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Commercial Landlord/Tenant Law | February 2017

Commercial Lease Enforcement: Ensuring a Proper Breach Has Occurred

In the face of a tenant default under a commercial lease, the commercial landlord must conduct an analysis of the Loehmann’s factors before declaring a material breach of the lease and proceeding with any remedies available at law.

With respect to commercial leases, a default on the part of the tenant can come in a number of forms:

  • monetary defaults (failure to pay rent or other charges called for under the lease);

  • non-monetary defaults (breach of covenants, use of property, etc.); and

  • abandonment of the premises prior to the expiration of the lease.

However, regardless of the form of tenant default, the threshold question is whether the default qualifies as a material breach under the lease.

While A.R.S. § 33-361(A) does not specifically limit the landlord’s right to terminate a lease or pursue other remedies in such situations in which the tenant has committed a material breach, Arizona courts applied such a requirement to commercial leases in the Loehmann’s matter.[1] In Loehmann’s, the Court set forth a "factors test" for materiality as follows:

  • the extent to which the injured party will be deprived of the benefit which it reasonably expected;

  • the extent to which the injured party can be adequately compensated [by damages] for the part of that benefit of which it will be deprived;

  • the extent to which the party failing to perform or to offer to perform will suffer the forfeiture;

  • the likelihood that the party failing to perform or to offer to perform will cure its failure, taking account of all the circumstances including any reasonable assurances; and

  • 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.[2]

It should be borne in mind that the Loehmann’s test is a factors test (as opposed to a test requiring every element to be satisfied), and, thus, there is an inherent amount of subjectivity that simply cannot be removed. That notwithstanding, in the face of a tenant default under a commercial lease, the commercial landlord must conduct an analysis of the Loehmann’s factors before declaring a material breach of the lease and proceeding with any remedies available at law. A failure to do so may result in a Court determining that the landlord improperly declared a breach of a lease under Loehmann’s, and therefore find the landlord liable to the tenant.

[1] See Foundation Development Corporation v. Loehmann’s, Inc., 163 Ariz. 438, 788 P.2d 1189 (1990) (holding that the breach must be material, serious or substantial).

[2] Id. (citing and adopting Restatement (Second) of Contract Section 241).