Tenant's Default Not Excused by Owner's Conduct

Facts: A tenant signed a five-year lease to operate its restaurant in a strip mall. After two years, the tenant asked the owner if it could sublet the space to another restaurant tenant, but the owner refused to sign a consent agreement. The tenant went ahead with its plans to sublet its space anyway.

After it was contacted by the health department about some issues at the restaurant, the owner called the tenant to inform it that it was going to prevent the subtenant from accessing the space. It had the locks changed and gave a new key to the tenant, which had stopped paying the rent it was responsible for under the lease.

The owner found a new subtenant to operate a restaurant in the space for the remainder of the tenant's lease term. The owner gave it access to the premises, without informing the tenant or making an offer to rent or buy its cooking equipment and fixtures. During that time, the owner continued to send monthly rent statements to the tenant, which didn't respond.

After the new subtenant went out of business, the owner terminated the lease and moved the cooking equipment and fixtures into a storage space after the tenant ignored several requests to pick them up. The owner sued the tenant for breaching its lease; the tenant sued the owner for violating its right to quiet enjoyment, wrongfully evicting it, and “conversion” of the cooking equipment and fixtures. The trial court ruled in favor of the owner, and the tenant appealed.

Decision: The appeals court upheld the decision in favor of the owner.

Reasoning: The tenant admitted that it hadn't paid rent for two years of the five-year lease term. But it argued that the breach was excused by the owner's refusal to consent to the tenant's proposed sublet, because the lease provided that the owner would not “unreasonably” withhold such consent. The appeals court noted that the owner hadn't responded in writing to the tenant's request to sublet within 30 days, as required by the lease—or, in fact, at all. It also noted that the tenant sublet the space anyway. Because the tenant and owner hadn't complained about each other's breach at the time, they both waived the right to complain about the other's conduct with regard to the illegal sublet, stated the appeals court. Therefore, the owner's conduct did not excuse the tenant's subsequent failure to pay rent.

The tenant also claimed that, by changing the locks to the space and preventing the subtenant from using it, the owner had breached the covenant of quiet enjoyment it owed to the tenant. Specifically, the lease provided that “Tenant, its permitted subtenants and their employees, licensees, and guests, shall have access to the Premises at all times, 24 hours per day, every day of the year.”

The provision couldn't be enforced by the tenant because, at the time that the locks were changed, the tenant was several months late on rent. “Inasmuch as the covenant of quiet enjoyment applies only after the tenant has paid its rent, in January 2008, the tenant was not entitled to enforce this provision,” said the appeals court. Moreover, when the owner told the tenant that the locks would be changed to prevent the subtenant's re-entry, the tenant did not object. And it was provided with a key to the new locks. The appeals court said that, under those circumstances, it couldn't find that changing the locks breached the covenant of quiet enjoyment.

Finally, the tenant couldn't prove that the owner had “converted—that is, unlawfully took or used—its equipment and fixtures. To establish conversion, the tenant was required to prove that the owner “knowingly or intentionally exerted unauthorized control over property belonging to the tenant.” The entire time that the cooking equipment and fixtures were in the restaurant, the owner recognized that the property belonged to the tenant. And when it terminated the lease, the owner explicitly requested that the tenant remove the property. When the tenant failed to do so, the owner removed it and placed it in storage at its own expense, stressed the appeals court.

• Rextori Pizza, Inc. v. Dutch Mill Plaza, LLC, February 2011