By M. Rosie Rees

Historically, a commercial lease was treated as a conveyance of real property, and real property laws governed interpretation of the lease. Under real property law principles, the agreements of one party to the lease were independent of the agreements of the other party. Thus, if the landlord failed to satisfy one of its covenants—for example, to provide adequate heat—the tenant was not released from its covenant to pay rent. The tenant could not offset rent, exercise self-help, or terminate the lease due to the landlord's default. The tenant's only remedy was to sue the landlord for damages. The only time a tenant was entitled to terminate the lease following a default by the landlord was if the breach by landlord was so egregious as to constitute a constructive eviction. In other words, only if the actions or inactions of the landlord were so severe that the tenant was forced to vacate the real estate would the tenant be entitled to terminate the lease. However, it was very hard for tenants to prove such egregious conduct as would allow a tenant to terminate a lease.

Treating a commercial lease as a conveyance of real property made sense when most leases were of farmland, and where the landlord had few, if any, obligations. However, the modern commercial lease is more likely to be space in a high-rise office building or multi-tenant retail center, where the landlord undertakes extensive obligations with respect to maintenance, leasing, etc.

Therefore, the modern trend is to treat a commercial lease as a contract, rather than as a conveyance of an interest in real property. Under contract principles, the covenants of one party are dependent on the covenants of the other—so that if one party breaches the contract, the other is excused from performance. This change is the law in a number of states, including New Jersey, Utah, Arizona, and Pennsylvania.

The most recent example of this change in the law is a case decided by the Supreme Judicial Court of Massachusetts, Wesson v. Leone Enterprises, Inc. . In this case, the tenant claimed that it had been constructively evicted by the landlord's failure to repair roof leaks, which damaged the paper and equipment used in the tenant's printing business. The court did not feel the breach by the landlord rose to the level of a constructive eviction (because the tenant had not submitted evidence that its business had been damaged by landlord's default), but the court still allowed the tenant to terminate the lease, and recover its costs of relocation, by adopting the contract theory of lease interpretation—in other words, that the landlord's and tenant's agreements in the lease were dependent on each other. The landlord's failure to keep the roof in good repair allowed the tenant to stop performing its obligations and thus to terminate the lease.

A most interesting feature of the Massachusetts case is that the court adopted the modern theory of treating leases as contracts retroactively, stating that since commercial landlords have known that the trend was towards adoption of this theory, they, "have had ample warning and opportunity to anticipate such a change and to incorporate appropriate provisions in their lease agreements." This puts landlords who have not already addressed this issue in their leases at risk that a tenant may exercise a self-help right, or withhold rent, or even terminate the lease due to a failure of the landlord to perform its obligations.

Not every breach by landlord of a covenant will give rise to a right by the tenant to termination, abatement, etc.—only those covenants which are "a significant inducement to the making of the lease." In the Massachusetts case, landlord's obligations to provide a non-leaking roof and dry environment were found to be a significant inducement to the tenant's entering into the lease. In other jurisdictions that have adopted the modern contract theory, the failure to repair an elevator, failure to provide adequate heat, failure to honor a tenant's exclusive use provision, consistently and intentionally overcharging tenant for insurance and taxes, and unreasonably withholding consent to an assignment have all been found to be significant inducements.

As the Massachusetts case makes clear, if the lease is silent as to whether the covenants of the parties are independent or dependent, the landlord is at risk that the dependence of covenants theory may apply. Landlords can protect themselves (and their lenders, who rely on the tenant's rental stream and do not want tenants to have rights like abatement and termination) by including language such as the following:

"The obligations of Landlord and Tenant, respectively, under this Lease are expressly agreed by the parties to be independent covenants. If Landlord fails to perform any obligation under this Lease required to be performed by Landlord, Tenant shall have no right to: (i) terminate this Lease; (ii) avail itself of self-help or to perform any obligation of Landlord; (iii) abatement or withholding of rent or any other charges or sums payable by Tenant under this Lease; or (iv) any right of setoff. "

By including express language making the covenants of landlord and tenant independent, landlords and lenders will avoid unanticipated bad results if their jurisdiction were to adopt the modern, dependence of covenants theory.

Rosie Rees is a partner at Pircher, Nichols and Meeks, a law firm with offices in Chicago and Los Angeles specializing in real estate law.