thing a new buyer wants to find out when he or she becomes the new landlord is that the tenant has prepaid rent for a year, will not be paying any future rent during that time, and oh, by the way, the landlord promised in writing to replace the roof the next month (true fact scenario!).

Most commercial sales contracts contain clauses that provide satisfactory treatment of these issues, but the TREC contract is fairly bare. Fortunately, TREC amended the base form last year to help a bit. Now, under Par. 10B., the seller must provide copies of existing leases within 7 days of the contract effective date. The Buyer will want a chance to review the lease and get comfortable with the terms, so it is important that an option period extend a minimum of 10 days. If the Buyer doesn’t like the lease terms, they would be able to terminate the contract during the option period. Par. 9B (5) provides that any security deposit will be transferred from seller to buyer at closing, and Par. 13 provides that rent will be prorated at closing.

But what important agreement does the TREC form lack? Most well-drafted commercial properties require the seller to obtain an “estoppel certificate” from the tenant, and provide it to the buyer during the option period. An estoppel certificate is a statement from the tenant themselves as to the tenant’s understanding of the lease terms, the amount of rent already paid, and any accrued obligations owed by the landlord. It is always best to confirm with the tenant that they are in agreement with the landlord’s characterization of the lease status. A buyer is well advised to add a provision in Par. 11 calling for an estoppel certificate.

Because lease and tenant-related issues expand the complexity of the transaction, the assistance of a competent attorney will be of great help in wording the contract and evaluating future rights and obligations. Armed with these protections, buyers of tenant-occupied property are in better position to protect themselves from post-closing lease surprises.

Contact Rattikin & Rattikin, LLP

Jack Rattikin, Jr., and Jeffrey A. Rattikin—the partners comprising Rattikin & Rattikin, LLP—have a combined 85-plus years of experience in all aspects of commercial and residential real estate law across the State of Texas. The firm continues a tradition of providing the most professional, ethical and up-to-date legal services available in the industry. In response to the growing needs of its clients, the firm has expanded its areas of practice to include a broad range of real estate and transactional services.

We would welcome the opportunity to assist you with your legal needs, and appreciate your interest in the Firm.

Copyright 2016 Jeffrey A. Rattikin, all rights reserved