Arbitration in Commercial Leasing

In May 2012 Premium Plastics Supply, Inc signed a two-year lease for commercial space owned by Thomas and Laura Howell. The Lease contained an arbitration provision, providing that all disputes related to it must be arbitrated.

The Lease term ended in May 2014, but Premium continued to occupy the space. In October 2014 the Howells sent a notice of default to Premium seeking payment under the holdover clause of the Lease. When Premium did not pay, the Howells started an arbitration proceeding.

After initiating arbitration, the Howells then changed the door locks on the leased space. Premium responded by claiming wrongful lockout under the Texas Property Code and several other claims, but ultimately all were voluntarily dismissed by Premium before the commencement of the arbitration.

The Howells were awarded $33,000 in unpaid rental at the arbitration. So the Howells filed a lawsuit in Harris County to confirm the award.

Premium responded to the lawsuit by reasserting the counterclaims previously raised and withdrawn in the arbitration.

The Howells obtained a confirmation of the arbitration award from the Harris County court, now converted to a Judgment. In rendering the Judgment, the court found that Premium no longer had the right to assert its counterclaims, as those matters should have been asserted in the arbitration.

The failure of Premium to timely assert those counterclaims, the trial court held, is not so much a waiver of legal rights as res judicata – a legal theory that says judicial resources will not be used to rehash the same arguments over and over, that have already been heard and decided. 

Or, should have been heard. And decided.

So Premium appealed, claiming it had claims that needed to be heard in the litigation forum.

The Appellate Court started by evaluating our Texas Rules of Civil Procedure, requiring counterclaims to be litigated in an initial arbitration or lawsuit when it arises out of the same transaction or occurrence, and does not need the presence of third parties of whom the court cannot acquire jurisdiction.

Next, it was time to consider the impact of arbitration awards. Basically, the Court concluded that there is not much difference between an arbitration award and a Court-ordered judgment. And an arbitration award is treated as a prior final judgment for purposes of res judicata.

Based on this, the Appellate Court had little trouble ruling for the Howells. It appears that Premium made a decision not to assert its claims in the arbitration, perhaps thinking those claims could be held for a later date. The Appellate Court did not agree that Premium could postpone the assertion of those claims, and found that the failure to assert such claims in the arbitration proceeding fatally impaired the ability of Premium to later assert them in Court.

So, Judgment is affirmed for the Howells. See Premium Plastics Supply, Inc. v. Thomas Howell and Laura Howell; Case No. 01-16-00481-CV; Texas Court of Appeals 1^st District-Houston; September 28, 2017: http://scholar.google.com/scholar_case?case=2032118509891223314&q=premium+plastics+v.+howell&hl=en&as_sdt=6,44.

Lessons learned:

1.      Arbitration is unusual in a commercial leasing context. Commercial landlords want the unrestrained right to claim a lease default and start court eviction proceedings in JP Court, as opposed to waiting for an arbitration award and then confirming it in a following lawsuit to convert the award into a Judgment. Typically JP Court eviction trials occur in only a few weeks after the eviction lawsuits are filed, but it can take years to obtain both an arbitration award and a Court-ordered confirmation and conversion to Judgment.

2.      This case is helpful to illustrate a sidebar point: Texas constables and sheriffs will not enforce an arbitration award. Only Judgments can be enforced. And Judgments only come from our courts – no arbitrator has the ability to issue a Judgment.

3.      Now you should be seeing how cumbersome arbitration proceedings can be in the context of a commercial lease. Most landlords won’t allow it; some power-tenants insist on it. In the latter situation, be sure to consider what happens when the tenant fails to pay rent or commits some other obvious lease default. An arbitration procedure followed by litigation might delay justice for a year or more.

                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,

Texas Board of Legal Specialization

Licensed in the States of Texas and New York

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

 

Is Your Renewal Notice Sufficient?

Town and Country Center, Inc. owns property in Marion Illinois. T&C had a lease with Rax of Marion, Inc., whereby Rax leased the property from T&C. On December 1, 1993, Rax assigned its rights as tenant to Sher-Jo, Inc.

On July 26, 1994, T&C and Sher-Jo amended the lease to extend the term for 20 more years beginning January 1, 1994. As well, the amendment allowed Sher-Jo the right to extend the lease term for five more years, if the option was exercised at least 180 days prior to the end of the then-current term.

The math works out to July 4, 2013 – that was the last day that Sher-Jo was afforded the right to extend the term.

On September 1, 1994, Sher-Jo subleased the property to Fazoli’s Restaurants for a 10 year sublease term, with three 5-year option renewal terms. T&C approved the sublease, but otherwise T&C was not a party to it.

On May 31, 2013, Fazoli’s sent a letter to Sher-Jo stating that Fazoli’s was exercising its first sublease renewal option. On June 4, 2013, Sher-Jo faxed to T&C a copy of Fazoli’s letter. Sher-Jo verbally confirmed with T&C that T&C received the fax and at that time, verbally advised T&C that Sher-Jo also needed to exercise its five-year renewal option.

Other than the Fazoli fax, no other correspondence was sent to T&C prior to the renewal deadline of July 4, 2013. Two weeks later (July 18, 2013), Sher-Jo sent T&C a letter by email and US certified mail, formally advising of Sher-Jo’s intent to renewal the prime lease.

T&C, believing that Sher-Jo was required to furnish notice by registered US mail (since that is what the prime lease said) and that in any event, Sher-Jo’s letter of July 18 was two weeks too late, ignored Sher-Jo’s letter and instead entered into a direct lease with Fazoli’s.

In response, Sher-Jo sued T&C, claiming that Sher-Jo had effectively renewed the prime lease through Sher-Jo’s substantial compliance with the prime lease, and T&C had no legal means to ignore Sher-Jo’s lease renewal and instead deal directly with Fazoli’s.

The trial court granted judgment to Sher-Jo, concluding that the June 4 fax from Sher-Jo to T&C (recall that the fax was only Fazoli’s exercise of its sublease renewal term) satisfied the notice requirements of the prime lease.

T&C appealed.

There was no dispute that the phone calls and fax were sent within the time required by the prime lease. The sole issue was: Did the tenant Sher-Jo comply with the terms of the renewal option exercise in the prime lease?

The Appellate Court reviewed the fax, which references only an extension of the sublease between Sher-Jo and Fazoli’s. Sher-Jo argued that Fazoli’s was authorized to send a notice on behalf of Sher-Jo to T&C. While that may or may not have been true, the notice that was actually sent did not reference Sher-Jo’s option exercise. Only Fazoli’s.

The Appellate Court found that Sher-Jo did not sent written notice of its desire to exercise its option to extend the prime lease within the requisite timeframe. Oral notice does not excuse the failure of Sher-Jo to strictly comply with the terns of the renewal option and notice provision in the prime lease.

The circuit court’s decision was reversed. T&C wins; Sher-Jo loses; T&C may directly lease the property to Fazoli’s or anyone else as Sher-Jo’s prime lease term expired December 31, 2013.

See Sher-Jo, Inc. v. Town and Country Center, Inc.; Case No. 5-16-0095-U; 5^th District Appellate Court of Illinois; July 31, 2017: http://www.illinoiscourts.gov/R23_Orders/AppellateCourt/2017/5thDistrict/5160095_R23.pdf.

Lessons learned:

1.      This Illinois Appellate Court concluded that commercial tenants who seek to exercise a renewal option must strictly comply – not substantially comply – with the terms of the lease. Those terms include not only timing elements, but also the manner in which notice must be sent.

2.      I have seen recent situations where commercial tenants engaged commercial brokers, agents and REALTORS® to assist with lease renewal negotiations. If the agent doesn’t understand the law and hasn’t read the lease, then malpractice claims can be asserted against the agent if the tenant is disadvantaged when the landlord doesn’t accept tenant’s late renewal notice. This may be so even though the agent was working with the landlord relative to the terms of the renewal, and inadvertently let the formal renewal date slide thinking (knowing!) that surely better renewal terms for the tenant would be received with just a few more days of negotiations.

3.      Are you helping a landlord or tenant negotiate a new commercial lease? Don’t overlook the notice ‘boilerplate’ provisions. No one uses faxes anymore. Change the notice provisions to allow notices to be sent by scan and email, provided they are also sent within the following three days by certified mail or overnight courier service.

                                                                                    Stuart A. Lautin, Esq.*

                   * Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,

                      Texas Board of Legal Specialization

                       Licensed in the States of Texas and New York

             

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