You Can’t Cure Them All – Sometimes It Depends On How You Write The Same Obligation

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If, three months ago, you failed to carry contractually required insurance for one week, can you cure that breach now? Over the past week, we were thinking about the curability of defaults. And, we weren’t distinguishing between those of landlords or tenants or borrowers or lenders. Our starting point was the common formulation used to define an “Event of Default,” the occurrence of which triggers “consequences.” Here’s an example of the genre:

10. It shall be an Event of Default if:

(a) default shall be made in the payment of the Basic Rent or of Additional Rent, and such default shall continue for a period of three (3) days after written notice, specifying such default, shall have been given to Tenant; or

(b) default shall be made in the performance of any other covenant or agreement on the part of Tenant to be performed hereunder, and such default shall continue for a period of thirty (30) days after written notice specifying such default shall have been given to Tenant; provided, however, in the case of a default which is of such a nature that it cannot, with due diligence, be remedied by Tenant within a period of thirty (30) days, so long as Tenant commences, as promptly as may reasonably be possible within the thirty (30) days after the service of such notice, to cure the default, and thereafter to prosecute such cure with all due diligence to completion, the thirty (30) day period aforesaid within which to remedy the default shall be extended for such period as may be necessary to cure the same with all due diligence.

[This isn’t one of “our” clauses, so make of it what you want.]

It seems to us that there are two classes of obligations – the “performance” kind, and the “outcome” kind. You can tell someone to have a swept floor at all times (an outcome) or you can tell that person to sweep the floor (a performance obligation). Has Ruminations lost its mind? What’s going on here?

Well, we’ll translate “performance” vs. “outcome” into a make believe lease example. Compare these two hypothetical lease provisions:

A. Tenant will maintain, repair, and replace the HVAC system.

B. Tenant must keep the HVAC system in good operating condition at all times.

Now, suppose the HVAC system stops working. Imagine that what follows is the default notice from the landlord for each example. First, as to example A:

A. Tenant, you are in default of your lease obligations in that you have failed to maintain, repair, and replace the HVAC system and, as a result, it’s not in working order. If you do not cure this default by maintaining, repairing, and replacing the HVAC system within the time periods set forth in Section 10 of the lease, it will be an Event of Default, and [“you’ll really be sorry”].

Now, as to example B:

B. Tenant, under the Lease, you were obligated to keep the HVAC system in good operating condition at all times. It isn’t. There is nothing you can do to cure this because nothing you can do will make the HVAC system work retroactively. You can possibly get it into good operating condition going forward, but you can’t erase what already happened. So, take your 30 days and try as hard as you can, but as soon as the 30 days is behind us, we are going to get you thrown out of the leased premises as soon as we can find a willing judge.

Now back to example A. If the tenant was in default because it wasn’t maintaining the HVAC system, it can remedy that situation by starting to maintain the HVAC system within 30 days after it gets the landlord’s default notice. After all, its default was its failure to honor a “performance” obligation: its commitment to maintain the HVAC, not its failure to keep the HVAC running. Playing with words you suggest? We don’t think so. It breached its obligation to perform and it can begin to perform (maintain, repair or replace, as the situation might call for) within 30 days

On the other hand, what do we have to say about example B? If the obligation was to keep the HVAC system in good operating condition was breached because it wasn’t working for a whole week, three months ago, what can anyone do to turn the clock back? The “outcome” didn’t happen.

OK, we’re being cute. So, now back to this week’s opening question. Suppose the tenant (or the landlord) is obligated to maintain certain insurance coverage and doesn’t. Is that curable? After all, if there was no insurance, there was no insurance. If the defaulting party can’t buy “retroactive” insurance (and, though pretty unusual, it can be purchased in some circumstances – so go ahead and try, but don’t count on being successful), how can the default be cured? Take the whole 30 days. It can’t be cured. It already happened.

There is a fascinating court opinion, at least it is fascinating to Ruminations, about a lease’s insurance provision. Now that we’ve remembered it, we may even revisit it more fully in a later blog posting. We’re referring to the 2007 decision in Boston Market Corporation v. Hack. This is an unpublished New Jersey appellate decision that can be seen by clicking HERE.  Today, we’re only going to “lift” a handful of the judges’ words. By way of (limited) background, the landlord in this case alleged that its tenant went for quite some time without carrying the level of insurance called for by the lease. [There was no loss during that period, or ever.] Almost all of the court’s opinion deals with whether the insurance actually carried by the tenant during that time period met the lease’s requirement, we’re only going to focus on the following excerpted text:

Although defendant argues that a tenant may not avoid termination of the lease by retroactively curing a breach, where, as here, the asserted breach is purely technical, we agree with the trial court that there was no material breach of the lease. [Underlining, ours].

Here, the court suggests something that should concern those who negotiate or write leases or other agreements. What this court was saying is that some breaches can’t be cured retroactively and if a court were faced with such a case, the difference between evicting a tenant (or doing things like that) and not evicting a tenant (or not doing bad things to the breaching party) depends on whether the breach was “material.” There’s nothing new in that because, as has been said in Ruminations before, when a remedy is sought from a court of equity, as is the case with the “eviction” remedy, courts will not impose a draconian remedy for trifling, though legitimate, claims. The rule is different (harsher) when it comes to “legal” remedies [mostly meaning, awards of money].

Let’s recast all of the disjointed Ruminating we’ve done to this point. There are contract breaches that cannot be cured, so getting a cure period won’t save the breaching party. While some of those breaches may be so trivial that a court won’t cause the breaching party to “forfeit” a valuable benefit (by way of terminating the contract), there will be cases when that’s not the case and if you think that all you need to “protect” against such a “forfeiture” is to insist on a period to cure any breach starting with receipt of a notice that you are in breach, think again. The same “objective” result can be achieved by phrasing it in the form of a “performance” obligation instead of an “outcome” obligation.

If you think Ruminations is doing a Chicken Little impression, we’ll remind you of the 2009 decision in the New Jersey case of CSFB 2001–CP–4 Princeton Park v. SB Rental 1, LLC, available for reading by clicking HERE. This involved a non-recourse loan that barred any secondary financing at the penalty of the loan’s guarantor becoming liable for the entire amount owed. For a short period of time, a relatively small loan was obtained by the borrower and it was secured by a second mortgage. It was paid off within seven month and never noticed by the lender until eighteen months later when the borrower missed a loan payment. The lender used the paid-off or “cured” second mortgage as support for its claim that the loan was now “full recourse.” The court agreed with the lender. What were the court’s words? Try these:

It matters not, as defendants argue, that they eventually cured the very breach that triggered their personal liability and that no harm accrued to plaintiff as a result thereof. [H]ere, the fact that the subordinate financing was paid off well before defendants’ ultimate default on payment of the principal loan does not alter the fact that defendants breached the very obligation… . In any event, the fact that such potential may not have actualized does not diminish the breach of obligation nor vitiate its contracted-for consequences.

Yes, an incurable default, and not one a court was willing to “forgive.”

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Comments

  1. I would not characterize the Princeton Park v. SB Rental case to be an incurable default. The note says:

    “Notwithstanding anything to the contrary in this Note or any of the Loan Documents ․ (B) the Debt shall be fully recourse to Maker in the event that ․ (iii) Maker fails to obtain Payee’s prior written consent to any subordinate financing or other voluntary lien encumbering the Mortgaged Property․”

    If the Borrower placed subordinate financing on the Property without the Lender’s consent then the loan became fully recourse. The court just implemented what the parties agreed to in the note. Based solely on this language, it is not even a default to put the secondary financing on the Property without the Lender’s consent or if it is a default, it is a default with a specific remedy in the Note.

    If this was a case where the loan documents prohibited junior financing without the conversion to a recourse loan and the same thing occurred, the Borrower put a junior mortgage on the property which was released before the senior lender discovered it, would that have constituted an “incurable default”. I would say it would not and if it did, there were no damages to the Lender, but I haven’t researched it.

    • Jim, that’s a good analysis and I can’t disagree with you. In fact, I would have analyzed it that way had I been given the robes to do so. But, to me, the court didn’t analyze it exactly the same way. If the court saw it strictly as a “condition,” something that courts are supposed to strictly enforce, it would not have speculated as to the “effect” on the Lender. More broadly, however, the point is that “all was not foregiven” even though the condition was “cured.” The way the court dealt with the issue gives some insight as to whether everything can be cured.

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