Daily Development for Tuesday, January 9, 2007
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.  2006 WESTLAW 3716035 (12/19/06)

This decision affirms the decision reported as the Daily Development for 4/20/06.  I’ll repeat some of my comments from that report and add some new commentary.  One of the Appellate Decision judges vigorously dissented below, and we got an uncharacteristically lengthy opinion.  The Court of Appeals decision is unanimous, but still does a more thorough job than many such decisions from New York in explaining its reasoning. 

The lease was an extensively marked up version of 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 lower court correctly noted was "not a model of clarity" on the issue of when a default occurred, 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.  The court notes that the landlord refused to permit tenant to sell any cars other than Bentleys or Rolls Royces in the premises. 

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.

In the lower court 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 the lease 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 habitually 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.  The editor also felt the waiver reasoning was incorrect, referring to the case as “Phoenix poop.” DIRT reader Manuel Fishman, who characterized himself as a “landlord’s lawyer,” disagreed.  He felt that the landlord should have declared a default if it later intended to rely on the default in pressing the guarantors.  He characterized the landlord’s behavior as “stupid.”

The Court of Appeals, perhaps recognizing the flaws in the reasoning of the appeals court, extending the meaning of “waiver” beyond its usual bounds, and also recognizing that the lease contained an “anti-waiver” clause, elected to decide the case on different grounds.

The Court of Appeals made a very fine reading of the term “monetary default” as used in the Guaranty.  It stated that the meaning of the term would be assumed to be the same for both the guaranty and the lease, and it therefore looked to the lease for guidance as to meaning.  It concluded that the terms “default” and “monetary default” were not just different kinds of default, but in fact occurred at different times for nonpayment of rent.  The parties had included a “second notice” requirement before the landlord could terminate the lease for nonpayment of rent.  After the first notice, the tenant had seven days to cure the defaulted rent payment, and after that the landlord still had to give a second three day notice before resorting to remedies.  The court appeared to be of the view that only after the first notice and failure to cure did a nonpayment of rent become a “monetary default.”  Before that, it was just a plain ole’ default.

The court characterized its interpretation as “common sense,” as it was of the view that the guarantors should not lose their three year window as a consequence of a late payment that in fact had caused no real injury to the landlord.  It reasoned that only continuing defaults ought to serve that function (although it doesn’t say what would have occurred if the tenant had been egregiously late and the landlord forgave the lateness only on the steps of the courthouse.  In such case, the landlord still got all its money, but under the technical reading by the court, a “monetary default” would have occurred. 

Comment: The editor was concerned with the lower court opinion because it characterized the landlord’s acceptance of late payments as waiver of rights created by the guarantee, which certainly would have been news to the parties drafting the lease and also inconsistent with the “anti-waiver” language in the lease.  This kind of interpretation, in the editor’s view, was poisonous enough to create uncertainty in the precedent, and the editor is happy to see it dismissed by the upper court.  Let’s hope that those looking at precedent understand the differences between the analysis of the two courts.

The Court of Appeals decision, in the editor’s view, is pure sophistry, twisting the language of the lease in ways certainly the parties never thought about at all.  But give me sophistry over bad policy every time.  The Court of Appeals outcome can be limited to the facts of this case, and thus causes less harm overall.  And it punishes the “stupid” landlord for not reacting in a more definitive way to repeated late payments. 

Comment 2: The editor repeatedly warns his students to tell their clients of the dangers of too much “nice guy” in dealing with deadbeats.  Formality is everything here if you want to preserve your rights.  The warning letters and demands should be clear succinct, as unconditional as possible, avoid extraneous issuesd, preserve all existing rights and insist on timely performance in the future.  The lawyer, and not the client, should write them, at least in the case of persistent late performance.  And the late performance itself should be followed by a letter

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