Rent Abatement Mandatory Under 'Self-Executing' Provision

Facts: In April, an owner and tenant signed a lease for retail space in a shopping center that was still under construction. The lease provided that the owner would deliver the property to the tenant in an improved condition specified in the lease by the time the lease was to start, in June. The lease also included a rent abatement provision, stating that the tenant could exercise it if the building was not in the promised improved condition when the lease started.

When the tenant moved into the space in June, the center was still under construction, so the tenant didn't pay any rent, nor did it mention the rent abatement provision to the owner. One month later, the owner demanded that the tenant pay its rent, but the tenant refused, claiming abatement. After several months without being paid rent by the tenant, the owner put a lock on the store door and placed signs demanding rent in the store windows. The tenant cut the lock off, but began to move the inventory out of its store, vacating it and returning the keys to the owner two days after the lockout. The owner sued the tenant for unpaid rent.

An Alaska superior court determined that the tenant had waived its right to rent abatement and owed the owner unpaid rental amounts for the time that it had occupied the building. But the superior court also concluded that the owner's lockout amounted to constructive eviction and awarded the tenant damages as a refund for the work performed on its store that it was unable to benefit from after the constructive eviction. The owner and tenant appealed.

Decision: The appeals court upheld the lower court's decision in part and reversed its decision in part.

Reasoning: The appeals court agreed with the superior court that the owner's actions constituted constructive eviction, but it disagreed that the tenant waived its entitlement to withhold the rent. It reiterated that, under the terms of the lease, the owner had no right to lock the tenant out as a tactic to get it to pay its rent, and physically excluding it from the building amounted to constructive, if not an actual, eviction.

However, the appeals court didn't believe that the tenant had waived its right to withhold its rent. The lower court had acknowledged that: (1) the lease contained a non-waiver clause; (2) it was unclear that the owner could have remedied the defects had the tenant mentioned them earlier; and (3) the owner didn't bring up abatement when he delivered the property to the tenant in an unimproved condition. Nevertheless, the lower court had determined that the tenant ultimately had waived its entitlement to abatement based on “the combination of consciously declining to timely invoke the rent abatement lease provision, its verbal promises to the owner to pay rent, and damage to the owner because it was left unable to timely respond and potentially remedy the tenant's claims.”

The appeals court disagreed, because the lease's non-waiver provision precluded a finding of implied waiver, and because the language in the lease made abatement mandatory, meaning that the tenant wasn't required to mention the clause to the owner in order to invoke abatement. The appeals court concluded that together, the non-waiver clause and the mandatory language of the rent abatement provision indicated that the tenant hadn't waived its entitlement to rent abatement.

The appeals court noted that, while the superior court was correct that a non-waiver clause doesn't always bar a finding of implied waiver, because there was no unreasonable acquiescence on the tenant's part in this case, the non-waiver provision supported the tenant's argument that it did not waive its entitlement to abatement.

The abatement provision's language stated that “Lessor shall abate the rent” and “a rent abatement will apply,” and the lease defined the words “shall” and “will” as mandatory. The appeals court agreed with the tenant's assertion that this language indicated that abatement was “self-executing” and therefore the tenant didn't have to provide the owner with notice that it intended to rely on the provisions. The tenant contended that it didn't mention abatement until the owner demanded rent in late July, because it assumed that both parties understood that the rent was being automatically abated. The appeals court agreed, ruling that although a party can implicitly waive its contractual rights regardless of the self-executing language of a contract provision, in this instance the tenant's conduct was insufficient to amount to an implied waiver.

Sengul v. CMS Franklin, Inc. and Manus, December 2011