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Arbitration Provisions in City Contracts

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Arbitration Provisions(September 6, 2011):  When is the last time you examined the contractual provisions set out in contracts entered into by your city or municipality? Arbitration provisions can be very problematic and a city or municipality should think twice before voluntarily agreeing to arbitration or including such provisions in a contract with an outside party. Why are arbitration provisions discouraged? First, agreeing to arbitration or including such a requirement in a contract may result in the loss of certain protections provided by state law being waived the city or municipality. Second, an arbitrator may not have experience in municipal law, and may apply equitable principles that would not apply in a court of law.

I. Background — Arbitration Provisions in City Contracts:

State law will often provide cities extra protection against damages and lawsuits, such as immunity from liability, which protects a city from judgment even if the legislature has agreed to allow it to be sued; alternatively, there may be immunity from suit which means a city cannot be sued unless it consents to be sued. Tex. Dep’t of  Transp. v. Jones, 8 S.W.3d 636, 638 (Tex.1999).  This is a general statement and many times an actual determination of privileges is fact-intensive.

II.  Arbitration Provisions Can Result in the Waiver of Immunity by a Texas City or Municipality:

However, in Texas, whenever a city contracts with a person or entity, then its immunity from suit is waived. See Texas Local Government Code Chapter 271.152. But damages are limited to factors such as the balance owed for services provided, possible increases for costs to perform as a result of city-caused delays; amounts for change orders authorized by the city, reasonable or necessary attorney fees and interest.  Consequential damages are often limited and exemplary damages are not allowed.  An arbitrator may not follow these limitations, whereas a court by law has to apply these limitations. As always it is recommended that both a city or private party contracting with a city consult with an attorney regarding contracts and the provisions therein. For more information, please contact Leonard Schneider in our Houston office.

Leonard Schneider, J.D., Healthcare Attorney serves for multiple Texas cities and municipalities. Leonard Schneider, J.D., is highly experienced in the legal representation of Texas cities and municipalities.  He serves as outside legal counsel and “City Attorney” for a number of Texas cities and towns.  For a free consultation regarding the inclusion of arbitration provisions in your contracts, call: 1 (800) 475-1906.

Hotel Occupancy Tax Funds – Management and Duty – Part III of III

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Hotel Occupancy Tax Issues -- HOT Funds -- Can Be Complicated(March 30, 2011): In Part I, the Hotel Occupancy Tax (“HOT”) was defined and examples of how it can be used were given. Part II examined the two-part test to determine if a proposed expenditure of HOT funds meets the purpose of the HOT tax.

Many cities will hire a third-party firm or organization to manage and use HOT funds.  Texas law allows this. See Texas Tax Code at § 351.101(c). When approving a contract and funding to a third-party the City Council determines if the proposed uses by the third-party is a permissible use and will “directly enhance and promote” tourism and the hotel and convention industry. See Tex.Atty.Gen.Op. No GA-0124 (2003); Texas Tax Code at § 351.101(b).

A contract with a third-party should reference the statute authorizing the Hotel Tax and duties regarding the expenditures of the Tax. This is because the funds are given to the third-party.  The Contract should also specify that any HOT funds given to a third-party should be kept in a separate account by the third-party and the funds cannot be commingled with any other money. Texas Tax Code at § 351.101(c)

Since HOT funds are taxes paid by the public, a fiduciary duty is imposed on the third-party regarding the management of the HOT funds. Id. At the most basic level, fiduciary duty means the third-party would put the City’s interest above its own in the management and expenditure of HOT funds entrusted to it. Additionally, whether by case-law or statute, fiduciary duty also means the third-party needs to maintain complete and accurate financial records of each expenditure of HOT funds and upon request the records should be made available to the City. See Texas Tax Code at § 351.101(d). The level of financial records kept should be such that an independent party could examine the records and determine if the money was spent appropriately.

HOT funds are a public tax. A City that wishes to contract with a third-party to manage HOT funds should have an independent audit conducted every year or two to determine if the monies are being spent appropriately and accurate records are being kept.

A third-party that wishes to manage HOT funds for a city should put in procedures to make sure the HOT funds are maintained in a separate account and that financial records are kept that will show how, when and on what the HOT funds were spent.  Notably, an officer of a corporation is liable for any tort committed through him or her, regardless of whether the officer personally benefits from the tort committed. McCollum v. Dollar, 213 S.W. 259, 261 (Tex.Com.App.1919); Gardner Machinery Corp. v. U.C. Leas., 561 S.W.2d 897, 899 (Tex.Civ.App.1978, writ dism’d) This includes being individually liable for breaching a fiduciary duty owed by the corporation (third-party) to the City. Gardner, 561 S.W.2d at 900; Searle-Taylor Mach. Co., Inc. v. Brown Oil Tools, Inc., 512 S.W.2d 335, 338 (Tex.Civ.App.1974, writ ref’d n.r.e.).   Always, in the handling of HOT funds, whether a City or a third-party, an attorney should be consulted.

Leonard Schneider Healthcare LawyerLiles Parker attorneys and staff have extensive experience representing Texas cities and municipalities.  Should you have questions regarding this article, please call Leonard Schneider for a complimentary consultation.  You may contact us at: 1 (800) 475-1906.         


Hotel Occupancy Tax Funds and Proper Use – Part II of III

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Hotel Occupancy Tax Funds(March 22, 2011): In Part I the term Hotel Occupancy Tax was defined, and examples of how it can be used were given. Hotel Occupancy Tax funds (in Texas) are to be spent on authorized uses if the HOT funds are spent in a manner directly enhancing and promoting tourism and the convention and hotel industry.




I.  Two-Part Test For Hotel Occupancy Tax Funds in Texas:

A two-part test in Texas that is commonly recognized by administrative agencies and cities is: (i) will the spending of the Hotel Occupancy Tax funds put “heads in beds”, in other words, will the funded project using Hotel Occupancy Tax funds likely attract overnight tourists to the city hotels and motels thereby promoting the city’s hotel industry; and (ii) does the expenditure of Hotel Occupancy Tax funds fit into the uses authorized by the state law? See Bennett Sandlin, General Counsel Texas Municipal League “The Hotel Tax Two-Step”, Texas Town & City pp. 45-46 (April 2005).

II.  When Should the Two-Part Texas for Hotel Occupancy Tax Funds be Applied?

This two-part test should be applied to every proposed used of Hotel Occupancy Tax funds for a particular project.  For example, will the donation of Hotel Occupancy Tax funds to a shelter meet the test? While funding a shelter is a worthy cause, it is unlikely that the promotion of a shelter will directly enhance and promote the attraction of tourists to the city.   Nor does the shelter likely fit into any authorized uses.

III.  Uses of Hotel Occupancy Tax Funds:

What about the donation of $1000.00 of Hotel Occupancy Tax funds to a Chamber of Commerce for its annual fund-raiser dinner?  While the Chamber annual fund-raiser may attract political figures from out-of-town, will that directly enhance and promote tourism? The political figures may tell others outside of the city about the Chamber and extol the city, but will that likely cause future tourists to come to town?  Objectively, the expenditure of the $1000.00 of Hotel Occupancy Tax funds to a Chamber fund-raiser, at the most, will indirectly enhance and promote tourism and therefore does not meet the first part of the test.  Further, the promotion of a Chamber normally will not fit into an authorized use or category which is the second part of the test. Id.

What about donating Hotel Occupancy Tax funds to advertise a weekend long folk music festival in the city that attracts out-of-town artists and folk music lovers?  This likely meets the first part of the test in that promotion of the two and ½ day music festival will directly enhance and promote tourism that will result in overnight stays in the hotels and motels of the city.  This also fits the second part of the test in that many Hotel Occupancy Tax statutes allow the funding of art events that include the presentation and performance of music.

What about the advertising of various city weekend long events or conventions in a city in a State-wide or State sponsored travel magazine?  This is similar to promoting the music festival above.  The purchase of the advertising is likely to directly enhance tourism to the city by letting readers of these magazines know of events that they may wish to attend, such as a music festival, a week-long sporting event, or a three-day convention for school administrators. This would also meet the second part of the test because a permissible category to spend HOT Funds is to advertise and promote programs to attract tourists and convention delegates.

Every proposed expenditure of Hotel Occupancy Taxes funds should be subjected to the Two Part test because there may be different facts that may allow or disallow the expenditure.

Part III will address the management of Hotel Occupancy Tax funds and fiduciary duty in the managing of these funds.

Leonard Schneider Healthcare AttorneyLeonard Schneider, J.D., represents cities and municipalities in connection with administrative, regulatory and civil litigation matters.  Other Liles Parker attorneys and staff also have experience representing Texas cities and municipalities.  Should you have questions regarding this article, please call Leonard Schneider for a complimentary consultation.  You may contact Leonard at: 1 (800) 475-1906.    

Hotel Occupancy Tax Funds (HOT Funds): What are They? Part I of III.

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What Are Hotel Occupancy Tax (HOT) Funds?(March 21, 2011): Many states have passed laws that allow a city to authorize Hotel Occupancy Tax funds to be collected.  Hotel Occupancy Tax funds are essentially taxes that are charged to individuals who stay at hotels within a city or its extra-territorial jurisdiction.  Cities are normally allowed to institute this tax pursuant to a state statute.




I.  Hotel Occupancy Tax Funds in Texas:

For most cities in Texas, this tax is capped at 7.0%  of the price paid for a room in a hotel. The price paid for a room does not include the cost of food served by the hotel and the cost of personal services performed by the hotel for the person except for those services related to cleaning and readying the room for use or possession.

II.  Exemptions from Paying Hotel Occupancy Tax Funds When Renting a Room:

Certain persons do not have to pay the Hotel Occupancy Tax when renting a room.  Some common exemptions are: (i) a permanent resident of the city where the hotel is located; (ii) certain members of charitable organizations; or (iii) state or government employees traveling as a part of their job duties.

III.  How Can Hotel Occupancy Tax Funds be Used by a City:

Hotel Occupancy Tax funds collected by a hotel are paid to the City.  However, a city may use these HOT funds only as authorized by state statute.  In Texas, Hotel Occupancy Tax funds are to be used only to promote tourism and the convention and hotel industry in the city that authorized the charging of Hotel Occupancy Tax funds as an additional tax.  The prerequisites for the expenditure of these funds on authorized uses are that the funds shall be expended in a manner directly enhancing and promoting tourism and the convention and hotel industry.

Common authorized purposes on which cities may spend Hotel Occupancy Tax funds include: (i) acquiring sites for and/or construct, enlarge, and maintain convention centers and/or visitor information centers; (ii) providing the facilities, personnel and materials to register convention delegates or registrants: (iii) advertising and conduction solicitations and promotional programs to attract tourists and convention delegates and registrants: (iv) generally promoting and supporting the arts, dance, drama, folk art, radio, etc  that are related to the presentation, performance and exhibition of the art forms authorized; (v) restoring, preserving and promoting of historic sites or museums that is near the convention center or located where frequented by tourists and convention delegates; or (vi) sporting events that will draw tourists.

In part II, tourism will be defined, a common test will be examined to determine if spending of these funds will directly enhance and promote tourism, and the fiduciary duty in relation to managing these Hotel Occupancy Tax funds will be discussed.

Leonard Schneider Healthcare LawyerLeonard Schneider represents a number of Texas cities and municipalities, serving as City Attorney.  Should you have questions regarding these issues, call us for a complimentary consultation.  Leonard can be reached at: 1 (800) 475-1906.

What Can Cities Do About Dangerous Buildings?

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Dangerous Buildings(June 25, 2010): Cities have the authority, usually provided by State statute, to regulate dangerous and substandard buildings and structures.   In Texas, a City has to pass an ordinance to activate its ability to regulate dangerous buildings and structures.  See TEX. LOC. GVT CODE § 214 Subchapter A.

Before taking action against a dangerous building, City officials should check their code of ordinances to make sure they have the ability and authority to regulate dangerous structures.   This authority will include the ability to require the repair, removal, or demolition of the building and to require occupants of a dangerous building to either vacate the premises or relocate.  Common criteria to cause the vacating of a premise include whether or not the building is “dilapidated, substandard, or unfit for human habitation”.

Unoccupied buildings that may pose a danger to the public or be an attractive nuisance to children and/or vagrants are also subject to the regulatory authority of a City.  It does not matter if the building or structure is secured or unsecured.  This broad regulatory authority is given to a City under the umbrella of providing for the “health, safety and welfare” of its citizens.

The City must follow due process and give proper notification to a property owner before taking action against a building. Consequently, property owners, landlords, or investors who purchase property within a city limit should contact the City and determine what city ordinances are applicable to the property.  The same applies to a person who may inherit a building or home, or the business that purchases a property.  This also allows the owner to determine if the City is following proper procedure in giving notice and in its determination that a building is unsafe or dangerous.

Cities should always consult legal counsel to ensure proper procedure is being followed when adverse action taken against a building.  Concurrently, owners of a building within city limits should consult their attorney if they get a notice that their building is considered a nuisance.

Should you have any questions regarding these issues, don’t hesitate to contact us.  For a complementary consultation, you may call Leonard Schneider, J.D.,  or one of our other attorneys at 1 (800) 475-1906.

Contracts with Cities 101:

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Contracts with Cities(May 10, 2010): Inevitably a service provider, such as an IT professional or a vendor supplying coffee or coke machines, will sign a year-to-year or a 3-5 year contract with a City.  Depending on the particular city, the contract may be signed by a City Officer such as the City Manager, City Administrator, or even a Mayor.  As a service provider, you may believe all is well and is happy to have a contract with a client who always pays.  The City personnel are happy to have the service.

It is all fine if the person who signed on behalf of the City had been given authority by the City Council to enter into the contract.  If that person had not been given authority by City Council, then the contract may be voidable.  How can that be?  Surely a service provider can rely upon the authority of a Mayor or City Manager as an agent of the City to enter into a contract.  That is not always the case.

For example, pursuant to Texas law, a City cannot be bound by a contract that the City Council did not authorize an officer or city employee to enter into.  See Stirman v City of Tyler, 443 S.W.2d 354, 358 (Tex.Civ.App.-Tyler 1969, writ ref’d n.r.e.); Alamo Carriage v. City of San Antonio, 768 S.W.2d 937, 941-942 (Tex.App.—San Antonio, no writ).  While the City in all likelihood will have to pay for service rendered up till the time of any termination of the contract, the City will also have the ability to adopt a position there is no contract or the contract is voidable because the City officer or City employee was not given authority to sign the contract.

The City officer or employee should always check to make sure he or she has been given authority to sign a contract, either by City Council vote or by City Council approved budgetary guidelines.  And the service provider should always request that the City officer or employee verify their authority to sign the contract.  For example, you can imagine the stakes are considerably higher for city construction contracts.

This due diligence should be done for all contracts by both City and the service provider and always each party should consult their attorney.

Should you have any questions regarding these issues, don’t hesitate to contact us.  For a complementary consultation, you may call Leonard Schneider or one of our other attorneys at 1 (800) 475-1906.