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In a recent case, a Pennsylvania common pleas court judge sorted out the issues in a landlord-tenant dispute and helped clarify the law on the rights of a commercial landlord to accelerate rent upon a tenant’s default. In the case of Hirsh v. Carbon Lehigh Intermediate Unit #21, the tenant entered into a lease to occupy approximately 5,000 square feet of space for use as a public school facility known as the “Lehigh Learning Adjustment School” for special needs students. Mold Problem Pursuant to the 10-year lease, the landlord made improvements according to specifications prepared by tenant to make it suitable for a school. Within 10 months of the start of operations, the tenant discovered mold and notified the landlord. The landlord agreed to remediate, and while that took place, classes were temporarily moved to another location for a two-week period. Tests confirmed that the remediation was successful and the tenant reoccupied the property. However, after approximately three months, the tenant received complaints from staff members that mold had recurred in several places in the building. Apparently, that’s where the tenant slipped up. It did not notify the landlord of these complaints. Instead, without even informing the landlord, it engaged an expert to complete an environmental study. After concluding that the building continued to have fungal contamination problems, as well as serious ventilation deficiencies, the tenant advised the landlord that it was terminating the lease. Within two weeks of the notice, the tenant vacated the property. It did not give the landlord advance notice of the environmental findings or an opportunity to do anything to correct the problem. It did not give him a copy of the expert’s report until after it had vacated the property. Termination Letters The landlord responded to tenant’s termination letter with his letter in which he declared the lease terminated, instructed the tenant to surrender the property and invoked the rent acceleration clause. The court found that the landlord did not intend by that letter to release the tenant of its obligations under the lease for future rent. The lease contained customary provisions obligating the tenant to keep the premises “in a clean and safe condition,” and obligating the tenant to restore the property upon termination “in as good condition as when tenant entered into possession. . . . “ The landlord then followed up with a second letter notifying tenant that he had secured another tenant and that the rents from this new tenant would reduce the landlord’s damage claim against the tenant. The new tenant soon began occupying the property but was granted a rent abatement for the first two months and a rent reduction for the next five months, because of renovations it was making to the property. The new lease was month-to-month. The dispute is over whether the landlord can recover more than $400,000 in accelerated rent, which is net of a credit he was willing to give to the tenant for rent paid and renovations done by the new tenant. Tenant’s Defenses The tenant defended on several grounds, including the following: The tenant had a right to terminate because the landlord breached an implied warranty of habitability. It had a right to terminate under the lease’s casualty clause that permitted the tenant to terminate “in the event the leased premises is partially destroyed by fire or other casualty.” Even if the landlord was not liable under these two theories, the tenant had been released from any continuing obligations under the lease by virtue of the doctrine of surrender and acceptance. Judge Alan M. Black rejected all of the tenant’s arguments and permitted the landlord to recover damages based on the landlord’s claim of accelerated rent. The court’s decision highlights what a tenant should and should not do when faced with a problem such as this tenant faced in the Hirsh case. Ordinarily, courts would tend to be sympathetic to a tenant trying to protect its students against an environmental condition such as mold, which could potentially affect the reputation of a school, the health of children and the ability to function in space that was specifically rented for school purposes. However, Black found that the mold problem was caused in large part by the tenant’s decision not to install an HVA system in the initial build-out of the property as landlord had suggested. In addition, tenant had made the fatal mistake of not giving the landlord notice or a reasonable opportunity to correct the condition after it was discovered the second time. As to the tenant’s argument that there was an implied warrant of habitability, the court cited earlier cases making it clear that in Pennsylvania there is no such warranty in commercial leases. Surrender On the tenant’s argument that the landlord could not recover damages because it accepted a surrender of the property, Black made it clear that surrender could only be accomplished by the agreement of both parties, and unless the landlord accepts the tenant’s surrender, “the surrender does not terminate the tenant’s obligations under the lease.” Whether there has been an acceptance of a tenant’s surrender is primarily a question of the landlord’s intent. In the landlord’s letter, he had made it clear that he was not releasing the tenant from any further obligations under the lease. In addition, bringing in the new tenant and permitting renovations for that tenant is not an acceptance of surrender if the landlord’s purpose is to protect the property or to mitigate the damages from the tenant’s breach of lease. The court held that a lease may not be rescinded by the decision of the tenant alone. That tenant cannot relieve itself of the obligation to pay rent by simply vacating the property and notifying the landlord that the lease is terminated. “Yet that is precisely what tenant has attempted in this case. Tenant vacated the premises and with its letter of June 18, 2002, declared the lease terminated as of June 30, 2002. This unilateral attempt to terminate the lease was ineffective.” The court stated: “Clearly, the parties could not have intended that the mere presence of mold would give either of them a right to terminate the lease. If that interpretation were to be adopted, no lease would be safe because the appearance of mold is a very common occurrence in buildings. That is the very reason why most property insurance policies contain exclusions from mold.” Implied Warranty In addition, Black rejected the tenant’s arguments about an implied warranty of habitability. In referring to the case of Pugh v. Holmes where the Pennsylvania Supreme Court established an implied warrant of habitability in residential leases, Black made it clear that this doctrine has never been extended to a commercial lease, and pointed out why the situation in this case is “completely different.” He stated, “Tenant was represented by legal counsel in negotiating the lease; tenant provided the language for the lease as well as the specifications for the leasehold improvements to be made by landlord; tenant was well aware of the design and construction of the building; and tenant has acknowledged that the leasehold improvements were completed in accordance with its specifications. The issue of warranties in such a case is best left for negotiation between the parties, rather than imposition by judicial fiat. The parties were free to negotiate whatever warranties they felt were appropriate. In such a case there is no need to impose any implied warranties.” Re-letting Black also summarized his understanding of the Pennsylvania doctrine of surrender and acceptance. Tenant had relied on earlier cases that blocked a landlord’s rights to recover rent once a landlord accepts the surrender of a property. This doctrine is analogous to the concept of rescission by mutual consent under contract law. In making this argument, the tenant relied on the first paragraph of landlord’s response letter, which said that he declared the lease terminated “at which time the lease and all of your rights in said property shall expire and terminate and you shall surrender the premises to me in good condition as required under the lease.” While Black acknowledged that this argument by the tenant has “a certain surface appeal,” it does not withstand analysis. Black pointed out that the letter goes on to demand accelerated rent for the balance of the term and that such a demand is completely inconsistent with an acceptance of the proffered surrender. “Therefore, upon reading the letter in its entirety, one cannot conclude that the landlord intended to release tenant from further obligations under the lease. Had landlord intended to do so, the letter would not have contained a demand for accelerated rent.” Black also pointed out that a landlord in Pennsylvania does not have a duty to mitigate damages under a commercial lease; but to the extent that the landlord receives rent from other tenants during the lease term, the defaulting tenant must receive a credit. However, a landlord cannot be faulted for seeking to secure a new tenant to minimize the loss. Indeed, as a mater of sound public policy, landlord should be encouraged to make efforts to re-let premises where the tenant has vacated. It benefits no one for the property to lie fallow and unused. A re-letting of the property benefits both landlord and tenant as well as third parties who may have a use for the property. Therefore, a court should not be quick to imply an acceptance of surrender from a re-letting of the premises. Such a conclusion should be reached only if the landlord’s actions are a clear manifestation of his intent to end the first lease. Landlords and tenants, and their attorneys, are frequently confused about what remedies are available to landlords when a tenant surrenders the property. The conduct of the parties at that crucial time could clearly affect the respective rights and remedies of the parties. Perhaps the most troublesome issue raised by the Hirsh case is what the tenant’s rights are once the landlord states that he has “terminated” the lease and accepts surrender of the property. Should the landlord still be able to collect full-accelerated rent for the balance of the term and at the same time control the space during that term? After all, if the tenant has paid for the use of the space, shouldn’t it still retain some rights to occupy it by itself, or by some designee? And shouldn’t it have some rights to seek another tenant to reduce its loss? In any event, based on the facts in the case, the decision of Black provides a reasonable solution and should be viewed as a resource for commercial landlords and tenants who find themselves in a battle about default remedies. (Copies of the 28-page opinion in Hirsh v. Carbon Lehigh Intermediate Unit #21 , PICS No. 04-0054, are available from The Legal Intelligencer . Please refer to the order form on Page 6.)

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