Daily Development for Monday, May 13, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

LANDLORD/TENANT; TENANT'S DUTY TO REPAIR; STRUCTURAL REPAIRS: Even where lease requires tenant to repair premises and maintain them in good repair, but the surrender clause simply states that tenant shall return premises in condition received, tenant's obligation to repair does not include structural repairs necessary to restore premises to "good condition" when premises were not delivered in that condition.

Miller v. Gammon & Sons, Inc., 67 S.W.3d 613 (Mo. Ct. App. 2001).

The lease originally was entered into in 1991 for an eight year term, but was modified when the instant tenant assumed it in 1995 to provide for, in addition to the remaining four year term, an single five year renewal right and then ten successive four year renewal rights. The repair clause stated that the tenant was "[t]o maintain in good condition all portions of the building, parking lot, and premises, and do all decorating and maintenance at Lessee's own expense." The surrender clause indicated that the tenant was to return the premises in "as good condition as received, ordinary wear and tear excepted."

The court concludes that the repair clause and the surrender clause should be read together to ascertain the true scope of the tenant's repair duties. The lease was silent as to structural repairs. The court cited Friedman on Leases for the proposition that: "A tenant's covenant to maintain or repair generally does not require him to replace something worn out."

In this case, the dispute was over repairs to the parking lot. Tenant had filled potholes and had done routine maintenance, but the lot was in poor condition. The court concluded that current unsatisfactory condition of the parking lot was not due to tenant's failure to do routine maintenance, but simply was the result of wear and tear since the lot was constructed over 30 years before the property was leased to tenant. There was apparently no dispute that the lot had not been delivered to tenant in "good" condition, and the question was whether the parties intended that the tenant be required to bring it to that condition.

The court found no such duty.

Comment: The terms "maintain" can be ambiguous, and ought to be interpreted in context. The editor does not necessarily agree that in every case the concept "maintain" would not require structural repairs or replacement of worn out elements. But the surrender clause did not support the lessor's contention for a broad reading of the concept of "maintain." In fact, it significantly undercut the fundamental meaning of the term, particularly in the context of a lease intended to be triple net and (despite the contentions of the court) was long term.

LANDLORD AND TENANT; TENANT'S DUTY TO REPAIR; STRUCTURAL REPAIRS; "TRIPLE NET" LEASE: When a commercial tenant enters into a triple-net lease with an initial term of four years, the tenant is not responsible for structural repairs in the absence of express language in the lease to the contrary. Miller v. Gammon & Sons, Inc., 67 S.W.3d 613 (Mo. Ct. App. 2001).

The basic facts concerning the parking lot repair dispute are set forth above under the heading: Landlord/Tenant; tenant's Duty to Repair; Structural Repairs."

The landlord argued that, in addition to the repair and surrender clauses, the court should look to the language of the "triple net" provisions of the lease. It is not clear whether this language was in the original eight year lease, but it was in the modification of the lease upon assumption by the instant tenant.

This language provided as follows:

"It is the intent of the Lessors that the monthly base rent set forth in Paragraph 1 above shall be a "net-net-net rental", as those terms are used and understood in connection with leasing of real property and improvements. Accordingly, as additional rental hereunder, Lessee shall pay all expenses accruing from and after July 1, 1995, directly to the appropriate entity or person, as the case may be; all taxes and assessments levied against the premises or any portion thereof whether federal, state or local or of any kind or nature, public utility and related costs and expenses, insurance premiums, expenses of operating, maintaining and repairing the premises, and any other expenses or charges which during the Lease Term shall be levied, assessed or imposed upon or with respect to or incurred in connection with, the possession, occupation, operation, alteration, maintenance, repair and use of the premises, it being intended that this lease shall result in a rental to be paid to L essors without additional cost to Lessors or diminution or offset thereto in the fixed monthly amount specified hereinabove".

The court, again citing Friedman, acknowledged that language of this type ordinarily would be construed to impose upon the tenant the cost of structural repairs. But it concluded that a different rule should apply when the lease was short term. Further, it was reluctant to read into the simple language "net lease" the concept of a structural repair obligation. Quoting from an earlier Missouri case, Mobil Credit Corp. v. DST Realty, Inc., 689 S.W.2d 658 (Mo. App. 1985), the court stated: "a tenant cannot be held for substantial structural repairs unless it so specifically agrees in the lease. . . This is so because the burden of making substantial structural repairs naturally falls on the lessor, so shifting the burden to the lessee should require specific language in the lease."

The Court pointed out that the cost of repairs would amount to 27%-45% of the tenant's annual rent, and that if tenant were required to pay for the repairs, the tenant would be providing the landlord with a better parking area than when the lease was signed.

The DST case involved a dispute over the need to repair a parking structure in an office building that had been leased in its entirety to tenant for ten years with a single five year renewal. The court characterized the problems with the parking lot as extraordinary and unanticipated, arising within the first year of the lease as a consequence of preexisting conditions. In addition to the language above, suggesting that where the tenant has no duty to repair, the landlord has that duty, the DST cases includes the following language:

" . . . [T]he burden of making substantial structural repairs naturally falls on the lessor, so shifting the burden to the lessee should require specific language in the lease."

Comment 1: The editor has no quarrel with the notion that, particularly in modern times, the term "net lease" is inherently ambiguous and ought not to be relied upon by inal fi a court, to interpret the parties' intent without resort to extrinsic evidence unless evidence of the meaning of the term from trade practice is very clear. Further, parties to a lease ought not t rely upon the term "net lease" as communicating any particular meaning, and ought to spell out completely the responsibilities allocated to tenant.

Comment 2: The above having been said, this case makes several serious errors, one of them compounding errors made in an earlier case that best would have been left undisturbed.

The first fundamental error is in characterizing this lease as a short term lease. From the standpoint of the tenant (which is the standpoint from which the lease ought to be viewed in evaluating the tenant's responsibilities), this was a long term lease. There was one five year renewal right and ten four year renewal rights. The tenant had the right to be on the property for 59 years. If that's not long term, what is?

Note that the DST case, upon which the court relies, made a similar error, discounting the tenant's renewal right. But in DST there was only one renewal right of the original ten year term, and that for only five more years. (The courts here and in DST use the term "renewal right" although in both cases the term might more properly be described as an "extension right.")

The court appears to acknowledge that if this had been a long term lease, it would have come to a different result. It was a long term lease, although, because of the ambiguity with respect to the language of the surrender clause, discussed above, the editor is not certain that the outcome was incorrect anyway.

Comment 3: The most serious error, however, is the revival of a major flaw in the DST case that has bothered the editor for years. He has warned CLE audiences in Missouri of this flaw in the fabric of the common law, but had thought that the DST case might have been a simple aberration. Now it's becoming genuine authority, albeit dicta here.

The flaw lies in the failure of the court to recognize that there are in fact three situations that can exist with respect to repair responsibilities under commercial leases:

(1) The tenant must repair.

(2) The landlord must repair.

(3) Neither side has a duty to repair, with each side thus living with the consequences of no repair if neither sides opts to make the repair.

Courts sometimes lose sight of option (3) because in many cases the repair in question is required by law of the landlord due to building codes. Although the DST case is silent on the point, the editor had always assumed that in fact the repair was publicly required. It does not appear, however, that the parking lot repairs in this case were required by public order. Consequently, the court could easily have reached the simple conclusion that neither landlord nor tenant was required by the lease to undertake the repair.

Instead, through its recitation of language from DST (which was also dicta - since the repair had been done before the parties went to court), the court buys into the notion that if the lease does not require the tenant to make a repair necessary or useful to the tenant's business, the tenant has a right to require that the landlord make such repair. This is not the law.

DST acknowledges, in its opening paragraph, that it is not imposing an implied warranty of habitability upon the landlord. Yet later, in making its comments about the landlord's duty for structural repairs, it relies heavily upon a Louisiana case which indeed, under the Civil Code of Louisiana in existence at the time, did impose an implied duty of maintenance on the landlord.

In short, DST was wrong in concluding that the landlord has a duty to make structural repairs not required by public ordinance or by the lease, and this case is wrong in relying upon it. As indicated, since the outcome does not result in imposing any duties upon the landlord, let us hope that the ideas surfacing here again sink down into unplumbed depths of ignored Missouri authority.

(Note that where we are talking about a lease of space in a multi tenant building, the rules may differ. In both cases discussed above, the lease was of an entire building, which, of course, is the usual practice in a "triple net" situation.)

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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