Realty leased a car lot to JJ Cars for a five-year term starting July 1, 2011.
John Mokarzel, owner of JJ Cars, guaranteed the Lease obligations. JJ Cars was
successful initially. But by February 2013 JJ Cars was in financial distress.
John decided to close his business
and sublet. From February 2013 until October 2015, three different businesses
subleased the property from JJ Cars. Approval for the first and third was
obtained from H&B’s owner Sterling Boyington. Evidently Boyington never
objected to the second sublet although he knew of it and may have furnished tacit
consent, if not actual approval.
In November 2015 JJ Cars sought
formal consent from H&B to sublease the property to Wholesale Motors. Boyington
refused, claiming he disliked Wholesale’s owner, Dave McGovern.
As a consequence, JJ Cars stopped
paying rent. H&B evicted JJ Cars in March 2016, only a few months before
the term was set to expire anyway. H&B sold the property two weeks later.
Several months after the sale
H&B filed a lawsuit against JJ Cars and John Mokarzel, alleging breach of
the Lease and seeking damages for six months of rent. JJ Cars defended by
claiming that H&B breached the Lease by refusing to allow the sublease to
Wholesale Motors, and H&B failed to mitigate its damages.
The trial court concluded that
although JJ Cars failed to pay rent, H&B breached the Lease by unreasonably
withholding its consent to allow the sublease to Wholesale Motors. The court
further determined that H&B did not mitigate damages after JJ stopped
paying rental. The court entered judgment in favor of JJ Cars and John Mokarzel,
concluding that their breach – failure to pay rent – was excused by H&B’s
Lease defaults – unreasonably withholding consent to sublease to Wholesale Motors
and failing to mitigate damages.
H&B Realty appealed.
The Court of Appeals examined Article
XIII of the Lease, and found that: (a) JJ Cars could not sublease without
H&B Realty’s consent; (b) H&B could not unreasonably withhold its consent
to a request for sublease; (c) H&B had the right to review each proposed
subtenant’s credit, business experience, and financial statement; and (d) each
subtenant had to agree to abide by the terms of the Lease.
From there, the examination of the
record revealed that no documents of Wholesale Motors were furnished to H&B.
John Mokarzel testified that, simply put, H&B’s owner Sterling Boyington did
not like Dave McGovern, owner of Wholesale Motors. Due to Boyington’s dislike
of McGovern, there was no purpose in delivering documents and financial
statements, and agreeing to abide by the terms of the Lease.
The Court of Appeals determined that
Boyington’s refusal to consider Wholesale Motors as a subtenant was a breach of
Landlord’s duty to not unreasonably withhold consent. That breach ended any
chance of JJ Cars to use the property in a way that would continue to generate
income to pay rent.
Boyington’s breach was material, and
excused JJ Car’s failure to pay rent.
JJ Cars wins again. See H&B Realty, LLC v. JJ Cars, LLC; Case 2021-ME-14, Maine Supreme Court; March 23, 2021: https://law.justia.com/cases/maine/supreme-court/2021/2021-me-14.html.
Lessons / Questions
Most commercial Leases require Landlord’s approval before a Tenant can assign
or sublease. Some prohibit subleasing and assigning entirely. It seems
inconsistent that a Landlord can prevent a financially distressed Tenant
from assigning or subleasing, and yet not be found liable for failure to
mitigate damages when the Tenant could not pay rent.
From this Court’s perspective, it is not enough for a commercial Landlord
to reject a sublease application simply because the Landlord dislikes the
owner of the proposed assignee or sublessee. If this Landlord had used the
pretext of declining Wholesale Motors due to one of the reasons stated in
the Lease (credit, business experience, financial statement), it likely
would have sufficed and the outcome reversed.
What does your Lease form say about Lease assignments and Premises subleases?
Do the laws of your State add an overlay to that analysis? Will your
Courts uphold the right of a Landlord to unequivocally say NO, then
successfully chase the Tenant and Guarantor for damages?
Stuart A. Lautin, Esq.*
* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization
Licensed in the States of Texas and New York
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.