Waste Is Only Waste If We Waste It

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Imagine you had a tenant for a free-standing building (say, one being used as a quick-service restaurant) who proceeded to alter that building without obtaining your consent as its lease required. To make it worse, the tenant’s alterations reduced the floor area of the building by 10%. Yet, the tenant is a good rent-payer and you don’t want to terminate its lease. Your lease might have anticipated such a situation by including the following:

Suit or suits for the recovery of the deficiency or damage or for any installment or installments of rent, additional rent or any other charge due under this Lease may be brought by Lessor at any time or, at Lessor’s election, from time to time, and nothing in this Lease shall be deemed to require Lessor to wait until the Term Expiration Date to bring suit.

It might have but, as we will see, it doesn’t. Using a December 12, 2019 California appellate court decision [that can be read by clicking: HERE], we’ll explain why that is the case.

Setting aside much of the verbiage in the cited lease provision, we can extract the following: “[A] [s]uit for damage may be brought by Lessor at any time [without requiring] Lessor to wait until the Term Expiration Date to bring suit.” Under the lease examined by the court, the landlord had the right to enter the property to make repairs and could have had the building repaired and restored. If it had done so, it could have charged the cost to do so as additional rent. It didn’t. Instead, it chose to sue its tenant for “waste.” A jury awarded damages for waste in an amount equal to the repair cost to restore the floor area (and to remedy alleged defects in the other renovation work performed by the tenant).

The tenant appealed and the appellate court ruled that, as a matter of law, the landlord was not entitled to any award for damages. Why? Well, it’s complicated. Ruminations will try to make it simple. Readers, you’ll decide if we have.

First, regardless of how we “feel,” the term “waste” has a limited legal meaning. In 2011, a different California appellate court explained its meaning as follows:

Waste is injury to the lessor’s reversion interest, not to the lessee’s present possessory interest. Indeed, while a lease is in effect, the only damage a lessor could suffer from waste is injury to the reversion interest because that is the interest the lessor has in the property. To cause injury to the reversion interest, damage from waste likely would have to be both substantial and permanent, particularly when there is a long period remaining on the lease term; in other words, waste occurs when damage is sufficiently substantial and permanent to cause an injury to the reversion interest.

Most of those words have an ordinary, common meaning. One pair of them may not: “reversion interest.” To understand that legal concept, we need to set forth the central legal meaning of a lease. As a matter of law, a lease gives the tenant the right to exclusive possession as against the whole world, including against its landlord or the owner of the property. Through the lease, the landlord has given away its own right to use the property. What it keeps is called a “future reversionary interest,” and that entitles it to “the possession of the property only at a future period.” The tenant’s right to occupy and enjoy the leased property during the lease term (for the purposes contemplated by lease), is “limited only by a restriction not to commit waste and by the terms of the lease.” So long as a lease is not terminated (as stipulated in our hypothetical and as was the case in the recent court decision), the tenant still has a present right of possession and the lessor only has a reversion interest.

In the reported case, confronted with the reality of this legal principle, the landlord (unsuccessfully) argued that the right it had to enter the property to make repairs was akin to a right of reversion. This argument was unavailing because this right of entry for a limited purpose doesn’t rise to a possessory interest beyond the term of the lease itself. A reversion right is a true property interest; the mere contractual right of entry is not.

For the moment, let’s assume that the lease had been terminated (though, those aren’t the facts we presented, or what the actual landlord here did). Does reducing the floor area of a building cause substantial and permanent damage to the landlord’s (owner’s) reversion interest? If it does, how would one determine the damage award needed to make the landlord whole?

In California and in most, if not all, other states, there is an answer to that last question. The appellate court offered the following:

[Under] California case law, and prevailing law across the nation, a lessor may not recover cost of repair damages for breach of a lease’s maintenance and repair obligations when the lease has neither expired nor been terminated. A lessor is limited to damages it actually suffered: injury to the reversion interest—the interest the lessor has in the leased property. Similarly, to recover for waste while a lease remains in effect, a lessor must prove the acts of waste caused damage that was sufficiently substantial and permanent to injure the lessor’s reversion interest.

Now, as that quoted material explained, the measure of damage for waste is the diminution (call it “reduction”) in the value of the property measured at the time the property reverts (goes back) to the landlord. But, if the lease is still in effect (because it wasn’t terminated), no calculation is possible. Yes, your gut tells you that a property’s value goes down when its building’s floor area is cut by 10%, but don’t be so sure. In the decision we’ve cited, the tenant’s appraiser even opined that the total effect of the alteration performed by the tenant increased the property’s market value. Further, the lease obligated the tenant to restore the building to its original condition at the end of the term. That, itself, suggested that any measure of damages for changes to the building had to await lease termination.

Let’s think about the lease provision we reprinted above, the one that allowed the landlord to sue its tenant for damages even without terminating the lease. Since the damages caused by a tenant’s “waste” aren’t incurred until its lease is terminated (according to its terms, by reason of a default or otherwise), the landlord had no damages to sue for.

Though today’s blog posting is focused on legal concepts, there is a practical lesson here as well. The one we are thinking of was expressed in a letter from Thomas, Duke of Norfolk to Thomas Cromwell in 1538: “You can’t have your cake and eat it too.” [As an aside, we think it should have been: “You can’t eat your cake and have it too.”] The implication is that if a tenant’s default bothers you, seek to terminate the lease. If you don’t want to do so and the lease permits you to cure the default and charge the tenant, then do that. But, if you don’t want to lose the rent (in the first situation) or advance your own money (in the second), then be prepared to come up empty-handed, left only to be upset at that no-good tenant who pays the rent, on time, each month.

[Those who click to read the California appellate court’s decision will have yet another opportunity to read about how contract interpretation rules are incredibly important when it comes to understanding the rights and obligations of the parties to an agreement. As we’ve often seen, the landlord involved here asked the court to enforce one particular lease provision and ignore how two others interacted with and limited that provision. For this week, we’ll be leaving that issue alone.]

[As to the title of today’s blog posting, we (too) have no idea what it means. It uses the word “waste” three times. That was good enough for us. It’s a quote from Will.i.am, of the band Black Eyed Peas. In early 2011, he was appointed as the director of creative innovation at Intel. So, it must be both deep and important.]

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