Okay for Tenant to Stop Paying Rent Despite "Hell or High Water"

Facts: Under the terms of a lease, a landlord was obligated to provide a building pad on which the tenant agreed to build a home improvement center, which opened in 1990. Three years later, the landlord mortgaged the property to an insurance company. The mortgage was guaranteed by an assignment of the lease agreement and the tenant was to make all payments, including rent, directly to the mortgagee. The tenant also signed a recognition agreement with the mortgagee, which included a “hell or high water” clause and an estoppels certificate. Several years later, when the tenant detected cracks in the building’s walls and noticed that the lot was settling unevenly, it stopped paying rent claiming the defective building pad resulted in its constructive eviction. The mortgage owner sued the tenant to recover rent payments owed under the lease agreement and the recognition agreement. A U.S. district court ruled for the mortgage owner, but the tenant appealed claiming that neither the “hell or high water” clause in the lease agreement nor the estoppels certificate barred it from asserting constructive eviction as a reason for stopping payment of rent.

Decision: A New York appeals court vacated the district court’s judgment and remanded the case for further proceedings.

Reasoning: The retailer said that it did not discover the defective building pad until at least two years after the recognition agreement was signed. The court reasoned that as long as the retailer inspected the building pad before building improvements on it, and was unaware of the faulty condition of the building pad when it executed the recognition agreement, the estoppels certificate does not bar the retailer from using constructive eviction as a defense. As a result, the “hell or high water” clause in the assignment agreement would terminate as a result of constructive eviction. Under New York law, a tenant who has been constructively evicted is relieved of its obligation to pay rent because that constructive eviction terminates the lease including the tenant’s obligation under the “hell or high water” clause.

n Reliastar Life Insurance Co. v. Home Depot U.S.A., Inc., June 2009