THE SUPREMES SPEAK. AGAIN.

             I have written about this before. It is rare that the Texas Supreme Court will review a case involving a commercial landlord – tenant dispute. Well it just happened. Again.

            Landlord Rohrmoos Venture executed a lease in 1996 with tenant UT Southwestern DVA Healthcare for a building in Dallas. I believe the building may be on Elmbrook Drive – very close to UTSW’s main campus facilities. The lease was modified and ratified in 2003. UTSW used the space for a dialysis clinic.

            At some point UTSW experienced water penetration in the building’s concrete foundation. UTSW installed ceramic floor tiles in an attempt to contain the moisture problem.

            In September 2007 Texas health inspectors evaluated the clinic and criticized UTSW because flooring had become loose and moisture could be seen under the tiles. UTSW notified Rohrmoos of the inspection results and the two parties exchanged communications over a period of several months. Neither party accepted responsibility.

            Multiple engineers and contractors were engaged, but the issue persisted to 2009 and then began to worsen as the building suffered significant water penetration.

            Because UTSW viewed the building as unsuitable for its intended commercial purpose, UTSW terminated the lease early, vacated, and relocated to Irving while still owing ~ $250k in unpaid rent. UTSW then sued Rohrmoos for breach of contract, breach of an implied warranty of suitability, and attorney’s fees.

            At trial, the case was submitted to a jury. The jury found that: (a) both UTSW and Rohrmoos had failed to comply with the lease, (b) Rohrmoos breached the lease first, and (c) Rohrmoos breached an implied warranty of suitability.

            The trial court, based on the jury’s verdict, held that UTSW properly terminated the lease and Rohrmoos owed UTSW over $1 million in attorney’s fees.

             Rohrmoos appealed to the Texas Court of Appeals.

 

            The Court of Appeals determined that UTSW had the right to terminate the lease based on Rohrmoos’ breach of an implied warranty of suitability. And, that UTSW was entitled to a judgment of $1+ million in attorney’s fees.

            Rohrmoos appealed to the Texas Supreme Court. And (surprise, surprise) the Supremes agreed to review the case.

            In a 56-page Opinion, the Supreme Court concluded that UTSW had the right to terminate the lease as a remedy for a material breach by the landlord. Since the jury found that Rohrmoos had materially breached the lease, then the relocation and termination actions of UTSW were justified.

            All of that was concluded in the first 15 pages. The remainder of the decision concerned procedural matters and a $1+ million attorney fee award.

            UTSW prevails on the right to terminate a lease and vacate following a landlord’s material breach of lease; Rohrmoos loses that point. However, the $1+ million attorney fee award was reversed and sent all the way back to Dallas County to present that singular issue to yet another trial jury.

See Rohrmoos Venture v. UTSW DVA Healthcare, LLP, Texas Supreme Court; Case No. 16-0006; April 26, 2019: https://law.justia.com/cases/texas/supreme-court/2019/16-0006.html.  

            Lessons Learned / Questions Asked:

 

1.      Texas attorneys, landlords, tenants, lenders, and brokers all had questions about the viability of allowing tenants to terminate a commercial lease and vacate, claiming the commercial premises are unsuitable for its intended business purpose. We’ve had this theory since 1988, but precious little has been written about it. Now we know the theory is correct.

2.      To Texas landlords: beware and quickly respond to the claim of commercial tenants that the premises are not suitable for its intended business purpose. To Texas tenants: if you have not committed a significant lease breach, this Rohrmoos case confirmed what we have believed since 1988 – you may have the right to relocate and terminate.

3.      To Texas litigation attorneys: your ability to receive a fee award has been severely compromised. You don’t need to read the first 15 pages, but you might want to focus hard on the remaining 41.

                                                                                     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

SUBLEASE TERM RENEWALS

            Subsea 7 Port Isabel is an engineering and construction firm that manufactures and installs undersea oil and gas pipelines. Starting in 2007 Port Isabel Logistical Offshore Terminal leased 54 acres in Port Isabel, Texas, from the Port Isabel-San Benito Navigation District. In April 2008 PILOT subleased about half of that property to Subsea, to be used as Subsea’s ‘spoolbase’ for its undersea pipe operations.

 

            The sublease term started on May 1, 2008, and ended May 31, 2012. If PILOT (as prime tenant) exercised its renewal options, then Subsea was also allowed to do the same relative to its sublease by issuing option exercise notice at least 60 days prior to May 31, 2012.

 

            Subsea claims it spent $40+ million to improve the property by building a dock, facilities for fabricating pipes and loading them unto ships, and stabilizing the ground with crushed rock. Clearly, the sublease was important to Subsea.

 

            In February or March 2012 the operations manager for Subsea spoke to PILOT’s president about renewing the sublease. Subsea asserts that the president told Subsea’s operations manager that Subsea did not need to send written notice to renew the sublease before March 31, 2012, as required by the Sublease.

            PILOT’s vice president also recalled that Subsea wanted to renew its sublease.

 

            In May 2012 PILOT replaced its president. Subsea sent an email to the new president providing that Subsea intended to renew its sublease. The following day Subsea sent a sublease renewal notice by certified mail.

            PILOT did not respond to either of the notices. PILOT did, however, continue to send sublease rental invoices to Subsea for two years after expiration of the original sublease term, and Subsea paid the invoices while Subsea remained in occupancy.

            PILOT sent an eviction notice to Subsea in April 2014. Subsea refused to vacate, claiming that the sublease had been effectively renewed due to the oral notice, email notice and Subsea’s continued occupancy of the subleased premises after May 2012.

            When PILOT refused to accept Subsea’s position regarding sublease extension, Subsea sued PILOT and asked the court for a ruling that Subsea had substantially complied with the sublease renewal notice provisions. After a two-week jury trial, the court entered judgment in 2016 that Subsea became an unlawful trespasser as of June 1, 2014 and was responsible for $635k in ‘trespass’ damages.

 

Both Subsea and PILOT appealed.

            Subsea argued to the Appellate Court issues of equitable estoppel, quasi-estoppel, and waiver. Each failed.

            It was then PILOT’s turn. PILOT claimed it was wrong to deny PILOT its attorney’s fees and court costs and that Subsea should not have been permitted to remove its property and improvements.

            All of PILOT’s arguments were rejected.

            The conclusion reached by the Appellate Court is that an oral understanding to exercise a sublease renewal term followed by a late email is ineffective, if the sublease requires formal, timely, written notice. Subsea failed to furnish compliant and timely written notice. Remaining at the subleased premises for two additional years does not waive PILOT’s position that Subsea is nothing more than a holdover tenant.

See Subsea 7 Port Isabel, LLC v. Port Isabel Logistical Offshore Terminal, Inc.; Texas Court of Appeals, 13^th District, Cause Number 13-17-00144-CV; June 20, 2019: https://law.justia.com/cases/texas/thirteenth-court-of-appeals/2019/13-17-00144-cv.html.  

            Lessons Learned / Questions Asked:

1.      To quote from Dr. Seuss, lease renewal and extension notice provisions mean what it says and says what it means. Renewal and extension options are usually strictly interpreted. Even a minor deviation can invalidate a renewal / extension notice.

2.      To the commercial tenants – get out your Leases and Subleases. Carefully calendar each renewal and extension date. Follow exactly the notice provisions of your document. Don’t assume that anything less than full compliance will result in an effective renewal.

3.      To the commercial landlords – don’t like the renewal / extension provisions of the Lease in your building? You may be able to defeat it if the tenant or subtenant deviates, based on this appellate decision.

                                                                                                      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

E: slautin@higierallen.com

W: www.higierallen.com