No Lease Termination for Anticipatory Breach

Facts: A retail tenant assigned its lease to a drugstore, but asked the owner if it could remain primarily liable for the strip mall space, instead of reducing or entirely relieving itself from liability. The owner objected to the assignment and sued the tenant.

The trial court ruled in favor of the owner. It pointed out that the tenant's lease with the owner provides that the owner is entitled to terminate the lease if the tenant: (1) makes a late rent payment; or (2) is relieved from liability or reduces its liability by assigning or subletting to another business.

The owner claimed that in casual conversations the tenant had persuaded it to treat the drugstore as secondarily liable and to continue treating the tenant as primarily liable. Despite the tenant's continued willingness to be primarily liable for the lease, the owner asserted that the assignment had constituted “sufficient notice of reduced liability as required for termination of the lease.” The trial court ruled in the owner's favor, and the tenant appealed.

The Vermont appeals court determined that the owner did not have the right to terminate the lease without direct notice from the tenant of its reduced liability. And an assignment of the lease or a tenant's financial problems did not amount to direct notice, it added. The owner appealed.

Decision: The Supreme Court of Vermont upheld the decision in favor of the tenant.

Reasoning: The Supreme Court agreed with the appeals court that the assignment was not a signal of reduced liability that the owner could rely on to terminate the lease. That was because the tenant's status was the same before and after the assignment—it was primarily liable for the space.

The owner also argued that the tenant's status as a “shell corporation” was proof of its reduced liability under the lease. According to the owner, shell corporations are financially unstable—and the tenant's alleged financial instability could be interpreted as notice of reduced liability because of the likelihood that a struggling company would not be able to fully pay for the items it was liable for. But the court disagreed with the owner's argument that due to the tenant's supposed lack of financial assets, in the event that the drugstore discontinued rent payments, the tenant would be unable to fulfill its obligations under the lease and the owner would have limited recourse to recover lost rent or income.

The court noted that while there was no dispute that the tenant was a corporation without employees, a bank account, or current income, it was a “special purpose entity”—an operating store that generated significant cash flow that should have provided comfort to the owner that all future obligations could be performed as required under the lease. The tenant's financial status had no bearing on its liability, the court stressed.

The court noted that a commercial owner's right to terminate a lease is directly conditioned upon “actual cessation” of its tenant's liability. And a tenant's financial status did not constitute cessation of that liability. In the absence of direct evidence that a tenant is no longer liable, the owner could not terminate the lease. The court concluded that, as long as the original tenant under a commercial lease—here, the retailer—remains primarily legally responsible
for performance, the lease can be assigned to a third party—here, the drugstore.

• Downtown Barre Development v. GU Markets of Barre, LLC, April 2011