Introduction

On May 13 2016, the Supreme Court of Texas delivered an opinion weighing the tension between freedom to contract and public policy in the context of a leasehold-repair reimbursement provision in a residential lease.  See, Philadelphia Indem. Ins. Co. v. White, 490 S.W.3d 468, 472 (Tex. 2016).

The primary issue in front of the Texas Supreme Court in White was whether public policy embodied in the Texas Property Code precludes enforcement of a residential-lease provision imposing liability on a tenant for property losses resulting from “any other cause not due to [the landlord’s] negligence or fault.”  Specifically at issue was a tenant’s responsibility for property damage sustained in a fire that originated in a tenant-owned clothes dryer stuffed with dry, unwashed bedding and pillows.

The Supreme Court of Texas held that (1) the provision in a lease obligating tenant to reimburse landlord for all damage “not due to the landlord’s negligence or fault” was not unenforceable per se, even though the provision was overly broad and could have encompassed scenarios in which a landlord would have had a nonwaivable duty to repair under the Texas Property Code, and (2) the jury’s finding that tenant’s negligence did not proximately cause damage from fire was not sufficient to support a finding that the reimbursement provision was unenforceable pursuant to the Texas Property Code’s prohibition against waiver of a landlord’s statutory repair duties and remedies or Section 92.052’s delineation of a landlord’s duties to repair or remedy, and thus the lease provision was not unenforceable under the Texas Property Code as applied.  Materially, the Supreme Court held that a lease will not be declared void merely because it could have been performed illegally or contrary to public policy.  Instead, a lease will be unenforceable per se only if it could not be performed without violating the Texas Property Code.

Background

Tenant executed a Texas Apartment Association (the “TAA”) form lease in which she agreed to reimburse her landlord for all property losses not resulting from the landlord’s negligence or fault (the “Reimbursement Provision”).  The specific language contained in the Reimbursement Provision and at issue is, “You must promptly pay or reimburse us for loss, damage, consequential damages, government fines or charges, or cost of repairs or service in the apartment community due to: ……… any other cause not due to [the landlord’s] negligence or fault.”

Shortly after Tenant moved into her apartment, she received a new washer and dryer as a gift from her parents.  She successfully connected the washer, but abandoned her efforts to install the dryer because the cord sparked and the circuit breaker tripped when she attempted to plug it into the receptacle.  At Tenant’s request, an apartment-complex employee later connected the dryer to the unit’s pre-existing utility connections via a cord Tenant supplied.

Within days of the dryer’s installation, Tenant’s apartment and several adjoining units were severely damaged in a fire that originated in her apartment.  Though the fire started in the dryer drum, the source of ignition is unknown. Tenant was unable to extinguish the fire, and the ensuing casualty loss to her and the surrounding units exceeded $83,000.

Philadelphia Indemnity Insurance Co. paid the landlord’s insurance claim and demanded reimbursement from Tenant pursuant to the Reimbursement Provision of the lease.  Tenant failed to remit payment, and Philadelphia Indemnity sued her for negligence and breach of contract for noncompliance with the Reimbursement Provision.

Following trial, the jury found that although Tenant’s negligence did not cause the fire, Tenant was in breach of contract for failing to pay the casualty loss, awarding Philadelphia Indemnity $93,498 in actual damages, plus attorney’s fees.  Tenant moved for judgment notwithstanding the verdict claiming, among other things, ambiguity and violations of public policy.  The trial court granted the Tenant’s motion and rendered a take nothing judgment in favor of Tenant.

On appeal, the San Antonio Court of Appeals affirmed, finding that although the lease was not ambiguous, the Reimbursement Provision was void as against public policy.

Ruling and Analysis

On appeal to the Texas Supreme Court, after the Court affirmed the lower court’s holding that the lease was not ambiguous, the Court and the parties focused their attention and main arguments on Tenant’s public-policy defenses to enforcement of the Reimbursement Provision.

The crux of the public-policy argument concerned the relationship between Section 92.006(c) of the Texas Property Code, which generally prohibits waiver of statutory repair duties and remedies, and Section 92.052, which delineates the landlord’s duty to repair or remedy conditions materially affecting the physical health or safety of an ordinary tenant.  The dispute ultimately centered on the Texas Property Code’s express allocation of the repair duty between landlords and tenants and the liberty to strike a different bargain.  Specifically, the Court addressed whether the Reimbursement Provision unambiguously imposed liability for the disputed damages and if so, did the agreement run afoul of public policy embodied in the Texas Property Code?

The main points of disagreement were (1) what Tenant must prove to establish the landlord’s repair duty as a predicate to invoking the statutory prohibition that undergirds her affirmative defense, and (2) whether the permissive exceptions to the general prohibition are exclusive.

Philadelphia Indemnity argued Section 92.006’s list of authorized contractual arrangements is permissive, but not exclusive, and the Texas Property Code neither prohibits agreements making tenants responsible for damages accidentally caused by their own appliances nor requires tenant fault to shift responsibility for tenant-caused damages.

Tenant argued that the Reimbursement Provision broadly imposes no-fault liability without requiring any causal nexus.

In considering the arguments, the Supreme Court first noted that, although parties may contract as they wish so long as the agreement reached does not violate positive law or offend public policy, in the residential-leasing context the Texas Legislature has limited the freedom of landlord and tenant to contractually allocate responsibility for repairs materially affecting health and safety but, importantly, has decided as a matter of public policy not to impose a categorical prohibition on such contracts.  As the Supreme Court noted, Tenant’s rental agreement was not limited to tenant-caused damages, but by negative reference assigned responsibility to her for all damage not caused by the landlord’s negligence or fault.

Regarding public policy and enforceability of lease provisions generally, the Court stated that public policy does not prohibit a landlord and tenant from agreeing that the tenant will be responsible for tenant-caused or tenant-imputed damages because, in those circumstances, the landlord has no duty to make (or fund) repairs and the tenant has no remedy under the Texas Property Code.  With regard to the Reimbursement Provision in particular, those broad notions of public policy ultimately reduced to whether enforcement of the Reimbursement Provision would require Tenant to pay for damages that were not tenant-caused and that the landlord, therefore, had a nonwaivable duty to make.  However, the Court stated that potential for an impermissible application cannot be dispositive of the public-policy inquiry.  In other words, a contract will not be declared void merely because it could have been performed illegally or contrary to public policy.  The Reimbursement Provision would be unenforceable per se only if it could not be performed without violating the Texas Property Code, which the Court concluded was not the case.

Finally, the Court addressed whether Tenant met her burden of proof on her affirmative defense of contract avoidance, i.e., her argument that the Reimbursement Provision contravenes the limitations set forth in section 92.006 of the Texas Property Code.  The Court began its analysis by holding that to establish her affirmative defense, it was the Tenant’s burden to establish she did not cause the fire, either by obtaining an affirmative finding regarding the cause of the fire or if the record established the absence of the requisite causal connection.  As to the first avenue, the Court found that the jury failing to find that Tenant’s negligence proximately caused the fire does not equate to an affirmative finding of no causation.  Having found that Tenant failed to obtain the necessary jury finding, the Court then looked to the record to see whether it established the absence of the requisite causal relationship, either by negating Tenant’s role in causing the damage or by establishing an alternative cause of the damage.  The Court found that there was some evidence in the record that Tenant’s actions, even if not negligent, caused the fire that originated in her personal appliance. Accordingly, the Court found that Tenant did not establish the factual predicate to contractual invalidity and reversed the court of appeals’ judgment to the extent it invalidated the Reimbursement Provision on public-policy grounds and rendered judgment that the lease provision is not unenforceable on that basis.

Conclusion

Ultimately, the Court concluded that a contract capable of being performed in harmony with the laws and statutes of Texas is not per se void as against public policy.  Unless an agreement cannot be performed without violating the law or public policy, the party seeking to avoid enforcement must establish its invalidity under the particular circumstances, which according to the Court, Tenant failed to do in this case.  Further, the Court concluded that landlords have no obligation to repair premises conditions that are tenant-caused and therefore are not restrained from contracting with tenants for reimbursement of associated repair costs.

The potential implications of the Court’s opinion are far reaching.  The number of executed residential leases which include the TAA’s Reimbursement Provision is likely vast.  The language contained in these leases does not limit reimbursement to tenant-caused damages, but by negative reference assigns responsibility to the tenant for all damage not caused by the landlord’s negligence or fault.  And, unless addressed by the tenant, the Reimbursement Provision probably remains in many leases.  This is a heavy burden for tenants to bear as potentially anything that causes damages that was not cause not by the landlord must be proven not to be caused by the tenant, no matter the degree of likelihood of causation.

Unless further legislation is forthcoming, it is up to the parties entering the lease agreement to address such pitfalls as those addressed by the Supreme Court of Texas and to address them at the time of execution, rather than at the courthouse.

No information in this article is intended to constitute legal advice.  For specific legal advice, please contact an attorney.

If you have any questions or would like more information about enforceability of lease provisions, please contact Eric Mettenbrink at 713.220.9141 or emettenbrink@hirschwest.com.