In my last Business Advocate posting, I discussed Surrender provisions in commercial leases. Since then, an interesting case was brought to my attention where a commercial landlord, by virtue of the tenant making repairs in the premises after the tenant surrendered the lease, argued that the tenant was a “holdover tenant” and that the landlord was entitled to holdover rent for the period of time that the tenant repaired the leased premises. This was the issue facing the 10th Circuit Court of Appeals in Fairfax Portfolio, LLC v. Owens Corning Insulating Systems, LLC, the United States Court of Appeals, 10th Circuit No. 12-3126 (February 6, 2013). In this case, Owens Corning Insulating Systems, LLC (the “Tenant” or “Owens Corning”) leased a building and the related grounds (the “Premises”) from Fairfax Portfolio, LLC (the “Landlord” or “Fairfax”) in the State of Kansas for a term of approximately two years. Under the terms of the lease between the Landlord and the Tenant (the “Lease”), the Tenant was required to maintain the Premises in good condition and repair any damage it caused, with the Lease particularly noting that any damage to the walls or interior columns in the Premises must be repaired by the Tenant. The Lease also contained a typical “Surrender Clause” that provided that the Tenant must surrender the Premises at the end of the lease term or pay holdover rent at a rate equal to 150% of the rent charged at the end of the Lease term.
After Owens Corning surrendered the Premises to the Landlord, the Landlord discovered a number of items that were damaged in the Premises and required repair, including the walls, interior columns and certain structural elements of the Premises. After negotiations regarding these repair obligations, the Landlord and Owens Corning agreed that Owens Corning would repair the damages at its expense. To facilitate these repairs, Fairfax returned possession of the leased premises, by delivery of keys, to Owens Corning. During the following few months, the Tenant caused the repairs to be made at a cost of approximately $40,000. The repairs were approved by the Landlord in April, 2010 and the Tenant returned the keys to the Premises to the Landlord. Approximately seven months later, in November, 2010, Fairfax filed suit against Owens Corning alleging that Owens Corning was a holdover tenant while they were in possession repairing the damages. Fairfax claimed that they were entitled to holdover rent at 150% of the last month rent of the lease term and other damages, totaling approximately $120,000 after application of Fairfax’s security deposit. Owens Corning argued that they were entitled to a return of their security deposit and were not a holdover tenant.
The essence of Fairfax’s argument was that the Tenant had breached the Lease by not making the required repairs prior to surrendering the Premises to the Landlord in December of 2009. Accordingly, the Tenant was a holdover Tenant during the five month period that Tenant occupied the Premises to make the repairs, and rent for those five (5) months was payable at the 150% holdover rate. Additionally, Fairfax argued that it was entitled to these damages because of the extreme nature of the repairs Owens Corning was required to make to the Premises rendered the Tenant a holdover tenant. Citing prior Kansas law, the District Court granted Summary Judgment to the Tenant, holding that the ordinary meaning of “holding over” refers to a failure to surrender the property on a timely basis upon the expiration of the term. The failure to surrender the Premises in a particular condition, although appearing in the same section of the Lease, is a separate requirement and does not create a holdover tenancy. Finding that there was no evidence that the parties intended any other meaning than this “common sense” approach, the District Court found for the Tenant on this claim and ordered that Fairfax return Owens Cornings’ security deposit.
The Court of Appeals affirmed the decision of the District Court agreeing that the District Court had correctly applied Kansas law and repeating the analysis of the plain meaning of the surrender clause completed by the District Court.
This leads to a few practice considerations. From the tenant’s perspective, the obvious implication of this case is that a tenant should be very cautious in the event they agree to undertake repairs or any activity in which they re-take (actually or constructively) possession of the surrendered premises. If the tenant does re-take possession, it would be appropriate for the tenant to obtain a written waiver from the landlord for any claims of rent or holdover as well as a written acknowledgment that the tenant is not in possession of the Premises in the same manner as under the Lease, but that the tenant is only accepting a license to enter the premises to make certain repairs as approved by the landlord. The agreement should also specify what repairs (or other actions) are required for the landlord to return the tenant’s security deposit. From the landlord’s perspective, a landlord may want to clearly state in the Lease that if the tenant does not return the premises in good condition and repair, that the tenant’s tenancy will continue as a holdover until the premises are delivered in the condition required by the lease.