Daily Development for Tuesday, February 23, 2010
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

LANDLORD/TENANT; FRUSTRATION OF PURPOSE: Rare case permits tenant to avoid lease based upon failure to obtain a liquor license.

Merry Homes, Inc. v.  Luu, 2010 Westlaw 547373 (Tex. App. 2/.18/10) (not yet released for publication)

Very few decision permit the tenant to escape a lease based upon public zoning and licensing problems arising after the lease commences.  Typically the court finds that it is up to the tenant to evaluate the risks and assume them.  Where zoning is adverse, often the courts find that the parties intended that the tenant would seek a variance, and took the risk of obtaining it.  In many cases, of course, the courts note that the tenant still has some residual value in its lease where the original purpose is frustrated.  And there is the odd case where zoning authorities “targeted” the tenant and change the zoning after the lease specifically to frustrate tenant’s activities.  Tenants have fared better in these cases.

Here, however, it was simply a matter of a liquor license.  The lease provided (who thought this was a good idea?) that the premises were to be used for a bar and nightclub “ and for no other purpose.”  Prior to entering into the lease, the tenant-to-be indeed did explore the possibility of obtaining a liquor license, and was told that the license application would require financial information about the landlord.  Landlord’s broker, apparently anxious to close the deal, indicated that this information would not be provided until the lease was signed.  Thus, tenant was between a rock and a hard place.

It should be noted, however, that both landlord and tenant believed that the liquor license would be a routine matter, because there was nothing adverse in tenant’s record and there were several other nightclubs in the area.  When the tenant finally applied, however, the licensing board denied the license because the establishment was within 300 feet of both a school and a hospital.

The court held that, under the circumstances the lease turned into a lease for an illegal purpose and was therefore void. 

The court also discussed at some length the possibility that the lease was terminable for frustration of purpose, as the trial court had also held.  A study of the court’s discussion here doesn’t yield any conclusive on this point.  Although the court appears to affirm the trial court holding, it continually turns back to the illegality notion.

What likely makes the case different from most precedent is the fact that the use was in fact illegal from the outset, because of the proximity to public buildings, and the fact that the lease permitted no other use.  One might argue that this is an issue that the tenant could have resolved in advance, measuring off the distance to a school and hospital in the area.  But licensing agencies often have their own way of measuring, and it might have been difficult for the tenant to get a good “read.”  And, of course, the landlord’s agent obstructed the tenant from getting a definitive reading from the licensing board before the lease was signed.

Comment :  The court seems to say that even if the tenant knew of the illegality before signing the lease, the lease would still be void.  It is less clear whether this would be true if the only defense was frustration of purpose, but there is certainly that suggestion.

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