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Commercial Lease Terminations in Michigan

November 9, 2022

Aside from the contractually agreed upon early termination clauses (whether fault-based or based upon economics, business needs or other factors) and a landlord’s statutory remedy of terminating a lease due to non-payment of rent, parties to a commercial lease in Michigan will find that their strongest claims and defenses to be those of common law doctrines and settled case law, such as (in the case of a tenant) landlord’s breach of the covenant of quiet enjoyment, impossibility or impracticability of fulfilling the purpose of the lease contract, frustration of purpose and constructive eviction, all of which are similar yet slightly different methods of claiming breach of contract. For either party, a breach of a force majeure clause may be helpful, although rarely invoked (at least not until the Covid-19 pandemic). A force majeure provision typically relieves a party from performing its lease obligations if certain specified circumstances occur that are beyond such party’s control, which render performance under the lease substantially difficult or impossible.

Underlying each of these concepts, are the tenant-friendly crown jewels in a lease which arise from the notion that every lease incorporates a covenant that (absent a tenant default) the tenant will not be dispossessed of its rights to the property by the landlord (or anyone claiming through the landlord), the landlord (or anyone claiming through the landlord) will not interfere with or disrupt the tenant’s right to use the property for the stated purpose and that the tenant is entitled to peaceful possession of the property (a/k/a the covenant of quiet enjoyment). Another tenant-friendly gem governing commercial leases in Michigan is that unless the tenant drafted the lease, commercial leases are generally construed against the landlord.

If a tenant desires to assert a claim of dispossession, interference/disruption or constructive eviction based upon a landlord’s conduct or a force majeure event in order to justify vacating the property and discontinuing the payment of rent, one of the “do’s” is to be aware that the common law defenses come with a high burden of proof and that the key to the kingdom is to establish “materiality.” Tenants must establish a clear commercial use or purpose in the lease and that the landlord’s conduct materially interfered with or disrupted such use or purpose. Elements of demonstrating impossibility/impracticability and frustration of purpose include a showing that supervening events made performance impossible or commercially impracticable, that non-occurrence of the event itself was a basic assumption upon which the contract was based, that the occurrence of the event was not the fault of the party seeking to invoke the defense and that neither party assumed the risk of the occurrence that gave rise to the problem.

Thus, if a tenant properly establishes a stated commercial use within the lease, such contractually established commercial purpose can allow for abandonment by the tenant based on the material breach of contract by the landlord (with no liability to the tenant). This is known as constructive eviction. Since the 1800’s, Michigan has recognized the concept of constructive eviction in commercial leases. Several historical cases provide examples of the factual situations that have led to a determination of constructive eviction. In 1933, a constructive eviction was upheld for a tenant clothing store because foul odors, frozen pipes, and no running water sufficiently frustrated the store’s commercial purpose. In 1920, a constructive eviction was upheld when two joint tenants abandoned their lease because a new balcony was built by the landlord which obstructed the light in the tenants leased space (and such lighting was determined to be imperative to the tenants’ precise work of repairing electrical instruments). These historical cases reinforce the principle that critical to a finding of constructive eviction is the establishment of a clear commercial purpose and that the actions of the landlord must frustrate that purpose almost entirely. More recent cases that have been decided in a tenant’s favor in this regard include: failure to provide heat, failure to provide the agreed upon parking spaces, and failure to control rodents – all were considered to be a “material breach of contract” and constituted constructive eviction.

Although the historical cases provide examples of when constructive eviction was found, the more modern cases seem to illustrate constructive eviction as more of a desperate argument by tenants to avoid liability. In a 1987 case, a Michigan court ruled there was no constructive eviction when the landlord of a mall refused to renew the fabric store’s tenancy and the fabric store vacated the premises before the original lease had expired. In a 2008 unpublished Court of Appeals opinion, the court upheld a finding of no constructive eviction for a tenant who was renting a 7000 sq. ft. space as a showroom. The tenant claimed it was constructively evicted by a health hazard (mold and standing water) and persistent building issues such as broken glass and broken lighting. However, the trial court found that the evidence did not support the claim. While there was evidence of a wet and stained wall, the landlord had made roof repairs when notified and the broken glass and lighting did not render the premises unfit for occupancy for the purposes for which they were demised nor deprive the tenants of the beneficial use and enjoyment of the property.

Another important “do” for a tenant is to provide its landlord with written notice of the problem situation and a reasonable period of time within which to rectify (cure) the problem. If the landlord fails to respond or fails to respond adequately, the tenant should provide written notice that it intends to vacate the property based upon any or all of the foregoing claims/defenses. Conversely, a critical “don’t” is to simply vacate the property and discontinue payment of rent. There must be some form of communication in advance. Lastly, an aggrieved tenant must, in fact, actually vacate.

When analyzing both the historical and more recent caselaw in their totality, it seems that modern courts are more hesitant to find in favor of tenants (based upon the breach of contract principles addressed above) in all but the most extreme circumstances involving landlord misconduct or negligence. It is likely that the evolution of contract drafting for commercial leases has made courts more reticent to venture beyond the terms of the contract. However, it might also be that landlords who knowingly engage in truly egregious actions which could give rise to a tenant defense, such as constructive eviction, know better than to sue for damages if their tenants abandon their leases.

Ultimately, when a tenant is considering whether to “break” a commercial lease in Michigan, the need to establish the existence of a material breach by the landlord in order to establish any of the common law claims/defenses for avoiding liability for unpaid rent makes it a risky endeavor. It requires a great deal of reliance on the language of the “use” or “purpose” clause in the lease and each case tends to be factually-driven. As for landlords, it is all but decreed that attempted terminations of commercial leases outside of  a landlord’s statutory rights (the Michigan Summary Proceedings Act) or contractually agreed upon clauses are ill-advised. Whether asserting a breach of contract claim or defending an early termination, landlords and tenants would be wise to proceed with great caution to avoid being the fool.

About the author:

Lisa HysniLisa B. Hysni is a real estate attorney with more than 35 years of experience handling a variety of transactions for clients around the country. She is chair of the firm’s Real Estate practice group. Lisa regularly drafts and negotiates leases for commercial clients, including office space, retail buildings, industrial complexes and medical facilities. She represents real estate owners and developers in the sale and financing of commercial properties and coordinates portfolio transactions, including reviews of surveys, title commitments and documents of record.

 

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