Commercial Landlord Obligations


Commercial Landlord’s Non-Contractual Obligations to Tenants Under Arizona Law

A commercial landlord holds various responsibilities and duties to its tenants that exist outside the bounds of the lease itself. Coupling these duties with those imposed by the lease can be complex, and a commercial landlord should be fully aware of all of its legal requirements.

Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop with the passage of time. Accordingly, before relying upon this article, care should be taken to verify that the law described herein has not changed.
The relationship between a commercial landlord and tenant is governed by the parties’ lease, Arizona common law, and statutory law. Because lease agreements can vary widely in their terms and conditions, this article will provide a broad overview of a commercial landlord’s non-contractual responsibilities to a tenant under Arizona law.

Preliminary Disclosures Regarding the Premises

Unless the lease itself provides to the contrary, there generally is not an implied landlord duty concerning the fitness and suitability of a leased premises. Tenants should therefore inspect a commercial property’s value and condition prior to entering into a lease, as the landlord will not be liable for any harm sustained by the tenant due to a defect existing at the time the lease was executed. However, an express provision of fitness and suitability may exist within the terms of the lease and, if so, those express terms would be enforceable.

Moreover, a limited duty of implied fitness and suitability may exist when a commercial lease involves a new building. In that instance, an implied warranty may warrant that the completed building will be suitable for the tenant’s use. If a landlord were to breach this limited implied warranty, the tenant’s remedy would be to bring a breach of contract action against the landlord.

Delivery of Possession of the Premises

Once the lease has been signed, a commercial landlord has the duty to deliver possession of the premises to the tenant at the time stated in the lease.

Covenant of Quiet Enjoyment

A commercial landlord has the duty to provide quite enjoyment of the premises to the tenant, which means that the landlord’s title is not defective and the tenant’s possession will not be disturbed. See Johansen v. Ariz. Hotel, 37 Ariz. 166, 173 (1930) (“It is generally well recognized that there is an implied covenant in a lease for the quiet enjoyment of the premises by the lessee free from any interference on the part of the landlord.”). This implied covenant prohibits a landlord from substantially and materially depriving the tenant of the beneficial use and enjoyment of the leased premises. See id. at 173–74; Restatement (Second) of Property, Landlord & Tenant § 4.3 (1977) (hereinafter, “Restatement”). Notably, there must be actual or constructive eviction before there is a breach of this implied covenant. Johansen, 37 Ariz. at 173–74.

Nonetheless, “the landlord’s obligation under a covenant of quiet enjoyment (which is imposed upon the landlord even though not within the terms of the lease) does not extend to the acts of other tenants or third parties unless such acts are performed on behalf of the landlord or by one claiming paramount title.” Thompson v. Harris, 9 Ariz. App. 341, 345 (1969).

Similarly, the tenant’s own use of the leased premises may disqualify it from the protections of quiet enjoyment. For example, the fact that a “tenant’s enjoyment of the demised premises is interfered with in the exercise of police power, not due to any fault on the part of the lessor, is not a breach of the lessor’s covenant of quiet enjoyment.” Dillon-Malik, Inc. v. Wactor, 151 Ariz. 452, 454 (Ct. App. 1986). Thus, it was not a breach of the covenant of quiet enjoyment where a tenant’s business expanded such that it caused complaints from neighbors and had to be discontinued after it was found to be out of compliance with zoning requirements and where there was no express warranty in the lease that such a use was permitted. Id.

Duty to Repair

Absent a covenant in the lease obligating the landlord to make repairs, a commercial landlord typically has no duty to repair the leased premises, unless the landlord had actual knowledge of the defect at the time of entering into the lease and fraudulently concealed it. See Grizzle v. Runbeck, 74 Ariz. 92, 95 (1952) (“[I]n the absence of an agreement to the contrary, the landlord is not obligated to make repairs upon demised premises or to keep them in repair during the term of the lease.”). Thus, unless indicated to the contrary in the lease, if a commercial tenant wants certain repairs done to the property, it must do so on its own.

Furthermore, “if the repairs are needed because the tenant has committed waste,” the landlord will have remedies against the tenant. Restatement § 13.1, cmt. c. “Waste” is defined as “[p]ermanent harm to real property committed by a tenant (for life or for years) to the prejudice of the heir, the reversioner, or the remainderman.” Black’s Law Dictionary (9th ed. 2009).

Implied Covenant of Good Faith and Fair Dealing

Implied in every contract—including leases—is a covenant of good faith and fair dealing, which requires each contracting party to refrain from acting in a manner that would impair the right of the other to receive the benefits of their agreement. See Rawlings v. Apodaca, 151 Ariz. 149, 153 (1986). A party breaches the covenant by denying the other party the “reasonably expected benefits” of the contract. Nolan v. Starlight Pines Homeowners Ass’n, 216 Ariz. 482, 489 (Ct. App. 2007).

Due to this implied covenant, a landlord must act in all dealings with the tenant in good faith and fair dealing. This duty extends to lease negotiations, rent adjustments, assignments and subleasing, and eviction. In one example, a landlord was found to have acted in bad faith by (1) bringing “contrived” and “improperly motivated” allegations based on its need for the space occupied by the tenant, (2) giving the tenant only thirty days to pay four years of back (and previously uncharged) rent, (3) failing to invoice the tenant for fees as indicated in the lease, and (4) threatening to lock tenant out of the space after refusing his tender of several thousand dollars. See Maleki v. Desert Palms Prof’l Props., LLC, 222 Ariz. 327, 333 (Ct. App. 2009).

Subleasing and Assignment of Lease

In Arizona, “[t]he general rule is that, in the absence of an express restriction by contract or statute, each tenant has the unrestricted right to assign or sublet as he wills.” TMC v. Zoslow, 147 Ariz. 612, 614 (Ct. App. 1985) (citations omitted). In this regard, “[a] restraint on alienation without the consent of the landlord of the tenant’s interest in the leased property is valid, but the landlord’s consent to alienation by the tenant cannot be withheld unreasonably, unless a freely negotiated provision in the lease gives the landlord an absolute right to withhold consent.” Id. (citation omitted).

For a refusal of consent to be “reasonable,” it “must be objectively sensible and of some significance.” Id. at 615. A rejection cannot be purely for financial reasons. See Campbell v. Westdahl, 148 Ariz. 432, 437–38 (Ct. App. 1985). Examples of appropriate objections include: “inability to fulfill the terms of the lease, financial irresponsibility or instability, unsuitability of the premises for the intended use, or intended unlawful or undesirable use of the premises.” TMC, 147 Ariz. at 615; see Campbell, 148 Ariz. at 436–47 (identifying examples for reasonable rejections of consent as an assurance of payment, proper care of property, and use in a manner consistent with that permitted to the original tenant (citation omitted)); Magna Inv. & Dev. Corp. v. Brooks Fash., 137 Ariz. 247, 249 (Ct. App. 1983), overruled on other grounds by DVM Co. v. Stag Tobacconist, Ltd., 137 Ariz. 466 (1983) (holding that a landlord’s reason for withholding consent for an assignment from a men’s to a women’s clothing store was unreasonable). The burden is on the tenant to provide sufficient information for a landlord to determine whether consent should be given, and the landlord is under no obligation to seek out such information. See D’Oca v. Delfakis, 130 Ariz. 470, 471–72 (Ct. App. 1981).

Nonetheless, if there is a valid contractual provision that restrains a tenant from assigning or subletting the lease, an assignment of the lease without the landlord’s consent is a material breach. See Lemons v. Knox, 72 Ariz. 177, 181 (1951).

Determining a Material Breach

Simply because a tenant violates a provision in the lease does not necessarily mean the breach constitutes grounds for a cause of action or even an eviction. See Foundation Dev. Corp. v. Loehmann’s, 163 Ariz. 438, 446 (1990) (“[A] material provision of a lease may be breached in such a trivial manner that to enforce forfeiture would be unconscionable and inequitable.”); Maleki, 222 Ariz. at 332 (“[A] tenant’s right to possession may not be conditioned on perfect performance of a commercial lease[.]”).

The Arizona Supreme Court adopted the following standards from the Restatement (Second) of Contracts § 241 for determining the “triviality or immateriality” of a breach in the commercial landlord-tenant context:
  • the extent to which the injured party will be deprived of the benefit which he reasonably expected;
  • the extent to which the injured party can be adequately compensated [by damages] for the part of that benefit of which he will be deprived;
  • the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
  • the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account if all the circumstances including any reasonable assurances;
  • the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.
Loehmann's, 163 Ariz. at 446.

Duties Upon Tenant's Breach of the Lease

If a tenant materially breaches the lease, Arizona law imposes certain responsibilities on a landlord. Initially, although a landlord is permitted to seize a tenant’s personal property left at the property if the tenant refuses or fails to pay outstanding rent, the landlord may not seize personal property that is exempt under Arizona law. See A.R.S. 33-361(D). If a tenant has not paid the outstanding rent for sixty days, the landlord may sell properly seized property. See A.R.S. § 33-1023.

More importantly, a commercial landlord may not simply allow the property to sit vacant and expect to recover the full value of the lease. Instead, a landlord has an affirmative duty to mitigate damages by using “reasonable efforts to rent . . . at a fair rental.” Stewart Title & Trust of Tucson v. Pribbeno, 129 Ariz. 15, 16 (Ct. App. 1981) (citing Duschoff v. Phx. Co., 22 Ariz. App. 445, 449 (1974)); see, e.g., Next Gen Capital, L.L.C. v. Consumer Lending Assocs., L.L.C., 234 Ariz. 9, 12 (Ct. App. 2013) (“A basic principle of the law of damages is that one who claims to have been injured by a breach of contract must use reasonable means to avoid or minimize the damages resulting from the breach.” (quotation omitted)); Fairway Builders, Inc. v. Malouf Towers Rental Co., Inc., 124 Ariz. 242, 255 (Ct. App. 1979) (“The key requirement is that the injured party exercise reasonable care to mitigate damages. No extraordinary or risky actions are required unless it would be unreasonable to fail to take those actions.”); Tempe Corp. Office Bldg. v. Ariz. Funding Servs., Inc., 167 Ariz. 394, 399 (Ct. App. 1991) (reasoning that the duty to mitigate damages requires a landlord to make reasonable effort to rent abandoned premises at fair rent before recovering for future rent due for balance of lease term and if landlord makes reasonable but unsuccessful efforts to relet premises, he is entitled to full amount of rent due under lease). Whether a landlord acts “reasonably” is determined by the totality of the circumstances and is a question for the trier of fact. Duschoff, 22 Ariz. App. at 449.

Notably, the party claiming the benefit of the doctrine of avoidable consequences has the burden of proving that “mitigation was reasonably possible but not reasonably attempted.” Fairway, 162 Ariz. at 548.

Conclusion

A commercial landlord holds various responsibilities and duties to its tenants that exist outside the bounds of the lease itself. Coupling these duties with those imposed by the lease can be complex, and a commercial landlord should be fully aware of all of its legal requirements.

Robert Mitchell has extensive experience reviewing, negotiating, and litigating commercial leases. If you have questions concerning a possible commercial lease issue, we would be happy to discuss your potential matter with you. To arrange a consultation, please contact Mr. Mitchell at rdm@tblaw.com or 602-452-2730.
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