When Does Tenant Violation = Material Breach Justifying Lease Termination?
Misconception: You can evict a tenant for committing a lease violation.
Truth: You can evict a tenant for committing a “material” lease violation.
Practical Impact: While they may be grounds for money damages, “non-material” or relatively trivial violations aren’t enough to forfeit a tenant’s lease rights. This rule has enormous practical impact on what you can do when tenants are behind on their rent or guilty of other lease infractions. If you overreact by mistaking a non-material for a material violation, you run the risk of wrongful eviction liability; if you make the opposite mistake, you can end up inadvertently waiving your legal rights.
How to Tell the Difference Between Material & Non-Material Breaches
Although it's crucial for landlords to be able to tell the difference between material and non-material violations, that’s easier said than done. The problem is that there’s no hard-and-fast definition of material violation, only factors that must be applied case by case. Of course, courts face the exact same challenge. So, if you know how courts do it, you’ll be able to make sounder judgments when dealing with your own tenants. Specifically, there are four basic factors courts use to determine whether a tenant lease violation is material and grounds for eviction or loss of renewal rights:
- Factor 1: Whether the violation deprived the landlord of the benefit it reasonably expected in making the lease;
- Factor 2: Whether money damages or other remedies short of terminating the tenant would be adequate to compensate the landlord for its losses;
- Factor 3: Whether the tenant can and is likely to cure the violation; and
- Factor 4: Whether the tenant acted in good faith.
TENANT VIOLATION IS NOT MATERIAL
Facts: After five years of paying rent on time, a construction equipment rental tenant decides to renew its lease for another five years. The landlord says no, citing the part of the lease that allows the tenant to renew, provided that it’s not “in default.” The landlord says the tenant is in default, claiming that damages to the parking lot, sidewalk, the stucco of an exterior wall, and a retaining wall violated its duty to maintain the premises “in good repair, except for ordinary wear and tear.” The tenant acknowledges committing the violation but denies being “in default.”
Decision: The Missouri federal court finds that the violation isn’t material.
Explanation: Here’s how the court applied the four factors in determining that the tenant “substantially performed” its obligations under the lease and shouldn’t lose the right to renew because of the property damage:
- Factor 1: Despite the damages, the landlord “received the substantial benefit of the promised performance” in the form of five years of “faithful” rent payments from the tenant;
- Factor 2: The tenant could remedy the harms by repaying the $248,000 the landlord spent to repair the damage—in fact, it had already done so;
- Factor 3: The property damage had been repaired at the tenant’s expense, and the landlord admitted that it hadn’t yet suffered any economic losses; and
- Factor 4: There was no indication that the tenant had acted in bad faith [Show Me Sunshine Props. v. Blueline Rental: 2019 U.S. Dist. LEXIS 155260, 2019 WL 4305747].
TENANT VIOLATION IS MATERIAL
Facts: A developer leases parcels of land being turned into an entertainment district and promises to refurbish and sublet the properties to retail establishments. Five years later, with only a small fraction of the renovations completed, the landlord terminates the lease because of the tenant’s “failure to complete construction or renovation of improvements.” The tenant admits to violating its development duties under the lease “early and often,” but claims the breaches aren’t material and that termination would be excessive. Sure, the work is over three years behind schedule, the tenant acknowledges, but the lease timetables are “arbitrary political cover” that nobody took seriously.
Decision: The Mississippi court rules that the landlord was justified in terminating the tenant for material violations.
Explanation: Here’s how the court applied the four factors in reaching its decision that the tenant’s lease violations were material:
- Factor 1: At the time of termination, little to no construction had been done for over a year, no final tenant improvements had been completed, and fewer than half of the parcels were even ready for improvements;
- Factor 2: The court rejected the tenant’s argument that the millions of dollars it had already spent on the work demonstrated its substantial compliance with the lease. It’s not how much money you spend, but how close you are to completing your obligations under the lease that determines substantial performance, reasoned the court;
- Factor 3: The tenant gave no indication of what it intended to do to get back on track or how close any of the properties actually were to being ready for retail subtenants. Adding to the landlord’s concern, it seemed to be spending most of its energy not on the work but on trying to negotiate a new master plan for the development; and
- Factor 4: Although the court didn’t say the tenant had shown bad faith, it did go out of its way to point out the good faith the landlord exhibited over the course of and during the termination of the lease [Watkins Dev. v. Jackson Redevelopment Auth.: 2019 Miss. LEXIS 356].