Does Tenant’s Temporary Loss of Common Area Use Justify Ending the Lease?

What are a landlord’s liability to tenants when it reopens part of the property after a disaster but still has to keep parts of the common areas closed for a while to fix the damage? That timely question is at the center of a recent case.

Restaurant Claims Right to Rescind Lease

The disaster in this case wasn’t a global pandemic but a hurricane—actually two hurricanes: Hurricane Irma, which ravaged Puerto Rico in September 2017, followed 12 days later by Hurricane Maria. The one-two punch left a mall in the city of Carolina without electric power or water until November. A month later, the small handful of tenants whose properties weren’t damaged were allowed to reopen, including Jackie’s Restaurant. But it would take many more months to repair the other store and restaurant tenants’ spaces, not to mention the interior corridors and common areas used by the public to access their establishments.

The owners of Jackie’s, who were unhappy with the lease even before the hurricanes, saw a way to get out. Their secret weapon: Article 1077 of the Puerto Rico Civil Code, which gives tenants the right “to rescind the mutual and reciprocal obligations” of a lease when the landlord doesn’t “comply with what is incumbent upon him.” Jackie’s theory: The landlord’s violation of its lease duty to provide the restaurant non-exclusive right to use the common areas triggered Jackie’s Article 1077 right to rescind the lease.

What the Court Ruled

Not so fast, said the U.S. district court. Even if the landlord had breached the lease, Article 1077 is supposed to be a remedy of last resort to be used only for breaches that “dissipate the very essence of a contract.” Getting non-exclusive use of the common areas wasn’t the reason Jackie’s entered into the lease, the court reasoned; securing access to the 808 square feet of leased space for use as a mall restaurant was its primary motivation.

Accordingly, Jackie’s was justified not to pay rent when the mall was closed in October and November. But once the landlord invited them to reopen in December, they got back the right to use that space and chose not to do so, thereby abandoning the lease [Jackie’s Rest., LLC v. Plaza Carolina Mall, L.P., 2020 U.S. Dist. LEXIS 100676].

Implications for COVID-19 Litigation

Even though it happened in Puerto Rico and involved a piece of local civil law, the Jackie’s Rest. case represents a sneak preview of the kinds of cases we can expect to see in the aftermath of the pandemic by tenants relying on COVID-19-related disruptions to stop paying rent and get out of their lease. The turning point in this case probably came during the deposition, when one of the owners of Jackie’s admitted that she didn’t “want to go with the lease anymore” and deliberately abandoned it. Landlord’s counsel made maximum use of this admission to persuade the judge that the whole business about not being able to use the common areas was a convenient excuse to escape the lease.

But even without the tenant’s slip-up, the landlord had a strong case thanks to some key lease provisions that, hopefully, your own leases include to ensure that tenants can’t use loss of access to common areas to evade their lease obligations:

• Defining the premises as consisting “solely” of the area leased exclusively to the tenant for its own business use—for example, the 808 square feet leased for restaurant use in the Jackie’s Rest. case;
• Reserving your right to temporarily close the common areas to make necessary repairs and renovations;
• Stating that the common areas will remain under your exclusive control and management at all times; and
• Reserving the right to establish, modify, and enforce reasonable rules and regulations with respect to the common areas.