Illinois Court Gives Agency Law Tutorial In Commercial Lease Fight

Three agency law issues that I regularly encounter in commercial litigation practice are (1) authority, (2) ratification and (3) a contract that doesn’t identify a valid entity.

The authority question posed is whether an individual – typically a company employee or independent contractor – can bind the company by the individual’s conduct.

Ratification applies where a corporate principal accepts the benefits of an agent’s unauthorized conduct.

The third, “unclear party” issue arises where a contract is signed by an individual on behalf of an unsueable entity such as a street address (i.e. “Tenant: 15 S. Wacker Drive”) or a generic business name with no “Inc.”, “Ltd.” or “LLC” designation.

Cove Management v. AFLAC, Inc. 2013 IL.App (1st) 120884, features all of these in a commercial lease dispute involving a large insurance company.

The lease designated the company as “tenant” but was signed by an independent  (non employee) sales agent.  After a lease default, the plaintiff landlord sued the company to recover rent damages.

The trial court dismissed the suit, buying the company’s argument that the agent who signed the lease wasn’t authorized to sign on the company’s behalf.  The landlord appealed.

Held: Affirmed.

Rules/Reasoning:

Even though the agent used business cards, envelopes and stationery submitted that bore the company colors and logo, it wasn’t enough to saddle the company with lease liability.

The Court rejected this argument as it laid out the operative Illinois agency rules:

An agent’s authority to bind a principal can be actual or apparent;

Actual authority can be express or implied;

Express authority is authority explicitly granted to the an agent by the principal, while implied authority is proven circumstantially based on the nature of the agent’s position;

Apparent authority is authority imposed by law – regardless of whether there is actual (express or implied) authority – based on a principal holding out an agent as having authority to bind the principal;

– Apparent authority must be based on words or conduct of the principal; not of the agent;

– If there is no showing of detrimental reliance by a third party on the agent’s authority; there can be no finding of apparent authority;

– A third party dealing with an agent has a duty to inquire into an agent’s supposed authority and can’t blindly rely on an agent’s claim that he has authority to enter contracts on behalf of his corporate principal;

Ratification applies where a principal learns of an unauthorized action (taken by a supposed agent) but retains the benefits of the transaction;

– Ratification requires the principal- with full knowledge of an agent’s unauthorized act – to manifest the intention to accept the benefits of the unauthorized act or to acquiesce in the transaction

¶¶ 9-14.

The Court found that there was no actual authority since the agent’s independent contractor agreement specifically provided that the agent could not sign contracts for the company.

There was also no apparent authority since plaintiff pointed to no conduct by the company that clothed the agent with authority to execute leases in the company’s name.

All of plaintiff’s apparent authority arguments were based on conduct of the agent; not the company.

The Court also found the lessor failed to show the company ratified the agent’s conduct.  All rent payments that were made came from the agent and there was  no evidence the company even knew the lease existed before suit was filed.

The corporate lack of lease knowledge also doomed the lessor’s alternative unjust enrichment/quantum meruit counts.  Since the company didn’t know about the lease, the plaintiff couldn’t show it conferred a benefit on the insurance company based on the sales agent renting the office space.  (¶¶ 34-35). (Quantum meruit requires plaintiff to prove that the defendant benefitted from plaintiff’s services.)

Take-aways: This case demonstrates the paramount importance of precision in lease drafting.  The insurance company defendant probably should have vetted all independent agent leases to ensure that the leases don’t designate the company as tenant.

Procedurally, the case shows how important it is to file counter-affidavits in response to a section 2-619 or summary judgment motion.  Since the landlord didn’t file a counter-affidavit in response to the company’s own affidavit, the Court had to accept the company’s version of events as true.  This spelled defeat for the landlord.

Commercial Lessor’s Acceptance of Rent After Lease Termination Notice Doesn’t Waive Termination

 Z&S Corp. v. Fill & Fly, Inc., 2014 IL App (3d) 130253-U examines whether a commercial lessor, who serves a 30-day notice to terminate an oral month-to-month lease, waives the termination  by accepting rents after the notice period expires.  The case also addresses what factual elements a plaintiff must prove to prevail on a specific performance claim under Illinois law.

The defendant operated gas stations on two properties owned by the plaintiff since 2008.  And while they had discussed the defendant’s purchase of the sites at various times – most recently in 2009 – they were operating under a verbal month-to-month tenancy pursuant to which the tenant paid monthly rents and real estate taxes to the plaintiff landlord.  When tenant defaulted under the oral lease, plaintiff served a 30-day notice (on February 28, 2012) to terminate the tenancy (effective March 31, 2012) and eventually filed a forcible suit seeking possession of both properties.  After the 30-day termination period expired, plaintiff accepted some rent payments from the tenant defendant.

The tenant filed a 2-619 motion to dismiss the forcible action on the basis that the landlord waived the 30-day termination notice by accepting rents after March 31, 2012 – the 30 day notice period’s expiration.  735 ILCS 5/9-207 (month-to-month tenancy terminable on 30 days’ notice); See  http://paulporvaznik.com/how-to-terminate-periodic-tenancies/23,

The trial court rejected this argument and denied the tenant’s motion on the basis that the parties were actively engaged in settlement talks and so the landlord’s lease termination notice wasn’t waived when the landlord accepted post-termination rents.  After a bench trial, the trial court found in favor of the plaintiff and awarded it possession of the properties.  The  trial court also entered judgment for plaintiff on the tenant’s specific performance counterclaim – which sought to enforce an earlier purchase contract for the sites – on the basis that the purchase contract lapsed.  The tenant appealed both the denial of its 2-619 motion and the trial result.  Z & S, ¶¶ 21-22.

The Third District affirmed the trial court.  On the termination notice issue, the Court held that a landlord’s acceptance of rent after a termination date usually results in a waiver of the notice.  Z & S, ¶ 30; Bismark Hotel Co. v. Sutherland, 92 Ill.App.3d 167, 173 (1980).  But Illinois case law provides that if the parties are involved in active settlement negotiations at the time the landlord accepts the rent payment, the landlord’s acceptance of the rent won’t waive the lease termination.  Z & S, ¶ 30; Yarc v. American Hospital Supply Corp., 17 Ill.App.3d 667, 671 (1974).  Here, since the record evidence demonstrated that the parties were engaged in settlement talks, the landlord’s acceptance of rent after the 30-day notice period ended didn’t nullify the notice.

The Court also upheld the trial verdict in landlord’s favor on the tenant’s specific performance claim. The tenant was trying to enforce a 2009 purchase contract for the two gas station properties.  A key component of a specific performance claim is whether the claimant (1) has complied with all terms of the contract or (2) was ready, willing and able to complete the contract but was prevented from doing so by the opposing party. Z & S, ¶ 37; Maywood Proviso State Bank v. York State Bank and Trust Co., 252 Ill.App.3d 164, 171 (1993).

The defendant’s failure to establish either element doomed its specific performance claim.  The trial evidence demonstrated that the defendant’s failure to pay real estate taxes on the properties – as required under the lease and aborted purchase contract – was the reason the properties’ mortgage lender wouldn’t permit defendant to assume the existing mortgages on the sites and consummate the purchase.  Also, the Court noted that the defendant’s principal’s trial testimony established that he was unable to complete financing for the purchase of the properties because he didn’t have a green card.  Without a green card, the bank wouldn’t allow the defendant to complete the purchase transaction.  Taken together, the evidence clearly demonstrated that the tenant couldn’t prove either that he complied with the purchase contract or was prevented from doing so by the plaintiff. Z & S, ¶¶ 37-39.

Z & S is useful for its discussion of how to terminate a month-to-month commercial lease and when a landlord can still accept rent payments after a termination notice lapses.  The case also shows that to plead and prove specific performance, a litigant must show that he either complied with the contract terms or stood ready to but was impeded by some act of the other contracting party.

 

Commercial Lease Acceleration: Termination of Possession vs. Termination of Lease

accelerator Form commercial lease language usually gives the landlord the option of terminating the lease OR terminating the tenant’s right to possession after a tenant default. Generally, if a landlord terminates the lease, this cuts off his damages at the date of termination. So, if landlord terminates the lease on January 1, 2013 and the lease expires on January 1, 2015 – the landlord cannot recover damages beyond January 1, 2013.

By contrast, if a landlord terminates only the tenant’s right to possession, the landlord can still periodically sue for rents as they come due or, using the above example, wait until January 1, 2015 (the expiration date) and sue for all accrued damages on that date.

Stillwell Real Estate Limited Partnership v. Deluxe Auto, Inc., 2011 IL App (2d) 100966-U examines the lease termination-vs.-lease possession  distinction. 

The landlord filed two separate actions: (1) an eviction (forcible) case; followed by (2) a breach of contract case for money damages.  The parties’ lease was three years (2007-2010) for the operation of a car dealership.  The tenant defaulted about two years into the term and the landlord sued to evict about a year before the lease ended.  The tenant moved out a month later and the court awarded the landlord damages owed through the trial date. (¶ 5). 

Six months later, when there was still some time left on the lease, landlord filed a separate breach of contract action against the lease guarantors to recover rental damages that accrued after the eviction trial date. 

One of the guarantors moved to dismiss on the basis of res judicata – that the landlord’s breach of contract claim was barred by failing to seek accelerated damages in the prior eviction suit.  The guarantor based this argument on lease language that said if the landlord terminated the lease, it could recover all rental damages through the 2010 lease end date.   But since the  landlord chose not to sue for all rents in the prior eviction suit, it was now too late.  The trial court agreed and dismissed the landlord’s suit.  Landlord appealed.

Disposition: Reversed.  

Reasoning: The lease required the landlord to provide written notice of its intent to terminate the lease.  Upon termination, the lease allowed the landlord to recover “all damages incurred by reason of the breach.” 

The lease also had an “excess rent” clause (landlord can recover excess rental stream for remainder of lease minus fair market value through the lease term). 

The Court found that the landlord’s statutory five-day notice didn’t equal a lease termination.  It merely signaled the landlord’s intent to terminate possession only.  Also, the landlord’s eviction suit didn’t terminate the lease since the purpose of a forcible/eviction suit is limited to the right  to possession. (¶¶ 18-19).   

Shifting to res judicata, the Court cited the doctrine’s three elements: (1) final judgment on the merits; (2) identity of parties; and (3) identity of cause of action.  (¶ 11).  Applying these rules, the Court found element (3) missing: there was no identity of cause of action between the earlier eviction suit and the later damages action. (¶ 12). 

The  the first eviction/forcible suit – was limited to the issue of possession and rents that were owed on the date of that trial.  The later filed breach of contract suit sought money damages accruing after the eviction trial date. 

Since the landlord never terminated the lease (it only terminated possession) it could sue separately to recover damages as they became due. (¶¶ 12-16).

Take-aways: Service of a 5-day notice and the filing of a forcible suit doesn’t equal a lease termination.  

This case vividly captures the importance of lease drafting precision and that leases contain clear acceleration language.  The case also describes what constitutes a lease termination (as opposed to possession termination only).