Daily Development for Wednesday, October 26, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

LANDLORD/TENANT; DEFAULT:   Under the literal reading of a default clause in lease, a “nonmaterial but not insignificant” tenant breach consisting of demolition of a storage shed and construction of a larger unit in its place might otherwise justify termination by the landlord, but equitable concerns will prevent termination on the current facts. 

DiBella v. Fiumara, 828 N.E.2d 534 (Mass. App. Ct. 2005). 

The parties entered into a contractual arrangement for the purchase of an existing adult entertainment business, the Golden Banana Club, and a lease of the property the club occupied.  The Lease contained two provisions of note here: one barring structural alterations without Landlord’s consent (not to be unreasonably withheld), and the other providing for Tenant’s default upon failure to observe the terms of the Lease. 

Tenant desired improved storage for the business, and determined to demolish and rebuild a dilapidated shed that abutted a corner of the business.  The new storage area was larger and sturdier, consisting of an 18’x 39’x 20’ structure with a basement, and was constructed at a cost to Tenant of $132,000.  While the new storage was being constructed, Landlord drove by the site, took photos, and interviewed the contractor.  Landlord made several visits to the site, and at one point told the contractor it “looked good.” 

Approximately one week after first discovering the work, Landlord sent Tenant a default notice for failing to obtain written consent.  Tenant responded that the improvement would benefit the property and Landlord and that withholding consent would be unreasonable.  Landlord then sent a denial of consent citing concern regarding damage to a load-bearing wall, exposure to additional property taxes, and the possibility of resulting zoning issues. 

Tenant continued construction for an additional month, then stopped in midconstruction.  Shortly thereafter, Landlord brought suit for default on the Lease.  The trial court found that Tenant’s failure to obtain prior written consent constituted a breach of the Lease, but that the breach was not material and therefore did not justify termination of the lease. 

The Appellate Division of the District Court then reversed the materiality ruling, finding that Tenant was on notice of possible termination under the provisions of the Lease, that Tenant had willfully breached those provisions, and that no action of Tenant could undo the harm done to Landlord. 

Tenant appealed, arguing for reinstatement of the trial court’s decision, and Landlord appealed on the ground that the default clause in the Lease should be dispositive as a matter of law regarding materiality.  The Appeals Court first noted that a materiality standard would apply in the absence of a default clause, and that the clause must therefore reach at least some non-material breaches.  The court also noted that even where operating under a default clause, insignificant or accidental breaches will not justify termination, concluding therefore that a default clause can reach non-material but significant breaches. 

Notwithstanding this conclusion that the breach need not be “material,” the court noted that equitable concerns will override contractual requirements for forfeiture or termination of a lease,

Relying on a line of Massachusetts cases and upon Restatement (Second) of Property (Landlord & Tenant) § 13.1,.  The Appeals Court found that the trial judge had properly made factual determinations regarding the lack of negotiation effort towards the default clause and also with respect to materiality under the detailed standards presented in Restatement (Second) of Contracts § 241 (1981).  Accordingly, the Appeals Court found that the Appellate Division failed to accord proper deference to the Trial Court’s findings, and could not be allowed to overrule factual findings which were properly reached. 

The court therefore reversed the Appellate Division’s ruling with respect to materiality of the breach, but upheld the ruling with respect to its finding that the pure language of the default clause demonstrated that the breach was not “insignificant and would support forfeiture of the lease in the absence of other  equitable considerations.  Landlord was given thirty days to petition for a hearing into whether such equitable considerations existed, although the court also noted that Landlord had acknowledged in its brief that the trial court implicitly found such considerations to exist, rendering such a request likely futile.

Comment 1: Here the court concludes that when there is a clause in  the lease that specifically identifies certain conduct as a breach, the question of whether a breach is material or not really doesn’t matter - the fact that the default exists should establish conclusively that the parties treated this conduct as significant.

This distinction between “nonmaterial” breaches and “not insignificant” breaches is one that the editor hasn’t seen before.  The editor first reaction to it is favorable, as the editor has long supported the notion that there is a distinction, often blurred by the courts,  between “contract right” and “equitable remedy.”  Whether a party should have equitable enforcement of its rights ought to be measured by the court in the individual instance.  Sometimes a party will be left to its other contract damages.

But the editor has not yet concluded that such equitable limitations ought to limit the options of a landlord to forfeit a lease where the tenant has clearly breached.  An eviction is not an injunction - it simply is a recognition of wrongful possession and restoration of possession to the lawful owner.  This is a very basic right, and where the parties have contracted for conditions under which this right exists, courts should uphold it.

Comment 2: There is still some question as to whether the frequent visits by the landlord, during which the landlord said nothing but good things about the project, ought to lead to another form of equitable intervention - estoppel based upon laches.  The estoppel concept modernly may be  used to bar both equitable and legal remedies in most common law courts.  Estoppel is based upon more than the “equitable sifting of the facts,” and depends, in most cases, upon some inequitable conduct on the side of the party seeking the remedy to be barred.  The editor views estoppel as a necessary lubricant to the joints of the law, and if that is all the court means here by “equitable enforcement,” the editor agrees completely.  But editor thinks the court’s view of the equitable discretion of the court is broader - similar to that which would apply when the court decides whether to grant an equitable remedy like an injunction.  Such discretion is too broad where, as here, there is a c!

deliberate, and uncurable breach of a specific contractual provision. 

Comment 3: The court emphasized the fact that there did not appear to be independent bargaining as to the default clause.  One way to address this kind of problem is for the landlord to insert language that the presence of a default clause, rendering any default in the terms of the lease an adequate basis for termination, is a material element in the negotiation of the parties and requiring the tenant to initial separately the paragraph containing that language.  The problem is that we’re getting a lot of clauses that need to be separately initialed.  Maybe we need a separate rider called a “we really mean it” rider that contains critical language for separate signature and emphasizes that the parties have negotiated over the terms of the entire lease, and each and every word.  But why should courts require parties to a commercial lease to jump through such hoops?  Hmmmm? 

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