Friday, April 2, 2021



            H&B 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:           

            Lessons / Questions / Observations:

  1. Observation: 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.
  1. Lesson: 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.
  1. Questions: 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.


No comments:

Post a Comment