Drafting Independent Repair and Rent Provisions

Q: A tenant’s space at my shopping center was damaged and I can’t afford to fix it immediately. The tenant is withholding rent, but continuing to operate from an undamaged portion of its store, so I don’t believe that it can claim that it has been “constructively evicted,” which under these circumstances would entitle it to withhold its rent. However, it says that it won’t pay rent again until all of the necessary repairs are made. Can it do this?

A: It depends on whether the rent provisions and repair provisions in your lease are independent of one another. A recent Illinois case is a good example of why it’s important for owners to negotiate and draft their leases to make certain obligations in those agreements independent of other obligations. For example, if the tenant’s duty to pay rent isn’t tied to whether the owner has breached any part of the lease—in your case, the failure to quickly repair damage—it would be forced to pay rent even though repairs aren’t complete. (Keep in mind it might have other remedies, though.)  

Crux of the Case

In the Illinois case, a fire severely damaged two floors of a building that were used by a restaurant tenant. A dispute arose concerning the owner’s duty to repair the property and the tenant’s obligation to pay rent while the repairs were being made. The owner filed a complaint for forcible entry and detainer, seeking termination of the lease and possession of the premises based on the tenant’s refusal to pay rent. In response, the tenant counterclaimed for a declaratory judgment that it didn’t have to pay rent because the property hadn’t been repaired to the condition existing immediately prior to the fire; and it asked for damages for lost profits.

Reasoning for Reversal on Appeal

The owner argued that its duty to repair and the tenant’s duty to pay rent were independent obligations under the lease, meaning that even if the owner failed to meet the repair obligation, the tenant’s obligation to pay rent continued because it wasn’t dependent on whether the repair provisions had been breached. But a trial court ruled in favor of the tenant. The owner appealed.

An appeals court reversed the lower court’s decision. The appeals court determined that the repair and rent provisions of the lease were independent. It noted that a portion of the lease “assigns exclusively to Landlord the duty to ‘repair, replace, or rebuild the premises or any portion thereof damaged by fire occurring during the term of the Lease.'” It was clear that the owner breached its duty to repair the leased building. But the appeals court noted that it was well settled that a tenant’s duty to pay rent and a landlord’s duty to repair are independent obligations. More important, the lease explicitly provided, without exception, that “Rent is due on the first day of each month and [the tenant] agrees to pay a late fee of $50 per day of each month for every day that rent is still not paid in full (including any accrued late fees). Damage or destruction [to the property] shall in no way annul or void this lease.”

Thus, the tenant’s obligation to pay rent and late fees under the lease was not excused following the fire, said the appeals court. The tenant materially breached the lease by failing to pay rent and late fees, and the owner’s forcible entry and detainer complaint sought possession based on that breach; as such, the owner was entitled to succeed on its complaint, said the appeals court [Giannopoulos v. Pitaya, Inc., May 2016].