Texas Attorney Blog

For mineral owners in the northern Texas Panhandle, there is an exciting new development: Apache Corporation is planning to conduct a seismic survey in the Pennsylvania Canyon Wash formation to see if it is suitable for horizontal drilling. At present, there are parts of the Panhandle that not been fully explored for oil. Apache intends to drill down for the 3D survey. At 9,200 feet deep, the company believes that Canyon Wash would be well suited to the type of drilling that it wants to do.

Apache, headquartered in Houston, Texas, has grown beyond its humble beginnings in Minnesota to become a successful multinational oil and gas company. Today, Apache has $30 billion in capital and offices in the United States, Canada, Australia, Argentina, Egypt, and the United Kingdom. Yet since the company moved its headquarters to Houston in 1992, it has kept an active interest in Texas projects.

Currently, Apache holds a 75% interest in 122,000 fields south of shallow production in the Panhandle field. The area remains mostly pristine, with just 23 penetrations. Apache hopes to start a multi-rig program in 2012 in the area known as the Cimarron Arch. The company’s Bivins Ranch acreage is situated in Oldham, Potter, and Hartley counties. Apache’s partner in the acreage, Gun Oil Company, already completed a vertical Canyon Wash discovery well in Oldham County in March 2010. The well produced 42,000 bbl within the first nine months. Apache officials believe that the latest exploration will lead to wells that could recover up to 343,000 bbl/well -- or 87% oil. Each well would have an estimated price tag of $3 million. Apache may achieve up to 100 drillable locations from 2012 through 2015.

This is welcome news not only for mineral owners in the Texas Panhandle, but also for anyone who cares about energy that is easy to access and affordable. Owners of land rich with minerals could be in a position to lease to the Apache Corporation and other energy companies that come along to explore, thus helping the local economy. The news is also welcome because it means that companies are finally starting to tap additional areas in the United States ripe for oil extraction. Oil and gas interests have been firm in their belief that energy independence begins at home -- but too often, federal regulators and environmentalists have put a stop to meaningful exploration. Meanwhile, some of the sources that are already tapped in the U.S. may be vulnerable to natural disasters (such as hurricanes in the Gulf of Mexico) or to regulators’ overreaction (such as the Obama administration’s decision first to stop, and then the slow walk deep water oil drilling permits following the Deepwater Horizon tragedy). The result is skyrocketing gasoline prices at the pump.

The Texas Panhandle is out of the reach of hurricane weather. Let us hope that that Apache and other energy companies active in the Panhandle are successful in their exploration. As a country, we won’t ever be weaned from Middle Eastern oil until we are producing more ourselves.

One of the largest offshore oil spills in history occurred when the massive Deepwater Horizon semi-submersible oil drilling platform suffered a drilling-related explosion, was engulfed in flames, and sank. The economic and environmental effects of this event are still not fully understood, so studies are ongoing to determine the impact that it has had on the Gulf region. One such study, entitled "The Gulf Oil Spill and Its Impact on Coastal Property Value Using The Before-and-After Procedure" was completed several months ago by the University of South Alabama on the effect that the spill has had on Alabama coastal property values.

In order to determine the amount of decline in value on affected coastal properties, the study made use of the before and after procedure (BAAP) that is based upon market prices preceding the Deepwater Horizon incident and data indicating the impacted value of those same properties after the accident occurred. The study seeks to determine if a stigma has attached to these properties, which amounts to the perceived blemishes on those properties that have arisen as a result of the spill. The study focused on evaluating properties located directly on the waterfront, multiple types of residential properties, and both developed and undeveloped land. It relied upon sales transaction records in the area for the year prior to the spill as a comparison basis to help determine the possible drop in value attributable to the spill.

The research showed that the possible effect on the studied areas was significant, and vacant residential properties on the waterfront suffered the greatest decrease in values after the spill, as they dropped over 42 percent in value from April 20, 2010, to August 15, 2010. Single-family waterfront residences saw a half-percent drop during the same period, and condominiums saw a 3.5 percent drop. However, much of the decrease in value was likely due to a downturn in prevailing economic conditions. A control group of properties located in Florida (not affected by the spill) was also tracked, and similarly situated properties also saw condo and vacant waterfront land prices drop by over 20 percent during the same time period, though single family residences saw a jump in value of over 30 percent. As such, the numbers indicate that only the drop in undeveloped property prices may have been caused by the oil spill.

While the study rendered a somewhat surprising result for many – that there was not a stigma attached to waterfront properties in the Gulf region of Alabama that caused a decline in property values – it also noted that there are some limitations to the analysis. The BAAP method is best served by having real-time property sales price information for continued evaluation to render more accurate results. Additionally, the BAAP does not factor in a decline in potential buyers in the market, and instead only focuses on sales prices properties during the study’s time period. In order to formulate a more full analysis of the Gulf Oil Spill’s effect on real estate values in the region, an adjustment process for the decline in buying activity is needed.

With the passage of time, we have seen that the long term effects of the Deepwater Horizon incident have been much smaller than expected. If a study were done today, I suspect it would reveal no lingering effect on any property values along the Gulf.

According to the American Land Title Association, the first reported private transfer fee covenant was created to pay money to the Sierra Club and the National Audubon Society in order to fund an open space preserve. Since then, developers and homeowners' associations alike have borrowed the mechanism to generate a form of income that was previously unavailable. Over the past decade, private transfer fee covenants have been heavily used in California and Texas, prompting lawmakers to consider banning the provisions altogether.

In 2007, the Texas Legislature addressed private transfer fees in Section 5.017 of the Texas Property Code. The provision provides that a deed restriction on residential property that requires the buyer to pay a third party a fee in connection with his purchase of the property is unenforceable. However, the statute's broad prohibition of private transfer fee covenants has a few major exceptions. Texas' private transfer fee prohibition does not apply to 1) property owners' associations, 2) certain not-profit organizations, and 3) governmental entities.

Texas' approach is not without criticism. First, many argue that the law does not go far enough because it only applies to residential property. Commercial developers are free to include private transfer fee covenants in the deeds of commercial property. Second, private transfer fees are legal and enforceable if made payable to homeowners' associations. Some find fees payable to homeowners' associations to be less objectionable than fees payable to the developer. After all, the money goes to improve common property and maintain the premises. On the other hand, homeowners complain that they already pay homeowners' association monthly dues. What gives the HOA a right to 1% of their home's purchase price?

Lastly, many lawyers and legal analysts complain that Texas' private transfer fee law is ambiguous. It's unclear whether private transfer fees are enforceable if chargeable to the property's seller. Additionally, the law does not address the tough legal details that arise with private transfer fee covenants. For example, the statute does not give homeowners' associations any specific remedy for enforcing private transfer fees, nor does it address whether or not a buyer could get out of a contract to buy a home once he discovers that he is obligated to pay a large fee to his homeowners' association.

The lesson for consumers is clear. Before you enter into a contract to purchase a home or condo, make sure that you know about all of the fees that you are expected to pay at closing and beyond. While you may not be happy about having to pay a private transfer fee to a homeowners' association, if you know that the fee is expected, you may be able to negotiate with the seller for a lower purchase price. On the flip side, buyers should also know that one day they may want to sell their property. A private transfer fee makes the sale a little more difficult, and gives the buyer some leverage to negotiate for a lower price.

Texas real estate attorney Aimee Hess is available to discuss any deed restriction, including private transfer fee covenants. She can be reached toll free at 1 (888) 818-5880.

Imagine buying your dream house and everything is going swimmingly. The closing date approaches, but you notice something odd in the paperwork. A “reconveyance fee” is listed as a deed restriction and requires all future buyers over the next ninety-nine years to pay one percent of the home's sales price as a “transfer fee” to a homeowners' association.

Over the past decade, thousands of Texas home buyers have found these strange “reconveyance fee” and “transfer fee” provisions in their dream home's deed. Commonly referred to as “private transfer fee covenants,” these types of fees are completely foreign to most home buyers and sellers.

A private transfer fee covenant is a fee payable to a private third party (frequently the property’s developer or the local homeowners' association) which becomes due every time the property is sold to a new buyer. These fees frequently purport to continue for ninety-nine years, and they are usually recorded in the county records or included as a covenant in the deed for every home in a new subdivision. The transfer fee is usually 1% of the final sales price, and either the home's buyer or the home's seller could be required to pay it.

If the fee goes unpaid, the private party who is entitled to the fee can obtain a lien against the property in the amount of the total unpaid fee, plus interest. The lien remains on the property and can create a cloud on the property's title, which makes the property unmarketable.

If this system sounds crazy to you, you're not alone. Many states have completely banned private transfer fees, and the federal government is also considering taking action. The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, recently proposed a rule that would prohibit Fannie, Freddie, and all federal home loan banks from investing in mortgages that carry private transfer-fee covenants.

Continue reading "A Texas Real Estate Attorney Comments on Private Transfer Fees - Part I" »

As a Texas real estate attorney representing buyers, sellers, lenders, developers, and occasionally brokers, in Texas, I have sometimes been accused of sounding like a broken record in advising my clients. My oft-repeated mantra is: "Read the document thoroughly, and then read it again". Even if the document is one I have prepared for my client, it is essential that the client review the document to make sure it expresses their intentions. After everything is signed, it is often too late to ask questions. A recent Texas Court of Appeals case illustrates the perils of signing a contract without reviewing it thoroughly beforehand.

In the case of ERA Realty Group, Inc. v. Advocates for Children and Families, Inc., the Texas Thirteenth Court of Appeals considered a commission agreement between ERA and a local advocacy group. The agreement was a preprinted form, with blanks filled in by typewriter by an ERA employee. As the Court explains: "The (agreement) contains a commission calculation if Advocates purchases property and also a commission calculation if Advocates leases property. No lease calculation is selected, although the number "6" is typed before the phrase, '% of all rents to be paid over the term of the lease.' Clearly, the instruction to 'check only one box' was not followed because no box is checked. The agreement, therefore, can be read in one of two ways: (1) as providing for a lease commission because the number "6" is typed, or (2) as making no provision for a lease commission because no box is checked." Because ERA had prepared the agreement, the Court construed the commission agreement against ERA and held that the agreement did not provide for a commission for leases.

As a result, ERA was not only denied it's request for a commission, it was also ordered to pay $15,000.00 in attorney's fees to the Defendant advocacy group. Actually, it's hard to understand why ERA would bring a lawsuit based on this agreement, rather than simply admitting a mistake had been made and resolving to read those form commission agreements more thoroughly next time. The publicity from this suit probably hurt ERA much more than the commission would have benefited them had they won!

One of the things I love about being a Texas real estate and development lawyer is that Texans are so open to innovative real estate developments. Practicing real estate and development law in Texas is great fun and very satisfying for this reason. A recent real estate development in Texas illustrates the point: co-housing, while not invented in Texas, has come to Texas. As a recent article by Bob Moos in the Dallas Morning News online entitled "Co-Housing Catching On in U.S." explains, the first elder co-housing development in Texas is being built in Duncanville, Texas, called Wildflower Village.

The members of the Village have been meeting together over the past two years to get to know one another, and to design their community. Some arguments have occurred, but they also meet socially to have fun as well. They like to arrive at decisions by consensus, rather than a "majority rules" vote. The development is limited to adults over 50 years of age. They plan to individually own their own single-story home. However, they will collectively own a common building that will have a gourmet kitchen, dining room, living area, home theater, craft room and two guest bedrooms.

This is an incredible concept and I wish them all the best of luck. They have gotten to know each other before they even hired a builder or an architect, and so have created a community for themselves, meaning "community" in the sense of a village with neighbors and friends, not just buildings. For more information, visit their website.

I have represented developers and investors in Texas real estate developments for over thirty years. I have been blessed with clients who are fabulous people to work with, and Texas development law is always challenging and interesting. There is one thing that is guaranteed to make both my clients and I tear our hair out however: arbitrary and capricious municipal governments and code enforcement personnel. They are not all that way, by any means: most Texas city government officials and personnel are highly professional. However, if you practice development law in Texas long enough, you will find that the few bad apples cause you more effort than all the others combined.

There is a game some municipal governments play called "Yes, that's what we promised then, but it's different now". The case of Continental Homes of Texas, L.P. v. City of San Antonio, decided recently by the Texas Fourth Court of Civil Appeals in San Antonio, illustrates what I mean. In 2002, the owners of a ranch, (located outside the San Antonio city limits but within its extra-territorial jurisdiction), received a "Vested Rights Permit" in return for giving the City a parcel of land for a gas metering station. The Permit had an effective date of 1991 and basically said that the ranch would be subject only to City ordinances and rules as of 1991, and not any passed thereafter. Importantly, the Permit had no expiration date.

In 2003, the City passed a Tree Preservation Ordinance, which required developers to, among other things, request a permit from the City Arborist before cutting trees, and to perform mitigation (i.e., plant new trees) if trees were going to be removed. In 2005, Continental bought part of the original ranch, and submitted a Master Development Plan to the City. The Plan was approved, but in a side letter, the City told Continental that Continental's Master Tree Stand Delineation was rejected, and further noted that the project will be subject to the City's Tree Preservation ordinance. In 2006, while Continental was clearing at the site, it was served with a temporary restraining order obtained by the City, stopping all work on the grounds that Continental was violating the Tree Preservation Ordinance.

The City argued that the Vested Rights Permit had become "dormant"! The trial court decided for the City. The Court of Appeals reversed the trial court decision, and quite rightly held that the Vested Rights Permit controlled, and since the City's tree ordinance was passed after the date of the Vested Rights Permit, the tree ordinance did not apply to this property. Appropriately, the City had to pay Continental's attorney's fees. If I were a San Antonio taxpayer, I would be furious that my tax dollars financed a suit like this!

As a Texas real estate lawyer representing developers, builders and investors in Texas, I have found that my clients benefit from the availability of "alternate dispute resolution" remedies in their contracts. These remedies, such as mediation and arbitration, can result in satisfactory outcomes to disputes, without the cost of extended litigation. A recent Texas Supreme Court case illustrates that the contract remedy of arbitration can be waived, however.

In the case of Perry Homes, Inc. v. Robert and Jane Cull, the Culls sued their homebuilder for structural and drainage defects in the home built by Perry Homes. Initially, Perry Homes requested that the dispute be submitted to arbitration, but the Culls resisted. A ruling was never obtained by either party from the trial court on whether the case must be submitted to arbitration. The Culls then engaged in a course of extended (and expensive) discovery for 14 months. Four days before trial, the Culls requested that arbitration be ordered. The trial court ordered arbitration, and the arbitration resulted in an $800,000.00 award to the Culls.

The Texas Supreme Court states that: "(the Culls) got extensive discovery under one set of rules and then sought to arbitrate the case under another. They delayed disposition by switching to arbitration when trial was imminent and arbitration was not. They got the court to order discovery for them and then limited their opponents’ rights to appellate review. Such manipulation of litigation for one party’s advantage and another’s detriment is precisely the kind of inherent unfairness that constitutes prejudice under federal and state law." As a result,the Texas Supreme Court set aside the award, and sent the case back to the trial court for a trial, on the grounds that the Culls had waived their right to arbitrate this dispute.

While arbitration is often less expensive than discovery and trial, it has some downside: discovery and the scope of appeal is substantially limited in an arbitration proceeding. That's why it is faster and costs less. The moral here for clients and lawyers: the case should be analyzed in the beginning, to determine whether trial or arbitration is the best remedy. Once you embark down the path of discovery and trial, the arbitration door is going to swing shut!

As a Texas attorney representing both builders and construction companies in Texas on one hand, and Texas consumers of construction services on the other, I have had occasion to litigate a number of cases in which construction defects were the central issue in the case. I learned long ago (because I had some great mentors when I was a new lawyer), that when I represented a Plaintiff in a suit to recover damages for a construction defect, the claim should be characterized as both a breach of contract as well as breach of warranty. It always seemed redundant to me, but a recent case illustrates that it may not be. Consider the case of Medical City Dallas Ltd. v. Carlisle Corporation, decided recently by the Dallas Court of Appeals and subsequently heard by the Texas Supreme Court.

Medical City purchased a membrane type roofing system from Carlisle Corporation. Within a short time, the roof began to leak. Initially, Carlisle performed repairs. When the repairs appeared not to cure the leaks, Medical City obtained the advice of a roofing expert, who examined the membrane and determined that it was failing. Medical City requested that the roof be replaced, and when Carlisle failed to respond, this litigation ensued.

The opinion of the Dallas Court of Appeals held that a breach of warranty was different than a breach of contract, and in particular, a breach of warranty did not support an award of attorneys fees to the damaged party, even though the Texas Civil Practices and Remedies Code Section 38.001 clearly allows the injured party in a breach of contract case to recover attorneys fees. Since Medical City's pleadings contained only a claim for breach a warranty, the Dallas Court of Appeals held that it could not recover attorneys fees, only its damages.

The Texas Supreme Court opinion reversed this decision, and concluded that since a written warranty is a type of written contract, Texas Civil Practices and Remedies Code Section 38.001(8) supports an award of attorneys fees for breach of a written warranty.

I think this was a good decision. If you asked a non-lawyer what they they thought the difference between a written warranty and a written contract was, you would get a lot of blanks looks. Common sense tells us that they should be the same, and attorneys fees should be awarded if either is violated and causes damages.

Texas attorneys representing developers, homeowners and contractors, and in fact any attorney who is drafting a contract for a client, should make note of a recent case by the 4th Court of Appeals in San Antonio, Texas.

In the recent case of San Antonio Properties L.P. v. PSRA Investments, Inc., the Seller of an apartment complex was held liable for fraud for its representations as to the financial condition of the apartments, even though the contract of sale contained language that the Buyer agreed to "...accept the Property in its current condition, as is, after having inspected the Property to Buyer's satisfaction." The evidence showed that the Seller had provided the apartments' operating statements to the Buyer, but had omitted from those financial documents the substantial amounts spent by the Seller in capital expenditures and repairs.

The resulting operating statement (minus the capital expenditures) showed that the apartments made money. When the capital expenditures were added back in, the apartments lost money. The Court held that the "as-is" clause in this contract did not prevent the Seller from being liable to the Buyer for fraud due to the intentionally inaccurate financial documents provided to the Buyer. The Court notes that "...even sophisticated buyers have the right to rely on the veracity of the financial information provided to them by the sellers."

I often see Texas real estate attorneys and their clients placing a great deal of reliance on the "as-is" clause in their contracts. This case suggests that this reliance may be misplaced, and will certainly not be a shield against actual deception.

I have served as an attorney representing both rural water companies and real estate developers in Texas for quite a few years. Very often, my representation involves negotiating "nonstandard service" contracts. These are contracts governing the conditions, terms and costs under which a rural water company will extend water service to a new development. At best, there is a bit of built-in tension between the two groups: real estate developers are appropriately mindful of their bottom line and want to minimize the costs and restrictions of obtaining water service, while rural water companies have legitimate concerns that their capital costs will be paid and that some amount of warranty service is covered. I emphasize to all my clients, whether they are real estate developers or rural water companies, that their agreements must be reduced to writing, to insure there is no misunderstanding in what can very often be a complex negotiation.

A recent case, BCY Water Supply Corp. v. Residential Investments, Inc., illustrates the pitfalls when one or the other of the parties involved takes action based on (often misunderstood) oral statements. This case, decided by the 12th Court of Appeals in Tyler, Texas, involved a small rural water company serving Anderson County, Texas. The Plaintiff was a real estate developer who was the considering the purchase of a small tract of land within the water company's service area. The developer came by the water company's office, and visited with the water company's bookkeeper and maintenance man. The developer questioned the maintenance man about the availability of water for the property the developer was thinking of buying. According to the developer, the maintenance man said that there would be "no problem" getting water service to the property. The maintenance man, on the other hand, testified that the developer requested a single meter at the property, and that he told the developer that, while he did not see a problem serving a single meter, all requests for service had to be directed to and approved by the board of directors and that the board might require capital improvements before service could be approved. The developer bought the property, and when he applied for service, the board of directors of the water company told him that he would have to install a new line prior to water service being supplied. The developer claimed that the representations by the maintenance man were negligent and sued the water company for denial of service.

The Court of Appeals held for the water company, ultimately. However, this litigation probably cost this small rural water company and its members dearly. The decision represents something I emphasize often to my rural water company clients: educate all your staff, whether office staff, maintenance people or operators, that whenever someone asks about the availability of water, always, and I mean always, tell them that they will have to talk to the manager of the company or the President of the board of directors. Do not guess, do not speculate and do not surmise. The maintenance man for this company was probably just trying to be helpful to this developer, and a lawsuit was the result.

As a real estate and development attorney in east Texas, I have represented Texas property or homeowners associations (HOAs) on quite a number of occasions. My legal services for my homeowner association clients have ranged from preparation of corporate documents and restrictive covenants, to mediating disputes, to overseeing annual meetings, to filing and collecting assessment liens, to litigation to enforce deed restrictions. As any lawyer who has represented HOAs knows, few things engender as much conflict and heated debate as interpretations of restrictive covenants among the members of the HOA. A recent case illustrates this situation.

In Jennings v. Bindseil, the Texas Court of Appeals in Austin considered just such a dispute. The neighborhood in question, in rural Comal County, Texas, had restrictive covenants in place. One of the restrictions prohibited mobile homes. The Defendant, Jennings, purchased a modular home, which was delivered in sections and assembled on Jennings property. The other members of the HOA cried foul, claiming that a modular home is the same thing as a mobile home, and sued Jennings for the removal of the structure.

The Court considers that modular and mobile housing (the term "mobile", as the Court notes, has been replaced by the term "manufactured" housing) are governed by different codes, differ as to their foundation requirements (modular houses must be placed on a permanent foundation) and in titles (titles are issued for mobile homes but not for modular housing). Because the case had been decided in the trial court on a motion for summary judgment (in other words, there had been no evidentiary hearing as to the details of the Defendant's house), the Court of Appeals reversed the summary judgment against the Defendant and sent the case back to the trial court for an evidentiary hearing.

This case illustrates what happens when older deed restrictions (drafted and filed before modular housing became widely available) come up against more recent technology. The truth is, mobile or manufactured housing is different from modular housing in many ways. However, while there is high end modular housing that is quite tasteful, some modular houses look not much nicer than manufactured or mobile homes, and are sometimes made of the cheapest of materials. If the other owners in this subdivision had spent substantial amounts of money on site-built homes, and the Defendant's home was of the cheap variety, it is understandable why they would be upset. The lesson for HOAs and their attorneys is clear: review your deed restrictions or restrictive covenants periodically, and update them to keep up with changing technologies.

In a previous post, I discussed the implications for Texas contractors and insurance companies and their attorneys of the decision of the Texas Supreme Court in Lamar Homes, Inc. v. Mid-Continent Casualty Company. The Court's decision had a second element that is notable, and will be helpful to attorneys who are trying to collect an insurance claim from a carrier.

Texas has what is commonly referred to as the "prompt payment" statute (Texas Insurance Code § 542.051 ) which provides for additional damages against an insurer who wrongfully refuses or delays payment of a claim. A “claim” is defined as a first party claim "made by an insured or policyholder under an insurance policy or contract or by a beneficiary named in the policy or contract [that] must be paid by the insurer directly to the insured or beneficiary.” The problem has been that the Texas Insurance Code does not separately define “a first-party claim,” and Texas court decisions have been divided as to what it means. Some Texas Courts have defined a first party claim as a claim paid under a first party insurance policy, such a life insurance policy or an auto policy, where the insured is buying insurance to cover their own life or property. The reasoning here is that third party insurance, where the insured is purchasing insurance to cover a loss to others (such as the other guy in a car wreck) is not a first party claim and is therefore not covered by the prompt payment statute.

The Texas Supreme Court in the Lamar Homes case decided that the insurance company's duty to defend Lamar Homes, even though the payment of attorney's fees for defense would go to a third party (Lamar's attorneys) was covered by the prompt payment statute. This part of the decision is, in my opinion, a good thing, because it requires insurance carriers to whom the statute applies to promptly review the claim, do their research and make a decision on the claim, rather than dragging their feet.

A decision by the Texas Supreme Court either delighted or horrified Texas attorneys, depending on whether they represented consumers of construction services, construction companies or insurance companies. In Lamar Homes, Inc. v. Mid-Continent Casualty Company, an opinion delivered on August 31, 2007 and which became final in December 2007, the Texas Supreme Court held that unintended construction defects constitute property damage under a commercial general liability policy ("CGL" policy), triggering a duty by the insurer to defend the home builder and to pay damages on behalf of the builder when a home owner sued the builder for construction defects.

This is a surprising decision in some ways because, in general, CGL policies in Texas cover claims for bodily injury, property damage, personal injury, and advertising injury (damage from slander or false advertising). A damage claim because something has been built defectively is usually not covered by a CGL policy. The CGL policy is intended to cover tort claims. A claim that something was built defectively is a breach of contract claim, As the dissent in this case so ably points out, this decision turns the construction industry and the CGL insurance industry on its head.

Attorneys representing home owners may smile at this decision, and think they have been handed another source from which to collect damages when a builder's construction (or the work of the builder's subcontractors) turns out to be defective. However, the real loser because of this decision may be the very person that this decision appeared to benefit: the consumer! If CGL insurers are now obligated to cover every real or imagined, major or minor, defect in new construction, then the premiums for those policies will most certainly rise. Those increased premiums paid by the contractor will be passed on to the consumer in both residential and commercial construction. Rents will ultimately increase. What this decision really does is spread the cost of construction defects among all of us. In addition, this decision really shields the bad builders in the short run: they can pass these costs on to their CGL carrier, rather than being liable themselves for shoddy work.

A recent decision by the Texas Supreme Court contains some very specific lessons for attorneys who represent temporary labor services who supply workers for Texas construction projects.

Temporary staffing agencies or temporary labor services have become a popular and often cost effective way for a property owner or contractor to supplement a work crew or even to staff an entire construction job. According to the U.S. Bureau of Labor Statistics, in 2005 there were 5.7 million temporary workers, or approximately 4% of the labor force in the United States, with the construction industry accounting for about 13% of that number. Such an arrangement has many advantages for the owner or contractor: the labor service recruits the workers, and is responsible for workers' compensation and liability insurance, payroll and payroll taxes. The labor service simply presents an invoice for the use of the workers to the owner or contractor on a periodic (usually weekly) basis.

It might seem obvious that workers from a temporary labor service should be considered as "labor" under the Texas mechanic's lien statutes. Interestingly, however, this issue does not seem to have been decided by the Texas Supreme Court until recently. In Reliance National Indemnity Co., L&T Joint Venture and Lamar Construction Inc. v. Advance'd Temporaries, Inc., the Texas Supreme Court decided that a temporary staffing agency could indeed file a mechanic's lien for unpaid labor invoices.

In this case, the general contractor and the surety on an apartment construction project in Corpus Christi, Texas, refused to pay the claim of a temporary labor agency (Advance'd) that had supplied labor to one of the subcontractors. The general contractor and surety argued that Advance'd did not actually furnish the labor to the apartment project because, in their view, the workers were really employees of the subcontractor, and not Advance'd. The Texas Supreme Court looked to the written contract signed by the subcontractor and Advance'd, noted that the parties had agreed in the contract that the workers were employees of Advance'd, even though the subcontractor directed their work, and decided that the Advance'd claim really was a claim for the furnishing of labor under the mechanic's lien statutes.

What appeared to be important to the Supreme Court was not simply that the contract stated that the workers were employees of Advance'd, but that the contract contained a number of other terms that clearly showed that Advance'd retained control over the workers:

1. Advance'd was obligated to maintain workers' compensation and liability insurance on the workers.
2. Advance'd offered a limited guarantee on the workers' performance.
3. The contract prohibited the workers from operating any machinery, automotive equipment or working on ladders or      scaffolds without prior written consent of Advance'd.
4. Advance recruited the workers, qualified the legal status of each worker and did all related paperwork.
5. The subcontractor had to pay a fee of $2500.00 to Advance'd if the subcontractor hired any worker within three months      of the agreement.

A simple sentence in the contract between the temporary labor agency and the contractor that the workers are the agency's employees may not be enough. A careful lawyer will spell out the areas of control, and therefore help insure that his or her client will be entitled to claim a mechanic's lien if they don't get paid.

Texas real estate law generally provides that a property owner in Texas is not required to ensure that an independent contractor perform its work in a safe and non-negligent manner. In the recent case of Central Ready Mix Concrete Company, Inc. v. Luciano Islas, the Texas Supreme Court reaffirmed that principle, and refused to accept some apparently novel arguments in support of changing that law. The Plaintiff was clearly trying to find the "deep pocket" here, and was making some pretty tenuous arguments to try to get there. The Court's decision in this case makes sense.

Central, the property owner, was a ready-mix concrete company who hired an individual, Taylor, to come to the property owner's business premises to clean out concrete trucks. All parties agreed that Taylor was an independent contractor, and was not an employee of the property owner. Islas, the Plaintiff, was injured when another of Taylor's employee's turned on a concrete truck's drum while Islas was inside, severely injuring him. The Texas Supreme Court refused to extend premises liability law to cover this situation.

It was important to the Court's decision that the property owner had neither contractual nor actual control over the independent contractor's employees. In ruling in favor of the property owner, the Court disagreed with the following arguments:

1. Islas claimed that the concrete truck contained a "concealed hazard", and that the property owner had a duty to warn him of this hazard. The Court said that while a property owner does have a duty to warn an independent contractor of concealed and hazardous conditions on its real property, a property owner does not have a duty to warn an independent contractor about the hazards of the contractor's own work.

2. Islas argued that the property owner should have trained Taylor and/or Taylor's employees. The Court said that the property owner had no duty to train an independent contractor.

3. Islas claimed that the cleaning of the trucks was "inherently dangerous", and that the property owner had a nondelegable duty to warn him of the danger. The Court said that almost any machine, whether a small appliance or a piece of heavy equipment, can cause injury if it is activated when someone's fingers or limbs are inside it, and declined to find that cleaning a concrete truck was inherently dangerous.

Ironically, an inspector with the Occupational Safety and Health Consultation Program, a division of the Texas Workers' Compensation Commission, had recommended that the property owner use an independent contractor to clean its trucks in the first place.