I often hear “it’s not like the old days” when a person’s word was as good as an ironclad written contract. Unfortunately, Health Quest Inc. v. Arizona Heat Inc. reminds us that the “good old days” are far behind us.
The case provides several important lessons about the dangers of miscommunication and not putting everything into a lease, despite written emails and good intentions.
Health Quest (HQ), the tenant, leased a unit for its business from the landlord, Arizona Heat (AH). As Justice Donald H. Burrage succinctly described, “In the lease, AH agreed to use its ‘best efforts’ to have the premises ready for occupancy by 1 September 2010. There were delays in the tenant fit-ups, the building construction and in obtaining the requisite permits. As a result, HQ did not open for business until 27 October 2010.”
The issues that arose during trial was whether or not the landlord used its best efforts and if it was negligent in carrying out the renovation and if the tenant was entitled to a rent-free period for the delayed occupancy. I’ll dissect the various issues and lessons in future articles, starting with one that I often see arising as tenant and landlord transition from the offer stage to the lease stage.
But, he promised and it’s in an email!
After an exchange of emails between the landlord and the tenant, the two finally arranged a meeting on May 27, 2010. At this meeting the tenant discussed her desire to rent space in the building and the two agreed that the landlord would fit up the space and make it available for occupancy by Sept. 1, 2010. The tenant, a sophisticated businessperson, wanted to ensure that the space would be ready for this date. As such, she required, and the landlord agreed, that she would get a month’s free rent for each month of delay beyond an occupancy date of Sept. 1, 2010. The tenant, wanting to ensure that the terms were in writing, sent the following email confirming the arrangement:
“A penalty clause that will afford 1 month free rent for each month the space is delayed beyond expected occupancy, which is September 1, 2010. The rates quoted above do not include common cost. Please reply to this email with your confirmation that this letter will form the basis of intent to finalize a formal lease document.” (emphasis added)
The landlord responded to her email the following day, agreeing to the rent-free arrangement:
“Sounds great to me, look forward to a long and beneficial relationship for all.”
After the meeting, a lease was provided and the tenant engaged a lawyer. Drafts went back and forth and the parties agreed to a final lease, which was signed on June 25, 2010. The lease, however, did not include the “rent-free” arrangement as per their email exchange.
Occupancy was delayed and the tenant moved in at the end of September, but, due to permitting and renovation issues, was unable to open up her business until the end of October 2010. As such, she claimed that she did not owe November and December rent. The landlord, however, disagreed, pointing to the following clause in the lease:
“3(f) The Landlord will use its best efforts to complete the renovations and leasehold improvements as agreed upon between the parties and have the Leased Premises ready for occupancy no later than September 1, 2010 AND if, due to no fault of the Tenant the Leased Premises are not available for occupancy as contemplated herein, the Rent and Common Area Costs payable by the Tenant hereunder shall be prorated such that the Rent and Common Area Costs shall not be payable in respect of those days preceding the day upon which the Leased Premises are first made available for occupancy.”
The lease further stated that there would be no variation on how rent would be paid, except “in the manner specified in the Lease, without any deduction whatsoever, save as herein specifically provided…” In other words, clause 3(f) and this section meant that rather than a rent-free penalty that kicked in for each month the tenant was unable to open, the lease provided that rent would only be prorated in the event of a delay in occupancy, regardless of whether or not she was able to open.
The landlord, after a lot of arguing with the tenant, agreed to provide her a rent-free period for November and December 2010 only if she paid the fit-up costs. She rejected this offer and eventually paid the November and December 2010 rent in order to avoid accrual of fees.
During the trial the tenant argued that she should be reimbursed for November and December rent because the parties had created a collateral contract (a contract in addition to the lease). Although I do not have access to the pleadings, it’s likely that she claimed that the reason for her reimbursement is because the rent-free provision was agreed to in a collateral contract (the email exchange). The fundamentals to a collateral contract, she likely asserted, existed: the rent-free provision was intended to be in the tenant’s lease; the terms of the provision were very clear and the rent-free provision was a fundamental term that induced her to enter into the lease.
But, it doesn’t matter if it’s not in the lease!
During the hearing and discovery process, it was revealed that both the landlord and tenant agreed that, during negotiations leading to the lease, they discussed a rent-free provision in the event of delayed occupancy. In fact, the landlord expected that the lease would contain such a provision. It, however, did not. And it didn’t despite the fact that the tenant and landlord both engaged lawyers and despite the fact that several other substantial factors were addressed during the negotiations. Clearly, the judge concluded, the “rent-free” period was not as important as the tenant now claimed.
What is more, the fact that the landlord later agreed to provide the tenant a rent-free period didn’t matter. This is because the tenant and landlord both described this “promise” as a “self-imposed punitive agreement he (the landlord) made with himself.” This is because a key element of a contract – consideration (an exchange of benefits between two contracting parties) – was not provided as the landlord simply imposed upon himself a punitive arrangement when attempting to resolve the dispute after the tenant moved in. As such, because promises aren’t enforceable; because the parties negotiated several terms of the lease using lawyers and because both parties never turned their mind to the “rent-free” issue, the judge concluded that it was highly unlikely that a collateral contract existed.
Do not assume that “having it in writing” is enough. An email exchange doesn’t necessarily create a binding contract. Neither does someone’s “word”. As such, ensure that all benefits that you believe you’re entitled to are in the lease.