Sometimes It Is Better to Ask for Permission First

Sometimes It Is Better to Ask For Permission First

Fritz Mgmt., LLC v. Huge Am. Real Estate, Inc., No. 05-14-00681-CV, 2015 WL 39582921 (Tex. App. June 30, 2015).

Tenant assumed the lease of a property in Texas that was being used as a fast food hamburger restaurant. There were ten years remaining in the term when the lease was assumed and the lease required Tenant to operate as a specified hamburger brand, in accordance with Tenant’s franchise agreement. Tenant’s franchise agreement required that all restaurants in the chain be remodeled every seven to ten years. The lease prohibited Tenant from making alterations to the interior or exterior of the property, without obtaining Landlord’s prior written approval. During the term, Tenant performed an extensive remodel of the interior and exterior of the building, without obtaining Landlord’s consent. After the remodel was completed, Landlord informed Tenant that Tenant was in default and Landlord was exercising its right under the lease to terminate Tenant’s right to possession without terminating the lease. When Tenant refused to vacate, Landlord brought an eviction action that was eventually successful. On appeal, Tenant asserted a number of arguments as to why Tenant’s breach of the lease was not material and why Tenant should be allowed to retain possession of the property. First, Tenant argued that Tenant’s alterations did not deprive Landlord of the primary benefit of the lease (i.e. receipt of rental income). The court was unconvinced of this claim, noting that the primary benefit of Landlord’s control over alterations was preventing alterations that might damage the commercial value and lifespan of the building. Next, Tenant argued that Landlord could have anticipated the renovation because Tenant’s franchise agreement required renovations every seven to ten years. The court rejected this argument and held that while Landlord may have known that renovations would eventually need to occur, that knowledge did not negate Landlord’s expectation that it would have approval rights with respect to Tenant’s renovations. Tenant also argued that the alterations did not impair the value of the property and instead actually increased the value of the property. The court cited evidence presented by Landlord that the alterations damaged Landlord’s ability to lease to certain tenants and impaired Landlord’s ability to sell the building. Tenant then argued that Landlord could be adequately compensated by monetary damages or an additional renovation at the end of the lease, negating the need to terminate the lease. The court rejected this argument and cited evidence that renovations can shorten a commercial building’s lifespan. Because of this, the lower court’s determination that other remedies would not adequately compensate Landlord was deemed proper. Finally, Tenant argued that if its breach were treated as a material breach then Tenant would be deprived of all future benefits of the lease, would lose the value of its investment in the property and Landlord would reap a windfall. While the court conceded to Tenant’s the first two points, the court noted that such a result was contemplated in the lease. As to Tenant’s final point, the court found that the damage to the building caused by the unconsented-to alterations, and the costs Landlord would incur to restore the building, collectively supported a conclusion that the eviction of Tenant would not result in a windfall to Landlord. Accordingly, the court upheld the eviction.