Ashford Partners, Ltd. v. ECO Resources, Inc. (Majority)

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State: Texas

Court: Supreme Court

Docket No: 10-0615

Case Date: 04/20/2012

Plaintiff: Ashford Partners, Ltd.

Defendant: ECO Resources, Inc. (Majority)

Preview:IN THE SUPREME COURT OF TEXAS
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NO . 10-0615
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ASHFORD PARTNERS, LTD., PETITIONER,
v.

ECO RESOURCES, INC., RESPONDENT
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ON PETITION FOR REVIEW FROM THE COURT OF APPEALS FOR THE FIRST DISTRICT OF TEXAS
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Argued February 8, 2012

JUSTICE MEDINA delivered the opinion of the Court.

This appeal is from a judgment awarding a tenant damages for a landlord's breach of a construction-related duty under a build-to-suit lease agreement. The tenant sued asserting that the landlord's failure to adhere to construction plans resulted in a substandard building, diminishing the value of its leasehold. At trial, the parties disagreed about the appropriate measure of damages for the landlord's breach. The tenant maintained that damages should be measured by the diminished value of the leasehold. The landlord contended that the appropriate measure should be the cost to repair the building. The court of appeals sided with the tenant, concluding that diminished value was the appropriate measure of damages for the landlord's breach of a construction-related duty under the lease. ___ S.W.3d ___ (Tex. App.--Houston [1st Dist.] 2010) (mem. op.). We, however, agree

with the landlord that the cost of repair is the appropriate measure under the circumstances of this case. Because under the appropriate measure there is no evidence that the tenant has been damaged, we reverse and render. I In March 2001, ECO Resources, Inc., a provider of water and wastewater treatment services, signed a lease agreement with TA/Sugar Land-ECO, Ltd. (TASL) for the construction of a 32,000 square foot office building and laboratory. While the building was under construction, TASL agreed to sell the property to Ashford Partners, Ltd. The Ashford/TASL earnest money contract provided that the ECO lease would be assigned to Ashford within thirty days after it commenced. ECO's lease was to begin when the building was substantially complete and a certificate of occupancy issued. The lease defined "substantially completed" to "mean that such improvements have been substantially completed in accordance with the Plans, subject only to completion of minor punch list items." The tenant was responsible for inspecting the construction and providing the punch list. The lease further provided that: Subject to Lessor's completion of such punch list items, the taking of possession by Lessee shall be deemed to conclusively establish that the buildings and other improvements had been completed in accordance with the Plans, that the Premises are in good and satisfactory condition as of when possession was taken, and that Lessee has accepted such buildings and other improvements. Finally, the lease directed the landlord to use reasonable efforts to complete the tasks on the tenant's punch list within thirty days of receipt. On September 28, 2001, ECO accepted the building as substantially complete, submitting an eight-page punch list of items in need of repair to TASL. About this same time, ECO received
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formal notice of the property's pending sale in a document entitled "Notice of Assignment of Lease and Estoppel Certificate." ECO promptly executed the estoppel certificate, as its lease required,1 and returned it a mere twelve days after submitting its punch list to TASL. Two weeks later, Ashford became ECO's landlord. Four days after that, the deadline for completing ECO's punch list expired. At least one repair on the punch list, a requirement for caulking between the tilt wall panels under grade, had not been performed. Two years passed, and ECO began to have problems with the building. Ashford hired engineers to investigate, and they determined that water had collected under the foundation. The cause for this was traced to the failure to caulk between the tilt wall panels below grade, the omitted repair on ECO's punch list. Ashford spent over $313,000 to make repairs and correct the problem and then sued the construction contractor that TASL had used on the project. Ashford also joined ECO as a defendant, seeking a declaratory judgment that the building was structurally sound and that ECO was not entitled a reduction in rent. ECO counterclaimed for breach of the lease, asserting that Ashford as successor landlord assumed the original lessor's obligations under the lease, including the duty to construct the building according to plans. Ashford subsequently settled with the construction contractor and also dismissed its suit against ECO. ECO did not abandon its claim, however, and the case proceeded to trial. At this trial, a jury was asked the following three questions:

The lease required ECO to execute an estoppel certificate, verifying the lease's validity and other matters, within ten days of the landlord's request.

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1. Did Ashford fail to comply with the Lease by failing to cause the Leased Space to be constructed pursuant to the Plans? 2. Did Ashford fail to comply with the Lease by failing to maintain the foundation of the Leased Space in good repair? 3. What sum of money, if any, if paid now in cash would fairly and reasonably compensate ECO Resources for the damages, if any, that resulted from Ashford's failure to comply with the Lease? The jury answered "Yes" to the first question and "No" to the second, finding Ashford had breached a construction-related duty under the lease but not its duty to maintain the foundation in good repair.2 In the third question on damages, the jury was instructed to base its award, if any, on the difference "between the rent required under the Lease and the rental value of the Leased Space in its actual condition." The jury found the diminished value of the lease to be $1,027,704. Adding interest and attorney's fees,3 the trial court rendered a total judgment of $1,494,462.25 in favor of ECO. Ashford appealed. The court of appeals concluded that Ashford had assumed a duty to oversee the completion of the punch list and bore responsibility for the omitted repair because it was ECO's landlord when the punch-list repairs came due. ___ S.W.3d at ___. The court further found the diminished value of the lease to be an appropriate measure for Ashford's breach of this assumed construction-related duty. Id. at ___. The court of appeals accordingly affirmed the trial court's judgment.

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The lease obligated the landlord to keep the building's foundation, walls, and roof in good repair. The parties stipulated to $407,046.20 as a reasonable and necessary attorney's fee in this case.

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II Ashford complains that the judgment in ECO's favor is erroneous because there is neither evidence that Ashford breached any duty under the lease nor that ECO suffered any damages as a consequence. Ashford argues that it did not breach any construction-related duty because the building's construction was complete before it became ECO's landlord. Even assuming that construction-related duties remained to be performed under the lease, Ashford next contends that the assignment of the lease in conjunction with ECO's estoppel certificate cut off any such duties. Finally, even if the estoppel certificate did not cut off all remaining construction-related duties, Ashford maintains there is no evidence that ECO suffered any damages when the appropriate measure of damages is applied to its case. A Ashford's first two arguments rely primarily on ECO's estoppel certificate, which Ashford obtained before taking the lease assignment. Ashford submits that ECO represented in this document that the building's construction had been completed to its satisfaction. As pertinent here, the document recited that ECO was in possession of the premises, that the 25-year lease term had begun on October 1, 2001, and that: Tenant has accepted the Premises without exception, except for undisclosed defects, and all requirements for the commencement and validity of the Lease, including all construction work, if any, required of the Landlord under the terms of the Lease have been satisfied.

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Because ECO "accepted the Premises without exception, except for undisclosed defects" and the items on its punch list were not undisclosed defects, Ashford concludes that it did not assume responsibility for completing ECO's punch list. ECO responds that Ashford's reading of the estoppel certificate is contradicted by the document's express disclaimer of any intent to "impair or diminish any of Landlord's obligations to Tenant under the Lease." Ashford's interpretation clearly diminishes ECO's rights under the lease. Moreover, ECO submits that the estoppel certificate is not inconsistent with its rights under the lease because the punch list's completion was not a prerequisite to the commencement and validity of the lease nor was the landlord in breach of its punch-list obligations when ECO executed the document. ECO contends that the certificate's purpose was merely to facilitate the sale of the property by confirming the validity of its lease and that the document did not otherwise affect its rights under the lease. Ashford's interpretation of the estoppel certificate is indeed difficult to reconcile with the document's disclaimer of any intent to "impair or diminish" the landlord's obligations under the lease. But even were we to accept Ashford's interpretation as a reasonable alternative, it would gain nothing. It would merely mean that the document was ambiguous, making its ultimate meaning a fact question, which the fact finder has already implicitly decided in ECO's favor. See J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex. 2003) (noting that an agreement that is susceptible to more than one reasonable interpretation "is ambiguous, creating a fact issue on the parties' intent"). Accordingly, we reject Ashford's first two complaints regarding its construction duties under the lease and the effect of the estoppel certificate on those duties.
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B Ashford also complains that the jury instruction in Question 3 submitted an erroneous measure of damages. Ashford argues that ECO's damages should be measured as in other cases involving construction deficiencies, since it has been held to have breached a construction-related duty. A contractor who has substantially performed its contract, but whose performance is deficient in some respect, is generally responsible for the cost of repair. Similarly, Ashford argues that the appropriate damages measure for a substantially-completed building under a build-to-suit lease is the cost to cure a remedial defect. The court of appeals, however, disagreed. Focusing on the basic nature of the landlord-tenant relationship, it concluded that the usual measure of damages for the breach of a real estate rental agreement is "`the difference between the agreed rental and the reasonable cash market value of the leasehold.'" ___ S.W.3d at ___ (quoting Rainwater v. McGrew, 181 S.W.2d 103, 105-06 (Tex. Civ. App.

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