Mansol Associates, L.L.C. v. Mansol Industries, Inc.

97-2016 (U.S. Dist. Ct. D. N.J. 1999) (Unpublished)
  • Opinion Date: April 22, 1999

LEASES; LANDLORD’S BREACH; TERMINATION—If a landlord intentionally and consistently overcharges its tenant for insurance and taxes, the tenant may be justified in terminating its lease.

A tenant leased part of one building and the entirety of another for a term of ten years. Both leases required the tenant to pay taxes, insurance, and the cost of maintenance and repairs. In each case, the landlord paid for those items, and then rebilled the tenant for its share according to the portion of each building occupied by the tenant. After about seven years, the tenant vacated the premises and claimed that it had the right to do so because the landlord had committed fraud with respect to the amounts charged for taxes and insurance. The landlord responded with a suit seeking to recover the shortfall that resulted after reletting each of the properties for the balance of the tenant’s initial lease term. Under New Jersey Law, commercial leases are governed by legal principles of contract law. Accordingly, “a lease, whether it be for a residence or for commercial purposes is a set of mutually dependent covenants.” Thus, if “a landlord breaches its obligations under a lease, a tenant can be excused from performing its obligations.” A tenant’s obligation to remain in leased premises and/or continue to pay rent is dependent on its landlord’s observance of the tenant’s quiet enjoyment. According to the New Jersey Supreme Court, “a tenant’s right to vacate leased premises is the same from a doctrinal standpoint whether treated stemming from breach of a covenant of quiet enjoyment or from breach of any other dependent covenant.” In an earlier case, the Appellate Division of the New Jersey Supreme Court held that a commercial tenant was justified in vacating premises before the expiration of its lease where the landlord had breached the lease by unreasonably withholding consent to an assignment. Thus, the Appellate Division extended the theory of mutually dependent covenants for circumstances not involving the landlord’s covenant of quiet enjoyment. In doing so, it relied on the Restatement (Second) Property 2d which “permits the tenant to terminate the lease if the landlord’s breach of covenant deprives the tenant of ‛a sufficient inducement to the making of the lease.’” According to the U.S. District Court, the situation presented in this case was similar. The “landlord’s obligation to charge the rents and additional rents provided for in the leases, rather than consistently and intentionally charging significantly greater amounts, may well have constituted a substantial and material element of the contract,” having a “significant impact on the benefits the tenant anticipated [if] received under the lease.” The Court also cited with approval a 1984 South Dakota case that held a landlord’s overbilling could justify a tenant’s termination of a lease. In light of that analysis, the Court determined that if the landlord consistently and intentionally overcharged its tenant for insurance and taxes, as the tenant contended, the tenant may have been justified in terminating the lease. Because there were outstanding discovery questions and unresolved issues of material fact, the matter was remanded to the lower court for further proceedings.