Foundation Development Corp. v. Loehmann's, Inc.

• Decision Date: 15 March 1990
• Docket Number: No. CV-89-0010-PR,CV-89-0010-PR
• Parties: FOUNDATION DEVELOPMENT CORPORATION, an Arizona corporation, Plaintiff-Appellant, Cross-Appellee, v. LOEHMANN'S, INC., a New York corporation, Defendant-Appellee, Cross-Appellant.
• Court: Arizona Supreme Court

Page 1189

788 P.2d 1189

163 Ariz. 438

FOUNDATION DEVELOPMENT CORPORATION, an Arizona corporation, Plaintiff-Appellant, Cross-Appellee, v. LOEHMANN'S, INC., a New York corporation, Defendant-Appellee, Cross-Appellant.

No. CV-89-0010-PR.

Supreme Court of Arizona, In Banc.

March 15, 1990.

Murphy & Posner by Michael L. Murphy and K. Bellamy Brown, Phoenix, for Foundation Development Corp.

Mariscal, Weeks, McIntyre & Friedlander, P.A. by James G. Speer and Perry, Pierson & Kolsrud by Renee B. Gerstman, Phoenix, for Loehmann's, Inc.

FELDMAN, Vice Chief Justice.

Loehmann's, Inc. (Loehmann's) petitions us to review a court of appeals opinion dealing with grounds for termination of a long-term commercial lease. See Foundation Dev. Corp. v. Loehmann's Inc., 162 Ariz. 26, 780 P.2d 1074 (Ct.App.1988). The trial court ruled that Loehmann's delay in paying a common area charge was a trivial breach of its lease and therefore refused to permit the landlord, Foundation Development Corporation (Foundation), to re-enter and take possession of the leased premises. The court of appeals reversed. We granted review to clarify the law dealing with triviality of breach as a defense to a forfeiture of a tenant's interest in a commercial lease. See Rule 23, Ariz.R.Civ.App.P., 17B A.R.S. We have jurisdiction pursuant to Ariz. Const. art. 6, § 5(3), and A.R.S. § 12-120.24.

FACTS AND PROCEDURAL HISTORY

The parties filed cross motions for summary judgment on stipulated facts set forth in a Joint Statement of Facts (Facts) filed May 14, 1987.

In 1978, Loehmann's became the anchor tenant in the Lincoln View Plaza Shopping Center by entering into a twenty-year lease with Foundation's predecessor in interest. ¹ The lease contained no provision for percentage rental or rental increase during the twenty-year term. Loehmann's had an option to renew for two five-year terms. The lease therefore was potentially of thirty years' duration, expiring in 2008. Loehmann's was to operate a retail clothing store, part of its nationwide chain.

In addition to rental payments due on the first day of each month, Loehmann's was liable for common area charges ² based on its proportionate share of the total square footage in the shopping complex. Loehmann's customary practice was to make estimated partial payments for the common area charges at the end of each of the first three quarters of each lease year. At the end of the fourth quarter, Foundation submitted an adjusted statement itemizing its actual expenditures for the year. Loehmann's then paid the difference between the partial payments it had made and the total actual expenditures, generally paying thirty days or longer after it received the statement. Loehmann's total annual payments to Foundation were approximately $50,000 ($45,000 annual rent plus approximately $5,000 for common area charges).

The lease also contained a section describing "Conditions of Default." If Loehmann's failed "to pay any installment of minimum annual rental or additional rental or other charges [and did not cure] within ten (10) days after receipt ... of notice of such neglect or failure," Foundation could "prior to the removal of such Condition of Default," elect to terminate the lease. The lease stipulated that "with respect to ... [Loehmann's] obligation to pay rent, taxes and other charges ... [or] in any case On February 23, 1987, Geri Beemiller (Beemiller), an employee of Foundation's local managing agent, Rae-Marc Asset Management (Rae-Marc), sent Loehmann's the year-end statement for common area charges for the lease year ending January 31, 1987. Facts, Exhibit F (hereafter Exhibit __). The statement was addressed to Kevin Gaw (Gaw) at Loehmann's Halsey Street address in New York. The balance due was $3,566.44. The statement did not indicate when payment was due, and Beemiller indicated that if Gaw had any questions, he should contact her. The lease had no provision indicating a time schedule for the payment of the fourth installment of the common area charge.

[163 Ariz. 440] where either party ... is required to do any act, the time for the performance thereof shall be of the essence." ³

Believing that Foundation had miscalculated its proration of the total square footage of the complex, Gaw sent an inquiry to Beemiller on March 18, 1987. Exhibit G. Beemiller responded to the Halsey Street address on March 25, 1987, indicating that because a portion of the complex had been sold, Loehmann's proportionate share of the total had been increased. Exhibit H.

On April 10, 1987, Timothy Richardson, another Rae-Marc employee in Phoenix, sent a demand letter to Loehmann's. Exhibit I. He referred to the original February 23, 1987 statement (erroneously noting that it covered the period ending March 31, 1987 and not January 31), and appended it, but did not mention Gaw's recent inquiry to Beemiller or the latter's response. He addressed the letter to Loehmann's at the leased premises in Phoenix and at the address listed on the lease on Baychester Avenue, New York. ⁴ He copied the letter to the Halsey Street address. Richardson did not address the letter to a specific individual. He further stated:

We have not yet received your payment in the amount of $3,566.44. We must reinstate time of the essence of your lease and insist that this amount be paid within ten days from the date of this letter.

Exhibit I.

Loehmann's received Richardson's letter in the Phoenix store on April 13, 1987. Because the local store was not responsible for paying rent or other charges, the letter was forwarded to the Halsey Street office. The letter sent to the Baychester Avenue address was returned to Foundation, presumably because Loehmann's no longer occupied that building.

Loehmann's Halsey Street office received the letter on Friday, April 17, 1987. Apparently because the letter was not addressed to any particular individual, the mail room personnel sent it to Loehmann's general counsel, Marvin Gardner. Mr. Gardner was not in his office that Friday, which Loehmann's notes was Good Friday. When he returned to work on Monday April 20, 1987, he sent the notice to the accounting department. A senior staff accountant marked the letter "REC'D 4-20-87." Exhibit I. The accountant approved the original statement for common area In the trial court, Foundation argued that it was entitled to summary judgment because Loehmann's breached its obligation to pay the common area charge in a timely fashion. In its cross motion for summary judgment, Loehmann's argued that the payment was timely, but, if not, forfeiture was improper, as a matter of law, because its failure to pay was a "mistake." Alternatively, it argued that any breach was trivial and did not constitute grounds for forfeiture.

[163 Ariz. 441] charges on April 22, 1987 by affixing his initials, and noting the date and the store number. Exhibit F. On Friday April 24, 1987 a check was issued. Exhibit J. Loehmann's claims the check was mailed the next day, April 25. Exhibit K. On Tuesday April 28, 1987, Foundation filed a complaint in superior court seeking termination of the lease, immediate possession of the leased premises, and payment of the accrued common area charges. A day later, April 29, Foundation received Loehmann's check in Phoenix.

The trial court found two issues were presented: (1) Whether Loehmann's breached the lease by failing to make payment within ten days; and (2) if so, whether the breach was trivial and therefore not sufficient to justify forfeiture of Loehmann's leasehold. The court found that Loehmann's had breached its lease with Foundation, but that the breach was trivial. Thus, it found Loehmann's was not in unlawful possession pursuant to the forcible entry and detainer statute and refused to allow Foundation to terminate the lease. Foundation appealed.

The court of appeals acknowledged that under usual principles of contract law a trivial breach does not justify forfeiture. However, citing DVM v. Bricker, 137 Ariz. 589, 672 P.2d 933 (1983), the court stated that this "principle ... is not embraced by Arizona courts in the landlord-tenant context." 162 Ariz. at 29, 780 P.2d at 1077. Believing that under Bricker forfeiture may be effected even though the breach was not material, the court found that because Loehmann's "violated a provision of the lease," the trial court erred in denying forfeiture. Id. at 28, 780 P.2d at 1076. Again recognizing substantial authority to the contrary, the court also held that even if Loehmann's delay in paying the common area charge would otherwise have been a trivial breach, under Arizona law the "time of the essence" provision made it a material one. At 29, 780 P.2d at 1077. The court reversed the trial court's judgment. We granted Loehmann's petition for review because of the substantial legal question presented.

The interplay of property and contract law in the landlord-tenant relationship is complex. Thus, before deciding whether the breach in this case could support a forfeiture, we must examine the common law nature of that relationship. Only then is it possible to determine the legislative objective behind the century-old statute that is now A.R.S. § 33-361.

DISCUSSION

A. The Historical Perspective

The landlord-tenant relationship had its genesis in feudal England. Most land was held through a personal relationship between a tenant and his lord, ⁵ the tenant expecting to hold for a lifetime, the lord expecting to dispose of the holding as he pleased after the tenant died. Restatement (Second) of Property, Introduction, at 1 (1977). As the concept of a tenancy for years first developed, the law regarded the tenant as having only contract rights. Id. at 3. Courts, however, gradually became aware that mere contractual remedies did not protect the tenant's right to quiet enjoyment of the property. Id. By 1235, the development of the writ quare ejecit infra terminum gave the tenant a remedy against those who took from...