In A Lease Or Other Agreement, Saying That Something Needs To Be “Material” Is Perfectly Acceptable!

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Leases and other contracts almost always use the word “material” to signify some threshold above or below which a consequence will be triggered. What is Ruminations saying, you ask? Give us some examples! Try these:

… shall not materially increase Tenant’s other obligations

… shall not materially and adversely affect the rights of Tenant

… there has been no material adverse change in Borrower’s or any guarantor’s financial condition

As a material inducement for…

[If such act] shall prevent or materially affect Tenant’s ability to open and operate its store

… upon paying the Fixed Rent and other charges payable hereunder and performing its material covenants under this Lease, Tenant may quietly have, hold…

If at any time during the Term: (a) Tenant shall be materially deprived of or impaired in the use and enjoyment…

[shall be allocated] in proportion to the material, adverse effect on Tenant’s business operations in the Leased Premises

each additional insured under a liability insurance policy shall receive prior written notice of cancellation, … or material change of coverage

[If] assets material to Borrower’s business operations are offered for sale or sold under execution or other legal process and such…

[If any critical feature] shall be modified in a manner which materially and adversely affects access to, or visibility of, the Leased Premises, …

Over the years, we’ve heard objections to using the term “material” based on some sense that it is indefinite and only serves to guaranty a dispute at some future time. This most often comes from inexperienced attorneys, but not entirely so. The most common factor linking those who raise this objection is their dogged insistence on the absolute correctness of their position.

In each of the examples. the word “material” is NOT being used as a lazy substitute for a bright-line test, but for exactly the opposite reason – a bright-line test just plain doesn’t make sense, doesn’t work, doesn’t describe the parties’ understanding.

Ruminations, as verbose as it often gets, doesn’t like to reinvent the wheel. So, here is some “reference” material, specifically a Section of Restatement (Second) of Contracts. While it deals with a specific “problem,” i.e., how to know if a breaching party’s default if important enough (read that – “material” enough) to allow a non-breaching to rightfully terminate their contract, it is still instructive.

§ 241. Circumstances Significant in Determining Whether a Failure Is Material

In determining whether a failure to render or to offer performance is material, the following circumstances are significant:

(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;

(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;

(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;

(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances;

(e) 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.

Although there are five listed factors, item (a) probably best expresses the “philosophy” behind the concept of “material” – look at the core of the benefits each party reasonably expected. Item (c) is closely related – you shouldn’t be exposed to forfeiture of your property and rights because of some minor, otherwise insignificant breach.

We’re going to “crib” a little from the comments to the Restatement: The “standard of materiality [] is necessarily imprecise and flexible. (Contrast the situation where the parties have, by their agreement, made an event a condition.) … It is to be applied in the light of the facts of each case in such a way as to further the purpose of securing for each party his expectation of an exchange of performances. This Section therefore states circumstances, not rules, which are to be considered in determining whether a particular failure is material.”

Yes, you can’t always make rules. In some instances, the exact same situation can be a “disaster” waiting to happen, and in others, “you wouldn’t even notice it.” The fundamental bargain in a lease is that in exchange for the tenant paying rent, its landlord grants exclusive possession of premises to the tenant. In a loan agreement, it is that the borrower get the money and that the lender gets paid back. In each case, it rarely matters that the screen on the back door has a hole in it. Likewise, a tenant shouldn’t be able to terminate its lease if another tenant happens to (wrongly) hold a sidewalk sale if, to realistic and honest people, in the scheme of things, customers can still get to the tenant’s store. To allow that would work a forfeiture of the landlord’s interest in the lease. There is a big difference between losing three potential customers out of 100 for one day and losing 30% of your potential customers for months on end because a sidewalk is blocked.

Even after explaining this, those who object to using “material” as an adjective-modifier retort: “in whose opinion?” That’s plain stupid! Everyone knows the answer – ultimately it is a judge’s “opinion.” That’s why we call them judges – they make “judgments.”

In reality, disputes over “material” things don’t go to judges because almost all “issues” are either clearly material or they are not. Not many are in the “gray” zone. Even as to those few that are legitimate subjects of dispute, virtually all of them are worked out between the parties. The reason this “whole scheme” works is because of factor (a) above, the disputants really understand the underlying concept of looking at: “(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected.”

To sum it up, as a practical matter, the modifier, “materially,” really works. That’s why you find it “all over the place,” no matter how hard a bunch of truly stubborn attorneys try to argue otherwise.

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Comments

  1. The concept of “materiality” is a necessity because it offers the necessary flexibility to the parties to an agreement.If the parties to an agreement attempt to eliminate the “materiality” concept they will be forced to be very detailed and specific in the agreement, the net effect would be to try to negotiate and address every conceivable situation in the agreement. We know this to be impossible.However, attorneys should not get sloppy or overuse the materiality concept. Some issues require detailed and specific language and we must just work through those in a detailed and specific way.

  2. One more thing to keep in mind: a good judge is not going to grant a drastic remedy for something that is not material, whether or not you say so in the lease. You may be able to recover your out of pocket loss, but a judge should know better than to grant a lease termination for a non-material default.

    • Exactly. Think of that law school case where the house construction contract required the installation of Reading brand pipe and an equivalent competing brand was installed instead. Plaintif was not entitled to have the wrong brand ripped out and the correct brand installed, but only to the difference in value, if any, of the house with the contracted-for brand of pipe and the house with the other brand of pipe.

  3. The parties may stipulate that certain defaults are material for certain purposes. For example, following is a clause (edited for brevity) which sets out a few specific defaults that are considered “material’, but not exclusively so, for purposes of the validity of an option exercise: A “material default” for purposes of this Section (Option to Extend), shall include, without limitation (i) any of the monetary terms and provisions of this Lease exceeding an amount equal to three (3) months’ Minimum Rent, (ii) the following non-monetary defaults: (a) assignment and subletting; (b) Use (c) Alterations; (d) Hazardous Materials; (e) initial Tenant’s Work to the extent the cost to bring either into Lease compliance exceeded $15,000; (f) compliance with laws and tenant repairs to the extent the cost to bring either into Lease compliance exceeded $100,000.

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