A Texas appeals court has sided with a landlord in a commercial real estate lease dispute involving an El Pollo Loco franchise. The court affirmed a lower court’s decision, awarding the landlord, Bitters JSEL, LLC (Bitters), over $793,000 in damages after the franchise, AA Pollo, Inc. D/B/A El Pollo Loco (AA Pollo), and its guarantor, Anil Yadav, breached their lease agreement.
The case, heard by the Thirteenth District Court of Appeals in Corpus Christi-Edinburg, revolved around a lease signed in 2015 for a property in San Antonio where AA Pollo was to operate an El Pollo Loco franchise. The lease, which commenced in March 2016, was for a 20-year term and specified increasing monthly rent payments. Anil Yadav, individually, guaranteed AA Pollo’s lease obligations.
In March 2020, AA Pollo failed to pay its rent. Bitters, the successor-in-interest to the original lessor, contacted AA Pollo about the missed payment. According to court documents, a representative of AA Pollo stated they did not plan to pay any further rent. Weeks later, AA Pollo sent a letter to Bitters requesting a three-month rent abatement due to the COVID-19 pandemic. However, after February 2020, AA Pollo never paid rent again and vacated the premises.
Bitters took steps to mitigate its damages, including fencing the vacant property, making repairs, hiring a broker to manage and re-lease the property, and paying property taxes. A new tenant was secured in September 2020, with the new lease beginning in February 2021. Bitters then filed a lawsuit, which resulted in a trial court judgment in its favor.
The appeals court addressed several arguments made by AA Pollo and Yadav in their appeal.
Mitigation of Damages
The appellants argued that Bitters failed to adequately mitigate its damages. They claimed that AA Pollo had offered to resume paying rent in July 2020 and that Bitters should have accepted this offer, limiting their damages.
The court rejected this argument, citing the legal principle that a landlord must make “objectively reasonable efforts to fill the premises.” The court stated that AA Pollo, as the breaching tenant, had not demonstrated it was a “suitable tenant under the circumstances” that Bitters was legally required to accept an offer from.
Validity of the Rent Acceleration Clause
The appellants also challenged the lease’s rent acceleration clause, which allowed Bitters to claim the remaining rent due for the entire lease term upon a breach of contract. They argued the clause was void because it allegedly exempted Bitters from its duty to mitigate damages. They further argued that the acceleration provision was an unenforceable penalty.
The court disagreed. It noted that the acceleration clause specifically reduced the amount owed by the amount received from a new tenant, indicating that mitigation was considered. The court found that the clause was not an unenforceable penalty because it was triggered by a failure to pay rent, a material breach of the lease. The court distinguished this case from others where acceleration clauses were deemed penalties because those cases involved trivial breaches of contract.
Bitters’ Cross-Appeal: Present Value and Prejudgment Interest
Bitters filed a cross-appeal, arguing that the trial court erred in two ways. First, they claimed the court improperly reduced the unaccrued rent award to present value. Second, they argued the court should have awarded more prejudgment interest on the unpaid rent.
The appeals court denied the cross-appeal. Regarding the present value argument, the court stated that the record did not clearly show how the trial court calculated the damage award. Since Bitters did not provide a transcript of a hearing where the calculations were discussed, they failed to meet their burden of proof to show the trial court made an error.
As for the prejudgment interest claim, the court found no abuse of discretion by the trial court. The court noted that prejudgment interest in this case was based on equity, and Bitters had not demonstrated that the trial court violated any equitable principles in its decision.
The appeals court ultimately affirmed the trial court’s judgment, upholding the damages award in favor of Bitters.