By Jim Pikl
On April 26, 2019, the Texas Supreme Court issued its unanimous opinion in Rohrmoos Venture v. UTSW, ___ S.W.3d ___, 2019 WL 1873428 (Tex.2019). Aside from its importance to the law relating to recovery of attorney’s fees (which is significant), it also has serious implications for commercial leasing.
The case involved a commercial landlord, Rohrmoos Venture, that was sued by a tenant, UTSW, for alleged breach of lease based on Rohrmoos not repairing defects in the building UTSW was using as a dialysis clinic. UTSW claimed various problems with the building, including what it deemed a “suitability” defect involving water allegedly coming up through the building’s concrete slab floor. UTSW made other, minor claims of defects such as the roof scuppers not protruding far enough from the edge of the building, the parking lot sloped incorrectly, and some door thresholds not working as designed. Rohrmoos counterclaimed for the two years of rent payments still owing on the lease after UTSW vacated the property and quit paying.
The lease in question had a provision, Article 13, that provided if a serious defect rendering the property unsuitable was brought to the landlord’s attention and the landlord failed to remedy the defect within 105 days of being notified, the tenant could terminate the lease. This lease provision becomes important to the analysis in this post (see below).
Since 1988, Texas law has provided that commercial landlords make an implied warranty of suitability that buildings they lease are suitable for the purpose the tenant is leasing them for, and will remain suitable for the duration of the lease. The Supreme Court created this implied warranty in the case Davidow v. Inwood North Professional Group—Phase I, 747 S.W.2d 373 (Tex.1988). To succeed on a Davidow warranty claim, the tenant had to prove a list of five very specific facts, which include the defect must exist at the time of lease inception and the defect must be such that it renders the building actually unsuitable for use (this is why the warranty is often referred to as the “implied warranty of suitability”).
In making this new implied warranty, the Supreme Court changed 100 years of Texas law under which commercial leases had always been treated differently from residential leases (which have an implied, now statutory, warranty of habitability). Before Davidow, tenants of commercial properties were essentially on a “buyer beware” footing when it came to the condition of the property, and the landlord had no duty (other than a duty that appears in the lease) to make any repairs to the property during the lease term. Finding such a “buyer beware” situation anachronistic, the Court created the Davidow warranty as a stop gap measure. Importantly, the court also held in Davidow that the parties were free to avoid application of the Davidow warranty if they made a contractual provision regarding the property (i.e., an express warranty) that provided the tenant an option to terminate for unsuitability. If they agree to such a provision, that lease provision would control. Article 13 was Rohrmoos’s attempt to make such an express warranty.
UTSW originally sued for breach of the Article 13 suitability provision in its lease with Rohrmoos, but abandoned that claim early on in the case, probably because it knew it could not prove facts necessary to allow it to terminate the lease under that provision. Instead, UTSW proceeded with a defense-only strategy to the landlord’s counterclaim for rent owing, and insisted that the defects with the property were both a breach of Davidow (which the tenant also could not and did not prove) and a “material” breach of contract, both of which supposedly justified the remedy of lease termination. UTSW did not seek money damages at trial.
The jury returned a verdict that Rohrmoos had breached the Davidow warranty and that Rohrmoos had breached the lease. The trial court then entered judgment allowing UTSW to get out of its rental obligations owed for the remainder of the lease term (i.e., lease termination). The trial court did not say whether that remedy was based on the Davidow finding or the “material” breach finding, the implication being that both findings were supportive.
On appeal, Rohrmoos argued multiple things.
First, it argued that the Davidow warranty did not apply because the parties had contracted for an express/suitability/termination clause in Article 13, which thus superceded Davidow’s implied warranty.
Second, Rohrmoos argued that under 100 years of Texas law and the express language in Davidow, since UTSW did not qualify to assert Davidow and did not prove or get jury findings of breach of Article 13, termination was not a remedy available to UTSW for Rohrmoos’s breach, but rather UTSW was only entitled to money damages, which UTSW did not seek.
Third, Rohrmoos argued that since there was insufficient evidence of any of the five elements required under Davidow to prove a suitability defect, termination could not be found under Davidow even if it did apply.
Finally, since UTSW did not get a jury finding of money damages, and the only available remedy was money damages for the breach of lease UTSW proved, the judgment allowing termination should be vacated and UTSW should take nothing.
The Dallas Court of Appeals disagreed, and found that even without Davidow, UTSW was entitled to terminate the lease based on Rohrmoos’s “material” breach of lease, and ignored the historical law allowing only money damages for such breaches and Article 13. Instead, the Court of Appeals found that a “material” breach of a commercial lease does, in fact, justify termination as a remedy regardless of the contrary language in Davidow.
The Supreme Court then granted review, and after holding the case for over three years, issued a unanimous opinion that basically vacates Davidow and changed 100 years of Texas law by holding that any “material” breach of lease by a landlord will afford the tenant the remedy of termination. Neither the Court of Appeals nor the Supreme Court identified what, exactly, such a “material” breach looks like, nor did they set any boundaries on a jury finding a “material” breach. In fact, without doing violence to their opinions, a tenant may now sue to terminate a commercial lease if the tenant gets a jury finding that the landlord’s failure to fix a broken lightbulb is a “material” breach of the lease. And not even a current broken lightbulb, but a lightbulb the landlord had failed to fix three years prior, even if during that three-year period the lightbulb had eventually been fixed. This conclusion is found in the Rohrmoos case facts because the alleged “material” breaches by Rohrmoos had taken place over three years before UTSW terminated the lease, and at the time of termination, every alleged defect UTSW had complained about had been fully remedied for at least three years.
Commercial landlords who have included unsuitability provisions in their leases pursuant to the “permission” to do so found in Davidow should avoid feeling too comfortable that they are protected from tenant’s terminating their leases without first showing that the elements of their unsuitability provision or the Davidow warranty are met. That is because, under Rohrmoos, a tenant can assert “material” breach, walk the lease, and then force the landlord to litigate whether that breach does or does not afford the remedy of termination as a “material” breach.
If the legislature does not fix this situation, commercial landlords can expect a flood of claims being made by dissatisfied tenants who simply want out of their leases, and the strictures found in Davidow and the unsuitability/termination/express warranty provisions found in their leases are now meaningless in that context.
Jim Pikl, Board Certified in Consumer and Commercial Law, Texas Board of Legal Specialization. Learn more about Jim Pikl here