Are Inequitable Forfeiture Provisions in Ohio Commercial Leases Unlawful?

Written By: Ilirjan Pipa, Summer Associate

Edited By: Stephen D. Richman, Esq.

“Equity abhors a forfeiture.” A rather powerful statement to say the least. What exactly does this phrase mean, and does it control the enforceability of forfeiture provisions in Ohio commercial leases?

“Equity” is the name given to a set of legal principles that operate on the grounds of fundamental fairness. “Abhors” is tantamount to “despise”, and “forfeiture” means the loss of a right or a thing because of a failure to do something as required. Hence, in the real estate world, “Equity abhors a forfeiture” would mean that one should not be divested from an interest in a property unless it is fair to do so. According to a recent Franklin County Court of Appeals case (Takis, L.L.C. v. C.D. Morelock Properties, Inc. (2008), 180 Ohio App. 3d 243), a landlord seeking to enforce the forfeiture of a tenant’s commercial lease rights has a few “equitable” challenges to overcome.

Ohio law provides that a forfeiture or termination clause in a lease is to be strictly construed, and forfeiture is not to be decreed in the absence of an express stipulation in the parties’ lease agreement.

Even if a forfeiture provision is clearly incorporated into a lease, equitable considerations may weigh against concluding that a lessee’s conduct should result in forfeiture of its leasehold interest. For example, in Takis, the Tenth District upheld the commercial lessee’s argument that defaults of certain lease provisions are not so significant as to warrant termination and resulting forfeiture of leased premises, even if the lease contains a forfeiture provision permitting the lessor to terminate the lease upon default. The breaches in Takis consisted of failing to remove a small dumpster from a concrete pad, failing to remove outdoor holiday lights, and failing to remove a backdoor sign. The court balanced all the competing interests and noted that the breaches were relatively insignificant when compared to the amounts of money invested by the plaintiffs in preparing the premises for their restaurant. Thus, the Tenth District agreed with the lessee’s reasoning that if a breach is not material and the lessor can be adequately compensated for such breaches, a forfeiture should not be decreed. (Sometimes, however, even when the breach is material, but it does not result in economic harm to the lessor (and, in fact, creates a “windfall”), the forfeiture provision may not be enforced. See David v. Edgewood Dev. Co. (2000), Summit App. No. 19252, 2000 WL 46107.)

Clearly, Ohio courts have the power, and sometimes exercise it to relieve a tenant from the harsh consequences of forfeiture of a leasehold interest. However, “equity abhors a forfeiture” does not replace the maxim that “equity follows the law” and represents more the exception, than the general rule in these cases. For example, according to the Supreme Court of Ohio, when parties enter into a commercial lease from equal bargaining positions and their lease expressly authorizes forfeiture upon the occurrence of any default, courts are bound, as a general rule to enforce such provision. See Joseph J. Freed & Assoc., Inc. v. Casinelli (1986), 23 Ohio St. 3d 94. In Joseph, the Supreme Court of Ohio upheld the enforcement of a lease forfeiture when a commercial tenant in a shopping mall did not adhere to the mall owner’s policy that required a mall tenant to be open for business during minimum specified business hours. The appellant here submitted the usual equitable maxims in urging a reversal of the trial court decision. The Supreme Court, however, declined to support this “equitable” argument and explained:

“It is readily apparent that the terms of the agreement extend the right of forfeiture to ’any default by tenant.’ As pointed out by the court of appeals below, “* * * the term ‘default’ is not possessed of any ambiguity or of any special definition in the context in which it appears in the lease. Therefore, it is reasonable to conclude that because the appellant’s obligation to remain open for business in accordance with the policy set forth in the lease is plain and unambiguous, the appellee was afforded a contractual right of forfeiture in the event that appellant breached its obligation under the lease by deviating from the uniform business hours established by the lessor. Joseph, 23 Ohio St. 3d at 96.

Similarly, in Equity Inns Partnership, L.P. v. Dae Kee Yun (1999), Cuyahoga App. No. 74160, 1999 WL 980633, after noticing the parties to the agreement were comparably sophisticated and that the tenant had not begun construction by the date specified in the lease, the Eighth District upheld the landlord’s cancellation of the lease. Finally, not more than one month after the Takis case, the Montgomery County Court of Appeals (in Fifth Third Bank Western Ohio. v. Carroll Building Co. (2009), 180 Ohio App. 3d 490, 494) reiterated the Supreme Court of Ohio’s general rule by concluding: “cases of contractual interpretation should not be decided on the basis of what is just or equitable; when both parties had equal bargaining power and there is no evidence of fraud or bad faith, a court will not save one party from an improvident contract.” In Fifth Third, an “effectual forfeiture” occurred as a result of the tenant’s failure to strictly adhere to the renewal provision in its lease. There was no ambiguity in the lease, and the tenant’s repairs and other payments to the landlord in reliance on what tenant thought was a renewal did not sway the Court.

At first glance, the only way to reconcile these cases is to conclude that Ohio courts are mixed when it comes to enforcing a forfeiture of lease rights. At “second glance”, however, at least general conclusions can be made. It seems that a tenant who does what is required in a lease agreement and does it in a reasonable way is not likely to lose all of its rights for the violation of a minor technicality if the lease has no clear, express forfeiture provision. Even with such a provision, the “exception to the general rule” may, in certain circumstances, on equitable grounds, prevent termination of a tenant’s lease rights. In these “equity cases”, imposing financial penalties on the defaulting party is acceptable, but a forfeiture of the leasehold’s interest would probably be too high of a price to pay. Forfeitures are more likely to be appropriate, and without “equitable exception” when the parties entering a lease agreement are comparably sophisticated, the default is material, and when the lease expressly authorizes forfeiture upon the occurrence of such default.

EDITOR'S NOTE:

So what does all of this mean, from a practical perspective, for landlords and tenants?

For landlords, the advice is not only to draft leases carefully, but practically. If you desire that certain defaults should trigger forfeiture, and a right to reclaim the premises, you should expressly provide so in the lease. If the occurrence or non-occurrence of certain events are to be conditions of forfeiture of tenant’s rights (and landlord’s obligation to continue to lease the premises to the tenant), express, conditional language should be utilized. If you desire that any default of tenant is to trigger forfeiture rights, there is authority enforcing such clauses, if both parties have equal bargaining strength and the provision in the lease expressly provides for the same. As a practical matter, however, landlords may lose deals in today’s market by insisting on their egregious, “standard” lease forms (or lease provisions). Failing to continuously operate, assigning/subleasing without consent, failing to pay rent or additional rent when due (or after a 5-10 day grace period), sale of substantially all assets of a tenant and similar events are all reasonable “forfeiture triggers” (from a landlord’s perspective). On the other hand, insisting on the right to evict a tenant due to any default or “immaterial” defaults such as insisting the tenant remove holiday lights within a specific period of time, may allow you to “win the battle, but lose the war” [of signing up tenants and reducing vacancies]. It may also cause a fair, equity minded judge to rule against you, if challenged in court.

For tenants, the advice is to remember that “boilerplate” is rarely judged as unfair language that will not hurt you. An honest mistake or seemingly “no harm no foul” act or failure to act on your part could give the landlord all the ammunition it needs to terminate your lease, and the express language in the lease granting landlord that right is often all the protection it needs. Scrutinize default provisions carefully. Ask for grace periods (5-10 days for monetary defaults; 30-60 days for performance defaults [or even no grace period expiration, if tenant is making good faith efforts to cure, and landlord has a right to cure tenant’s performance defaults, if the defaults are still uncured after 60 days]. Also, negotiate to limit the number and type of defaults that can trigger “automatic forfeiture” discussed above. If faced with a “Boilerplate” lease, it will be well worth your while to arm yourself with “armor piercing” brokers and lawyers, and not rely on exceptions to general rules of law.