Opinion ID: 1191742
Heading Depth: 1
Heading Rank: 2

Heading: rent abatement under a commercial lease

Text: Tsern contends that the trial court erred in ruling that it could fix an amount for the abatement of rent based on that court's finding that the parties had agreed to the concept of rent abatement during the time the elevator was inoperable but not to the amount. In the alternative, Tsern contests the trial court's ruling that Barton's covenant to pay rent was dependent on Tsern's compliance with the covenant to repair the elevator. Barton contends (1) that there was an oral agreement with Tsern to abate rent, and alternatively (2) that Barton was entitled to abatement on the ground that Tsern violated an implied covenant of suitability of the building for the intended purpose and, in any event, that the covenant to pay rent was dependent on the covenant to repair the elevator. It is fundamental that a meeting of the minds on the integral features of an agreement is essential to the formation of a contract. See Pingree v. Continental Group of Utah, Inc., 558 P.2d 1317, 1321 (Utah 1976); Valcarce v. Bitters, 12 Utah 2d 61, 362 P.2d 427, 428 (1961). An agreement cannot be enforced if its terms are indefinite or demonstrate that there was no intent to contract. Valcarce, 362 P.2d at 428; 1 Joseph M. Perillo et al., Corbin on Contracts § 4.3, at 569 (rev. ed. 1993). The trial court found that the parties agreed to the concept of a rent credit (emphasis added) but did not agree on an amount. Communications between the parties concerning a possible rent abatement began on December 10, 1991. At that time, Tsern had not repaired the elevator or even contracted to have it repaired, and a holdover tenant still had possession of the second floor. Barton therefore could have repudiated the lease. Barton proposed a rent credit, and Tsern was amenable to the general idea. Initially, Tsern suggested a 50%, or $1,500, rent abatement. Barton did not accept the offer but counter offered by proposing a rent credit because of the holdover tenant's occupancy of the second floor and for any further time necessary to repair the elevator. Discussions continued into January. Tsern then asserted that Barton was obligated to pay full rent, and Tsern continued to so contend through the trial and this appeal. The lease does not explicitly provide for a remedy in this situation. The only portion of the lease which is conceivably applicable is paragraph 9.6, which reads as follows: In the event of [certain] damage ... and Lessor or Lessee repairs or restores the Premises pursuant to the provisions of this Paragraph 9, the rent payable hereunder for the period during which such damage, repair or restoration continues shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. The paragraph provides a remedy only in the event of damage to the premises and has no application to this case. This case does not involve damage to the property. Having found that the parties had not agreed on the amount of an abatement, the trial court nevertheless ruled that it could fix a reasonable amount because the parties had agreed to the concept of a rent abatement. Tsern argues that the trial court erred in supplying a requisite term of the proposed modifications. We agree. We first observe that because no finding of fact is challenged, the issue is one of law. Accordingly, we do not defer to the trial court's ruling. The only issue, given the trial court's findings, is whether the parties agreed on each of the necessary elements of a valid modification. We hold that they did not. Courts may not impose a modification of a lease to which the parties have not agreed and, a fortiori, may not do so when the parties have explicitly disagreed as to the essential terms thereof. A valid modification of a contract or lease requires a meeting of the minds of the parties, which must be spelled out, either expressly or impliedly, with sufficient definiteness. Valcarce v. Bitters, 12 Utah 2d 61, 63, 362 P.2d 427 (1961); see Restatement (Second) of Contracts § 33(1) (1981). Modification of such terms as the amount of rent must be agreed upon in a modification of a lease agreement. As Corbin notes, when parties have not agreed on a reasonable price or a method for determining one, the agreement is too indefinite and uncertain for enforcement. Joseph M. Perillo et al., Corbin on Contracts § 4.3, at 568 (rev. ed. 1993); see Pingree v. Continental Group of Utah, Inc., 558 P.2d 1317, 1321 (Utah 1976) (holding option to renew in lease that provided for rental amount to be negotiated but not to exceed specified amount too vague and indefinite to be enforceable). Barton and Tsern did not agree as to the amount of the abatement, either expressly or impliedly. [1] As an alternative to the lease modification ground for abating rent, the trial court also ruled that the covenant to pay rent was dependent on the lessor's compliance with its covenant to repair the elevator. Tsern argues that the trial court erred in so ruling and that a lessee's covenant to pay rent is independent of a lessor's obligations once the lessee takes possession of the premises. See General Ins. Co. of Am. v. Christiansen Furniture Co., 119 Utah 470, 229 P.2d 298 (1951); Jespersen v. Deseret News Publishing Co., 119 Utah 235, 225 P.2d 1050 (1951); 3A Arthur L. Corbin, Corbin on Contracts § 686 (1960); 6 Samuel Williston, A Treatise on the Law of Contracts § 890 (3d ed. 1962); see also P.H. Inv. v. Oliver, 778 P.2d 11, 12 (Utah Ct.App.1989). He argues that the trial court consequently erred in ruling that the contract doctrine of mutually dependent covenants governed and that Barton's obligation to pay rent was dependent on Tsern's covenant to repair the elevator. Specifically, he relies on King v. Firm, 3 Utah 2d 419, 285 P.2d 1114 (1955), which held that a lessee's covenant to pay rent was wholly independent of the lessor's covenant to make repairs even though the lessee had paid for repairs and the lessor had not reimbursed the lessee. At common law, a lease transferred an interest in land to the lessee. Although a lease covenant to pay rent at common law was governed partly by the law of contracts and partly by real property law, a lease was considered primarily a conveyance of an interest in land. Williston, § 890, at 587, 590. Under principles of property law, the lessor's covenants were independent of the lessee's covenant to pay rent. Williston, § 890; Corbin, § 686. This doctrine originated in an agrarian society in which the estate in land was the most important feature of the real estate lease. The lessor was required to deliver the right of possession to the lessee, and the lessee was required to pay rent, even if the lessor failed to comply with an obligation imposed by a covenant in the lease. Each party had an independent action for breach of a covenant by the other party, Williston, § 890, at 590, but a lessor's breach of a covenant did not relieve the lessee of the obligation to pay rent. The doctrine that lease covenants are independent obligations was established prior to the development of the doctrine of mutually dependent covenants in contract law and often caused harsh results. Williston, § 890, at 585-88. Eventually, the common law rule was mitigated to some extent by the fiction of constructive eviction, which allowed a lessee to stop paying rent if a lessor's breach of a covenant or warranty was tantamount to eviction of the tenant from the premises. This Court first modified the rule by holding that a breach of the implied covenant of quiet enjoyment to which all leases are subject [2] could constitute a constructive eviction and thereby relieve a tenant of the obligation to pay rent. Thirteenth & Washington Sts. Corp. v. Neslen, 123 Utah 70, 254 P.2d 847 (1953); see also Brugger v. Fonoti, 645 P.2d 647 (Utah 1982). To establish a constructive eviction, however, the lessee had to vacate the entire lease-hold, and only then could the lessee withhold rent. See Brugger v. Fonoti, 645 P.2d 647 (Utah 1982); Thirteenth & Washington Sts. Corp. v. Neslen, 123 Utah 70, 254 P.2d 847 (1953); Barker v. Utah Oil Ref. Co., 111 Utah 308, 178 P.2d 386, 387-88 (1947); accord Tregoning v. Reynolds, 136 Cal.App. 154, 28 P.2d 79 (1934); Shindler v. Grove Hall Kosher Delicatessen & Lunch, Inc., 282 Mass. 32, 184 N.E. 673 (1933); see also 2 Richard R. Powell, Powell on Real Property § 232(1) (1994). For example, in Thirteenth & Washington Streets, a group of attorneys leased office space in a commercial building. The lessor impeded their use of the premises by obstructing the entrance to the building so that clients could not find the lessees' offices and by locking the front doors and shutting down the elevator prior to the close of the lessees' business day. This Court held that the landlord's failure to provide access to the leased premises during business hours was a breach of the covenant of quiet enjoyment and constituted a constructive eviction from the premises. On that rationale, the lessees were entitled to abandon the premises and withhold rent. The common law rule of independent covenants was further modified by the rule that a lessee who abandons only a portion of leased premises that is rendered unusable is constructively evicted therefrom and may withhold a proportional share of the rent without abandoning the entire premises. Corbin states: Continued enjoyment of possession is a condition, even though not expressly so provided, of the tenant's duty to pay rent or to perform his other covenants. Eviction from possession of any substantial part of the premises goes to the essence and operates as a discharge of the tenant's duty. Corbin, § 686, at 241; see, e.g., Dennison v. Marlowe, 106 N.M. 433, 744 P.2d 906, 910 (1987); Minjak Co. v. Randolph, 140 A.D.2d 245, 528 N.Y.S.2d 554, 557 (1988); see also Williston, § 890. In Union City Union Suit Co. v. Miller, 162 A.D.2d 101, 556 N.Y.S.2d 864 (1990), a case remarkably similar to the instant case, a commercial lessor failed to repair, and eventually removed, a freight elevator from a leased building in violation of the lease. The court held that the lessor had constructively evicted the lessee from one floor of the building and that the lessee had no obligation to pay rent for the second floor. In other cases, however, the doctrine of constructive eviction was inadequate to achieve a fair result. For example, if a lessor breached a covenant to repair and the lessee made the necessary repairs, the lessee could not offset the cost of those repairs against the rent owed. Even if the cost of repairs exceeded the rent, the lessee was subject to eviction for failure to pay rent. See King v. Firm, 3 Utah 2d 419, 424, 285 P.2d 1114, 1117 (1955) (citing 3 Williston, A Treatise on the Law of Contracts § 887 F (rev. ed.)). Although the fiction of constructive eviction served the useful purpose of ameliorating the harshness of the rule of independent covenants while continuing to use recognized common law vocabulary and concepts, even the doctrine of constructive eviction had limited capacity to achieve fairness. With the evolution from an agrarian to an urbanized, industrialized society, improvements on the land became relatively more important. Improvements such as houses, apartments, office and commercial buildings, and plants and factories came to have greater value to the lessee than did the land itself. These developments have required courts to reassess the doctrines that underlie and define the legal rights and liabilities of parties to a lease. In 1985, this Court recognized that certain property law rules that historically governed the leasing of land had become obsolete. In Williams v. Melby, 699 P.2d 723, 727 (Utah 1985), this Court observed that the realities of the expectations and relationships of lessors and lessees had so changed from earlier times that it was necessary to recognize that a residential lessee does not realistically receive an estate in land. Rather, the lessee's rights, liabilities, and expectations are more appropriately viewed as governed by contract and general principles of tort law. On the basis of tort law, a landlord was held to have a higher duty of due care to a tenant than property law had historically imposed. We observed that because the purposes for leasing land had evolved, the common law tort duties of landlords had been expanded from what they had been under the common law in almost all states. See id. at 726-27; Javins v. First Nat'l Realty Co., 428 F.2d 1071, 1074 (D.C.Cir.1970) (When American city dwellers, both rich and poor, seek `shelter' today, they seek a well known package of goods and services  a package which includes not merely walls and ceilings, but also adequate heat, light and ventilation, serviceable plumbing facilities, secure windows and doors, proper sanitation and maintenance.). Four years after deciding Williams, this Court again reflected on the changes in circumstances affecting the leasing of real estate, this time in the context of a commercial lease, and held that principles of contract law rather than property law governed the law of damages in computing a lessee's liability for damages for breach of a lease. Reid v. Mutual of Omaha Ins. Co., 776 P.2d 896 (Utah 1989). The Court stated: The trend rule [that the lessor has an obligation to mitigate] reflects the more modern view that the leases are essentially commercial transactions, contractual in nature. . . . . ... [T]he traditional rule also stems from the ancient concept that a leasehold is a complete conveyance of real property... and the landlord simply has no present ownership interest in the property during the lease term.... Today, leases are generally viewed as commercial transactions in which the landlord retains the estate but permits its use by another on specified conditions; leases are seldom seen as complete conveyances of the underlying property for a specified term. Id. at 904-05 (emphasis added). The same rationale was one of the important premises of this Court's decision in Wade v. Jobe, 818 P.2d 1006 (Utah 1991). In Wade, we again observed that the reality of modern residential leases is that lessees bargain for the use of the structures, facilities, and services attached to the land rather than the land itself, so that the appurtenances to the land are the more important feature of the lease. Id. at 1009; see Williams v. Melby, 699 P.2d 723, 727 (Utah 1985); Javins v. First Nat'l Realty Corp., 428 F.2d 1071, 1074 (D.C.Cir.1970). We held that a contract concept of implied warranty should be extended to residential leases in the form of an implied warranty of habitability and that the covenant to pay rent was dependent on the lessor's compliance with the implied warranty of habitability. Wade, 818 P.2d at 1010. The ruling in Wade is consistent with the positions taken on similar issues in a majority of states. E.g., Javins, 428 F.2d at 1074; Boston Housing Auth. v. Hemingway, 363 Mass. 184, 293 N.E.2d 831 (1973); Park West Management Corp. v. Mitchell, 47 N.Y.2d 316, 418 N.Y.S.2d 310, 391 N.E.2d 1288 (1979); Kamarath v. Bennett, 568 S.W.2d 658 (Tex. 1978). We find that the principles announced in Wade in the context of residential leases are equally applicable to the commercial context. In addition, several other states have held that under certain circumstances, commercial lessees may withhold rent. One group of states, which includes Texas and New Jersey, holds that covenants in commercial leases are mutually dependant. Texas offers the most expansive protection for commercial leases; it extends to commercial lessees all protections available to residential lessees, including an implied warranty of suitability that the leased premises are suitable for their intended commercial purpose. Davidow v. Inwood North Professional Group  Phase I, 747 S.W.2d 373, 377 (Tex.1988). The court in Davidow reasoned that a commercial lessee should have the same protections as those accorded a residential lessee and that contract principles rather than medieval property principles should apply. See also Gober v. Wright, 838 S.W.2d 794 (Tex.Ct.App.1992); Kerrville HRH, Inc. v. City of Kerrville, 803 S.W.2d 377 (Tex.Ct.App.1990); Henry S. Miller Mgmt. Corp. v. Houston State Assocs., 792 S.W.2d 128 (Tex.Ct.App.1990); Coleman v. Rotana, Inc., 778 S.W.2d 867 (Tex.Ct.App. 1989). Although it stopped short of providing the same broad protections as Texas, the New Jersey Supreme Court held that fair treatment for tenants with respect to latent defects remediable by the landlord ... require[s] imposition on [the landlord] of an implied warranty against such defects. Reste Realty Corp. v. Cooper, 53 N.J. 444, 251 A.2d 268, 273 (1969). A New Jersey appellate court thereafter noted that the state supreme court's decision heralded the demise of the doctrine of independent covenants. Ringwood Assocs. v. Jack's of Route 23, Inc., 166 N.J.Super. 36, 398 A.2d 1315, 1319 (App.Div.1979). A second group of states does not recognize implied warranties in commercial leases but nevertheless holds that covenants in commercial leases may be mutually dependent. Massachusetts and Indiana hold that the covenant to pay rent and the covenant to repair may be mutually dependent. Erhard v. F.W. Woolworth Co., 374 Mass. 352, 372 N.E.2d 1277 (1978). [3] See Welborn v. Society for Propagation of Faith, 411 N.E.2d 1267, 1269 n. 4 (Ind.Ct.App.1980) (citing Morrison's Southern Plaza Corp. v. Southern Plaza, Inc., 252 Ind. 109, 246 N.E.2d 191 (1969), where the court treated the covenants in a commercial lease as mutually dependent). The Supreme Court of Pennsylvania has held that a covenant to pay rent is dependent on all covenants that were significant inducements to the making of the lease. Teodori v. Werner, 490 Pa. 58, 415 A.2d 31 (1980). [4] Both groups of cases recognize that the covenant to pay rent under a commercial lease is dependent on the lessor's compliance with those covenants necessary to provide the lessee with the benefits that were the essence of the bargain as reflected in the lease. This approach relieves a lessee of the obligation to abandon the premises, as is necessary under the fiction of a constructive eviction. By making the lessee's covenant to pay rent dependent on the lessor's performance of essential covenants, the legal analysis can focus, as it should, on the essential elements and purposes of the bargain between the lessor and the lessee. By employing contract principles, a court's analysis of a dispute between a lessor and a lessee should provide a more fair, realistic, and forthright analysis of whether a lessee may abate rent. The result reached on such an analysis should better comport with modern leasing practices and expectations than the result under an analysis based on the principle of independent covenants as modified by the doctrine of constructive eviction. To the extent that King v. Firm, 3 Utah 2d 419, 285 P.2d 1114 (1955), is inconsistent with this conclusion, it is overruled. Not all breaches of covenants by a lessor, however, justify a lessee in withholding rent. Only a significant breach of a covenant material to the purpose for which the lease was consummated justifies a lessee in abating rent. Temporary or minor breaches of routine covenants by a lessor do not. Thus, if a breach has little effect on the essential objectives of the lessee in entering into the lease, the lessee may not withhold rent. Restatement (Second) of Property § 7.1, cmt. c (1977) states that a covenant is not a significant inducement if the landlord's failure to perform his promise has only a peripheral effect on the use of the leased property by the tenant. See also Ringwood Assoc. Ltd. v. Jack's Route 23, Inc., 166 N.J.Super. 36, 398 A.2d 1315, 1320 (App.Div. 1979). A significant inducement means the performance of [a] promise [that has] a significant impact on the benefits the tenant anticipated he would receive under the lease. Restatement (Second), § 7.1 cmt. c. Thus, in assessing whether a lessor's breach is sufficient to justify the withholding of rent, a lessee first and a court later, if necessary, must gauge the materiality of the breach in light of the lessee's purpose in leasing the premises. Relevant to that determination may be whether the breach has a significant effect on the rental value of the premises. See Davidow v. Inwood North Professional Group  Phase I, 747 S.W.2d 373, 377 (Tex. 1988). In sum, we hold that the lessee's covenant to pay rent is dependent on the lessor's performance of covenants that were a significant inducement to the consummation of the lease or to the purpose for which the lessee entered into the lease. As noted above, this conclusion is consistent with our holding in Wade v. Jobe, 818 P.2d 1006 (Utah 1991), and with the direction in which the law in this state has been evolving with respect to the nature of the legal duties that parties to a lease have. See Reid v. Mutual of Omaha Ins. Co., 776 P.2d 896 (Utah 1989); Williams v. Melby, 699 P.2d 723 (Utah 1985). Holding Barton liable for the full amount of rent when a significant part of the leased premises was practicably unusable for the purpose for which the premises were leased would be tantamount to requiring that Barton pay for something he could not use in the manner intended when the lease was executed, given the nature of his business and the nature of the building. Tsern knew that an operable elevator was essential to Barton's use of the second floor and that the lack of an operable elevator was not simply a matter of inconvenience. Tsern's promise to repair the elevator was a significant inducement to Barton to enter into the lease. Indeed, on several occasions before the lease was signed, Barton explicitly told Tsern that the business required an operable elevator. The absence of an operable and safe elevator had more than a peripheral effect on Barton's use of the premises; it impaired Barton's ability to conduct its business on the premises. It follows that Tsern was entitled to receive rent equal to the value of the premises without an operable freight elevator. In computing the amount of rent abatement or reimbursement to which a lessee is entitled, the trial court followed the formula set out in Wade v. Jobe, 818 P.2d 1006, 1012-13 (Utah 1991). Under that approach, the lessee is entitled to abate rent by an amount equal to the reduced value of the premises due to the lessor's breach. Id. at 1012-13. Apparently anticipating that this Court might adopt the principle of dependent covenants, Tsern argues that the rule should be applied only prospectively because it would constitute an abrupt departure from prior law on which Tsern has relied. While the adoption of the principle of dependent covenants is a departure from prior law, the result we reach in this case is not different from the result we would have reached had we applied the rule of constructive eviction. See Thirteenth & Washington Sts. Corp. v. Neslen, 123 Utah 70, 254 P.2d 847 (1953); Union City Union Suit Co. v. Miller, 162 A.D.2d 101, 556 N.Y.S.2d 864 (1990). For that reason, we decline to hold that the rule of dependent covenants should not be applied in this case.