January 16, 2026|Franchise Frontlines
January 16, 2026 | United States District Court, Southern District of Texas | Unpublished Opinion
Executive Summary
In an unpublished decision, Magistrate Judge Dena Palermo of the Southern District of Texas denied summary judgment on core breach of lease and guaranty claims arising from the collapse of a franchise relationship and subsequent efforts to reposition restaurant locations. The plaintiff landlord argued that the tenant breached a long-term commercial lease by ceasing rent payments following termination of its franchise agreements. The defendants countered that the lease had been modified through ongoing communications and conduct, including substantial investments in rebranding the locations. The court held that fact issues precluded summary judgment, finding that a reasonable jury could conclude the parties modified the lease through emails and partial performance, and that the landlord’s conduct could support related defenses and counterclaims, including fraud and negligent misrepresentation.
Relevant Background
The dispute arises out of a long-term lease covering twenty-four restaurant properties in the Houston area. The tenant operated these locations as franchised restaurants under agreements with a third-party franchisor. When those franchise agreements were terminated in 2022, the tenant was enjoined from continuing to operate the branded locations, effectively disrupting its ability to operate under the existing system.
Following that disruption, the parties began discussing potential paths forward. These included restructuring the lease to cover fewer locations and allowing the tenant to convert certain sites to a new restaurant concept. During this period, the tenant moved forward with converting several locations, investing significant capital into renovations associated with the new concept. The record reflects that the landlord was aware of these plans, received updates, reviewed materials, and continued engaging with the tenant regarding the evolving business strategy.
At the same time, the landlord explored alternative options, including leasing the properties to another operator associated with the former franchisor. These discussions were not disclosed to the tenant while negotiations regarding the potential restructuring of the lease and the tenant’s rebranding efforts were ongoing.
The tenant eventually ceased paying rent on certain locations, citing financial constraints and the changed circumstances following the franchise termination. The landlord issued default notices, took possession of the properties, and ultimately entered into a new lease with a different operator connected to the prior franchisor.
The landlord filed suit for breach of the lease and guaranty, while the tenant asserted counterclaims, including breach of contract, fraud, and equitable theories based on its investments and the parties’ course of dealing.
Decision
The court denied summary judgment on the central breach of contract claims, concluding that genuine issues of material fact existed as to whether the lease had been modified through the parties’ communications and conduct.
Applying Texas law, the court emphasized that even agreements subject to the statute of frauds—such as long-term commercial leases—may be modified through written communications, including emails, and may be enforced through the doctrine of partial performance. The summary judgment record included evidence of ongoing negotiations concerning a reduced set of properties, revised rent obligations, and a new operating concept. The court found that a reasonable jury could conclude these communications reflected an agreement on essential terms.
The court also found that the tenant’s substantial investments in renovating multiple locations supported application of the partial performance exception. The evidence showed that the landlord was aware of, and continued to engage with, the tenant’s rebranding efforts without directing the tenant to stop. This conduct, combined with the tenant’s expenditures, raised a factual issue as to whether the parties intended to modify their contractual relationship.
Because these fact issues remained unresolved, the court held that summary judgment was inappropriate on the breach of lease claim. For similar reasons, the court denied summary judgment on the guaranty claim, explaining that liability under the guaranty depended on whether a breach of the underlying lease had occurred.
The court also rejected several affirmative defenses but allowed others—most notably waiver and mitigation—to proceed, again based on factual disputes arising from the parties’ course of dealing.
Significantly, the court permitted the tenant’s fraud and negligent misrepresentation claims to proceed. The evidence, viewed in the light most favorable to the tenant, suggested that the landlord may have encouraged or acquiesced in the tenant’s renovation efforts while simultaneously pursuing alternative leasing arrangements without disclosure. The court found that these facts could support a claim that the tenant relied on the landlord’s conduct to its detriment.
Finally, the court addressed claims against the landlord’s parent entity, concluding that factual issues existed regarding its involvement in the relevant communications and decision-making, precluding summary judgment on those claims as well.
Looking Forward
This decision illustrates how quickly a straightforward lease enforcement action can evolve into a fact-intensive dispute when franchise relationships break down and parties attempt to reposition locations in real time.
For franchisors and system operators, the case underscores the importance of disciplined communication during transition periods. When franchise agreements are terminated or disrupted, discussions about rebranding, restructuring, or reallocating locations often occur under time pressure. This case shows that informal communications—particularly when combined with knowledge of a counterparty’s reliance and investment—may later be characterized as evidence of a modified agreement or as a basis for equitable claims.
The opinion also highlights the risks associated with parallel strategies. Exploring alternative operators or re-leasing opportunities while engaging in active discussions with an existing operator may create exposure if those efforts are not clearly communicated and appropriately documented. Courts may examine not only what was said, but also what was not disclosed, when evaluating claims of reliance or misrepresentation.
At the same time, the court’s ruling is grounded in a highly fact-specific record. The outcome reflects the combination of ongoing negotiations, substantial capital investment, and continued engagement between the parties. Different facts—particularly clearer documentation of non-binding discussions or express reservation of rights—may lead to different results.
From a structural perspective, this case reinforces the need for alignment between franchise agreements, lease arrangements, and any interim transition strategies. Where franchisors, landlords, and operators are navigating post-termination scenarios, clarity in roles, expectations, and documentation may be critical to avoiding unintended contractual or quasi-contractual obligations.
In short, the decision serves as a reminder that, in the franchise context, operational flexibility during periods of disruption must be balanced with careful legal discipline to ensure that informal efforts to stabilize a system do not create unintended liability.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Partner at Buchalter LLP and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
This communication is not intended to create, and does not create, an attorney-client relationship or any other legal relationship. No statement herein constitutes legal advice, nor should it be relied upon or interpreted as such. This communication is for general informational purposes only and is not a substitute for legal counsel. Readers should not act or refrain from acting based on any information provided without seeking appropriate legal advice specific to their situation. For more information, visit www.buchalter.com.
