Last week was a busy one for the Texas Supreme Court.  In addition to the Hamrick v. Ward opinion we discussed on Monday, the Court also issued an important opinion in Wheeler v. Enbridge Pipelines, L.P. that clarifies the proper measure of recovery for damages to real property.  [Read full opinion here.]

Background

The Wheeler family owned 153 acres of heavily wooded property in Shelby County.  The Wheelers agreed to grant Enbridge an easement across the property in order to place a pipeline, but required that the pipeline be installed by boring underground in order to preserve the trees on the land.  Enbridge agreed to these terms and the parties entered an easement agreement.  After the agreement was signed, Enbridge hired a construction company to build the pipeline, but failed to inform them about the boring provision in the contract.  Instead of abiding by the parties’ agreement, the contractor cut down several hundred feet of trees and bulldozed the ground.

The Wheelers, in turn, sued Enbridge for breach of contract and trespass.  The case was tried to a jury, which found Enbridge liable in both contract and trespass.  With regard to the contract claim, the jury awarded restoration damages of $300,000.  With regard to the trespass claim, the jury awarded $288,000 for damages to the intrinsic value of the trees destroyed.  The Wheelers, of course, elected to accept the breach of contract damages of $300,000.

Enbridge appealed arguing two main points.  First, Enbridge claimed that restoration damages were an improper damage measure because the injury was permanent and, therefore, the proper damage award was the change in market value of the property.  Second, Enbridge argued that the award of damages for the intrinsic value of the trees was improper.  The court of appeals sided with Enbridge, holding that because the Wheelers failed to obtain a finding that the injury was temporary, the restoration damages were improper.

The Wheelers sought review from the Texas Supreme Court.

Law Regarding Damages to Real Property

This case turns on the proper calculation of damages for damage to real property.  This is a confusing and complex area of law, which the Texas Supreme Court even recognized in its opinion.

Under Texas law, the proper calculation of damages to real property turns on whether the damage is categorized as temporary or permanent.  If the damage is temporary, the landowner is entitled to recover restoration damages–the costs necessary to restore the property to its prior condition before the injury.  If, on the other hand, the damage is permanent, the landowner is entitled to receive the diminution in the fair market value of the property due to the injury–calculated by comparing the fair value just prior to the injury and the value just after the injury.

Temporary v. Permanent Injury

As the Supreme Court stated, “applying the distinction between temporary and permanent injury to real property has proven a vexing task for litigants and courts alike.”  In light of this, the court clarified the applicability of this doctrine, whether it is a question of fact or of law, and “reformulated” the proper definition of a temporary and a permanent injury.

First, the court held that the temporary v. permanent damage distinction is applicable in all cases involving damage to real property, whether they sound in contract or in tort.  Thus, this distinction applied to both the breach of contract and trespass claims at issue in this case.

Second, the court found that the question of whether an injury is temporary or permanent is a question of law to be decided by the court.  Of course, if disputed facts underlie the finding, those facts will be determined by the fact finder.  Thus, in this case, failure to submit a jury question on whether damage was temporary or permanent was not in error, as that question should have been answered by the court.

Third, the court “reformulated” the definition of temporary and permanent injuries.  “An injury to real property is considered permanent if (a) it cannot be repaired, fixed, or restored, or (b) even though the injury can be repaired, fixed, or restored, it is substantially certain that the injury will repeatedly, continually, and regularly recur, such that future injury can be reasonably evaluated.  Conversely, an injury to real property is considered temporary if (a) it can be repaired, fixed, or restored, and (b) any anticipated recurrence would be only occasional, irregular, intermittent, and not reasonably predictable, such that future injury could not be estimated with reasonable certainty.”  The court did not have to determine whether the damages to this case were temporary or permanent due to the parties agreement that the damages were permanent and the applicability of an exception discussed below.

Exceptions

Further complicating this issue are a number of exceptions under Texas law to the general rule regarding temporary v. permanent damages.  Two of these exceptions–the economic feasibility exception and the intrinsic value of trees exception–are at issue in this case.

First, the economic feasibility exception applies when a temporary injury occurs and the cost of required restoration costs (the proper measure of damages for a temporary injury) exceeds the diminution in the property’s market value caused by the injury “to such a disproportionately high degree that the repairs are no longer economically feasible.”  In those situations, the exception treats the temporary injury are permanent, and the damages awarded are the loss in fair market value.

This exception applied in the instant case.  Here, the jury found reasonable restoration costs to be $300,000.  The loss in the property’s fair market value was somewhere between $0 and $3,000.  Because the restoration costs grossly exceeded the diminution in fair market value, the exception applied and the damages were deemed to be permanent pursuant to this exception.  In light of this, the proper measure of damages should have been $3,000, rather than $300,000.

Second, the intrinsic value of trees exception provides that even where the proper measure of damages is loss of fair market value to which the trees were attached, and the value of the land did not decline due to the loss of trees, the landowner may still recover for the trees intrinsic value, namely their aesthetic and utilitarian value.  This rule applies in situations where there was no diminishment in the property’s fair market value and in cases where there was a nominal loss in value to the property.

Again, this exception applies in this case.  As noted above, the diminished market value in this case was only $3,000.  The jury awarded $288,000 in damages for the intrinsic value of the trees that were destroyed. In light of this, the court found that the intrinsic value of trees exception applied and such damages could property be awarded.

Why Does This Matter?

First, it is important to draft a clearly worded easement agreement when negotiating with a pipeline company.  Fortunately for the Wheelers, there was no dispute in this case that the easement clearly required Enbridge to use the boring method and, when they failed to do so, they breached the contract.  Instead, the only battle was the proper measure of damages.

Second, when requiring certain methods to be undertaken by a pipeline company to whom an easement has been granted, the landowner should require that any such requirements be submitted in writing to all contractors and a copy of such writing given to the landowner.  In this case, had the contractors received notice of the boring requirement prior to the pipeline being dug, this entire dispute may have been avoided.

Third, parties to an easement agreement may set the proper amount of compensation for damages by contact.  For example, the parties could have agreed in this case that if any trees were damaged the proper compensation to the landowner would have been a set dollar amount per tree ($100 per tree, for example).  Likewise, the parties could have agreed on a proper damage award that in the event Enbridge breached the contract.  Parties should at least consider including these types of liquidated damage clauses in agreements where calculating damages may be difficult.

Finally, landowners should be aware of the economic feasibility exception and consider including language in contracts to avoid this exception.  In this case, the Wheelers were not awarded the $300,000 in restoration damages because the court found this was grossly in excess of the $3,000 diminution in value of the economic feasibility exception.  Clearly, the Wheelers would have preferred the restoration damages.  Had they considered a contractual provision providing that the measure of damages for any injury to real property would be the cost of restoration, regardless of the diminution in value and without regard to the economic feasibility exception, they may have been able to recover the greater amount.