Foundation Development Corp. v. Loehmann's, Inc.
788 P.2d 1189 (1990)
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Rule of Law:
A landlord may not enforce a forfeiture and terminate a commercial lease for a trivial or immaterial breach, even if the lease contains a 'time is of the essence' clause.
Facts:
- In 1978, Loehmann’s, Inc. (Loehmann's) entered into a twenty-year commercial lease to be the anchor tenant in a shopping center owned by Foundation Development Corporation's (Foundation) predecessor.
- In addition to monthly rent, the lease required Loehmann's to pay common area charges, and contained a default clause allowing termination if a payment was not cured within 10 days of notice, along with a 'time is of the essence' clause.
- On February 23, 1987, Foundation sent Loehmann's a year-end statement for common area charges totaling $3,566.44.
- After Loehmann's inquired about the calculation and received a response in late March, Foundation sent a demand letter on April 10, 1987, to a general store address, demanding payment within 10 days.
- The letter was received at Loehmann's Phoenix store on April 13 and forwarded to its New York office, where it was received on April 17 (a Friday).
- Due to internal mail routing and the weekend, the notice was processed, and a check was issued on April 24 and mailed on April 25.
- Foundation filed a lawsuit to terminate the lease on April 28, one day before receiving Loehmann's check on April 29.
Procedural Posture:
- Foundation Development Corporation filed a complaint in superior court (trial court) against Loehmann’s, Inc., seeking termination of the lease and recovery of the premises.
- Both parties filed cross-motions for summary judgment.
- The trial court found that Loehmann's had breached the lease but that the breach was trivial, and entered judgment in favor of Loehmann's, refusing to permit forfeiture.
- Foundation (as appellant) appealed to the Arizona Court of Appeals.
- The Court of Appeals reversed, holding that any breach, regardless of materiality, could justify forfeiture in the landlord-tenant context in Arizona.
- Loehmann's (as petitioner) petitioned for review by the Supreme Court of Arizona.
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Issue:
Does a tenant's minor delay in paying a common area charge constitute a material breach of a commercial lease sufficient to justify forfeiture, especially when the lease includes a 'time is of the essence' clause?
Opinions:
Majority - Feldman, Vice Chief Justice
No. A trivial or immaterial breach of a commercial lease is not sufficient to justify the harsh remedy of forfeiture. The court held that despite statutory language allowing termination for 'any' breach and the presence of a 'time of the essence' clause, principles of equity prevent a landlord from terminating a valuable, long-term lease based on a minor, non-prejudicial delay in payment. The court's reasoning was rooted in the historical abhorrence of forfeitures in property law, viewing such clauses as security for payment rather than a tool for termination over technicalities. It joined the majority of jurisdictions in holding that a breach must be 'material,' 'serious,' or 'substantial' to warrant forfeiture. The court adopted the materiality test from the Restatement (Second) of Contracts § 241, finding that Foundation was not significantly deprived of its bargain, could be compensated with interest for the short delay, and that the forfeiture suffered by Loehmann's would be grossly disproportionate to the breach. The court concluded that a 'time of the essence' clause is merely one factor to consider in the materiality analysis and does not automatically convert a trivial breach into a material one.
Analysis:
This decision aligns Arizona commercial landlord-tenant law with the modern contract principle of materiality, preventing landlords from using technical defaults as a pretext to terminate unfavorable leases. It provides significant protection for commercial tenants, whose substantial investments in their leaseholds could otherwise be jeopardized by minor, inadvertent errors. The case establishes that courts will weigh the equities and the actual harm caused by a breach before permitting the drastic remedy of forfeiture. This promotes stability in commercial relationships and discourages opportunistic litigation by landlords seeking to escape long-term leases in a rising market.
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