Daily Development for
Tuesday, December 16, 1997

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

LANDLORD/TENANT; TENANT'S DEFENSES; ILLEGALITY OF USE: Landlord may enforce rent claims even though that lease is an illegal contract due to zoning violation where tenant's use could have been validated by special permit, and lease's severability clause worked to place risk on tenant that the property could not be used for tenant's purposes.

Custer v. Environmental, Inc. v. 9305 Old Georgetown Rd. Partnership, 691 A.2d 1336 (Md. 1997).

Tenant leased space for under a series of leases for approximately five years. The property was located in a single family residential zone (the court, suffering from an incomplete record, does not indicate whether the zoning had been consistent throughout the occupancy.) The most recent lease contained language indicating that the premises were to be used "for office and commercial purposes," although in this litigation the landlord argued that this language had been inserted fraudulently by tenant's agent or attorney. The tenant rejoined that the landlord had misrepresented that the property was properly zoned for its use.

A jury verdict determined that the lease was an illegal lease. In a separate verdict question, the jury answered "no" to the question "If illegal is either party entitled to recover (because the contract appeared to be legal and was illegal because of something only the other party knew?)"

The court complains that it lacks the record leading up to the jury verdict, and this is hampered in evaluating what it meant. Nevertheless, it appears to assume that any fraud was either nonexitstant or irrelevant, and proceeds to evaluate the matter on the basis of whether the landlord, as a party to an illegal contract, can recover any rent.

The bulk of the opinion analyzes authority in Maryland and New York to establish that a landlord can collect on a contract for a purpose made illegal under the zoning laws if those laws permit the tenant to make a lawful use of the property through some form of variance or special use permit.

At the end of the opinion, in the last paragraph, the court also concludes, apparently as a separate basis for its result, that the lease contained language allocating the risk to the tenant of any zoning illegality. The language in question in fact is a general "severability clause," and does not mention zoning problems specifically:

"Should any provision of this Lease and or its conditions be illegal or not enforceable under the laws of the State of Maryland it or they shall be considered severable, and the lease and its conditions shall remain in force and be binding upon the parties as thought the said provisions had never been included."

In sum, the landlord could enforce the contract to collect rent. Because the case involved primarily a claim on certain escrowed monies, it is not clear whether the court is enforcing completely all of the landlord's contract claims, but there is nothing in the opinion to suggest that it would not do so.

Comment 1: This case does not set forth a surprising result, but the analysis is interesting and gives some direction as to future lease drafting in Maryland, and probably elsewhere.

Perhaps the first important feature to note is the fact that the court treats this lease as committing the parties to an illegal purpose, even though the language regarding use (quoted above) would not necessarily have been viewed as prohibiting residential uses. Many courts would view such language as setting forth simply the general objectives of the parties, rather than prohibiting any other use. Normally, if one wants to restrict useage to an identified activity - one ought to include the language "and for no other purpose." Even this, of course, would not constitute a "continuous operation" duty - requiring that the tenant make the identified use of the property.

The court perhaps did not choose to base its opinion on the breadth of the use clause because the jury had already determined that the lease was illegal and the court lacked the transcript.

Comment 2: In then proceeding to analyze the case on the notion that the tenant is expected to seek out variances or special use permits where available, the court lines up with a number of other cases. But a problem with this analysis is that it fails to answer the question of what happens when no such special exemption from zoning is available. Where the zoning is a matter of public record, and the landlord has made no express or implied misrepresentation, should not the tenant still be liable for the rent?

The court does not answer this question.

Some courts have found that "typical" zoning illegality does not render the contract totally unenforceable. Compare this to cases where the legislative intent is clear that it is illegal even to enter into a contract for the prohibited purpose - such as is the case sometimes with prostitution and drug activities. In the latter cases, courts often conclude that the contract is so violative of public policy that the court system should not participate at all in the working out of contract rights - the parties are left where they stand, with any consideration or value passing treated as forfeited to the other side and any future enforcement or damages refused.

The Maryland court here appears, until the last paragraph, to assume that it would treat this contract as "illegal" in the latter sense if it were not for the fact that the tenant might have obtained some special permit. If it is taking this approach (the editor will call it the "total illegality approach") the Maryland court probably is going beyond the treatment given the situation in other jurisdictions. As indicated, however, the court may simply be accepting the jury verdict without question, since it intends to find for the landlord anyway.

Comment 3: The best evidence that the Maryland court is not adopting the "total illegality approach" to zoning problems in leases is the language in the last paragraph - where it indicates that a broadly worded "severability" clause operates to transfer the risk of loss for zoning problems to the tenant. If the contract were illegal and totally unenforceable, then, of course, this allocation of risk in the contract also would be unenforceable.

Note that the court would not invoke the severability clause if it determined that the landlord had been guilty of fraud or misrepresentation. Many courts have found that leasing property for a purpose to which it is being put at the time the proposed tenant views the property is an implied representation that the current use is valid under current zoning laws.

Comment 4: Unfortunately, perhaps because of the incomplete record, the court does not address the most difficult, but still common situation - where there is no severance clause and the law does not admit the possibility of variance or special permit.

In this case, what is the matter with a standard rule that the, absent any misrepresentation or fraud by landlord, the tenant takes the risk of determining whether publicly available zoning regulations permit the tenant's proposed activity?

In short, the court should have read an implied severability provision into this lease for zoning matters even if there wasn't one there already. It is understandable why it didn't want to go into this issue in light of the weak record, but it is unfortunate that Maryland lawyers still will have uncertainty on the matter.

In any event, the drafting lesson is clear. Landlord form leases ought to allocate clearly the risk of illegality to tenant, and further ought to contain language indicating that the tenant is not relying upon any express or implied representation of legality of the tenant's anticipated use, either from the landlord or from any of landlord's agents or representatives.

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