Lease Required Tenant to Make Interior Repairs

September 7, 2018
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In all commercial real estate leases, it’s of the utmost importance that definitions are unambiguous and cover foreseeable events. For example, damage and destruction in the space is a possibility anywhere, whether in retail or office building properties. But if you want to make the tenant responsible for damage to the property, you’ll need to specify where the damage would be. Designating whether damage that is the tenant’s problem is “exterior” or “interior” is key. And making sure that a tenant that is responsible for damage can’t terminate its lease based on the disruption any damage would cause is also important. A recent New York case highlights the importance of assigning responsibility for damage in a lease.

There, a bank leased space for its branch in a retail center. Over the course of several years, the tenant experienced sewer backups and other plumbing problems. It repaired these problems without giving notice to the landlord. After the tenant suspected that water damage had led to mold in the space, it hired a mold inspection company. The tenant contacted the landlord, informing it of the mold issue and terminating its lease effective immediately. According to the tenant it had been “constructively evicted” because of the mold hazard. It stopped paying rent.

The owner informed the tenant that under the lease the tenant didn’t have the right to terminate the lease—only the landlord had a termination right—and that any work in the space, including mold remediation, was the tenant’s responsibility. The tenant moved out of the space, and the landlord accelerated rent payments for the remainder of the lease. The landlord sued the tenant for breach of contract, and asked a court for a judgment in its favor without a trial.

A New York trial court ruled in favor of the landlord. The trial court said that the tenant’s constructive eviction claim based on the owner’s refusal to repair the mold problem failed because the lease clearly categorized the alleged mold, sewage, and plumbing defects inside the premises as “interior” issues that the tenant, not the landlord, must repair. It noted that, while the lease provided the landlord with the right to terminate the lease in the event of a casualty damaging or destroying the premises—such as flooding—it did not provide the tenant with a corresponding right to terminate. Regarding the rent acceleration, the trial court declined to find that a clause requiring the tenant to pay the future rent payments owed under the lease was “plainly or grossly disproportionate to the probable loss from the tenant’s breach of the lease.”

The trial court awarded damages to the landlord. It pointed out that the lease provides that any rent payment not paid within 10 days of its due date is subject to a late fee of five cents for each dollar overdue. It further provides that upon an event of default by the tenant, the landlord may elect to terminate the lease and recover from the tenant all damages incurred by reason of such breach. The trial court determined that this included the cost of recovering the space plus the total of all minimum annual rent, additional rent, and other charges reserved in the lease payable over the remainder of the lease term discounted to net present value with a percentage discount rate [Leeber Realty LLC v. Trustco Bank, June 2018].