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New legal developments.

The past year brought about a host of legal developments affecting property owners and managers. Key cases and legislation addressed issues such as sublets, constructive eviction, the First Amendment, fraud, premises liability, and continuous operation clauses.

State law governing these issues can vary dramatically, so owners and managers are urged to become familiar with legal developments in their states. This article presents a brief selection of some of the more interesting recent court decisions and statutes.

Assignment and sublet low

Many commercial leases prohibit the tenant from subletting or assigning without the owner's prior written consent. But often, these leases do not specify under what circumstances the owner or manager may withhold consent. While the law in some states requires an owner to act reasonably or in good faith in approving or disapproving an assignment or sublet, elsewhere, owners retain absolute discretion to deny sublet and assignment requests if the lease so provides. Courts in yet another group of states have not yet ruled on the issue.

The controversy continued in 1990. For example, in a New Jersey decision, a retail lease gave the owner the absolute right to withhold consent to both assignments and sublets. While the court ducked the question of whether the "absolute" right was strictly enforceable, it upheld the owner's refusal based on "reasonable business concerns," i.e., concern that the purchaser/assignee would not maintain the same level of percentage rent as the current tenant (Jonas v. Prutaub Joint Venture).

On the other hand, the Connecticut Supreme Court ruled that the owner must act in good faith and deal fairly when considering sublet and assignment requests, even if the lease gives the owner absolute discretion to withhold consent. In Warner v. Konover, the owner would not allow the tenant to assign or sublet unless it renegotiated the rental terms of the lease. The court held that this did not constitute fair dealing and ruled in favor of the tenant.

In California, new legislation applicable to leases executed on or after September 23, 1983, provides that the parties may mutually agree upon any express standards for, or conditions to, a landlord's consent to an assignment or sublet. However, ff the lease requires the landlord's consent to an assignment or subletting but provides no standard for such consent, then consent may not be unreasonably withheld by the landlord.

In American Stores Corp. v. Newman, a Nebraska court was unusually protective of the tenant's rights. The lease prohibited assignments without the owner's consent, but permitted sublets. After failing to obtain the owner's consent to assignment, the tenant "sublet" the premises for a term ending two days prior to the expiration date of the lease. The owner argued this was a disguised assignment, but the court ruled for the tenant, holding that any transfer that ends before the original term expires is a sublet.

The recent cases and legislation suggest a trend toward allowing parties with equal bargaining power to freely negotiate the express provisions of their leases. However, if the rights between the parties are not clearly defined, or if bargaining power appears to be unequal, some state courts seem to liberally construe assignment and sublet provisions in favor of tenants.

Constructive eviction

Courts often are called upon to balance manager and tenant rights where a disturbance of the tenant's possession by the property manager renders the premises unfit for their intended occupancy or deprives the tenant of beneficial use and enjoyment of the premises, causing the tenant to abandon.

Constructive eviction claims generally hinge on the specific facts presented, as courts assess the degree of interference with the tenant's operations and try to reach an equitable result. Several recent constructive eviction decisions involved interesting fact situations.

In a New York case, the owner removed the building's freight elevator during renovation and conversion the building into co-op apartments despite a lease provision requiring the landlord to provide freight elevator service. The court ruled that removal of the elevator constituted an actual partial eviction which suspended the tenant's obligation to pay rent (Union City Union Suit Company Ltd. d/b/a Health Loan Corp, v. Nachume Miller).

In Fidelity Mutual v. Kaminsky, the tenant was a gynecologist who performed elective abortions. Anti-abortion protestors picketed the building until the tenant vacated. A Texas court held that the landlord breached the express covenant of quiet enjoyment in the lease and constructively evicted the tenant by failing to deal with the protestors.

Other courts, however, have favored landlords in their decisions. In an important California decision, Segalas v. Moriarty, an office tenant complained that construction work in a nearby space disrupted the tenant's use of its premises and attracted insects. However, the tenant did not relocate until six months after the construction was completed. The California court ruled in favor of the owner, stating that a tenant cannot claim constructive eviction unless the tenant vacates the premises within a reasonable time.

Other decisions focused on the nature of the claimed disturbance to deny constructive eviction claims. In Scolamiero v. Cincotta (New York), a reduction in its parking rights entitled the tenant to a reduction in rent, but the court ruled that the tenant had not been evicted and therefore could not withhold all of the rent.

The court was even less persuaded by the tenant's claim in Tucker v. Watson, a Kansas decision. In that case, the tenant vacated because the owner had failed to provide a water meter. The court ruled that the tenant was not constructively evicted because it had not proved the space was unfit for occupancy. The court was persuaded by the fact that water service had never been discontinued, the tenant had not properly notified the owner about the water problem, nor had the tenant given the owner reasonable time to respond.

Free Speech activities

in shopping centers

Can private mall owners absolutely prohibit groups from accessing their centers for expressive activity? Courts in Arizona, Connecticut, Michigan, New York, North Carolina, Pennsylvania, and Wisconsin have said "yes." However, other courts have allowed limited access by political activists.

Two California decisions shed new light on the debate. Savage v. Trammell Crow Company upheld the shopping center's power to prohibit leafletting in its parking lot, but rejected the shopping center's attempt to distinguish between "political" and "religious" expressive activities, where the plaintiff had attempted to place gospel literature on vehicles in the parking lot.

The court held that freedom of expression is not limited to "political" activities. Prohibiting the expression of religious beliefs, while allowing the expression of other beliefs, would be impermissible. However, the owner could bar all leafletting in the parking lot because the restriction was content neutral and narrowly tailored to serve the shopping center's significant interest in controlling litter and traffic, while leaving adequate alternative channels for communicating information by permitting leafletting on the center's sidewalks.

Similarly, in Westside Sane/Freeze v. Ernest W Hahn, Inc., the court held that all forms of expressive activity in privately owned shopping centers are protected, not merely pure "political petitioning" (defined by the center as collection of signatures on petitions and the like).

In Washington, political activists recently lost a battle over their claimed right to demonstrate, solicit funds, and collect petition signatures in private malls. The Washington Supreme Court ruled that political groups have no constitutional right to solicit contributions or sell literature on mall property. Such groups may use mall property only to gather signatures in order to put referenda or initiatives on the ballot (South-center Joint Venture v. National Democratic Policy Committee).

Misrepresentation

and fraud claims

In making offers tenants cannot refuse, leasing agents and owners sometimes make promises they cannot keep. Owners should be aware that these promises and representations can be actionable.

Recent decisions have involved representations about such matters as the promised tenant mix or exclusivity (Donald H. Hartvig, Inc. v. Clackamas Town Center Associates in Oregon), and the status of sale of the property, which would affect the tenant's rights (Jim-Bob, Inc. v. Mehling in Michigan).

Oral representations can have serious consequences even where the lease provides to the contrary. For example, a Wisconsin appellate court upheld an award of punitive damages against an owner based on the leasing agent's misrepresentation that the tenant would have the exclusive right to sell Italian food in a shopping center. Although the lease explicitly stated that the tenant had no exclusive rights, the agent told the tenant to ignore the lease provision. The court upheld an award of damages for lost profits and punitive damages because the agent's actions were "reckless and outrageous" (H&M Italian Food Corp. v. General Growth Development Corp.).

Liability on promises

Courts continue to struggle with the issue of owner liability for negligence and injuries on the premises. In Love v. Schmidt (Virginia), the court held the owner liable for injury to a tenant's employee who fell off a loose toilet seat in a common-area bathroom. The tenant had previously informed the building manager of the condition.

The court reasoned that, since the building manager was the owner's agent, notifying the manager of the problem constituted notice to the owner. The court also held that if a duty to maintain the premises in a safe condition is imposed by contract or law, it cannot be delegated to an independent contractor.

However, a Tennessee court came to a different conclusion in Marshalls of Nashville, Tenn., Inc. v. Harding Mall Association, Ltd., where the manager hired an independent contractor approved by the tenant to replace the roof of the building. The tenant also hired its own consultant to monitor the contractor's work.

When roof problems occurred, the tenant sued the manager for breach of the repair clause and breach of the covenant of quiet enjoyment. The court held that the landlord was not liable because the manager had not been negligent in selecting the contractor. The tenant also claimed that because the repair was inherently dangerous, the owner could not contract away its duty of due care. The court concluded that repairing the roof was not an inherently dangerous undertaking, so the rule of "non-delegable duty" did not apply.

Finally, the courts have resisted extending the implied warranty of habitability to commercial tenants. In Chasse v. Coz, a factory tenant's employee was injured in an explosion caused by the tenant's manufacturing process and low humidity in the building. The Massachusetts Supreme Judicial Court held that no implied warranty of habitability applied. Low humidity was not a condition for which a manager should be liable, even if in other circumstances the court might recognize an implied warranty of habitability in a commercial lease.

Manager's duty to

mitigate damages

Courts generally require owners to mitigate (reduce) their damages when tenants vacate. The question is whether the owner has taken sufficient steps to mitigate. How far must the owner go?

In Harts Plaza Partners v. N.R. Dayton Mall, Inc. (Ohio), the court held that the manager had reasonably attempted to mitigate damages (even though they were not successful in reletting) because the manager tried to lease the premises to another, less desirable tenant. Therefore, the court held that the tenant remained liable for rent for the remainder of the term.

On the other hand, a New Jersey court found that the owner's efforts were not sufficient although it had advertised in appropriate trade journals and placed "for rent" signs in front of the building (Fanarjian v. Moskowitz).

A recent California case held that a manager is not required to renegotiate a lease with a tenant who has repudiated the original lease and whose lease is terminated by an unlawful detainer judgment, even where such renegotiation would mitigate the manager's damages. The court held that the issue was whether the steps that the manager actually took were reasonable (Zanker Development Co. v. Cogito Systems, Inc.).

Other developments

Two other notable legislative developments deserve comment. On July 26, 1990, President Bush signed the Americans with Disabilities Act of 1990 (ADA) into law. Among other things, the ADA regulates handicapped access to public accommodations and services operated by, private entities.

Significantly, the Act contains a much broader definition of "public accommodations" than is contained in the 1964 Civil Rights Act. The ADA includes restaurants, theaters, hotels, grocery stores, parks, health spas, banks, shopping malls, and other similar places of business. The ADA undoubtedly will become a significant issue for owners and managers as they design and implement their compliance strategies.

In late 1990, the California Legislature enacted AB 2249, the so called "crime in the suites" bill, one of the nation's strictest corporate responsibility laws. The new law imposes personal and corporate criminal liability on a manager or corporation which has actual knowledge of a "serious concealed danger" that is subject to regulatory agency authority and is associated with a product or a business practice, and knowingly fails to inform Cal OSHA and warn employees within a specified time.

Conclusion

The courts and legislatures in 1990 addressed numerous issues of importance to the real estate community. Property owners and managers are urged to stay abreast of changes in law because these developments will have an impact on their operations in 1991 and beyond.

Adrienne T. Kentor is an attorney with Cox, Castle & Nicholson, a Los Angeles-based law firm noted for its work with complex real estate and construction industry transactions and litigation. The firm counsels major financial institutions, investors, and many of the country's leading developers. It has one of the largest real estate law practices in the nation and the largest in California.
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Author:Kentor, Adrienne T.
Publication:Journal of Property Management
Date:Mar 1, 1991
Words:2258
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