Our
Texas Courts rarely give us insight into the interpretation of commercial lease
security deposits laws. Until recently. New guidance awaits.
In August 2010 ProLogis Texas II
leased real property in Sugar Land, Texas, to Daryl Flood Logistics. Daryl
Flood assigned the lease to FP Stores in 2013, who, in turn, subleased part of
it to Tramontina US in 2014.
Tramontina paid FP a $50,000 sublease
security deposit. The sublease required FP to refund the deposit, less proper
deductions, within 60 days after Tramontina vacated.
The Master Lease between ProLogis
and FP Stores terminated March 8, 2015, so by operation of law – the sublease
also terminated. FP vacated but Tramontina stayed, as the direct tenant of
ProLogis.
A week after termination Tramontina
sent a letter to FP with Tramontina’s new forwarding address and demand to
return the deposit within the time allowed by Texas law. Regardless, more than
two months elapsed without either a return of the deposit or tender of an
accounting that would provide for deposit offsets.
Tramontina sued FP for the refund of
its security deposit, which by law is required to be returned within 60 days if
a shorter time is not otherwise provided in the sublease. See Texas Property
Code 93.011: https://statutes.capitol.texas.gov/Docs/PR/htm/PR.93.htm.
That same law states that a landlord can be liable for triple damages if the
monies are not timely returned, or otherwise a written description of damages
and itemization of charges is not timely furnished.
The trial court agreed with
Tramontina’s position and awarded Tramontina $150,100 ($50,000 times three,
plus $100 statutory damages – exactly as stipulated in the Texas Property Code)
and $25,000 in attorney’s fees.
FP appealed.
The Court of Appeals found – surprise
to no one – virtually no cases on point in Texas regarding commercial leases
although we have had this law for 29 years. So the Court reviewed parallel Texas
statutes that are relevant to residential security deposits.
In doing so, the Court decided that
the landlord must prove its good faith
to avoid liability for treble damages. Good
faith, the Court determined, is “honesty in fact in the conduct or
transaction concerned” and that the landlord did not intend to deprive the
tenant of its rights or of a lawfully due refund.
From there, it was a short stretch
to determine that FP had presented at least some evidence that it had intended
to act in good faith.
Lessons
Learned / Questions Asked:
1.
This landlord was not found responsible for
triple damages. But in doing so, it had to defend a lawsuit in trial court,
appeal to the Texas Court of Appeals, and if the litigation was not settled, endure
yet another trial back in the district court of Fort Bend County. What do you
think this landlord spent in attorney’s fees - $100k? To save $50k?
2.
While there is honor in defending your position,
there is also a substantial cost in doing so. My assumption is that FP would
have been *far ahead if it would have timely complied with Texas laws and the
Sublease terms.
3.
In my experience, the landlords that are most at
risk are the ones that do not routinely engage in commercial real estate
leasing. They don’t know the laws; they don’t have appropriate accounting
procedures for deposit return. Brokers can help rookie landlords and tenants by
tracking the termination dates of leases and subleases, and then making all
parties aware that the security deposits must be timely processed.
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
Higier
Allen & Lautin, PC
2711
N. Haskell Avenue, Suite 2400
Dallas
Texas 75204
P:
972.716.1888