Wednesday, April 18, 2012

Beware the Mob

Recently I had an opportunity to look, again, at a Texas Landlord’s obligation to mitigate its damages when a Tenant breaches a Lease. It’s hard to believe we have had this law since 1997 – almost 15 years now. And before that date we had appellate case decisions that led to Texas Property Code 91.006.

In September 2005, MOB 90 of Texas, LP, leased commercial property to Nejemie Alter MD’s professional association. The property was in the Corpus Christi area, intended to be used as a medical office for five years. Alter personally guaranteed the lease obligation. Virtually no rent was paid during 2006, so MOB filed an eviction lawsuit against Alter.

Alter vacated in January 2007, and claimed that he only owed rental through that date. MOB had a different theory in mind, and claimed that Alter owed rental through the date of trial. The monthly rent was $4,677. Rental owing through the date that Alter vacated was $36,782, and that amount was not in dispute.

MOB requested judgment for $93,220. Alter contested that amount, claiming that MOB failed to properly mitigate damages, as required by the Texas law.

Alter testified that as he passed by the MOB property there were no signs posted that the property was available to lease. To his knowledge, there were no visible efforts undertaken by MOB to re-lease the premises. Alter further testified that after he defaulted he attempted to negotiate a deal with MOB involving lesser space. Alter claimed that he was willing to pay weekly amounts.

At trial MOB’s counsel called the property manager as a witness. Jean Shivers testified that typically for-lease signage was not used in medical office building settings. Shivers stated she had shown the premises three times since Alter was evicted, and that she had not leased any space in MOB’s building since January 2007 – the date that Alter vacated.

Shivers also testified that she listed the premises on both Loopnet and Costar, kept in contact with personnel at Doctor’s Regional Hospital, and that it was hardly unusual for it to take an extended period of time to re-lease commercial premises.

In any event, the Nueces County trial court entered judgment for MOB, but only for $36,782. MOB appealed.

The Corpus Christi Court of Appeals, citing a landmark 1997 Texas Supreme Court decision, discussed the duty of a Texas landlord to take objectively reasonable efforts to mitigate damages and find a suitable replacement tenant, when the tenant breaches a lease and abandons the property. A Texas landlord is not required to take all known efforts or accept an unsuitable tenant.

The trial court was of the view that MOB failed to adequately mitigate because MOB refused to work with Alter, who had defaulted on the Lease. The trial court also concluded that MOB’s efforts to mitigate by online listings, showing the property to those who expressed an interest and contacting the hospital administrators were insufficient.

The Court of Appeals disagreed, finding that since Alter did not prove that MOB’s failure to mitigate damaged Alter in any way, the trial court made a mistake and MOB was owed $93,220 in back rent through the date of trial. The Court of Appeals also saw no duty of a Texas landlord to renegotiate its lease with a defaulting tenant. See MOB 90 of Texas, LP v. Nejemie Alter MD, PA (Texas Court of Appeals – Corpus Christi-Edinburg 2009).

MOB wins, Dr. Alter loses.

Bottom line:

1. Texas landlords must mitigate their damages. When practical I recommend signage, in addition to other objectively reasonable efforts. In that manner tenants can at least observe some of your efforts.

2. There is nothing in this case or the mitigation law which precludes Texas landlords from clearly defining their mitigation burden in the lease. Note, however, that Texas landlords may not force or allow a tenant to waive the landlord’s burden of mitigation.

3. Beware the MOB.

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

Tuesday, April 3, 2012

Be Careful with Contract Definitions

In August 2004, TC Dallas #1, LP bought an office building from Republic Underwriters Insurance Company for $20 million. TC intended to redevelop the property, but it could not do so until Dallas National Bank vacated. To make the deal, Republic agreed to share TC’s early lease termination expenses and the costs of operating and managing the building until the Bank moved out.

Instead of redevelopment, TC instead elected to sell the property 10 months later for $16 million, to SCA 2727 Turtle Creek LP. TC retained in its contract with SCA the right to receive compensation from Republic as stated in the first contract. As well the second contract provided that the reduced purchase price reflected a $6 million reduction from the intended price, called a “bank credit,” which was defined as the amount by which the intended purchase price was reduced to compensate SCA for the risk in accepting title subject to the tenancy of Dallas National Bank, as well as anticipated lease termination expenses and operational costs of the property as an occupied building.

The second contract then reserved for SCA the exclusive right to negotiate lease termination fees. For reasons not explained in the appellate decision, the second contract obligated SCA to pay the anticipated Bank lease termination fees to TC. It was then TC’s duty in the second contract to remit such fees to the Bank.

Using the second contract’s procedures regarding the Bank lease termination fee, SCA wired $2 million to TC, and TC wired $2 million to the Bank. Actually the fee was not really for a lease termination, but rather the Bank was paid for a release of its right to renew the lease term through 2014.

TC then sued Republic, demanding reimbursement for portions of the $2 million paid to Dallas National Bank, as well as the $6 million “bank credit” and other expenses.

Republic asserted in the trial court that it had no obligation to reimburse TC for such expenses. The trial court agreed. TC Dallas #1, LP appealed.

The Dallas Court of Appeals, deferring at one point to Webster’s Third New International Dictionary for guidance, rejected TC’s appeal. Using the strict language of the first contract regarding “lease termination costs,” and “expenses and disbursements,” the Court of Appeals ruled that the monies paid and credit offered in the secondary contract did not exactly match the definitional phrases in the first contract.

TC lost, again. See TC Dallas #1, LP v. Republic Underwriters Insurance Company, Dallas Court of Appeals, July 21, 2010.

Bottom line:

1.       Definitional phrases in contracts are really important.

2.       Definitional phrases in contracts are vitally important.

3.       Definitional phrases in contracts are critically important.

Yes I know there is some repetition, but I thought it was important enough to repeat.

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.