United States: What’s In Your Leases?

A commercial tenant’s complaint about a leaking roof has given the Supreme Judicial Court of Massachusetts, the state’s highest court, the opportunity to repudiate over a century of legal thought about the nature of commercial leases and a tenant’s right to terminate a lease on account of the landlord’s failure to make repairs. Is this revolution in leasing law coming to a mall or strip center near you? If so, what can you do about it?

In Wesson vs. Leone Enterprises, Inc., decided in September 2002, the Massachusetts high court brushed aside the findings of the trial judge that the landlord’s failure constituted constructive eviction of the tenant justifying the tenant’s termination of the lease. Instead, the Court decided to "abandon the common law rule of independent covenants of commercial leases in favor of the modern rule of mutually dependent covenants . . ." to reach the same result. In doing so, the Court bypassed the role of the so-called "covenant of quiet enjoyment" found in most commercial and retail leases, making it easier for tenants to terminate the leases on account of the landlord’s failure to keep its promises.

The covenant of quiet enjoyment has been the chief remedy for extreme landlord neglect for decades. A covenant of quiet enjoyment provided a defense to a landlord’s suit to collect rent and formed the basis of a tenant’s claim that the tenant had been constructively evicted based upon the landlord’s default. The Wesson case has now made it easier for a tenant to terminate its lease where proof of constructive eviction may fall short.

In Wesson, the tenant leased a building for its financial printing business. In April 1991, the tenant complained to the landlord about "a significant leak in the roof." The landlord personally attempted to repair the roof. After leaks reappeared some months later, the landlord hired a professional roofer to repair the roof. Toward the end of the summer, the roof began leaking again and the tenant notified the landlord that it was "forced to take necessary precautions to protect [their] business from more water damage." The landlord again had a professional roofer attempt to repair the roof and except for a new leak attributable to an electrical conduit that was the tenant’s responsibility to repair, no additional leaks occurred after September 1991. In November 1991, the tenant notified the landlord that the tenant was "vacating the premises on or before December 31, 1991," because of "the constant lack of minimal heat as well the serious leakage problem." The tenant paid its rent through the end of the calendar year and moved to smaller quarters at considerable savings in rent.

In defending against the landlord’s suit for rent, the tenant said it had been "constructively evicted from the premises by the landlord’s failure to adequately repair the roof." The trial judge agreed and added that even if the tenant had not been constructively evicted, the tenant could have lawfully withheld rent under the dependent covenant’s rule, where the landlord had failed to provide a "dry space," a service "essential" to the lease. On appeal, the high court, however, thought the tenant’s proof of constructive eviction was inadequate. Evidently wanting to address the long-established legal theory under common law that covenants in leases were considered "independent" of one another, the Court decided to strike down the independent covenants rule.

The Court acknowledged that at "common law the promises made by landlord in a lease were independent obligations, so that the failure to perform them did not give tenant any right to disregard his obligations under the lease." The theory of such obligations being independent of one another the Court attributed to the "expectations [of landlord and tenant] in rural agrarian society where a right to possession of the land constituted the chief element of the exchange." The Court observed, quoting a treatise on leases, that "the theory of the lease as a conveyance . . . fitted in well with the ancient farm lease. The lease was essentially of land; the house was incidental. Tenant got no services from landlord and expected none. Tenant was there, landlord absent. Tenant had tools that he was well versed in using. He could make such repairs as might be necessary." The Court noted that express maintenance promises of the landlord in the lease were "secondary" and did not obviate the tenant’s obligations to pay rent. The tenant’s remedies were to seek damages for breach of lease covenants, not the termination of the lease itself. To permit a lease to terminate for such "secondary" violations, was deemed too extreme an outcome.

As early as 1892, the Massachusetts courts began moving away from the rule of independent covenants in residential leases and then in the early 1970s, the courts came to the revolutionary conclusion that leases were not really conveyances of land, but contracts between landlord and tenants, and hence the law of contracts should pervade the field of lease law. Leases, the court observed, citing a federal case, were no longer "conveyances" but contracts for the possession of property . . . ."

This shift in the legal underpinnings of lease law has created the potential for a dramatic change in the resolution of landlord/tenant disputes. The court in Wesson noted the dangers in ignoring the fundamental differences between leases and other forms of agreements. Focusing on implied warranties, which courts read into many commercial contracts, the Wesson court recognized that some courts have taken the commercial contract model to extremes by "recognizing an implied warranty of suitability in commercial leases." Nevertheless, although still willing to distinguish between residential and commercial tenancies in applying the rule, the Court struck down the centuries old legal theory that a "commercial lease is a conveyance of property where the right to possession of the land constitutes the chief element of the exchange."

What’s in your leases? If you are relying on a covenant of quiet enjoyment to provide the ultimate remedy of termination based upon a finding that the landlord’s conduct constitutes constructive eviction, you may be missing the bigger picture. What clauses in your leases are the primary basis of the exchange between the landlord and the tenant? Which ones are secondary? Does your lease address the intention of the parties as to what happens when the "primary" promises are violated?

In answering these questions and establishing clear understanding of the rights of the parties, the Wesson court adopted the following policy guidelines found in the Restatement (Second) of property:

Having the Wesson decision in mind, several steps may be in order in negotiating a lease to avoid an unintended termination based on the landlord’s default. First, clearly state the purposes of the lease. Here, the use clause may become more than a limitation on the tenant. It could form the basis for establishing the primary purpose of the lease and indicate which purposes are primary and therefore give rise to a right of termination. Second, leases may now need to state which covenants are to be considered independent and which dependent. Third, re-examine the default and remedy clauses in light of the Wesson-type analysis. It would be prudent to draft the remedies section to establish any exceptions to the promises that do not give rise to a right of termination. In the absence of specific references to such promises, the courts may choose to decide which promises would form the basis of a tenant’s right to terminate should the landlord breach those promises. In any event, a re-examination of lease covenants is in order in light of the Wesson revolution.