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Commercial Leases: What If . . . ?

by on June 8, 2011 » Add the first comment.

Like any good contract, commercial leases should not only set out the basic terms (e.g., rental amount, term of lease), but need to include provisions for circumstances and situations not always readily apparent or obvious.

For example, some commercial leases are not specific enough about which party is responsible for replacing major structures. This occurred in NW Parkway LLC. v. Lemser, A10A1781 (3/24/11).  In that case, the parties entered into a 20-year commercial lease.   A few years after the inception of the lease, the lessor inspected the property and notified lessee that it needed to replace the roof.  Not wanting to incur the cost of the replacing the roof, lessee responded by invoking an early-termination clause.  Lessor asserted lessee couldn’t terminate early because lessee was in default under the lease by virtue of not replacing the roof.  A lawsuit ensued.

The lease contained several relevant provisions:

  • A special stipulation stated that that it was a triple net lease and lessee was responsible for the entire property and building, with the exception that lessor was responsible for walls, concrete slab, and foundation.
  • A dispute-resolution clause stated that the special stipulations trump any other terms in the lease.
  • A paragraph regarding maintenance stated that the lessee acknowledged the premises was in good condition and agreed to maintain the premises, but this paragraph did not include maintaining or repairing the roof.
  • An early-termination clause allowed the lessee to voluntarily vacate if the lessee was not in default under the lease.
  • Lastly, a waver of default provision stated that no waiver of any default would be deemed a waiver of any other breach.

Concluding that the lessee had not defaulted under the lease because it did not have an obligation to repair the roof, the trial court granted lessee’s partial motion for summary judgment and declaratory relief.  The trial court found that even if lessee had an obligation to repair the roof, the lessor had waived any right to claim breach because lessor had accepted subsequent rent payments.

The Court of Appeals disagreed and reversed the trial court.  Regarding which party was responsible for replacing the roof, the Court went through the three-step analysis to determine the parties’ intent in the contract.   The Court concluded that the plain language of lease obligated the lessee to replace the roof.   This is because the special stipulation stated that lessee was responsible for “all expenses for the entire property and building . . . [except] normal wear and tear” and the lessor was responsible for “any expense” related to the walls, slab, and foundation.”

Regarding the waiver clause, the Court acknowledged that acceptance of rental payments often constitute a waiver of the lessee’s default and reinstatement of the lease; however, the Court noted that in these cases, the early termination rights solely benefited the lessor.   In NW Parkway, the merger clause benefited the lessee.  Thus, lessee’s failure to comply with the terms required to terminate early, i.e., failure to replace the roof, prevented lessee from being entitled to terminate early.  The Court reasoned: “To hold otherwise would render meaningless the conditions precedent listed in the early termination clause.”

The lesson and the “what if” to take from this case is is to make sure, whether you’re a landlord or tenant, to carefully articulate in your leases how repairs and replacements of structural items will be completed.

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