The commercial real estate leasing industry is notable in the extent to which business terms and legal obligations are memorialized in great detail in written contracts.  The exclusive use of written agreements is driven by the subject of the contracts, i.e., real estate, complexity of designing an agreement that may remain in effect for many years, and the potentially conflicting interests and incentives of the landlord and tenant. Perhaps few industries are as awash in standardized contract forms and boilerplate terms like the real estate industry.

It is understandable and appropriate for commercial landlords and tenants to focus their attention on the important task of memorializing their agreements about known issues such as the allocation of risk of potential unknown factors such as damages for water leaks, and other casualty and force majeure events.  In the event of a dispute, the contract is meant to be the determinant of who bears the risk of loss.  However, the parties should not lose sight of the fact that their legal rights and remedies are not based solely on the agreements they may have signed.

In addition to agreement-based rights and obligations, Oklahoma “tort” law imposes all sorts of implied rights and obligations independent of what parties may have formally agreed to.  The foremost “tort” obligation is to use reasonable care so as to avoid damage to others.  The failure to use reasonable care is negligence.

Because of the dominance of formal contracts in the commercial real estate leasing industry, courts in other jurisdictions historically were reluctant to recognize the applicability of tort remedies on commercial contracts. The philosophy was that parties were expected to define their obligations in the written agreements that would be the sole determinants of their rights.

One party could not sue another outside of contract for negligence if the harm was merely economic and the duty arose from the contractual relationship. The recent case of Abercrombie & Fitch v. Penn Square Mall, 2018 OK CIV APP 56, 425 P.3d 757 (Okla. Ct App. 2018), however, teaches commercial landlords and tenants that Oklahoma courts will permit the pursuit of both contractual and negligence theories for economic losses. This case emphasizes the serious risk of claims and damages outside the scope of the parties’ carefully negotiated contracts.

Abercrombie & Fitch v. Penn Square Mall, arose from a water leak in a roof drain line running above the ceiling of the leased premises in Penn Square shopping mall. Abercrombie & Fitch, the tenant, filed suit against Penn Square Mall LP alleging Penn Square “had a contractual duty to maintain the mall’s plumbing lines in good order, condition, and repair,” and that Penn Square breached this duty. Abercrombie asserted theories of breach of contract and negligence against Penn Square, and asserted that as a result of the water leak it “incurred substantial damages in cleanup, repair, lost merchandise, lost profits, and interruption to its business,” and sought damages in excess of $300,000. Despite the existence of a commercial lease with a limitation of liability clause, the case went to trial for damages under both contract and negligence theories.  At trial, the tenant was awarded nothing at all for its breach of contract claims, but the jury awarded $243,000 in lost profits, cleanup, repair, lost merchandise, and interruption to its business on the negligence claim. 

The landlord appealed, arguing that the tenant should not have been able to pursue damages for both breach of contract and negligence, and that the lease contract had a clause waiving such consequential damages.  However, the appeals court ruled that the language of the consequential damages limitation in the contract could reasonably be interpreted to relate only to the tenant’s contractual claims and not its negligence claims.  Therefore, the tenant’s judgment for lost profits, cleanup, repair, lost merchandise, and interruption to its business on the negligence claim was upheld.

Abercrombie & Fitch v. Penn Square Mall is a good reminder that commercial landlords and tenants must consider the extra-contractual risks and remedies under Oklahoma tort law.  As the court in Abercrombie found, a waiver of consequential damages provision, depending upon its wording, may only protect against contractual claims, not negligence claims.  Notice and other procedures may be interpreted to relate to contractual claims unless the contract explicitly includes the full universe of claims—both contractual and non-contractual.

The issue of extra-contractual claims can also arise in the context of determining the scope of an arbitration clause.  If an arbitration clause is drafted narrowly to encompass claims arising under the contract, it may not be broad enough to include negligence claims related to the leased premises and the parties’ relationship as a whole.  Absent unusual situations, care should be taken to ensure that the arbitration scope broadly covers all claims that might arise, not just contractual claims.

A good contract will recognize and address the possibility that parties may resort to tort remedies.  That way, the contract will retain its primacy in governing the rights and obligations of commercial real estate landlords and tenants. To anticipate this problem, the drafter should include language in the contract to this effect: “The parties agree that, regardless of the failure of the sole and exclusive remedy, landlord will not be liable for any consequential damages of whatsoever kind or nature.”

The Protecting Tenants at Foreclosure Act of 2009 expired on December 31, 2014. Now it is back and it is permanent. The law limits the rights of new owners of foreclosed properties from evicting tenants after a foreclosure, and was passed as a result of widespread hardships after the collapse of the mortgage markets. By 2014, it was felt that such protections were no longer necessary. But the law has been revived. On May 24, 2018, President Trump signed into law a bill which contained major rollbacks to the Dodd Frank Act. It ALSO revived the Protecting Tenants at Foreclosure Act of 2009 and makes it permanent.

Tenants cannot be evicted after a foreclosure, and can stay until the expiration of their lease term. The only exceptions are if the rent is dramatically below market (whatever that means) or if the tenant is closely related to the borrower. It provides protections to bona fide tenants in foreclosed properties where the foreclosed mortgage is a “federally related mortgage loan” (a very broad category of mortgage loans as defined in the federal Real Estate Settlement Procedures Act (“RESPA”)). An amended version of the Tenants Protection Act is available here.  A sample letter for tenants and advocates to use to implement the Tenants Protection Act is available here.

Are Commercial Loans Covered?

An important question for lenders, mortgage holders and servicers is whether the Tenants Protection Act is limited to residential one- to four-family mortgage loans, or whether commercial loans are covered.  The answer is that some commercial loans are covered; where a loan is made to an individual or entity to purchase or improve property which is one- to four-family residential property, the Tenants Protection Act provisions for notice and eviction must be followed, even if the borrower took the applicable mortgage loan for a commercial purpose.  Commercial purpose loans that meet the definition of “federally related mortgage loans” must comply with the Tenants Protection Act.

A “federally related mortgage loan” is any loan (other than a temporary loan such as a construction loan), which is secured by a first or subordinate mortgage on real property that is designed to be a one- to four-family residential property (including condominiums and manufactured homes), and the property has to be located in a U.S. state.  Refinancings and purchase money mortgages are included.  The mortgage loan (1) must be made by a lender that is either federally regulated or its deposits are insured by the Federal Government; (2) is insured, guaranteed or supplemented by the Federal Government; (3) is made in conjunction with programs administered by HUD or by another federal agency; (4) is intended to be sold to Fannie Mae, Ginnie Mae or Freddie Mac; (5) is made by a “creditor” as defined by the Consumer Credit Protection Act (15 USC §1602(f)) and that creditor makes or invests in $1,000,000 worth of residential real estate loans per year; (6) is a reverse mortgage made by one of the aforementioned lenders; (7) is an installment sales contract for residential one- to four-family residential property.

Protecting Tenants at Foreclosure Act of 2009 Basics

As a refresher, the Tenants Protection Act requires immediate successors in interest to foreclosed properties, including banks that take title to property after foreclosure, to provide a notice to vacate to any bona fide tenant at least ninety (90) days prior to evicting those tenants as a result of foreclosure.  In the event a foreclosure does take place, the Tenants Protection Act requires the successor owner of foreclosed property to honor any existing leases with renters until the end of the lease terms.  Protection is not available for the former mortgagor, the mortgagor’s spouse, child or parent.  A “bona fide” lease is the result of an arm’s-length transaction, and the rent has to be fair market value or government subsidized.  The Tenants Protection Act also provides Section 8 tenants in foreclosed properties certain protections.

Dodd-Frank Clarifies When Prior Notice of Foreclosure Occurs

A major change in the Tenants Protection Act brought about by Dodd-Frank concerns the interpretation of the provision that allows bona fide tenants of foreclosed properties to continue to reside at the property for the remaining term of the lease executed with the former owner only if that lease was entered into “as of the date of foreclosure”.  Prior to the amendment found in Dodd-Frank, it was unclear when the “date of foreclosure” occurred.  If the cut-off period began when foreclosure notices were sent, borrowers and tenants could no longer enter into leases that would have to be honored once the foreclosure notices were mailed and advertised.  Thus, under the prior version of the Tenants Protection Act, a foreclosing owner would take the position that leases entered into AFTER the date the foreclosure notice was mailed were not effective, and the foreclosing owner would not have to honor those leases.

Dodd-Frank changes all that by clarifying the phrase and explaining “For purposes of this section, the date of a notice of foreclosure shall be deemed to be the date on which complete title to a property is transferred to a successor entity or person as a result of an order of a court or pursuant to provisions in a mortgage, deed of trust or security deed.”    Unfortunately, ambiguity remains.  While Dodd-Frank clarifies that “notice of foreclosure” does not mean any correspondence or advertising undertaken by the mortgagee leading up to the foreclosure sale, it leaves the post-foreclosure timeframe unclear.  Put more simply, Dodd-Frank shifts the ambiguity from pre-foreclosure sale to post-foreclosure sale.  This is due to the use of the term “complete” in the new definition, i.e., what does “complete title” mean?

Debate is already underway as to whether “complete title to a property is transferred to a successor” occurs at the time of the foreclosure sale or at the time of recording of the foreclosure deed.   In Bankruptcy Courts, Judges who have opined on the issue of when the foreclosure sale is final from a bankruptcy perspective find that the foreclosure is final when the gavel goes down completing the auction, and the purchase and sale agreement is executed by the buyer.  On the other hand, there is an argument that the buyer at foreclosure who tenders a deposit and signs the purchase agreement only has equitable title; no legal title passes until the foreclosure deed is tendered to the buyer.  Still another interpretation is made by the foreclosing owner who seeks to evict any holdover borrowers or tenants from the property after foreclosure.  Post-foreclosure property owners are going to have to watch out for borrowers and mortgagors whose properties are in the process of foreclosure, as they could enter into lease agreements with tenants AFTER the foreclosure sale date, but before the foreclosure deed goes on record, and the foreclosing owner would be required by law to honor those lease and tenancy agreements.

In sum, post-foreclosure property owners must give ninety (90)-day pre-eviction notices to bona fide tenants, but the date on which that notice has to be given will now be later in the process — on or after the date the foreclosure deed is recorded.  Ninety (90)-day notices sent on behalf of the servicer during the foreclosure process will no longer satisfy the Tenants Protection Act.  Post-foreclosure property owners should do everything they can to ensure that foreclosure deeds are recorded expeditiously after a foreclosure sale to cut off the rights of mortgagors from entering into new lease agreements with bona fide tenants so that the new owner does not have to contend with honoring the terms of those new lease agreements.

Further, since bona fide leases survive the foreclosure until the end of their term, the tenants have state law based remedies for violations of the tenants’ rights against successors in interest in foreclosed properties. Nativi v. Deutsche Bank National Trust Company, 223 Cal. App. 4th 261 (2014).

Generally, every employee hired in Oklahoma or who is injured in Oklahoma is covered by the workers’ compensation laws of the state.  Independent contractors are not employees and are therefore not covered.

The issue of whether a person or entity is an employee or an independent contractor is a complicated one. Nevertheless, the Workers’ Compensation Commission provides CC-Form-36A: Affidavit of Exempt Status under the Administrative Workers’ Compensation Act and CC-Form-36C: Cancellation of Affidavit of Exempt Status for use by contractors. The Affidavit of Exempt Status is a two-page document, and the independent contractor must complete and sign both pages. The second page includes an 11-part checklist to aid in determining whether the person is or is not a bona fide independent contractor. The form states “[i]f the greater weight of the statements do not describe your business, you should not sign the attached Affidavit …”. In other words, there is no single factor which controls. The Affidavit of Exempt Status which the proposed independent contractor must complete includes questions such as whether the company exercises very little control over his work; whether he is engaged in business for others; whether the company does not supply the things needed to perform his job; whether the work he does is not the regular business of the company; and whether he has the right to terminate the relationship without any liability.

Just because a person has incorporated or is an LLC does not automatically transform that person into an independent contractor. That is but one factor. A written contract with the customer/owner will not alone transform the worker into an independent contractor. Independent contractors and companies alike must be aware of this area of the law in order to avoid the myriad of problems which can arise from misclassifying a worker.

With the new tax laws benefitting independent contractors with a 20% deduction from their income, now is a good time for companies to re-assess any persons/entities which may be classified as independent contractors.

Have you got a regular LLC? Considering whether or not to change it into a Series LLC? Here are some of the things to think about before making the change:

1. Are you in a Series LLC state? In Oklahoma the answer is: Yes! So you can file an amendment to your Articles of LLC to legally convert your regular LLC into a Series LLC.
2. If you want to start a whole new Series LLC, you can do that too.
3. If your LLC is from a non-Series LLC state, and if it is really important to you to keep your existing LLC’s history, Tax ID number, etc., you can move your LLC’s corporate home to Oklahoma and simultaneously convert it into a Series LLC. That would allow you to keep your existing history. You would then dissolve your existing LLC in your home state, to cancel it off the books. And finally, you’d have to reintroduce your newly converted Series LLC, this time as a foreign entity, back into your home state.
4. Are you in a state that isn’t Series LLC friendly? All states permit LLCs from out-of-state to cross-register in, when required. The same goes for Series LLCs (you cross-register the parent only; there is no way to cross-register Series LLC Cells at this time).
5. Beware of California which looks at each Cell in the Series LLC as a distinct entity for tax purposes. As such, every Cell would register with the Franchise Tax Board and pay the state’s minimum $800/year franchise tax fee!
6. There are many variables when you’re structuring a business. Unless you talk to someone who’s got some knowledge and experience on the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

You have just noticed that your neighbor’s front door camera directly faces your door and/or window. With the new motion sensitive video surveillance systems and online cloud storage of all video, you are recorded every time you open the door. Maybe this makes you uncomfortable, and you feel a loss of privacy. But is this illegal?

It is estimated that the average American is caught on camera more than 75 times each day. We are all recorded more than we realize, and while sometimes it makes us feel safer, other times it makes us uncomfortable, or worse, feel violated. For better or worse, being recorded is now a fact of life. Our society and legal system have been playing catchup with this growing trend to regulate the use of cameras and punish people who abuse the technology. Unless your neighbor is misusing the video recorded, perhaps by posting it on social media sites, there is likely not much that can be done.

Property owners have the right to place cameras in and around their home for security reasons. The cameras should either be easily noticeable, or there should be signs warning visitors that they are being recorded. The cameras should not be used to record neighbors or anyone where they have a reasonable expectation of privacy, such as inside their house, a hot tub, or any place where that person would expect that no one is looking at them without their permission or knowledge.

Penalties for being a video “peeping tom” are severe. Oklahoma Statute §21-1171, commonly known as the “Peeping Tom” law, prohibits the use of video equipment in a clandestine manner to record others without consent in areas where they have a reasonable expectation of privacy. This law does not affect your right to a home surveillance system unless your cameras are recording any private area of your neighbor’s property (i.e. interior rooms, fenced backyard, etc.).

Once you have a properly configured security camera system installed, you should be aware of your rights and responsibilities to operate the system. Oklahoma Statute §13.176.3 prohibits anyone from intercepting or disrupting your security camera signals, either to your internal storage device or to an external monitoring center.

Another Oklahoma law, Oklahoma Statute §21-1993, prohibits others from tampering with or disabling your security cameras. This can include covering the camera lens, manipulating the signal, disconnecting the device, or destroying any part of the system.

If someone does record you without your knowledge and permission when you are somewhere that should be private, the law will look at the intent with which you were recorded. If your neighbor’s door camera was for security and positioned so that it just happened to see inside your home as you entered and exited (a time when you might not normally expect privacy), then it would likely be legal. But if your neighbor has set up cameras to be a high-tech Peeping Tom, he very well may be committing a crime.

By court decision, Oklahoma already recognizes a limited cause of action in tort founded on invasion of privacy. Munley v. ISC Financial House, Inc., 584 P.2d 1336 (Okl. 1978). In addition 21 O.S. 1971 § 839.1 prohibits appropriation for one’s own benefit of another’s name or likeness and makes such appropriation a misdemeanor. Section 839.2 provides a cause of action for damages resulting from the appropriation.¹ 

It may be tempting for a farming operation with fallow acreage to consider leasing to a tenant for above-market rents. However, when the offer is coming from a marijuana grower, the would-be landlord will have a number of additional legal issues to consider.

It bears repeating that marijuana is still illegal as a Schedule I drug under the Federal Controlled Substances Act. Even though Oklahoma is likely to approve marijuana for medicinal use this Summer, the federal government doesn’t recognize such use as valid and prohibits the manufacture, sale, and distribution of marijuana. An owner who leases to a tenant for the purpose of manufacturing, distributing, or storing controlled substances, illegal under federal law, is punishable under the Controlled Substances Act by a fine and up to 20 years in prison.

That might be the end of the story for most landlords. This is especially true now that the Trump Administration’s Justice Department has signaled that it may take a different path with respect to marijuana prosecutions. The U.S. Department of Justice could seek to take real property used in connection with marijuana-related crimes of tenants through civil asset forfeiture. For landlords who determine that the potential revenues are too great to pass up and their risks associated with federal prosecution or civil asset forfeiture are immaterial, there are still other concerns. A landlord may find that a conservative financial institution could refuse to accept deposits of funds related to a marijuana grow operation lease. Also, if the landlord has a loan from a financial institution, the landlord may find itself in breach of that loan without available replacement financing.

Most loan agreements prohibit the borrower from violating the law, and if the loan was entered into more recently, there may be express prohibitions against use of the property with respect to state-licensed marijuana-related businesses. Thus, a financial institution could call a loan due from a landlord renting to a marijuana grow operation. If there is an opportunity for replacement financing, the loan amount may be reduced (if the financial institution excludes rents from the marijuana-growing tenant when calculating the value of the collateral or the revenues of the landlord).

Oregon and Colorado federal bankruptcy courts have come to the conclusion that bankruptcy protections are not available to a landlord leasing to a marijuana business, even if the tenant’s marijuana business is operated in compliance with state law. Federal bankruptcy courts in Oklahoma may come to the same conclusion. Some of this risk can be mitigated with proper planning, but there would always be some portion of the landlord’s business operation that would remain at risk.

Aside from the issues concerning federal law, a landlord could find itself at risk of violating state law if its tenant is not in compliance with state and local regulations.

Unless and until the Controlled Substances Act is changed to permit the state-legalized marijuana activities, landlords should be wary of leasing to marijuana grow operations and should consider the other risks and potential obligations of having such a tenant. At a minimum, before you negotiate a lease, make sure you have a cannabis lawyer help you guard against potential pitfalls down the road. The cannabis industry is unlike any other industry, and there are several factors to consider before you lease.