Daily Development for
Friday, June 13, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

LANDLORD/TENANT; COMMERCIAL LEASES; TENANT'S REMEDIES: Utah Supreme Court junks independence of covenants doctrine in commercial leases. A tenant's obligation to pay rent depends upon its landlord's compliance with covenants that are "significant inducements" to tenant's performance, and a tenant is justified in abating rent on account of a significant breach of such covenants.

Richard Barton Enterprises, Inc. v. Tsern, 928 P.2d 368 (Utah 1996).

Barton leased the first and second floors of a commercial building from Tsern for Barton's use as an antique store. Barton accepted the premises "as-is," except that Tsern was obligated to repair the leaking roof and to put the freight elevator in "good working order." Tsern never got the elevator into "good working order," and Barton and Tsern agreed to a rent abatement, but never as to its amount. After reviewing the development of implied warranties in residential leases, the court found that the bargain in a commercial lease is that the tenant agrees to pay rent in exchange for stipulated services, as well as space. As a result, Barton's obligation to pay rent was dependent upon Tsern's provision of the benefits that were the essence of their bargain in the lease. Barton was entitled to a rent abatement equal to the reduced value of the premises as a result of Tsern's breach because of the failure of the elevator to work. The court's holding was unaffected by Barton's exercise of its purchase option in the lease, because Tsern's performance of its repair obligations was due before the consummation of the sale.

Comment 1: This is a major case, and likely will appear in the next three or four property law casebooks. For three pages, it appears that the court in fact is going to adopt a full-blown implied warranty of habitability. Indeed, it cites with approval the Davidow case in Texas that applies residential-style habitability principles to a lease of space in an office building. Then it cites its own residential implied warranty case, and states that "the same principles apply here." But then there is a dramatic change in the discussion, and the rest of the case deals only with the independence of covenants doctrine and the express holding at the end of the case addresses only that issue. It is as if a clerk prepared a first draft adopting a complete warranty, and then the court, realizing it had an express warranty in this case, backed off. Don't be surprised if the Utah court drops the other shoe within a year or two and moves to an implied warranty in commercial leases.

Comment 2: But the court stops short of that far-reaching action here, and instead limits itself to establishing on the remedies part of the implied warranty of habitability - granting the tenant a rent withholding doctrine. In this case, the landlord had covenanted expressly to repair the elevator, and the tenant's business depended on a working elevator. So the case was really quite straightforward with regard to breach.

Comment 3: The opinion states that the court could have applied more traditional notions of constructive eviction to give the tenant a remedy, since the tenant was evicted from one half the space. It cites other jurisdiction's cases to the effect that a tenant can claim a partial constructive eviction when it is unable to use a portion of the space rented due to conditions that are the fault of the landlord. This, in fact, is also a relatively unusual view of the traditional landlord/tenant relationship, and the court's embracing the concept is news in and of itself. Under traditional law, if the tenant isn't completely ousted, it has no constructive eviction remedy. (The tenant here apparently did not want to vacate and terminate because it was trying to preserve its option to purchase the premises - which it ultimately did exercise.)

Comment 4: The Utah court leaves a lot unsaid. Is the rent withholding remedy waivable? (It is in Texas). Will a tenant have to pay rent into court to keep possession while an eviction suit is pending? Will a tenant be able to "make up" unpaid rents by a payment into court after the court adjudicates the degree to which rent could be withheld? Will there be a retaliatory eviction doctrine in commercial leases?

Comment 5: The editor has a simple one word response to all of the above: Why? There is no special public interest in overseeing the fairness of arm's length commercial agreements. Under the facts of the case, it would appear, if anything, that the tenant had a superior bargaining position, as the landlord had a dump that the tenant had an interest in buying. We're not dealing with a scarce or special commodity such as housing here. Why not let the tenant bargain for rent withholding if the tenant needs it?

Comment 6: The best thing that courts can do for commercial landlords and tenants is to provide clear and enforceable rules. A few modest restrictions are appropriate to insure a free market and open competition, but beyond that, let the market resolve the rest of the problems. Even if we would not today establish the independence of covenants doctrines as the "default" approach ( the rule to apply when the lease is silent) if we were writing *new* rules, that doesn't mean that we improve things by altering the old rules. In commerical leasing, the courts do best when they do least.

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