Can Owner Withhold Consent for Required Alterations?

March 17, 2016
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If you’re a franchisee of a large restaurant chain you could be required to update your space at intervals designated by the corporation. There often is a reference to the required updates in the lease with the owner. And there likely are also provisions that require you to get consent from the owner for construction to the space. But what if the owner won’t consent to changes? Construction in the space would be a breach of the lease, but if you don’t make the updates your ability to continue operating your restaurant would be compromised. The big issue in such a situation is whether the owner can sue you for a breach—despite knowing when the lease was signed that future alterations would be necessary.

The answer is that the owner could possibly have a breach of contract claim if you perform unauthorized construction. A Texas appeals court concluded in a case that dealt with a similar situation, that the reference to the necessity of future alterations in order to operate a business doesn’t necessarily negate a consent requirement in the lease.

There, a fast-food restaurant franchisee was required to update its space every seven to 10 years in accordance with its franchise agreement. Its lease prohibited the tenant from making any alterations to the interior or exterior of the premises without the owner’s written consent. The tenant performed an extensive remodel to the exterior and interior of the restaurant without consent. After the alterations were completed, the owner informed the tenant that it was in breach of the lease, and it terminated the tenant’s right to possession of the premises without terminating the lease. The owner demanded that the tenant vacate the premises. When it refused, the owner sued it for forcible detainer—that is, immediate possession of the property. A trial court awarded possession to the owner. The tenant appealed. A Texas appeals court upheld the trial court’s decision.

The appeals court determined that the owner was entitled to possession of the premises because the tenant had “materially” breached its lease. To determine whether the tenant’s breach of contract was material, the appeals court had to consider: (1) the extent to which the owner will be deprived of the benefit that it reasonably expected; (2) the extent to which the owner can be adequately compensated for the part of that benefit of which it will be deprived; (3) the extent to which the tenant by failing to perform will suffer forfeiture; and (4) the likelihood that the tenant will cure—that is, fix—its failure.

The tenant argued that the altering of the premises without the owner’s consent didn’t deprive the owner of its primary expected benefit—receipt of rental income. The tenant paid all the rent that was due as well as all other charges required under the lease. However, the payment of rent isn’t relevant to whether the tenant’s breach of altering the property without consent was a material breach, noted the appeals court. The benefit the owner expected from that provision in the lease was that it would have control over alterations to its building. By altering the building without the owner’s consent, the owner had no way to protect itself from alterations that might damage the premises, shorten the building’s lifespan, or alter the commercial profitability of the building.

The owner presented evidence that the commercial profitability of the building was changed because, after the remodel, the restaurant’s sales declined 30 to 40 percent, which the owner blamed largely on the alterations. The owner also presented evidence that it wanted to control the alterations to the building because some types of alterations would shorten the building’s lifespan and the ability to sell it later.

The tenant argued that the owner could anticipate the building would have to be remodeled during the term of the lease because the franchisor required its restaurants be remodeled every seven to 10 years. Although the fact that the premises would have to be remodeled may have been known to the owner, that knowledge didn’t negate the owner’s expectation that the tenant would obtain the owner’s written consent to the alterations before modifying the building, said the appeals court [Fritz Management, LLC v. Huge American Real Estate, Inc., June 2015].