Tenant-Seller Can Get Hold-Back Money After Tenant-Buyer Breaches Lease

Facts: A tenant entered into an agreement to purchase nearly all the assets of the tenant-seller (seller), including lease agreements with the owner of the seller's space. The agreement allowed the tenant-buyer (buyer) to hold back $500,000 of the purchase price for a specified period, after which payment became due if the owner had not interfered with the buyer's business. The owner agreed to pay the seller this amount if the owner breached the sales contract.

After a series of disagreements with the owner, the buyer notified the owner that it would be “abandoning the leases” for the seller's former space. The owner locked the buyer out of the space and signed a new lease during the hold-back period. The buyer refused to pay the seller the hold-back amount of $500,000. The seller sued the buyer and the owner.

Decision: A U.S. Bankruptcy Court in Ohio ruled that the buyer owed the seller $500,000. The court also found that the seller was not entitled to any damages from the owner.

Reasoning: The court determined that the owner had not violated the leases, even though the owner's actions seemed to interfere with the buyer's business. The court ruled that the leases became ineffective once the buyer clearly expressed that it would abandon the leases, and the owner terminated the agreements. According to the leases, the owner was entitled to take possession of the property once the leases were rescinded.

Since the agreements were already void, the court concluded that the owner could not breach them by signing a new lease or locking out the buyer. Because the owner did not breach the agreement, the buyer can't keep the $500,000 hold-back amount.

• Medi-Care Orthopedic & Hospital Equipment, Inc. v. Health II of Ohio, LLC: No. 02-37161, Chapt. 11, Adv. Pro. No. 04-3424, 2007 Bankr. LEXIS 1298 (U.S. Bankr. Ct. N.D. Ohio 4/3/07).