Article

From the Wild West to the Regulated West: Avoiding Pitfalls in Texas Commercial Leases

September 10, 2019

For many businesses, entering into a lease is an essential and important part of their business. On the surface, a lease may seem fairly simple—an agreement to let a party use and occupy space in exchange for the payment of rent. Commercial leases, however, tend to immerse the parties in business and legal issues that are far more complex than initially anticipated. After painstaking lease negotiations, unsuspecting landlords and tenants are often surprised to learn that certain lease terms can be affected or even be void under Texas statutory law. This article discusses some of them. This article, however, only focuses on commercial leases, so it does not include any of the required disclosures or notices that are only necessary in residential transactions.

Assignment and Subletting

As a general rule in most US jurisdictions, an assignment of the lease or subletting of the leased premises is permitted unless it is expressly prohibited by the lease terms. Therefore, if the lease is silent, the tenant may assign the lease or sublet the leased premises without the landlord’s prior consent. Tenants from other states may make the mistake of assuming that assignment/subletting is allowed in Texas if not specifically prohibited in the lease.

However, the general rule is not the case in Texas. Pursuant to Section 91.005 of the Texas Property Code (TPC), if the lease does not expressly provide otherwise, an assignment or subletting always requires the prior consent of the landlord. As a matter of public policy, this prohibition is incorporated into all leases by operation of law. If the original tenant does assign or sublet the lease without the landlord’s consent, the landlord may refuse to accept rent and treat the lease as forfeited.

Further, unless the lease provides otherwise, a landlord is not required to act reasonably in withholding consent, as there is no implied duty of good faith and fair dealing in Texas in connection with the landlord/tenant relationship. Texas courts will not consider the fact that the landlord’s refusal to consent to an assignment or sublease creates the practical equivalent of a restraint on alienation. If a tenant desires to require a reasonableness standard for a landlord’s consent, it must be clearly stated in the lease.

When reviewing a lease to be governed by Texas law, the tenant should remember that the landlord is not required to act reasonably in withholding consent to a tenant’s request to assign the lease or sublet the leased premises, and should seek a reasonableness standard for such consent.

Lockouts

Whether it is expressly stated in the lease or not, under Section 93.002 of the TPC, Texas allows a landlord to prevent a commercial tenant from entering the leased premises by changing the door locks of a tenant who is delinquent in paying at least part of the rent. The tenant no longer has access to the leased space or its contents until the past due rent is paid. It is a landlord self-help remedy that does not require the prior permission or approval of a court. However, when a commercial landlord changes a tenant’s locks due to delinquent rent, the landlord must place a written notice on the tenant’s front door stating the name and the address or phone number of the individual or company from which a new key may be obtained. The new key must be available during the tenant’s regular business hours, upon payment of the delinquent rent. 

Lockouts can be an extremely useful tool to a landlord. While the judicial eviction process is slow, a lockout can happen in a matter of hours or even minutes. This elimination of delay catches many tenants off-guard, before they have time to remove inventory and business records from the leased premises. A lockout can secure and isolate critical inventory and business records located in the leased premises that are necessary to the ongoing business of the tenant (or its liquidation for that matter). Unfortunately for tenants, the law provides absolutely no grace period before this right is available to the landlord. If the lease does not provide some grace period, the landlord has the right to lock out a tenant even one day after rent is delinquent. 

If the provisions of the applicable law and the lease itself are inconsistent, the provisions of the lease supersede the law. For a tenant, it is imperative to understand the law regarding lockout since it is a remedy granted to landlords, even if not mentioned in the lease. If lockout provisions are in the lease, a tenant should be aware that such provisions may expand the landlord’s legal rights beyond those provided by the applicable sections of the TPC. 

Statutory Landlord Lien

In addition to any contractual landlord lien to secure the tenant’s obligation to pay rent, the TPC provides for a lien in favor of a landlord against a tenant who leases or rents all or part of a building for nonresidential use. This statutory landlord’s lien secures the tenant’s obligation to pay rent for the current 12-month period during the lease (with the first 12-month period beginning on the commencement date of the lease). The statutory lien attaches to the tenant’s personal property located in the building.

However, as a practical matter, the Texas statutory lien is not equivalent to a contractual security interest. Although the statutory lien technically secures one year’s worth of rent, unless the landlord files a lien affidavit every six months, it will be limited to enforcing the lien only for the prior six months’ worth of rent. Also, based on the statute, the statutory lien must be enforced by applying to the justice of the peace court for a distress warrant.

If a landlord intends to have a useful security interest in a tenant’s property to secure sums due under the lease, rather than relying on the statutory lien it should consider adding a provision to the lease creating a contractual security interest to be governed by Article 9 of the Uniform Commercial Code, as adopted in Texas. If a tenant intends to eliminate all landlords’ liens, the tenant should be aware that the deletion of provisions relating to a contractual security interest will not automatically constitute a waiver of the statutory lien, and it should seek to add an affirmative waiver of all statutory liens.

Landlord’s Duty to Mitigate Damages

In response to a 1997 Texas Supreme Court case concerning commercial landlords’ duty to mitigate their damages in certain circumstances after a tenant breach, the Texas Legislature enacted Section 91.006 of the TPC. This statute states that a landlord has a duty to mitigate damages if a tenant abandons the leased premises in violation of the lease. Further, any provision in a lease attempting to waive a right or to exempt a landlord from a liability or duty set forth in Section 91.006 of the TPC is void. The statute, on its face, only applies to abandonment breaches, and in that one situation only, it is clear that the duty to mitigate may not be waived, at least with respect to leases entered into after the statute’s effective date.

However, the statute gives no further guidance as to what behavior will be considered to fulfill its “duty” to mitigate, or what the consequences of such a failure would be. Given the uncertainty of the law on this issue, the landlord and tenant may want to include language in the lease that would guide a court in deciding whether, in a given situation, the landlord fulfilled any statutory or common law duties to mitigate its damages (e.g., engaging a broker, making the leased premises ready to relet to a new tenant, etc.).

Abandoned Tenant Property

Section 93.002(e) of the TPC permits a landlord to dispose of a tenant’s personal property without foreclosing on it. Under this section, a landlord may remove and store any property of a tenant that remains on the leased premises that are abandoned. In addition to exercising any other rights, a landlord may dispose of the stored property if the tenant does not claim the property within 60 days after the date the property is stored.

Under Texas law, the term “abandonment” is well defined and requires evidence of a clear intent to abandon the leased premises. The simple act of vacating the leased premises will not be deemed abandonment when the tenant continues to pay rent. For this reason, and the fact that there are notice and waiting periods under the statute, the landlord may want to include lease provisions that broaden the statute’s applicability and notice provisions.

Prohibition Against Certain Charges

Under Section 93.012 of the TPC, a landlord “may not assess a charge, excluding a charge for rent or physical damage to the leased premises, to a tenant unless the amount of the charge or the method by which the charge is computed is stated in the lease, an exhibit or attachment that is part of the lease, or an amendment to the lease.” In light of the statute, it is problematic to charge a fee based on landlord’s discretion. Even though it is commonplace now to characterize all sums and charges under the lease as “rent,” lease provisions that allow the total discretion of the landlord as to the amount of a fee should be replaced by a flat fee or a fee based on a certain calculation.

Ad Valorem Property Taxes

Under Texas law, a tenant is not liable to the governing taxing authority for the payment of ad valorem taxes on the real property comprising the leased premises; however, many commercial leases require the tenant to reimburse the landlord for its proportionate share of such taxes assessed against the real property. In this situation, a landlord often has less incentive to challenge appraisals as being inappropriately high because the tax increases are passed along to tenants. Section 41.413 of the Texas Tax Code, however, provides some protection to a tenant who is contractually obligated to reimburse the owner of the property for its payment of ad valorem property taxes. The landlord is required to deliver a copy of any notice of reappraisal to any such tenants within 10 days of the date the landlord receives the notice. Regardless, a failure by the landlord to timely send a copy of the valuation notice to the tenant will not give the tenant additional time in which to bring a protest.

The statute does not address the consequences of a landlord’s failure to deliver the appraisal notice. Further, both the tenant and the landlord are entitled to protest the valuation before the appropriate appraisal review board, but only one protest may be made. Presumably, the first protest received, either from the landlord or the tenant, will have the right to pursue it. The uncertainty created by the statute may warrant the inclusion of a provision in the lease to deal with the allocation of rights to make protests and the landlord’s obligation to deliver the appraisal notice to the tenant.

Conclusion

While this article does not describe all of the potential pitfalls involved in Texas commercial leasing, it hopefully provides guidelines to avoid some of the major traps for the unwary.