Justia.com Opinion Summary: This was an appeal from a judgment awarding 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. On appeal, the court agreed with the landlord that the cost of repair was the appropriate measure under the circumstances of the case. Because under the appropriate measure, there was no evidence that the tenant had been damaged, the court reversed.
Receive FREE Daily Opinion Summaries by Email Download as PDF
Loading PDF...
<![CDATA[
IN THE SUPREME COURT OF TEXAS
444444444444
NO . 10-0615
444444444444
ASHFORD PARTNERS, LTD., PETITIONER,
v.
ECO RESOURCES, INC., RESPONDENT
4444444444444444444444444444444444444444444444444444
ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE FIRST DISTRICT OF TEXAS
4444444444444444444444444444444444444444444444444444
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
2
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:
1
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.
3
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.
2
3
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.
4
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.
5
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.
6
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.–Waco 1944, writ ref’d w.o.m.)). The court reasoned that cost of repair would only benefit the
property owner, Ashford, and that the difference-in-value measure was therefore necessary to
compensate ECO for its loss. Id.
Under a build-to-suit lease, the lessor wears two hats, functioning as both the tenant’s
construction contractor and landlord. Under this arrangement, the property owner agrees to construct
a building to the tenant’s specifications, and the tenant agrees to lease the building for a term
sufficient to permit the owner a profit. Although Ashford apparently intended to assume only the
latter role, the assignment and estoppel certificate failed to eliminate some lingering constructionrelated issues.
7
Recognizing that discrepancies inevitably arise during construction, the doctrine of
substantial completion generally controls the measure of damages for failure to make repairs or
complete construction. See Warren v. Denison, 563 S.W.2d 299, 303 (Tex. Civ. App.—Amarillo
1978, no writ) (citing Linch v. Paris Lumber & Grain Elevator Co., 15 S.W. 208 (Tex. 1891)).
Substantial completion has been described as the “legal equivalent of full compliance less any offsets
for remediable defects.” Uhlir v. Golden Triangle Dev. Corp., 763 S.W.2d 512, 515 (Tex.
App.—Fort Worth 1988, writ denied). Once a construction project has been substantially completed,
the damages for errors or defects in construction “is the cost of completing the job or of remedying
those defects that are remediable” without impairing the building as a whole. Vance v. My
Apartment Steak House of San Antonio, Inc., 677 S.W.2d 480, 482 (Tex. 1984). On the other hand,
a difference-in-value measure of damages may apply when the contractor has failed to substantially
comply with the contract or when repairs will impair the structure or materially damage it. Turner,
Collie & Braden, Inc. v. Brookhollow, Inc., 642 S.W.2d 160, 164 (Tex. 1982); Hutson v. Chambless,
300 S.W.2d 943, 945 (Tex. 1957). Substantial completion, however, implies that the parties have
been given the object of their contract and that any omissions or deviations can be remedied. Turner,
Collie & Braden, 642 S.W.2d at 164–65.
The question then is whether the construction of ECO’s build-to-suit lease was ever
substantially completed. When Ashford assumed ownership, ECO was already in possession of the
premises and had ostensibly accepted the building as substantially complete. Its acceptance was, of
course, subject to the exceptions contained in its punch list, but if those exceptions were capable of
8
repair, then that cost would be the appropriate measure of ECO’s damage for this constructionrelated breach.
ECO argues, however, that Ashford’s repair efforts failed to fix the problem—that even after
repairs, the foundation remained unstable and continued to heave and fall. It submits that the jury’s
award of past and future damages for the diminished value of the leasehold is recognition of the
ongoing nature of these foundation problems.
The jury, however, did not find Ashford’s repairs ineffective. In fact, when asked whether
Ashford failed to maintain the foundation in good repair, the jury answered, “No”. Although we
agree that Ashford, as ECO’s landlord, had a continuing contractual duty to maintain the foundation,
the damages awarded by the jury here are the product of an erroneous instruction regarding the
appropriate measure rather than the recognition of the problem’s continuing nature.
ECO also alluded to business disruptions caused by the foundation problems during oral
argument. Such consequential damages might be recoverable in an appropriate case if caused by the
breach of a construction-related duty under a build-to-suit lease. ECO, however, did not attempt to
prove such damages at trial. Its theory was instead that it did not get the building it bargained for
and that its damages should therefore be measured by the building it got, that is, the difference in
value. But this theory presumes that the defect could not be remedied. The doctrine of substantial
completion, on the other hand, presumes that deficiencies can be repaired.
Under the lease, it was substantial completion that triggered ECO’s obligation to submit its
punch list of remediable defects. Substantial completion likewise entitled ECO to obtain a certificate
of occupancy and commence the lease’s 25-year term. The court of appeals concluded that
9
Ashford’s liability rested “exclusively” on its failure to complete a single punch list item on a
substantially completed building and that the diminished value of the leasehold was the appropriate
measure of ECO’s damages. ___ S.W.3d at ___. We conclude, however, that cost of repair is the
appropriate measure of damages to remedy an omitted item on a substantially-completed building.
Because Ashford made these repairs at no cost to ECO, we further conclude that ECO has suffered
no damages under the appropriate measure.
III
ECO also obtained an award of attorney’s fees under Chapter 38 of the Civil Practice and
Remedies Code. The chapter pertains to the recovery of attorney’s fees in breach-of-contract cases.
It provides that: “A person may recover reasonable attorney’s fees . . . in addition to the amount of
a valid claim and costs, if the claim is for . . . an oral or written contract.” TEX . CIV . PRAC. & REM .
CODE § 38.001(8).
Ashford submits that ECO cannot recover attorney’s fees under this statute in the absence of
a valid claim or in the absence of recoverable damages. Indeed, we have said that to qualify for fees
under the statute, a litigant must prevail on a breach of contract claim and recover damages. MBM
Fin. Corp. v. Woodlands Operating Co., 292 S.W.3d 660, 666 (Tex. 2009) (citing Mustang Pipeline
Co. v. Driver Pipeline Co., 134 S.W.3d 195, 201 (Tex. 2004) (per curiam)). As ECO has not done
this, we agree that it is not entitled to attorney’s fees.
Ashford further argues that it should be awarded the attorney’s fees that ECO got in the trial
court. The parties stipulated below that $407,046.20 was a reasonable and necessary attorney’s fee
in the case. In rendering judgment on the jury’s verdict, the trial court incorporated the stipulated
10
amount into ECO’s judgment. Because we must reverse ECO’s underlying judgment, Ashford
contends that the stipulated attorney’s fees should now be awarded to it.
The stipulation, however, is merely an agreement as to the amount of reasonable and necessary
attorney’s fees in the case.4 It was not the basis for the award of attorney’s fees, nor has Ashford
otherwise briefed its entitlement to such fees in this case other than to state that it too prayed for
attorney’s fees in the trial court. As a general rule, litigants in Texas are responsible for their own
attorney’s fees and expenses in litigation. See MBM Fin. Corp., 292 S.W.3d at 669 (noting the
prohibition on fee awards unless specifically provided by contract or statute). Because Ashford’s
briefing provides no basis for an exception to the general rule, its request for attorney’s fees is denied.
***
The court of appeals’ judgment is reversed and judgment is rendered that ECO Resources, Inc.
take nothing.
_________________________________
David M. Medina
Justice
Opinion delivered: April 20, 2012
4
The stipulation clearly applied to ECO’s attorney’s fees. W hether it was also intended to apply to Ashford’s
attorney’s fees is not entirely clear since there was no basis for such an award at the time of the stipulation and no
contingency expressed for any future entitlement.
11
]]>
