A recent decision from the Dallas Court of Appeals arising out of a fire in Dallas demonstrates the importance of including written notice provisions in commercial leases and the risks of failing to enforce them.

Readers in the Dallas area likely remember the fire on Lower Greenville Ave that partially destroyed buildings that housed several restaurants and bars in 2010, the most prominent being the great Dallas institution Terilli’s. At the time, one of the tenants, Hurricane Grill, was operating in a bit of no-man’s land: it continued to occupy the space and pay rent, even though the lease had expired by its terms and it had not provided the required written notice of renewal. The parties had, however, discussed renewal but nothing was ever confirmed in writing.

After the fire, the landlord, Greenville Landmark Venture, notified Hurricane Grill that its lease was terminated. Hurricane Grill responded by filing suit against the landlord alleging that it breached its obligation to repair and restore the leased premises after the fire and to allow it to occupy the space after the repairs.

In Lucy Merk, LLC v. Greenville Landmark Venture, Ltd., the Dallas Court of Appeals affirmed the trial court’s directed verdict for the landlord based on its conclusion that Hurricane Grill could not prove an essential element of its claim—the existence of a valid contract. No. 05-12-00848-CV, 2014 Tex. App. LEXIS 9699 (Tex. App.—Dallas Aug. 28, 2014, no pet. h.). Hurricane Grill’s theory was that the lease was in effect because it had orally renewed the lease.  To prevail under this theory, the court explained that Hurricane Grill must have presented some evidence that the landlord accepted an oral renewal and waived the written notice requirement. The only potential evidence to support acceptance and waiver, in the court’s view, was the landlord’s testimony that it had “always accept[ed] oral notices.” This evidence was not probative of acceptance and waiver, however, because it was provided in relation only to a separate matter, namely, accepting oral notice regarding repairs. The court disregarded Hurricane Grill’s other evidence, including: Hurricane Grill had provided oral notice to the landlord that it wanted to renew; the landlord never objected to the oral notice; the parties began discussing a new rental rate based on the renewal rate provision; and Hurricane Grill never paid, and was never asked to pay, the increased rent that applied to a holdover tenant.  Suffice it to say, it’s very possible that a different court would disagree with the court’s conclusion on this point based on these or similar facts. Cf. Tex-Craft Builders, Inc. v. Allied Constr., 465 S.W.2d 786, 793 (Tex. Civ. App.—Tyler 1971, writ ref’d n.r.e.) (noting that waiver may be found when after receiving a defective or improper notice, the receiving party has by its own affirmative acts and conduct created an impression that the notice given is adequate).

Hurricane Grill’s claim also failed as a matter of law because, according to the court, such renewal was ineffective due to Hurricane Grill being in default when it attempted to renew. The lease provided that it could only be renewed if no default existed at renewal. The lease required Hurricane Grill to carry insurance, something which it undisputedly had not done at the time of any attempted renewal, and this was a default that could not have been waived because it was undisputed that the landlord had no knowledge of the default at that time. Because the renewal was ineffective, the court concluded that the lease was no longer in effect and therefore could not support a breach of contract claim.

Although the court’s conclusion regarding ineffective renewal is correct, the conclusion that no contract existed seems to conflict with Texas law. Absence evidence to the contrary, Hurricane Grill’s tenancy was a tenancy at will and the lease continued to be in force until terminated. See Coinmach Corp. v. Aspenwood Apt. Corp., 417 S.W.3d 909, 916 (Tex.2013) (“If the tenant remains in possession and continues to pay rent, and the landlord, having knowledge of the tenant’s possession, continues to accept the rent without objection to the continued possession, the tenant is a tenant at will, and the terms of the prior lease will continue to govern the new arrangement absent an agreement to the contrary.”); Carrasco v. Stewart, 224 S.W.3d 363, 368 (Tex. App.—El Paso 2006, no pet.) (“[A] holdover tenant continues to be bound by the covenants [that] were binding upon him during the term, in the absence of evidence to the contrary.”). Thus, even without a renewal, the terms of the lease continued to apply and could support a breach of contract claim.

Lessons Learned

Regardless of the arguable flaws in the court’s opinion, the underlying facts that gave rise to Lucy Merk offer several important lessons.

• Require Written Notice. Leases should require written notice for all important matters. Written notice eliminates uncertainty as to whether notice was, in fact, given. More cynically, it prevents a party from falsely claiming that notice was provided orally when it was not—a fact which can be hard to rebut and very hard to resolve by summary judgment.
• Enforce the Writing Requirement. Landlords should not accept oral notices when the lease requires written notice. This case would have been far simpler had the landlord’s agent not testified that he accepted oral notices. Landlords often accept oral notices due to a trusting relationship and a hesitancy of being overly formal, or because the landlord thinks that the matter is of minor importance and therefore sees little risk in not strictly enforcing the written notice requirement. Although the motivation for accepting oral notices may come from the right spot, landlords would be well advised to resist the temptation. It simply creates too much uncertainty that can prove to be expensive when the landlord-tenant relationship sours.
• Don’t Go Overboard With Written Notice Requirements. The need for consistent enforcement of written notice requirements leads to another drafting tip: leases should be drafted such that written notice is only required for more important matters. By limiting written notice to only the more important matters, landlords will be less tempted to forgo enforcing the written notice requirement. A common approach is to require written notice for all matters that require notice. Although this makes sense if one could be confident that the landlord will always enforce the written notice requirement, practice has shown that, more often than not, this does not happen, particularly if the property is not managed by a specialized third-party property management company. Therefore, requiring written notice for every matter will often only increase the chance of inconsistent enforcement and potentially give rise to an allegation of waiver as was done in Lucy Merk.
• Make Sure Your Renewal Clause is Conditioned on No Default. Landlords should always include a renewal clause similar to the one used in Lucy Merk—that a renewal is only effective if the tenant is not in default of any term of the lease.
• Include Appropriate Holdover Language. Landlords should ensure that their leases include appropriate holdover language. Holdover language commonly provides (1) the nature of the tenancy; (2) a substantial increase in the amount of rent to provide a disincentive to holding over, and (3) that the lease provisions will continue to apply during the holdover period. Landlord’s counsel may want to consider, however, whether it makes sense to limit the continued applicability of landlord’s obligations to only the obligation to allow continued possession of the space until it provides notice of termination.
• It Pays to Have Good Property Management. Standard property management ensures that all tenants maintain current insurance.
• Negotiate Renewals Early. Tenants should negotiate any renewals before the renewal time period has passed. After that point, tenants operate in a position of much less strength and much more uncertainty.
• Get insurance. It’s kind of important.