Councils Corner v107

SUBLEASE TERM RENEWALS

Subsea 7 Port Isabel is an engineering and construction firm that manufactures and installs undersea oil and gas pipelines. Starting in 2007 Port Isabel Logistical Offshore Terminal leased 54 acres in Port Isabel, Texas, from the Port Isabel-San Benito Navigation District. In April 2008 PILOT subleased about half of that property to Subsea, to be used as Subsea’s ‘spoolbase’ for its undersea pipe operations.

The sublease term started on May 1, 2008, and ended May 31, 2012. If PILOT (as prime tenant) exercised its renewal options, then Subsea was also allowed to do the same relative to its sublease by issuing option exercise notice at least 60 days prior to May 31, 2012.

Subsea claims it spent $40+ million to improve the property by building a dock, facilities for fabricating pipes and loading them unto ships, and stabilizing the ground with crushed rock. Clearly, the sublease was important to Subsea.

In February or March 2012 the operations manager for Subsea spoke to PILOT’s president about renewing the sublease. Subsea asserts that the president told Subsea’s operations manager that Subsea did not need to send written notice to renew the sublease before March 31, 2012, as required by the Sublease.

PILOT’s vice president also recalled that Subsea wanted to renew its sublease.

In May 2012 PILOT replaced its president. Subsea sent an email to the new president providing that Subsea intended to renew its sublease. The following day Subsea sent a sublease renewal notice by certified mail.

PILOT did not respond to either of the notices. PILOT did, however, continue to send sublease rental invoices to Subsea for two years after expiration of the original sublease term, and Subsea paid the invoices while Subsea remained in occupancy.

PILOT sent an eviction notice to Subsea in April 2014. Subsea refused to vacate, claiming that the sublease had been effectively renewed due to the oral notice, email notice and Subsea’s continued occupancy of the subleased premises after May 2012.

When PILOT refused to accept Subsea’s position regarding sublease extension, Subsea sued PILOT and asked the court for a ruling that Subsea had substantially complied with the sublease renewal notice provisions. After a two-week jury trial, the court entered judgment in 2016 that Subsea became an unlawful trespasser as of June 1, 2014 and was responsible for $635k in ‘trespass’ damages.

Both Subsea and PILOT appealed.

Subsea argued to the Appellate Court issues of equitable estoppel, quasi-estoppel, and waiver. Each failed.

It was then PILOT’s turn. PILOT claimed it was wrong to deny PILOT its attorney’s fees and court costs and that Subsea should not have been permitted to remove its property and improvements.

All of PILOT’s arguments were rejected.

The conclusion reached by the Appellate Court is that an oral understanding to exercise a sublease renewal term followed by a late email is ineffective, if the sublease requires formal, timely, written notice. Subsea failed to furnish compliant and timely written notice. Remaining at the subleased premises for two additional years does not waive PILOT’s position that Subsea is nothing more than a holdover tenant.

See Subsea 7 Port Isabel, LLC v. Port Isabel Logistical Offshore Terminal, Inc.; Texas Court of Appeals, 13th District, Cause Number 13-17-00144-CV; June 20, 2019: https://law.justia.com/cases/texas/thirteenth-court-of-appeals/2019/13-17-00144-cv.html.

Lessons Learned / Questions Asked:

1. To quote from Dr. Seuss, lease renewal and extension notice provisions mean what it says and says what it means. Renewal and extension options are usually strictly interpreted. Even a minor deviation can invalidate a renewal / extension notice.

2. To the commercial tenants – get out your Leases and Subleases. Carefully calendar each renewal and extension date. Follow exactly the notice provisions of your document. Don’t assume that anything less than full compliance will result in an effective renewal.

3. To the commercial landlords – don’t like the renewal / extension provisions of the Lease in your building? You may be able to defeat it if the tenant or subtenant deviates, based on this appellate decision.

Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,

Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Higier Allen & Lautin, PC

2711 N. Haskell Avenue, Suite 2400

Dallas Texas 75204

P: 972.716.1888

E: slautin@higierallen.com

W: www.higierallen.com