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.

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