Daily Development for
Monday, February 14, 2000
By: Patrick A. Randolph,
Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu
LANDLORD/TENANT;
LANDLORD'S BREACH; TERMINATION: Because traditional "independence of
covenants" doctrine is dead, If a landlord intentionally and consistently overcharges
its tenant for insurance and taxes, the tenant may be justified in terminating
its lease.
Mansol Associates, L.L.C.
v. Mansol Industries, Inc., 972016 (U.S. Dist. Ct. D. N.J. 1999).
A tenant leased part of
one building and the entirety of another for a term of ten years. Both leases
required the tenant to pay taxes, insurance, and the cost of maintenance and
repairs. In each case, the landlord paid for those items, and then rebilled the
tenant for its share according to the portion of each building occupied by the
tenant.
After about seven years,
the tenant vacated the premises and claimed that it had the right to do so
because the landlord had committed fraud with respect to the amounts charged
for taxes and insurance. The landlord responded with a suit seeking to recover
the shortfall that resulted after reletting each of the properties for the
balance of the tenant's initial lease term.
Under New Jersey Law,
commercial leases are governed by legal principles of contract law. Accordingly,
"a lease, whether it be for a residence or for commercial purposes is a
set of mutually dependent covenants." Thus, if "a landlord breaches
its obligations under a lease, a tenant can be excused from performing its
obligations." A tenant's obligation to remain in leased premises and/or
continue to pay rent is dependent on its landlord's observance of the tenant's
quiet enjoyment. According to the New Jersey Supreme Court, "a tenant's
right to vacate leased premises is the same from a doctrinal standpoint whether
treated stemming from breach of a covenant of quiet enjoyment or from breach of
any other dependent covenant."
In an earlier case, the
Appellate Division of the New Jersey Supreme Court held that a commercial
tenant was justified in vacating premises before the expiration of its lease
where the landlord had breached the lease by unreasonably withholding consent
to an assignment. Thus, the Appellate Division extended the theory of mutually
dependent covenants for circumstances not involving the landlord's covenant of
quiet enjoyment. In doing so, it relied on the Restatement (Second) Property 2d
which "permits the tenant to terminate the lease if the landlord's breach
of covenant deprives the tenant of 'a sufficient inducement to the making of
the lease.'"
According to the U.S.
District Court, the situation presented in this case was similar. The
"landlord's obligation to charge the rents and additional rents provided
for in the leases, rather than consistently and intentionally charging
significantly greater amounts, may well have constituted a substantial and
material element of the contract," having a "significant impact on
the benefits the tenant anticipated [if] received under the lease." The
Court also cited with approval a 1984 South Dakota case that held a landlord's
overbilling could justify a tenant's termination of a lease. In light of that
analysis, the Court determined that if the landlord consistently and
intentionally overcharged its tenant for insurance and taxes, as the tenant
contended, the tenant may have been justified in terminating the lease. Because
there were outstanding discovery questions and unresolved issues of material
fact, the matter was remanded to the lower court for further proceedings.
Comment 1: Although the
case is not unique, it certainly appears to be part of a trend in commercial
leasing. There are numerous cases that stress the fact that a landlord's breach
of a lease that constitutes a "major breach" may constitute a basis
for termination of performance by the tenant, even if the breach does not
constitute a "constructive eviction." But most of the cases,
understandably, deal with the physical conditions of the premises, as that's
mostly what the landlord makes covenants about. Here, we are dealing with a
duty totally unrelated to the condition of the premises, so the movement in the
case law suddenly becomes much more apparent.
Comment 2: Real estate
negotiation practice is all about knowing the "default construction"
of the documents, so that you know the base from which you are negotiating. This
case suggests that the base is being rebuilt. Landlords who really want to
preserve the "independence of covenants" doctrine are going to have
to bargain for that concept in the lease, instead of counting on the fact that
they have it unless they waive it. Mortgagees, who often are quite anxious that
there be independence of the covenants, so that the rents will continue to
flow, may want to redraft their own requirements for leases entered into by
their mortgagors.
Readers are urged to respond, comment, and argue with the daily
development or the editor's comments about it.
Items in the Daily Development section generally are extracted from the
Quarterly Report on Developments in Real Estate Law, published by the ABA
Section on Real Property, Probate & Trust Law. Subscriptions to the
Quarterly Report are available to Section members only. The cost is nominal.
For the last six years, these Reports have been collated, updated, indexed and
bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6,
published by the ABA Press. The Annual Survey volumes are available for sale to
the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312)
988 5590 or mtabor@staff.abanet.org
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. Accuracy of data and
opinions expressed are the sole responsibility of the DIRT editor and are in no
sense the publication of the ABA.
Parties posting messages to DIRT are posting to a source that is readily
accessible by members of the general public, and should take that fact into account
in evaluating confidentiality issues.
ABOUT DIRT:
DIRT is an Internet discussion group for serious real estate professionals.
Message volume varies, but commonly runs 5 ‑ 10 messages per workday.
Daily Developments are posted every workday.
To subscribe to Dirt, send an e-mail to:
To: |
ListServ@listserv.umkc.edu |
Subject: |
[Does not matter] |
Text in body of message |
Subscribe Dirt [your name] |
To cancel your subscription to Dirt, send an e-mail to:
To: |
ListServ@listserv.umkc.edu |
Subject: |
[Does not matter] |
Text in body of message |
Signoff Dirt |
For information on other commands, send the message Help to the listserv
address.
DIRT has an alternate, more extensive coverage that includes not only
commercial and general real estate matters but also focuses specifically upon
residential real estate matters. Because real estate brokers generally find
this service more valuable, it is named “Brokerdirt.” But residential specialist
attorneys, title insurers, lenders and others interested in the residential
market will want to subscribe to this alternative list. If you subscribe to
Brokerdirt, it is not necessary also to subscribe to DIRT, as Brokerdirt
carries all DIRT traffic in addition to the residential discussions.
To subscribe to Brokerdirt, send an e-mail to:
To: |
ListServ@listserv.umkc.edu |
Subject: |
[Does not matter] |
Text in body of message |
Subscribe Brokerdirt [your name] |
To cancel your subscription to Brokerdirt, send an e-mail to:
To: |
ListServ@listserv.umkc.edu |
Subject: |
[Does not matter] |
Text in body of message |
Signoff Brokerdirt |
DIRT is a service of the American Bar Association Section on Real Property,
Probate & Trust Law and the University of Missouri, Kansas City, School of
Law. Daily Developments are copyrighted by Patrick A. 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: http://www.umkc.edu/dirt/