Don't Rely on Owner's Breach to Justify Your Noncompliance with Lease

If the owner of your space breaches its lease, you might think that you're justified in not complying with the lease terms either. But don't be fooled into thinking that the eye-for-an-eye philosophy applies--especially if the owner's breach was minor or nonmaterial. A New Jersey tenant found out the hard way that sticking with what you agreed to in the lease is the best move—regardless of what the owner does.

In that case, the tenant—a securities firm—moved out of its office building space three and a half years before the end of the lease term and stopped paying rent. The owner of the office building sued the tenant. The tenant denied that moving out of its space and failing to pay rent had breached the lease. It said that it had been “compelled” to move because the owner breached the lease by allegedly violating the covenant of good faith and fair dealing, among other claims. A district court determined that the tenant had breached the lease. The tenant appealed.

A New Jersey appeals court upheld the district court’s decision. On appeal the tenant asserted that the owner’s supposed breach pre-dated the tenant’s breach, which was based on its failure to pay rent after it vacated the premises. The tenant contended that because the owner breached the lease first, the tenant was excused from further performance as a matter of law. But the appeals court disagreed. It said that when there’s a breach of a “material” term of an agreement, the non-breaching party is relieved of its obligations under the agreement. A breach is material when it goes to “the essence of the contract,” the appeals court noted.

The tenant maintained that the owner made several material breaches of the lease, including leasing space in the building to another securities firm (despite a provision of the lease precluding it from doing so) and failing to make certain agreed-upon renovations to the premises. The appeals court agreed with the trial court that the tenant was able to use the leased premises during the 17 months of its occupancy, and that the problems it had identified with the building and other tenants didn’t materially impair its ability to conduct its business in the premises [40 Eisenhower Drive, LLC v. Karoon Capital, December 2014].