The state of Texas is among a burgeoning group of tenants that has allegedly resorted to breaking leases as the office market grapples with its uncertain future.
A handful of landlords accused various state departments of premature terminations, with the most recent allegation made in a lawsuit brought by Philadelphia-based Brandywine Realty Trust, according to the Austin Business Journal.
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The lease at the center of the suit is for a 122K SF office in the Uptown ATX development in North Austin, where the Texas Health and Human Services Commission had agreed to a 120-month term scheduled to end in July 2025. The lease was later extended to Oct. 31, 2026, but the HHSC began moving out in January, according to the ABJ.
HHSC claimed it was within its rights to back out of the lease due to terms that allow premature termination for state entities if funding is no longer allocated.
But lawyers for Brandywine said the Texas Legislature approved more than enough money to pay the department’s rent. The HHSC chose to certify a much lower figure than what was actually appropriated, the suit says, allowing it to cancel its lease in North Austin, along with four others.
The annual base rent for the North Austin lease was $4M, according to the ABJ. Brandywine said in the suit it had spent $6M on building out the space.
“Texas enticed [Brandywine] to provide millions of dollars in goods and services to the State by making long-term contractual promises for rent payments,” Brandywine lawyer Casey Dobson with Scott Douglass & McConnico LLP wrote in the suit. “The State’s attempt to now avoid those promises is based on ‘facts’ as transparently untrue as they are odiously flippant.”
Brandywine is requesting that a judge order the HHSC to resume its rent payments. It is also asking the state to pay monetary damages stemming from the broken lease and legal costs.
At least two other Austin landlords are suing the state for similar breaches of contract, according to Bloomberg Law. One complaint accuses the state of abruptly pulling out of its 10-year lease in the Horizon Bank Tower after the legislature banned the Permanent School Fund Corp. from spending public money on a private lease agreement.
Horizon Bank CEO James Dyess said the company was blindsided by the move, lambasting the state in its suit as “not a trustworthy business partner.”
The HHSC and the Texas Facilities Commission didn't immediately respond to Bisnow’s requests for comment.
The state has been chipping away at its office presence since the onset of the pandemic. In February 2020, the state leased 9.4M SF. Today, it leases 8.5M SF, about a 10% reduction, according to data JLL provided to Bisnow.
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