A Franchised Location – Renovating the King?
The Supreme Court of Texas recently issued a ruling—by denying a petition for review—which could be important to franchisors, franchisees, landlords, and tenants alike who are evaluating renovations.
In Huge American Real Estate, Inc. vs. Fritz Management, LLC, et. al., Case Number 22-1106, on December 15, 2023, without a written opinion, the Supreme Court of Texas denied a petition for review that had been filed by the landlord in the case. Thus, for now, at least, the controlling written opinion in the case is from the Dallas Court of Appeals in Fritz Management, LLC v. Huge American Real Estate, Inc., 2022 WL3500011 (Tex. App. – Dallas 2022, pet. denied).
Background: The case involved the lease of a Burger King restaurant that operated under a franchise from Burger King. The original franchisee was Huge American Restaurants, LLC, which leased the property where the restaurant was located from its affiliate Huge American Real Estate, Inc. Eventually, the franchisee Huge American Restaurants, LLC filed for bankruptcy protection, though its real estate affiliate Huge American Real Estate did not. Through the bankruptcy process, the franchise rights and related lease agreement rights were acquired by Fritz Management. So, Fritz became the franchisee from Burger King and the tenant of the property leased from Huge American Real Estate.
Under the lease agreement, Fritz was prohibited from making alterations, changes, additions, and improvements without the prior written consent of the landlord. Even where such consent was given, the lease also required the landlord’s written approval of the plans and specifications. Finally, the lease required certain landlord protections in any contracts for work exceeding a certain threshold.
Notwithstanding these requirements, once Fritz acquired the lease it began substantial remodeling without the required written consent of the landlord. Fritz claimed it was given oral permission to proceed. Over the next several years, the parties litigated their disputes—termination of the lease and eviction, and then competing claims for breach of the lease, wrongful termination, and alleged damages. Fritz disputed the landlord’s claim of breach, saying it had oral permission to proceed with the repairs. Fritz claimed it sent an email seeking approval, and the landlord never responded in writing. Fritz claimed that subsequently, the landlord’s general counsel and vice president orally told Fritz, “Yes, you’re good to go,” and that the landlord was “good with that.” Fritz also claimed the renovations were necessary to comply with the franchise obligations, which was well known to the landlord because its business also included operating Burger King franchised locations.
The Court rulings: The trial court ruled in favor of the landlord, granting summary judgment against Fritz for failing to obtain written consent to remodel. The Court of Appeals, however, sided with Fritz, finding Fritz had raised sufficient fact questions about a waiver to require a trial on the issue.
First, the Court noted how a waiver of an express right in a contract may occur:
- The right may be expressly renounced;
- The renunciation may be shown where a party knowingly possessing the right is inactive or silent for an unreasonable period of time such that the intention to waive is implied; or
- If a party knowingly possessing the right acts in such a manner that the party misleads the other party into believing that a waiver has occurred.
Fritz, 2022 WL 3500011 * 5 (citation omitted).
The Court further noted there is a high burden when alleging implied waiver by conduct: “When a party relies on inferred or implied waiver by conduct, it is that party’s burden ‘to produce conclusive evidence that the opposite party manifested its intent to no longer assert its claim.’” Id. at *5 (citation omitted) (underline added).
The Court found Fritz’s factual evidence of alleged waiver precluded summary judgment for the landlord:
“Here, assuming the veracity of Fritz’s evidence, as we must, Huge Real Estate, through its general counsel and vice president responsible for Fritz and enforcing leases, gave its permission to Fritz to remodel the property. It gave this permission after declining to respond either affirmatively or negatively to Fritz’s email seeking permission for the remodel. Such permission could have led Fritz to “reasonably believe[ ] strict compliance” with any written consent provision would not be required. [Citation omitted]. This is particularly true in light of the evidence showing that both parties were experienced Burger King franchisees who understand the nature of franchisor requirements. That is, Fritz’s evidence supported a reasonable inference that Huge Real Estate would have understood the sort of remodel sought by Fritz, which was required to maintain a Burger King franchise on the premises pursuant to the lease. After allegedly receiving permission to remodel sometime in 2012, Fritz did not hear from Huge Real Estate until over a year later, after the remodel was complete. We conclude this is sufficient evidence to raise a fact issue on Fritz’s affirmative defense of waiver…”
Id. at *6.
Not only did this summary judgment evidence prevent summary judgment in favor of the landlord on the breach claim, but the Court also found that the evidence created a fact issue of whether the landlord waived the non-waiver clause in the lease agreement. Id. at *7.
The case will now go back to the trial court for further proceedings.
Takeaways:
The case is interesting for those involved in franchise operations or commercial leases. It is also interesting, given that contracts are generally enforced as written under Texas law. Seagull Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342, 345 (Tex. 2006); Barrow-Shaver Resources Co., 590 S.W.3d at 494-495 (Tex. 2019). Further, Texas courts generally enforce contract provisions requiring that certain approvals or consents be in writing. James Const. Group, LLC v. Westlake Chemical Corp., 650 S.W.3d 392, 403 (Tex. 2022) (substantial compliance with a contract notice provision is required, but where the contract requires written notice, substantial compliance still requires written notice, even if there are other forms of actual notice). Yet, as shown in Fritz, even the strongest contract is subject to the risk of waiver.
Franchisors, franchisees, and those involved in landlord/tenant relationships should continue to monitor this case and others like it.
