Commerical Leases: What if...?

At Krause Golomb & Witcher LLC, we're often asked to draft and review commercial leases.  Like any good contract, commercial leases should not only set out the basic terms (e.g., rental amount, term of lease), but should also provide for "what if" issues.  What are "what if" issues?  These are provisions in a contract that anticipate circumstances and situations that are not readily apparent or obvious.

For example, some commercial leases are not specific enough about which party is responsible for replacing major structures.  This occurred in NW Parkway LLC. v. Lemser, A10A1781 (3/24/11).  In that case, the parties entered into a 20-year commercial lease.  A few years after the inception of the lease, the lessor inspected the property and notified lessee that it needed to replace the roof.  Not wanting to incur the cost of the replacing the roof, lessee responded by invoking an early-termination clause.  Lessor asserted lessee couldn't terminate early because lessee was in default under the lease by virtue of not replacing the roof.  A lawsuit ensued.

The lease contained several relevant provisions:

• A special stipulation stated that that it was a triple net lease and lessee was responsible for the entire property and building, with the exception that lessor was responsible for walls, concrete slab, and foundation. 

• A dispute-resolution clause stated that the special stipulations trump any other terms in the lease.  

• A paragraph regarding maintenance stated that the lessee acknowledged the premises was in good condition and agreed to maintain the premises, but this paragraph did not include maintaining or repairing the roof.  

• An early-termination clause allowed the lessee to voluntarily vacate if the lessee was not in default under the lease.

• Lastly, a waver of default provision stated that no waiver of any default would be deemed a waiver of any other breach. 

Concluding that the lessee had not defaulted under the lease because it did not have an obligation to repair the roof, the trial court granted lessee's partial motion for summary judgment and declaratory relief.  The trial court found that even if lessee had an obligation to repair the roof, the lessor had waived any right to claim breach because lessor had accepted subsequent rent payments.

The Court of Appeals disagreed and reversed the trial court.

Regarding which party was responsible for replacing the roof, the Court went through the three-step analysis to determine the parties' intent in the contract.  The Court concluded that the plain language of lease obligated the lessee to replace the roof.   This is because the special stipulation stated that lessee was responsible for "all expenses for the entire property and building . . . [except] normal wear and tear" and the lessor was responsible for "any expense" related to the walls, slab, and foundation."

Regarding the waiver clause, the Court acknowledged that acceptance of rental payments often constitute a waiver of the lessee's default and reinstatement of the lease; however, the Court noted that in these cases, the early termination rights solely benefited the lessor.  In NW Parkway, the merger clause benefited the lessee.  Thus, lessee's failure to comply with the terms required to terminate early, i.e., failure to replace the roof, prevented lessee from being entitled to terminate early.  The Court reasoned:  "To hold otherwise would render meaningless the conditions precedent listed in the early termination clause."

The lesson and the "what if" to take from this case is is to make sure, whether you're a landlord or tenant, to carefully articulate in your leases how repairs and replacements of structural items will be completed.

Rare Win for Debtor in Confirmation Case

The Georgia Court of Appeals finally sided with a debtor in a foreclosure confirmation case.  Citizens Bank of Effingham v. Rocky Mountain Enter. LLC, A10A2203 (4/8/11).  At issue in this case was the statutory requirement that a lender report a foreclosure sale to a judge of the superior court of the county in which the land is location within 30 days after the foreclosure sale.  The applicable statute, OCGA § 44-14-161, states as follows: 

no action may be taken to obtain a deficiency judgment unless the person instituting the foreclosure proceedings shall, within 30 days after the sale, report the sale to the judge of the superior court of the county in which the land is located for confirmation and approval and shall obtain an order of confirmation and approval thereon.

In this case, the lender foreclosed on a security deed and filed its petition for confirmation within 30 days after the foreclosure.  At the confirmation hearing, the debtor challenged the confirmation on the grounds that the lender had failed to report the foreclosure directly to a judge of the superior court.  The trial court agreed and denied confirmation to the lender.

On appeal, the lender argued that a motion for continuance filed by the debtor with 30 days of the foreclosure, which was signed by a superior court judge, satisfied the requirement of reporting the sale to a superior court judge.  The lender also argued that the clerk of the court was a proper legal authority under OCGA § 44-14-161, and by virtue of filing the confirmation with the clerk of court, the requirement of notifying a superior court judge was satisfied.

The Court of Appeals rejected both arguments.  Referencing Goodman v. Vinson, 142 GA. App. 420, 236 SE.2d 153 (1977) and other past case law, the Court reaffirmed the requirement that a lender must directly notify a superior court judge within 30 days in order to satisfy OCGA § 44-14-161.  The Court noted that a confirmation petition is a "special statutory proceeding and not a complaint which initiations a civil action or suit in the ordinary meaning of those terms."  (citing Vlass v. Security Pacific Nat. Bank, 263 Ga. 296, 297, 430 SE.2d 732 (1993)).  Further, the confirmation statute is in derogation of common law and must be strictly construed.

Foreclosure Confirmations: Battle of the Appraisers

One of the consequences of the recent "Great Recession" has been an avalanche of mortgage foreclosures.  The Atlanta area being no exception.  In turn, this has led to a record number of foreclosure confirmation filings.  As these confirmations have been tried and appealed, we've watched with interest.  A clear pattern has emerged:  the appellate courts in Georgia are reluctant to second guess a trial court.

In Jimmy Britt Builders Inc. v. Suntrust Bank, A10A2352 (2/11/11), the central issue was the extent to which experts can be challenged on appeal.  In that case, both sides came to trial armed with experienced appraisers.  Each appraiser had done thousands of appraisals.  

The property in question was a partially finished spec house.  Both appraisers approached their appraisals similarly.  Each provided an estimate of how much the spec house would be worth fully built and then subtracted the cost of completing the house.  The amounts arrived at by both appraisers was similar.

But the lender's appraiser went one step further.  He applied an additional discount of 15% based on what he termed "builder/buyer's risk."  The lender's appraiser testified that the 15% discount was necessary to account for a homebuilder stepping into to complete a house that had only been partially completed and to account for the condition of the neighborhood (there were other unfinished houses).

The trial court sided with the lender's appraiser and confirmed the foreclosure.

On appeal, the borrower raised several issues. The borrower contended that the 15% "builder/buyer's risk" discount was "unsubstantiated and irrational."  The Georgia Court of Appeals rejected this argument.  It stated that

the question is not whether this Court would have found [the borrower's] or the [lender's] expert more reliable or accurate . . ., "but whether the record contains any evidence to support . . . that the property brought its true market value at the foreclosure sale."

Id. (Citing Greenwood Homes v. Regions Bank, 302 Ga. App. 591, 596, 692 S.E.2d 42 (2010)).

In analyzing the evidence supporting the 15% discount, the Court of Appeals explained that the bank's expert had arrived at his opinion by speaking with two builders and viewing the property.  It is not clear how or why speaking with two builders and viewing the property supports a 15% "builder/buyer's risk" discount, but the Court of Appeals Court of Appeals explained that "'[a]n expert need not give reasons for an opinion."  The borrower also argued that a 15% discount was illogical because the lender's expert had already incorporated the cost of completing the construction of the house into the appraisal.  The Court of Appeals disagreed and found that it was up to the trial court to determine the legitimacy of a 15% discount.

Though it might have been reasonable to conclude that the 15% discount was arbitrary and capricious, the Court of Appeals was unwilling to go down this path.  Jimmy Britt reinforces the notion that, in the context of a confirmation petition, it is virtually impossible to reverse a trial court on claims that an appraiser's opinion was flawed.  In these cases, you must win the appraisal battle at trial or live with the consequences.

Constructive Eviction Is An Uphill Battle In Georgia

If a landlord isn't making reasonable repairs, is a tenant entitled to terminate the lease and vacate the premises before the lease expires and without penalty?  From a tenant's standpoint, this is known as a constructive eviction.  It is used frequently by tenants, especially commercial tenants, in an attempt to escape liability in default situations.  As illustrated below, constructive eviction is narrowly construed by the courts and only applied in limited circumstances.

There are two essential elements required in order to show constructive eviction.

First, the tenant must prove that the landlord's failure to keep the rented premises in repair allowed the premises to deteriorate to such an extent as to make the rented premises unfit for the tenant to carry on business in a commercial lease or uninhabitable in a residential lease.  See, Hightower v. Daniel, 143 Ga. App. 217, 237, 237 S.E.2d 688 (1977).  

Second, the tenant must prove that the rented premises couldn't be restored to a fit condition by ordinary repairs that could be made without unreasonable interruption of the tenant's business in a commercial lease or the tenant's habitation in a residential lease.  Id.

In addition to these two elements, the tenant must show "some grave act of a permanent character done by the landlord with the intention of depriving the tenant of the enjoyment of the demised premises before a constructive eviction will result."  Alston v. Ga. Credit Counsel, 140 Ga. App. 784, 785, 232 S.E.2d 134 (1976).

These principles were put to the test in Delta Cleaner Supply Company v. Mendel Drive Associates, 286 Ga. App. 227, 648 S.E.2d 651 (2007).  In that case, a landlord accused the tenant of breaching the lease by not paying water bills and the tenant accused the landlord of breaching the lease by not providing adequate security.  The tenant moved out and was sued by the landlord.  As one of its defenses, the tenant claimed constructive eviction.

The trial court awarded the landlord summary judgment on the issue of constructive eviction.  Citing the above law, the Georgia Court of Appeals agreed with the trial court and ruled that, as a matter of law, the facts did not show a constructive eviction.

Specifically, the Court found that all of the security measures and water issues could have been resolved without unreasonable interruption of the tenant's business.  Moreover, none of the conditions complained of by the tenant were permanent.

Because the tenant could not prove that the premises could not be used as a result the landlord's inaction, that the premises could not be restored without unreasonable interruption to the tenant, and that deteriorated condition of the premises was permanent and done intentionally by the landlord, the evidence was insufficient to show a constructive eviction.