Eugene L. Grant[*]
Robert J. Krapf[**]
Joseph G. Lisicky[***]
Virtually all real estate attorneys have had clients ask if they can break their commercial lease because of some intolerable condition the landlord failed to fix. A review of the cases dealing with such disputes, reveals a continuing evolution in the ability of the tenant to invoke constructive eviction as a means to terminate the lease. In many respects, however, the more things change, the more they stay the same, when it comes to the tenant as terminator. Although the intolerable conditions may have changed in these modern times, the common law of constructive eviction still seems capable of dealing with the complexities of the modern commercial tenant's problems. That is not to say constructive eviction is unchallenged as the best means to deal with a lackadaisical landlord. There are detractors calling for implied warranties to provide an even bigger gun with which to blast the landlord, but they are a distinctly minority voice, and rightfully so, at least in the eyes of most commercial landlords.
The goal of this article is to examine in some detail the evolution in the constructive eviction remedy resulting from two categories of intolerable conditions that continue to grow in importance and prominence in modern commercial leases. The first category is the failure of the Landlord to bring the Premises in compliance with legal requirements, and the second is conditions existing outside of the leased premises such as common areas, adjacent land owned by the landlord or even intangible conditions such as the landlord's unfair competition or interference with the Tenant's business. The purpose of this examination is not only to get a feel for the direction in which the constructive eviction remedy is headed, but also illustrate why "consumer protection" principles such as the implied warranties doctrine has failed to make much of an advance on commercial leases and may actually be in retreat together with some of its kindred doctrines from the law of contracts. But before we can understand the role of these modern contract doctrines in commercial leases, we need to briefly review the evolution the landlord-tenant law.
The lease evolved as a species of real estate conveyance. The Tenant was essentially the "owner" of the land for a specified term, and had the entire responsibility for the condition of the land. Leases were short and sweet, almost like deeds. There was little if any need for a constructive eviction doctrine, because the Landlord had virtually no ongoing duties during the lease term. The covenant of the landlord was to not disturb the tenant's quiet enjoyment of the premises by an actual eviction. That worked in agrarian times when the land was primary and any buildings of only secondary importance.
Leasing evolved from a simple one page conveyance of an interest in agricultural land for a fixed term to the modern book length commercial space lease in a multi-tenant building. Virtually all those extra pages result from the Landlord's assumption of all, if not most, of the responsibility for the condition of premises and the land and the building of which the premises are a part. Even the complicated rent provisions are largely concerned with the determination of the landlord's ability to pass through to the tenant, in the form of additional rent, the cost of fulfilling the landlord's duties regarding the condition of the premises. The traditional independence of the tenant's rent covenants and the landlord's covenants regarding the condition of the premises would require the tenant to sue for cost of remedying any landlord defaults rather than conveniently deducting the cost from the next due rent. For a small space tenant in a large building, suing the landlord or even offsetting the cost against the rent is an impractical remedy, since the tenant would not have access to the entire building and the cost of remediation would often be prohibitive.
Constructive eviction evolved to solve this problem. To understand this evolution, its relationship to the quiet enjoyment covenant must be considered. Quiet enjoyment is traditionally the one covenant on which the rent depends. Essentially the covenant of quiet enjoyment mutated to include much more than just undisturbed possession of the premises. Originally the quiet enjoyment covenant meant the tenant wanted the landlord to stay away from the premises and leave the tenant alone. Now it means the landlord better be around on a daily basis to clean the premises, change the light bulbs, resupply the restrooms, maintain the communications, electrical, mechanical and other building systems, and provide security among other goods and services. The covenant now includes the enjoyment of all the ongoing goods and services promised by the Landlord which the courts feel are important to the enjoyment of the premises.
A constructive eviction occurs, therefore, through acts attributable to the landlord, by which a tenant is substantially deprived of the beneficial enjoyment of the leased premises.[1] It involves the surrender of possession by the tenant on justifiable grounds, rather than a deprivation of actual occupancy by direct action of the landlord. The mere breach by the landlord of its obligations under the lease is generally insufficient to establish that a constructive eviction has occurred. For a constructive eviction to be established, there must be a substantial interference with the tenant's possession or enjoyment of the leased premises. In most jurisdictions, this requires the tenant to vacate the leased premises within a reasonable time on the theory that if the tenant remained in possession, any interference caused by the landlord was not substantial.[2] On the other hand, some courts have held that if the tenant has not actually vacated the leased premises, the tenant can still establish a constructive eviction by showing that the landlord's acts deprived the tenant of the consideration for the rental which the tenant agreed to pay.[3]
Many jurisdictions also require a finding of the landlord's intent. In other words, the landlord must have intended to deprive the tenant of the use and enjoyment of the leased premises.[4] The evidence of this intent need not always be overt and direct. Courts have held that the requisite intent may be inferred from the character of the landlord's acts if their natural and probable consequences are such as to deprive the tenant of the use and enjoyment of the leased premises.[5]
A constructive eviction suspends the tenant's obligation to pay rent and permits the tenant to treat the lease as terminated.[6] In most instances, constructive eviction is alleged by the tenant either as an affirmative defense against the landlord's claim of breach of lease or to support a claim, or counterclaim, for damages.
The traditional grounds for constructive eviction has been intolerable physical defects in the premises itself such as the proverbial leaking roof. There are plenty of recently reported cases involving such facts due to the failure of the parties to clearly provide in the lease who was responsible for the particular physical defect in the Premises. Attorneys drafting commercial leases need to take note that these cases reflect a continuing erosion in the common law allocation of these responsibilities creating much uncertainty in the result if the allocation of responsibility is not explicitly addressed in the lease.[7] Constructive eviction has evolved far beyond the traditional building defect type of cases. Having reviewed the evolution of the remedy, we are now ready to consider in detail the conditions which are the real subject of this article, conditions daily becoming more important in our modern commercial leasing environment.
Under the typical situation, a public authority issues an order that certain repairs must be undertaken to correct deficiencies apparent in the leased premises or in the building in which the leased premises are located. If the repairs are not completed by the required date, occupancy of the leased premises (or the building) is prohibited until such time as the repairs are completed. Since, in such cases, the tenant is no longer permitted to occupy the leased premises, a constructive eviction claim can be established by the tenant by showing that the landlord was obligated to make the repairs.
The paramount issue in most constructive eviction cases arising under a failure to make repairs or alterations required by governmental authorities is whether the landlord or the tenant is responsible for compliance with the requirement. Since repairs required by public authorities generally involve safety and/or health concerns, public policy requires that there must always be a party obligated to undertake the repairs.[9]
A court will initially look to the intent of the parties as manifested in the lease. The threshold issue is easily resolved where the lease clearly imposes on the landlord the obligation to comply with requirements mandated by public authorities or otherwise requires the landlord to maintain the leased premises in compliance with applicable laws, codes and ordinances. Of course, there are few reported cases where the duty is clearly and expressly imposed on the landlord.
Where the lease is silent on the issue or where there are competing or ambiguous lease provisions, the court may attempt to determine the parties' intent by examining the prior conduct of the parties,[10] but most jurisdictions have focused on the nature of the repairs. If the repairs are determined to be substantial or structural, such that they could not have been contemplated by the parties at the time the lease was entered into, then the landlord is generally held responsible for making the repair. One reason for this rule is that repairs ordered by public authorities are generally of a type that would ordinarily fall outside of the tenant's common law duty to repair, and the expenses of compliance would more properly be regarded as capital expenditures to be paid for out of rental income.[11] Further, it is often considered inequitable for the tenant to be required to make extensive repairs that would inure primarily to the reversionary interest of the landlord. Since the landlord, as owner of the property, generally has the initial duty under most laws to comply with public requirements, the duty remains the obligation of the owner in his capacity as landlord absent an agreement to the contrary.[12] A typical "repair" or "compliance with laws" clause imposed on the tenant will not necessarily overcome these factors and allocate the responsibility to the tenant.[13]
One of the most comprehensive treatments of the factors considered by many courts when determining whether the landlord or the tenant has the duty to undertake repairs required by public authorities is found in Brown v. Green,[14] which involved an action by the landlord for collection of unpaid rent after the subtenant had vacated the leased premises as a result of the landlord's failure to abate asbestos contamination in the leased premises. A routine inspection of the leased premises found that debris containing friable asbestos had flaked onto furniture in a showroom operated by the subtenant. Subsequent air sampling confirmed the presence of airborne asbestos fibers at harmful levels and an abatement order was subsequently issued by the Department of Health Services. During the negotiations between the landlord and the subtenant over the responsibility for clean-up of the asbestos, the subtenant moved its business operations into a portion of the leased premises that was being used as a warehouse. When the parties could not resolve the issue of responsibility for the abatement work, the subtenant ceased paying rent.
The trial court ruled in favor of the landlord, relying principally on the terms of applicable lease provisions to the effect that (I) the tenant was obligated to comply with applicable laws, statutes, ordinances, orders, etc. in effect during the lease term regulating the use of the leased premises, (ii) the tenant was obligated to keep the leased premises, structural and non-structural, in good order and repair, whether or not such work was required as a result of the tenant's use of the leased premises, and (iii) the landlord had no obligation of any kind to repair or maintain the leased premises. The appellate court affirmed and the issues were appealed to the California Supreme Court.
The court began its analysis by noting that unqualified covenants to maintain and repair the leased premises and to comply with applicable laws do not, standing alone, constitute an obligation to comply with laws that require substantial curative action. Further, while a tenant might be found liable to make repairs occasioned by its particular use of the leased premises, the asbestos condition at issue in this case would have manifested itself regardless of any particular use being carried on in the leased premises. As a result, rather than focusing on the literal text of the repair and compliance provisions in the lease, the court determined that it could properly consider other relevant lease provisions and other factors bearing on the intent of the parties.
The court first reasoned that broad repair and compliance covenants in long-term "net" commercial leases were probative of the parties' intent to shift the major burdens of property ownership onto the tenant. Whether the parties actually intended the allocation of responsibilities suggested by the lease covenants, however, was better evaluated by relevant factors outside of the four corners of the lease, particularly where, as in Brown, the parties used a preprinted form lease. The court then considered the following six factors:
(1) The relationship between the cost of the curative action and the remaining lease term. (Repair and compliance clauses are more likely to be construed literally if the tenant has sufficient time to amortize the repair costs.)(2) The term for which the lease was made. (The longer the term, the greater likelihood that the parties intended to shift burdens of property ownership onto the tenant.)
(3) The relationship of the benefit to the tenant to that of the reversioner. (The length of the term in relation to the remaining useful life of the leased premises.)
(4) Whether the curative action is structural or nonstructural in nature. (Whether the repairs fall within the literal text of the lease covenants.)
(5) The degree to which the tenant's enjoyment of the leased premises will be interfered with while the curative action is being undertaken. (The greater the disruptive effect of the compliance action, the more likely it is that the repair is "substantial" and thus the landlord's duty.)
(6) The likelihood that the parties contemplated the application of the particular law or order involved. (Whether either party was aware or had reason to believe that the cited condition would require curative action during the lease term.)
Based upon an analysis of the foregoing factors, the court concluded that in the context of the particular lease entered into by the parties, the tenant assumed the burden of complying with the abatement order. Accordingly, the tenant's constructive eviction claim failed.
Interestingly, on the same day that the California Supreme Court issued its opinion in Brown, the court issued its opinion in the companion case of Hadian v. Schwartz,[15] which involved city-ordered repairs to a bar and cabaret. In that case, the court refused to impose the repair obligation on the tenant, concluding instead that the probable intent of the parties was that the landlord would be responsible for the repairs. The Court in Hadian was influenced by both the three-year term of the lease, which would have left little time for the tenant to amortize the cost of the repairs, and by the estimated cost of the repairs, which represented a substantial percentage of the aggregate rent due over the lease term.
Where there are no lease provisions addressing the issue of which party is obligated to make repairs to the leased premises required by public authorities, courts have usually concluded that the landlord has the duty to make such repairs. In Polk v. Armstrong,[16] the tenant was denied a certificate of occupancy for the leased premises (in this case, the entire building) because of an opening in one of the building walls that had been made to accommodate a prior tenant. The municipal authorities ordered the opening to be closed with a cement block wall. The landlord refused to construct the wall or permit the tenant to do so. When the tenant stopped paying rent, the landlord changed the locks and took possession of the building. In a damages action filed by the tenant, the Nevada Supreme Court determined that the construction of the block wall was a substantial alteration and was structural in nature. Noting that the parties had not contemplated any such municipal order at the time the lease was negotiated, the court ruled, based upon reasons similar to those articulated by the California Supreme Court in the Brown case, that the landlord was under a duty to construct the wall. Since the landlord's failure to repair the wall and comply with the applicable building code resulted in the refusal of the municipality to issue a certificate of occupancy, thereby preventing the tenant from occupying the leased premises, the court found that a constructive eviction had occurred and remanded the case to the trial court for a determination of damages.
Ambiguous lease provisions were considered by the Colorado Court of Appeals in Millman v. Hernandez.[17] The tenant in Millman had leased a building for use as a rooming and boarding house. Halfway through the three year lease term, city inspectors determined that the building was structurally unsound and ordered repairs that were estimated to cost between $47,000 and $70,000. Both the landlord and the tenant disclaimed responsibility for making the repairs. The tenant vacated the building and the landlord sued for, among other things, the loss of rental income and the cost of the required repairs. According to one provision of the lease, the tenant was obligated to "keep the leased premises in proper condition in order to meet all standards of the [city] building department," but under a separate provision of the lease the tenant was merely required to keep the premises in the same condition as when entered upon, reasonable wear and tear excepted. In order to resolve the competing provisions, the court considered other provisions of the lease, such as the landlord's duty to insure the leased premises against loss by fire, vandalism and casualty, and the prior conduct of the parties, such as previous structural repairs that had been undertaken by the landlord. The court concluded that the landlord was obligated to make the required structural repairs and its failure to do so justified the tenant's vacating the leased premises.
The interpretation of a fairly typical repair and compliance provision can be found in a declaratory action decided by the Wyoming Supreme Court in Scott v. Prazma.[18] Among other things, provisions in the lease obligated the tenant to keep the leased premises in good condition and repair at the tenant's expense and to conduct its business operations in compliance with all applicable governing bodies. The lease also stated that the landlord was not required to make any repairs to the building during the term. After an inspection of the leased premises revealed serious safety violations, the municipality ordered the landlord to make extensive remodeling and structural repairs or else vacate the leased premises. The landlord refused to make the repairs and the tenant vacated the leased premises (as required by the municipality), claiming constructive eviction.
The Scott court noted that it could find no case which held categorically that either the landlord or the tenant was responsible for repairs ordered by public authorities, but rather that each case must be considered in light of its particular factual circumstances. The court then indicated that terms used in repair clauses are not technical, and that an agreement to "repair" does not constitute an agreement to "replace" or "remodel." Instead, the meaning of "repair" in the lease should be based upon the parties' intention when using the term. In this particular case, the court did not believe, after considering the short term of the lease, the cost of the repair and the resulting improvement in the condition of the leased premises (together with the corresponding increase in value), that the parties intended to shift to the tenant the burden of compliance with orders such as the one that was issued. This was especially true where the tenant was obligated only to maintain the leased premises in the same condition as at the beginning of the term. Since the burden of compliance rested on the landlord, the court concluded that the tenant established its right to claim a constructive eviction.
The failure of the landlord to permit the tenant to make required repairs has also been found to constitute a constructive eviction. The Polk case, discussed above, is one example of that situation. In Gans v. L. Olchin & Co.,[19] the tenant had sought permission to construct an exit that was required by the New York Department of Labor for the manufacturing facility operated by the tenant. The landlord refused to permit the work and the tenant was required by the State to cease using the leased premises. On appeal from a successful motion to set aside a verdict in favor of the landlord, the Connecticut Supreme Court of Appeals noted that in cases where a landlord has refused to consent to an act by the tenant without which the tenant cannot occupy the leased premises, there is a constructive eviction. The court went on to uphold the verdict in favor of the tenant.
While most reported cases ultimately impose upon the landlord the burden of compliance with mandated repairs, the tenant has been held responsible for such repairs under certain circumstances, such as in Brown v. Green, discussed above. Generally, however, the mere agreement of the tenant to comply with all laws, ordinances, rules and regulations does not, by itself, constitute an assumption by the tenant to comply with orders requiring improvements of a substantial or structural nature.[20] Instead, there must be a clear showing that either (I) the tenant knew that the repairs would probably be required, (ii) the tenant's specific use of the leased premises resulted in the need for the ordered repairs, or (iii) the tenant unequivocally agreed to be responsible for all repairs, including those deemed to be substantial and structural.
One such case is Glenn R. Sewell Sheet Metal, Inc. v. Loverde,[21] where the subtenant converted the leased premises from an automobile repair operation to a trailer park. During the conversion, a septic system was installed which later failed. When the subtenant could not make adequate repairs to the failed system, the county health department ordered that the trailer park be connected to a public sewer or that the use terminate. Both the landlord and tenant refused to pay for the connection, causing the subtenant to close the trailer park and later abandon the leased premises. The subtenant then sought to have the sublease declared unenforceable and its deposit returned. The California Supreme Court began its analysis by stating that a tenant who voluntarily puts the leased premises to uses different from those prior to its tenancy, thereby subjecting the premises to laws that were not previously applicable, must bear the burden of conforming the new use to the requirements of law. Otherwise, the landlord would be subject to the whim of a tenant who freely changes the use of the leased premises. The court also reasoned that a tenant who puts the leased premises to a particular use is charged with knowing the laws and regulations affecting such use. In this case, the tenant had accepted the leased premises in their as-is condition, knew (or should have known) that septic systems eventually fail and that connection to a public sewer might be required, and therefore assumed the risk of later compliance with applicable laws.
A similar result was reached in Ell & L. Investment Company v. International Trust Company,[22] where the Colorado Supreme Court, based upon the surrounding circumstances and terms of the lease, held that the parties intended for the tenant to be liable for making substantial improvements and alterations that had been ordered by a local building inspector. The court noted in particular that the lease expressly provided that the landlord was not obligated to make repairs of any kind, that the tenant had previously made structural repairs and that the leased premises, although located at a prominent intersection in the City of Denver, had been leased on a long term basis at a fairly nominal rent (presumably because the parties recognized that due to the age of the leased premises and the term of the lease, substantial repairs would be needed during the term).
The constructive eviction doctrine has also been applied to situations involving improvements required to be made to the building of which the leased premises are a part, although not directly relating to the leased premises. In Chernberg v. Peoples National Bank of Washington,[23] the tenant operated a restaurant in a portion of a building located in Seattle, Washington. When the abutting building was razed, a former party wall became exposed and was determined to be structurally unsafe and in need of substantial repairs to satisfy the requirements of the City of Seattle Building Department. Although the leased premises did not abut the exposed wall, the tenant requested that the landlord make the necessary repairs, estimated to cost between $30,000 and $50,000. The landlord refused to make the repairs and terminated the lease because of the unsafe condition of the building. The lease required the tenant to make repairs necessary to maintain the leased premises, except for the outside walls and other structural components of the building within the leased premises, but was silent as to which party was obligated to maintain the structural components of the building. The Washington Supreme Court upheld a lower court ruling concluding that there was an implied duty on the landlord to make repairs mandated by government authority where such repairs arise from defective building conditions or are required for reasons of the public welfare. Further, even though the required repairs did not directly affect the leased premises, the court concluded that since the landlord did not fulfill its duty within a reasonable time after notification from the public authority, the landlord breached the implied covenant of quiet enjoyment which resulted in a constructive eviction of the tenant from the leased premises.
A similar result was reached in Johnson v. Snyder,[24] where the tenant rented a stall in the landlord's building for the operation of a restaurant. The restaurant, which at the time was one of only two occupants of the building, was ordered closed by a city inspector after he found unsanitary conditions in the building. Although the restaurant itself was found to be properly maintained, the rest of the building was in such a deplorable condition that the inspector was required "to take drastic steps and close the restaurant." Even though the lease required the tenant to comply with all requirements of public authorities pertaining to the leased premises, the California Court of Appeal was quick to distinguish the case from those where improvements were required to be made directly to the leased premises. In this case, the court noted that the tenant had no duty to abate a nuisance located in any portion of the building other than the leased premises, nor did the tenant possess an occupancy right to the portion of the building in need of repair, which remained under the landlord's exclusive control. The court concluded that "where the landlord leases part of a building and permits unsanitary conditions amounting to a nuisance to exist in the portion of the building remaining under his control which operate to deprive the tenant of his beneficial enjoyment, the tenant may treat this as a constructive eviction."
In addition to constructive eviction claims arising as a result of the tenant's inability to occupy any portion of the leased premises, tenants have also been successful in establishing a constructive eviction where only a portion of the leased premises was rendered untenantable. For example, in Dennison v. Marlow,[25] the tenant leased a two-story building for a five year term for use as a restaurant. During the first year of the lease, the tenant received a letter and a cease and desist order from the state fire marshal, advising the tenant that the building was in violation of the state safety code due to, among things, the absence of an automatic sprinkler system. At a hearing, the state fire board ordered the second floor of the building closed until the sprinkler system was installed, thereby reducing the restaurant's seating capacity by over 50%. The landlord, however, informed the tenant that if the tenant wanted to continue to use the second floor of the building, it would have to pay for the installation of the sprinkler system. The tenant did not install the sprinkler system, but instead began paying a reduced rental since it occupied only the first floor. The landlord later sued to collect the rent that had not been paid. Based upon an analysis similar to that used in Brown v. Green, discussed above, the New Mexico Supreme Court found that the landlord was obligated to install the sprinkler system and that its failure constituted a constructive eviction of the tenant. The tenant then claimed that the constructive eviction should result in the suspension of all rent due under the lease. Noting the general requirement that the tenant must vacate the premises to sustain a constructive eviction claim, the court found that the landlord's failure to install the sprinkler system compelled the tenant to vacate only the second floor of the building. Since the tenant was not deprived of the use of the first floor of the building, the court concluded that the landlord's failure resulted in only a partial constructive eviction and that the tenant remained obligated to pay the fair rental value for the use of the first floor.
The tenant in Longstreet Associates LP v. Gordon Investment New York, Inc.[29] raised sick building syndrome as one of several defense to the landlord's action for unpaid rent. As alleged by the tenant, the poor air quality in the leased premises amounted to a partial actual eviction, thereby alleviating the tenant of its obligation to pay rent.[30] The New York Supreme Court, however, ruled that the tenant had failed to prove its case. The only evidence offered by the tenant was an affidavit from an employee stating that complaints about the air quality had been made for several years. The tenant did not provide any medical or scientific evidence or any test reports to support its claim. The landlord, on the other hand, submitted proof that it regularly monitored the air in the building and that test results consistently indicated that there were no problems with the ambient air quality.
While Longstreet did not involve repairs or improvements required by public authorities, the American Society of Heating, Refrigerating and Air-Conditioning Engineers, a professional organization charged with developing and recommending industry standard ventilation rates, has published air quality standards and it is possible that a local municipality could adopt the standards in the same manner as it might have adopted the BOCA building code, and then seek to enforce the standard in order to protect the public.
Of course, one of the problems with sick building syndrome and the analysis of indoor air pollution is that the sources of pollutants can be outside of the landlord's control, such as the tenant's furniture or equipment. This may serve to complicate the determination of the landlord's responsibility, particularly if the offending condition results from the interaction of substances arising from the building and mixing with those arising from the tenant's property. Likewise, radon or electromagnetic fields arise from conditions outside of the building over which the landlord typically has no control. It is not difficult to envision a constructive eviction claim by the tenant based on the landlord's failure to vent the building sufficiently to eliminate or reduce radon contamination or on the landlord's failure to locate the building away from, or to provide adequate shielding from, electromagnetic field sources.
A more recent decision by the Wisconsin Court of Appeals in N/S Associates v. McDonald's Corp. involved the operation of a McDonald's restaurant located in an enclosed shopping mall.[34] McDonald's paid percentage rent and had a penalty rent clause which protected the landlord if McDonald's gross sales were low. A successor landlord installed a food court in the mall in such a manner that part of the common area was used as the seating for the food court. Accordingly, McDonald's felt its payments for common area charges were unfairly being used to subsidize its competitors. McDonald's was also in a disadvantageous location relative to the food court, and the tenants in the food court were paying a higher percentage rent to the landlord. McDonald's felt that the landlord had restructured the mall intentionally to divert food customers from McDonald's to the food court in order to maximize the landlord's income at McDonald's expense. The court reversed a summary judgment in favor of the landlord, finding that if McDonald's could prove the facts alleged, then the landlord would have been in breach of the lease.[35]
The landlord sued McDonald's after it abandoned the premises, and McDonald's attempted to terminate the lease based on a constructive eviction theory. McDonald's pled the affirmative defenses of failure to perform obligations under the lease, fraud, commercial frustration/impossibility, unconscionability, estoppel, unclean hands, failure to mitigate damages, and unjust enrichment. It also pled as counterclaims, breach of contract, breach of covenant of quiet enjoyment, breach of covenant of good faith and fair dealing, breach of covenant not to compete with a tenant under a percentage rent lease that contains a penalty rental clause, and fraud. The court made the strong statement that each of these defenses and counterclaims would be valid if McDonald's proved the facts alleged by it. It is notable, however, that the common area provisions of the lease did not contain the common disclaimer and reservation regarding diminishing or modifying common areas.[36]
The specific provisions of the lease are often the focal point in economic constructive eviction cases. In the McDonald's case, the court relied heavily upon the fact that the lease required the common areas to be maintained by the landlord for the benefit of the tenants. In Carrols Corp. v. Canton Joint Venture,[37] decided by the Ohio Court of Common Pleas, a disclaimer of liability for any alterations to the common areas was relied upon successfully to reject a claim by a Burger King franchisee that the landlord had breached the lease on facts and theories similar to those in the McDonald's case. It should be noted, however, that courts have not found constructive eviction where the conditions are beyond the landlord's control, such as a general economic decline in the vicinity of the leased premises or the adverse conduct of third parties.[38]
Renovation of common areas in office projects have been the subject of constructive eviction claims. The New Hampshire Supreme Court recently upheld such a claim where office building renovations inconvenienced the tenant.[42] The court refused to go so far as to find a constructive eviction since there was always at least one means of entering and leaving the leased premises, but it did find a breach of the quiet enjoyment covenant based on the interference which resulted from the landlord's work on the common areas, and remanded the case to the trial court to determine damages. The court rejected the old view that the covenant of quiet enjoyment protects only the mere possession of the leased premises and not the fulfillment of the tenant's expectations and contractual rights for common areas under a modern office lease.
For both retail and office space, common area parking is often crucial to the enjoyment of the leased premises. While it might be expected that inability to use the parking garage would constitute a constructive eviction, the Minnesota Court of Appeals determined otherwise in Thoele Printing, Inc. v. First Trust National Ass'n,[43] a case involving a successor landlord who purchased the leased premises at a foreclosure sale. According to the court, since the successor landlord was subject to privity of estate, but not privity of contract, the landlord was not liable for any breach of the lease that occurred prior to its purchase of the leased premises. While it may be surprising that the court did not view the defective condition of the parking garage as a continuing breach of the lease that required repair by the successor landlord, the court may have been persuaded by provisions in the lease explicitly obligating the landlord only for ordinary maintenance and not the costly structural repairs which were necessary to allow the parking garage to be used again.
The Missouri Court of Appeals also addressed problems created by a neighboring tenant in a case that involved an injunction obtained by one. In Shop 'N Save Warehouse Food, Inc. v. Soffer,[45] the landlord had included an exclusive clause in a lease protecting a grocery store tenant from competition by the landlord leasing to another grocery store within a specified radius of the leased premises. The exclusive clause contained an exception for a mortgagee as successor landlord. The landlord then structured transfers to take advantage of the exception without really changing the ownership of the property in substance. The landlord induced another grocery store tenant to enter into a lease within the area subject to the exclusive clause by showing that prospective tenant an opinion letter from the landlord's attorney but withholding from the tenant a side letter from the attorney cautioning the landlord that the transfers could be viewed as a sham transaction to avoid the intent of the lease. When the original tenant obtained an injunction based on the sham transaction theory, the new tenant sued the landlord and received a million dollar judgment for damages based on its inability to use the premises for a grocery store as a result of the court order. The court held that the injunction obtained by the original tenant constituted a breach of the quiet enjoyment covenant and a constructive eviction of the new tenant. The court rejected the landlord's claim that the new tenant could use the leased premises for any use other than a grocery store, holding that the quiet enjoyment warranty protected the intended use.
Tenants seem to be increasingly negotiating for both rent abatement and lease termination rights due to utility service interruptions regardless on a no fault basis. Landlords forms typically disclaim any responsibility for damages and any right to abate rent payments due to service interruptions. Understandably, landlords do not want to be guarantors of the utility providers. They view themselves as being in the real estate industry and not the utility industry. Services are provided by the utility company through the landlord as a conduit and not normally as a profit center for the landlord. These concerns notwithstanding, it is common for landlords to subject themselves to loss of rent and even termination of the lease if services are interrupted for time periods as short as 48 hours. This seems surprising and disturbing in light of the traditional contractual allocation of rights and remedies upon the occurrence of physical damage to the premises by fire or other casualty which should provide a model for the parties to reach a compromise on these utility service issues. The traditional damage or destruction clause in a commercial lease will allow termination by the tenant, if at all, only if the landlord is unable to restore the premises to serviceability within a much longer period of time such as 180 days. Rent is abated from the date of the damage until the restoration is complete. The landlord protects itself by obtaining property insurance to pay for the restoration and that includes rent loss coverage to replace the abated rent payments. The tenant generally accepts the fairness of having to do business in a temporary location until the premises can be restored.
There is no apparent reason to distinguish between the tenant having to use temporary space due to a service interruption as compared to physical damage to the premises. In an intangible sense, the premises are temporarily damaged when services are unavailable. In many instances the cause of the utility interruption will be some physical damage to the building such as a fire. The parallel and overlap between these two types of "intolerable" conditions seems obvious, and the lease provisions should also be parallel. The only significant difference is that the risks covered by the landlord's insurance will not be coextensive with the risks which can cause an interruption of services. For example, damage to the generating equipment of the utility company will not constitute an insured risk that would trigger the rent loss coverage under the landlord's insurance policy. Normal rent loss coverage is triggered only by an insured occurrence of physical damage to the landlord's property and not the property of third parties such as the utility company. The hard issue for interruption of services is when the interruption is due to reasons other than damage to the landlord's property. The concern of the landlord is that an uninsured loss of rent could jeopardize the ability to service any montage debt on the premises. Accordingly, landlords and their attorneys who agree readily to an abatement of rent for any interruption of services are jeopardizing their investment. It would be far better to bargain for a rent abatement only to the extent rent loss insurance coverage will be available to replace the loss and let the Tenant look to its business interruption insurance for compensation due to interruptions not covered by the Landlord's insurance.
Some courts felt an evolutionary result too conservative and in effect called for a revolution in the law. They perceived the real estate legal principles as being too favorable to landlords, and wanted a liberal "new deal" of modern contract law principles more favorable to the tenant. With respect to the condition of the premises, these courts inferred entirely new warranties as the tool that would allow the tenant to withhold rent if the landlord failed to perform as promised during the lease term. This revolutionary approach found wide acceptance in the form of an implied warranty of habitability in residential landlord-tenant legislation that swept across the country in the name of consumer protection earlier in this century. A few states extended the implied warranty of habitability to commercial leases, at least where the lessee is a small business owner.[47] Similar contract law principles gained even more acceptance in the commercial leasing law such as requiring a reasonable basis for withholding consent to assignment based on the principle of good faith and fair dealing or requiring the landlord to use reasonable efforts to relet the premises based on the mitigation of damages principle in the event of an abandonment.
The implied warranty of habitability has not been extended to commercial leases as a warranty of fitness in the vast majority of jurisdictions.[48] Generally, courts have reasoned that the factors which justify an implied warranty in residential leases do not exist in commercial leases. First, commercial tenants are in a better position to inspect the leased premises or hire an expert to do so. Second, the commercial tenant's economic resources and the greater availability of commercial space create a more equal bargaining power between the landlord and the tenant. Third, lessors of commercial property have a greater incentive to attract and retain commercial tenants in order to have a steady rental income. Fourth, commercial tenants are able to pass along to customers the cost of inspection or repairing defects.
The Supreme Court of Texas, however, rejected these concepts when it overruled earlier authority and held that a lessor in a commercial lease impliedly warrants that the leased premises are suitable for their intended commercial purposes. In Davidow v. Inwood North Professional Group-Phase I,[49] the leased premises were used as a medical office. Shortly after moving in, the tenant began experiencing problems: the air conditioning did not to work properly; the roof leaked; the hallways were dark because lights were not replaced; the leased premises were infested with pests and rodents; cleaning and maintenance were not provided; the parking lot was filled with trash; hot water was not provided; and several burglaries and acts of vandalism occurred.
The court concluded that it cannot be assumed that a commercial tenant is more knowledgeable about the structure's quality than a residential tenant. Commercial tenants may have little incentive to make any extensive repairs to the leased premises since commercial leases are often short-term. As a result, commercial tenants rely on their landlord's greater abilities to inspect and repair the leased premises. The factors which the court deemed important in determining whether there had been a breach of warranty were: the nature of the defect, its effect on the tenant's use of the leased premises, the length of time the defect persisted, the structure's age, the amount of the rent, the area in which the leased premises were located, whether the tenant waived the defects, and whether the defect resulted from any unusual or abnormal use by the tenant.
At least one state has attempted to put "new wine in old bottles" by holding the tenant may recover damages for breach of the quiet enjoyment covenant and thereby implicitly holding that a tenant may withhold rent even if the breach does not rise to the level of even a partial constructive eviction.[50] This is really just disguising the implied warranty of fitness in the clothing of the quiet enjoyment covenant. It is questionable whether the court realized the implications of its holding, and it is to be expected that a different result may occur if in the future they are faced with a rent withholding case based upon a claimed violation of the quiet enjoyment covenant without at least a partial abandonment of the premises. The hard issue that needs to be faced is whether the tenant should be able to withhold rent as opposed to paying the rent and suing the landlord to recover the remediation costs and other damages if the tenant stays in the premises.
Most experienced real estate lawyers understand the dynamics involved in disputes over the condition of the premises. The Tenant has the advantage of possession of the rent while the landlord has the advantage on gaining possession of the premises by summary eviction for failure to pay the rent. Giving the Tenant the advantage of both possession of the rent and the premises could create an imbalance of power particularly if the landlord is financially weaker than the tenant. In the commercial context this is often the case. Tenants are often financially strong corporations and landlords are often relatively weak investors. The uniformity of the financial strength of the landlord and the weakness of the tenant in residential leasing just does not exist in commercial leasing. Withholding rent can unfairly coerce landlords into accepting unjustified tenant's demands. This may be the real underlying reason why most courts have rejected implied warranties in commercial leases when faced with the issue, upholding instead the traditional constructive eviction remedy based on the quiet enjoyment covenant.[51] This may reflect a larger recognition that the importation of contract law principles into the commercial landlord-tenant field has created some unexpected problems. Many recent cases seem to reflect a retreat from the high water mark of the contract law approach to a more hybrid result that reconciles and synthesizes the contract law and real estate law principles.[52] The New York Court of Appeals decided in 1995 to be openly counter revolutionary opting for the traditional rules and flatly rejecting the need to tilt the balance in favor of the commercial tenant on the issue of mitigation of damages.[53] There are those jurisdictions, however, where the revolutionary fervor seems entirely unabated with deeply troubling results for landlords and their attorneys. [54]
Of course tenants will argue they are put in a similar financial bind if they have to pay both rent and the remediation cost of the landlord's default. To some degree they are in fact paying double at least until they can get a judgment and recover damages. Essentially this is a debate over who will have to wait until after the period of dispute resolution to recover their money. If "justice delayed is justice denied" then the solution is to speed up justice as opposed to endlessly debating who should bear the financial burden of waiting to recover remediation costs or the wrongfully withheld rent, as the case may be. In the end it appears the real culprits are dilatory courts, and until they dispense speedy justice, the best compromise solution is to bypass them by means of expedited ADR. Either the landlord or the tenant (depending on the state of the law on implied warranties in the particular state) should at a minimum insist on expedited ADR as the means to level the playing field unless they have the leverage to simply overpower the other party in the negotiating process and totally disclaim all warranties, express or implied. It takes a lot of negotiating leverage, however, to overcome these contract law principles such as implied warranties, good faith and fair dealing and miti gation of damages, once adopted by the courts as the general rule governing commercial leases. The compromise would be a tenant right to set off remediation cost against rent only after expedited arbitration resolves any dispute over the issue of whether a material breach has occurred. If implied warranties have been adopted then the compromise would be to prevent withholding of rent pursuant to a warranty claim if the Landlord disputes the alleged breach and submits it to expedited arbitration.
The courts often find the text of leases ambiguous as to whether the landlord is responsible for a particular condition. The court will then look to all of the relevant facts and circumstances to discern and uphold the perceived intentions of the parties. All of this should caution attorneys working with commercial leases to be fully informed on the continuing evolution of the commercial leasing environment and to draft their leases accordingly. While leaving the lease silent on certain issues may be beneficial in the right circumstances, relying on the shifting sands of the common law decisions most often does the client a disservice. More often than not, the best course is to explicitly allocate the risk of all material adverse conditions which are foreseeable before they arise. Careful attention to the internal consistency of the lease is also critical if the lease is to be determinative.
The popularity of applying contract law principles to commercial leases appears to be waning somewhat, and there are signs of a renewed regard for the traditional principles of real estate law. As a result it seems unlikely there will be any general acceptance of implied warranties in commercial leases. What does seem certain is that the covenant of quiet enjoyment and the constructive eviction remedy will continue to evolve to meet the needs of Landlords and tenants in an evermore densely populated and regulated urban environment dealing with new services and technologies only dreamed of in the
[**]Director, Richards, Layton & Finger, P.A., Wilmington, Delaware
[***]Associate, Richards, Layton & Finger, P.A., Wilmington, Delaware
[1]Scott v. Prazma, 555 P.2d 571 (Wyo. 1976).
[2]Sigsbee v. Swathwood, 419 N.E.2d 789 (Ind. Ct. App. 1981); Stevan v. Brown, 458 A.2d 466 (Md. Ct. Spec. App. 1983)(tenant waives its rights if it waits an unreasonable length of time before vacating premises); Sewell v. Hukill, 356 P.2d 39 (Mont. 1960)(tenant must show permanent interference with beneficial enjoyment and abandonment of possession within a reasonable time thereafter).
[3]Mileski v. Kirby, 113 P.2d 950 (Wyo. 1941).
[4]Stevan v. Brown, 458 A.2d 466 (Md. Ct. Spec. App. 1983); Mileski v. Kirby, 113 P.2d 950 (Wyo. 1941).
[5]See Dennison v. Marlowe, 744 P.2d 906 (N.M. 1987)(intention of parties as expressed in lease in light of surrounding circumstances is determinative); Thirteenth & Washington Sts. Corp. v. Nelson, 254 P.2d 847 (Utah 1953)(intent is ordinarily of a purely legal nature inferred from the character of the landlord's acts).
[6]Scott v. Prazma, 555 P.2d 571 (Wyo. 1976).
[7]See First Class Condition: Responsibilities, rights, and Remedies Respecting the Condition of Commercial Leasehold Premises, 29 Real Property, Probate and Trust Journal 735 (Winter 1995).
[8]See Bradley v. DeGoicouria, 12 Abb. N.C. 53, 12 Daly 393, 67 How. Pr. 76 (N.Y. 1884) (landlord's failure to comply with board of health order resulted in defective plumbing which justified tenant's abandonment of leased premises); Pratt v. Grafton Electric Co., 65 N.E. 63 (Mass. 1902) (constructive eviction claim, although unsuccessful, based upon landlord's failure to comply with order of county commissioners to replace mill gates); Younger v. Campbell, 163 N.Y.S. 609 (N.Y. App. Div. 1917) (landlord could not recover rent where tenant was evicted by public authorities due to landlord's failure to make expensive and unforeseen structural repairs ordered by fire marshal); Galland v. Shubert Theatrical Co., 105 Misc. 185, 172 N.Y.S. 775 (1918) (failure of landlord to make structural alterations resulted in an eviction constituting a defense to an action for rent). See also 86 A.L.R.3d 352, Failure of Landlord to Make, or Permit Tenant to Make, Repairs or Alterations Required by Public Authority as Constructive Eviction (1976).
[9]Polk v. Armstrong, 540 P.2d 96 (Nev. 1975).
[10]Millman v. Hernandez, 535 P.2d 263 (Colo. Ct. App. 1975).
[11]Polk v. Armstrong, 540 P.2d 96 (Nev. 1975).
[12]Id.
[13]See cases discussed in M. Glazerman, Who Pays for Asbestos Remediation--Landlord or Tenant?, 35 Probate and Property (Nov./Dec. 1995).
[14]884 P.2d 55 (Cal. 1994).
[15]884 P.2d 46 (Cal. 1994).
[16]540 P.2d 96 (Nev. 1975).
[17]535 P.2d 263 (Colo. Ct. App. 1975).
[18]555 P.2d 571 (Wyo. 1976).
[19]145 A. 751 (Conn. 1929).
[20]Dennison v. Marlow, 744 P.2d 906 (N.M. 1987). But see Kintner v. Harr, 408 P.2d 487 (Mont. 1965) (tenant unable to establish constructive eviction as defense to landlord's action for rent after landlord refused to undertake repairs required by state board of health where tenant had expressly agreed to occupy leased premises so as not to violate any laws of city or state in which leased premises was located).
[21]451 P.2d 721 (Cal. 1969).
[22]286 P.2d 338 (Colo. 1955).
[23]564 P.2d 1137 (Wash. 1977).
[24]221 P.2d 164 (Cal. Ct. App. 1950).
[25]744 P.2d 906 (N.M. 1987).
[26]415 S.E.2d 677 (Ga. Ct. App. 1992).
[27]For a general overview of sick building syndrome, see Comment, Stuck inside these four walls: recognition of sick building syndrome has laid the foundation to raise toxic tort litigation to new heights, 26 Tex. Tech. L. Rev. 1041 (1995).
[28] Mackey v. TKCC, Inc., 894 P.2d 1200 (Or. App. 1995)
[29]New York Law Journal, December 20, 1995, p.26, col. 4 (N.Y. Sup. Ct.).
[30]While the tenant alleged there had been an partial actual eviction, the tenant had vacated the premises independently of any possession proceeding instituted by the landlord.
[31]See Stockton Dry Goods Co. v. Girsh, 227 P.2d 1 (Cal. 1951)(constructive eviction of tenant paying percentage rent where landlord leased second shoe department in department store); Daitch Crystal Dairies, Inc. v. Neisloss, 167 N.E.2d 643 (N.Y. 1960)(where lease prohibited other supermarkets in shopping center, constructive eviction of tenant paying percentage rent when landlord constructed building on adjoining land for supermarket); Berland's, Inc. of Tulsa v. Northside Village Shopping Center, Inc., 378 P.2d 860 (Okla. 1963)(constructive eviction where store space and parking area were not built according to original plan); Lilac Variety, Inc. v. Dallas Texas Co., 383 S.W.2d 193 (Tex. Civ. App. 1964)(where lease provided that supermarket would be anchor tenant in shopping center, tenant constructively evicted when supermarket closed).
[32]369 A.2d 458 (Pa. Super. Ct. 1976).
[33]For cases having a similar result, see Bermuda Avenue Shopping Center Associates v. Moe Rappaport, 565 So. 2d 805 (Fla. 1990)(court found tenant was constructively evicted when mall renovation began shortly after lease commencement with no disclosure to tenant of renovation plans) and Sigsbee v. Swathwood, 419 N.E.2d 789 (Ind. Ct. App. 1981)(trial court found constructive eviction due to installation of traffic barrier, but decision was reversed on appeal due to tenant's unreasonable delay in vacating leased premises).
[34]514 N.W.2d 879 (Wis. 1994).
[35]All of the facts described herein were not stated in the cited opinion. The additional facts were drawn from the article: Fair is Fair: Implied Covenants in Commercial Leases, Real Est. Rev., Fall 1995, at 68-72, which does not disclose the source of the additional information.
[36]Consider whether the result would have been the same if the landlord had installed a food court that created a new common area for seating paid for only by the food court tenants. McDonald's might have argued that it would have violated the implied covenants of good faith and fair dealing, a corollary of which would be not to compete with a tenant paying percentage rent with a penalty clause for low gross sales. Just as the landlord wants implied continuous operation covenants for tenants paying percentage rent, those same tenants want implied covenants from the landlord not to compete with them. The latter type of implied covenant is essentially a means for a tenant to seek remedies for adverse economic conditions due to changes in the area controlled by the landlord outside of the premises.
[37]No. 88-2115-1, 1990 WL 99047 (Ohio Comm. Pl. 1990).
[38]Net Realty Holding Trust v. Nelson, 358 A.2d 365 (Conn. Super. Ct. 1976); First Wis. Trust Co. v. L. Wiemann Co., 286 N.W.2d 360 (Wis. 1980). But see Reisterstown Plaza Assoc. v. General Nutrition Center, 597 A.2d 1049 (Md. Ct. Spc . App. 1991)(combination of loss of anchor tenant and major infestation of shopping center by rodents held to constitute constructive eviction).
[39]778 S.W.2d 423 (Tenn. 1989).
[40]Id. at 428.
[41]The court also made a point of indicating that all of the communications that constituted the wrongful eviction in the Tenn-Tex case were done by the landlord's legal counsel. Id. at __________.
[42]Echo Consulting Services, Inc. v. North Conway Bank, 669 A.2d 227 (N.H. 1995).
[43]1996 Minn. App. LEXIS 47 (Minn. Ct. App., Jan. 16, 1996).
[44]466 S.E.2d 324 (N.C. Ct. App. 1996).
[45] 918 S.W.2d 851 (Mo. Ct. App.1996).
[46] Hidden Ponds of Ontario, Inc. v. Gregory Hresent, 209 A.D.2d 1025, 622 N.Y.S.2d 168, 1994 N.Y. App. Div. LEXIS 12066
[47]See Pylate v. Inabnet, 458 So.2d 1378 (La. App. 2d Cir. 1984) (holding that a lessor guarantees a lessee against all vices and defects in the premises which may prevent their use); Reste Realty Corp. v. Cooper, 251 A.2d 268 (N.J. 1969) (holding that a warranty against latent defects is implied in a commercial lease).
[48]See The Unwarranted Implication of a Warranty of Fitness in Commercial Leases--An Alternative Approach, 41 Vanderbilt L. Rev. 1057, 1080-83 (Oct. 1988). See also 76 A.L.R.4th 928, Implied Warranty of Fitness or Suitability in Commercial Leases--Modern Status (1990).
[49]747 S.W.2d 373 (Tex. 1988).
[50] Echo Consulting Service Inc. v. North Conway Bank, 669 A.2d 227 (N.H. 1195)
[51] Vlatas at p. 670
[52] See Pacific First Bank v. New Morgan Park Corp., 319 Ore. 342; 876 P.2d 761; 1994 Ore. LEXIS 65 (1994) (good faith and fair dealing limited to parties reasonable expectations in the circumstances); Echo Consulting Services, Inc. v. North Conway Bank,140 N.H. 566; 669 A.2d 227; 1995 N.H. LEXIS 192 (1995) (acceleration of rent claim permitted but with duty to provide refund resulting from actual mitigation of damages)
[53] Holy Properties Limited, L. P. v. Kenneth Cole Productions, Inc., 87 N.Y.2d 130; 661 N.E.2d 694; 1995 N.Y. LEXIS 4449; 637 N.Y.S.2d 964 (1995)
[54] See Amoco Oil Company v. Ervin 908 P.2d 493 (Colo. 1995) (landlord is bound by duty of good faith and fair dealing to offer fair rent for a renewal even though lease does not give the tenant a renewal option). Hopefully, for the sake of all the landlords, this case and others like it involving gas stations will be limited to their facts, because the implications for commercial leasing generally are so contrary to the landlord's normal expectations. This case seems to be a good example of how "hard facts make bad law." past.