Texas Misses Lease Payment Date as Landlords Sue State for Rent

A Texas agency that supports public schools was to make its first rent payment in a new highrise in downtown Austin Monday, but that won’t happen following a shift by state budget makers.

That’s drawn lawsuits from two landlords—with potentially more to come—who say the state is canceling rent contracts with private companies by refusing to appropriate the money. The endgame is unclear, but the state’s lawyers hint at a desire to unite state agencies with state buildings, including those opening in a new $900 million complex near the Texas Capitol.

Horizon Bank’s chief executive, James Dyess, said the bank was “blindsided” this summer when the state’s Permanent School Fund Corporation abruptly ended a 10-year lease agreement that was set to begin on Monday. The parties entered into the contract in 2022, with Horizon saying it was confident it had found a reliable tenant after the legislature authorized the agency to contract with a private landlord the year before.

The deal crumbled this year in the following legislative session, when state lawmakers approved and Gov. Greg Abbott (R) signed a $321 billion two-year budget that expressly prohibited the school fund corporation from spending public money on a private lease agreement. Seeking to strike down that provision as unconstitutional, the lawsuit says that it’s a “bedrock principle” that a state can’t pass legislation to avoid its obligations to a contract. Horizon says it’s out $6.2 million in rent over the next two years. The bank says it had also agreed to spend an additional $1 million to alter the space.

Dyess said the cancellation signals “the state is not a trustworthy business partner.”

“The state doesn’t believe it has any responsibility to honor legally binding contracts with private business,” he said. “Hard to see where the pro-business adage we continue to hear follows through in action.”

The broken agreements raise questions about the impact on Texas’ creditworthiness and the state’s reliability in business transactions, a lawyer for landlord Horizon Bank wrote in the June complaint in federal court. That complaint is against three state leaders: Lt. Gov. Dan Patrick (R), House Speaker Dade Phelan (R), and Comptroller Glenn Hegar (R). A second lawsuit, filed in September by a Florida company that rents space to the Health and Human Services Commission, is against the state, not any individual.

The number of private lease agreements the state has exited or expects to exit is uncertain. A spokesperson for the Texas Facilities Commission, the agency that manages facilities the state owns and leases, declined to comment, referring all inquiries to Attorney General Ken Paxton’s (R) office. Paxton’s office, whose lawyers are representing the state or state leaders in both cases, didn’t respond to a request for comment.

Also declining comment was a spokesperson for the Health and Human Services Commission, which court records show had five lease agreements that became “inactive” on Aug. 31—the day before the state’s new fiscal year.

Horizon is represented by lawyers from the firms Nix Patterson LLP and Rigby Slack. Last month, the bank filed a related lawsuit against a commercial real estate broker that it says made misstatements to induce the bank into the agreement, such as representing that the risk of the legislature not appropriating rent funds was “extremely low.”

Agencies Cry Poor

In a related lawsuit, a Florida company said the Texas Facilities Commission terminated a rental contract in Austin with five years and $10.4 million remaining, citing a “non-availability of money.” The lawsuit from 8317 Cross Park LLC argues the money is available, pointing to a $25 million surplus gap between the amount of annual funding the commission received in the state budget and what it needs to fill its lease requirements.

“In short, there was complete funding by the legislature of Texas for the funds needed the pay the HHSC’s rent as due under the Lease,” lawyer Kemp Kasling wrote in the petition.

The state’s lawyers filed a response last week seeking to toss the case on the grounds that the state is immune from most suits and this isn’t an exception. The filing offered no information on the broken leases.

In general, state contracts are subject to legislative appropriation, said Austin lawyer Bill Aleshire, who once served as the top executive for Travis County. For that reason, he said, it can be risky for a private company to do business with the state.

“I don’t see how they can make the state keep the contract for which there is no appropriation,” Aleshire said. “There’s no authority for the state comptroller to cut them a check.”

State Sends Conflicting Messages

The next home for the Permanent School Fund Corporation raises further questions about the broken lease agreement.

In a court filing from early August, Paxton’s attorneys said the plan is for the agency to move into one of “several newly constructed state buildings” in a campus complex near the Capitol. The school fund needed somewhere to go because its current lease agreement, at a private office building in Austin, is set to expire at the end of the year and isn’t eligible for renewal.

Yet, within weeks of the court filing, the lodging plans had changed. Later in August, the school fund reached an agreement with the University of Texas Board of Regents to lease property in a downtown Austin tower, several blocks from the Capitol complex. The lease is for 10 years and $42 million. The reason for the sudden shift is unclear.

The lawsuit is on hold until a federal judge says if it can go forward. Hegar, Phelan, and Patrick have separately sought to dismiss it, arguing that they are protected by legislative and sovereign immunity. Phelan and Patrick are taking it a step further, arguing that in their roles as joint chairs of the Legislative Budget Board they only prepared a budget draft and didn’t enforce the budget.

The lawsuit also touches on an ongoing civil war in the Texas Republican Party. Patrick and Hegar opted for representation from Paxton’s attorney general’s office, which is standard for a state official in a lawsuit, but Phelan did not.

Phelan has been at odds with Paxton, a fellow Republican, since May when Phelan helped orchestrate Paxton’s impeachment in the House. Paxton, who the Senate acquitted at a removal trial in September, has repeatedly called for Phelan to resign and accused him of being drunk on the House floor while conducting the chamber’s business earlier this year.
Phelan, bypassing counsel from Paxton’s lawyers, opted for an outside attorney: Dale Wainwright, a former Texas Supreme Court justice. Neither Phelan or Wainwright responded to a request for comment.

The cases are 8317 Cross Park LLC v. Texas, Tex. Dist. Ct., No. D-1-GN-23-006445, 9/25/23, Horizon Bank v. Patrick, W.D. Tex., No. 23-cv-00691, 6/20/23 and Horizon Bank v. Cushman, Tex. Dist. Ct., No. D-1-GN-23-006671, 9/25/23.