Tenants: Beware and Negotiate

In a matter of first impression before the Texas Supreme Court, the Court ruled that a Residential Lease provision that obligated the Tenant to pay for any damages that result from “any cause not due to Landlord’s negligence or fault” was not void and unenforceable.

The background facts:  A young lady, Carmen White, got her first apartment and signed a standard Texas Apartment Association (“TAA”) lease.  Her parents gave her a washer and dryer set as a gift.  While using the dryer, it caught fire and burned her apartment and others nearby.  The damages to the apartment complex exceeded $83,000.00.  The source of the ignition was unknown and no fault was placed on White or the Landlord.  The landlord’s insurance company paid the claim, subrogated, and demanded reimbursement from Ms. White.  When she refused to pay the insurance company brought suit against her. 

The Procedural facts:  The case was tried to a jury.  After trial, the jury answered “no” to a question asking if White’s negligence proximately caused the fire.  However, the jury answered “yes” to the question whether White breached the lease agreement by failing to pay the casualty loss.  The jury awarded the landlord $93,498.00 in damages.  White moved for judgment not withstanding the verdict which was granted and the trial court rendered a take-nothing judgment.  The Court of Appeals affirmed the trial court ruling holding that that the Reimbursement Provision was void as against public policy.  The Appeals Court found a fatal conflict between the Reimbursement Provision’s broad language and Chapter 92 of the Texas Property Code restricting a Landlord’s ability to contractually allocate repair responsibilities.

The Supreme Court ruling:  The Supreme Court was to determine, as a matter of first impression, whether public policy embodied in the Texas Property Code precludes enforcement of a residential lease provision imposing liability on a tenant for property losses resulting from “any other cause not due to the landlord’s negligence or fault”.  In so holding the Supreme Court (in a 5-4 decision) repeatedly stated the well known legal axiom that “Parties in Texas may contract as they wish, so long as the agreement does not violate the law or offend public policy, recognizing the the Legislature has limited the freedom of a landlord and tenant to contractually allocate responsibility for repairs materially affecting health and safety.  Interestingly in footnote 4, the court acknowledged that above the signature block, the lease prominently states that the lease can be modified by agreement of the parties, but neither party requested modifications to the Reimbursement Provision. 

The Lease contained a reimbursement provision standard in the TAA lease which obligated the Tenant to pay for any damages that result from “any cause not due to Landlord’s negligence or fault”.

As we all know it is almost impossible to get a Landlord to revise any provision in a standard form lease, but if you are to avoid the tragedy that happened to Ms. White, you must negotiate a modification of the Lease.

Be aware that the TAA Lease is a legal document and forms a binding contract.  You should consult an attorney for help revising the Lease. 

We would first add a sentence to Section 10, Special Provisions.  We would write in the blanks a sentence to limit my liability.  For instance, “Notwithstanding anything to the contrary, Tenant shall never be responsible for repair, or liable for damages to Landlord’s property, including other units in the complex, unless such damage is proximately caused by the negligence of Tenant, Tenant’s guests, or invitees.”

Secondly, we would strike out certain language contained in Section 12. We would strike out “or any other cause not due to our negligence or fault”, at the end of the first sentence of Section 12.

We firmly believe that no residential Tenant should be held responsible to repair other units damaged or for property losses “resulting from any other cause not due to the landlord’s negligence or fault.”  Do not let this happen to you.

IRS Clarifies “Employee” Versus “Independent Contractor” Test

The IRS recently issued clarifying guidelines to help employers determine which workers should be treated as independent contractors or employees. The government naturally wants accurate decisions to be made since they determine when it’s paid certain taxes on each worker’s wages.

The main deductions that should be subtracted from all employees’ paychecks include those for Social Security, Medicare, unemployment and income taxes. When a business has work done by an independent contractor, that person must pay all those taxes in the form of self-employment tax.

What remains the general standard for deciding if a worker is an independent contractor?

If an employer reserves the right to only direct control over the result of the work – and cannot tell a worker exactly what to do and how to handle the assignment – then that worker will usually be legally viewed as an independent contractor.

However, deciding what constitutes specific directions for completing a given task can still fall into a gray area.

Fortunately, there are three basic analytic categories that can help employers accurately determine when workers are properly classified as “employees” or “independent contractors.”

What are the three main categories of analysis for deciding a worker’s correct status?

The IRS indicates that employers should carefully examine the following three aspects of how they relate to workers to determine their proper work status.

  1. Behavior control. An employer may have behavior control over a worker even when it does not exercise it. For example, when such control is involved, it may include telling a worker which specific tools to use and where those supplies should be purchased. Under those circumstances, the worker should be considered an employee. Conversely, the less control over a worker’s behavior, the greater the chance that the person is working as an independent contractor.

If there are strict guidelines for determining the quality of the work provided, there’s a strong chance that the worker is an employee. When the worker is provided a bit more leeway in terms of quality control – there’s a stronger chance that the person is an independent contractor.

Of course, the two parties will usually need to agree to some basic quality standards, regardless of whether the worker is an employee or independent contractor. Finally, if periodic training or ongoing training is required of a worker – that increases the chances that the worker should be treated as an employee.

  1. Financial control. Does the worker have to personally cover the majority (or all) of the expenses tied to completing the work? These might include the purchase and maintenance of proper computers, printers, fax machines, scanners and other required equipment. If the worker is covering all those expenses, he or she should probably be classified as an independent contractor.

Stated differently, when a worker has many unreimbursed expenses, that person is usually an independent contractor — not an employee. Independent contractors are also those who retain the right to continue obtaining additional work from other parties. As for the payment for services, independent contractors are usually paid a flat fee – although that arrangement can vary in some cases.

  1. How the employer and worker each perceive the nature of their relationship. When the parties have not negotiated any employee benefits like vacation pay, sick pay, a pension plan and stock options – the worker is usually an independent contractor. While a written contract signed by the two parties can indicate how they view their interactions, it’s not always the only evidence the IRS and the courts will review when classifying the work relationship. All relevant documents and communications may need to be examined.

The main consequence for an employer who misclassifies a worker is that the employer may be required to pay all employment taxes currently owing for that worker – as opposed to requiring the worker to cover them.

What unique emphasis is placed on these three categories in the updated guidelines?

As for behavior control, employers really shouldn’t be telling the independent contractor the exact sequence of events for all tasks to be performed or exactly how they should be handled.

Regarding financial control, only independent contractors can experience a profit or loss while handling assigned tasks. Employees whose expenses are generally covered will usually not experience any profit or loss while completing assigned tasks on a given schedule.

As for how the parties view their work relationship, a fully executed contract can be controlling when other conclusive details aren’t available. However, as briefly noted above, the parties’ communications can usually provide clear indications of whether they’re interacting as employer-employee or employer and independent contractor.

The key bottom line for employers who don’t want to only work with employees – is to allow their independent contractors considerable flexibility while completing tasks – while respecting professional standards acceptable to both parties.

Please give our law firm a call if you need any help determining which workers are employees or independent contractors. We can also help you better understand the many different types of classifications that govern a wide range of employees you may want to hire – and the tax consequences for hiring those who fit in each group.

Our firm always remains available to help you draft many different types of contracts that can serve all your business needs.

Is Notice to the Address of Record in the Loan Agreement always Sufficient? We'll See…

Many years of past precedent had established that a lenders notice to the debtor’s address of record in the Loan Agreement was almost always sufficient. However, one case from the Texas Supreme Court, and another in which Petition for Review has been filed may change established law.

In July 2015, in a landlord verses tenant case, (“Katy Venture v. Cremona Bistro”) the Texas Supreme Court ruled that because the landlord had used an outdated “registered” address even though it knew of a new “unofficial” mailing address, a fact issue was presented to defeat Landlord’s Motion for Summary Judgment in a bill of review proceeding after default judgment was entered against the Tenant.

Following the “Katy Venture” decision, the Fort Worth Court of Appeals, in a Lender verses Guarantor case, the Court held that the Guarantor raised a genuine issue of material fact to defeat a summary judgment. The Court held that because some summary judgment evidence exists that the Bank knew the Guarantor’s current address but nonetheless utilized an outdated “official” address in its certificate of last known address, a fact issue exists precluding summary judgment. This is true even assuming the Bank conclusively established the Guarantor’s negligence in failing to update his contractually-agreed-to address for notice.

Petition for review has been filed to the Texas Supreme Court. We’ll see in the coming year how the law of adequate notice evolves.

Practice point: Send notices to the borrowers and guarantors “official” address of record, but also send notice to ay other addresses which the bank knows, or with reasonable diligence and investigation should have known, where the borrowers and guarantors receive their mail or reside.

Negotiation and Drafting of Construction Contracts

Significant risks to the construction contractor can arise from the contracts entered into for various projects.  However, these risks can be managed by a thorough understanding of key contract provisions and assistance of counsel in negotiating and drafting contract provisions to clarify rights and obligations of the parties, fair allocation of risks, and other protections that may be available.  A well-drafted construction contract clearly defines key terms such as scope of work, price, terms and conditions of payment, and allocation of foreseeable risks.

The contract process in the construction industry often starts with the bidding process.  Bidding for construction jobs can make or break the construction contractor.  It is essential for the contractor to know how to effectively bid for work to make a profit and have a successful business.  There are a number of ways to bid construction contracts.  But whichever method is used, success depends upon developing the most accurate cost estimate and formulating the lowest reasonable bid.

A project can be either private or public.  Usually a private project is one let by a private individual or entity, while a public project is let by a governmental entity.  The private project process usually involves solicitation of quotes or formal bid proposals from contractors, bids or offers by the contractors, and acceptance of the bid, resulting in a legally enforceable contract.  On the other hand, the public construction contract bidding process must follow set requirements under federal, state, and local laws.

Construction contracts are usually priced according to one of several methods involving two basic types, fixed price and cost reimbursable.

Two more common fixed price methods are Lump Sum and Unit Price.

Lump Sum is an agreement to a fixed price prior to the contract award which is not subject to adjustment except for changes in the scope of work. An example would be an agreement that the contractor will build a garage for a fixed price of $15,000.  Under this scenario, the contractor bears any overage in labor and/or material costs.

Unit Price is an agreement to a fixed price for a given unit of work and the total price is the unit price times the quantity of items delivered, installed or erected.  An example would be an agreement that a contractor build a garage for a set price per square foot.

One of the more common cost reimbursable methods is Cost Plus Fee.  Under this method, the agreement is for payment of all contractor labor and material costs plus a fee which can be expressed as a percentage or a lump sum, such as an agreement that a contractor will build a garage for the cost of labor and materials plus 25%.

Ten significant contract provisions that should be considered are as follows:

  1. Scope of Work – Statement of the scope of work including quality, completeness of design, and nature of the parties’ duties is critical to avoiding costly disputes later.
  1. Price and Payment Methods – Typically the contract will contain a schedule for specific items of work and, as they are completed, the contractor certifies that a percentage of the work is completed and will request payment for it.
  1. Insurance – At a minimum, construction contracts require insurance coverage for comprehensive general liability (CGL), automobile, and worker’s compensation coverage. Additionally, some type of proof of insurance may be required from subcontractors. The owner may also provide for other insurance coverage to protect against risks such as catastrophic events.
  1. Indemnification – One party agrees to cover certain losses which might be incurred by the other party as a result of claims which might arise under the contract, holding the other party harmless.
  1. Warranties and Bonds – Certain warranties are customary such as a warranty that goods furnished will be of good quality. Contract bonds such as performance and payment bonds may be required guaranteeing completion of the project and payment under the contract.
  1. Project Changes and Change Orders – Provision for submission and approval of necessary changes in plans and specifications during the course of the project.
  1. Delays – Contracts often provide an allowance of certain delays, and penalties for other delays by the contractor.
  1. Suspension and Termination – If the contractor fails to comply with the certain provisions of the contract, the owner may suspend or terminate the contract.
  1. Disputes – Many contracts contain an arbitration clause which requires disputes to be resolved in arbitration rather than in court.
  1. Transaction Rules for Particular Industries – Construction contracts should set out required industry procedures for the transaction where necessary.

A properly negotiated and drafted construction contract will be fairly complex if it is to be clear as to all material terms and provide for a fair allocation of risks.  Any contractor or owner preparing to take on a construction project would be well advised to have a solid understanding of all of the primary contract provisions and to seek legal counsel to assist in negotiation and drafting of the construction contract.  Failure to understand the contract one signs or the failure to seek assistance of counsel are not legal defenses to problems that might arise later after the project is underway.