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In Re Spence

2007 WL 1652284 (Bkrtcy. D. N.J. 2007) (Unpublished)

LEASES; BREACH —A material breach of a lease is one that defeats the purpose of the lease, such as by interference with the tenant’s business.

A commercial landlord moved for partial summary judgment as to its tenant’s demand for consequential damages arising from an alleged breach of a commercial lease. The lease required the tenant to pay $50,000 toward construction costs, with $25,000 to be a refundable deposit. The tenant was to receive the deposit back after making a specified number of timely rental payments. The tenant claimed that its landlord was in material breach of the lease by not returning the deposit amount.

According to the Court, a breach of contract analysis requires the following four-step analysis. The first step is to determine if a valid contract existed. Neither party disputed that the lease was a valid contract.

The next step requires that the tenant prove that its landlord had breached the lease. The tenant argued that its landlord had breached the lease by failing to return the deposit within twenty-four months after the signing of the lease. The Court found that the lease’s language was not as clear as the tenant portrayed it to be, and therefore it needed to analyze the lease’s deposit provision. After doing so, it found that the tenant had misinterpreted the lease’s language. While the tenant asserted that “24 months” meant the mere passage of twenty-four months from the lease’s signing, the Court found that the term meant the period in which twenty-four rental payments were due. This construction was based on the reading of other lease terms and the normal usage of the word “completion.” The Court noted that this would be nine days later than the date the tenant asserted the deposit was due to be returned. Alternatively, if the tenant’s construction was correct, the Court still noted that it took five days for the tenant’s rent check to clear the bank, thereby making the date for the refund deadline five days later than the tenant’s asserted date.

The Court again looked to the lease for guidance on how to determine the deposit return date. The lease had a provision giving the owner a termination right if the tenant did not pay the $50,000 within a stated time frame. The Court noted the absence of a parallel provision giving the tenant a termination right if the refund was not made within a stated time frame. Thus, the Court thought that if the timeliness of the deposit’s return was truly important to the tenant, it should have negotiated for similar protection as the owner had negotiated. The Court would not retroactively create the provision.

The Court also found that the lease had referenced a time period that would be helpful to it in determining the deposit refund date. The lease provided that the tenant would receive the security deposit back within forty-five days after the end of the term. The Court concluded that the parties contemplated that the construction security deposit could be returned in a similar time frame of forty-five days. The tenant never received the deposit check, though it was cut by the owner. Therefore, the Court looked to the evidence of the tenant’s attempt to obtain the check. The tenant called its landlord several times, was told to come pick up the check, and then found the business closed on the day she was told to get the check. The Court found this to be adequate evidence to conclude that the landlord did not take adequate steps to ensure that the tenant received the deposit refund in a reasonable time. Therefore, the owner breached the lease.

The next step in the contract breach claim analysis was to determine whether the tenant performed its obligations under the lease. The Court noted that this was a key part to the analysis, as the tenant claimed that it was entitled to cease performance because the owner committed a material breach when it did not refund the deposit in a reasonable time. The Court disagreed with the tenant’s position, holding that a material breach has to defeat the purpose of the lease, such as by interference with the tenant’s business. Since the landlord’s failure to refund the deposit did not interfere with this purpose, there was no material breach that would excuse the tenant’s failure to perform under the lease or that would allow the tenant to terminate the lease.

The final step in the analysis was for the tenant to prove that it had suffered damages. The tenant argued that its failure to receive the deposit promptly had prevented it from entering into a lucrative sublease, though it never introduced any evidence regarding this sublease. The Court noted that there was not enough evidence on record to decide whether there were consequential damages.

The landlord attempted to cross claim for losses incurred in re-letting the property. Since the Court found that the lease was not properly terminated by the tenant, the landlord could recoup such expenses. Thus, the Court found that a trial solely on the issue of damages, was required.


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