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When is a Texas Landlord Guilty of “Bad Faith” for Failure to Return a Security Deposit?

In a recent case, FP Stores Inc. v. Tramontina US, Inc., the Houston Court of Appeals provided guidance, for the first time, on what constitutes “bad faith” by a commercial landlord that fails or refuses to return a security deposit.

Facts of the Case

The FP Stores case involved a sublease for commercial premises located in Sugar Land, Texas. The original lease was signed in 2010 for the entire premises. Thereafter, several subleases were signed for various portions of the premises. In this case, the relevant sublessor was FP Stores, the sublessee was Tramontina US, Inc. and the master lessor was ProLogis Texas II, LLC.

In September 2014, FP Stores and Tramontina signed a sublease agreement for a portion of the premises. Tramontina paid over $50,000 as a security deposit for the sublease. A few months later, on March 8, 2015, the master lease between ProLogis and FP Stores terminated. The sublease between FP Stores and Tramontina also terminated on the same day. At that point, FP Stores vacated its portion of the premises and no longer had access to the premises. In March 2015, ProLogis and Tramontina entered into a new lease under which Tramontina leased all of the premises from ProLogis.

Tramontina sought to obtain a refund of its $50,000 security deposit from FP Stores. In various demand letters, Tramontina cited Texas Property Code § 93.011 which prohibits a commercial landlord from retaining a security deposit in bad faith. A presumption of bad faith arises if the landlord fails to return the security deposit within 60 days. FP Stores made various excuses over the next couple of months, including the fact that they needed to arrange access through ProLogis to the premises to assess any damages or repairs that might be offset against the security deposit. On September 1, 2015, FP Stores inspected the leased premises for the first time and determined that Tramontina had caused $31,381.44 in damages to the leased premises.

In the meantime, however, on June 5, 2015, Tramontina filed suit against FP Stores for, among other causes of action, bad faith refusal/failure to refund of Tramontina’s security deposit in violation of Tex. Prop. Code, § 93.011. Tramontina filed for summary judgment which the trial court granted. The trial court awarded Tramontina $50,000.00 in damages on its breach of lease claim, $150,100.00 in statutory damages under § 93.011, and $25,000.00 in conditional appellate attorney’s fees.

The Court of Appeals reversed the summary judgment because it believed that FP Stores had presented sufficient evidence to create a question of fact — thus defeating summary judgment — on FP Stores’ affirmative defenses of impossibility and that it did act in good faith. Principally, FP Stores claimed that ProLogis was slow to act to give it access to the premises to determine damages and that there were scheduling mistakes, new management and this security deposit issue just “fell through the cracks.” Further, Tramontina sued less than 90 days after lease terminated.

himCourt’s Reasoning and Resolution

Prior to this case, there were no reported decisions interpreting Texas Property Code § 93.011. In the absence of case law, the Court of Appeals looked to similar language in Texas Property Code § 92.109 which governs bad faith refusal/failure to return security deposits for residential leases. Finding the provisions to be similar, the Court of Appeals used case law related to § 92.109 to formulate standards for bad faith under § 93.011. From that, the Court of Appeals held that “bad faith” is shown if the landlord “… retains the security deposit in dishonest disregard of the tenant’s rights or with the intent to deprive the tenant of a lawfully due refund.”

The Court held that, pursuant to § 93.011, if the tenant shows that the landlord failed to timely provide a refund of the security deposit or an accounting, then a presumption of bad faith arises. The burden then shifts to the landlord to rebut the presumption by providing evidence that it acted in good faith. In the case of LP Foods and Tramontina, as noted, the Court held that FP Foods had presented enough evidence to defeat summary judgment. As a result, the case was remanded for a full trial.

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