Locating Lease Space for your Business in Texas: Things to Consider when searching for Commercial Lease Space

When searching for commercial lease space there many things to take into consideration such as, just to name a few, expenses, the lease term, parking and permitted uses and restrictions.

The total monthly cost of the lease is usually the primary concern for tenants and is determined by the type of lease you agree to.  There are two main types of leases – gross leases and triple net leases. Under a gross lease the tenant pays a set amount specified in the lease agreement while the landlord pays for all of the operating costs.  Under a triple net lease the tenant pays the set amount specified in the lease agreement plus its pro rata share of the operating expenses, which may include repair costs, insurance premiums, taxes, and utilities.  It is important for the tenant to determine up front what the anticipated expenses will be and understand that expenses could increase for various reasons such as maintenance issues or increases in taxes or utility rates.  There are also ‘hybrid’ leases that combine elements of the gross and triple net lease.

Many commercial leases will contain a personal guaranty, which means that the individuals signing the lease are also agreeing to be personally liable for all amounts due under the lease agreement.  Even though your business entity is the tenant, you will be personally responsible for the rent as well.  Some landlords may negotiate with prospective tenants if they can show a good rental history or are willing to put up collateral.

Most commercial lease space will need to be altered in some way to meet your needs, or in other words, the space will need to be “finished-out.”  The cost of finish-out may be paid by the landlord, may be the tenant’s sole responsibility, or the landlord may provide the tenant with a budget, and any extras will be charged to the tenant.  It is also important to determine whether the landlord requires that you use certain contractors for finish-out.

Other concerns will depend on the type of business you intend to operate.  Prospective tenants need to ensure there are no restrictions against operating their type of business, and they may want to ask the landlord for a restriction against other businesses similar to yours in the future to prevent competition from moving in next door.  You may need reserved parking or a sign; prospective tenants should determine in advance what they will need to operate their business and ensure the landlord will address these issues.

While commercial leases can be long and confusing, it is important to read and fully understand the lease agreement to ensure the space will meet your business needs and to prevent problems for years to come.

Prepared by Eric Rupe.  Edited by Sarah Berry, Attorney

Landlord's Remedies When Tenants Abandon Leased Premises

As a real estate lawyer in San Antonio, I am frequently asked about a Landlord's options upon learning that a Tenant has moved-out without notice, or who simply abandoned the leased premises before a lease ends. The Texas Supreme Court has recognized four distict causes of action that a landlord may assert against a tenant who breaches a lease by abandoning the premises:

(1) maintain the lease and sue for rent as it becomes due;
(2) treat the breach as an anticipatory repudiation, repossess, and sue for the present value of future rentals reduced by the reasonable cash market value of the property for the remainder of the lease term;
(3)treat the breach as anticipatory, repossess, re-lease the property to a new tenant, and sue the original tenant for the difference between the contractual rent and the amount received from the new tenant; or
(4) declare the lease forfeited (if the lease so provides)and relieve the tenant of liability for future rent.

See Austin Hill Country Realty, Inc. v. Palisades Plaza, Inc., 948 S.W.2d 293, 300 (Tex. 1997).

However, it is important to remember that a landlord has a duty to mitigate its losses/damages when a tenant abandons the leased premises and stops paying rent. Id., at 295–300. This principle recognizes that a landlord who claims anticipatory breach has a duty to mitigate because the landlord’s claim is contractual in nature. Id. at 300.

Further, the Texas Legislature has codified the landlord’s duty to mitigate as section 91.006 of the Property Code. See TEX.PROP.CODE ANN.§ 91.006 (Vernon 2007). That same section prohibits, and makes "void," lease terms that attempt to exempt a landlord from a liability or duty to mitigate its losses. Id.

Tenants Enjoy Protections When Landlord/Homeowner Loses Property to Foreclosure

These days, foreclosures are commonplace. Our natinal economy is experiencing the hangover following years of a credit party reminiscient of a fraternity blow-out. A recent magazine article quoted the CEO of mega-homebuilder Toll Brothers spreading the blame:

“What cracked the market was not just our greed but the greed of our buyers.”

Irrespective of the cause, thousands of tenants have received a nasty and unexpected surprise -- news that the home they are occupying has been foreclosed. Even worse is that in most instances the new owner -- often the mortgage lender -- has plans for the property that don't include continuing the lease. Frequently, the tenant has been faithfully paying rent to the landlord, and wasn't even aware that the property was subject to foreclosure. Imagine the financial disaster that can accompany being suddenly and unexpectedly displaced from a comfortable rental home...

Fortunately, Texas law provides some relief for an unwitting tenant of a foreclosed property.

First, the notice period required before a landlord may file an eviction suit is extended from 72 hours to 30 days (provided the tenant was in compliance with the lease at or near the time of foreclosure). See Texas Proeprty Code Section 24.005.

Second, if the previous owner's interest in the premises is terminated by sale, assignment, death, appointment of a receiver, bankruptcy, or otherwise, the new owner (other than the foreclosing bank, itself) is liable for the return of security deposits. See Texas Property Code Section Sec. 92.105.

I have heard of instances where new owners of properties acquired through foreclosure or trustee's sale have actually offered to pay a pre-existing tenant to vacate the property promptly and peaceably. Such a payment can make sense for both the new and reluctant owner/landlord and the innocent tenant. The new owner obtains certainty and finality concerning possession of the property -- all without incurring attorneys' fees associated with an eviction proceeding. Meanwhile, the tenant receives a quick infusion of cash to help offset moving and related expenses.

If you are either the new owner of a tenant-occupied property, or a tenant in a rental property whose ownership has changed through foreclosure, you should consider consulting an experienced real estate attorney who can explain your rights and responsibilities.

Landlord's Remedies When Tenants Abandon Leased Premises

As a real estate lawyer in San Antonio, I am frequently asked about a Landlord's options upon learning that a Tenant has moved-out without notice, or who simply abandoned the leased premises before a lease ends. The Texas Supreme Court has recognized four distict causes of action that a landlord may assert against a tenant who breaches a lease by abandoning the premises:

(1) maintain the lease and sue for rent as it becomes due;
(2) treat the breach as an anticipatory repudiation, repossess, and sue for the present value of future rentals reduced by the reasonable cash market value of the property for the remainder of the lease term;
(3)treat the breach as anticipatory, repossess, re-lease the property to a new tenant, and sue the original tenant for the difference between the contractual rent and the amount received from the new tenant; or
(4) declare the lease forfeited (if the lease so provides)and relieve the tenant of liability for future rent.

See Austin Hill Country Realty, Inc. v. Palisades Plaza, Inc., 948 S.W.2d 293, 300 (Tex. 1997).

However, it is important to remember that a landlord has a duty to mitigate its losses/damages when a tenant abandons the leased premises and stops paying rent. Id., at 295–300. This principle recognizes that a landlord who claims anticipatory breach has a duty to mitigate because the landlord’s claim is contractual in nature. Id. at 300.

Further, the Texas Legislature has codified the landlord’s duty to mitigate as section 91.006 of the Property Code. See TEX.PROP.CODE ANN.§ 91.006 (Vernon 2007). That same section prohibits, and makes "void," lease terms that attempt to exempt a landlord from a liability or duty to mitigate its losses. Id.

Personal Property Lease Termination

When personal property is the subject of a Lease Agreement (“Lease”), the Lessor (or owner of the property) should initially look to the default provisions and consider terminating and/or accelerating the Lease payments at the initial stages of attempting a work out with a delinquent Lessee. This is true for two reasons: (1) after putting pressure on the Debtor, he may file a bankruptcy and the owner of the personal property will then be dealing with the “assumption or rejection” provisions of the Bankruptcy Code, and/or (2) when the Lessor attempts to repossess the property, prior to terminating the Lease, the Debtor may seek the intervention of a State Court judge by obtaining a Temporary Restraining Order or other injunctive relief. Either of these two scenarios can be expensive and will delay relief to the Lessor.

The Lessor should carefully consider its initial options and review the Lease documentation prior to the making of threats or the sending of threatening letters to a distressed Debtor that might trigger one of these two options to try to hang on to the property. This is especially true for highly valuable personal property (for example - construction equipment and/or modular buildings, etc) which may be integral to a Lessee’s business. The Creditor’s communications with the Debtor should not simply be viewed as an attempt to get them to pay, but rather a complex game of chess where the Creditor is setting up the next move.

Depending upon the documentation in the Lease, the Lessor may be able to utilize one (or all) of the following options (and perhaps others): (1) demanding payment, (2) giving notice of intention to accelerate the indebtedness, (3) accelerating the indebtedness, (4) demanding the return of the property, (5) demanding the right to inspect the property at a given time and place, and/or (6) terminating the Lease. Consideration should be given as to whether the Debtor is complying with the terms of the Lease or other documentation under the Lease, including requirements to maintain insurance, not damage the property, remain solvent, provide financial statements, or avoid actions which might result in the Lessor deeming itself insecure. The Lease documentation is important for determining what constitutes an “event of default” for these purposes. By doing so, the Lessor may be able to document a default that has occurred before an imminent Bankruptcy filing.

Before the sending of any of these types of notices or upon hearing that a bankruptcy is a possibility, the Lessor will want to consider all of these matters and, only then, communicate with the Debtor anticipating the Debtor’s next move. If the Creditor makes the wrong move, it may be stuck with the Lessee being able to keep the collateral for extended periods after an injunction, Automatic Stay, or potential acceptance under the Bankruptcy Code.

In the Bankruptcy context, the Debtor (or Debtor-in-Possession, or Trustee) has extensive powers, options, and, importantly, additional time to exercise the options. See 11 U.S.C. § 365. If the Lease (or Executory Contract) has not yet expired, been cancelled or terminated, then the Trustee (subject potentially to Court approval and some exceptions) may be able to assume or reject the contract on behalf of the Debtor. The Trustee may even be able to assume and assign the contract. Documenting the prior default becomes especially important in dealing with the Trustee, because when the Debtor is in default, the Trustee may be required to cure, compensate (or provide adequate assurances of such) prior to being able to exercise acceptance or assumption remedies. As a result, and significantly, if the Lessee is able to terminate and cancel the Lease, then the Lease may no longer be considered executory or unexpired, may not be “Property of the Bankruptcy Estate,” and, therefore, the Debtor (and Trustee) will have reduced rights with respect to the leased property. The Creditor may still have to file a Motion to Lift the Automatic Stay under Section 362 of the Bankruptcy Code, but obtaining this relief will likely be much easier with the defaults documents and/or the Lease terminated.

(Post by Erik Cary)