RE: [DIRT] DD 4/20/06 When is a lease "default" not a "default?" When it's been waived.

Daily Development for Thursday, April 20, 2006 by: Patrick A. Randolph, Jr. Elmer F. Pierson Professor of Law UMKC School of Law Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu LANDLORD/TENANT; DEFAULT; WAIVER: Under form lease guarantee that states that guarantors obligations will terminate if the tenant is not in default during the first three years of lease, tenant will not be regarded as in default if it habitually pays rent within a 20 day "grace period" following due date if landlord consistently accepts such payment without objection. Madison Avenue Leasehold, L.L.C. v. Madison Bentley Associates, L.L.C. , 811 N.Y.S. 2d 47 (N.Y. App. Div. 2006) This case is noteworthy for a lot of little things. First, the Bentley dealer runs out on the lease. That's "man bites dog" news a little bit. Second a New York court actually writes a lengthy opinion explaining its result (wonder of wonders.) Perhaps the latter event is explained by the fact that one of the judges vigorously dissented, leading the author of the majority opinion to develop his thoughts further than he might otherwise have done. The lease was the Standard Form of Store Lease published by the Real Estate Board of New York, Inc. Presumably the guarantee came from the same source, although we're not told. The guaranty stated that the guarantors were relieved of their guaranty if the tenant "shall not have been in monetary default . . . at any time during the first three years of the lease." Tenant routinely paid rent late, but within 20 days of the due date. The default language, which the court correctly notes is "not a model of clarity" on the issue of when a default occurs, read as follows: "It tenant defaults in . . . the covenant for the payment of rent . . . and if tenant shall not have diligently commenced curing such default within such twenty (20) day period . . . then owner may serve a written three (3) days notice of cancellation of this lease upon tenant." Tenant quit the lease three years and three months following commencement (what a coincidence!!). In fact, after three years, the rent subsidy that tenant was receiving from the manufacturer of its Bentleys, Rolls Royce, expired. Likely all those Bentley cars on the showroom floor did not belong to tenant, and there wasn't any money to pay the default damages. Obviously, the fight was about whether the guarantee had been released. The court acknowledged, as the dissent asserted, that it was likely that the failure to pay rent on the original due date ought to be regarded as a "default." But it held that the landlord's consistent pattern of accepting late payments without comment constituted a waiver of its right to declare a default. The landlord noted that the concept of waiver usually occurs in an equitable context. Here, there was solely a suit for damages, not forfeiture of the leasehold estate, as the tenant had abandoned. But the court responded that waiver analysis is appropriate both for legal and equitable disputes. Of course, the fact that landlord had waived its right to enforce the default provisions of the lease as a consequence of the late payments didn't necessarily mean that tenant hadn't "defaulted" for purposes of the guarantee release. In fact, the default clause appears to say that failure to pay on time is a "default." But the court, despite the fact that it claimed that waiver is appropriate in a legal context, used the waiver here as a kind of estoppel of the landlord's right to assert that the late payments were defaults: Having failed, over the course of three years, to give Bentley any notice that timely payment of rent would be required, landlord may not now insist that the tenant's failure to strictly comply with the timely payment condition of the lease constitutes a default." The court viewed its interpretation as necessary to the well being of the law in light of the facts that the lease was a standard form lease and that its interpretation was, in its view, reflective of the probably intent of these parties and the market in general in the interpretation of the document. Landlord attempted a second ploy: the anti-waiver language in the guarantee itself: The guarantee stated that the individual defendants' obligations "shall in no wise be . . . terminated, affected, diminished or impaired by reason of . . . the failure to assert . . . rights or remedies reserved to Landlord [under the Lease]." Further, the guaranty provided that the guarantors' liability "shall in no way be affected . . . by reason of any extension of time that may be granted by Landlord to the Tenant." Landlord pointed out that the alleged "waiver" that prevented it from asserting that Tenant had defaulted during the first three years arose from an extension of time. The court disagreed, and said that the language of the guaranty did not cure the problem with the establishment of the condition precedent to the guaranty being in effect - the lack of a default within the first three years. The editor will try to explain the majority position, which seems quite clear to it, simply by quoting the language of the opinion: "As previously stated, because landlord, by a course of conduct extending over a period of years, waived the tenant's late payment of rent, there was no 'monetary default' by the tenant under the lease during the applicable three-year period, the guaranty neither took effect nor was extended, and the guarantors were never subject to its terms and obligations. Once waived, the default in timely payment of rent, is extinguished and cannot later be revived, like a phoenix, into a material default for the purpose of extending the period of the collateral guaranty." The decision. Justice McGuire, in dissent, took the position that in fact the interpretation of the majority was not what the parties probably expected - in fact it was far from it: "[T]his waiver analysis ignores the economic realities of th elease in light of the guaranty. The guaranty effectively shifted the ultimate risk of [tenant's] non performance of the obligation to make rent payments from [Landlord] to the [guarantors.] Accordingly, [Landlord] had no economic reason to notify [tenant] of [tenant's] own habigually late payments during the very period in which [landlord] allegedly waived its rights by failing to do so. To insist on pain of waiver that [landlord] formally advise [tenant] of what it already knew makes little sense. On the facts of this case, in particular, that the [guarantors] are [tenant's] principals, the waiver analysis is all the more confounding, for it reduces to this: [Landlord] waived the rights it bargained for under the guaranty by failing formally to belabor the obvious both to [tenant] and [guarantor.]" Judge McGuire was perfectly willing to concede that the Landlord might have waived its rights against Tenant to terminate the lease for late payment of rent. But, he asserted, this does not mean that Landlord ever waived its right to assert against guarantors that a default had occurred. Comment 1: Judge McGuire is correct. The majority's view is so much Phoenix poop. Of course the guarantee "anti waiver" language specifically applied to this case. It consistently stated that it there would be no waiver based upon failure to respond or to delay response to acts of the tenant. It was addressed entirely to a further interpretation of the meaning of the lease insofar as the guarantor's relationship with the Landlord was concerned. To read the lease as independent of the meaning ascribed to it in the guarantee, for purposes of reading the guarantee, is absurd.Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. 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Randolph, Jr., Professor of Law, UMKC School of Law, but Professor Randolph grants permission for copying or distribution of Daily Developments for educational purposes, including professional continuing education, provided that no charge is imposed for such distribution and that appropriate credit is given to Professor Randolph, DIRT, and its sponsors. DIRT has a WebPage at: https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://cctr.umkc.edu/dept/dirt/ Comment 2: Usually, waiver arguments are used to support a claim that the party asserting waiver was "lulled into a false sense of security" by the other sides failure to assert its rights. But that didn't happen here. Exactly what would the guarantors have done differently had they known that the landlord regarded late payment of the lease as a default, and no joking around? Made sure all payments were on time after the first late payment? This wouldn't have mattered - the first late payment cost them their three year "out." Defaulted sooner? This would only have exposed them to more liability? Done something to the tenant? What? [In fact, it appears that they were the tenant in other clothing.) The opinion is wrong. Let's see if there's an appeal. (The case was decided March 14.) ----- To be removed from this mailing list, please go to <https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://listserv.umkc.edu/listserv/wa.exe?SUBED1=DIRT%26A=1> or send an email message to the address listserv@listserv.umkc.edu, with the text SIGNOFF DIRT in the body of the message. Problems or questions should be directed to manager@listserv.umkc.edu. mmfishman@STOEL.COM ----- To be removed from this mailing list, please go to <https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://listserv.umkc.edu/listserv/wa.exe?SUBED1=DIRT%26A=1> or send an email message to the address listserv@listserv.umkc.edu, with the text SIGNOFF DIRT in the body of the message. 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