Bagel Shop Successor Tenant Hit For Rent Damages and Attorneys’ Fees in Commercial Lease Case – IL First Dist.

6945015869_a7cf0dd963_bThe First District affirmed a money judgment of about $150,000 (including $70,000 in attorneys’ fees) in a commercial lease dispute  in Alecta v. BAB Operations, Inc., 2015 IL App (1st) 132916-U.  An unpublished opinion, it’s useful for its vivid illustration of the importance of lease drafting clarity and an assigning tenant documenting its intent to not be responsible for post-assignment rent payments.

For over 15 years, the plaintiff landlord leased the property to various bagel shops.  The master lease was assigned six times over that time span. When the sixth assignee defaulted, the plaintiff sued multiple defendants including the third lease assignee – the defendant who ultimately got hit with the money judgment. (The other defendants either settled out or were defaulted.)

On appeal, the defendant (the third lease assignee) argued it was immunized from lease liability after it assigned the lease to a successor (the fourth assignee) several years earlier and that the trial court shouldn’t have awarded the landlord’s attorneys’ fees.

Affirming the money judgment, the First District provides a useful primer on contract interpretation rules applied in the commercial lease context.

– A court interprets a contract by looking to its plain language to discern the intent of the contracting parties;

– The court considers the contract in its totality and tries to harmonize each part of the contract;

– If the contract is unambiguous, the court interprets it without considering any outside evidence as to what the contract is supposed to mean;

– if the contract is ambiguous – meaning it’s susceptible to more than one meaning, the court can consider external evidence to try to resolve the ambiguity;

– a contract can be modified but the changes must materially alter the parties’ rights and duties before the change is regarded as a new contract or agreement;

– A contract can be assigned.  An assignment operates to transfer to the assignee all of the assignor’s right, title or interest in the thing assigned, and the assignee then stands in the shoes of the assignor;

– A lease is a type of contract that is governed by general contract law and can be assigned;

– It (a lease) creates privity of contract (which obligates a tenant to pay rent) and privity of estate (right to possession, basically) between the lessor and the lessee;

– Where a lease is assigned, but not assumed, there is privity of estate between the landlord and the assignee but not privity of contract.  This means the assignee can avoid further lease liability by vacating the premises or assigning to someone else;

– By contrast, where a lease is assumed (“assumption of the lease”), the party assuming the lease remains responsible to the landlord through the life of the lease even after the assuming party decamps the premises or assigns the lease;

¶¶ 40-61.

Here, the court found the assignment from the defendant to the fourth assignee ambiguous.  The assignment’s text was conflicting because at one point it said the defendant was released from further lease obligations while another section provided the assignor/defendant’s liability to the landlord remained intact.  Because the assignment language clashed on the defendant’s future (after the assignment) lease liability, the court heard trial testimony as to what the parties intended when they drafted the assignment and ultimately found for the landlord.

Afterwords:

This case serves as a good reminder of how a court interprets a written contract and handles textual ambiguity.  Any contractual ambiguity will be determined against the drafter of the contract.  Since the defendant is the one who drafted the assignment here, the court sided against it and found it liable for the lease breaches of the later assignees.

The case is also useful for its discussion of lease assignments versus lease assumptions and the different liability rules that flow from that dichotomy.  If the parties intent is to relieve an assignor from further liability, they should take pains to document that intent.

 

 

 

 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.